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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003
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Commission File No. 0-24683
FLORIDA BANKS, INC.
A Florida corporation
(IRS Employer Identification No. 58-2364573)
5210 Belfort Road
Suite 310, Concourse II
Jacksonville, Florida 32256
(904) 332-7770
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant (5,893,259 shares) on June 30, 2003 was
approximately $67,949,276 based on the closing price of the registrant's common
stock as reported on the NASDAQ National Market on June 30, 2003.
As of March 16, 2004, there were 6,886,777 shares of $.01 par value common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement to be delivered to shareholders in
connection with the 2004 Annual Meeting of Shareholders are incorporated by
reference in response to Part III of this Report.
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TABLE OF CONTENTS
Item
Number Page
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Part I
1. Business........................................................................ 3
2. Properties...................................................................... 23
3. Legal Proceedings............................................................... 25
4. Submission of Matters to a Vote of Security Holders............................. 25
Part II
5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................................... 25
6. Selected Financial Data......................................................... 27
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 29
7A. Quantitative and Qualitative Disclosures About Market Risk...................... 69
8. Financial Statements and Supplementary Data..................................... 69
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................................... 69
9A. Controls and Procedures......................................................... 70
Part III
10. Directors and Executive Officers of the Registrant.............................. 71
11. Executive Compensation.......................................................... 71
12. Security Ownership of Certain Beneficial Owners and Management.........................71
13. Certain Relationships and Related Transactions.................................. 71
14. Principal Accounting Fees and Services.......................................... 71
Part IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................ 71
SIGNATURES 75
2
PART I
ITEM 1. BUSINESS
GENERAL
Florida Banks, Inc. (the "Company") was formed in 1997 to create a
statewide community banking system that would focus on the largest and fastest
growing Florida banking markets. The Company began to operate in 1998 after it
completed the acquisition of First National Bank of Tampa, which became the
Company's wholly owned banking subsidiary and was subsequently named Florida
Bank, N.A. (the "Bank"). The Company offers a broad range of traditional banking
products and services, focusing primarily on small to medium-sized businesses
with annual revenues between $5 million and $40 million. The Company currently
operates community-banking offices in the Tampa, Jacksonville, Gainesville, Ft.
Lauderdale, St. Petersburg/Clearwater, Ocala and West Palm Beach markets. As
opportunities arise, it may also expand into other Florida market areas with
demographic characteristics similar to the markets it currently serves.
The Company has a community banking approach that emphasizes responsive
and personalized service to its customers. The management of the Company
("management") believes that the significant consolidation in the Florida
banking market has disrupted customer relationships as the larger out-of-state
financial institutions operating in Florida have increasingly focused on larger
corporate customers and standardized loan and deposit products and services.
Generally, these products and services are offered through less personalized
delivery systems, which has created a need for higher quality services to small
and medium-sized businesses. In addition, consolidation of the Florida banking
market has dislocated experienced and talented management, as well as, lending
personnel. As a result of these factors, management believes that it has a
substantial opportunity to attract additional banking customers and experienced
management and lending personnel both within the markets it currently serves and
in other Florida banking market areas.
The Company's top five senior managers have an average of over 30 years
of banking experience. The Company's growth and focus on small to medium-sized
business customers have attracted strong local management and lending teams who
have significant banking experience, strong community contacts and strong
business development potential in the markets it currently serves and in other
Florida banking market areas. Local bank presidents, who have an average of over
28 years of banking experience, run the Company's community banking offices.
They have a high degree of local decision-making authority, including the
ability to customize products and services to meet the specific needs of the
local market. The Company's management is compensated based on profitability,
growth and loan production goals, and each market area is supported by a local
advisory board of directors, which is provided with financial incentives to
assist in the development of banking relationships throughout the community.
The Company provides a variety of support services to its community
banking offices from its main office located in Jacksonville and its operations
center in Tampa. These services include back office operations, investment
portfolio management, credit administration and review, human resources,
compliance, internal audit, administration, training and strategic planning.
Functions such as core bank data processing, check clearing and other similar
functions are currently outsourced to a major vendor. As a result, the Company
can achieve cost efficiencies, maintain consistency in policies and procedures
and allow its local management teams to concentrate on developing and enhancing
customer relationships. Management believes it can leverage the Company's
current infrastructure and systems to meet its growth and other financial goals.
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The Company's business strategies have resulted in strong growth in
assets and profitability. The Company intends to continue to grow its business
and become more efficient by attracting additional small to medium-sized
business customers in its existing Florida banking markets, leveraging its
existing infrastructure and capacity, utilizing technology to enhance its
customer service and maximize deposit growth, and expanding into additional
Florida banking markets.
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. The
mortgage bank segment originates mortgage loans through its network of mortgage
brokers and sells these loans into the secondary market.
RECENT DEVELOPMENTS
On March 18, 2004, the Company announced that it entered into a
definitive agreement to be acquired by The South Financial Group, Inc. ("South
Financial") in an all-stock transaction. Under terms of the agreement, the
Company's shareholders will receive 0.77 shares of South Financial common stock
for each share of Florida Banks, Inc., subject to certain minimum price levels
for South Financial common stock. In addition, outstanding options to purchase
the Company's stock will be converted into options to acquire South Financial's
common stock at the 0.77 exchange ratio. The transaction is expected to close in
July 2004 and is subject to regulatory and Company shareholder approval. The
Company's subsidiary, Florida Bank, N.A., will merge into South Financial's
Florida banking subsidiary, Mercantile Bank.
GROWTH HISTORY
The Company has grown substantially in both size and profitability
since its formation. The table below presents data relating to the growth of key
areas of the Company's business for the last five fiscal years.
As of and For The Year Ended December 31,
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(Dollars in thousands) 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Assets................................ $944,461 $756,066 $522,323 $372,797 $218,163
Loans held for investment, net of
deferred fees...................... 690,590 550,455 401,444 285,526 157,517
Deposits.............................. 796,613 664,910 451,249 305,239 159,106
Shareholders' equity.................. 57,794 52,964 46,142 38,556 39,235
Net income (loss) applicable to common
shares............................. 4,406 1,327 558 (1,080) (1,847)
Non-performing loans to total loans... 0.38% 0.25% 0.36% 1.44% 1.46%
Net charge-offs to average loans...... 0.19 0.09 0.21 0.12 0.80
The Company's historical financial results for fiscal 1999 to 2000
reflect the development of the Company in its early stages, notably in
connection with initial start-up costs and the raising and retention of capital
to fund its planned growth. In 1999 and 2000, the Company incurred significant
non-interest expenses for the start-up and infrastructure costs described above,
while revenue items gradually increased as it began to source and originate
loans and other earning assets. The Company has maintained profitability and
asset growth throughout the last three fiscal years.
In the fourth quarter of 2002, the Company started its wholesale
mortgage banking division that is managed as a separate line of business. The
Company targets markets in the eastern United States for wholesale origination
of both adjustable and fixed rate mortgage loans. To minimize interest rate
risk, the Company sells the mortgage loans it originates on a servicing-released
basis in the secondary markets to government agencies or other investors. The
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Company has realized the following results in its mortgage banking division
since its formation:
For the Year Ended December 31,
--------------------------------
(Dollars in thousands) ................. 2003 2002
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Mortgage loans originated .............. $1,079,475 $ 98,001
Net interest income .................... 4,073 62
Non-interest income .................... 11,079 1,355
Gain on sale of mortgage loans 8,870 1,093
Mortgage loan processing fees 2,209 262
Non-interest expense ................... 11,025 911
Income before income taxes ............. 4,127 505
THE FLORIDA BANKING MARKET
The favorable demographic and economic characteristics of the Florida
banking markets are key factors in the Company's ability to grow its assets,
achieve its financial goals and create stockholder value. In addition,
management believes that the consolidation in the Florida banking market since
the early 1990s have created an underserved market of Florida-based, small and
medium-sized businesses that the Company can successfully target.
According to the U.S. Census Bureau, Florida is the fourth most
populous state in the country with an estimated population in 2003 of
approximately 17.0 million. In terms of population, Florida is expected to be
among the five fastest-growing states in the U.S. over the period from 2002 to
2007, and the fastest-growing state of the most populous states over that
period. Management believes that Florida's major metropolitan areas will benefit
the most from this expansion. Approximately 37% of the total population and 40%
of the non-farm businesses in Florida are located in the markets the Company
currently serves. According to the Federal Deposit Insurance Corporation (the
"FDIC"), the Florida banking markets have grown over the past four years, with
statewide deposits increasing from $194.2 billion in 1998 to $268.2 billion in
2003. Florida's economy has broadened from a reliance on tourism, agriculture
and retirement living to a diversified base that includes significant levels of
industrial and commercial trade. Accordingly, the Company expects that the local
Florida banking markets will grow faster than most in the U.S. with less
volatility than experienced in the past, providing opportunities for strong
growth and potential profitability for the Company.
The Florida banking market is currently characterized by the dominance
of large out-of-state financial institutions. Today, Florida's ten largest
banking organizations by deposits are headquartered outside of Florida and more
than 75% of the total deposits in the state are controlled by out-of-state
organizations. In the mid 1990s, prior to it being purchased by Nations Bank,
Barnett Bank was the largest in-state financial institution with almost 20% of
the Florida banking market. Today, the largest Florida-based financial
institution holds less than a 2% market share. Management believes that the
continued consolidation within the Florida banking markets has created a unique
opportunity to build a successful, locally oriented banking system. Further,
management believes that many small and medium-sized companies are interested in
banking with a company headquartered, and with decision-making authority, in
Florida with established Florida bankers who have the expertise to act as
trusted advisors. These customers are attractive to the Company because
management believes that, if it can serve these customers properly, it will be
able to establish long-term relationships and provide multiple products to them,
enhancing the Company's overall profitability. The Company's community banking
offices have been built around experienced bankers with lending expertise in the
specific industries found in their market areas, allowing for responsive,
personalized service.
5
STRATEGY
The Company's objective is to further enhance its net income by
continuing to grow and become more efficient. Any important aspect of the
Company's growth strategy is the ability to service and effectively manage a
large number of loans and deposit accounts in multiple markets in Florida.
Accordingly, the Company has an operations infrastructure sufficient to support
statewide lending and banking operations and has developed the following
specific strategies, which are further discussed below:
o Improve profitability by:
o Leveraging existing infrastructure efficiently to support a
larger volume of business and utilizing outsourcing to provide
cost-effective operational support, and
o Maximizing the efficiency and profitability of the wholesale
mortgage banking operation.
o Continue loan growth by:
o Focusing on key metropolitan markets;
o Attracting small and medium-sized business customers that require
the attention and service that a community-oriented bank is well
suited to provide;
o Identifying and retaining local management teams that emphasize a
high level of personalized customer service, and
o Expanding into additional Florida banking markets.
o Utilize technology to enhance customer service and maximize deposit
growth.
IMPROVE PROFITABILITY BY LEVERAGING EXISTING INFRASTRUCTURE EFFICIENTLY TO
SUPPORT A LARGER VOLUME OF BUSINESS AND UTILIZING OUTSOURCING TO PROVIDE
COST-EFFECTIVE OPERATIONAL SUPPORT.
The Company has made significant investments in its infrastructure in
order to centralize many of its critical operations, such as investment
portfolio management, credit administration and review, human resources,
compliance, internal audit, administration, training, strategic planning and
data and loan application processing. Management believes that its existing
infrastructure can accommodate substantial additional growth without substantial
additional capital expenditures. Management further believes that its existing
infrastructure allows the Company to grow its business both geographically and
with respect to the size and number of loan and deposit accounts. Management
also believes that the centralization of its administrative operations enables
the Company to maximize efficiency through economies of scale, while allowing
its bankers to focus on building and maintaining customer relationships.
In addition, the Company utilizes outside service providers where they
can increase the efficiency of its operations. Currently, the Company's data
processing and certain bank operations, and almost all of its internal audit
functions, are provided by outside service providers. The Company intends to
continue to review its operations to determine where it can contain costs by
using third party service providers.
6
IMPROVE PROFITABILITY BY MAXIMIZING THE EFFICIENCY AND PROFITABILITY OF THE
WHOLESALE MORTGAGE BANKING OPERATION.
In the fourth quarter of 2002, the Company launched its wholesale
mortgage banking division by hiring its management staff from HomeSide Lending,
Inc. after HomeSide was acquired by Washington Mutual, Inc. The Company targets
markets in the eastern United States for origination of both adjustable and
fixed rate mortgage loans. During the year ended December 31, 2003, the Company
originated $1.1 billion in mortgage loan volume. The Company offers an extensive
array of residential mortgage products, which are later, sold in the secondary
market to governmental agencies or other investors. To minimize interest rate
risk, these loans are sold on a servicing-released basis. The mortgage loans are
originated primarily through a network of third party mortgage brokers. This
distribution channel allows the Company to generate high levels of loan volume
on a cost-effective basis through its 15 sales personnel who are primarily paid
on a commission-only basis. In addition, as mortgage origination volume has
increased during 2003, the Company has made the strategic decision to hire
predominantly temporary and contract employees to meet this increased volume. As
a result, approximately 25% of the personnel employed in the Company's mortgage
operation are temporary employees and another 13% are commission-only employees.
Management believes this will allow the Company to vary the cost structure of
its mortgage origination platform to maximize profits if overall mortgage
volumes decline in the future.
The Company intends to further leverage its investment in its mortgage
operation by employing additional retail loan officers in its local markets and
wholesale account executives in other major markets outside of Florida. The
Company is emphasizing purchase loan originations in its retail network through
its residential construction-lending program, and in both its retail and
wholesale mortgage lending channels by offering premium pricing and accelerated
service levels. Management also believes this initiative will allow the Company
to continue to leverage its wholesale mortgage operation as interest rates
increase and the volume of refinance activity declines as a percentage of the
overall mortgage loan market.
CONTINUE LOAN GROWTH BY FOCUSING ON KEY METROPOLITAN MARKETS.
The established relationships of the Company's bankers tend to be
centered in the metropolitan areas that were the core business markets of the
large independent Florida banks before the consolidation of the banking industry
in Florida in the 1990s. In addition, these metropolitan areas contain a high
concentration of the Company's core small to medium-sized business customers.
Management believes the nature of the business communities in Florida's
metropolitan markets provides the Company with a broad, diverse customer base
that allows it to spread its lending risks throughout a number of different
borrowers and industries. As a result, the Company intends to focus its
development efforts in these market areas. Management believes its focus on
small to medium-sized businesses and the existing relationships of its bankers
with these core customers provides the Company with a competitive advantage in
the metropolitan market areas. Management further believes this competitive
advantage will enable the Company to continue its growth and compete
successfully in these markets.
CONTINUE LOAN GROWTH BY ATTRACTING SMALL AND MEDIUM-SIZED BUSINESS CUSTOMERS
THAT REQUIRE THE ATTENTION AND SERVICE THAT A COMMUNITY-ORIENTED BANK IS WELL
SUITED TO PROVIDE.
The Company's business strategy concentrates on business customers with
annual revenues between $5 million and $40 million. Management believes these
target customers are currently underserved in Florida. Management further
believes that the Florida operations of many of the large out-of-state banks
generally do not focus on small to medium-sized businesses, preferring instead
to focus on retail consumer banking clients and larger commercial clients with
revenues over $40 million. Smaller community banks, savings and loans, and
credit unions tend to focus on residential mortgage loans, consumer loans and
retail deposit accounts. Small and medium-sized businesses generally have the
size and sophistication to demand customized products and services, which
management believes its bankers are well-equipped to understand and respond to
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due to their experience and personal relationships with their clients.
Management further believes that a significant amount of the growth the Company
has experienced has been due to its concentration on this underserved segment of
the Florida banking markets. By continuing the Company's focus on these
customers, the Company expects to continue to grow in its current markets and to
compete successfully as it enters other Florida banking markets.
CONTINUE LOAN GROWTH BY IDENTIFYING AND RETAINING LOCAL MANAGEMENT TEAMS THAT
EMPHASIZE A HIGH LEVEL OF PERSONALIZED CUSTOMER SERVICE.
The Company has identified individuals in each of the markets it
currently serves who serve as the president of that community banking office.
Management believes that a management team that is familiar with the needs of
its community can provide higher quality personalized service to local
customers. The Company's local management teams have a significant amount of
decision-making authority and are accessible to local customers. In addition,
within each market area, the Company's community banking offices have a local
advisory board that is comprised of prominent members of the community,
including business leaders and other professionals. Certain members of the local
boards may serve as members of the Company's board of directors. The directors
of these local advisory boards act as the Company's representatives within the
community and are expected to promote the business development of each community
banking office. The Company expects the members of its local advisory board and
its lending officers to be active in the civic, charitable and social
organizations in the local communities. Many members of the local management
team hold leadership positions in a number of community organizations and the
Company expects that they will continue to volunteer for other positions in the
future. Management believes that these strong local management teams will
facilitate the growth in the markets the Company currently serves and enable it
to compete successfully as it enters new markets.
CONTINUE LOAN GROWTH BY EXPANDING INTO ADDITIONAL FLORIDA BANKING MARKETS.
The Company has built its community banking system in its existing
markets by assembling a local management team and local advisory board
experienced in that particular market area and establishing a community banking
office in that market either through the opening of a Loan Production Office
("LPO") or a full service bank. In June 2002, the Company opened a LPO in West
Palm Beach, which has been expanded into a full service community banking
office. The Company will also consider expansion into other selected Florida
banking markets if management believes it will enable the Company to grow its
assets and profitability and is otherwise consistent with its strategic goals
and objectives. If the Company expands into additional Florida banking markets,
it intends to establish a local community banking office in that new market
through de novo branching. The Company may, however, acquire existing banks if
an attractive opportunity for such an acquisition becomes available.
The Company may also establish LPO's in new Florida banking markets as
a prelude to establishing full service community banking offices. LPO's would
provide the same lending products and services to the local market as the
community banking office with substantially less overhead expense. These offices
would typically be staffed with a president, a senior lender and one
administrative assistant. By opening LPO's, the Company can begin to generate
loans during the period it is preparing to open a full-service banking
operation, staff the banking office and reduce the overall cost of expansion
into a new market. These offices would also establish local advisory boards,
which would be responsible for promoting the growth of the office.
UTILIZE TECHNOLOGY TO ENHANCE CUSTOMER SERVICE AND MAXIMIZE DEPOSIT GROWTH.
The Company believes that there is a need within its market niche for
consumer and commercial telephone banking and Internet banking. The Company's
customers are provided access to detailed account information via a toll free
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number 24 hours a day and via DirectNet, the Company's Internet banking product.
DirectNet also enables the Company's customers to execute transactions, download
account information, view check images and pay bills electronically. In
addition, DirectNet affords the Company the opportunity of opening deposit
accounts both within and outside of the local markets. The DirectNet banking
service and telephone banking are provided by a third-party data processor.
The Company also offers origination of Automated Clearing House and
Electronic Funds Transfers (ACH/EFT), automated wire transfer services, stored
value cards, check imaging, lockbox services, account reconciliation, and other
services through its Internet site or through other delivery channels.
Management believes that these services assist the Company's community banking
offices in retaining customers.
LENDING ACTIVITIES
The Company oversees all lending activities centrally while still
granting local authority to each community banking office. The Company's Chief
Credit Officer is responsible for maintaining a quality loan portfolio and
developing a strong credit culture throughout the entire organization. The Chief
Credit Officer is also responsible for developing and updating the credit policy
and procedures for the organization. In addition, he works closely with each
lending officer at the community banking offices to ensure that the business
being solicited is of the quality and structure that fits the Company's desired
risk profile. Credit quality is controlled through uniform compliance to credit
policy. The Company's risk-decision process is actively managed in a disciplined
fashion to maintain an acceptable risk profile characterized by soundness,
diversity, quality, prudence, balance and accountability.
The credit approval process consists of a system of dual credit
authority with a cumulative feature for larger credits. The Chief Credit Officer
has the authority to manage and adjust the levels of credit authority within the
Company's banks. The Company utilizes a house-lending limit that limits the
maximum credit exposure to any one borrower. As of December 31, 2003, this limit
was $9.0 million. Within this house-lending limit, the Company utilizes an
exposure matrix methodology that further limits maximum exposure based on a
combination of the assigned risk rating of the credit and a percentage of the
house limit. These limits reflect the Company's desire for diversification and
granularity in its loan portfolio. Any changes to these limits require the
approval of the Company's board of directors. Risk management requires active
involvement with the Company's customers and active management of its portfolio.
The Chief Credit Officer reviews the Company's credit policies with the local
management teams at least annually but will review it more frequently if
necessary. The results of these reviews are then presented to the board of
directors. The purpose of these reviews is to attempt to ensure that the credit
policy remains compatible with the Company's short and long-term business
strategies. The Chief Credit Officer will also generally require all individuals
charged with risk management to reaffirm their familiarity with the credit
policy annually.
The Company focuses its marketing efforts on attracting small to
medium-sized business customers with annual revenues between $5 million and
approximately $40 million, which include:
o professionals, such as physicians and attorneys;
o service companies;
o manufacturing companies; and
o other small to medium-sized businesses with real estate or other
collateral to secure their indebtedness to the Company.
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Because the Company focuses on small to medium-sized business
customers, the majority of its loan portfolio is in the commercial area with an
emphasis placed on commercial and industrial loans secured by real estate,
accounts receivable, inventory, property, plant and equipment. However, in an
effort to maintain a high level of credit quality, the Company attempts to
ensure that the commercial real estate loans are made to borrowers who occupy
the real estate securing the loans or investment properties occupied by
creditworthy tenants or seasoned investment properties. In addition, the Company
has attracted and will continue to attract consumer business. The Company
expects to develop most of its business through its lending officers and local
advisory boards of directors and by pursuing an aggressive strategy of making
calls on customers throughout the market area.
The Company offers a wide range of short to long-term commercial and
consumer loans and has grown its loan portfolio substantially since its
formation. The following table provides information about the growth of the
Company's portfolio of loans held for investment by type of loan for the last
five fiscal years.
December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Commercial real estate $424,498 $313,120 $210,373 $158,654 $69,261
Commercial 176,094 166,122 142,911 102,391 68,991
Residential mortgage 34,120 23,080 22,309 9,796 10,846
Consumer 54,648 45,860 23,158 13,036 7,246
Credit card and other 1,956 2,792 2,912 1,747 1,244
Net deferred loan fees (726) (519) (219) (98) (71)
-------- -------- -------- -------- --------
Loans held for investment, net $690,590 $550,455 $401,444 $285,526 $157,517
======== ======== ======== ======== ========
The Company generally invests a greater proportion of its assets in
commercial loans and commercial real estate loans than other banking
institutions of its size, which typically invest a greater proportion of their
assets in consumer loans and loans secured by single-family residences. At
December 31, 2003, commercial loans, commercial real estate loans, residential
mortgage loans and consumer loans accounted for 25.3%, 61.6%, 4.9% and 8.2%,
respectively, of its total loan portfolio. The Company's commercial loans
generally involve a higher degree of credit risk than commercial or residential
mortgage loans due, in part, to their less readily marketable collateral. Due to
the nature of their collateral, losses incurred on a small number of commercial
loans could have a material adverse impact on its financial condition and
results of operations. In addition, unlike residential mortgage loans, its
commercial loans and commercial real estate loans generally depend on the cash
flow of the borrower's business to service the debt. Furthermore, a significant
portion of its commercial loans is dependent for repayment largely on the
liquidation of assets securing the loan, such as inventory and accounts
receivable. These loans carry incrementally higher risk, since their repayment
is often dependent solely on the financial performance of the borrower's
business. The Company's business plan calls for continued efforts to increase
its assets invested in commercial loans. An increase in non-performing loans
could cause operating losses, impaired liquidity and the erosion of its capital,
and could have a material adverse effect on its business, financial condition or
results of operations.
While risk of loss in the Company's loan portfolio is primarily tied to
the credit quality of the borrowers, risk of loss may also increase due to
factors beyond the Company's control, such as local, regional and/or national
economic downturns. General conditions in the real estate market may also impact
the relative risk in the Company's real estate portfolio. As discussed above, of
the Company's target areas of lending activities, commercial loans are generally
considered to have greater risk than real estate loans or consumer loans. For
this reason, the Company seeks to diversify its commercial loan portfolio by
industry, geographic distribution and size of credits.
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COMMERCIAL REAL ESTATE LOANS
The Company's commercial real estate loan portfolio consists of 1)
loans to owner occupied business customers who secure their indebtedness to the
Company with real, other property, or personal guarantees, and 2) loans to
developers of both commercial and residential properties.
The strategy is to seek to develop long-term relationships with select
businesses, investors and real estate professionals. In making these loans, the
Company utilizes traditional credit analysis to manage credit risk by actively
monitoring such measures as the financial condition of the borrower and debt
service coverage of the property, as well as the advance rate, cash flow,
collateral value and other appropriate credit factors. In the real estate
development area, the Company typically makes loans only to developers that have
an established record of project completion and repayment. The Company closely
monitors the status of each loan and the underlying project throughout its
terms.
At December 31, 2003, commercial real estate loans represented
approximately 61% of the Company's loans held for investment.
COMMERCIAL LOANS
The Company's commercial lending consists primarily of commercial and
industrial loans for the financing of accounts receivable, inventory, property,
plant and equipment, and other commercial assets. The majority of the business
loan portfolio is secured by real estate, accounts receivable, inventory,
equipment and/or general corporate assets of the borrower, as well as the
personal guarantee of the principal.
Commercial loans can contain risk factors unique to the business of
each customer. In order to mitigate these risks and better serve the customers,
the Company seeks to gain an understanding of the business of each customer so
that it can place appropriate value on collateral taken and structure the loan
to maintain collateral values at appropriate levels. The Company manages credit
risk by actively monitoring such measures as advance rate, cash flow, collateral
value, ability to repay and other appropriate credit factors. In addition, the
Company relies on the experience of its bankers and their relationships with its
customers to aid its understanding of the customer and their business.
At December 31, 2003, commercial loans represented approximately 25% of
the Company's loans held for investment.
RESIDENTIAL MORTGAGE LOANS
The Company's residential mortgage loans consist of residential first
and second mortgage loans, residential construction loans and home equity lines
of credit and term loans secured by first and second mortgages on the residences
of borrowers for home improvements, education and other personal expenditures.
At December 31, 2003, residential mortgage loans represented
approximately 5% of the Company's loans held for investment.
11
CONSUMER LOANS
The Company's consumer loans consist of installment loans to
individuals for personal, family and household purposes. In evaluating these
loans, the Company requires the lending officers to review the borrower's level
and stability of income, past credit history, and the impact of these factors on
the ability of the borrower to repay the loan in a timely manner. In addition,
the Company requires that its banking officers maintain an appropriate margin
between the loan amount and collateral value. Many of the Company's consumer
loans are made to the principals of the small to medium-sized businesses for
whom the community banking offices provide banking services.
At December 31, 2003, consumer loans represented approximately 8% of
the Company's loans held for investment.
CREDIT CARD AND OTHER LOANS
The Company has issued credit cards to certain of its customers. In
determining to whom the Company will issue credit cards, the Company evaluates
the borrower's level and stability of income, past credit history and other
factors. Finally, the Company makes additional loans such as overdraft
protection lines of credit, which may not be classified in one of the above
categories. In making such loans, the Company attempts to ensure that the
borrower meets the Company's credit quality standards.
At December 31, 2003, credit card and other loans represented
approximately 0.3% of the Company's loans held for investment.
LOANS HELD FOR SALE
The wholesale mortgage division originates residential mortgage loans
through a network of third party mortgage brokers, and sells them in the
secondary mortgage market. Loans held for sale at December 31, 2003 were
approximately $66 million and consisted entirely of wholesale residential
mortgage loans. Due to the Company's high wholesale mortgage loan origination
volume and the substantially higher volume of mortgage loan origination activity
nationally, the major secondary market purchasers of these loans were unable to
complete loan purchases within their typical time frame. This has resulted in a
higher level of loans held for sale at December 31, 2003. Management believes
that as its volume of activity decreases and the major purchasers of loans
return to their typical purchase schedule, the level of loans held for sale will
decrease. The Company does not retain interests in the portion of the loan
portfolio it sells.
INVESTMENTS
The Company invests primarily in direct obligations of the United
States, obligations guaranteed as to principal and interest by the United
States, obligations of agencies of the United States and mortgage-backed
securities. The Company's current investment policy permits purchases primarily
of securities which are rated investment grade by a nationally recognized rating
agency, and substantially all of the investments in the Company's portfolio at
December 31, 2003 were rated in one of the two highest grades. The Company also
enters into federal funds transactions with its principal correspondent banks,
and acts as a net seller of such funds, which amounts to a short-term loan from
another company. The Company's investment portfolio at December 31, 2003 totaled
$53 million.
FUNDING
The Company funds its lending activities by offering a broad range of
deposit products within the markets it currently serves, including
interest-bearing and noninterest-bearing deposit accounts, such as commercial
and retail checking accounts, money market accounts, individual retirement
accounts, regular and premium rate interest-bearing savings accounts and
12
certificates of deposit with a range of maturity date options. The primary
sources of these deposits are small to medium-sized businesses and individuals.
In each market, senior management has the authority to set rates within
specified parameters in order to remain competitive with other financial
institutions located in the identified market.
In addition to deposits within the local markets, the Company utilizes
brokered certificates of deposits to supplement its funding needs, particularly
with respect to its mortgage banking business. Brokered CDs are sold by various
investment firms, which are paid a fee by the bank for placing the deposit.
Depending on current market conditions, the cost of brokered deposits may be
slightly lower than the cost of the same deposits in the local markets. All
deposits are insured by the FDIC up to the maximum amount permitted by law.
Approximately 58% of the Company's total deposits at December 31, 2003 consisted
of certificates of deposit of $100,000 or more.
The Company also has short term funding available through its various
federal funds lines of credit with other financial institutions and its
membership in the Federal Home Loan Bank of Atlanta, which provides the Company
the availability of participation in loan programs with varying maturities and
terms. At December 31, 2003, the Company had borrowings from the Federal Home
Loan Bank of Atlanta in the amount of $10.7 million.
Finally, the Company has two senior holding company lines of credit
with SunTrust Bank, Atlanta. The first line of credit is revolving with a
borrowing capacity of $7.5 million. The second line of credit is non-revolving
with a borrowing capacity of $2.5 million. At December 31, 2003, the Company had
borrowings from SunTrust Bank, Atlanta in the amount of $10.0 million.
NONINTEREST INCOME
GAINS ON SALE OF LOANS. The Company may originate or purchase a loan at
a price (i.e., interest rate and discount) that may be higher or lower than it
would receive if it immediately sold the loan in the secondary market. These
pricing differences occur principally as a result of competitive pricing
conditions in the primary loan origination market. The Company may also
recognize a gain or loss on sale of a loan as a result of changes in the fair
value of underlying interest rate locks. These changes in fair value result from
changes in interest rates from the time the price commitment is given to the
customer until the time that the Company sells the loan to an investor. To
reduce the effect of interest rate changes on the gain or loss on loan sales,
the Company generally commits to sell all of its warehouse loans (i.e., mortgage
loans that have closed) and its pipeline loans (i.e., mortgage loans which are
not yet closed but for which the interest rate has been established) to
investors for delivery at a future time for a stated price. In addition, the
Company utilizes the services of a third party provider to manage interest rate
risk and execute the Company's pipeline hedging strategy.
MORTGAGE LOAN PROCESSING FEES. Mortgage loan processing fees are
comprised of fees earned on the origination of residential mortgage loans and
fees charged to review loan documents for purchased residential mortgage loan
production.
SERVICE FEES. In order to capture additional noninterest income, the
Company has implemented a service charge fee schedule, which is competitive with
other financial institutions in the community banking offices' market areas,
covering such matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and other similar
fees.
ACH/EFT SERVICES. The Company offers various Automated Clearing House
and Electronic Funds Transfer (ACH/EFT) services to commercial customers
throughout the United States. These services include payroll direct deposits,
payroll tax payments, electronic payments and other funds transfers. The
services are customized to meet the needs of the customer and offer an
economical alternative to paper checks and drafts.
13
STORED VALUE CARDS. The Company offers stored value (prepaid debit)
cards to commercial customers. These cards are issued primarily to facilitate
incentive payments, payroll disbursements, customer loyalty programs, and as
gift cards. The bank derives income from use of the prepaid funds and fee income
from issuing and servicing the cards.
INVESTMENT ADVISORY AND INSURANCE SERVICES. Beginning in the first
quarter of 2003, the Company began to offer certain alternative investment
products through its financial services subsidiary, FB Financial Services, Inc.
These products include equities, fixed-income products, equity and bond mutual
funds, unit investment trusts, life insurance policies, and to the extent
permitted by applicable regulations, fixed and variable annuities. This program
expands the Company's offering of financial products in response to demand from
customers seeking a single source for their financial service needs.
OTHER SERVICES
SPECIALIZED CONSUMER SERVICES. The Company offers specialized products
and services to its customers, such as lock boxes, traveler's checks and safe
deposit services.
COURIER SERVICES. The Company offers courier services to its customers.
Courier services, which may be either provided directly by the Company or
through a third party, permits the Company to provide the convenience and
personalized service by scheduling deposit pick-ups from its customers. The
Company currently offers courier services only to its business customers. The
Company has received regulatory approval for and is currently offering courier
services in all of the markets it currently serves and expects to apply for
approval in other Florida banking market areas.
AUTOMATIC TELLER MACHINES ("ATMS"). Presently, the Company does not
expect to establish an ATM network although the Company currently provides ATMs
in three of the markets it currently services and in the future other banking
offices may provide one or more ATMs in their local Florida banking market. As
an alternative, the Company has made other financial institutions' ATMs
available to its customers and offers customers up to ten free ATM transactions
per month.
OTHER PRODUCTS AND SERVICES. The Company intends to evaluate other
services, such as trust services and other permissible activities, and it
expects to introduce these services in the future as they become economically
viable.
ASSET-LIABILITY MANAGEMENT
The objective is to manage assets and liabilities to provide a
satisfactory level of consistent operating profitability within the framework of
established liquidity, loan, investment, borrowing and capital policies. The
Company's Chief Financial Officer is primarily responsible for monitoring
policies and procedures that were designed to maintain an acceptable composition
of the asset-liability mix while adhering to prudent banking practices. The
overall philosophy of the management is to support loan growth primarily through
growth of core deposits. Management intends to continue to invest the largest
portion of the Company's earning assets in commercial, industrial and commercial
real estate loans.
The Company's asset-liability mix is monitored on a daily basis, with
monthly reports presented to its Asset-Liability Management Committee. The
objective of this policy is to control interest-sensitive assets and liabilities
so as to minimize the impact of substantial movements in interest rates on the
Company's bank's earnings. For further discussion, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Analysis of
Financial Condition - Interest Rate Risk Management."
14
COMPETITION
Competition among financial institutions in Florida is intense. The
Company primarily competes with the Florida operations of large out-of-state
commercial banks and Florida-based regional commercial banks. In addition, the
Company competes with other bank holding companies, state and national
commercial banks, savings and loan associations, consumer finance companies,
credit unions, securities brokerages, insurance companies, mortgage banking
companies, money market mutual funds, asset-based non-bank lenders and other
financial institutions. Many of these competitors have substantially greater
resources and lending limits, larger branch networks, and are able to offer a
broader range of products and services than the Company.
Various legislative actions in recent years have led to increased
competition among financial institutions. As a result of such actions, most
barriers to entry to the Florida banking market by out-of-state financial
institutions have been eliminated. Recent legislative and regulatory changes and
technological advances have enabled customers to conduct banking activities
without regard to geographic barriers through computer and telephone-based
banking and similar services. With the enactment of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 and other laws and regulations
affecting interstate bank expansion, financial institutions located outside of
Florida may now more easily enter the markets currently and proposed to be
served by the Company. In addition, the Gramm-Leach-Bliley Act repealed certain
sections of the Glass-Steagall Act and amended sections of the Bank Holding
Company Act. The future effect of these changes in regulations could be far
ranging in their impact on traditional banking activities. Mergers, partnerships
and acquisitions between banks and other financial and service companies could
dramatically affect competition within the Florida banking markets.
The Company cannot assure you that the United States Congress, the
Florida Legislature or the applicable bank regulatory agencies will not enact
legislation or promulgate rules that may further increase competitive pressures
on it. The Company's failure to compete effectively for deposit, loan and other
banking customers in the Company's market areas could have a material adverse
effect on the Company's financial condition and results of operations.
DATA PROCESSING
The Company currently has an agreement with Metavante Corporation
(formerly M&I Data Services) to provide core processing and certain customer
products. Metavante Corporation, a wholly owned subsidiary of Marshall & Ilsley
Corporation, provides services to more than 5,100 clients including the largest
20 banks in the United States. Management believes that Metavante will be able
to provide state-of-the-art data processing and customer service-related
processing at a competitive price to support the Company's future growth.
Management further believes the Metavante contract to be adequate for the
Company's business expansion plans.
EMPLOYEES
The Company presently employs a combined total of 219 persons on a
full-time basis and 13 persons on a part-time basis and will hire additional
persons, including additional tellers, mortgage loan processors and financial
service representatives, as needed to support the Company's growth.
NONBANKING SUBSIDIARIES
In April 2000, the Company formed FB Financial Services, Inc. for the
purposes of providing non-traditional banking and financial services to its
customers. Beginning in the first quarter of 2003, the Company began to offer
these products, primarily through its Ft. Lauderdale banking office. The
products include equities, fixed-income products, equity and bond mutual funds,
unit investment trusts, life insurance policies, and, to the extent permitted by
applicable regulations, fixed and variable annuities.
15
The Company has the following directly and wholly owned nonbanking
subsidiaries that are currently active:
o Florida Banks Statutory Trust I, a Connecticut business trust,
issued $6 million in trust preferred securities in December 2001;
o Florida Banks Capital Trust II, a Delaware business trust, issued $4
million in trust preferred securities in April 2002;
o Florida Banks Capital Trust I, a Delaware business trust, issued $4
million in trust preferred securities in June 2002;
o Florida Banks Statutory Trust II, a Connecticut business trust,
issued $3 million in trust preferred securities in December 2002;
and
o Florida Banks Statutory Trust III, a Connecticut business trust,
issued $3 million in trust preferred securities in June 2003.
The Company guarantees all of these securities.
RISK FACTORS
RISKS RELATED TO THE COMPANY'S BUSINESS
GENERAL
INTEREST RATE LEVELS SIGNIFICANTLY AFFECT THE COMPANY'S OPERATIONS
Changes in interest rates can have differing effects on various aspects
of the Company's business, particularly in the areas of net interest income and
mortgage loans originated and purchased.
NET INTEREST INCOME
The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between interest income it earns as a
result of interest paid to the Company on loans and investments and interest it
pays to third parties such as the Company's depositors and those from whom it
borrows funds. The Company is affected by changes in general interest rate
levels, which are currently at historically low levels, and by other economic
factors beyond its control. Interest rate risk can result from mismatches
between the dollar amount of repricing or maturing assets and liabilities and
from mismatches in the timing and rate at which the Company's assets and
liabilities reprice. The Company pursues an asset-liability management strategy
designed to control its risk from changes in the market interest rates, given
its current volume and mix of interest-bearing liabilities and interest-earning
assets. However, if market interest rates remain at their present levels for a
prolonged period of time or decline further, the cash flows from continued high
levels of loan prepayments would be reinvested at lower yields while the
Company's cost of funds may remain relatively flat, resulting in a decrease in
its profitability. Although management believes the Company's asset liability
management strategy will reduce the potential effects of changes in interest
rates on its results of operations, this strategy may not always be successful.
In addition, any substantial and prolonged increase in market interest rates
could reduce the Company's customers' desire to borrow money from it or limit
their ability to repay their outstanding loans by increasing their credit costs
since most of the Company's loans have adjustable interest rates that reset
16
periodically. If the Company does not adequately manage the maturities of its
deposits and loans, any substantial change in interest rates could cause its
cost of funds to increase more rapidly than the yield on its loans, thereby
decreasing the Company's net interest income. Any of these events could decrease
the Company's profitability or adversely affect its financial condition.
VOLUME OF MORTGAGE LOANS ORIGINATED AND PURCHASED
In periods of declining interest rates, such as have occurred recently,
demand for mortgage loans typically increases, particularly for mortgage loans
related to refinancing of existing loans. The refinancing of existing loans
currently comprises approximately 72% of the Company's loan volume. In periods
of rising interest rates, demand for mortgage loans typically declines. The
Company's income from its mortgage banking division would significantly decrease
following a decline in demand for mortgage loans in the eastern United States,
which is the area in which the Company originates and purchase the majority of
its loans.
THE COMPANY'S BUSINESS STRATEGY INCLUDES THE CONTINUATION OF SIGNIFICANT GROWTH
PLANS, AND IF IT FAILS TO GROW OR FAIL TO MANAGE ITS GROWTH EFFECTIVELY AS IT
PURSUES ITS STRATEGY, THE COMPANY'S RESULTS OF OPERATION COULD NEGATIVELY BE
AFFECTED.
The Company intends to continue pursuing a significant growth strategy
for its business. The Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in
significant growth stages of development. The Company cannot assure you that it
will be able to expand its market presence in its existing markets or
successfully enter new markets or that any such expansion will not adversely
affect its results of operations. Failure to manage the Company's growth
effectively could have a material adverse effect on its business, future
prospects, financial condition or results of operations, and could adversely
affect its ability to successfully implement its business strategy. Also, if the
Company's growth occurs more slowly than anticipated or declines, its operating
results could be materially adversely affected.
THE COMPANY'S LOAN PORTFOLIO GROWTH IS DEPENDENT ON INCREASED BROKERED DEPOSITS
AND JUMBO CDS.
The Company primarily relies on brokered deposits and Jumbo CDs to fund
its growing operations. The Company cannot assure you that it will be able to
continue to attract brokered deposits at current levels of growth or that it
will be able to fund its growth through Jumbo CDs without having to offer above
market rates. Jumbo CDs and brokered deposits tend to be more price sensitive
and also tend to be more likely to be withdrawn at maturity if a bank encounters
operational or regulatory difficulties. The inability to fund growth of the
Company's loan portfolio through increased brokered deposits or Jumbo CDs would
materially adversely affect its financial condition or results of operations.
BECAUSE THE COMPANY FOCUSES ON COMMERCIAL LENDING, ITS EXPOSURE TO CREDIT RISK
COULD ADVERSELY AFFECT ITS EARNINGS AND FINANCIAL CONDITION.
As of December 31, 2003, commercial loans totaled $600.6 million, or
86.9% of the Company's total loan portfolio. The Company generally invests a
greater proportion of its assets in commercial loans than other banking
institutions of its size, which typically invest a greater proportion of their
assets in loans secured by single-family residences. The Company's commercial
loans generally involve a higher degree of credit risk than residential mortgage
loans due, in part, to their larger average size and generally less readily
marketable collateral. Due to their size and the nature of their collateral,
losses incurred on a small number of commercial loans could have a material
17
adverse impact on the Company's financial condition and results of operations.
In addition, unlike residential mortgage loans, the Company's commercial loans
generally depend on the cash flow of the borrower's business to service the
debt. Furthermore, a significant portion of the Company's loans is dependent for
repayment largely on the liquidation of assets securing the loan, such as
inventory and accounts receivable. These loans carry incrementally higher risk,
since their repayment is often dependent solely on the financial performance of
the borrower's business. The Company's business plan calls for continued efforts
to increase its assets invested in commercial loans. An increase in
non-performing loans could cause operating losses, impaired liquidity and the
erosion of the Company's capital, and could have a material adverse effect on
its business, financial condition or results of operations.
IF THE VALUE OF REAL ESTATE IN THE COMPANY'S CORE FLORIDA MARKETS WERE TO
DECLINE MATERIALLY, A SIGNIFICANT PORTION OF THE COMPANY'S LOAN PORTFOLIO COULD
BECOME UNDER-COLLATERALIZED, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS
BUSINESS.
The market value of real estate, particularly real estate held for
investment, can fluctuate significantly in a short period of time as a result of
market conditions in the geographic area in which the real estate is located. If
the value of the real estate serving as collateral for the Company's loan
portfolio were to decline materially, a significant part of its loan portfolio
could become under-collateralized. As of December 31, 2003, approximately 61.0%
of the Company's loans held for investment were secured by real estate. Of the
commercial real estate loans in the Company's portfolio, approximately $185.3
million represent properties owned and occupied by businesses to which the
Company has extended loans and $239.2 million is secured by real estate held for
investment by the borrower. If the loans that are collateralized by real estate
become troubled during a time when market conditions are declining or have
declined, then the Company may not be able to realize the amount of security
that it anticipated at the time of originating the loan, which could have a
material adverse effect on its provision for loan losses and its operating
results and financial condition.
THE COMPANY'S BUSINESS IS CONCENTRATED IN FLORIDA AND A DOWNTURN IN THE ECONOMY
OF FLORIDA OR OTHER EVENTS IN FLORIDA MAY ADVERSELY AFFECT ITS BUSINESS.
Substantially all of the Company's business is located in Florida. As a
result, the Company's financial condition and results of operations may be
affected by changes in the Florida economy. A prolonged period of economic
recession or other adverse economic conditions in Florida may result in an
increase in nonpayment of the Company's loans and a decrease in collateral
value. In addition, the Company presently generates all of its commercial real
estate mortgage loans in Florida. Therefore, conditions of the Florida
commercial real estate market could strongly influence the level of the
Company's non-performing loans and its results of operations and financial
condition. Real estate values and the demand for mortgages and construction
loans are affected by, among other things, changes in general or local economic
conditions, changes in governmental rules or policies, and the availability of
loans to potential purchasers. In addition, Florida historically has been
vulnerable to certain natural disaster risks, such as floods, hurricanes and
tornadoes, which are not typically covered by the standard hazard insurance
policies maintained by borrowers. Uninsured disasters may adversely impact the
ability of borrowers to repay loans made by the Company. The existence of
adverse economic conditions, declines in real estate values or the occurrence of
such natural disasters in Florida could have a material adverse effect on the
Company's business, future prospects, financial condition or results of
operations.
IF THE COMPANY'S ALLOWANCE FOR LOAN LOSSES WERE NOT SUFFICIENT TO ABSORB ACTUAL
LOSSES, ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD BE ADVERSELY
AFFECTED.
The Company's experience in the banking industry indicates that a
portion of its loans will become delinquent, some of which may only partially be
repaid or may never be repaid at all. The Company's allowance for loan losses
was $9.1 million at December 31, 2003, which represents 1.31% of the Company's
total loan portfolio. Although management believes the Company's allowance for
loan losses is sufficient to cover actual loan losses and it has not received
any communications from regulatory agencies suggesting that the Company's
reserves are inadequate, it cannot assure you that its allowance for loan losses
will be
18
adequate to cover actual loan losses. In addition, the Company also cannot
assure you that it will not experience significant losses in its loan portfolio
from general economic conditions or other factors beyond its control. These
losses may require significant increases to the allowance for loan losses in the
future. Significant and unexpected additions to the Company's allowance for loan
losses would decrease its profitability in that period.
BANK REGULATORS MAY REQUIRE THE COMPANY TO INCREASE ITS ALLOWANCE FOR LOAN
LOSSES, WHICH COULD HAVE A NEGATIVE EFFECT ON ITS FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Federal regulators, as an integral part of their respective supervisory
functions, periodically review the Company's allowance for loan losses. The
regulatory agencies may require the Company to increase its allowance for loan
losses or to recognize further loan charge-offs based upon their judgments,
which may be different from the Company's view. In addition, regulatory agencies
may require additional reserves for loan losses that may not be required under
generally accepted accounting principles. Although the Company has not received
any requests or directions from regulatory agencies to adjust its allowance for
loan losses, any increase in the allowance for loan losses required by these
regulatory agencies could have a negative effect on its financial condition and
results of operations.
LACK OF SEASONING OF THE COMPANY'S LOAN PORTFOLIO MAY INCREASE THE RISK OF
CREDIT DEFAULTS IN THE FUTURE.
Most of the loans in the Company's loan portfolio were originated
within the past three years. In general, loans do not begin to show signs of
credit deterioration or default until they have been outstanding for period of
time, such as between twelve and twenty-four months, a process referred to as
"seasoning." As a result, a portfolio of older loans will usually behave more
predictably than a newer portfolio. Because the Company's loan portfolio is
relatively new, the current level of delinquencies and defaults may not be
representative of the level that will prevail when the portfolio becomes more
seasoned, which is likely to be somewhat higher than current levels. As of
December 31, 2003, 37.8% of the Company's loan portfolio had been originated in
the last twelve months and 13.2% of its loan portfolio had been originated in
the last twenty-four months.
UNTIL THE COMPANY'S PORTFOLIO BECOMES MORE SEASONED, IT MUST RELY IN PART ON THE
HISTORICAL LOAN LOSS EXPERIENCE OF OTHER FINANCIAL INSTITUTIONS AND THE
EXPERIENCE OF ITS MANAGEMENT IN DETERMINING ITS ALLOWANCE FOR LOAN LOSSES, AND
THIS MAY NOT BE COMPARABLE TO THE COMPANY'S LOAN PORTFOLIO.
Because most of the Company's loans in its loan portfolio were
originated relatively recently, its loan portfolio does not provide an adequate
history of loan losses for its management to rely upon in establishing its
allowance for loan losses. When determining the Company's allowance for loan
losses, it must rely to a significant extent upon other financial institutions'
histories of loan losses and their allowance for loan losses, as well as the
Company's management's estimates based on their experience in the banking
industry. The Company cannot assure you that the history of loan losses and the
reserving policies of other financial institutions and its management's judgment
will result in reserving policies that will be adequate for its business and
operations or applicable to its loan portfolio.
THE COMPANY IS DEPENDENT UPON KEY PERSONNEL, INCLUDING ITS LOCAL MANAGEMENT
TEAMS.
The Company's success depends to a significant extent upon certain key
employees, the loss of whom could have an adverse effect on its business. The
Company's key employees include Charles E. Hughes, Jr., its Chief Executive
Officer and President, T. Edwin Stinson, Jr., its Chief Financial Officer, and
Richard B. Kensler, its Chief Credit Officer. Although the Company has entered
into employment agreements with each of these employees, which contain covenants
not to compete, it cannot assure you that it will be successful in retaining
these key employees. The Company is also dependent on its local management
teams. The Company has established relationships with well-trained local senior
management and other employees. The Company's business strategy gives
significant local decision-making authority to its senior officers and managers.
The local bank presidents have entered into covenant not to compete agreements
19
with the Company. However, the Company cannot assure you that it will be able to
retain its current local senior officers or attract new qualified management
personnel. The Company's inability to attract and/or retain qualified management
personnel as it pursues its business strategy could have a material adverse
effect on its financial condition and results of operations.
THE COMPANY COMPETES FOR LOANS AND DEPOSITS WITH MANY LARGER FINANCIAL
INSTITUTIONS THAT HAVE SUBSTANTIALLY GREATER FINANCIAL RESOURCES THAN IT HAS.
Competition among financial institutions in Florida is intense. The
Company primarily competes with the Florida operations of large out-of-state
commercial banks and Florida-based regional commercial banks. In addition, the
Company competes with other bank holding companies, state and national
commercial banks, savings and loan associations, consumer finance companies,
credit unions, securities brokerages, insurance companies, mortgage banking
companies, money market mutual funds, asset-based non-bank lenders and other
financial institutions. Many of these competitors have substantially greater
financial resources, lending limits and larger branch networks than the Company,
and are able to offer a broader range of products and services than it can.
Trends toward the consolidation of the banking industry may make it more
difficult for smaller banks to compete with large national and regional banking
institutions. The Company cannot assure you that it will compete successfully
against its competitors. Failure to compete effectively for deposit, loan and
other banking customers in the Company's markets could cause it to lose market
share, slow its growth rate and may have an adverse effect on its financial
condition and results of operations.
THE COMPANY'S CONTINUED FUTURE PROFITABILITY DEPENDS TO A SIGNIFICANT EXTENT
UPON REVENUE THE COMPANY RECEIVES FROM ITS SMALL TO MEDIUM-SIZED BUSINESS
CUSTOMERS AND THEIR ABILITY TO MEET THEIR LOAN OBLIGATIONS.
At December 31, 2003, a substantial majority of the Company's loan
portfolio was comprised of loans to its small to medium-sized business
customers. For the year ended December 31, 2003, a significant portion of the
Company's total interest income was derived from small to medium-sized business
customers. The Company expects that its future profitability will depend to a
significant extent upon revenue it receives from small to medium-sized business
customers, and their ability to continue to meet existing loan obligations. As a
result, adverse economic conditions or other factors adversely affecting this
market segment may have a greater adverse effect on the Company than on other
financial institutions that have a more diversified customer base.
THE COMPANY MAY RELY ON FLORIDA BANK, N.A. TO FUND ITS OPERATIONS.
The Company has no significant independent sources of revenue. From the
Company's inception to the present, its principal sources of funds have been
capital received in its initial public offering, subsequent issuances of
preferred stock and trust preferred securities and borrowings from its line of
credit. In the future, the Company plans for cash dividends and other payments
that it receives from Florida Bank, N.A. to serve as its principal source of
funds to service indebtedness and to fund operations. The payment of dividends
by the Company's bank to it is subject to the prior approval of the OCC if the
total of all dividends declared by the bank in any calendar year exceeds the sum
of the bank's net profits for that year and its retained net profits for the
preceding two calendar years, less any required transfers to surplus. At
December 31, 2003, the amount of dividends available for Florida Bank, N.A. to
pay to the Company without OCC approval was $9.0 million. In addition, federal
20
law also prohibits a national bank from paying dividends if it is, or such
dividend payments would cause it to become, undercapitalized. The Company's
success and profitability is solely dependent on the success and profitability
of its bank.
THE COMPANY COMPETES IN AN INDUSTRY THAT CONTINUALLY EXPERIENCES TECHNOLOGICAL
CHANGE, AND THE COMPANY MAY HAVE FEWER RESOURCES THAN MANY OF ITS COMPETITORS TO
CONTINUE TO INVEST IN TECHNOLOGICAL IMPROVEMENTS.
The financial services industry is undergoing rapid technological
changes, with frequent introductions of new technology-driven products and
services. In addition to improving the ability to serve customers, the effective
use of technology increases efficiency and enables financial institutions to
reduce costs. The Company's future success will depend, in part, upon its
ability to address the needs of its customers by using technology to enhance its
product and service offering. Many of the Company's competitors have
substantially greater resources to invest in technological improvements. The
Company cannot assure you that it will be able to implement new
technology-driven products and services effectively or be successful in
marketing these products and services to its customers.
SYSTEM FAILURE OR BREACHES OF THE COMPANY'S NETWORK SECURITY COULD SUBJECT IT TO
INCREASED OPERATING COSTS AS WELL AS LITIGATION AND OTHER LIABILITIES.
The computer systems and network infrastructure the Company uses could
be vulnerable to unforeseen problems. The Company's operations are dependent
upon its ability to protect its computer equipment against damage from fire,
power loss, telecommunications failure or a similar catastrophic event. Any
damage or failure that causes an interruption in the Company's operations could
have an adverse effect on its financial condition and results of operations. In
addition, the Company's operations are dependent upon its ability to protect its
computer systems and network infrastructure against damage from physical
break-ins, security breaches and other disruptive problems. In particular, the
Company's systems may be susceptible to attacks, break-ins and viruses launched
from the Internet. Such computer break-ins and other disruptions would
jeopardize the security of information stored in and transmitted through the
Company's computer systems and network infrastructure, which may result in
significant liability to it and deter potential customers. Although the Company,
with the help of third-party service providers, intends to continue to implement
security technology and establish operational procedures to prevent such damage,
it cannot assure you that these security measures will be successful. In
addition, advances in computer capabilities, new discoveries in the field of
cryptography or other developments could result in a compromise or breach of the
algorithms that the Company and its third-party service providers use to protect
customer transaction data. A failure of such security measures could have an
adverse effect on the Company's financial condition and results of operations.
MORTGAGE DIVISION
THE COMPANY'S WHOLESALE RESIDENTIAL MORTGAGE BANKING DIVISION HAS A LIMITED
OPERATING HISTORY AND, AS A RESULT, THE FINANCIAL PERFORMANCE TO DATE OF THIS
DIVISION MAY NOT BE A RELIABLE INDICATOR OF WHETHER THIS BUSINESS DIVISION WILL
CONTINUE TO BE SUCCESSFUL.
The Company commenced its wholesale residential mortgage banking
operations in the fourth quarter of 2002. As a result, the Company has a very
limited historical basis upon which to rely for gauging the business performance
of this division under normalized operations. Also, the limited operating
history of this division has coincided with a period of historically low
interest rates, which has resulted in a significant volume of refinancing for
residential mortgage loans. In periods of rising interest rates, demand for
mortgage loans typically declines, which could cause a decrease in the income
from the Company's wholesale residential mortgage banking division. Accordingly,
21
the financial performance of this division to date may not be representative of
its long-term future performance or indicative of whether the mortgage division
will continue to be successful. A substantial portion of the Company's mortgage
loan volume is related to refinancing activities. For the year ended December
31, 2003, approximately 68% of the Company's mortgage loan volume resulted from
refinancing activities as compared to approximately 32% for purchase loans. For
the year ended December 31, 2002, approximately 83% of the Company's mortgage
loan volume resulted from refinancing activities, as compared to approximately
17% for purchased loans. As interest rates begin to increase, the volume of
refinancing will decrease substantially, resulting in a decrease in the overall
volume of the Company's mortgage bank segment and a reduction in earnings. There
is no assurance that the Company can reduce expenses as the revenue associated
with the lower volume of mortgage loans decreases, or that it can increase its
volume of purchase loans to offset the loss of volume related to refinancing
activities. Although a significant decrease in mortgage refinancing activity due
to higher interest rates would reduce the Company's earnings and could
materially adversely affect the results of its mortgage operations, management
believes this reduction will be partially offset by the benefits of improved
margins resulting from higher rates on its core loan portfolio.
ADJUSTMENTS FOR LOANS HELD FOR SALE MAY ADVERSELY AFFECT THE COMPANY'S PROFITS
In the Company's financial statements it must value, on a quarterly
basis, loans that it originates and classify as held for sale to the lower of
their cost or market value. Depending on market conditions, the Company may be
required to make adjustments that adversely affect its results of operations.
Loans held for sale totaled $66.5 million as of December 31, 2003. This amount
will vary depending on loan production volume and the Company's ability to sell
or securitize its mortgage loans in the secondary market on a timely basis.
THE COMPANY MAY EXPERIENCE LOSSES FROM THE SALE OF ITS MORTGAGE LOANS.
The sale of mortgage loans may result in a loss to the Company. Losses
may result primarily from several factors. The Company may originate or purchase
a loan at a price (i.e., interest and discount), which may be higher or lower
than it receives when the loan is sold in the secondary market. The borrower may
default on the loan while the Company is holding it for sale resulting in the
loan being sold at a greatly reduced price. The borrower may default on the loan
shortly after the sale in the secondary market, which would require the Company
to repurchase the loan and sell it at a greatly reduced price. The Company may
purchase a loan that has been fraudulently originated resulting in a total loss
on the value of the loan. The Company may issue a commitment to a borrower at a
certain interest rate and may commit to sell that same loan to an institutional
investor for delivery at a future time for a stated price. If the Company's
borrower fails to close on the loan, it may have to a pay a fee or incur an
expense for failure to deliver the loan as promised. All or any of these losses,
if they were to occur on a large enough scale, could materially adversely affect
the Company's results of operations.
THE COMPANY HAS NO CONTRACTUAL AGREEMENTS WITH THE BROKERS THAT ORIGINATE A
SIGNIFICANT AMOUNT OF ITS MORTGAGE LOANS AND THE FAILURE TO MAINTAIN ITS
RELATIONSHIPS WITH THESE BROKERS COULD NEGATIVELY AFFECT ITS VOLUME OF LOAN
ORIGINATIONS.
During the year ended December 31, 2003, brokers and correspondents
accounted for substantially all of the mortgage loans originated and purchased
by the Company. None of these brokers or correspondents is contractually
obligated to do business with the Company. Further, the Company's competitors
also have relationships with these brokers and correspondents and actively
compete with it in an effort to expand their broker and correspondent networks.
Accordingly, the Company cannot assure you that it will be successful in
maintaining its existing relationships or expanding its broker and correspondent
networks. The Company originated and purchased loans from a total of 548 brokers
and correspondents in the year ended December 31, 2003. Approximately 15.3% of
the loans the Company originated were provided to it by five of these brokers.
Accordingly, if any of these principal brokers or correspondents ceased to do
business with the Company, the volume of the Company's loan originations and
purchases, as well as its results of operations and financial condition, could
be negatively affected.
22
THE COMPANY'S MORTGAGE BUSINESS COMPETES WITH MANY SOURCES OF MORTGAGES THAT
HAVE SUBSTANTIALLY GREATER RESOURCES THAN IT.
Many sources of mortgages are available to potential borrowers today.
These sources include consumer finance companies, mortgage banking companies,
savings banks, commercial banks, credit unions, thrift institutions, credit card
issuers and insurance companies. Many of these alternative sources are
substantially larger and have considerably greater financial, technical and
marketing resources than the Company. Additionally, many financial services
organizations against which the Company competes for business have formed
national loan origination networks or have purchased home equity lenders. The
Company competes for mortgage loan business in several ways, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of loan, loan origination fees and interest rates. If
any of these competitors significantly expand their activities successfully in
the Company's target markets or if the Company fails to compete effectively with
existing competition, its business could be materially adversely affected.
AVAILABILITY OF REPORTS AND OTHER INFORMATION
The Company's corporate website is http://www.flbk.com. It makes
available on this website, free of charge, access to the Company's Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy
Statement on Schedule 14A and amendments to those materials filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as
soon as reasonably practicable after the Company electronically submits such
material to the Securities and Exchange Commission. In addition, the
Commission's website is HTTP://WWW.SEC.GOV, which makes available on its
website, free of charge, reports, proxy and information statements, and other
information regarding issuers, such as the Company, that file electronically
with the Commission. Information provided on the Company's website or on the
Commission's website is not part of this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
The Company leases its main offices located at 5210 Belfort Road, Suite
310, Concourse II, Jacksonville, Florida 32256, where it occupies 6,613 square
feet. In addition, the Company leases seven banking offices and an operations
center in the following locations: Jacksonville, Tampa, Fort Lauderdale, St.
Petersburg/Clearwater, Ocala, Tampa - Operations Center and West Palm Beach. In
the fall of 2003, the Company's Fort Lauderdale office moved its operations to
leased space in downtown Fort Lauderdale. The Company owns the property for its
offices in Gainesville. The Company also leases the space for its mortgage
division business in Jacksonville.
In September 2002, the Company purchased a parcel of land for the
purpose of constructing its corporate headquarters and the Jacksonville banking
office. In July 2003, the Company sold the land to a developer for construction
of the offices and concurrently entered into a lease to occupy a portion of the
building beginning in May 2004.
The following is a listing of the Company's banking offices:
Florida Bank, N.A. - Alachua County
600 N.W. 43rd Street, Suite A
Gainesville, Florida 32607
Facilities: Owned by the Company - 7,581 sq. ft.
23
Florida Bank, N.A. - Jacksonville - Duval County
5210 Belfort Road, Suite 140
Jacksonville, Florida 32256
Facilities: Leased 6001 sq. ft.
Florida Bank, N.A. - Tampa - Hillsborough County
100 West Kennedy Boulevard
Tampa, Florida 33602
Facilities: Leased 12,573 sq. ft.
Florida Bank, N.A. - Ft. Lauderdale - Broward County
200 Las Olas Boulevard, Suites 150 & 1820
Ft. Lauderdale, Florida 33301
Facilities: Leased 8,777 sq. ft.
Florida Bank, N.A. - Pinellas County
8250 Bryan Dairy Road, Suite 150
Largo, Florida 33777
Facilities: Leased 6,400 sq. ft.
Florida Bank, N.A. - Marion County
2437 SE 17th Street, Suite 101
Ocala, Florida 34470
Facilities: Leased 9,400 sq. ft.
Florida Bank, N.A. - Marion County
Paddock Mall Night Drop Branch
3100 College Road
Ocala, Florida 34474
Facilities: Leased - No sq. ft.
Florida Bank, N.A. - Operations Center
6301 Benjamin Road, Suite 105
Tampa, Florida 33634
Facilities: Leased 11,328 sq. ft.
Florida Bank Mortgage
4815 Executive Park Court, Suite 103
Jacksonville, Florida 32216
Facilities: Leased 13,200 sq. ft.
Florida Bank, N.A. - Palm Beach County
Phillips Point
777 S. Flagler Drive, Suite 128E
West Palm Beach, Florida 33401
Facilities: Leased 4,602 sq. ft.
Additional information concerning the property owned or leased by the
Company and its subsidiaries is incorporated herein by reference from Note 4,
PREMISES AND EQUIPMENT of the Notes to the Consolidated Financial Statements.
24
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
the Bank is a party or of which any of their properties are subject, nor are
there material proceedings known to the Company or the Bank to be threatened or
pending by any governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the three months ended December 31,
2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The NASDAQ National Market
under the symbol "FLBK." The common stock began trading on The NASDAQ National
Market on July 30, 1998. The following table sets forth for the periods
indicated the quarterly high and low sales prices per share as reported by The
NASDAQ National Market. These quotations also reflect inter-dealer prices
without retail mark-ups, markdowns, or commissions.
HIGH LOW
--------------- --------------
Fiscal year ended December 31, 2003
First Quarter $10.25 $8.31
Second Quarter 12.10 9.00
Third Quarter 12.49 11.00
Fourth Quarter 16.30 11.70
Fiscal year ended December 31, 2002
First Quarter 8.90 5.90
Second Quarter 9.64 7.41
Third Quarter 9.00 7.27
Fourth Quarter 8.97 7.58
As of December 31, 2003, there were approximately 510 holders of record
of the Common Stock. Management believes that there are in excess of 3,000
beneficial holders of its Common Stock.
DIVIDENDS
The Company has never declared or paid any dividends on its common
stock. The Company currently anticipates that all of its earnings will be
retained for development of the Company's business, and does not anticipate
paying any cash dividends in the foreseeable future. Future cash dividends on
common stock, if any, will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's future
earnings, operations, capital requirements and surplus, general financial
condition, contractual restrictions, and such other factors as the Board of
Directors may deem relevant.
STOCK REPURCHASE PLANS
In September 1999, the Company's Board of Directors authorized a stock
repurchase plan covering up to ten percent (10%) of the outstanding shares of
common stock (approximately 585,000 shares). The share repurchase plan
authorizes the purchase of common shares at any price below the then current
book value per share. As of December 31, 2003, the Company had repurchased
302,200 shares for a total cost of $1.9 million or an average cost of $6.18 per
share. No shares have been repurchased under this plan during the fiscal year
ended December 31, 2003 and 2002.
25
Pursuant to the stock repurchase plan, on December 10, 2001, the
Company's Board of Directors authorized a pre-programmed stock repurchase
program pursuant to the `safe harbor' guidelines of Rule 10b-18 of the
Securities Exchange Act of 1934. This program provides for repurchase of up to
250,000 shares in the open market when the trading price of the Company's common
stock falls to $5.75 per share or less. No shares have been repurchased under
this plan during the fiscal year ended December 31, 2003.
EQUITY COMPENSATION PLANS
The Company maintains the Amended and Restated1998 Stock Option Plan
(the "1998 Plan"), the Employee Stock Purchase Plan (the "ESPP") and the Amended
and Restated Incentive Compensation Plan (the "Incentive Plan"). Only restricted
common stock is awarded under the Incentive Plan.
The following table gives information about equity awards under the
1998 Plan, the Incentive Plan and the ESPP as of December 31, 2003:
NUMBER OF SHARES TO BE WEIGHTED AVERAGE NUMBER OF SECURITIES
ISSUED UPON THE EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
------------- ------------------- ------------------- -----------------------------
Equity Compensation Plans
approved by the shareholders 16,642 (1) $10.20 (2) 221,318 (3)
Equity Compensation Plans not
approved by the shareholders 975,026 (4) $8.64 (5) 110,413 (6)
------------------- ------------------- -----------------------------
TOTALS 991,668 $8.67 331,731
- -------------
(1) Represents an aggregate of 16,642 common shares issuable upon exercise of
options under the ESPP.
(2) Represents weighted-average exercise price of outstanding options under
the ESPP.
(3) Includes 85,186 common shares and 136,132 common shares remaining
available for issuance under the ESPP and the Incentive Plan,
respectively.
(4) Represents the aggregate of common shares issuable upon exercise of
options under the 1998 Plan.
(5) Represents weighted-average exercise price of outstanding options under
the 1998 Plan.
(6) Represents common shares remaining available under the 1998 Plan.
SERIES C PREFERRED STOCK
On December 31, 2002, the Company 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 but is redeemable only as a result of a
change in control.
DIVIDENDS
Non-cumulative cash dividends accrued at five percent annually through
December 31, 2003 and will accrue at 3.75% thereafter and are payable quarterly
in arrears.
26
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of affairs
of the Company, the holders of Series C preferred stock at the time shall
receive $100.00 per share plus an amount equal to accrued and unpaid dividends
thereon through and including the date of distribution prior to any distribution
to holders of common stock. The liquidation preference at December 31, 2003 was
approximately $5.1 million.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company
for the periods indicated. The selected financial data of the Company as of
fiscal years ended and for each of the years then ended are derived from the
financial statements of the Company, which have been audited by Deloitte &
Touche LLP, independent auditors. These selected financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's financial statements and notes
thereto, and financial and other information included elsewhere herein.
Year Ended December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
Summary Income Statement:
Interest income $ 43,568 $ 34,927 $ 31,380 $ 23,766 $ 11,142
Interest expense 16,891 15,584 16,548 13,711 4,696
-------- -------- -------- -------- --------
Net interest income 26,677 19,343 14,832 10,055 6,446
Provision for loan losses 2,936 3,026 1,889 1,912 1,610
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 23,741 16,317 12,943 8,143 4,836
Noninterest income 15,603 4,040 2,048 1,011 583
Noninterest expense 32,198 18,005 13,693 10,886 8,342
-------- -------- -------- -------- --------
Income (loss) before provision for
income taxes 7,146 2,352 1,298 (1,732) (2,923)
Provision (benefit) for income taxes 2,490 885 490 (652) (1,076)
-------- -------- -------- -------- --------
Net income (loss) 4,656 1,467 808 (1,080) (1,847)
-------- -------- -------- -------- --------
Preferred stock dividends 250 140 250 -- --
-------- -------- -------- -------- --------
Net income (loss) applicable to
common shares $ 4,406 $ 1,327 $ 558 $ (1,080) $ (1,847)
======== ======== ======== ======== ========
Earnings (loss) per common share:
Basic $ 0.65 $ 0.21 $ 0.10 $ (0.19) $ (0.32)
Diluted 0.62 0.20 0.10 (0.19) (0.32)
27
December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Summary Balance Sheet Data:
Investment securities $ 56,886 $ 53,652 $ 38,886 $ 36,756 $ 28,511
Loans held for investment, net of deferred loan fees 690,590 550,455 401,444 285,526 157,517
Loans held for sale 66,495 54,674 -- -- --
Earning assets 844,587 721,296 494,987 353,239 205,898
Total assets 944,461 756,066 522,323 372,797 218,163
Noninterest-bearing deposits 134,648 141,395 99,899 41,965 22,036
Total deposits 796,613 664,910 451,249 305,239 159,106
Repurchase agreements and other borrowed funds 57,555 14,576 14,210 26,035 18,279
Total shareholders' equity 57,794 52,964 46,142 38,556 39,235
Performance Ratios:
Net interest margin (1) 3.17 % 3.33 % 3.62 % 3.58 % 4.57 %
Efficiency ratio (2) 76.15 77.00 81.12 98.37 118.68
Return on average assets 0.50 0.22 0.13 (0.36) (1.07)
Return on average equity 7.98 2.79 1.30 (2.83) (3.12)
Asset Quality Ratios:
Allowance for loan losses to total loans held for investment 1.31 % 1.32 % 1.17 % 1.23 % 1.18 %
Non-performing loans to total loans held for investment 0.40 0.25 0.36 1.44 1.46
Net charge-offs to average loans held for investment 0.18 0.09 0.21 0.12 0.80
Capital and Liquidity Ratios:
Total capital to risk-weighted assets 10.95 % 11.92 % 12.70 % 12.73 % 18.19 %
Tier 1 capital to risk-weighted assets 9.73 10.78 11.63 11.58 17.29
Tier 1 capital to average assets 8.24 9.97 10.64 10.28 20.01
Average loans to average deposits 110.76 97.21 99.03 94.90 101.53
Average equity to average total assets 6.04 7.79 9.96 12.80 34.30
- ---------------
(1) Computed by dividing net interest income by average earning assets.
(2) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THE COMPANY AND ITS REPRESENTATIVES MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL
STATEMENTS THAT ARE "FORWARD-LOOKING" AND PROVIDE OTHER THAN HISTORICAL
INFORMATION, INCLUDING STATEMENTS CONTAINED IN THE FORM 10-K, THE COMPANY'S
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR IN COMMUNICATIONS
TO ITS SHAREHOLDERS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO BE MATERIALLY
DIFFERENT FROM ANY RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY ANY FORWARD-LOOKING STATEMENT. THESE FACTORS INCLUDE,
AMONG OTHER THINGS, THE RISK FACTORS LISTED BELOW.
IN SOME CASES, 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 CAUTIONS 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. SEE THE SECTION ON RISK FACTORS THAT THE COMPANY HAS IDENTIFIED,
WHICH ARE DISCUSSED IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
29
EXECUTIVE SUMMARY
OVERVIEW OF OPERATING RESULTS
Florida Banks, Inc. (the "Company") was formed in 1997 to create a
statewide community banking system that would focus on the largest and fastest
growing Florida banking markets. The Company began to operate in 1998 after it
completed the acquisition of First National Bank of Tampa, which became the
Company's wholly owned banking subsidiary and was subsequently named Florida
Bank, N.A.
An important aspect of the Company's growth strategy is the ability to
service and effectively manage a large number of loans and deposit accounts in
multiple markets in Florida. Accordingly, the Company created an operations
infrastructure sufficient to support statewide lending and banking operations.
Management believes that the Company's existing infrastructure allows it to grow
its business both geographically and with respect to the size and number of loan
and deposit accounts without substantial additional capital expenditures.
The Company's historical financial results for fiscal 1998 to 2000
reflect the development of the Company in its early stages, notably in
connection with initial start-up costs and the raising and retention of capital
to fund its planned growth. In 1998 and 1999 the Company incurred significant
noninterest expenses for the start-up and infrastructure costs described above,
while revenue items gradually increased as it began to originate loans and
invest in other earning assets. In the fourth quarter of 2000, the Company
achieved profitability as these costs were spread over a larger asset base. The
Company has maintained profitability and asset growth throughout fiscal 2001,
2002 and fiscal 2003.
In the fourth quarter of fiscal 2002, the Company launched its
wholesale residential mortgage banking division that is managed as a separate
line of business. This mortgage operation significantly increased noninterest
income and noninterest expense and significantly contributed to earnings in
fiscal 2002 and 2003.
The Company's operating results have improved significantly over the
past several years. The table below shows the annual growth rate of its net
interest income, net income, assets, loans and deposits:
AS OF OR FOR AS OF OR FOR
AS OF OR FOR THE ANNUAL THE YEAR ENDED ANNUAL THE YEAR ENDED ANNUAL
YEAR ENDED GROWTH DECEMBER 31, GROWTH DECEMBER 31, GROWTH
(Dollars in Thousands) DECEMBER 31, 2003 RATE (1) 2002 RATE (1) 2001 RATE (1)
----------------- -------- ------------- -------- -------------- --------
Net interest income $26,677 37.9 $19,343 30.4 $14,832 47.5
Net income (loss)
applicable to common
shares 4,406 232.0 1,327 137.8 558 151.7
Total assets 944,461 24.9 756,066 44.8 522,323 40.1
Loans held for investment, net
of deferred fees 690,590 25.5 550,455 37.1 401,444 40.6
Deposits 796,613 19.8 664,910 47.3 451,249 47.8
- ----------
(1) The annual growth rate with respect to this data is the percentage growth
of the item in the year ended shown compared to the most recently
completed prior year end.
30
CRITICAL ACCOUNTING POLICIES
The preparation of the financial statements, on which this management's
discussion and analysis is based, requires the Company 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.
ALLOWANCE FOR LOAN LOSSES
Management carefully monitors the credit quality of the Company's loan
portfolios and makes estimates about the amount of credit losses that have been
incurred at each financial statement reporting date. This process significantly
impacts the financial statements and involves complex, subjective judgments. The
allowance is largely determined based upon the market value of the underlying
collateral. Market values of collateral are generally based upon appraisals
obtained from independent appraisers. If market conditions decline, the
allowance for loan losses would be negatively impacted resulting in a negative
impact on the Company's earnings. The allowance for loan losses is a significant
estimate that can and does change based on management's assumptions about
specific borrowers and applicable economic and environmental conditions, among
other factors.
OTHER REAL ESTATE OWNED
At December 31, 2003, the Company had two real estate properties that
were obtained through a foreclosure. The properties are 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 properties are 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 plus a foreign
currency swap and have provided interest rate swaps to loan participants. As a
result of these activities, the Company recognized a net loss on derivative
instruments of $19,000 for the year ended December 31, 2003. 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 Company's earnings.
BUSINESS SEGMENTS
Prior to October 2002, the Company had only one reporting segment. In
October 2002, the Company began operating its mortgage banking division, which
is managed as a separate business segment. Accordingly, beginning in 2002, the
Company began to report its results of operations on the following two reporting
segments: the COMMERCIAL BANK and the MORTGAGE BANK. Net interest income per
segment is determined by including interest earned on loans and investments in
that segment, less interest expense of deposits and borrowings used to support
the earning assets of that segment. For more details on the Company's business
segments, see Note 23, SEGMENT REPORTING of the Notes to the Consolidated
Financial Statements.
31
COMMERCIAL BANK
The commercial bank segment offers a wide array of financial services
to its customers, including short and long-term commercial, consumer and
mortgage loans, interest-bearing and noninterest-bearing deposit accounts,
telephone and internet banking, Automated Clearing House and Electronic Funds
Transfer, stored value cards and other specialized products and services. For
the year ended December 31, 2003, the commercial bank segment accounted for
86.6% of consolidated net interest income, 29.0% of consolidated noninterest
income, and 51.8% of consolidated noninterest expense. For the year ended
December 31, 2002, the commercial bank segment accounted for 97.9% of
consolidated net interest income, 66.5% of consolidated noninterest income, and
76.0% of consolidated noninterest expense. As this segment comprises the
majority of the Company's operations, the performance of this segment is
described in the consolidated discussion of financial condition and results of
operations below.
MORTGAGE BANK
The mortgage bank segment originates residential mortgage loans through
a network of third party mortgage brokers and sells these loans on a wholesale
basis into the secondary mortgage loan market. For the year ended December 31,
2003, the mortgage bank segment accounted for 15.3% of consolidated net interest
income, 71.0% of noninterest income, and 34.2% of noninterest expense. The
mortgage bank originated approximately $1.1 billion in mortgage loans, and sold
approximately $1.0 billion in mortgage loans, during the fiscal year ended
December 31, 2003. For the year ended December 31, 2003, this segment
contributed $4.1 million to income before income taxes, excluding any allocation
of parent company costs.
For the year ended December 31, 2002, the mortgage bank segment
accounted for 0.3% of net interest income, 33.5% of noninterest income, and 5.1%
of noninterest expense. The mortgage bank originated approximately $98 million
in mortgage loans, and sold approximately $44 million in mortgage loans, during
the fiscal year ended December 31, 2002. For the year ended December 31, 2002,
this segment contributed $0.5 million to income before income taxes, excluding
any allocation of parent company costs.
Approximately 68% and 83% of the Company's mortgage loan volume for the
years ended December 31, 2003 and 2002, respectively, resulted from refinancing
activities. As interest rates begin to increase, the volume of refinancing will
decrease substantially, resulting in a decrease in the overall volume of the
Company's mortgage bank segment and a reduction in earnings. Initially, the
Company will offset a portion of this reduction in earnings by reducing its
overhead expenses, including a reduction in temporary and contract employees. To
offset this decline in volume, the Company intends to continue to expand its
sales force and enter other Florida banking markets. The Company will also
emphasize purchase loan originations by offering premium pricing and accelerated
service levels for wholesale loans. In addition, the Company, in its initiatives
that address the short term effects of lower volumes and the longer term goal of
increasing its presence in the Florida banking market will allow it to continue
to leverage its wholesale mortgage operation as interest rates increase and the
volume of refinance activity declines as a percentage of the overall mortgage
loan market.
OTHER
This category includes the Company's investment securities portfolio,
capital, derivative instruments, liquidity and funding activities, risk
management and certain other support activities not currently allocated to the
abovementioned business segments.
32
Information about reportable segments, and reconciliation of such
information to the audited consolidated condensed financial statements as of and
for the year ended December 31, 2003 follows:
COMMERCIAL INTER-SEGMENT CONSOLIDATED
(Dollars in Thousands) BANK MORTGAGE BANK OTHER ELIMINATIONS TOTAL
---------- ------------- ----- ------------ ------------
Net interest income................. $ 23,115 $ 4,073 $ (511) $ -- $ 26,677
Noninterest income.................. 4,524 11,079 -- -- 15,603
Noninterest expense................. 16,689 11,025 4,484 -- 32,198
Income (loss) before taxes.......... 8,015 4,127 (4,996) -- 7,146
Total assets........................ 869,269 68,991 88,528 (82,327) 944,461
Expenditures for additions to
premises and equipment.......... 1,066 423 160 -- 1,649
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for the year
ended December 31, 2002 follows:
COMMERCIAL MORTGAGE INTER-SEGMENT CONSOLIDATED
(Dollar in Thousands) BANK BANK OTHER ELIMINATIONS TOTAL
---------- --------- ----- ------------ ------------
Net interest income.............. $18,943 $62 $338 $-- $19,343
Noninterest income............... 2,685 1,355 -- -- 4,040
Noninterest expense.............. 13,690 911 3,404 -- 18,005
Income (loss) before taxes....... 4,913 505 (3,066) -- 2,352
Total assets..................... 694,561 55,235 70,291 (64,021) 756,066
Expenditures for additions to
premises and equipment........ 2,398 562 8 -- 2,968
"Inter-Segment Elimination" in the tables above represents primarily
the holding company's (Florida Banks, Inc.) investments in its subsidiary bank
(Florida Bank, N.A.) and its nonbank subsidiaries, and the holding company's
deposits held by its subsidiary bank. These eliminations are made pursuant to
the presentation of consolidated financial information as discussed in Note 1,
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of the Notes to the Consolidated
Financial Statements.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Throughout this section, the Company uses the following terms and
meanings to discuss its results of operations:
"Net interest income" is the principal component of a commercial bank's
income stream and represents the difference or spread between interest and
certain fee income generated from earning assets and the interest expense paid
on deposits and other borrowed funds. Fluctuations in interest rates, as well as
volume and mix changes in earning assets and interest-bearing liabilities, can
materially impact net interest income. The Company had no investments in
tax-exempt securities during 2003, 2002 and 2001. Accordingly, no adjustment is
necessary to facilitate comparisons on a taxable equivalent basis.
"Provision for loan losses" is the expense of providing an allowance or
reserve for probable future losses on loans. The amount of the provision for
each period is dependent upon many factors, including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
management's assessment of loan portfolio quality, the value of loan collateral
and general business and economic conditions.
"Noninterest income" consists of revenues generated from a broad range
of financial services, products and activities, including fee-based services,
33
service fees on deposit accounts and other activities. In addition, gains
realized from the sale of the guaranteed portion of Small Business
Administration ("SBA") loans, other real estate owned, and available for sale
investments are included in noninterest income.
"Noninterest expense" consists of items such as salaries and benefits,
occupancy and equipment, and other general and administrative expenses.
"Net income applicable to common shares" means net income after taxes
less any dividends on preferred stock for that period. Preferred stock for the
periods presented consists of Series B preferred, which was issued June 29, 2001
and converted to common stock on April 26, 2002, and Series C preferred, which
was issued December 31, 2002, and was still outstanding as of December 31, 2003.
FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE FISCAL YEAR ENDED DECEMBER
31, 2002
NET INTEREST INCOME increased by $7.3 million, or 37.9% to $26.7
million for the year ended December 31, 2003 from $19.3 million for the year
ended December 31, 2002. This is attributable to an increase of $9.8 million in
interest on loans for the year ended December 31, 2003, resulting from the
growth in the Company's loan portfolio, partially offset by decreases in
interest income from investments and Federal funds sold and an increase in
interest expense of $1.3 million. The increase in interest expense resulted
primarily from an increase of $693,000 in interest on deposits and $549 interest
on trust preferred securities, partially offset by decrease in interest on
repurchase agreements and borrowed funds.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS
No. 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. Upon the adoption of SFAS
No. 150, the Company's obligated mandatorily redeemable preferred securities of
subsidiary trusts were reclassified from mezzanine equity to debt. The dividends
related to these securities are reflected as interest expense beginning July 1,
2003, on a prospective basis. At December 31, 2003, the Company had $20 million
outstanding as company obligated mandatorily redeemable preferred securities of
subsidiary trusts. The Company expensed approximately $975,000 related to those
instruments of which approximately $549,000 (including amortization of debt
issuance costs of approximately $71,000) is recorded as interest expense and
$426,000 is recorded as dividends on trust preferred securities in the
Consolidated Statement of Operations.
The net interest spread increased to 2.85% in 2003 from 2.70% in 2002,
as the yield on average earning assets decreased 78 basis points while the cost
of interest-bearing liabilities decreased 93 basis points. The net interest
spread measures the absolute difference between the yield on average earning
assets and the rate paid on average interest-bearing sources of funds. The net
interest spread eliminates the impact of noninterest-bearing funds and gives a
direct perspective on the effect of market interest rate movements. This
measurement allows management to evaluate the variance in market rates and
adjust rates or terms as needed to maximize spreads.
During recent years, the net interest margins and net interest spreads
have been under pressure, due in part to intense competition for funds with
non-bank institutions and changing regulatory supervision for some financial
intermediaries. The pressure was not unique to the Company and was experienced
by the banking industry nationwide.
To counter potential declines in the net interest margin and the
interest rate risk inherent in the Company's balance sheet, the Company adjusts
the rates and terms of the interest-bearing liabilities in response to general
market rate changes and the competitive environment. The Company monitors
Federal funds sold levels throughout the year, investing any funds not necessary
34
to maintain appropriate liquidity in higher yielding investments such as
short-term U.S. government and agency securities. The Company will continue to
manage its balance sheet and its interest rate risk based on changing market
interest rate conditions.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The table below presents the changes in interest income and interest
expense attributable to volume and rate changes between the fiscal years ended
December 31, 2003 and 2002. The effect of a change in average balance has been
determined by applying the average rate in 2002 and 2003 to the change in
average balance from 2002 to 2003, respectively. The effect of change in rate
has been determined by applying the average balance in 2002 and 2003 to the
change in the average rate from 2002 to 2003, respectively. The net change
attributable to the combined impact of the volume and rate has been allocated to
both components in proportion to the relationship of the absolute dollar amounts
of the change in each.
YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 VS. 2002
INCREASE/(DECREASE) DUE TO:
----------------------------------------
VOLUME YIELD/RATE TOTAL
------- ------- -------
INTEREST EARNED ON:
Taxable securities $ 369 $(1,239) $ (870)
Federal funds sold 60 (240) (180)
Net loans 15,689 (5,930) 9,759
Repurchase agreements 39 (107) (68)
------- ------- -------
Total earning assets 16,157 (7,516) 8,641
------- ------- -------
INTEREST PAID ON:
Money-market and interest-bearing
demand deposits 721 (574) 147
Savings deposits 140 (537) (397)
Time deposits 6,294 (5,352) 942
Repurchase agreements 95 (213) (118)
Trust preferred securities (1) 549 -- 549
Other borrowed funds 282 (97) 185
------- ------- -------
Total interest-bearing liabilities 8,081 (6,774) 1,307
------- ------- -------
Net interest income $ 8,076 (742) 7,334
======= ======= =======
- -------------
(1) Effective July 1, 2003, dividends on trust preferred securities are
reported as interest expense on a prospective basis. Previously such
dividends were reported as noninterest expense. The change in interest
expense on trust preferred securities has been reflected in the table as
attributable to volume.
PROVISION FOR LOAN LOSSES charged to operations decreased by
approximately $90,000 or 3.0% to $2.9 million for the year ended December 31,
2003 from $3.0 million for the year ended December 31, 2002. This decrease is
primarily a result of an increase in specific reserves in 2002 for loans that
were charged off in the first quarter of 2003, offset by the growth of the
Company's overall loan portfolio in the fiscal year ended December 31, 2003 as
compared to the fiscal 2002. For a more detailed discussion of the provision for
loan losses, see "-- Analysis of Financial Condition -- Allowance for Loan
Losses and Net Charge-offs.
35
The following table presents an analysis of the NONINTEREST INCOME for
the fiscal years ended December 31, 2003 and 2002 with respect to each major
category of noninterest income:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
2003 2002 $ CHANGE % CHANGE
------- ------- -------- ----------
Gain on sale of mortgage loans $ 8,767 $ 1,093 $ 7,674 702.1
Mortgage loan origination fees 3,357 805 2,552 317.0
Service fees 2,316 1,719 597 34.7
Gain on sale of commercial loans -- 43 (43) (100.0)
Loss on sale of available for sale
investment securities, net -- (4) 4 100.0
Other noninterest income 1,163 384 779 203.0
------- ------- -------- -----
Total $15,603 $ 4,040 $ 11,563 286.2
------- ------- -------- -----
NONINTEREST INCOME increased by $11.6 million, or 286.2% to $15.6
million for the year ended December 31, 2003 from $4.0 million for the year
ended December 31, 2002. This increase primarily resulted from gains on sale of
mortgage loans of $8.8 million and mortgage loan origination fees of $3.4
million for the year ended December 31, 2003, compared to $1.1 million and
$805,000 for these categories for the year ended December 31, 2002. These income
categories relate to the Company's wholesale mortgage division, which commenced
operations in the fourth quarter of 2002. Due to the short time this division
has been in operation, and the substantial portion of its revenue attributable
to mortgage refinance activity; the Company cannot assure you that the current
levels of income or growth will continue in the future. Service fees on deposits
increased by $597,000, or 34.7%, to $2.3 million for the year ended December 31,
2003 from $1.7 million for the year ended December 31, 2002. This increase is
primarily attributable to an increase in deposit accounts. Other noninterest
income increased by $779,000, or 203.0% to $1.2 million for the year ended
December 31, 2003 from $384,000 for the year ended December 31, 2002. The
increase in other noninterest income is primarily a result of an increase in the
cash surrender value of Bank owned life insurance.
The following table presents an analysis of the NONINTEREST EXPENSE for
fiscal years ended December 31, 2003 and 2002 with respect to each major
category of noninterest expense:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
2003 2002 $ CHANGE % CHANGE
------- ------- -------- ---------
Salaries and benefits $21,930 $11,038 $ 10,892 98.7
Occupancy and equipment 2,809 2,106 703 33.4
Communications 1,583 1,144 439 38.4
Data processing 1,134 873 261 29.9
Professional 966 524 442 84.5
Dividends on preferred securities
of subsidiary trusts 426 633 (207) (32.7)
Other 3,349 1,687 1,662 98.5
------- ------- -------- -----
Total $32,198 $18,005 $ 14,193 78.8
------- ------- -------- -----
- -----------
(1) Effective July 1, 2003, dividends on trust preferred securities are
reported as interest expense on a prospective basis. Previously such
dividends were reported as noninterest expense.
NONINTEREST EXPENSE increased by $14.2 million, or 78.8%, to $32.2
million for 2003 compared to $18.0 for 2002. The increase resulted primarily
from increases in salaries and benefits, occupancy and equipment and other
36
expenses. Salaries and benefits expenses increased primarily due to the addition
of staff associated with the overall growth of the Company's business and with
the addition of the mortgage banking division. Commission incentives associated
with loan volume originated by the Company's mortgage banking division totaled
$4.6 million, or 21%, of the Company's total salary and benefits for the year
ended December 31, 2003. Dividends on preferred securities of subsidiary trusts
decreased during 2003 compared to 2002 primarily due to the change in
classification of such dividends effective July 1, 2003, from noninterest
expense to interest expense upon adoption of SFAS No. 150. Trust preferred
securities increased from $17.0 million at December 31, 2002 to $20.0 million at
December 31, 2003. Total dividends paid on the trust preferred securities
totaled $975,000 in 2003 of which $549,000 (including amortization of debt
issuance costs of approximately $71,000) is recorded as interest expense and
$426,000 is recorded as dividends on trust preferred securities in the
Consolidated Statement of Operations. Accordingly, total dividends on trust
preferred securities increased from $633,000 in 2002 to $975,000 due to the
increase in the average balance outstanding. The increase in other expenses is
primarily attributed to the expenses associated with supporting operations
related to the Company's overall growth. Specific operational expenses that
increased include recruitment expenses and postage/courier expenses. Other
expenses related to the Company's intranet, internet and facsimile facilities,
continue to increase in relation to the overall growth of its business.
Recruitment expenses in 2003 related primarily to the recruiting of personnel
with specific skills and experiences to staff its mortgage banking division.
During the fiscal year ended December 31, 2003, non-interest expense was
accounted for by compensation paid to temporary and contract employees for its
mortgage business. Recruiting expenses for the mortgage banking division should
be primarily of a non-recurring nature. Because its physical locations are
spread over a large geographic area, postage/courier expenses tend to be
significant, because of the need for written communication among the Company's
banking facilities, operations center, and customers. These costs will tend to
rise in relation to the overall growth of its business.
A PROVISION FOR INCOME TAXES of $2.5 million was recognized for the
year ended December 31, 2003 compared to $885,000 for the year ended December
31, 2002. These provisions for income taxes represent an estimated effective
annual tax rate of approximately 34.8% and 37.6% 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.
Certain income and expense items are recognized in different periods
for financial reporting purposes and for income tax return purposes. Deferred
income tax assets and liabilities reflect the differences between the values of
certain assets and liabilities for financial reporting purposes and for income
tax purposes, computed at the current tax rates. Deferred income tax expense is
computed as the change in the Company's deferred tax assets, net of deferred tax
liabilities and the valuation allowance. The Company's deferred income tax
assets consist principally of net operating loss carryforwards and the allowance
for loan losses. A deferred tax valuation allowance is established if it is more
likely than not that all or a portion of the deferred tax assets will not be
realized. No valuation allowance was considered necessary at December 31, 2003
or 2002.
First National Bank of Tampa reported losses from operations each year
from its inception in 1988 through 1994. These losses primarily resulted from
loan losses and high overhead costs. Management of First National Bank of Tampa
was replaced during 1992 and additional capital of $1.6 million was raised
through a private placement of common stock during 1993. Largely as a result of
these changes, First National Bank of Tampa became profitable in 1995. In order
to reflect this fresh start, the bank elected to restructure its capital
accounts through a quasi-reorganization. A quasi-reorganization is an accounting
procedure that allows a company to restructure its capital accounts to remove an
accumulated deficit without undergoing a legal reorganization. Accordingly,
First National Bank of Tampa charged against additional paid-in capital its
accumulated deficit of $8.1 million at December 31, 1995. As a result of the
quasi-reorganization, the future benefit from the utilization of the net
operating loss carryforward generated prior to the date of the
quasi-reorganization was required to be accounted for as an increase to
37
additional paid-in capital. Such benefits are not considered to have resulted
from First National Bank of Tampa's results of operations subsequent to the
quasi-reorganization.
The following table presents the components of net deferred tax assets:
AS OF DECEMBER 31,
---------------------
2003 2002
------ ------
Deferred tax assets $4,953 $4,436
Deferred tax liabilities 355 527
Valuation allowance -- --
------ ------
Net deferred tax assets $4,598 $3,909
====== ======
As of December 31, 2003, the Company had approximately $3.9 million in
net operating loss carryforwards available to reduce future taxable earnings at
December 31, 2003, which resulted in net deferred tax assets of $1.4 million.
This net operating loss carryforward will expire in varying amounts in the years
2007 through 2018 unless fully utilized by the Company. Based on management's
estimate of future earnings and the expiration dates of the net operating loss
carryforward as of December 31, 2003 and 2002, it was determined that it is more
likely than not that the benefit of the deferred tax assets will be realized.
The utilization of the net operating loss carryforwards reduces the
amount of the related deferred tax asset by the amount of such utilization at
the current enacted tax rates. Other deferred tax items resulting in temporary
differences in the recognition of income and expenses such as the allowance for
loan losses, loan fees, accumulated depreciation and cash to accrual adjustments
will fluctuate from year-to-year.
As a result of the Company's acquisition of First National Bank of
Florida through the merger, the Company has the use of its net operating loss
carryforwards. However, the portion of the Company's net operating loss
carryforwards that becomes usable each year is limited under provisions of
Section 382 of the Internal Revenue Code relating to the change in control. The
annual limitation is based upon the purchase price multiplied by the applicable
long-term tax-exempt rate (as defined in the Internal Revenue Code) at the date
of acquisition. Based upon the applicable long-term tax-exempt rate for December
1998 acquisitions, this annual limitation is approximately $700,000. Management
believes it is more likely than not that it will produce sufficient taxable
income to allow the Company to fully utilize its net operating loss
carryforwards prior to their expiration.
NET INCOME APPLICABLE TO COMMON SHARES increased by $3.1 million, or
232.1%, to $4.4 million for the year ended December 31, 2003 from $1.3 million
for the year ended December 31, 2002. Basic and diluted earnings per common
share for the year ended December 31, 2003 was $0.65 and $0.62, respectively
compared to $0.21 and $0.20, respectively, for the year ended December 31, 2002.
The increase in net income applicable to common shares can be attributed to an
increase in net interest income and non-interest income, partially offset by
increases in interest and noninterest expense.
The Company's earnings performance is reflected in the calculations of
net income as a percentage of average total assets (return on average assets)
and net income as a percentage of average shareholders' equity (return on
average equity). Return on average assets and return on average equity are
computed using net income applicable to common shares. For the fiscal year ended
December 31, 2003 and 2002, the return on average assets was 0.50% and 0.22%,
respectively. For the same periods, the return on average equity was 7.98% and
2.79%, respectively. The Company's ratio of total equity to total assets
decreased to 6.1% at December 31, 2003 from 7.01% at December 31, 2002,
primarily as a result of growth from branch operations.
38
FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 31, 2001
NET INTEREST INCOME increased by $4.5 million, or 30.4% to $19.3
million for the year ended December 31, 2002 from $14.8 million for the year
ended December 31, 2001. This increase is attributable to growth in loan volume
due to ongoing branch operations, new loan production office operations, and the
new wholesale mortgage operation. These increases were partially offset by the
growth in time deposits, repurchase agreements and other borrowed funds. The
trend in net interest income is commonly evaluated using net interest margin and
net interest spread. The net interest margin, or net yield on average earning
assets, is computed by dividing fully taxable equivalent net interest income by
average earning assets. The net interest margin decreased 29 basis points to
3.33% in 2002 on average earning assets of $581.0 million from 3.62% in 2001 on
average earning assets of $409.8 million. This decrease was primarily due to the
fact that the average yield on earning assets decreased slightly more than the
average rates on interest-bearing liabilities decreased. There was an 170 basis
point decrease in the average yield on earning assets to 5.96% in 2002 from
7.66% in 2001 and a 162 basis point decrease in the average rate paid on
interest-bearing liabilities to 3.25% in 2002 from 4.87% in 2001. The decreased
yield on earning assets was primarily the result of lower market rates on loans
and investment securities, prompted by a decrease in the Prime Rate during
November 2002, from 4.75% to 4.25%, combined with ongoing weakness in other loan
indices, including LIBOR and various mortgage rate indices. The decrease in the
average cost of interest-bearing liabilities is attributable to decreases in
market rates on interest-bearing demand deposits, savings and time deposits,
money market accounts and other borrowed funds.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The table below presents the changes in interest income and interest
expense attributable to volume and rate changes between the fiscal years ended
December 31, 2002 and 2001. The effect of a change in average balance has been
determined by applying the average rate in 2001 and 2002 to the change in
average balance from 2001 to 2002, respectively. The effect of change in rate
has been determined by applying the average balance in 2001 and 2002 to the
change in the average rate from 2001 to 2002, respectively. The net change
attributable to the combined impact of the volume and rate has been allocated to
both components in proportion to the relationship of the absolute dollar amounts
of the change in each.
YEAR ENDED DECEMBER 31, 2002 VS. 2001
INCREASE/DECREASE DUE TO:
----------------------------------------
VOLUME YIELD/RATE TOTAL
------- ----------- -------
INTEREST EARNED ON:
Taxable securities $ 267 $ (681) $ (414)
Federal funds sold 511 (713) (202)
Net loans 11,669 (7,508) 4,161
Repurchase agreements 287 (250) 37
------- ------- -------
Total earning assets 12,734 (9,152) 3,582
------- ------- -------
INTEREST PAID ON:
Money-market and interest-bearing
demand deposits 424 (80) 344
Savings deposits 650 (1,206) (556)
Time deposits 5,221 (5,300) (79)
Repurchase agreements 149 (852) (703)
Other borrowed funds 133 (68) 65
------- ------- -------
Total interest-bearing liabilities 6,577 (7,506) (929)
------- ------- -------
Net interest income $ 6,157 $(1,646) $ 4,511
======= ======= =======
39
PROVISION FOR LOAN LOSSES charged to operations for the year ended
December 31, 2002 increased by $1.1 million, or 60.2%, to $3.0 million from $1.9
million during the year ended December 31, 2001. The increase in the provision
from 2001 to 2002 was generally due to the increase in the amount of loans
outstanding. In addition, in December 2002, a provision of approximately $0.5
million was charged to establish a specific reserve for an overdraft related to
one of the Company's Automated Clearing House processors. This overdraft was
charged off in the first quarter of 2003. For additional information regarding
provision for loan losses, charge-offs and allowance for loan losses, see "--
Financial Condition--Asset Quality."
The following table presents an analysis of the NONINTEREST INCOME for
the fiscal years ended December 31, 2002 and 2001 with respect to each major
category of noninterest income:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
2002 2001 $ CHANGE % CHANGE
------- ------ -------- ----------
Gain on sale of mortgage loans $ 1,093 $ -- $ 1,093 100.0
Mortgage loan origination fees 805 235 570 242.5
Service fees 1,719 1,224 495 40.4
Gain on sale of commercial loans 43 104 (61) (58.8)
Loss on sale of available for sale
investment securities, net (4) 74 (78) (105.4)
Other noninterest income 384 411 (27) 6.6
------- ------ ------- -------
Total $ 4,040 $2,048 $ 1,992 97.3
======= ====== ======= =======
NONINTEREST INCOME increased by $2.0 million, or 97.3%, to $4.0 million
for the year 2002 from $2.0 in 2001. This change resulted from an increase in
the amount of service fees on deposit accounts, an increase in mortgage loan
origination fees, and the income generated by the wholesale mortgage division,
partially offset by a loss on the sale of investment securities available for
sale, a smaller gain on sale of commercial loans, and lower other noninterest
income. Service fees on deposit accounts increased in 2002 from 2001 due to an
increase in the volume of business and personal transaction accounts and
increased volume in the number of services transacted for customers subject to
service charges. Gain on sale of mortgage loans in 2002 totaled $1.1 million,
and mortgage loan origination fees increased in 2002 compared to 2001. This was
due to the wholesale mortgage division commencing operations in the fourth
quarter of 2002. Other income, which includes various recurring noninterest
income items such as debit card fees, decreased in 2002 from 2001.
The net interest spread decreased to 2.71% in 2002 from 2.79% 2001, as
the yield on average earning assets decreased 170 basis points while the cost of
interest-bearing liabilities decreased 162 basis points.
40
The following table presents an analysis of the NONINTEREST EXPENSE for
fiscal years ended December 31, 2002 and 2001 with respect to each major
category of noninterest expense:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
2002 2001 $ CHANGE % CHANGE
------- ------- ---------- ---------
Salaries and benefits $11,038 $ 8,761 $2,277 26.0
Occupancy and equipment 2,106 1,786 320 17.9
Communications 1,144 970 174 17.9
Data processing 873 678 195 28.7
Professional 524 431 93 21.6
Dividends on preferred securities
of subsidiary trusts 633 13 620 4,769.2
Other 1,687 1,054 633 60.1
------- ------- ------ ----
Total $18,005 $13,693 $4,312 31.5
======= ======= ====== ====
Noninterest expense increased by $4.3 million, or 31.5%, to $18.0
million for the year 2002 from $13.7 million in 2001. These increases are
primarily attributable to increases in personnel, occupancy, data processing and
other expenses relating to the establishment of the wholesale mortgage division
and the West Palm Beach loan production office. Increases are also due to
increased dividends on preferred securities of the Company's subsidiary trusts,
together with increases in personnel and other expenses related to it's the
overall growth of the mortgage banking division. Salaries and benefits increased
in 2002 from 2001. This increase is primarily attributable to increases in the
overall number of personnel, and additional employees related to the wholesale
mortgage division. Occupancy and equipment expense increased in 2002 from 2001,
primarily as a result of the activities of the wholesale mortgage division,
which began operations in the fourth quarter of 2002. Data processing expense
increased in 2002 from 2001, which is primarily attributable to the growth in
loan and deposit transactions and the addition of new services. Dividends on
preferred securities of the Company's subsidiary trusts increased in 2002 from
in 2001 due to an increase in the amount of such securities outstanding to $17.0
million at December 31, 2002 from $6.0 million at the prior year-end. Also, the
securities outstanding at December 31, 2001 were issued on December 18, 2001, so
only thirteen days' interest accrued with respect to those securities in 2001.
Other operating expenses increased 36.7% to $3.4 million in 2002 from $2.5
million in 2001. This increase is attributable primarily to an increase of $0.1
million in other real estate owned expenses, an increase of $0.1 million in
audit, tax and accounting expense, an increase of $90,000 in communication
expense and an increase of $89,000 in Automated Clearing House and bank service
charge expense. These expenses are primarily attributable to opening of the
wholesale residential mortgage division and an overall increase in the size and
volume of business conducted by Florida Bank, N.A.
A PROVISION FOR INCOME TAXES of $885,000 was recognized for the year
ended December 31, 2002 compared to $489,000 for the year ended December 31,
2002. These provisions for income taxes represent an estimated effective annual
tax rate of 37.6% for fiscal years ended December 31, 2002 and 2001. The Company
paid no income taxes during fiscal 2002 and 2001 due to the availability of net
operating loss carryforward.
The following table presents the components of net deferred tax assets
as of December 31, 2002 and 2001:
AS OF DECEMBER 31,
---------------------
2002 2001
------ ------
Deferred tax assets $4,436 $4,365
Deferred tax liabilities 527 348
Valuation allowance -- --
------ ------
Net deferred tax assets $3,909 $4,017
====== ======
The Company's deferred income taxes consist principally of net
operating loss carryforwards and the allowance for loan losses. As of December
31, 2002 and 2001, the Company had approximately $4.6 million and $7.1 million,
respectively, in net operating loss carryforward available to reduce future
41
taxable earnings, which resulted in net deferred tax assets of $1.7 million and
$2.7 million, respectively. This net operating loss carryforwards will expire in
varying amounts in the years 2006 through 2018 unless fully utilized by the
Company. Based on management's estimate of future earnings and the expiration
dates of the net operating loss carryforward as of December 31, 2002 and 2001,
it was determined that it is more likely than not that the benefit of the
deferred tax assets will be realized.
NET INCOME APPLICABLE TO COMMON SHARES increased by $769,000, or
137.7%, to $1.3 million for the year ended December 31, 2002 from $558,000 for
the year ended December 31, 2001. Basic and diluted earnings per common share
for the year ended December 31, 2002 were $0.21 and $0.20. Basic and diluted
earnings per common share for the year ended December 31, 2001 were $0.10. This
increase was primarily attributable to an increase in net interest income and
noninterest income, partially offset by an increase in noninterest expenses. Net
interest income increased to $19.3 million in 2002 from $14.8 million in 2001,
an increase of 30.4%. The provision for loan losses increased 60.1% to $3.0
million in 2002, from $1.9 million in 2001. Noninterest income increased 97.3%
to $4.0 million in 2002 from $2.0 million in 2001. Noninterest expense increased
to $18.0 million in 2002 from $13.7 million in 2001, an increase of 31.5%.
The Company's earnings performance is reflected in the calculations of
net income as a percentage of average total assets (return on average assets)
and net income as a percentage of average shareholders' equity (return on
average equity). Return on average assets and return on average equity are
computed using net income applicable to common shares. For the fiscal year ended
December 31, 2002 and 2001, the return on average assets was 0.22% and 0.13%,
respectively. For the same periods, the return on average equity was 2.79% and
1.30%, respectively. The Company's ratio of total equity to total assets
decreased to 7.0% at December 31, 2002 from 8.8% at December 31, 2001, primarily
as a result of growth from branch operations.
ANALYSIS OF FINANCIAL CONDITION AS OF DECEMBER 31, 2003 AND 2002
TOTAL ASSETS increased by $188.4 million at December 31, 2003, or
24.9%, to $944.5 million 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 that were funded by new deposit growth and other
borrowed funds. Total investment securities decreased by $3.2 million, or 6.0%,
to $56.9 million at December 31, 2003 as compared to $53.7 million at December
31, 2002. Federal funds sold decreased by $31.9 million or 51.0% to $30.6
million at December 31, 2003 from $62.5 million at December 31, 2002. Other
assets increased by $13.0 million to $13.4 million at December 31, 2003 from
$344,000 at December 31, 2002. This increase in other assets results principally
from a $10 million investment in bank owned life insurance for certain of the
Company's executives.
LOANS increased by $140.1 million, or 25.5%, to $690.6 million at
December 31, 2003, from $550.5 at December 31, 2002. Mortgage loans held for
sale increased by $11.8 million, or 21.6%, to $66.5 million at December 31, 2003
from $54.7 million at December 31, 2002. The increase in loans was funded by
increases in depository accounts, repurchase agreements sold and other
borrowings. The allowance for loan losses increased by $2.9 million, or 24.7%,
at December 31, 2003 from $7.3 million at December 31, 2002. The increase
primarily resulted from additional provision of $1.8 million during this period,
offset by charge-offs. The allowance for loan losses as a percentage of total
loans held for investment was 1.31% at December 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 Company's bank's loan portfolio.
The Company has a policy of transferring certain non-performing loans
to NONACCRUAL status when they become more than 90 days past due on either
principal or interest. At December 31, 2003, nonaccrual loans amount to $2.6
million, compared with $1.5 million at December 31, 2002. The increase of $1.1
million is due to the overall increase in loans held for investment. Management
believes the specific reserves placed against these loans are adequate. In
addition, payment on these loans is being sought from secondary sources, such as
the sale of collateral.
42
DEPOSITS increased by $131.7 million, or 19.8%, to $796.6 million at
December 31, 2003 from $664.9 million at December 31, 2002. The increase in
total deposits primarily resulted from increases in the following types of
interest-bearing deposits:
DECEMBER 31,
-------------------------
2003 2002 $ CHANGE % CHANGE
-------- -------- -------- --------
Interest-bearing demand $ 59,057 $ 52,803 $ 6,254 11.8
Regular savings 97,679 66,941 30,738 45.9
Money market accounts 31,676 19,211 12,465 64.9
Time $100,000 and over 382,091 314,853 67,238 21.4
Other time 91,462 69,707 21,755 31.2
-------- -------- -------- ----
Total $661,965 $523,515 $138,450 26.4
-------- -------- -------- ----
Time deposits often fluctuate in response to interest rate changes and
can vary rather significantly as a result. The increase in time deposits of
$100,000 and over resulted primarily from an increase in brokered deposits.
Noninterest-bearing deposits decreased as a result of fewer transfers of funds
into demand deposit accounts that were previously invested in repurchase
agreements sold. This transfer is related to certain of the Company's customers'
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 December 31, 2003 and December 31,
2002. Similar fluctuations can be observed relative to prior year-ends, and
management believes fluctuations will continue in similar fashion in the future.
The growth in savings and money market accounts is primarily attributable to
continued expansion of the Company's customer base as a result of ongoing
marketing and savings activities.
REPURCHASE AGREEMENTS AND OTHER BORROWED FUNDS sold increased by $28.9
million, or 620.0%, to $33.5 million at December 31, 2003 from $4.7 million at
December 31, 2002, for reasons discussed in the previous section on Deposits,
and due to continued expansion of the Company's customer base. Other borrowed
funds increased by $14.1 million, or 142.4%, to $24.0 million at December 31,
2003 from $9.9 million at December 31, 2002. This increase is primarily
attributable to borrowings of $10.0 million under a line of credit with SunTrust
Bank, Atlanta, which was used as additional capital for the Company of which$2.5
million is non-revolving. The other $7.5 million is a revolving line of credit,
which the Company can repay in full or in part from time to time and draw on it
from time to time as need for these funds dictates.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES increased by $5.1 million, or
107.1%, to $9.9 million at December 31, 2003 from $4.8 million at December 31,
2002. This increase is primarily attributable to accrued commissions and
incentives related to the mortgage banking division.
SHAREHOLDERS' EQUITY increased by $4.8 million, or 9.1%, to $57.8 at
December 31, 2003, from $53.0 at December 31, 2002. This increase is the result
of net income applicable to common shares for the year ended December 31, 2003
of $4.4 million, in addition to stock issued under the Company's Employee Stock
Purchase Plan of $102,000, stock option and warrant exercises of $160,000, and
stock grants of $339,000. These increases were partially offset by a decrease in
other comprehensive income related to an unrealized loss in the Company's bond
portfolio of $361,000.
The following table reflects information related to the Company's
average balance sheet, yields on average earning assets, and average rates on
interest-bearing liabilities. This information will facilitate the discussions
of financial condition that follows this section. The yields and rates have been
calculated by dividing income or expense by the average balance of the
corresponding assets or liabilities. Average balances have been derived from the
daily balances during the year ended December 31, 2003 and 2002.
43
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2003 2002
------------------------------------- -------------------------------------
AVERAGE REVENUE/ AVERAGE REVENUE/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- ------- ---- --------- ------- ----
ASSETS:
Total loans (1) $ 722,560 $41,611 5.76% $ 484,132 $31,853 6.58%
Investment securities (2) 50,378 1,370 2.72 43,264 2,239 5.18
Federal Funds sold and other
investments 58,641 587 1.00 53,623 835 1.56
--------- ------- ---- --------- ------- ------
Total earning assets 831,579 43,568 5.24 581,019 34,927 6.01
Cash and due from banks 27,959 20,169
Premises and equipment, net 5,465 4,382
Other assets, net 21,085 9,750
Allowance for loan losses (8,002) (5,747)
--------- ---------
Total assets (3) $ 878,086 $ 609,573
========= =========
LIABILITIES:
Interest-bearing transaction accounts $ 84,256 858 1.02 $ 41,817 710 1.70
Savings deposits 78,990 1,047 1.34 72,145 1,443 2.00
Time deposits 477,452 13,410 2.81 317,305 12,469 3.93
Repurchase agreements sold 44,836 384 0.86 37,726 502 1.33
Trust preferred securities (4) 18,616 1,305 5.56 11,037 704 6.38
Other borrowed funds 16,347 643 3.93 10,143 460 4.54
--------- ------- ---- --------- ------- ------
Total interest-bearing liabilities 720,497 17,377 2.41 490,173 16,288 3.32
Demand deposits 93,136 66,769
Accrued interest and other
liabilities 9,209 5,143
Shareholders' equity 55,244 47,488
--------- ---------
Total liabilities and shareholders'
equity $ 878,086 $ 609,573
========= =========
Net interest income $26,191 $18,639
======= =======
Net interest spread 2.83 2.69
Net interest margin 3.15 3.21
- -----------
(1) The average balance of total loans includes mortgage loans held for sale
and nonaccrual loans. At December 31, 2003 and 2002, $2.6 million and $1.5
million, respectively, in loans were accounted for on a nonaccrual basis.
(2) Stated at amortized cost. Does not reflect unrealized gains or losses. All
securities are taxable. The Company does not have trading account
securities.
(3) All yields are considered taxable equivalent, as the Company does not have
tax-exempt assets.
(4) Dividends on Trust Preferred Securities are included in interest expense
for the entire year of 2003 and 2002 for purposes of the table above.
AVERAGE EARNING ASSETS
Average earning assets increased by $250.6 million, or 43.1% to $831.6
million for the year ended December 31, 2003, as compared to $581.0 million for
the year ended December 31, 2002. Average loans, including mortgage loans held
for sale, net of deferred loan fees, represent 86.8% of average earning assets
at December 31, 2003. Investment securities and Federal Funds sold and other
investments represent 6.1 and 7.1, respectively, of average earning assets at
44
December 31, 2003. At December 31, 2002, average loans, net of deferred loan
fees, represented 83.4% of average earning assets, investment securities
comprised 7.4%, and federal funds sold and other investments comprised 9.2%.
Growth in earning assets was funded primarily through an increase in total
deposits due to expanded branch operations and the selling of additional
brokered deposits, and the issuance of trust preferred securities.
LOAN PORTFOLIO
Total loans held for investment increased by $140.1 million, or 25.5%,
to $690.6 million at December 31, 2003, from $550.5 million at December 31,
2002. Mortgage loans held for sale increased by $11.8 million, or 21.6%, to
$66.5 million at December 31, 2003 from $54.7 million at December 31, 2002.
Average total loans in 2003 increased by $238.4 million, or 49.2%, to $722.6
million from $484.1 million in 2002. These increases in loans were funded by
increases in depository accounts, repurchase agreements sold and other
borrowings.
The Company engages in a full complement of lending activities,
including commercial, real estate construction, real estate mortgage, home
equity, installment, SBA and USDA guaranteed loans and credit card loans. The
following table presents various categories of loans contained in the Company's
portfolio of loans held for investment for the periods indicated, the total
amount of all loans for such periods, and the percentage of total loans
represented by each category for such periods:
BALANCE / % OF TOTAL
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------
TYPE OF LOAN 2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Commercial real estate $ 424,498 $ 313,120 $ 210,373 $ 158,654 $ 69,261
61.4% 56.8% 52.4% 55.6% 43.9%
Commercial 176,094 166,122 142,911 102,391 68,991
25.5% 30.2% 35.6% 35.8% 43.8%
Residential mortgage 34,120 23,080 22,309 9,796 10,846
4.9% 4.2% 5.6% 3.4% 6.9%
Consumer 54,648 45,860 23,158 13,036 7,246
7.9% 8.3% 5.7% 4.6% 4.6%
Credit cards and other 1,957 2,792 2,912 1,747 1,244
0.3% 0.5% 0.7% 0.6% 0.8%
--------- --------- --------- --------- ---------
Total $ 691,317 $ 550,974 $ 401,663 $ 285,624 $ 157,588
========= ========= ========= ========= =========
100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========= =========
Net deferred loan fees $ (727) $ (519) $ (219) $ (98) $ (71)
Loans, net of deferred fees 690,590 550,455 401,444 285,526 157,517
Allowance for loan losses (9,057) (7,263) (4,692) (3,511) (1,858)
Net loans held for investment 681,533 543,192 396,752 282,015 155,659
The Company's only area of credit concentration is commercial and
commercial real estate loans. The Company has not invested in loans to finance
45
highly leveraged transactions, such as leveraged buy-out transactions, as
defined by the Federal Reserve Board and other regulatory agencies. In addition,
the Company had no loans to foreign countries or to lesser-developed countries
as of December 31, 2003.
While risk of loss in the Company's loan portfolio is primarily tied to
the credit quality of its borrowers, risk of loss may also increase due to
factors beyond its control, such as local, regional and/or national economic
downturns. General conditions in the real estate market may also impact the
relative risk in the Company's real estate portfolio. Of the Company's target
areas of lending activities, commercial loans are generally considered to have
greater risk than real estate loans or consumer loans. For this reason the
Company seeks to diversify its commercial loan portfolio by industry, geographic
distribution and size of credits.
From time to time, the Company has originated certain loans, which,
because they exceeded its internally established or legal lending limit, were
sold to other institutions. As a result of growth, the Company has an increased
lending limit and repurchased certain loan participations, thereby increasing
earning assets. The Company also purchases participations from other
institutions. When the Company purchases these participations, such loans are
subjected to its underwriting standards as if it had originated the loan.
Accordingly, management does not believe that loan participations purchased from
other institutions pose any greater risk of loss than loans that the Company
originates.
The repayment of loans in the Company's loan portfolio as they mature
is a source of liquidity for the Company. The following table sets forth the
maturity of the Company's loan portfolio held for investment within specified
intervals as of December 31, 2003:
DUE IN 1 YEAR DUE AFTER 1 DUE AFTER 5
TYPE OF LOAN OR LESS TO 5 YEARS YEARS TOTAL
------------ ------------- ------------ ------------ --------
Commercial real estate $ 70,490 $186,128 $167,880 $424,498
Commercial 98,738 71,648 5,708 176,094
Residential mortgage 13,161 18,448 2,511 34,120
Consumer 5,743 47,962 943 54,648
Credit card and other loans 1,957 -- -- 1,957
-------- -------- -------- --------
Total $190,089 $324,186 $177,042 $691,317
======== ======== ======== ========
The following table presents the maturity distribution as of December
31, 2003 for loans with predetermined fixed interest rates and floating interest
rates by various maturity periods:
DUE IN 1 YEAR DUE AFTER 1 DUE AFTER
INTEREST CATEGORY OR LESS TO 5 YEARS 5 YEARS TOTAL
----------------- ------- ---------- ------- -----
Predetermined rate $ 56,599 $183,510 $123,220 $363,329
Variable rate 133,490 140,676 53,822 327,988
-------- -------- -------- --------
Total $190,089 $324,186 $177,042 $691,317
======== ======== ======== ========
ASSET QUALITY
Nonaccrual loans were $2.6 million at December 31, 2003, an increase of
$1.1 million, or 70.2%, 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 nonaccrual 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.
46
At December 31, 2003, loans totaling $1.9 million were considered
restructurings, compared to $3.1 million at December 31, 2002. For further
information, see the NON-PERFORMING ASSETS discussion below.
The Company substantially reduced its SBA lending operations in 1998
due to the cost of maintaining this specialized lending practice and recent
charge-offs in the unguaranteed portion of the SBA loans that were retained.
As of December 31, 2003, there were no loans other than those disclosed
above that were classified for regulatory purposes as doubtful or substandard
which (1) represented or resulted from trends or uncertainties that management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or (2) represented material credits about which management
is aware of any information, which causes management to have serious doubts as
to the ability of such borrowers to comply with the loan repayment terms. There
are no loans other than those disclosed above where known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with loan repayment terms.
ALLOWANCE FOR LOAN LOSSES AND NET CHARGE-OFFS
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio.
In its evaluation of the allowance and its adequacy, management considers loan
growth, changes in the composition of the loan portfolio, the loan charge-off
experience, the amount of past due and non-performing loans, current and
anticipated economic conditions, underlying collateral values securing loans and
other factors. While it is the Company's policy to provide for a full reserve or
charge-off for loans in the period in which a loss is considered probable, there
are additional risks of future losses that cannot be quantified precisely or
attributed to particular loans or classes of loans. Because these risks include
the state of the economy, management's judgment as to the adequacy of the
allowance is necessarily approximate and imprecise.
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. There is no unallocated portion of the Company's allowance for loan
losses. All classified loans are reviewed on an individual basis, resulting in a
specific allowance.
General Allowance. It is difficult in a bank of this size to use
migration analysis or other more sophisticated approaches due to the small size
of the loan portfolio, the short history of Florida Bank, N.A., and the loan
problems, which surfaced in the early years of the Bank's preceding operation,
First National Bank of Tampa. For this reason, a reasonable indicator of the
Bank's potential future losses in the non-classified and homogeneous 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 Florida Bank, N.A.
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. These adjustments reflect management's
best estimate of the level of loan losses resulting from these conditions by
determining a range for each current condition adjustment, "lower range to upper
range". This allows the Bank to "shock" the loan portfolio and look at the level
of allowances required should an "upper range" scenario start to unfold. The
following current condition factors were considered in this analysis:
47
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.
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 feels 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.
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 $572,000 at December 31,
2003. The range for the allowance for loan losses at December 31, 2003,
including specific allowances, were determined to be between $7.8 million or
1.13% of loans (low range) and $12.3 million or 1.78% of loans (high range). The
allowance for loan losses totaled $9.1 million or 1.31% of loans at December 31,
2003
48
An analysis of the Company's loan loss experience is furnished in the
following table for the last five fiscal years, as well as a detail of the
allowance for loan losses:
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Balance at beginning of period $ 7,263 $ 4,692 $ 3,511 $ 1,858 $ 1,073
Charge-offs:
Commercial real estate (1,120) -- (400) (4) --
Commercial -- (435) (362) (388) (819)
Residential mortgage (23) -- -- -- (5)
Consumer (44) (51) (66) -- (19)
Credit cards and other -- -- -- (9) (14)
------- ------- ------- ------- -------
Total charge-offs (1,187) (486) (828) (401) (857)
------- ------- ------- ------- -------
Recoveries:
Commercial real estate 6 11 12 18 15
Commercial 31 20 105 74 14
Residential mortgage -- -- -- 50 2
Consumer 7 -- 3 -- --
Credit cards and other 1 -- -- -- 1
------- ------- ------- ------- -------
Total recoveries: 45 31 120 142 32
------- ------- ------- ------- -------
Net charge-offs (1,142) (455) (708) (259) (825)
Provision for loan losses 2,936 3,026 1,889 1,912 1,610
------- ------- ------- ------- -------
Balance at end of period $ 9,057 $ 7,263 $ 4,692 $ 3,511 $ 1,858
======= ======= ======= ======= =======
Net charge-offs as a percentage
of average loans held for
investment 0.16% 0.09% 0.21% 0.12% 0.80%
Allowance for loan losses as a
percentage of total loans 1.31% 1.32% 1.17% 1.23% 1.18%
Net charge-offs were $1.1 million, or 0.16% of average loans
outstanding at December 31, 2003, as compared to net charge-offs of $455,000 or
0.09% of average loans held for investment outstanding at December 31, 2002.
Allowance for loan losses increased 24.7% to $9.1 million, or 1.31% of loans
held for investment outstanding at December 31, 2003, from $7.3 million or 1.32%
of loans held for investment outstanding at December 31, 2002. Allowance for
loan losses as a multiple of net loans charged-off was 7.9x for the year ended
December 31, 2003 as compared to 16.0x for the year ended December 31, 2002.
The increase in the provision was generally due to increases in the
amount of loans held for investment outstanding, together with the mix and
performance of those loans. The increase in net charge-offs in 2003 is related
primarily to a specific $591,000 net charge-off for an overdraft incurred by one
of the Company's Automated Clearing House processors. See "-- Asset Quality"
above.
In assessing the adequacy of the allowance, management relies
predominantly on its ongoing review of the loan portfolio, which is undertaken
to ascertain whether there are probable losses that must be charged-off and to
assess the risk characteristics of the portfolio in the aggregate. This review
encompasses the judgment of management, utilizing internal loan rating
standards, guidelines provided by the banking regulatory authorities governing
the Company, and their loan portfolio reviews as part of the Company's
examination process.
Statement of Financial Accounting Standards No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN (SFAS 114) requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or the fair value of the collateral if the
loan is collateral dependent. The Company adopted SFAS 114 on January 1, 1995.
At December 31, 2003 and 2002, the Company held impaired loans as defined by
49
SFAS 114 of $2.6 million and $1.4 million, respectively, for which specific
allocations of $572,000 and $690,000, respectively, have been established within
the allowance for loan losses that have been measured based upon the fair value
of the collateral. Such reserves have been allocated between commercial loans
and commercial real estate. Of these impaired loans, $0 and $535,000 have also
been classified by the Company as loans past due over 90 days at December 31,
2203 and 2002, respectively. Interest income on such impaired loans during 2003
and 2002 was not significant.
As shown in the table below, the Company determined that as of December
31, 2003 and 2002, respectively, 55.3% and 56.0% of the allowance for loan
losses was related to commercial real estate loans, 33.5 % and 31.0% was related
to commercial loans, 5.6% and 4.2% was related to residential mortgage loans,
4.7% and 8.3% was related to consumer loans, 0.9% and 0.5% to credit card and
other loans. The fluctuations in the allocation of the allowance for loan losses
between 2003 and 2002 is attributed to the establishment of specific allowances
totaling $2.5 million and $2.2 million at December 31, 2003 and 2002,
respectively, and the changing mix of the loan portfolio as previously
discussed.
For the last five fiscal years, the allowance was allocated as follows:
2003 2002 2001 2000 1999
--------------- --------------- ----------------- ----------------- ----------------
% OF % OF % OF % OF % OF
BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial real estate $5,009 55.3 $4,067 56.0 $2,348 52.4 $1,300 55.6 $ 636 43.9
Commercial 3,031 33.5 2,252 31.0 1,814 35.6 1,775 35.8 1,027 43.8
Residential mortgage 507 5.6 305 4.2 240 5.6 317 3.4 89 6.9
Consumer 422 4.6 603 8.3 261 5.7 69 4.6 77 4.6
Credit cards and other 88 1.0 36 0.5 29 0.7 50 0.6 29 0.8
Unallocated -- 0.0 -- 0.0 -- 0.0 -- 0.0 -- 0.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $9,057 100.0 $7,263 100.0 $4,692 100.0 $3,511 100.0 $1,858 100.0
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
In considering the adequacy of the Company's allowance for loan losses,
management has focused on the fact that as of December 31, 2003, 55.3% of
outstanding loans held for investment are in the category of commercial real
estate and 33.5% are in commercial loans. Commercial loans are generally
considered by management to have greater risk than other categories of loans in
the Company's loan portfolio. Generally, such loans are secured by accounts
receivable, marketable securities, deposit accounts, equipment and other fixed
assets that reduce the risk of loss present in commercial loans. Commercial real
estate loans inherently have a higher risk due to depreciation of the
facilities, limited purposes of the facilities and the effect of general
economic conditions. The Company attempts to limit this risk by generally
lending no more than 75% of the appraised value of the property held as
collateral.
Residential mortgage loans constituted 5.6% of outstanding loans held
for investment at December 31, 2003. The majority of the loans in this category
represent residential real estate mortgages where the amount of the original
loan generally does not exceed 80% of the appraised value of the collateral.
These loans are considered by management to be well secured with a low risk of
loss.
At December 31, 2003, the majority of the Company's consumer loans were
secured by collateral, primarily consisting of automobiles, boats and other
personal property. Management believes that these loans involve less risk than
commercial loans, due to the marketability and nature of the underlying
collateral.
At December 31, 2002, the allowance for loan losses contained an
additional provision of $450,000 for an overdraft related to one of the
Company's ACH processors. The Company facilitates ACH transactions for a variety
of processors in its normal course of business. These transactions involve
50
preauthorized transfers of funds from a purchaser's bank account to a seller's
bank account. In November and December of 2002, one of the Company's processors
experienced an extreme number of returns, or refused transactions, and failed to
cover the overdraft these returns caused. This overdraft was charged off in the
first quarter of 2003.
An internal credit review of the loan portfolio is conducted on an
ongoing basis. The purpose of this review is to assess the risk in the loan
portfolio and to determine the adequacy of the allowance for loan losses. The
review includes analyses of historical performance, the level of nonconforming
and rated loans, loan volume and activity, review of loan files and
consideration of economic conditions and other pertinent information. In
addition to the above credit review, the Company's primary regulator, the OCC,
also conducts a periodic examination of the loan portfolio. Upon completion, the
OCC presents its report of examination to the Company's board of directors and
management. Information provided from these reviews, together with other
information provided by management and other information known to members of the
Company's board of directors, is utilized by its board of directors to monitor
the loan portfolio and the allowance for loan losses. Specifically, the
Company's board of directors attempts to identify risks inherent in the loan
portfolio (e.g., problem loans, probable problem loans and loans to be charged
off), assess the overall quality and collectibility of the loan portfolio, and
determine amounts of the allowance for loan losses and the provision for loan
losses to be reported based on the results of their review. The credit policy
committee of the Company's board of directors must approve all loans in excess
of the matrix levels established by Florida Bank, N.A. credit policy, and any
exceptions to the credit policy. This committee also reviews all criticized or
classified assets in excess of $100,000, reviews trends in the Company's bank's
loan portfolio, and reviews all reports on credit quality prepared by the
Company's bank's personnel or the OCC.
NON-PERFORMING ASSETS
The following table presents components of non-performing assets:
AS OF DECEMBER 31,
--------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Nonaccrual loans $2,613 $1,535 $1,090 $1,547 $1,100
Accruing loans past due 90 days or more -- -- -- 2,555 293
Other real estate owned 1,769 653 2,778 -- --
Nonaccrual loans were $2.6 million at December 31, 2003, an increase of
$1.1 million, or 70.2%, compared to the balance of $1.5 million at December 31,
2002. These loans were reclassified under the Company's policy of transferring
loans to non-accrual status when they become more than 90 days past due on
either principal or interest. Management believes the specific reserves placed
against these loans are adequate, and payment is being sought from secondary
sources, such as the sale of collateral.
Loans totaling $1.9 million and $3.1 million were considered troubled
debt restructurings at December 31, 2003 and 2002, respectively. A troubled debt
restructuring is a loan where the Company has changed the original terms of the
agreement. The loans classified as troubled debt restructurings at December 31,
2003 and 2002 were restructured to extend maturities or to add guarantee terms.
At December 31, 2003 and 2002, the Company has items categorized as
other real estate owned, with a carrying value of $1.8 million and $653,000,
respectively.
The Company has policies, procedures and underwriting guidelines
intended to assist in maintaining the overall quality of its loan portfolio. The
Company monitors its delinquency levels for any adverse trends. Non-performing
assets consist of loans on nonaccrual status, real estate and other assets
acquired in partial or full satisfaction of loan obligations and loans that are
past due 90 days or more.
51
The Company's policy generally is to place a loan on nonaccrual status
when it is contractually past due 90 days or more as to payment of principal or
interest. A loan may be placed on nonaccrual status at an earlier date when
concerns exist as to the ultimate collections of principal or interest. At the
time a loan is placed on nonaccrual status, interest previously accrued but not
collected is reversed and charged against current earnings. Recognition of any
interest after a loan has been placed on nonaccrual status is accounted for on a
cash basis. Loans that are contractually past due 90 days or more, which are
well secured or guaranteed by financially responsible third parties and are in
the process of collection generally are not placed on nonaccrual status.
INVESTMENT PORTFOLIO
The following table presents the carrying amount of the Company's
investment securities, including mortgage-backed securities as of December 31,
2003 and 2002:
AS OF DECEMBER 31,
---------------------------------------------------
2003 2002
--------------------- ---------------------
INVESTMENT CATEGORY BALANCE % BALANCE %
------------------- ------- ----- ------- -----
Available for sale:
U. S. Treasury and other U.S.
agency obligations $23,679 41.6 $ 6,775 12.6
State and municipal securities 657 1.2 1,051 2.0
Mortgage-backed securities 21,673 38.1 37,913 70.7
Marketable equity securities 7,273 12.8 5,192 9.7
------- ----- ------- -----
53,282 93.7 50,931 95.0
------- ----- ------- -----
Other investments 3,604 6.3 2,493 4.6
------- ----- ------- -----
Held to maturity:
U. S. Treasury and other U.S.
agency obligations -- -- -- --
Mortgage-backed securities -- -- 229 0.4
------- ----- ------- -----
-- -- 229 0.4
------- ----- ------- -----
Total $56,886 100.0 $53,652 100.0
======= ===== ======= =====
Total investment securities increased by $3.2 million, or 6.0%, to
$56.9 million at December 31, 2003 from $53.7 million at December 31, 2002.
Investment securities available for sale totaled $53.3 million at December 31,
2003 compared to $50.9 million at December 31, 2002.
At December 31, 2003 and 2002, investment securities available for sale
had net unrealized gains of $197,000 and $775,000, respectively, comprised of
gross unrealized losses of $121,000 and $11,000, respectively, and gross
unrealized gains of $318,000 and $786,000, respectively. Investments with
unrealized losses at December 31, 2003 are comprised of a mutual fund and six
agency notes and mortgage-backed securities from the Federal National Mortgage
Association, the Federal Home Loan Bank and the Federal Home Loan Mortgage
Corporation. Volatility in the home loan mortgage market throughout the period
combined with timing of investment purchases have lead to the investment's
temporary impairment. At December 31, 2003, the Company had no investments that
have been in a continuous unrealized loss position for greater than twelve
months.
The Company invests primarily in direct obligations of the United
States, obligations guaranteed as to principal and interest by the United
States, obligations of agencies of the United States and mortgage-backed
securities. In addition, the Company enters into federal funds transactions with
its principal correspondent banks, and act as a net seller of such funds. The
sale of federal funds amounts to a short-term loan from the Company to another
company.
52
Proceeds from sales, paydowns and maturities of available for sale and
held to maturity investment securities increased 55.8% to $46.4 million in 2003
from $29.8 million in 2002, with a resulting net loss on sale of securities of
$0 and $4,000 in 2002 and 2003, respectively. Such proceeds are generally used
to reinvest in additional investment securities.
Other investments include Independent Bankers Bank stock, Federal
Reserve Bank stock and Federal Home Loan Bank stock that are required for the
Company to be a member of and to conduct business with such institutions.
Dividends on such investments are determined by the institutions and are payable
semi-annually or quarterly. Other investments increased 44.5% to $3.6 million at
December 31, 2003 from $2.5 million at December 31, 200. Other investments are
carried at cost; as such investments do not have readily determinable fair
values.
At December 31, 2003 and 2002, the investment portfolio included $10.2
million and $29.1 million, respectively, in collateralized mortgage obligations,
and $11.5 million and $8.8 million, respectively, other mortgage-backed
securities.
The Company utilizes its available for sale investment securities,
along with cash and Federal Funds sold, to meet its liquidity needs. As of
December 31, 2003, $21.7 million, or 40.7%, of the investment securities
portfolio consisted of mortgage-backed securities compared to $37.9 million, or
74.1% of the investment securities portfolio as of December 31, 2002.
In accordance with Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (SFAS 115), the
Company has segregated its investment securities portfolio into securities held
to maturity and those available for sale.
Investments held to maturity are those for which management has both
the ability and intent to hold to maturity and are carried at amortized cost. At
December 31, 2003, the Company did not hold any investments classified as held
to maturity. At December 31, 2002, investments classified as held to maturity
totaled $228,000 at amortized cost and $229,000 at fair value.
Investments available for sale are securities identified by management
as securities that may be sold prior to maturity in response to various factors
including liquidity needs, capital compliance, changes in interest rates or
portfolio risk management. The available for sale investment securities provide
interest income and serve as a source of liquidity for the Company. These
securities are carried at fair market value, with unrealized gains and losses,
net of taxes, reported as other comprehensive income, a separate component of
shareholders' equity.
Investment securities with a carrying value of approximately $45.0
million and $41.3 million at December 31, 2003 and December 31, 2002,
respectively, were pledged to secure deposits of public funds, repurchase
agreements, interest rate swap agreements and certain other deposits as provided
by law. The maturities and weighted average yields of debt securities at
53
December 31, 2003 are presented in the following table using primarily the
stated maturities, excluding the effects of prepayments:
WEIGHTED AVERAGE
AVAILABLE FOR SALE AMOUNT YIELD (1)
------------------ ------ ---------
U.S. Treasury and other U.S. agency
obligations:
0-- 1 year $16,580 2.38
Over 1 through 5 years 7,099 2.12
Over 5 years -- --
-------
Total $23,679
-------
State and municipal:
0-- 1 year -- --
Over 1 through 5 years 622 7.09
Over 5 years 35 7.62
-------
Total $ 657
-------
Mortgage-backed securities:
0-- 1 year 163 1.32
Over 1 through 5 years 20,980 3.09
Over 5 years 444 1.38
Over 10 years 86 9.54
-------
Total $21,673
-------
Total available for sale debt
securities $46,009
=======
- ----------
(1) The Company has not invested in any tax-exempt obligations.
As of December 31, 2003, the Company's investment securities portfolio
did not contain any debt securities held to maturity.
As of December 31, 2003, except for the U.S. Government and its
agencies, there was not any issuer within the investment portfolio who
represented 10% or more of the Company's shareholders' equity.
DEPOSITS AND SHORT-TERM BORROWINGS
The Company's average deposits increased by 47.3%, or $235.8 million,
to $733.8 million for the fiscal year ended December 31, 2003 from $498.0
million for the fiscal year ended December 31, 2002. This growth is attributed
to a 39.5% increase in average noninterest-bearing demand deposits, a 101.5%
increase in average interest-bearing transaction account deposits, a 9.5%
increase in average savings deposits, and a 50.5%increase in average time
deposits.
Average noninterest-bearing demand deposits increased by 39.5% to $93.1
million for the fiscal year ended December 31, 2003 from $66.8 million for the
fiscal year ended December 31, 2002. As a percentage of average total deposits,
these deposits represent 12.7% and 13.4%, respectively, at December 31, 2003 and
2002. The increased volume of noninterest-bearing demand deposits is primarily
attributable to large business deposits retained by the Company.
54
Average interest-bearing transaction accounts increased by 101.5% to
$84.3 million for the fiscal year ended December 31, 2003 from $41.8 million in
the fiscal year ended December 31, 2002. Average savings deposits increased 9.5%
to $79.0 million for the year ended December 31, 2003 from $72.1 million in the
fiscal year ended December 31, 2002. Average balances of certificates of deposit
increased by 50.5% to $477.5 million for the fiscal year ended December 31, 2003
from $317.3 million in the fiscal year ended December 31, 2002. The increases in
overall deposit balances result primarily from new deposits obtained as a result
of growth in existing markets.
Since 1999, the Company has utilized brokered certificates of deposit
as a component of its funding. These deposits range in term from three months to
ten years. Longer-term fixed rate certificates are typically matched to
fixed-rate loans of similar duration to assure a desired spread between the
yield on that loan and the cost of funding it over its term, in the event of
fluctuating interest rates. Longer-term fixed rate certificates may also be
matched to interest rate swaps, which are derivative instruments whose effect is
to convert the Company's cost in the certificate to a floating rate.
Certificates with shorter terms, typically less than five years, are normally
fixed rate instruments. It has consistently been the Company's experience that
these funds are readily obtainable at rates lower than the competitive rates
paid for time deposits of the same duration in its local markets. It has also
been the Company's experience that brokered time deposits are no more sensitive
to competitive market rates than local time deposits. In both cases, a bank must
pay a competitive rate to obtain or retain the deposit. Because brokered
certificates of deposit are normally obtained in denominations of five million
dollars or more, the Company's transaction and maintenance costs for a brokered
deposit are significantly less than for same amount obtained in its local
markets through several smaller transactions. The use of brokered deposits has
had a positive impact on the Company's net interest margin, by allowing the
Company to tailor its time deposit portfolio more closely to its funding
requirements, and lowering its cost of funds. Management believes they will
continue to do so. It is the intent of management to continue utilizing brokered
deposits as a significant funding source and as a component of the Company's
asset-liability management strategy.
The following table presents, for the years ended December 31, 2003 and
2002, the average amount of and average rate paid on each of the following
deposit categories:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2003 2002
-------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
DEPOSIT CATEGORY BALANCE RATE BALANCE RATE
---------------- ------- -------- ------- -------
Noninterest-bearing demand $ 93,136 -- $ 66,769 --
Interest-bearing demand 57,661 0.9 28,874 1.6
Money market 26,595 1.2 12,943 2.0
Savings 78,990 1.3 72,145 2.1
Certificates of deposit of $100,000 or more 387,221 2.7 234,983 3.9
Other time 90,231 3.1 82,322 3.8
-------- --- -------- ----
Total $733,834 2.1 $498,036 2.94
======== === ======== ====
Interest-bearing deposits, including certificates of deposit, will
continue to be a major source of funding for the Company. During 2003, aggregate
average balances of time deposits of $100,000 and over comprised 52.8% of total
deposits compared to 47.2% for the prior year. The average rate on certificates
of deposit of $100,000 or more decreased to 2.73% in 2003, compared to 3.96% in
2002.
55
The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and their respective contractual maturities:
AS OF DECEMBER 31,
--------------------------------------------------------------
2003 2002
--------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
-------- --------- -------- ---------
3 months or less $ 91,511 1.65 $ 37,465 2.93
3-- 6 months 94,011 1.84 83,569 2.00
6-- 12 months 45,538 1.74 47,795 3.10
Over 12 months 151,031 3.28 146,024 3.86
-------- ---- -------- ----
Total $382,091 2.43 $314,853 3.26
======== ==== ======== ====
Average short-term borrowings increased 27.8% to $61.2 million for the
year ended December 31, 2003 from $47.9 million for the year ended December 31,
2002. Short-term borrowings consist of treasury tax and loan deposits, Federal
Home Loan Bank borrowings, borrowings under lines of credit, and repurchase
agreements with certain customers. In addition, the Company has securities sold
under agreements to repurchase, which are classified as secured borrowings.
Average treasury tax and loan deposits decreased 23.0% to $1.5 for the year
ended December 31, 2003 from $2.0 million for the year ended December 31, 2002.
Average Federal Home Loan Bank borrowings increased 18.8% for the year ended
December 31, 2003 to $9.7 million from $8.1 million for the year ended December
31, 2002. Average repurchase agreements with customers increased 18.8% to $44.8
million for the year ended December 31, 2003from $37.7 million for the year
ended December 31, 2002. The treasury tax and loan deposits provide an
additional liquidity resource to the Company as such funds are invested in
Federal funds sold. The repurchase agreements represent an accommodation to
certain customers that seek to maximize their return on liquid assets. The
Company invests these funds primarily in securities purchased under agreements
to resell at the nationally quoted rate for such investments. The year-end
balance of repurchase agreements increased 620.0% to $33.5 million at December
31, 2003 from $4.7 million at December 31, 2002.
Securities sold under repurchase agreements are instruments by which
the Company provides large deposit customers with the opportunity to earn
interest on funds in excess of their immediate cash needs for short periods of
time, typically overnight. These transactions are collateralized by marketable
securities from the Company's investment portfolio pledged to this purpose. This
product is an added service to the Company's customers, and allows it to retain
these funds in exchange for payment of an overnight interest rate, which is
typically lower than the rates paid on savings accounts or certificates of
deposit. Should these customers withdraw these funds, it would not significantly
impact the Company's liquidity, because such a withdrawal would free the
marketable securities previously pledged to those repurchase agreements,
allowing them to be sold or pledged to other borrowings if needed. The Company's
customers do not typically move funds between demand deposits and repurchase
agreements based on interest rate changes or liquidity needs because demand
deposits and repurchase agreements are typically of comparable liquidity and
interest rate changes are typically reflected in repurchase agreements as well
as demand deposits. Customers in Florida do, however, often move funds between
demand deposits and repurchase agreements at year-end to manage state intangible
tax exposure. The Company believes that this pattern of movement between demand
deposits and repurchase agreements will continue in the future.
56
The following table presents the components of short-term borrowings
and average rates for such borrowings for the years ended December 31, 2003 and
2002:
MAXIMUM
AMOUNT
OUTSTANDING AVERAGE
AT ANY MONTH AVERAGE AVERAGE ENDING RATE AT
END BALANCE RATE BALANCE PERIOD END
-------------- ------- ---- ------- ----------
YEAR ENDED DECEMBER 31, 2003:
Treasury tax and loan deposits $2,290 $1,547 0.93 $3,354 0.83
Repurchase agreements 56,968 44,836 0.86 33,508 0.88
Federal Home Loan Bank 10,700 9,663 4.90 10,693 4.48
Borrowings under line of credit 10,000 5,137 3.03 10,000 3.29
------- ------- -------
Total $79,958 $61,183 $57,555
======= ======= =======
YEAR ENDED DECEMBER 31, 2002:
Treasury tax and loan deposits $2,808 $2,008 1.27 $2,422 0.96
Repurchase agreements 49,542 37,726 1.33 4,654 0.93
Federal Home Loan Bank 7,500 8,135 5.33 7,500 5.53
------- ------- -------
Total $59,850 $47,869 $14,576
======= ======= =======
57
In addition to the outstanding borrowings shown from the Federal Home
Loan Bank ("FHLB"), the Company has available an additional credit limit from
the FHLB in the amount of $28.5 million. This limit is secured by a lien on the
Company's one- to four-family residential mortgage loans held for investment.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity, as defined by the SEC, is the ability of a company to
generate adequate amounts of cash to meet the Company's needs for day-to-day
operating expenses and material commitments on both a long- and short-term
basis. Liquidity management involves maintaining the Company's ability to meet
the day-to-day cash flow requirements of its customers, whether they are
depositors wishing to withdraw funds or borrowers requiring funds to meet their
credit needs. The Company does not know of any trends, demands, commitments,
events or uncertainties that will result in or that are reasonably likely to
result in the Company's liquidity increasing or decreasing in any material way.
The primary function of asset-liability management is not only to
assure adequate liquidity in order for the Company to meet the needs of its
customer base, but also to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities so that the Company
can profitably deploy its assets. Both assets and liabilities are considered
sources of liquidity funding and both are, therefore, monitored on a daily
basis. The greatest risk addressed by asset-liability management is
disintermediation - when the margin between an institution's cost of liabilities
and its yield on earning assets narrows to an unacceptable level. During the
year ended December 31, 2003, when the prime loan rate dropped from 6.8% to
4.0%, the Company demonstrated the ability to maintain its net interest margin
at an acceptable level through constant attention to asset-liability management.
As discussed under "Interest Rate Risk Management" below, the Company frequently
evaluates its assets and liabilities in relation to different interest rate
movement scenarios. Based on these projections, management believes the
Company's assets and liabilities are balanced in such a way that the risk of
disintermediation is held to a minimum.
Given current historically low interest rate levels, the Company has
given significant attention to the risks posed by rising interest rates, which
would increase its cost of funds. The Company's balance sheet is structured in
such a way that these increased costs are projected to be exceeded by increased
income from variable-rate loans. As pointed out in the previous paragraph, even
if interest rates doubled from their current levels, they would still be lower
than two and a half years ago, when they were considered moderate. All financial
institutions compete for time deposits, primarily on interest rates. It is the
Company's experience that an institution must pay the market rate to obtain
deposits in any rate environment. Since inception, the Company has not had
significant difficulty attracting deposits and raising other sources of funds at
reasonable rates. The Company knows of no factors, which would reduce its
ability to do so in the future in any material way.
58
In September of 1999, the Company's board of directors authorized a
stock repurchase plan covering up to ten percent (10%) of the outstanding shares
of its common stock (approximately 585,000 shares). The stock repurchase plan
authorizes the purchase of the Company's common stock at any price below the
then current book value per share. Pursuant to the stock repurchase plan, on
December 10, 2001, the Company's board of directors authorized a pre-programmed
stock repurchase program pursuant to the "safe harbor" guidelines of Rule 10b-18
of the Securities Exchange Act of 1934. This program provides for the repurchase
of up to 250,000 shares in the open market when the trading price of the
Company's common stock falls to $5.75 per share or less. As of December 31,
2003, the Company had repurchased 302,200 shares for a total cost of $1.9
million or an average cost of $6.18 per share, none of which had been
repurchased under the pre-programmed stock repurchase program.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table presents, as of December 31, 2003, a summary of the
Company's future contractual obligations. Each of these categories is further
described in the Company's consolidated financial statements, which are included
in ITEM 8 of this Form 10-K:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
LESS THAN ONE TO FOUR TO AFTER FIVE
CONTRACTUAL OBLIGATIONS TOTAL ONE YEAR THREE YEARS FIVE YEARS YEARS
----------------------- ----- -------- ----------- ---------- ----------
Time deposits $473,553 $278,941 $97,366 $85,494 $11,753
Federal Home Loan Bank advances 10,693 27 80 153 10,433
SunTrust Lines of Credit 10,000 10,000 -- -- --
Trust preferred securities 20,000 -- -- -- 20,000
Operating leases 6,153 920 1,591 1,225 2,417
Treasury tax and loan deposits 3,354 3,354 -- -- --
-------- -------- ------- ------- -------
Total contractual obligations $523,753 $293,242 $99,037 $86,872 $44,603
======== ======== ======= ======= =======
The following table presents, as of December 31, 2003, a summary of the
Company's commercial commitments. These categories are further described in the
Company's consolidated financial statements, which are included in ITEM 8 of
this Form 10-K:
COMMITMENT EXPIRATIONS BY PERIOD
LESS THAN ONE TO FOUR TO AFTER FIVE
COMMERCIAL COMMITMENTS TOTAL ONE YEAR THREE YEARS FIVE YEARS YEARS
Commitments to fund loans $ 62,504 $ 62,504 $ -- $-- $--
Lines of credit 221,790 163,790 58,000 -- --
Standby letters of credit 11,035 11,035 -- -- --
-------- -------- ------- --- ---
Total other commitments $295,329 $237,329 $58,000 $-- $--
======== ======== ======= === ===
Management believes the Company's ability to raise funds through
deposits, borrowings, trust preferred securities, capital, and other sources of
liquidity is adequate to allow it to meet its commitments and contractual
obligations going forward.
59
OFF-BALANCE SHEET ARRANGEMENTS
The Company originates financial instruments with off-balance sheet
risk in the normal course of business, usually for a fee, primarily to meet the
financing needs of its customers. The financial instruments include commitments
to fund loans, letters of credit and unused lines of credit. These commitments
involve varying degrees of credit risk, however, management does not anticipate
losses upon the fulfillment of these commitments.
At December 31, 2003, financial instruments having credit risk in
excess of that reported in the balance sheet totaled approximately $221.8
million.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $4.8 million to $57.8 million at
December 31, 2003, from $53.0 million at December 31, 2002. This increase is the
result of net income for the year ended December 31, 2003 of $4.4 million,
combined with the issuance of stock under the Employee Stock Purchase Plan of
$223,000, and the issuance of stock related to exercise of options and warrants
and stock grants of $498,000. These increases were partially offset by a
decrease in other comprehensive income related to an unrealized loss on
available for sale investment securities of $361,000, and the payment of stock
dividends on the Series C preferred stock of $186,000.
PREFERRED STOCK
In 2001, the Company issued 102,283 shares of series B preferred stock
for $68.00 per share through a private placement. Each share of Series B
preferred stock was convertible into ten shares of the Company's common stock at
a price of $6.80 per share (subject to adjustment for stock splits, stock
dividends, etc.). The Series B preferred stock was subject to automatic
conversion to common stock upon the following events: 1) change in control; 2)
if the average closing price of the Company's common stock for any 30
consecutive trading day period was at or above $8.00 per share; or 3) the
consummation of an underwritten public offering at a price of $8.00 per share or
greater of the Company's common stock. Cumulative cash dividends accrued at 7%
annually and were payable quarterly in arrears. On April 26, 2002, all 102,383
shares of the Company's Series B preferred stock automatically converted into
1,022,830 shares of common stock as a result of the average closing price of the
Company's common stock closing above $8.00 for the period from March 4, 2002
through April 15, 2002.
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. Shares of the Company's Series C preferred stock are non-convertible
or redeemable except as a result of a chance in control. Non-cumulative cash
dividends accrued at 5.0% annually through December 31, 2003, and will accrue at
3.75% annually thereafter. These dividends are payable quarterly in arrears. In
the event of any liquidation, dissolution or winding up of affairs of the
Company, the holders of Series C preferred stock at the time shall receive
$100.00 per share plus an amount equal to accrued and unpaid dividends thereon
through and including the date of distribution prior to any distribution to
holders of common stock. The liquidation preference at December 31, 2003 was
approximately $5.1 million.
60
TRUST PREFERRED SECURITIES
By issuing trust preferred securities, the Company is able to increase
its Tier 1 capital for regulatory purposes without diluting the ownership
interests of the Company's common shareholders. Also, dividends paid on trust
preferred securities are deductible as interest expense for income tax purposes.
The net proceeds from all pooled trust preferred offerings included in the
calculation of Tier 1 capital for regulatory purposes was approximately $20.0
million and $17.0 million, respectively, at December 31, 2003 and 2002.
The terms of the trust preferred securities at December 31, 2003 are
summarized as follows:
DIVIDEND CALL OPTION MATURITY
PREFERRED TRUST AMOUNT DIVIDEND RATE PAYMENT DATES DATE DATE
--------------- ------ ------------- ------------- ----------- ---------
Statutory Trust I $6,000 3-month LIBOR plus 3.60% 3/18, 6/18, 12/18/2006 12/18/2031
(4.75% at December 31, 2003) 9/18, 12/18
Statutory Trust II 3,000 3-month LIBOR plus 3.25% 3/26, 6/26, 12/26/2007 12/19/2032
(4.90% at December 31, 2003) 9/26, 12/26
Statutory Trust III 3,000 3-month LIBOR plus 3.10% 3/26, 6/26, 6/26/2008 6/26/2033
(4.25% at December 31, 2003) 9/26, 12/26
Capital Trust I 4,000 3-month LIBOR plus 3.65% 3/30, 6/30, 6/30/2007 6/28/2032
(4.80% at December 31, 2003) 9/30, 12/30
Capital Trust II 4,000 6-month LIBOR plus 3.70% 4/22, 10/22 4/22/2007 4/10/2032
(4.92% at December 31, 2003)
---------
$20,000
=========
The various federal bank regulators, including the Federal Reserve and
the FDIC, have risk-based capital requirements for assessing bank capital
adequacy. These standards define capital and establish minimum capital standards
in relation to assets and off-balance sheet exposures, as adjusted for credit
risks. Capital is classified into two tiers. Tier 1 Capital (or "core" capital)
consists of common shareholders' equity, qualifying perpetual preferred stock
and minority interests in the common equity accounts of consolidated
subsidiaries, reduced by goodwill, other intangible assets and certain
investments in other corporations. Tier 2 Capital consists of Tier 1 Capital, as
well as a limited amount of the allowance for possible loan losses, certain
hybrid capital instruments (such as mandatory convertible debt), subordinated
and perpetual debt and preferred stock that does not qualify for inclusion in
Tier 1 Capital.
At December 31, 1994, a risk-based capital measure and a minimum ratio
standard was fully phased in, with a minimum total capital ratio of 8.00% and
Tier 1 Capital equal to at least 50% of total capital. The Federal Reserve also
has a minimum leverage ratio of Tier 1 Capital to total assets of 3.00%. The
3.00% Tier 1 Capital to total assets ratio constitutes the leverage standard for
bank holding companies and Bank Insurance Fund ("BIF")-insured, state-chartered,
non-member banks, and will be used in conjunction with the risk-based ratio in
determining the overall capital adequacy of banking organizations. The FDIC has
similar capital requirements for BIF-insured, state-chartered, non-member banks.
The Federal Reserve and the FDIC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such minimum levels of capital only if it were rated a composite "one"
under the regulatory rating systems for bank holding companies and banks. All
other bank holding companies are required to maintain a leverage ratio of 3.00%
plus at least 1.00% to 2.00% of additional capital. These rules further provide
that banking organizations experiencing internal growth or making acquisitions
will be expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve continues to consider a
"tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total average assets less
all intangibles.
61
REGULATORY CAPITAL CALCULATION
AS OF DECEMBER 31,
-----------------------------------------
2003 2002
------------------ ------------------
AMOUNT % AMOUNT %
------- ---- ------- ----
TIER 1 RISK-BASED:
Actual $77,088 9.73 $68,953 10.78
Minimum required 31,681 4.00 25,580 4.00
------- ---- -------
Excess above minimum $45,407 5.73 $43,373 6.78
TOTAL RISK-BASED:
Actual $86,727 10.95 $76,216 11.92
Minimum required 63,362 8.00 51,160 8.00
------- ---- -------
Excess above minimum $23,365 2.95 $25,056 3.92
LEVERAGE:
Actual $77,088 8.24 $68,953 9.97
Minimum required 37,400 4.00 27,655 4.00
------- ---- -------
Excess above minimum $39,688 4.24 $41,298 5.97
Total risk-based assets 792,026 639,498
Total average assets 877,986 609,573
The Company's Tier 1 Capital ratio decreased to 9.7% in 2003 from 10.8%
in 2002. The Company's total risk-based capital ratio decreased to 10.9% in 2003
from 11.9% in 2002. These ratios exceed the minimum capital adequacy guidelines
imposed by regulatory authorities on banks and bank holding companies, which are
4.00% for Tier 1 Capital and 8.00% for total risk-based capital. The ratios also
exceed the minimum guidelines imposed by the same regulatory authorities to be
considered "well-capitalized," which are 6.00% of Tier 1 Capital and 10.00% for
total risk-based capital.
The Company does not have any commitments that management believes
would reduce the Company's capital to levels inconsistent with the regulatory
definition of a "well capitalized" financial institution.
The Company's rapid growth since inception has required it to increase
its capital resources from time to time as discussed above. While it is the
Company's intention to continue to expand prudently, there can be no assurance
that the Company will continue to grow at the same rate as the Company has in
past years. Should the Company fail to attract sufficient capital resources, it
would limit its growth in order to remain a "well capitalized" institution.
A positive trend related to the Company's capital resources is its
increased earnings. Prior to 2001, the Company operated at a loss. In 2001, it
reported net income applicable to common shares of $558,000. In 2002, the
Company reported net income applicable to common shares of $1.3 million. For the
year ended December 31, 2003, the Company reported net income applicable to
common shares of $4.4 million. While there can be no assurance that this trend
will continue, this level of income has provided internally generated capital.
Internally generated capital, such as earnings retained by the company, enhances
its tier 1 regulatory capital position and defers the need to raise additional
capital from outside sources. Subsequent to this offering, the Company does not
expect, nor can it presently foresee, any events, trends, or commitments, which
would materially change the mix and relative costs of its capital resources and
debt.
62
INTEREST RATE RISK MANAGEMENT
Interest rate sensitivity is a function of the repricing
characteristics of the Company's portfolio of assets and liabilities. These
repricing characteristics are the time frames within which the interest-bearing
assets and liabilities are subject to change in interest rates either at
replacement, repricing or maturity during the life of the instruments. Interest
rate sensitivity management focuses on repricing relationships of assets and
liabilities during periods of changes in market interest rates. Interest rate
sensitivity is managed with a view to maintaining a mix of assets and
liabilities that respond to changes in interest rates within an acceptable time
frame, thereby managing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volume of assets and liabilities that are subject to repricing at various time
horizons. The differences are interest sensitivity gaps: less than one month,
one to three months, four to twelve months, one to five years, over five years
and on a cumulative basis.
The following table shows interest sensitivity gaps for these different
intervals as of December 31, 2003. The effects of derivative instruments
(foreign currency swap and interest rate swaps) have been incorporated into this
table by revising the repricing intervals of the underlying assets and
liabilities so they are shown repricing at the next strike date, where that
differed from their contractual repricing interval.
ONE ONE TO
MONTH OR THREE FOUR TO ONE TO FIVE OVER FIVE NON-INTEREST
LESS MONTHS TWELVE MONTHS YEARS YEARS SENSITIVE TOTAL
------- ------- ------------ ---------- -------- ------------- -------
Interest Sensitive Assets:
Available for sale
investment securities $ 7,310 291 10,719 14,881 23,685 -- $ 56,886
Loans held for sale 66,495 -- -- -- -- -- 66,495
Federal funds sold and
repurchase agreements 30,616 -- -- -- -- -- 30,616
Loans held for investment
net of deferred fees 254,766 101,970 46,543 193,188 91,123 -- 690,590
------- ------- ------ ------- ------ -------- -------
Total earning assets 359,187 102,261 57,262 208,069 117,808 -- 844,587
------- ------- ------ ------- ------ -------- -------
Interest Sensitive
Liabilities:
Interest-bearing demand
deposits 59,056 -- -- -- -- -- 59,056
Savings deposits 94,036 -- -- -- -- 3,644 97,680
Money market deposits -- -- -- -- -- 31,676 31,676
Certificates of deposit of
$100,000 or more 35,710 36,872 143,974 152,529 13,006 -- 382,091
Other time deposits 24,064 10,723 27,749 25,314 3,613 -- 91,462
Repurchase agreements -- -- -- -- -- 33,508 33,508
Trust preferred securities -- -- -- -- 20,000 -- 20,000
Other borrowed funds 3,354 -- -- -- 10,693 -- 14,057
------- ------- ------ ------- ------ -------- -------
Total interest-bearing
liabilities 216,220 47,595 171,723 177,843 47,312 68,828 729,521
------- ------- ------ ------- ------ -------- -------
Interest sensitivity gap:
Amount 142,967 54,666 (114,461) 30,226 70,496 (68,828) 115,066
------- ------- ------ ------- ------ -------- -------
Cumulative amount 142,967 197,633 83,172 113,398 183,894 115,066 --
------- ------- ------ ------- ------ -------- -------
Percent of total earning
assets 16.93% 6.47% (13.55)% 3.58% 8.35% (8.15)% 13.62%
Cumulative percent of total
earning assets 16.93% 23.40% 9.85% 13.43% 21.77% 13.62% --
Ratio of rate sensitive
assets to rate sensitive
liabilities 1.66 2.15 0.33 1.17 2.49 -- --
Cumulative ratio of rate
sensitive assets to rate
sensitive liabilities 1.66 1.75 1.19 1.18 1.28 -- --
63
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.
The Company has specified gap ratio guidelines for a one year time
horizon of between 0.60 and 1.20. At December 31, 2003, the Company had
cumulative gap ratios of approximately 1.19. Thus, over the next twelve months,
rate-sensitive assets will reprice slightly faster than rate-sensitive
liabilities. At December 31, 2002, the Company had cumulative gap ratios of
approximately 1.29. However, relative repricing frequency of rate-sensitive
assets versus rate-sensitive liabilities is not the sole indicator of changes in
net interest income in a fluctuating interest rate environment, as further
discussed below.
The allocations used for the interest rate sensitivity report above
were based on the contractual maturity (or next repricing opportunity, whichever
comes sooner) for loans and deposits and the duration schedules for investment
securities. All interest-bearing demand deposits were allocated to the one-month
or less category with the exception of personal savings deposit accounts, which
were allocated to the noninterest sensitive category because the rate paid on
these accounts typically is not sensitive to movements in market interest rates.
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the net interest spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and the liability remain the same, thus impacting net interest
income. This is referred to as basis risk and, generally, relates to the
possibility that the repricing characteristics of short-term assets tied to the
Company's prime lending rate are different from those of short-term funding
sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities that are not reflected in the
interest sensitivity analysis report. Prepayments may have significant effects
on the Company's net interest margin. Because of these factors and in a static
test, interest sensitivity gap reports may not provide a complete assessment of
the Company's exposure to changes in interest rates. Management utilizes
computerized interest rate simulation analysis to determine the Company's
interest rate sensitivity. The table above on interest sensitivity gaps
indicates that the Company is in a liability sensitive gap position for the
first year, then moves into a matched position through the five year period.
Overall, due to the factors cited, current simulations results indicate a
relatively low sensitivity to parallel shifts in interest rates. A liability
sensitive company will generally benefit from a falling interest rate
environment as the cost of interest-bearing liabilities falls faster than the
yields on interest-bearing assets, thus creating a widening of the net interest
margin. Conversely, an asset sensitive company will benefit from a rising
interest rate environment as the yields on earning assets rise faster than the
costs of interest-bearing liabilities. Management also evaluates economic
conditions, the pattern of market interest rates and competition to determine
the appropriate mix and repricing characteristics of assets and liabilities
required to produce a targeted net interest margin.
In addition to the gap analysis, management uses rate shock simulation
to measure the rate sensitivity of the Company's balance sheet. Rate shock
simulation is a modeling technique used to estimate the impact of changes in
rates on the Company's net interest margin. The Company measures its interest
rate risk by estimating the changes in net interest income resulting from
instantaneous and sustained parallel shifts in interest rates of plus or minus
200 basis points over a period of twelve months. The Company's most recent rate
shock simulation analysis, which was performed as of February 29, 2004,
indicates that a 200 basis point decrease in rates would cause a decrease in net
interest income of $2.9 million over the next twelve-month period. Conversely, a
200 basis point increase in rates would cause an increase in net interest income
of $5.9 million.
64
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 the Company cannot assure you that this will be the
case. While this simulation is a useful measure of the Company's sensitivity to
changing rates, it is not a forecast of the future results and is based on many
assumptions that, if changed, could cause a different outcome. In addition, a
change in U.S. Treasury rates in the designated amounts accompanied by a change
in the shape of the Treasury yield curve would cause significantly different
changes to net interest income than indicated above.
Generally, the Company's commercial and commercial real estate loans
are indexed to the prime rate. A portion of the Company's investments in
mortgage-backed securities is indexed to U.S. Treasury rates. Accordingly, any
changes in these indices will have a direct impact on the Company's interest
income. Certificates of deposit are generally priced based upon current market
conditions, which include changes in the overall interest rate environment and
pricing of such deposits by competitors. Other interest-bearing deposits are not
priced against any particular index; but rather, reflect changes in the overall
interest rate environment. Repurchase agreements are indexed to the nationally
quoted repurchase agreement rate and other borrowed funds are indexed to U.S.
Treasury rates. The Company adjusts the rates and terms of its loans and
interest-bearing liabilities in response to changes in the interest rate
environment.
The Company does not currently engage in trading activities.
The Company adopted Statement of Accounting Standards No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (SFAS 133), as
amended, on January 1, 2001. SFAS 133 requires all derivative instruments to be
recorded on the balance sheet at fair value.
At December 31, 2003, the following instruments qualify as derivatives
as defined by SFAS 133:
WEIGHTED WEIGHTED
CONTRACT/NOTIONAL AVERAGE PAYING AVERAGE
AMOUNT FAIR VALUE RATES RECEIVING RATES
------------------ ------------ -------------- ---------------
Interest rate swap
agreements............ $166,521,000 $151,523 1.22% 4.40%
Foreign currency swap
agreements............ 2,000,000 (185,716) 1.79% 2.47%
Mortgage loan interest rate
locks................. 62,503,000 1,529,571 N/A N/A
Mandatory mortgage delivery
forwards.............. 55,791,000 (231,953) N/A N/A
65
Interest rate swap agreements at December 31, 2003 consist of
twenty-four 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 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 earnings. The Company recognized losses of $198,000 during the year
ended December 31, 2003 as a result of changes in the fair value of the foreign
currency agreement and the related translation adjustment.
The five counter parties to these derivatives are large, credit-worthy
financial services companies experienced in derivative operations. If a counter
party were to default on one of the interest rate swap agreements, the practical
impact of that default would be to revert the Company's cost on the underlying
certificate of deposit to its fixed coupon rate. As per the preceding table,
this would raise the Company's effective cost on the underlying deposit by an
average rate of 3.18% as of December 31, 2003. However, most of these underlying
certificates contain a provision allowing the Company to cancel the certificate
of deposit in the event the related swap agreement is unwound, and the Company
would probably do so to avoid the increase in cost of these funds. The default
risk, therefore, on these interest rate swaps is limited. If the Company was to
cancel the underlying certificate of deposit, the Company might need to replace
it in the brokered deposit market, depending on its funding needs at the time.
There can be no assurance the Company could replace such a deposit on terms as
favorable as the cancelled deposit and the related interest rate swap had
provided. If the counter party for the foreign currency swap were to default,
the Company would have to use another process to convert the foreign currency
payments into dollars, which might entail some additional costs, but in
management's judgment, these would not be significant. The Company currently has
no agreements with its counter parties to hold collateral to secure the positive
value of these instruments, and management does not believe such agreements
would present any real financial advantage. At December 31, 2003, in
management's opinion there was no significant risk of loss in the event of
nonperformance of the counter parties to these financial instruments.
At December 31, 2002, the following instruments qualify as derivatives
as defined by SFAS 133:
WEIGHTED
CONTRACT/NOTIONAL WEIGHTED AVERAGE AVERAGE
AMOUNT FAIR VALUE PAYING RATES RECEIVING RATES
---------------- ---------- ---------------- ---------------
Interest rate swap agreements $85,500,000 $2,308,044 1.96% 4.88%
Foreign currency swap
agreements............. 2,000,000 12,599 3.34 3.79
Interest rate swap agreements consist of agreements that qualify for
the fair value method of hedge accounting under the "short-cut method" based on
the guidelines established by SFAS 133. At December 31, 2001, the Company had in
place several loan participation agreements accounted for as derivatives, which
do not qualify for hedge accounting. The Company recognized a gain of
approximately $50,000 during the year ended December 31, 2001 as a result of
changes in the fair value of those loan participation agreements. These
participation agreements were unwound during 2002, and accordingly, the Company
recognized a loss of approximately $50,000 during the year ended December 31,
2002, because the fair value of these agreements was reduced to zero.
Additionally, the Company entered into a foreign currency swap agreement during
the first quarter of 2001. This swap agreement does not qualify for hedge
accounting under SFAS 133. Accordingly, all changes in the fair value of the
foreign currency swap agreement will be reflected in the Company's earnings. The
Company recognized a loss of approximately $67,000 during the year ended
December 31, 2002, as a result of changes in the fair value of the foreign
currency agreement. At December 31, 2002, the Company had made and received
66
certain commitments related to the origination and sale of mortgage loans
through its wholesale mortgage division. The Company accounted for these
commitments as derivative instruments where applicable in accordance with
Derivatives Implementation Group Implementation Issue C13, WHEN A LOAN
COMMITMENT IS INCLUDED IN THE SCOPE OF STATEMENT NO. 133 (DIG C13). The fair
value of these commitments is included in the balance of mortgage loans held for
sale at December 31, 2002. For the year ended December 31, 2002, the Company
recognized a gain in connection with the recording of the fair value of these
instruments. For the year ended December 31, 2002, there were no realized gains
or losses on terminated interest rate swaps, with the exception of the loss on
terminated loan participation agreements as discussed above.
The Company has no off-balance sheet activities with unconsolidated or
limited purpose entities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, ACCOUNTING FOR
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This Statement nullifies
Emerging Issues Task Force ("EITF") No. 94-3 and requires that a liability for
costs associated with an exit or disposal activity be recognized only when the
liability is incurred. SFAS No. 146 is effective for exit and disposal
activities that are initiated after December 31, 2002. The Company adopted the
Statement effective January 1, 2003 and it did not have an impact on the
Company's consolidated financial position and consolidated results of
operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, which expands on the accounting
guidance of Statements No. 5, 57, and 107 and incorporates without change the
provisions of FASB Interpretation No. 34, which is being superseded. This
Interpretation requires a guarantor to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The recognition requirements of FIN 45 apply
prospectively to guarantees issued or modified after December 31, 2002. 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.
Significant guarantees that have been entered into by the Company are discussed
in Note 22, GUARANTEES, to the Company's Consolidated Financial Statements for
the year ended December 31, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES. This Interpretation applies to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise held a variable
interest that is acquired on or before January 31, 2003. The Company adopted FIN
46 on July 1, 2003 and based on a reasoned judgment, concluded that FIN 46
permits a sponsor to consolidate trust-preferred vehicles and, accordingly,
continued to consolidate the vehicles after the application of FIN 46.
In December 2003, the FASB issued Interpretation No. 46 (revised
December 2003) CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46(R)"). This
Interpretation defines trust-preferred vehicles as variable interest entities
and requires traditional trust preferred vehicles to be deconsolidated effective
the first reporting period ending after March 15, 2004. Upon adoption if FIN
46(R), investment in trust preferred vehicles totaling $620,000 at December 31,
2003 will no longer be eliminated in consolidation.
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 the statement effective July1, 2003 and it
did not have an impact on the Company's consolidated financial position, results
of operations or cash flows.
67
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 were reclassified from mezzanine equity to debt. The dividends
related to these securities are reflected as interest expense on a prospective
basis. At December 31, 2003, the Company had $20 million outstanding as company
obligated mandatorily redeemable preferred securities of subsidiary trusts. The
Company expensed approximately $975,000 related to those instruments of which
approximately $549,000 (including amortization of debt issuance costs of
approximately $71,000) is recorded as interest expense and $426,000 is recorded
as dividends on trust preferred securities in the Consolidated Statement of
Operations.
In December 2003, the FASB issued a revision of SFAS No. 132,
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, which
amends SFAS No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS and SFAS No. 88
EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. This
Statement amends the disclosure requirements of SFAS No. 132 to require more
complete information in both annual and interim financial statements about
pension and postretirement benefits as well as to increase the transparency of
the financial reporting related to those plans and benefits. The Company adopted
the revised provisions of SFAS No. 132 as of December 31, 2003.
In March of 2004, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 105, APPLICATION OF ACCOUNTING PRINCIPLES
TO LOAN COMMITMENTS, Topic 5: DD. This Bulletin summarizes the views of the SEC
regarding the application of generally accepted accounting principles to loan
commitments accounted for as derivative instruments and must be applied to all
loan commitments accounted for as derivatives entered into after March 31, 2004.
The Company will adopt the Bulletin on March 31, 2004 and is currently assessing
the impact of adoption on the Company's consolidated financial position, results
of operations or cash flows.
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead,
and to the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' increased cost of goods and services purchased, the cost
of salaries and benefits, occupancy expense, and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings, and
shareholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
MONETARY POLICIES
The Company's results of operations will be affected by credit policies
of monetary authorities, particularly the Federal Reserve Board. The instruments
of monetary policy employed by the Federal Reserve Board include open market
operations in U.S. Government securities, changes in the discount rate on member
company borrowings, changes in reserve requirements against member company
deposits and limitations on interest rates which member company may pay on time
and savings deposits. In view of changing conditions in the national economy and
in the money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates or the Company's deposit levels,
loan demand, business and earnings.
68
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to "Liquidity Management and Interest Rate Sensitivity" in Item
7, Management's Discussion and Analysis for discussion of interest rate
fluctuations.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risks, including fluctuations in
interest rates, variability in spread relationships (Prime to LIBOR spreads),
mismatches of repricing intervals between finance receivables and related
funding obligations, and variability in currency exchange rates. The Company has
established policies, procedures and internal processes governing its management
of market risks and the use of financial instruments to manage its exposure to
such risks. Sensitivity of earnings to these risks are managed by entering into
securitization transactions, issuing debt obligations with appropriate price and
term characteristics, and utilizing derivative financial instruments. These
derivative financial instruments consist primarily of interest rate swaps and
foreign currency swaps. The Company does not use derivative financial
instruments for trading purposes.
The Company uses interest rate swap agreements to change the
characteristics of its fixed and variable rate exposures and to manage the
Company's asset/liability match. The Company's interest rate swap portfolio is
an integral element of its risk management policy, and as such, all swaps are
linked to an underlying debt. The Company entered into a foreign currency swap
agreement during the first quarter of 2001. The purpose of this transaction is
to mitigate fluctuations in the exchange rate of the dollar and the Japanese
yen, which might otherwise adversely affect the interest income on a loan
denominated in Japanese Yen and tied to Japanese interest rates. This swap
agreement does not qualify for hedge accounting under SFAS No. 133. Accordingly,
all changes in the fair value of the foreign currency swap agreement will be
reflected in the earnings of the Company.
Refer to "Interest Rate Sensitivity and Liquidity Management" in Item
7, Management Discussion and Analysis for discussion of derivative instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are filed with this report:
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Operations - Years ended December 31,
2003, 2002 and 2001
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows - Years ended December 31,
2003, 2002 and 2001
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no occurrence requiring a response to this Item.
69
ITEM 9A. CONTROLS AND PROCEDURES
In order to ensure that the information the Company must disclose in
its filings with the Securities and Exchange Commission is recorded, processed,
summarized and reported on a timely basis, the Company has formalized its
disclosure controls and procedures. The Company's principal executive officer
and principal financial officer have reviewed and evaluated the effectiveness of
the Company's disclosure controls and procedures, as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e), as of December 31, 2003 (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures were effective
in timely alerting them to material information relating to the Company (and its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings. Since the Evaluation Date, there have not been any significant changes
in the internal controls of the Company, or in other factors that could
significantly affect these controls subsequent to the Evaluation Date.
70
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to directors and executive officers of the
Company contained in the Company's definitive proxy statement to be delivered to
shareholders in connection with the 2004 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation contained in the
Company's definitive proxy statement to be delivered to shareholders in
connection with the 2004 Annual Meeting of Shareholders is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial
owners and management contained in the Company's definitive proxy statement to
be delivered to shareholders in connection with the 2004 Annual Meeting of
Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to related party transactions contained in the
registrant's definitive proxy statement to be delivered to shareholders in
connection with the 2004 Annual Meeting of Shareholders is incorporated herein
by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information relating to principal accounting fees and services
contained in the registrant's definitive proxy statement to be delivered to
shareholders in connection with the 2004 Annual Meeting of Shareholders is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS. The following financial statements and
accountants' reports have been filed as Item 8 in Part II of this Report:
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Operations - Years ended December 31,
2003, 2002 and 2001
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows - Years ended December 31,
2003, 2002 and 2002
Notes to Consolidated Financial Statements
71
2. EXHIBITS.
--------
3.1 Articles of Incorporation of the Company, as amended(1)
3.1.1 Second Amended and Restated Articles of Incorporation of the
Company(1)
3.1.2 Amendment to Second Amended and Restated Articles of Incorporation
of the Company(2)
3.1.3 Articles of Amendment to Second and Amended and Restated Articles of
Incorporation of the Company(3)
3.2 Amended and Restated By-Laws of the Company(1)
4.1 Specimen Common Stock Certificate of the Company(1)
4.2 See Exhibits 3.1.1 and 3.2 for provisions of the Articles of
Incorporation and By-Laws of the Company defining rights of the
holders of the Company's Common Stock(1)
4.3 Indenture, dated December 18, 2001, between the Company and State
Street Bank and Trust Company of Connecticut, National
Association(4)
4.4 Amended and Restated Declaration of Trust, dated December 18, 2001,
by and among State Street Bank and Trust Company of Connecticut,
National Association, the Company and the administrators named
therein(4)
4.5 Indenture, dated as of April 10, 2002, between the Company and
Wilmington Trust Company, as trustee(5)
4.6 The Amended and Restated Declaration of Trust, dated as of April 10,
2002, among the Company, as sponsor, the Administrator(s) named
therein and Wilmington Trust Company, as Delaware Trustee and
Institutional Trustee, and the holders from time to time of
undivided beneficial interests in the assets of Florida Banks
Capital Trust II(5)
4.7 Indenture, dated as of June 27, 2002, between the Company and Wells
Fargo Delaware Trust Company, as trustee(5)
4.8 The Amended and Restated Trust Agreement dated as of June 27, 2002
among the Company, as depositor, the Administrative Trustees named
therein and Wells Fargo Bank, N.A., as property trustee, Wells Fargo
Delaware Trust Company, as resident trustee, and the holders from
time to time of undivided beneficial interests in the assets of
Florida Banks Capital Trust II(5)
4.8 Indenture, dated December 19, 2002, between the Company and State
Street Bank and Trust Company of Connecticut, National
Association(7)
4.9 Amended and Restated Declaration of Trust, dated December 19, 2002,
by and among State Street Bank and Trust Company of Connecticut,
National Association, the Company and the administrators named
therein(7)
4.10 Indenture, dated June 26, 2003, between Florida Banks, Inc. and
State Street Bank and U.S. Bank National Association.(8)
4.11 Amended and Restated Declaration of Trust, dated June 26, 2003, by
and among State Street Bank and U.S. Bank National Association,
Florida Banks, Inc. and the administrators named therein.(8)
10.1 Form of Employment Agreement between the Company and Charles E.
Hughes, Jr.(1)
10.2 The Company's 1998 Stock Option Plan(1)
72
10.2.1 Form of Incentive Stock Option Agreement(1)
10.2.2 Form of Non-qualified Stock Option Agreement(1)
10.3 The Company's Amended and Restated Incentive Compensation Plan(6)
10.4 Form of Employment Agreement between the Company and T. Edwin
Stinson, Jr., Don D. Roberts and Richard B. Kensler(1)
10.5 Placement Agreement, dated December 4, 2001, between the Company,
First Tennessee Capital Markets and Keefe, Bruyette & Woods, Inc.
(4)
10.6 Subscription Agreement, dated December 18, 2001, between the
Company, Florida Banks Statutory Trust I and Preferred Term
Securities IV, Ltd. (4)
10.7 Guarantee Agreement, dated December 18, 2001, by and between the
Company and State Street Bank and Trust Company of Connecticut(4)
10.8 Placement Agreement, dated as of March 26, 2002, between the Company
and Florida Banks Capital Trust II and Salomon Smith Barney Inc. (5)
10.9 Debenture Subscription Agreement, dated as of April 10, 2002,
between the Company and Florida Banks Capital Trust II(5)
10.10 Capital Securities Subscription Agreement, dated March 26, 2002,
among the Company, Florida Banks Capital Trust II and MM Community
Funding III, Ltd. (5)
10.11 Common Securities Subscription Agreement, dated April 10, 2002,
between the Company and Florida Banks Capital Trust II(5)
10.12 Guarantee Agreement, dated as of April 10, 2002, between the Company
and Wilmington Trust Company, as trustee(5)
10.13 Subscription Agreement, dated as of June 27, 2002, between the
Company, Florida Banks Capital Trust II and Bear, Stearns & Co. (5)
10.14 Placement Agreement, dated as of June 27, 2002, between the Company
and Florida Banks Capital Trust II and SAMCO Capital Markets, a
division of Service Asset Management Company(5)
10.15 Trust Preferred Securities Guarantee Agreement, dated as of June 27,
2002, between the Company and Wells Fargo, as trustee(5)
10.16 Placement Agreement, dated December 11, 2002, between the Company,
Florida Banks Statutory Trust II, FTN Financial Capital Markets and
Keefe, Bruyette & Woods, Inc. (7)
10.17 Subscription Agreement, dated December 19, 2002, between the
Company, Florida Banks Statutory Trust II and Preferred Term
Securities VIII, Ltd. (7)
10.18 Guarantee Agreement, dated December 19, 2002, by and between the
Company and State Street Bank and Trust Company of Connecticut(7)
10.19 Placement Agreement, dated June 16, 2003, between Florida Banks,
Inc., FTN Capital Markets and Keefe, Bruyette & Woods, Inc.(8)
10.20 Subscription Agreement, dated June 26, 2003, between Florida Banks,
Inc., Florida Banks Statutory Trust III and Preferred Term
Securities X, Ltd.(8)
10.21 Guarantee Agreement, dated June 26, 2003, by and between Florida
Banks, Inc. and State Street Bank and U.S. Bank National
Association.(8)
10.22 Subscription Agreement for Series C Preferred Stock, dated December
31, 2002(3)
73
21.1 Subsidiaries of the Registrant(9)
23.1 Consent of Deloitte & Touche LLP(9)
31.1 Certifications by Chief Executive Officer under Section 302 of
Sarbanes-Oxley Act of 2002(9)
31.2 Certifications by Chief Financial Officer under Section 302 of
Sarbanes-Oxley Act of 2002(9)
32.1 Certifications by Chief Executive Officer and Chief Financial
Officer under Section 906 of Sarbanes-Oxley Act of 2002 (furnished
but not filed)(9)
- ----------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, previously filed by the Company (Registration Statement No.
333-50867).
(2) Incorporated by reference to Exhibit to the Registration Statement on Form
S-3, previously filed by the Company (Registration Statement No.
333-67372).
(3) Incorporated by reference to the Form 8-K dated January 2, 2003,
previously filed by the Company.
(4) Incorporated by references to the Form 10-Q for the quarter ended March
31, 2002, previously filed by the Company.
(5) Incorporated by reference to the Form 10-Q for quarter ended June 30,
2002, previously filed by the Company.
(6) Incorporated by reference to Exhibit 10.1 to the Registration Statement on
Form S-8, previously filed by the Company (Registration Statement No.
333-70442).
(7) Incorporated by reference to the Form 10-K for the year ended December 31,
2002, previously filed by the Company.
(8) Incorporated by reference to the Form 10-Q for the quarter ended June 30,
2003, previously filed by the Company.
(9) Filed herewith.
(b) No reports on Form 8-K were filed in the quarter covered by this report.
74
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, in the City of Jacksonville, State
of Florida on March 25, 2004.
FLORIDA BANKS, INC.
By: /s/ CHARLES E. HUGHES, JR.
--------------------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------- ---------------------------------- -------------------------------------
/s/ CHARLES E. HUGHES, JR. President, Chief Executive March 25, 2004
- --------------------------------------- Officer and Director (Principal
Charles E. Hughes, Jr. Executive Officer)
/s/ T. EDWIN STINSON, JR. Chief Financial Officer, March 25, 2004
- --------------------------------------- Secretary, Treasurer and
T. Edwin Stinson, Jr. Director (Principal Financial
and Accounting Officer)
/s/ M.G. SANCHEZ Chairman of the Board March 25, 2004
- ---------------------------------------
M. G. Sanchez
/s/ T. STEPHEN JOHNSON Vice-Chairman of the Board March 25, 2004
- ---------------------------------------
T. Stephen Johnson
/s/ CLAY M. BIDDINGER Director March 25, 2004
- ---------------------------------------
Clay M. Biddinger
/s/ P. BRUCE CULPEPPER Director March 25, 2004
- ---------------------------------------
P. Bruce Culpepper
/s/ DR. ADAM F. HERBERT, JR. Director March 25, 2004
- ---------------------------------------
Dr. Adam F. Herbert, Jr.
/s/ W. ANDREW KRUSEN, JR. Director March 25, 2004
- ---------------------------------------
W. Andrew Krusen, Jr.
/s/ NANCY E. LAFOY Director March 25, 2004
- ---------------------------------------
Nancy E. LaFoy
/s/ WILFORD C. LYON, JR. Director March 25, 2004
- ---------------------------------------
Wilford C. Lyon, Jr.
/s/ DAVID MCINTOSH Director March 25, 2004
- ---------------------------------------
David McIntosh
75
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche, LLP
31.1 Certifications by Chief Executive Officer under Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Certifications by Chief Financial Officer under Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer and Chief Financial
Officer under Section 906 of Sarbanes-Oxley Act of 2002 (furnished
but not filed).
76
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Florida Banks, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Florida Banks,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Florida Banks, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
reclassified trust preferred securities effective July 1, 2003 in accordance
with the adoption of Financial Accounting Standards Board Statement of Financial
Accounting Standard No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Jacksonville, Florida
March 16, 2004
F-1
FLORIDA BANKS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
------------- -------------
ASSETS
CASH AND CASH EQUIVALENTS:
Cash and due from banks $ 81,513,673 $ 26,964,504
Federal funds sold and repurchase agreements 30,616,000 62,515,000
------------- -------------
Total cash and cash equivalents 112,129,673 89,479,504
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $53,085,489 and
$50,155,158 at December 31, 2003 and 2002) 53,282,085 50,930,650
Held to maturity (fair value $0 and $299,475
at December 31, 2003 and 2002) -- 227,925
Other investments 3,604,050 2,493,350
------------- -------------
Total investment securities 56,886,135 53,651,925
MORTGAGE LOANS HELD FOR SALE 66,495,468 54,674,248
LOANS, net of allowance for loan losses of $9,056,665
and $7,263,029 at December 31, 2003 and 2002, respectively 681,533,481 543,192,040
PREMISES AND EQUIPMENT, NET 5,008,664 5,466,332
ACCRUED INTEREST RECEIVABLE 2,684,599 2,375,102
DEFERRED INCOME TAXES, NET 4,597,922 3,908,751
DERIVATIVE INSTRUMENTS -- 2,321,643
OTHER REAL ESTATE OWNED 1,768,569 652,500
OTHER ASSETS 13,356,388 343,505
------------- -------------
TOTAL ASSETS $ 944,460,899 $ 756,065,550
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing $ 134,647,508 $ 141,395,150
Interest-bearing 661,965,351 523,514,558
------------- -------------
Total deposits 796,612,859 664,909,708
REPURCHASE AGREEMENTS 33,508,157 4,653,878
OTHER BORROWED FUNDS 24,046,860 9,921,898
TRUST PREFERRED SECURITIES 20,000,000 --
ACCRUED INTEREST PAYABLE 2,364,087 2,377,963
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 9,869,871 4,765,136
DERIVATIVE INSTRUMENTS 265,144 --
------------- -------------
Total liabilities 886,666,978 686,628,583
------------- -------------
COMPANY OBLIGATED MANDITORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUSTS -- 16,473,092
------------- -------------
COMMITMENTS (NOTE 10)
SHAREHOLDERS' EQUITY:
Series C preferred stock, $100.00 par value, 50,000 shares authorized, 50,000
shares issued and outstanding at December 31, 2003 and 2002 5,000,000 5,000,000
Common stock, $.01 par value; 30,000,000 shares authorized 6,838,271 and
6,768,362 shares issued, respectively 68,383 67,684
Additional paid-in capital 53,008,095 52,287,390
Accumulated deficit (deficit of $8,134,037
eliminated upon quasi-reorganization on December 31, 1995) (405,174) (4,874,873)
Accumulated other comprehensive income, net of tax 122,617 483,674
------------- -------------
Total shareholders' equity 57,793,921 52,963,875
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 944,460,899 $ 756,065,550
============= =============
See notes to consolidated financial statements.
F-2
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
- --------------------------------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
INTEREST INCOME:
Loans, including fees $ 41,610,943 $ 31,852,739 $ 27,692,486
Investment securities 1,369,518 2,239,454 2,653,164
Federal funds sold 402,756 582,723 819,741
Repurchase agreements 184,692 252,245 214,787
------------ ------------ ------------
Total interest income 43,567,909 34,927,161 31,380,178
------------ ------------ ------------
INTEREST EXPENSE:
Deposits 15,315,217 14,622,492 14,948,191
Borrowed funds 643,191 460,027 395,131
Trust preferred 549,316 -- --
Repurchase agreements 383,666 501,638 1,204,752
------------ ------------ ------------
Total interest expense 16,891,390 15,584,157 16,548,074
------------ ------------ ------------
NET INTEREST INCOME 26,676,519 19,343,004 14,832,104
PROVISION FOR LOAN LOSSES 2,935,921 3,025,775 1,889,079
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 23,740,598 16,317,229 12,943,025
------------ ------------ ------------
NONINTEREST INCOME:
Gain on sale of mortgage loans 8,766,776 1,092,911 --
Mortgage loan origination fees 3,357,688 805,264 234,810
Service fees 2,316,130 1,718,888 1,224,020
Gain on sale of commercial loans -- 42,888 104,151
(Loss) gain on sale of available for sale investment securities -- (3,967) 73,976
Other noninterest income 1,162,817 383,775 411,046
------------ ------------ ------------
15,603,411 4,039,759 2,048,003
------------ ------------ ------------
NONINTEREST EXPENSES:
Salaries and benefits 21,929,864 11,037,925 8,761,416
Occupancy and equipment 2,809,565 2,105,683 1,785,996
Communications 1,583,313 1,144,290 969,842
Data processing 1,133,570 872,630 677,963
Professional 966,399 523,652 430,826
Dividends on preferred security of subsidiary trust 425,835 633,580 12,995
Other noninterest expense 3,349,146 1,687,049 1,054,151
------------ ------------ ------------
32,197,692 18,004,809 13,693,189
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,146,317 2,352,179 1,297,839
PROVISION FOR INCOME TAXES 2,490,317 885,121 489,400
------------ ------------ ------------
NET INCOME 4,656,000 1,467,058 808,439
PREFERRED STOCK DIVIDENDS (250,000) (140,058) (250,901)
------------ ------------ ------------
NET INCOME APPLICABLE TO COMMON SHARES $ 4,406,000 $ 1,327,000 $ 558,348
============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.65 $ 0.21 $ 0.10
============ ============ ============
Diluted $ 0.62 $ 0.20 $ 0.10
============ ============ ============
See notes to consolidated financial statements.
F-3
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
- --------------------------------------------------------------------------------
Accumulated
Other
Compre-
hensive
Preferred Stock Common Stock Additional Income
-------------------- -------------------- Paid-in Accumulated (Loss),
Shares Par Value Shares Par Value Capital Deficit Net of Tax Total
------- ---------- --------- --------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 5,688,651 $56,887 $45,245,904 $(6,760,222) $ 13,870 $38,556,439
Comprehensive income:
Net income -- -- -- -- -- 808,439 -- 808,439
Unrealized gain on available
for sale investment securities,
net of tax of $138,968 -- -- -- -- -- -- 230,332 230,332
Comprehensive income -- -- -- -- -- -- -- 1,038,771
Issuance of common stock under
employee stock purchase plan -- -- 50,109 501 226,587 -- -- 227,088
Issuance of Series B
preferred stock, net 102,283 6,955,244 -- -- (148,774) -- -- 6,806,470
Series B preferred stock
cash dividends paid -- -- -- -- -- (127,373) -- (127,373)
Purchase and retirement
of common stock -- -- (61,100) (611) (358,750) -- -- (359,361)
------- ---------- --------- ------- ----------- ----------- --------- -----------
BALANCE, DECEMBER 31, 2001 102,283 6,955,244 5,677,660 56,777 44,964,967 (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 (102,283) (6,955,244) 1,022,830 10,228 6,945,016 -- -- --
Exercise of stock options -- -- 7,063 71 46,401 -- -- 46,472
Issuance of common stock
under employee stock
purchase plan -- -- 41,133 411 210,359 -- -- 210,770
Issuance of restricted stock -- -- 19,676 197 120,647 -- -- 120,844
Issuance of Series C
preferred stock, net 50,000 5,000,000 -- -- -- -- -- 5,000,000
Series B preferred stock
dividends paid -- -- -- -- -- (262,775) -- (262,775)
------- ---------- --------- ------- ----------- ----------- --------- -----------
BALANCE, DECEMBER 31, 2002 50,000 5,000,000 6,768,362 67,684 52,287,390 (4,874,873) 483,674 52,963,875
Comprehensive income:
Net income -- -- -- -- -- 4,656,000 -- 4,656,000
Unrealized loss on
available for sale
investment securities,
net of tax of $217,839 -- -- -- -- -- -- (361,057) (361,057)
-----------
Comprehensive income -- -- -- -- -- -- -- 4,294,943
Exercise of stock options -- -- 6,498 65 31,491 -- -- 31,556
Exercise of stock warrants -- -- 12,800 128 127,872 -- -- 128,000
Issuance of common stock under
employee stock purchase plan -- -- 30,935 309 222,835 -- -- 223,144
Issuance of restricted stock -- -- 19,676 197 338,507 -- -- 338,704
Series C preferred stock
dividends paid -- -- -- -- -- (186,301) -- (186,301)
------- ---------- --------- ------- ----------- ----------- --------- -----------
BALANCE, DECEMBER 31, 2003 50,000 $5,000,000 6,838,271 $68,383 $53,008,095 $ (405,174) $ 122,617 $57,793,921
======= ========== ========= ======= =========== =========== ========= ===========
See notes to consolidated financial statements.
F-4
FLORIDA BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
- --------------------------------------------------------------------------------
2003 2002 2001
------------- ------------- -------------
OPERATING ACTIVITIES:
Net income $ 4,656,000 $ 1,467,058 $ 808,439
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 983,000 863,886 756,426
Restricted stock grants 338,704 120,844 --
Loss on disposition of furniture and equipment 18,573 -- 17,628
Deferred income tax (benefit) expense (471,332) (36,447) 449,400
Loss (gain) on sale of securities -- 3,967 (73,976)
(Gain) loss on sale of real estate owned (8,834) 6,703 (24,928)
(Gain) loss on foreign currency translation (217,634) 23,650 206,151
Gain on mortgage loan interest rate lock derivative
instruments (1,519,571) (730,104) --
Gain on bank owned life insurance (467,159) -- --
Loss on mandatory mortgage forwards 230,953 -- --
Loss (gain) on interest rate swap derivative instruments 198,313 43,258 (262,008)
Amortization (accretion) of premiums (discount) on
investments, net 946,268 131,708 (295,582)
Amortization of premiums on loans 86,153 123,055 196,651
Amortization of debt issuance costs 131,304 70,445 --
Provision for loan losses 2,935,921 3,025,775 1,889,079
Net increase in mortgage loans held for sale (10,301,649) (53,944,144) --
(Increase) decrease in accrued interest receivable (309,497) (652,356) 174,557
(Increase) decrease in other assets (2,150,120) 194,083 (2,180)
(Decrease) increase in accrued interest payable (13,876) (485,919) 657,503
Increase in accounts payable and accrued expenses 5,104,735 2,726,341 1,279,801
------------- ------------- -------------
Net cash provided by (used in) operating activities 170,252 (47,048,197) 5,776,961
------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, paydowns and maturities of investment securities:
Available for sale 46,161,180 27,068,362 15,808,333
Held to maturity 227,925 2,700,791 4,154,215
Purchases of investment securities:
Available for sale (50,037,779) (43,858,241) (17,193,780)
Held to maturity -- -- (3,361,015)
Other (1,110,700) (428,800) (798,550)
Net increase in loans held for investment (142,342,955) (150,265,325) (119,896,460)
Purchase of bank owned life insurance (10,000,000) -- --
Purchases of premises and equipment (1,649,035) (2,968,336) (839,608)
Proceeds from the sale of premises and equipment 1,105,130 -- 3,841
Proceeds from the sale of real estate owned 66,190 2,771,124 114,928
------------- ------------- -------------
Net cash used in investing activities (157,580,044) (164,980,425) (122,008,096)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits,
money market accounts and savings accounts 45,114,197 91,014,976 86,829,039
Net increase in time deposits 88,993,268 120,771,110 59,390,096
Proceeds from issuance of preferred stock, net -- 5,000,000 6,806,470
Proceeds from issuance of trust preferred securities, net 3,000,000 10,583,647 5,819,000
Proceeds from the exercise of stock options and warrants, net 159,556 46,472 --
Purchase and retirement of common stock -- -- (359,361)
Preferred dividends paid (186,301) (262,775) (127,373)
Proceeds from advances 13,200,000 10,000,000 9,500,000
Repayment of advances (6,667) (10,000,000) (7,000,000)
Increase (decrease) in repurchase agreements 28,854,279 158,331 (14,316,831)
Increase (decrease) in other borrowed funds 931,629 207,206 (8,710)
------------- ------------- -------------
Net cash provided by financing activities 180,059,961 227,518,967 146,532,330
------------- ------------- -------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 22,650,169 15,490,345 30,301,195
CASH AND CASH EQUIVALENTS:
Beginning of year 89,479,504 73,989,159 43,687,964
------------- ------------- -------------
End of year $ 112,129,673 $ 89,479,504 $ 73,989,159
============= ============= =============
See notes to consolidated financial statements.
F-5
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Florida Banks, Inc. (the "Company") was incorporated on October 15, 1997
for the purpose of becoming a bank holding company and acquiring First
National Bank of Tampa (the "Bank"). On August 4, 1998, the Company
completed its initial public offering and its merger with the Bank
pursuant to which the Bank was merged with and into Florida Bank No. 1,
N.A., a wholly owned subsidiary of the Company, and renamed Florida Bank,
N.A.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to
general practices within the banking industry. The following summarizes
these policies and practices:
USE OF ESTIMATES--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the
near term relate to the allowance for loan losses and the valuation of
other real estate owned, deferred tax assets, and derivative instruments.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash and due
from banks, Federal funds, sold, and repurchase agreements all of which
mature within 90 days. Generally, Federal funds and repurchase agreements
are sold for one-day periods.
INVESTMENT SECURITIES--Debt securities for which the Company has the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost. Securities are classified as
trading securities if bought and held principally for the purpose of
selling them in the near future. No investments are held for trading
purposes. Securities not classified as held to maturity are classified as
available for sale, and reported at fair value with unrealized gains and
losses excluded from earnings and reported net of tax as a separate
component of other comprehensive income or loss until realized. Other
investments, which include Federal Reserve Bank stock and Federal Home
Loan Bank stock, are carried at cost as such investments are not readily
marketable.
Realized gains and losses on sales of investment securities are recognized
in the statements of operations upon disposition based upon the adjusted
cost of the specific security. Declines in value of investment securities
judged to be other than temporary are recognized as losses in the
statements of operations.
LOANS HELD FOR INVESTMENT--Loans held for investment are stated at the
principal amount outstanding, net of unearned income and an allowance for
loan losses. Interest income on all loans is accrued based on the
outstanding daily balances.
F-6
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
Management has established a policy to discontinue accruing interest on a
loan after it has become 90 days delinquent as to payment of principal or
interest unless the loan is considered to be well collateralized and the
Company is actively in the process of collection. In addition, a loan will
be placed on nonaccrual status before it becomes 90 days delinquent if
management believes that the borrower's financial condition is such that
collection of interest or principal is doubtful. Interest previously
accrued but uncollected on such loans is reversed and charged against
current income when the loan is estimated to be uncollectible. Interest
income on nonaccrual loans is recognized only as received.
Nonrefundable fees and certain direct costs associated with originating or
acquiring loans are recognized over the life of the related loans on the
interest method.
MORTGAGE LOANS HELD FOR SALE--Mortgage loans held for sale are residential
mortgage loans originated by the Company which management either intends
to sell at some point in the future or which are committed to be sold to
various institutions under agreements obtained at the time the Company
extends commitments to borrowers. Mortgage loans held for sale are
reported at the lower of cost or estimated fair value, determined on an
aggregate basis.
ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral,
and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and larger
balance real estate and other loans by either the present value of
expected future cash flows discounted at the loan's effective interest
rate, the loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
F-7
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and smaller balance residential loans for
impairment disclosures.
PREMISES AND EQUIPMENT--Premises and equipment are stated at cost less
accumulated depreciation computed on the straight-line method over the
estimated useful lives. Leasehold improvements are amortized on the
straight-line method over the shorter of their estimated useful life or
the period the Company expects to occupy the related leased space.
Maintenance and repairs are charged to operations as incurred.
INCOME TAXES--Deferred tax liabilities are recognized for temporary
differences that will result in amounts taxable in the future and deferred
tax assets are recognized for temporary differences and tax benefit
carryforwards that will result in amounts deductible or creditable in the
future. Net deferred tax liabilities or assets are recognized through
charges or credits to the deferred tax provision. A deferred tax valuation
allowance is established if it is more likely than not that all or a
portion of the deferred tax assets will not be realized. Subsequent to the
Company's quasi-reorganization (see Note 19) reductions in the deferred
tax valuation allowance are credited to additional paid-in capital.
DERIVATIVE INSTRUMENTS--The Company enters into derivative contracts to
hedge certain assets, liabilities, and probable forecasted transactions.
On the date the Company enters into a derivative contract, the derivative
instrument is designated as (1) a hedge of the fair value of a recognized
asset or liability or of an unrecognized firm commitment (a "fair value"
hedge), or (2) a hedge of the variability in expected future cash flows
associated with an existing recognized asset or liability or a forecasted
transaction (a "cash flow" hedge).
In a fair value hedge, changes in the fair value of the hedging derivative
recognized in earnings are offset by recognizing changes in the fair value
of the hedged item attributable to the risk being hedged. To the extent
that the hedging derivative is ineffective, the changes in fair value will
not offset and the difference is reflected in earnings.
In a cash flow hedge, the effective portion of the changes in the fair
value of the hedging derivative is recorded in accumulated other
comprehensive income and is subsequently reclassified into earnings during
the same period in which the hedged item affects earnings. The change in
fair value of any ineffective portion of the hedging derivative is
recognized immediately in earnings.
The Company formally documents the relationship between the hedging
instruments and hedged items, as well as its risk management objective and
strategy before undertaking the hedge. To qualify for hedge accounting,
the derivatives and related hedged items must be designated as a hedge.
Both at the inception of the hedge and on an ongoing basis, the Company
assesses whether the hedging relationship is expected to be highly
effective in offsetting changes in fair value or cash flows of hedged
items. If it is determined that the derivative instrument is not highly
effective as a hedge, hedge accounting is discontinued.
The Company discontinues hedge accounting prospectively when (1) it
determines that the derivative is no longer effective in offsetting
changes in the fair value or cash flows of the designated hedge item,
F-8
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
(2) the derivative expires or is sold, or (3) the derivative is
de-designated as a fair value or cash flow hedge.
OTHER REAL ESTATE OWNED--Assets acquired through, or in lieu of, loan
foreclosure are held for sale and are initially recorded at fair value at
the date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value less cost
to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
OTHER BORROWED FUNDS--Other borrowed funds consist of Federal Home Loan
Bank borrowings, SunTrust revolving and nonrevolving credit lines and
treasury tax and loan deposits. Treasury tax and loan deposits generally
are repaid within 1 to 120 days from the transaction date.
REPURCHASE AGREEMENTS--Repurchase agreements consist of agreements with
customers to pay interest daily on funds swept into a repo account based
on a rate of .75% to 1.00% below the federal funds rate. Such agreements
generally mature within one to four days from the transaction date. In
addition, the Company has securities sold under agreements to repurchase,
which are classified as secured borrowings. Such borrowings generally
mature within 1 to 30 days from the transaction date. Securities sold
under agreements to repurchase are reflected at the amount of cash
received in connection with the transaction. Information concerning
repurchase agreements for the years ended December 31, 2003 and 2002 is
summarized as follows:
2003 2002
------------- ------------
Average balance during the year $ 44,836,145 $ 37,725,667
Average interest rate during the year .86% 1.33%
Maximum month-end balance during the year $ 56,968,233 $ 49,542,093
COMPREHENSIVE INCOME--Accounting principles generally require that
recognized revenue, expenses, gains, and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized
gains and losses on available for sale securities, are reported as a
separate component of the equity section of the balance sheet, such items
along with net income, are components of comprehensive income. The
components of other comprehensive income and related tax effects are
presented in the consolidated statements of shareholders' equity.
TRANSFERS OF FINANCIAL ASSETS--Transfers of financial assets are accounted
for as sales when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets, and (3) the Company does not
maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
F-9
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE--Basic earnings per common share ("EPS")
excludes dilution and is computed by dividing earnings applicable to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects additional common shares
that would have been issued, as well as any adjustment to income that
would result from the assumed issuance. Potential common shares that may
be issued by the Company relate solely to outstanding stock options and
convertible preferred stock. The potential common shares are determined
using the treasury stock method for outstanding stock options and the
if-converted method for preferred stock.
STOCK OPTIONS--The Company accounts for stock based compensation utilizing
the intrinsic value based method under Accounting Principles Board Opinion
("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In January 2003,
the Company's Board of Directors approved the Amended and Restated 1998
Stock Option Plan (the "1998 Plan"), which provides for the grant of
incentive or nonqualified stock options to certain directors, officers,
and key employees who participate in the plan. The exercise price of each
stock option equaled the market price of the Company's stock on the date
of grant. An aggregate of 1,100,000 shares of common stock are reserved
for issuance pursuant to the 1998 Plan. During 2003, 2002, and 2001, the
Company granted 92,600, 94,900, and 62,650 options, respectively, at
various exercise prices based on the fair value of the stock at the time
of grant.
Pursuant to the disclosure requirements of Statement of Financial
Accounting Standard ("SFAS") No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE, the following table provides an
expanded reconciliation for all periods presented that adds back to
reported net income the recorded expense under APB No. 25, net of related
income tax effects, deducts the total fair value expense under SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, net of related income tax
effects and shows the reported and pro forma earnings per share amounts.
See NOTE 12 - SHAREHOLDERS' EQUITY for additional information regarding
the Company's stock options.
2003 2002 2001
------------- ------------- -----------
Net income applicable to common shares
As reported $ 4,406,000 $ 1,327,000 $ 558,348
Total stock-based employee compensation
cost included in the determination of net
income, net of related tax effects 211,250 75,370 --
Total stock-based employee compensation
cost determined under fair value method
for all awards, net of related tax effects (409,614) (219,434) (243,347)
------------- ------------- -----------
Pro forma net income applicable
to common shares $ 4,207,636 $ 1,182,936 $ 315,001
============= ============= ===========
Earnings per share - Basic
As reported $ 0.65 $ 0.21 $ 0.10
Pro forma 0.62 0.18 0.06
Earnings per share - Dilutive
As reported $ 0.62 $ 0.20 $ 0.10
Pro forma 0.60 0.18 0.06
F-10
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
PENSION BENEFITS--The Company records pension costs and liabilities,
including an additional minimum liability in accordance with SFAS No. 187,
EMPLOYER'S ACCOUNTING FOR PENSIONS. Several estimates and assumptions are
required to record these costs and liabilities, including discount rates,
salary increases and longevity and service lives of employees. Management
reviews and updates these assumptions periodically. See NOTE 11 - EMPLOYEE
BENEFIT PLANS, for the disclosure required by SFAS. No. 132 (revised
2003), EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS.
RECENT ACCOUNTING PRONOUNCEMENTS--In June 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This statement nullifies
Emerging Issues Task Force No. 94-3 and requires that a liability for
costs associated with an exit or disposal activity be recognized only when
the liability is incurred. SFAS No. 146 is effective for exit and disposal
activities that are initiated after December 31, 2002. The Company adopted
the statement effective January 1, 2003 and it did not have an impact on
the Company's consolidated financial position and consolidated results of
operations.
In November 2002, the FASB issued Interpretation No. ("FIN") 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, which expands on
the accounting guidance of Statements No. 5, 57, and 107 and incorporates
without change the provisions of FASB Interpretation No. 34, which is
being superseded. This interpretation requires a guarantor to recognize,
at the inception of the guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The recognition
requirements of FIN 45 apply prospectively to guarantees issued or
modified after December 31, 2002. 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. Significant guarantees that
have been entered into by the Company are discussed in Note 22.
In January 2003, the FASB issued 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 adopted FIN 46
on July 1, 2003 and based on a reasoned judgment, concluded that FIN 46
permits a sponsor to consolidate trust-preferred vehicles and,
accordingly, continued to consolidate the vehicles after the application
of FIN 46.
In December 2003, the FASB issued FIN 46 (revised December 2003)
CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46(R)"). This
interpretation defines trust preferred vehicles as variable interest
entities and requires traditional trust preferred vehicles to be
deconsolidated effective the first reporting period ending after March 15,
2004. Upon adoption of FIN 46(R), investment in trust preferred vehicles
totaling $620,000 at December 31, 2003 will no longer be eliminated in
consolidation.
F-11
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 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 No. 149 is
generally effective prospectively for contracts entered into or modified,
and hedging relationships designated, after June 30, 2003. The Company
adopted the statement effective July1, 2003 and it did not have an impact
on the Company's consolidated financial position, results of operations,
or cash flows.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY.
SFAS No. 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 No. 150 are generally effective for
financial instruments entered into or modified after May 31, 2003.
Additionally, the Company must apply the provisions of SFAS No. 150 to all
financial instruments on July 1, 2003. Upon the adoption of SFAS No. 150,
the Company's obligated mandatorily redeemable preferred securities of
subsidiary trusts were reclassified from mezzanine equity to debt. The
dividends related to these securities are reflected as interest expense on
a prospective basis. At December 31, 2003, the Company had $20 million
outstanding as company obligated mandatorily redeemable preferred
securities of subsidiary trusts. The Company expensed approximately
$975,000 related to those instruments of which approximately $549,000
(including amortization of debt issuance costs of approximately $71,000)
is recorded as interest expense and $426,000 is recorded as dividends on
trust preferred securities in the Consolidated Statement of Operations.
In December 2003, the FASB issued a revision of SFAS No. 132, EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, which amends
SFAS No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS and SFAS No. 88,
EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS.
This statement amends the disclosure requirements of SFAS No. 132 to
require more complete information in both annual and interim financial
statements about pension and postretirement benefits as well as to
increase the transparency of the financial reporting related to those
plans and benefits. The Company adopted the revised provisions of SFAS No.
132 as of December 31, 2003.
In March of 2004, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 105, APPLICATION OF ACCOUNTING
PRINCIPLES TO LOAN COMMITMENTS, Topic 5: DD. This bulletin summarizes the
views of the SEC regarding the application of generally accepted
accounting principles to loan commitments accounted for as derivative
instruments and must be applied to all loan commitments accounted for as
derivatives entered into after March 31, 2004. The Company will adopt the
bulletin on March 31, 2004 and is currently assessing the impact of
adoption on the Company's consolidated financial position, results of
operations or cash flows.
RECLASSIFICATIONS--Certain reclassifications have been made to the 2002
and 2001 consolidated financial statements to conform with the
presentation adopted in 2003.
F-12
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of available for sale and
held to maturity investment securities as of December 31, 2003 and 2002
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
December 31, 2003 Available for sale:
U.S. Treasury securities and
other U.S. agency obligations $23,660,004 $ 37,876 $ (19,135) $23,678,745
State and municipal 610,000 47,025 -- 657,025
Mortgage-backed securities 21,505,841 232,872 (65,265) 21,673,448
----------- ----------- ----------- -----------
Total debt securities 45,775,845 317,773 (84,400) 46,009,218
Mutual fund 7,309,644 -- (36,777) 7,272,867
----------- ----------- ----------- -----------
Total securities available
for sale $53,085,489 $ 317,773 $ (121,177) $53,282,085
=========== =========== =========== ===========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
December 31, 2002 Available for sale:
U.S. Treasury securities and
other U.S. agency obligations $ 6,721,835 $ 52,718 -- $ 6,774,553
State and municipal 990,000 60,527 -- 1,050,527
Mortgage-backed securities 37,263,079 660,553 $ (10,571) 37,913,061
----------- ----------- ----------- -----------
Total debt securities 44,974,914 773,798 (10,571) 45,738,141
Mutual fund 5,180,244 12,265 -- 5,192,509
----------- ----------- ----------- -----------
Total securities available
for sale $50,155,158 $ 786,063 $ (10,571) $50,930,650
=========== =========== =========== ===========
Held to maturity:
Mortgage-backed securities $ 227,925 $ 1,550 $ -- $ 229,475
=========== =========== =========== ===========
F-13
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
The gross unrealized losses and fair value, aggregated by investment
category for those securities that have been in a continuous unrealized
loss position for less than twelve months, at December 31, 2003, are shown
below:
Available for Sale
-----------------------------
Unrealized Fair
Losses Value
----------- -----------
U.S. Treasury securities and
other U.S. agency obligations $ (19,135) $10,562,175
Mortgage-backed securities (65,265) 9,975,643
Mutual fund (36,777) 7,272,867
----------- -----------
Total $ (121,177) $27,810,685
=========== ===========
The U.S. Treasury securities and other U.S agency obligations with
unrealized losses as of December 31, 2003 are comprised of six agency
notes from the Federal National Mortgage Association, the Federal Home
Loan Bank and the Federal Home Loan Mortgage Corporation. The
mortgage-backed securities with unrealized losses are comprised of nine
mortgage-backed securities from the U.S. agencies discussed above,
including fixed rate collateralized mortgage obligations, fixed and
variable rate mortgage backed securities and variable rate whole loans.
The mutual fund with unrealized losses is comprised of one adjustable rate
mortgage fund. Volatility in the home loan mortgage market throughout the
period combined with timing of investment purchases have lead to the
investment's temporary impairment. At December 31, 2003, the Company had
no investments that have been in a continuous unrealized loss position for
greater than twelve months.
Expected maturities of debt securities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. The amortized cost and
estimated fair value of debt securities, at December 31, 2003, by
contractual maturity, are shown below:
Available for Sale
----------------------------
Amortized Fair
Cost Value
----------- -----------
Due before one year $16,553,541 $16,579,665
Due after one year through five years 7,681,463 7,720,424
Due after five years through ten years -- --
Due after ten years 35,000 35,681
----------- -----------
24,270,004 24,335,770
Mortgage-backed securities 21,505,841 21,673,448
----------- -----------
Total $45,775,845 $46,009,218
=========== ===========
Investment securities with a carrying value of $45,042,604 and $41,259,412
were pledged as security for certain borrowed funds and public deposits
held by the Company at December 31, 2003 and 2002, respectively.
F-14
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
3. LOANS
Loans at December 31 are summarized as follows:
2003 2002
------------- -------------
Commercial real estate $ 424,498,020 $ 313,120,588
Commercial 176,094,389 166,122,230
Residential mortgage 34,119,945 23,080,140
Consumer 54,648,116 45,859,704
Credit card and other loans 1,956,431 2,791,678
------------- -------------
Total loans 691,316,901 550,974,340
Allowance for loan losses (9,056,665) (7,263,029)
Net deferred loan fees (726,755) (519,271)
------------- -------------
Net loans $ 681,533,481 $ 543,192,040
============= =============
Changes in the allowance for loan losses are summarized as follows:
2003 2002
----------- -----------
Balance, beginning of year $ 7,263,029 $ 4,692,216
Provision for loan losses 2,935,921 3,025,775
Charge-offs (1,187,747) (485,950)
Recoveries 45,462 30,988
----------- -----------
Balance, end of year $ 9,056,665 $ 7,263,029
=========== ===========
The Company's primary lending area is the state of Florida. Although the
Company's loan portfolio is diversified, a significant portion of its
loans are collateralized by real estate. Therefore, the Company could be
susceptible to economic downturns and natural disasters. It is the
Company's lending policy to collateralize real estate loans based upon
certain loan to appraised value ratios.
Nonaccrual loans totaled approximately $2,613,000 and $1,535,000 of which
approximately $0 and $151,000 is guaranteed by the Small Business
Administration ("SBA") at December 31, 2003 and 2002, respectively. The
effects of carrying nonaccrual loans during 2003, 2002, and 2001 resulted
in a reduction of interest income of approximately $139,000, $67,000, and
$147,000, respectively.
F-15
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
The following is a summary of information pertaining to impaired loans:
December 31,
--------------------------
2003 2002
---------- ----------
(approximately)
Impaired loans with a valuation allowance $2,609,000 $1,415,000
Impaired loans without a valuation allowance -- --
---------- ----------
Total impaired loans $2,609,000 $1,415,000
========== ==========
Valuation allowance related to impaired loans $ 572,000 $ 690,000
Years Ended December 31,
------------------------------------------
2003 2002 2001
---------- ---------- ----------
(Approximately)
Average investment in impaired loans $2,012,000 $1,300,000 $1,065,000
========== ========== ==========
The interest income recognized on impaired loans for the years ended
December 31, 2003, 2002, and 2001 was not significant.
No additional funds are committed to be advanced in connection with
impaired loans.
At December 31, 2003 and 2002, restructured loans amounted to
approximately $1,860,000 and $3,124,000, respectively. No additional funds
are committed to be advanced in connection with restructured loans.
4. PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
2003 2002
----------- -----------
Land $ 1,050,815 $ 2,009,387
Buildings 705,795 660,315
Leasehold improvements 1,165,066 1,014,555
Furniture, fixtures, and equipment 5,838,068 4,736,652
----------- -----------
8,759,744 8,420,909
Accumulated depreciation and
amortization (3,751,080) (2,954,577)
----------- -----------
$ 5,008,664 $ 5,466,332
=========== ===========
Depreciation and amortization amounted to $983,000, $863,886, and $756,426
for the years ended December 31, 2003, 2002, and 2001, respectively.
F-16
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
The range of estimated useful lives of each major asset category is as
follows:
Range
-------------
Buildings 15 - 39 years
Leasehold improvements 15 - 39 years
Furniture, fixtures, and equipment 3 - 7 years
5. OTHER ASSETS
Other assets are composed of Bank Owned Life Insurance ("BOLI"), deposits,
debt issuance costs, and prepaid items expected to be utilized in the next
twelve months.
In 2003, the Company purchased a $10,000,000 whole-life insurance policy
on key employees whereby the Company is the sole beneficiary. Income
related to the policy was approximately $467,000 for 2003.
Under certain loan sales agreements, the Company must maintain funds on
deposit to facilitate the sale of mortgage loans. Deposits totaled
$750,000 at December 31, 2003.
Unamortized debt issuance costs of approximately $486,000 at December 31,
2003 are included in "Other Assets". Prior to the adoption of SFAS No.
150, these costs were included in "Company Obligated Manditorily
Redeemable Preferred Securities of Subsidiary Trusts". Effective July 1,
2003, such costs are amortized to interest expense over the respective
term of the debt instruments and totaled approximately $71,000 in 2003.
In April of 2003, Florida Bank, N.A. initiated a Supplemental Executive
Retirement Plan (the "SERP Plan") as discussed in Note 11. As a result, an
intangible pension asset of approximately $634,000 is recorded in "Other
Assets" at December 31, 2003.
6. DERIVATIVE INSTRUMENTS
The following instruments qualify as derivatives as defined by SFAS
No. 133:
December 31, 2003
------------------------------------
Contract/Notional Fair
Amount Value
----------------- ------------
Interest rate swap agreements $166,521,000 $ 151,523
Foreign currency swap agreements 2,000,000 (185,714)
Mortgage loan interest rate locks 62,503,665 1,519,571
Mandatory mortgage delivery forwards 55,791,000 (230,953)
F-17
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
Interest rate swap agreements consist of numerous agreements, which
effectively convert the interest rate on certain certificates of deposit
from a fixed rate to a variable rate to more closely match the interest
rate sensitivity of the Company's assets and liabilities. The Company has
designated and assessed the derivatives as highly effective fair value
hedges, as defined by SFAS No. 133. Additionally, the Company entered into
a foreign currency swap agreement during the first quarter of 2001. This
swap agreement does not qualify for hedge accounting under SFAS No. 133.
Accordingly, all changes in the fair value of the foreign currency swap
agreement are reflected in the earnings of the Company. The Company
recognized a loss of approximately $198,000 and $67,000 for the years
ended December 31, 2003 and 2002, respectively, as a result of changes in
the fair value of the foreign currency agreement.
The Company enters into commitments to make loans whereby the interest
rate on the loan is set prior to funding (rate lock commitment). Rate lock
commitments on mortgage loans that are intended to be sold are considered
to be derivatives. Therefore, they are recorded, at fair value, in
mortgage loans held for sale on the accompanying consolidated balance
sheets with changes in fair value recorded in gain on sale of mortgage
loans on the accompanying consolidated statement of operations. In
measuring the fair value of rate lock commitments, the amount of the
expected gain on sale of the loans is included in the valuation. This
value is calculated adjusting for an anticipated fallout factor for loan
commitments that will never be funded. This policy of recognizing the
value of the derivative has the effect of recognizing the gain from
mortgage loans before the loans are sold. Rate lock commitments expose the
Company to interest rate risk. The Company manages that risk by entering
into forward sales contracts, which are recorded at fair value with
changes in fair value reported in gain on sale of mortgage loans.
7. INCOME TAXES
The components of the provision for income tax expenses for the years
ended December 31, 2003, 2002, and 2001 are as follows:
2003 2002 2001
----------- ----------- -----------
Current:
Federal provision $ 2,568,349 $ 774,868 $ 40,000
State provision 393,300 146,700 --
----------- ----------- -----------
2,961,649 921,568 40,000
----------- ----------- -----------
Deferred:
Federal (benefit) provision (395,351) (31,120) 383,716
State (benefit) provision (75,981) (5,327) 65,684
----------- ----------- -----------
(471,332) (36,447) 449,400
----------- ----------- -----------
$ 2,490,317 $ 885,121 $ 489,400
=========== =========== ===========
F-18
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
Income taxes for the years ended December 31, 2003, 2002, and 2001 differ
from the amount computed by applying the federal statutory corporate rate
to earnings before income taxes as summarized below:
2003 2002 2001
----------- ----------- -----------
Provision based on Federal income
tax rate $ 2,416,181 $ 799,741 $ 441,265
State income taxes net of Federal benefit 211,750 85,384 49,731
Nontaxable income, net (137,325) -- --
Other (289) (4) (1,596)
----------- ----------- -----------
$ 2,490,317 $ 885,121 $ 489,400
=========== =========== ===========
The components of net deferred income taxes at December 31, 2003 and 2002
are as follows:
2003 2002
---------- ----------
Deferred income tax assets:
Net operating loss carryforwards $1,471,322 $1,728,963
Allowance for loan losses 3,206,242 2,473,645
Loan fees 273,479 195,402
Other 1,493 37,769
---------- ----------
4,952,536 4,435,779
---------- ----------
Deferred income tax liabilities:
Accumulated depreciation 226,850 150,108
Unrealized gain on investment securities 73,979 291,818
Other 53,785 85,102
---------- ----------
354,614 527,028
---------- ----------
Deferred income tax assets, net $4,597,922 $3,908,751
========== ==========
At December 31, 2003 and 2002, the Company had tax net operating loss
carryforwards of approximately $3,910,000 and $4,595,000, respectively.
Such carryforwards expire as follows: $1,550,000 in 2007, $1,620,000 in
2008, $92,000 in 2009, $369,000 in 2012, and $279,000 in 2018. A change in
ownership on August 4, 1998, as defined in section 382 of the Internal
Revenue Code, limits the amount of net operating loss carryforwards
utilized each year to approximately $700,000. Unused limitations from each
year accumulate in successive years.
F-19
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
At December 31, 2003 and 2002, the Company assessed its earnings history
and trends over the past three years, its estimate of future earnings, and
the expiration dates of the loss carryforwards and has determined that it
is more likely than not that the deferred tax assets will be realized.
Accordingly, no valuation allowance is recorded at December 31, 2003 and
2002.
8. DEPOSITS
Interest-bearing deposits at December 31, 2003 and 2002 are summarized as
follows:
2003 2002
------------ ------------
Interest-bearing demand $ 59,056,481 $ 52,803,427
Regular savings 97,679,405 66,940,672
Money market accounts 31,676,249 19,210,512
Time $100,000 and over 382,091,082 314,852,717
Other time 91,462,134 69,707,230
------------ ------------
$661,965,351 $523,514,558
============ ============
At December 31, 2003, the scheduled maturities of time deposits are as
follows:
2004 $278,940,833
2005 62,009,236
2006 35,356,570
2007 55,585,789
2008 29,908,258
Thereafter 11,752,530
------------
Total $473,553,216
============
F-20
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
9. OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2003 and 2002 are summarized as
follows:
2003 2002
----------- -----------
Treasury tax and loan deposits $ 3,353,526 $ 2,421,898
Federal Home Loan Bank advance, principal due upon
maturity on July 6, 2010, subject to early termination;
interest, due quarterly, is fixed at 5.90% 5,000,000 5,000,000
Federal Home Loan Bank advance, principal due upon
maturity on September 14, 2011, subject to early
termination; interest, due quarterly, is fixed at 4.80% 2,500,000 2,500,000
Federal Home Loan Bank advance, principal due upon
maturity on April 29, 2008, subject to early
termination; interest, due monthly, is fixed at 3.36% 2,800,000 --
Federal Home Loan Bank advance, principal payments
of $6,667 due quarterly until maturity on July 16, 2018;
interest, due monthly, is fixed at 4.27% 393,334 --
SunTrust Revolving Line of Credit, principal due
upon maturity on July 31, 2004; interest, due quarterly, is adjustable
based on the 30-day LIBOR plus 1.75%, 2.87% at December 31, 2003 7,500,000 --
SunTrust Non-Revolving Line of Credit, principal due
upon maturity on March 31, 2004; interest, due quarterly, is adjustable
based on the 30-day LIBOR plus 3.00%, 4.12% at December 31, 2003 2,500,000 --
----------- -----------
$24,046,860 $ 9,921,898
=========== ===========
Treasury tax and loan deposits are generally repaid within 1 to 120 days
from the transaction date.
The Federal Home Loan Bank of Atlanta has the option to convert the
$2,500,000 advance outstanding at December 31, 2003 into a three-month
LIBOR-based floating rate advance September 14, 2006, and any payment date
thereafter with at least two business days' prior notice to the Company.
If the Federal Home Loan Bank elects to convert the advance, then the
Company may elect, with at least two-business days' prior written notice,
to terminate in whole or in part the transaction without payment of a
termination amount on any subsequent payment date. The Company may elect
to terminate the advance and pay a prepayment penalty, with two days'
prior written notice, if the Federal Home Loan Bank does not elect to
convert this advance.
F-21
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
The Federal Home Loan Bank advances are secured by certain mortgage loans
receivable of approximately $36,922,000 at December 31, 2003.
The SunTrust Revolving Line of Credit and the SunTrust Non-Revolving Line
of Credit are secured by first assignment of 100% of subsidiary bank
stock, Florida Bank, N.A. at December 31, 2003. In addition, any funds
raised either through the issuance of common stock or convertible
preferred securities are first to be applied to paying down this loan.
10. COMMITMENTS
LEASES--The Company has entered into certain noncancelable operating
leases and subleases for office space and office property. Lease terms are
generally for 5 to 20 years, and in many cases, provide for renewal
options. Rental expense for 2003, 2002, and 2001 was approximately
$1,148,000, $852,000, and $705,000, respectively. Rental income for 2003,
2002, and 2001 was approximately $7,000, $27,000, and $45,000,
respectively. Both rental expense and rental income are included in net
occupancy and equipment expense in the accompanying consolidated
statements of operations. The following is a schedule of future minimum
lease payments at December 31, 2003:
Payments for
Operating Leases
-----------------
2004 $ 920,000
2005 785,000
2006 806,000
2007 714,000
2008 511,000
Thereafter 2,417,000
----------
$6,153,000
FEDERAL RESERVE REQUIREMENT--The Federal Reserve Board requires that
certain banks maintain reserves, based on their average deposits, in the
form of vault cash and average deposit balances at a Federal Reserve Bank.
The requirement as of December 31, 2003 and 2002 was approximately
$12,234,000 and $8,946,000, respectively.
LITIGATION--Various legal claims also arise from time to time in the
normal course of business which, in the opinion of management, will not
have a material effect on the Company's consolidated financial statements.
INCENTIVE AGREEMENT--Senior management of the Mortgage Banking Division of
Florida Bank, N.A. has an incentive compensation agreement whereby they
are entitled to a percentage of the pretax profits of the Mortgage Banking
Division based on predetermined incentive targets. In 2003 and 2002,
approximately $3,697,000 and $79,000, respectively, was expensed related
to this agreement.
F-22
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
11. EMPLOYEE BENEFIT PLANS
In April 2003, the Florida Bank, N.A. initiated the SERP Plan in which
participation is limited to selected executives of the Florida Bank, N.A.
who elect to participate in the SERP Plan. The SERP Plan provides defined
benefits based on years of service and final average compensation. Florida
Bank, N.A. uses a December 31 measurement date for the SERP Plan.
The following table presents a reconciliation of prior and ending balances
of the Projected Benefit Obligation and the fair market value of plan
assets:
2003
-----------
Change in benefit obligation:
Benefit obligation as of April 1, 2003 $ 1,061,208
Service cost 191,884
Interest cost 53,258
Actuarial losses 261,726
-----------
Benefit obligation at end of year 1,568,076
-----------
Fair value of plan assets at end of year --
-----------
Funded status (1,568,076)
Unrecognized prior service costs 1,011,256
Unrecognized net actuarial loss 261,726
-----------
Net amount recognized $ (295,094)
===========
Amounts recognized in the consolidated statement of financial position
consist of:
2003
---------
Accrued benefit liability $(929,162)
Intangible asset 634,068
---------
Net amount recognized $(295,094)
=========
The projected benefit obligation, the accumulated benefit obligation, and
the fair value of plan assets for the SERP Plan at December 31, 2003 was
approximately $1,568,000, $929,000, and $0, respectively.
The following table provides the components of net periodic pension cost:
2003
---------
Service cost $ 191,884
Interest cost 53,258
Amortization of prior service cost 49,952
---------
Net Periodic Pension costs $ 295,094
=========
F-23
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
In order to determine the benefit obligations at December 31, 2003, a
discount rate of 6.00% and a rate of compensation increase of 5.00% were
used. A discount rate of 7.00% and a rate of compensation increase of
5.00% were used to determine the net periodic benefit cost for the year
ended December 31, 2003. Florida Bank, N.A. does not expect to contribute
to its SERP Plan in 2004.
The Company has a 401(k) defined contribution benefit plan (the "401(k)
Plan") which covers substantially all of its employees. The Company
matches 50% of employee contributions to the 401(k) Plan, up to 6% of all
participating employees' compensation. The Company contributed
approximately $211,000, $144,000, and $136,000 to the 401(k) Plan in 2003,
2002, and 2001, respectively.
12. SHAREHOLDERS' EQUITY
SERIES B PREFERRED STOCK
On June 29, 2001, the Company issued 100,401 shares of Series B preferred
stock. On July 24, 2001, the Company issued an additional 1,882 shares of
Series B preferred stock. All Series B preferred shares were issued for
$68.00 per share through a private placement.
CONVERSION RIGHTS--Each share of preferred stock is convertible into ten
shares of the Company's common stock at a price of $6.80 per share
(subject to adjustment for stock splits, stock dividends, etc.). The
preferred stock will be automatically converted to common stock upon the
following events: 1) change in control, 2) if the average closing price of
the Company's common stock for any 30 consecutive trading day period is at
or above $8.00 per share, or 3) the consummation of an underwritten public
offering at a price of $8.00 per share or greater of the Company's common
stock.
DIVIDENDS--Cumulative cash dividends accrue at 7% annually and are payable
quarterly in arrears.
On April 16, 2002, all 102,283 shares of Series B preferred stock
automatically converted into 1,022,830 shares of common stock as a result
of the average closing price of the Company's common stock exceeding $8.00
for the period from March 4, 2002 through April 15, 2002.
SERIES C PREFERRED STOCK
On December 31, 2002, the Company issued 50,000 shares of Series C
preferred stock for $100.00 per share through a private placement. The
Series C preferred stock is not convertible or redeemable except as a
result of a change in control.
DIVIDENDS--Noncumulative cash dividends accrue at 5% annually through
December 31, 2003 and at 3.75% annually thereafter. Dividends are payable
quarterly in arrears.
LIQUIDATION PREFERENCE--In the event of any liquidation, dissolution, or
winding up of affairs of the Company, the holders of Series C preferred
stock at the time shall receive $100.00 per share plus an amount equal to
accrued and unpaid dividends thereon through and including the date of
distribution prior to any distribution to holders of common stock. The
liquidation preference at December 31, 2003 was $5,063,699.
F-24
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
WARRANTS
In 1998, in connection with the sale of common stock, warrants to purchase
80,800 shares of common stock at $10.00 per share were issued to
accredited foreign investors. Such warrants have been valued at an
aggregate price of approximately $165,000, or $2.04 per share, as
determined by an independent appraisal and have been recorded as
additional paid-in capital. The warrants are exercisable through February
3, 2008.
In 2003, 12,800 warrants were exercised, leaving 68,000 warrants
outstanding as of December 31, 2003. The shares of Company common stock
delivered upon exercise have not been registered with the Securities and
Exchange Commission, and the transfer of such shares is restricted.
INCENTIVE STOCK
During 2001, the Company's Board of Directors approved the Amended and
Restated Incentive Compensation Plan (the "Incentive Plan") for all
full-time senior officers and other officers and employees so designated
by the Chief Executive Officer. The amendments to this Incentive Plan
permit the issuance of common stock to officers and employees as incentive
awards. Previously, the incentive awards were paid in cash. The Company
has reserved 300,000 shares of common stock for issuance pursuant to the
Incentive Plan. Upon attainment of the required goals, the officer would
be awarded shares in the Company based on a pre-established vesting
schedule. In 2003 and 2002, the Company awarded 104,839 and 59,029 shares
under the Incentive Plan at a weighted average grant price of $10.81 and
$6.14, respectively, based upon the closing share price on the date of
grant. Compensation expense included in earnings is approximately $339,000
and $121,000 for 2003 and 2002, respectively.
EMPLOYEE STOCK PURCHASE PLAN
On January 22, 1999, the Board of Directors of the Company adopted the
Employee Stock Purchase Plan (the "Plan"). The Plan was approved by the
Company's shareholders at the Company's 1999 Annual Meeting of
Shareholders on April 23, 1999. The Plan provides for the sale of not more
than 200,000 shares of common stock to eligible employees of the Company
pursuant to one or more offerings under the Plan. The purchase price for
shares purchased pursuant to the Plan is the lesser of (a) 85% of the fair
market value of the common stock on the grant date or, if no shares were
traded on that day, on the last day prior thereto on which shares were
traded or (b) an amount equal to 85% of the fair market value of the
common stock on the exercise date or, if no shares were traded on that
day, on the last day prior thereto on which shares were traded. Shares
purchased by employees were approximately 31,000, 41,000, and 50,000 for
the years ended December 31, 2003, 2002, and 2001, respectively.
F-25
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
STOCK OPTIONS
The Company applies the intrinsic value-based method of APB Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, to account for its stock
plans. See Stock Options in NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES for a presentation of pro forma net income and earnings per share
information pursuant to the disclosure requirements of SFAS No. 148,
ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, and a
description of the Amended and Restated 1998 Stock Option Plan.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for options granted in 2003, 2002, and 2001,
respectively: dividend yield of 0%, expected volatility of 29.54%, 32.08%,
and 32.27%, risk-free interest rate of 2.15%, 3.48%, and 4.57%, and an
expected life of three years.
A summary of the status of fixed stock option grants under the Company's
stock-based compensation plans as of December 31, 2003, 2002, and 2001 and
changes during the years ending on those dates is presented below:
2003 2002 2001
----------------------- ---------------------- -------------------------------
Weighted - Weighted - Weighted -
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- --------- ------- --------- ------- ---------
Outstanding -
Beginning of year 904,098 $8.68 850,348 $8.63 816,948 $8.76
Granted 92,600 9.10 94,900 7.93 62,650 6.52
Cancelled (15,174) 7.72 (34,087) 9.09 (29,250) 7.73
Exercised (6,498) 6.50 (7,063) 6.58 -- --
------ ------ -------
Outstanding -
End of year 975,026 $8.64 904,098 $8.68 850,348 $8.63
======= ======= ======== ==
Options exercisable
at year end 815,867 $8.64 730,833 $8.84 652,291 $9.04
Weighted average fair
value of options
granted during the year $2.09 $2.07 $1.80
The following table summarizes information related to stock options
outstanding at December 31, 2003:
Weighted-
Average
Exercise Options Remaining Exercise Options Exercise
Price Outstanding Life Price Exercisable Price
-------------- ----------- --------- -------- ----------- --------
$5.25 - $6.75 325,369 6.45 $ 6.42 298,266 $ 6.40
$7.98 - $11.37 649,657 5.62 $ 9.75 517,601 $ 9.94
F-26
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
13. RESTRICTION ON DIVIDENDS, LOANS, AND ADVANCES
Federal and state bank regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total
amount of dividends which may be paid at any date is generally limited to
the retained earnings of the Bank, and loans or advances are limited to
10% of the Bank's capital stock and surplus on a secured basis.
At December 31, 2003, the Bank's retained earnings available for the
payment of dividends was approximately $11,207,000. Accordingly,
approximately $69,809,000 of the Company's equity in the net assets of the
Bank was restricted at December 31, 2003. Funds available for loans or
advances by the Bank to the Company amounted to approximately $6,971,000.
In addition, dividends paid by the Bank to the Company would be prohibited
if the effect thereof would cause the Bank's capital to be reduced below
applicable minimum capital requirements.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company originates financial instruments with off-balance sheet risk
in the normal course of business, usually for a fee, primarily to meet the
financing needs of its customers. The financial instruments include
commitments to fund loans, letters of credit, and unused lines of credit.
These commitments involve varying degrees of credit risk; however,
management does not anticipate losses upon the fulfillment of these
commitments.
At December 31, 2003, financial instruments having credit risk in excess
of that reported in the balance sheet totaled approximately $221,790,000.
15. TRUST PREFERRED SECURITIES
As of December 31, 2003, the Company has participated in five pooled trust
preferred offerings. In connection with the transaction, the Company,
through its subsidiary trusts, Florida Banks Statutory Trust I ("Statutory
Trust 1"), Florida Banks Statutory Trust II ("Statutory Trust II"),
Florida Banks Statutory Trust III ("Statutory Trust III"), Florida Banks
Capital Trust I ("Capital Trust I"), and Florida Banks Capital Trust II
("Capital Trust II"), issued $20,000,000 in trust preferred securities.
F-27
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
The terms of the trust preferred offerings are summarized as follows:
Preferred Trust Amount Dividend Rate Par Call Option Maturity
--------------- ------ ------------- --------------- --------
Statutory Trust I $ 6,000,000 3-month LIBOR plus 3.60% December 18, 2006 December 18, 2031
(4.75% at December 31, 2003)
Statutory Trust II 3,000,000 3-month LIBOR plus 3.75% December 26, 2007 December 19, 2032
(4.90% at December 31, 2003)
Statutory Trust III 3,000,000 3-month LIBOR plus 3.10% June 26, 2008 June 26, 2033
(4.25% at December 31, 2003)
Capital Trust I 4,000,000 3-month LIBOR plus 3.65% June 30, 2007 June 28, 2032
(4.80% at December 31, 2003)
Capital Trust II 4,000,000 6-month LIBOR plus 3.70% April 22, 2007 April 10, 2032
------------ (4.92% at December 31, 2003)
$ 20,000,000
============
In accordance with SFAS No. 150, the trust preferred securities are
reflected as a liability in the Company's accompanying consolidated
balance sheets as of December 31, 2003.
16. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
Supplemental disclosure of cash flow information:
2003 2002 2001
----------- ----------- -----------
Cash paid during the year for interest
on deposits and borrowed funds $15,963,308 $15,630,556 $15,890,571
Cash paid for income taxes, net of refunds $ 2,552,572 $ 275,000 $ --
Supplemental schedule of noncash investing and financing activities:
2003 2002 2001
----------- ----------- -----------
Proceeds from demand deposits used to
purchase shares of common stock under
the employee stock purchase plan $ 223,144 $ 210,770 $ 227,088
Loans transferred to real estate owned $ 1,173,425 $ 652,500 $ 2,867,827
Increase in fair market value of derivative
instruments used to hedge interest rate
exposure on time deposits $(2,181,170) $ 2,085,117 $ 17,776
F-28
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
17. QUASI-REORGANIZATION
Effective December 31, 1995, the Bank completed a quasi-reorganization of
its capital accounts. A quasi-reorganization is an accounting procedure
provided for under current banking regulations that allows a bank to
restructure its capital accounts to remove a deficit in undivided profits
without undergoing a legal reorganization. A quasi-reorganization allows a
bank that has previously suffered losses and subsequently corrected its
problems to restate its records as if it had been reorganized. A
quasi-reorganization is subject to regulatory approval and is contingent
upon compliance with certain legal and accounting requirements of the
banking regulations. The Bank's quasi-organization was authorized by the
Office of the Comptroller of the Currency upon final approval of the
Bank's shareholders which was granted November 15, 1995.
As a result of the quasi-reorganization, the Bank charged against
additional paid-in capital its accumulated deficit through December 31,
1995 of $8,134,037.
18. CONDENSED FINANCIAL INFORMATION OF FLORIDA BANKS, INC. (PARENT ONLY)
The following represents the parent only condensed balance sheets as of
December 31, 2003 and 2002 and the related condensed statements of
operations and cash flows for the years ending December 31, 2003, 2002,
and 2001.
Condensed Balance Sheets 2003 2002
------------ ------------
Assets:
Cash and repurchase agreements $ 557,422 $ 1,951,961
Available for sale investment securities, at
fair value (cost $733,242 and $3,292,213, respectively) 768,279 3,418,212
Premises and equipment, net 263,699 170,091
Accrued interest receivable 3,436 21,591
Deferred income taxes, net 4,658,717 2,555,217
Prepaid and other assets 583,465 52,301
Investment in bank subsidiary 80,997,712 61,585,109
Investment in other subsidiaries 695,317 536,215
------------ ------------
Total Assets $ 88,528,047 $ 70,290,697
============ ============
Liabilities and Shareholders' Equity:
Subordinated debentures payable to subsidiary trust $ 20,134,395 $ 17,000,092
Other borrowed funds 10,000,000 --
Accounts payable and accrued expenses 599,731 326,730
Shareholders' Equity:
Preferred stock 5,000,000 5,000,000
Common stock 68,383 67,684
Additional paid-in capital 53,008,095 52,287,390
Accumulated deficit (405,174) (4,874,873)
Accumulated other comprehensive income,
net of tax 122,617 483,674
------------ ------------
Total Liabilities and Shareholders' Equity $ 88,528,047 $ 70,290,697
============ ============
F-29
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
Condensed Statements of Operations 2003 2002 2001
------------ ------------ ------------
Interest income on loans, including fees $ 496 $ 18,719
Interest income on investment securities $ 117,436 318,230 666,051
Other interest income 5,136 34,811 80,748
Other income -- -- 436,948
------------ ------------ ------------
Total income 122,572 353,537 1,202,466
------------ ------------ ------------
Equity in undistributed income of bank subsidiary 7,735,263 3,379,436 1,654,552
Equity in undistributed income (loss) of subsidiary 58,672 (151) (155)
Expenses (5,118,334) (3,419,569) (2,557,156)
Income tax benefit 1,857,827 1,153,805 508,732
------------ ------------ ------------
Net income $ 4,656,000 $ 1,467,058 $ 808,439
============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income $ 4,656,000 $ 1,467,058 $ 808,439
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in undistributed income of Florida Bank, N.A (7,735,263) (3,379,436) (1,654,552)
Equity in (income) loss of Florida Bank
Financial Servicies, Inc. (58,672) 151 155
Depreciation and amortization 71,215 62,618 65,353
Restricted stock grants 338,704 120,844 --
Deferred income tax benefit (2,069,271) (1,428,805) (548,731)
Transfer from affiliate, net (5,265) (3,079) --
Gain on sale of investment securities -- -- (73,988)
Accretion of discounts on investments, net (15,196) (15,466) (16,687)
Amortization of debt issuance costs 131,304 70,445 --
Benefit for loan losses -- -- (10,000)
Amortization of loan premiums -- -- 1,225
Decrease in accrued interest receivable 18,155 17,312 41,150
(Decrease) increase in due to Florida Bank, N.A -- (92,318) 92,318
(Increase) decrease in prepaid and other assets (531,164) 173,277 (92,775)
Increase in accounts payable and accrued expenses 273,001 145,997 98,253
------------ ------------ ------------
Net cash used in operating activities (4,926,452) (2,861,402) (1,289,840)
------------ ------------ ------------
Investing activities:
Purchase of premises and equipment (159,558) (8,410) (62,353)
Proceeds from sales, paydowns, and maturities
of investment securities 2,574,167 2,928,012 5,865,516
Net decrease in loans -- -- 1,073,535
Purchase of common stock of Florida Bank
Preferred Trusts (93,000) (341,000) (186,000)
Capital contributed to Florida Bank
Financial Services, Inc. (7,430) -- --
Capital contributed to Florida Bank, N.A (11,981,664) (14,000,000) (9,500,000)
------------ ------------ ------------
Net cash used in investing activities (9,667,485) (11,421,398) (2,809,302)
------------ ------------ ------------
F-30
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Financing activities:
Decrease in repurchase agreements $ (1,000,000) $ (9,143,000)
Payment of debt issuance costs $ (90,001) (196,353) --
Proceeds from issuance of common stock, net 223,144 210,770 227,088
Proceeds from the issuance of preferred stock, net -- 5,000,000 6,806,470
Proceeds from the issuance of subordinated debt, net 3,093,000 11,121,000 6,005,000
Proceeds from other borrowings 10,000,000 -- --
Preferred dividends paid (186,301) (262,775) (127,373)
Proceeds from the exercise of stock options/warrants, net 159,556 46,472 --
Purchase and retirement of common stock -- -- (359,361)
------------ ------------ ------------
Net cash provided by financing activities 13,199,398 14,919,114 3,408,824
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,394,539) 636,314 (690,318)
Cash and cash equivalents at beginning of year 1,951,961 1,315,647 2,005,965
------------ ------------ ------------
Cash and cash equivalents at end of year $ 557,422 $ 1,951,961 $ 1,315,647
============ ============ ============
19. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2003,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 2003 and 2002, notifications from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized,
under the regulatory framework for prompt corrective action. To be
categorized as adequately or well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
F-31
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
The Company's and Bank's actual capital amounts and ratios are presented
in the following table.
To Be Well
Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2003:
Total capital
(to risk-weighted assets)
Florida Banks, Inc. $86,727,000 10.95% > $ 63,362,000 > 8.00% N/A N/A
- -
Florida Bank, N.A. 89,949,000 11.41 > 63,067,000 > 8.00 > $ 78,834,000 > 10.00%
- - - -
Tier I capital
(to risk-weighted assets)
Florida Banks, Inc. 77,088,000 9.73 > 31,681,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 80,892,000 10.26 > 31,534,000 > 4.00 > 47,300,000 > 6.00
- - - -
Tier I capital
(to average assets)
Florida Banks, Inc. 77,088,000 8.24 > 37,400,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 80,892,000 8.65 > 37,400,000 > 4.00 > 46,750,000 > 5.00
- - - -
To Be Well
Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
AS OF DECEMBER 31, 2002:
Total capital
(to risk-weighted assets)
Florida Banks, Inc. $ 76,216,000 11.92% > $ 51,160,000 > 8.00% N/A N/A
- -
Florida Bank, N.A. 68,443,000 10.75 > 50,920,000 > 8.00 > $ 63,650,000 > 10.00%
- - - -
Tier I capital
(to risk-weighted assets)
Florida Banks, Inc. 68,953,000 10.78 > 25,580,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 61,180,000 9.6 > 25,460,000 > 4.00 > 38,190,000 > 6.00
- - - -
Tier I capital
(to average assets)
Florida Banks, Inc. 68,953,000 9.9 > 27,655,000 > 4.00 N/A N/A
- -
Florida Bank, N.A. 61,180,000 8.9 > 27,280,000 > 4.00 > 34,100,000 > 5.00
- - - -
F-32
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating financial instrument fair values:
GENERAL COMMENT--The financial statements include various estimated fair
value information as required by SFAS No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS. Such information, which pertains to the
Company's financial instruments, is based on the requirements set forth in
SFAS No. 107 and does not purport to represent the aggregate net fair
value of the Company. Furthermore, the fair value estimates are based on
various assumptions, methodologies, and subjective considerations, which
vary widely among different financial institutions and which are subject
to change.
CASH AND CASH EQUIVALENTS--Cash and due from banks, federal funds sold,
and repurchase agreements are repriced on a short-term basis; as such, the
carrying value closely approximates fair value.
INVESTMENT SECURITIES--Fair values for available for sale and held to
maturity securities are based on quoted market prices, if available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
OTHER INVESTMENT SECURITIES--Fair value of the Bank's investment in
Federal Reserve Bank stock and Federal Home Loan Bank stock is based on
its redemption value, which is its cost of $100 per share.
MORTGAGE LOANS HELD FOR SALE--Fair values of mortgage loans held for sale
are based on commitments on hand from investors or prevailing market
prices.
LOANS HELD FOR INVESTMENT--For variable rate loans that reprice
frequently, the carrying amount is a reasonable estimate of fair value.
The fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings for the same remaining
maturities.
DERIVATIVE INSTRUMENTS--Fair values of derivative instruments are based on
quoted market prices, if available. If quoted market prices are not
available, fair values are determined based on a cash flow model using
market assumptions.
DEPOSITS--The fair value of demand deposits, savings deposits, and certain
money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed rate certificates of deposit is estimated
using a discounted cash flow calculation that applies interest rates
currently being offered to a schedule of aggregated expected monthly time
deposit maturities.
REPURCHASE AGREEMENTS--The carrying amounts of repurchase agreements
approximates the estimated fair value of such liabilities due to the short
maturities of such instruments.
OTHER BORROWED FUNDS--For treasury tax and loan deposits, the carrying
amount approximates the estimated fair value of such liabilities due to
the short maturities of such instruments. The fair value of the Federal
Home Loan Bank advances are based on quoted market prices. The carrying
value of the SunTrust Lines of Credit approximated fair value as the
interest rates adjust monthly.
TRUST PREFERRED SECURITIES--The fair value of the Company's trust
preferred securities approximates the estimated fair value as such
liabilities reprice frequently based on a quoted market rate of interest.
F-33
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
A comparison of the carrying amount to the fair values of the Company's
significant financial instruments as of December 31, 2003 and 2002 is as
follows:
2003 2002
---------------------- ----------------------
Carrying Fair Carrying Fair
(Amounts in Thousands) Amount Value Amount Value
-------- ------ --------- -------
Financial assets:
Cash and cash equivalents $112,130 $112,130 $ 89,480 $ 89,480
Available for sale investment securities 53,282 53,282 50,931 50,931
Held to maturity investment securities -- -- 228 299
Other investments 3,604 3,604 2,493 2,493
Mortgage loans held for sale 66,495 66,495 54,674 54,674
Loans held for investment 691,317 705,563 550,974 551,469
Derivative instruments -- -- 2,322 2,322
Financial liabilities:
Deposits $796,613 $799,137 $664,910 $667,897
Repurchase agreements 33,508 33,508 4,654 4,654
Other borrowed funds 24,047 23,553 9,922 8,831
Derivative instruments 265 265 -- --
Trust preferred securities 20,000 20,000 16,473 16,473
Off-balance sheet credit related financial instruments:
Commitments to extend credit $221,790 $221,790 $193,443 $193,443
21. EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the following.
2003 2002 2001
----------- ----------- -----------
Net income $ 4,656,000 $ 1,467,058 $ 808,439
Less preferred stock dividends (250,000) (140,058) (250,091)
----------- ----------- -----------
Net income applicable to common stock $ 4,406,000 $ 1,327,000 $ 558,348
=========== =========== ===========
Weighted average number of common
shares outstanding - Basic 6,800,776 6,442,022 5,703,524
Incremental shares from the assumed
conversion of stock options 264,110 89,597 2,738
----------- ----------- -----------
Total - Diluted 7,064,886 6,531,619 5,706,262
=========== =========== ===========
F-34
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
The incremental shares from the assumed conversion of stock options were
determined using the treasury stock method under which the assumed
proceeds were equal to (1) the amount that the Company would receive upon
the exercise of the options plus (2) the amount of the tax benefit that
would be credited to additional paid-in capital assuming exercise of the
options. The convertible preferred stock was determined to be
anti-dilutive and is therefore excluded from the computation of diluted
earnings per share.
22. GUARANTEES
The Company issues standby letters of credit to provide credit support for
some creditors in case of default. As of December 31, 2003, the carrying
amount of the liability was $66,000 and the maximum potential payment was
$11,035,000.
The Company also sells loans without recourse that may have to be
subsequently repurchased due to defects that occurred during the loan's
origination process. The defects are categorized as documentation errors,
underwriting error, and fraud. When a loan sold to an investor without
recourse fails to perform according to its contractual terms, the investor
will typically review the loan file to determine whether defects in the
origination process occurred. If a defect is identified, the Company may
be required to either repurchase the loan or indemnify the investor for
losses sustained. If there are no defects, the Company has no commitment
to repurchase the loan. The maximum exposure to cover the estimated loss
exposure related to the loan origination process defects that are inherent
within this portfolio as of December 31, 2003 represents the principal
balance of the loan portfolio (approximately $1,098,980,000). The fair
value of the liability recorded in the accompanying consolidated balance
sheets as of December 31, 2003 is approximately $86,000.
23. SEGMENT REPORTING
Prior to October 1, 2002, the Company had one reporting segment. However,
in October 2002, the Company started a mortgage banking division which is
managed as a segment. Accordingly, during 2002 the Company has two
reporting segments, the commercial bank, and the mortgage bank. The
commercial bank segment provides its commercial customers such products as
working capital loans, equipment loans and leases, commercial real estate
loans, and other business related products and services. This segment also
offers mortgage loans to principals of its commercial customers. The
mortgage bank segment originates mortgage loans through its network of
mortgage brokers and sells these loans (on a wholesale basis) into the
secondary market.
F-35
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
Information about reportable segments and reconciliation of such
information to the consolidated financial statements as of and for the
year ended December 31, follows:
2003 Commercial Mortgage Intersegment Consolidated
Bank Bank Other Eliminations Total
------------ ------------ ------------ ------------ ------------
Net interest income $ 23,115,028 $ 4,072,917 $ (511,426) $ -- $ 26,676,519
Noninterest income 4,524,644 11,078,767 -- -- 15,603,411
Noninterest expense 16,688,814 11,024,542 4,484,336 -- 32,197,692
Income (loss) before taxes 8,014,937 4,127,142 (4,995,762) -- 7,146,317
Assets 869,268,635 68,990,933 88,528,047 (82,326,716) 944,460,899
Expenditures for additions
to premises and equipment 1,066,062 423,415 159,558 -- 1,649,035
2002 Commercial Mortgage Intersegment Consolidated
Bank Bank Other Eliminations Total
------------ ------------ ------------ ------------ ------------
Net interest income $ 18,943,155 $ 61,645 $ 338,204 $ -- $ 19,343,004
Noninterest income 2,684,723 1,355,036 -- -- 4,039,759
Noninterest expense 13,689,351 911,222 3,404,236 -- 18,004,809
Income (loss) before taxes 4,912,752 505,459 (3,066,032) -- 2,352,179
Assets 694,561,605 55,234,735 70,290,697 (64,021,487) $756,065,550
Expenditures for additions
to premises and equipment 2,398,326 561,600 8,410 -- 2,968,336
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment appeals to different markets and accordingly requires different
technology and marketing strategies.
The Company derives a majority of its revenues from interest income and
gain on sale of mortgage loans and the chief operating decision maker
relies primarily on net income before taxes to assess the performance of
the segments and make decisions about resources to be allocated to the
segments. Therefore, the segments are reported above using net income
before taxes. The Company does not allocate income taxes to the segments.
F-36
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
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% or more of its revenues and operates in one geographical area.
24. RELATED PARTY TRANSACTIONS
The Company lends to shareholders, directors, officers, and their related
business interests on substantially the same terms as loans to other
individuals and businesses of comparable credit worthiness. Such loans
outstanding were approximately $5,321,000 and $2,364,000 at December 31,
2003 and 2002, respectively.
Deposits from related parties held by the Company at December 31, 2003 and
2002 were approximately $18,033,000 and $3,772,000, respectively.
On September 9, 2002, Florida Bank, N.A. purchased a parcel of land for
the purpose of future construction of a corporate headquarters and the
Jacksonville banking office. A director of the Company was among the 11
sellers of the property. The purchase price was $905,084, which did not
exceed an independent appraisal of the property which was conducted prior
to the purchase. This property was subsequently sold during 2003.
F-37
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED)
- --------------------------------------------------------------------------------
25. SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the
years ended December 31, 2003 and 2002:
Fiscal Quarter
--------------------------------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
$ in Thousands, Except Per Share Amounts
2003
Interest income $ 9,799 $ 11,161 $ 11,215 $ 11,393 $ 43,568
Interest expense 3,940 4,183 4,425 4,343 16,891
-------- -------- -------- -------- --------
Net interest income 5,859 6,978 6,790 7,050 26,677
Provision for loan losses 889 964 599 484 2,936
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 4,970 6,014 6,191 6,566 23,741
Noninterest income 3,684 5,168 3,328 3,423 15,603
Noninterest expense 7,435 9,142 7,691 7,930 32,198
-------- -------- -------- -------- --------
Income before income taxes 1,219 2,040 1,828 2,059 7,146
Income tax expense 426 671 655 738 2,490
-------- -------- -------- -------- --------
Net income 793 1,369 1,173 1,321 4,656
Preferred stock dividends (62) (62) (63) (63) (250)
-------- -------- -------- -------- --------
Net income applicable to
common shares $ 731 $ 1,307 $ 1,110 $ 1,258 $ 4,406
======== ======== ======== ======== ========
Basic income per share $ 0.11 $ 0.19 $ 0.16 $ 0.19 $ 0.65
Diluted income per share $ 0.11 $ 0.19 $ 0.16 $ 0.16 $ 0.62
F-38
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONCLUDED)
- --------------------------------------------------------------------------------
Fiscal Quarter
--------------------------------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
$ in Thousands, Except Per Share Amounts
2002
Interest income $ 8,008 $ 8,676 $ 9,067 $ 9,176 $ 34,927
Interest expense 3,729 3,688 4,126 4,041 15,584
-------- -------- -------- -------- --------
Net interest income 4,279 4,988 4,941 5,135 19,343
Provision for loan losses 380 1,028 699 919(1) 3,026
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 3,899 3,960 4,242 4,216 16,317
Noninterest income 537 569 755 2,179 4,040
Noninterest expense 3,633 4,270 4,578 5,524 18,005
-------- -------- -------- -------- --------
Income before income taxes 803 259 419 871 2,352
Income tax expense 307 97 153 328 885
-------- -------- -------- -------- --------
Net income 496 162 266 543 1,467
Preferred stock dividends (120) (20) (140) (140)
-------- -------- -------- -------- --------
Net income applicable to
common shares $ 376 $ 142 $ 266 $ 543 $ 1,327
======== ======== ======== ======== ========
Basic income per share $ 0.07 $ 0.02 $ 0.04 $ 0.08 $ 0.21
Diluted income per share $ 0.07 $ 0.02 $ 0.04 $ 0.08 $ 0.20
(1) Includes an additional provision for loan losses of approximately $530,000
related to the specific reserve established against a customer's
uncollected ACH account.
******
F-39