FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-24683
FLORIDA BANKS, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 58-2364573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5210 BELFORT ROAD, SUITE 310
JACKSONVILLE, FL
32256
(Address of principal executive offices)
(904) 332-7770
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding
COMMON STOCK, $.01 PAR VALUE 6,798,368 OUTSTANDING AT July 31, 2003
PER SHARE
Table of Contents
Part I Financial Information
Item 1. Financial Statements ...................................... Page 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... Page 14
Item 3. Qualitative and Quantitative Disclosures about
Market Risk ............................................. Page 23
Item 4. Controls and Procedures ................................... Page 24
Part II Other Information
Item 1. Legal Proceedings ......................................... Page 24
Item 2. Changes in Securities ..................................... Page 24
Item 3. Defaults Upon Senior Securities ........................... Page 24
Item 4. Submission of Matters to a Vote of Security Holders ....... Page 25
Item 5. Other Information ......................................... Page 25
Item 6. Exhibits and Reports on Form 8-K .......................... Page 25
Signatures ......................................................... Page 27
Exhibits ........................................................... Page 28
PART I. Financial Information, Item 1. Financial Statements
FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
ASSETS 2003 2002
CASH AND DUE FROM BANKS $ 92,850,657 $ 26,964,504
FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS 27,372,000 62,515,000
------------- -------------
Total cash and cash equivalents 120,222,657 89,479,504
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $45,727,698 and $50,155,158 at June
30, 2003 and December 31, 2002) 46,142,241 50,930,650
Held to maturity, at cost (fair value $0 and $229,475 at June 30, 2003 and
December 31, 2002) 227,925
Other investments 3,304,050 2,493,350
------------- -------------
Total investment securities 49,446,291 53,651,925
MORTGAGE LOANS HELD FOR SALE 106,602,354 54,674,248
LOANS:
Commercial real estate 381,213,368 313,120,588
Commercial 164,341,868 166,122,230
Residential mortgage 31,130,448 23,080,140
Consumer 48,135,545 45,859,704
Credit card and other loans 2,497,060 2,791,678
------------- -------------
Total loans 627,318,289 550,974,340
Allowance for loan losses (7,997,368) (7,263,029)
Net deferred loan fees (686,750) (519,271)
------------- -------------
Net loans 618,634,171 543,192,040
PREMISES AND EQUIPMENT, NET 5,824,760 5,466,332
ACCRUED INTEREST RECEIVABLE 2,512,374 2,375,102
DEFERRED INCOME TAXES, NET 3,563,619 3,908,751
DERIVATIVE INSTRUMENTS 2,677,306 2,321,643
OTHER REAL ESTATE OWNED 652,500 652,500
OTHER ASSETS 11,676,790 343,505
------------- -------------
TOTAL ASSETS $ 921,812,822 $ 756,065,550
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand $ 94,871,769 $ 141,395,150
Interest-bearing demand 51,114,265 52,803,427
Regular savings 73,750,262 66,940,672
Money market accounts 25,886,843 19,210,512
Time $100,000 and over 430,008,463 314,852,717
Other time 91,813,016 69,707,230
------------- -------------
Total deposits 767,444,618 664,909,708
REPURCHASE AGREEMENTS SOLD 50,966,436 4,653,878
OTHER BORROWED FUNDS 18,867,449 9,921,898
ACCRUED INTEREST PAYABLE 2,588,192 2,377,963
TRUST PREFERRED SECURITIES 3,000,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 7,292,088 4,765,136
------------- -------------
Total liabilities 850,158,783 686,628,583
------------- -------------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST 16,534,243 16,473,092
------------- -------------
SHAREHOLDERS' EQUITY:
Series C Preferred Stock, $100.00 par value, 50,000 shares authorized, 50,000
shares issued and outstanding 5,000,000 5,000,000
Common stock, $.01 par value; 30,000,000 shares authorized; 6,788,935 and
6,768,362 shares issued, respectively 67,890 67,684
Additional paid-in capital 52,567,902 52,287,390
Accumulated deficit (deficit of $8,134,037
eliminated upon quasi-reorganization on December 31, 1995) (2,774,546) (4,874,873)
Accumulated other comprehensive income, net of tax 258,550 483,674
------------- -------------
Total shareholders' equity 55,119,796 52,963,875
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 921,812,822 $ 756,065,550
============= =============
See notes to condensed financial statements
FLORIDA BANKS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Six-Month Period Ended
June 30, June 30,
-----------------------------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
INTEREST INCOME:
Loans, including fees $10,733,616 $ 7,947,575 $20,019,244 $15,177,735
Investment securities 308,810 571,360 717,489 1,146,494
Federal funds sold 118,298 156,728 222,660 359,587
----------- ----------- ----------- -----------
Total interest income 11,160,724 8,675,663 20,959,393 16,683,816
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 3,906,341 3,454,760 7,640,569 6,940,273
Repurchase agreements 106,382 125,323 207,274 251,458
Borrowed funds 170,251 107,967 274,914 225,103
----------- ----------- ----------- -----------
Total interest expense 4,182,974 3,688,050 8,122,757 7,416,834
----------- ----------- ----------- -----------
NET INTEREST INCOME 6,977,750 4,987,613 12,836,636 9,266,982
PROVISION FOR LOAN LOSSES 963,686 1,027,516 1,852,725 1,407,950
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,014,064 3,960,097 10,983,911 7,859,032
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Service fees 598,291 401,070 1,116,736 769,518
Gain on sale of mortgage loans 3,068,609 5,340,235
Mortgage loan processing fees 858,078 1,335,631
Mortgage loan origination fees 341,089 79,696 523,026 172,132
Other noninterest income 301,963 87,781 536,211 164,105
----------- ----------- ----------- -----------
5,168,030 568,547 8,851,839 1,105,755
NONINTEREST EXPENSES:
Salaries and benefits 6,390,489 2,522,202 11,504,383 4,711,045
Occupancy and equipment 652,953 506,740 1,281,757 973,290
Data processing 278,248 200,282 537,234 397,196
Dividends on preferred security of subsidiary trust 203,759 140,758 425,835 223,740
Other 1,616,238 899,734 2,827,562 1,597,604
----------- ----------- ----------- -----------
9,141,687 4,269,716 16,576,771 7,902,875
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,040,407 258,928 3,258,979 1,061,912
PROVISION FOR INCOME TAXES 671,226 97,427 1,097,008 404,089
----------- ----------- ----------- -----------
NET INCOME 1,369,181 161,501 2,161,971 657,823
----------- ----------- ----------- -----------
PREFERRED STOCK DIVIDENDS 62,329 20,008 123,973 140,058
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON SHARES $ 1,306,852 $ 141,493 $ 2,037,998 $ 517,765
=========== =========== =========== ===========
INCOME PER COMMON SHARE:
Basic $ 0.19 $ 0.02 $ 0.30 $ 0.08
Diluted $ 0.19 $ 0.02 $ 0.29 $ 0.08
See notes to condensed financial statements.
-4-
FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
---------------------------------------------- Paid-In
Shares Par Value Shares Par Value Capital
BALANCE, JANUARY 1, 2002 102,283 $ 6,955,244 5,677,660 $ 56,777 $ 44,964,967
Comprehensive income:
Net Income
Unrealized gain on available for sale
investment securities, net of tax of $144,482
Comprehensive income
Conversion of Series B Preferred Stock into
common stock (102,283) (6,955,244) 1,022,830 10,228 6,945,016
Exercise of stock options 7,063 71 46,401
Issuance of common stock under employee
stock purchase plan 41,133 411 210,359
Issuance of restricted stock 19,676 197 120,647
Issuance of Series C Preferred Stock, net 50,000 5,000,000
Series B Preferred Stock dividends paid
------- ----------- --------- -------- ------------
BALANCE, DECEMBER 31, 2002 50,000 5,000,000 6,768,362 67,684 52,287,390
Comprehensive income:
Net Income
Unrealized gain on available for sale
investment securities, net of tax of $94,254
Comprehensive income
Issuance of common stock to Employee
Stock Purchase Plan 14,842 148 101,816
Exercise of stock warrants 4,000 40 39,960
Series C Preferred Stock offering costs (10,677)
Exercise of stock options and issue of stock grants 1,731 18 149,413
Series C Preferred Stock dividends paid
------- ----------- --------- -------- ------------
BALANCE, June 30, 2003 (Unaudited) 50,000 $ 5,000,000 6,788,935 $ 67,890 $ 52,567,902
======= =========== ========= ======== ============
Accumulated
Other
Comprehensive
Accumulated (loss) income
Deficit Net of Tax Total
BALANCE, JANUARY 1, 2002 $ (6,079,156) $ 244,202 $ 46,142,034
Comprehensive income:
Net Income 1,467,058 1,467,058
Unrealized gain on available for sale
investment securities, net of tax of $144,482 239,472 239,472
Comprehensive income 1,706,530
Conversion of Series B Preferred Stock into
common stock
Exercise of stock options 46,472
Issuance of common stock under employee
stock purchase plan 210,770
Issuance of restricted stock 120,844
Issuance of Series C Preferred Stock, net 5,000,000
Series B Preferred Stock dividends paid (262,775) (262,775)
------------ --------- ------------
BALANCE, DECEMBER 31, 2002 (4,874,873) 483,674 52,963,875
Comprehensive income:
Net Income 2,161,971 2,161,971
Unrealized gain on available for sale
investment securities, net of tax of $94,254 (225,124) (225,124)
Comprehensive income 1,936,847
Issuance of common stock to Employee
Stock Purchase Plan 101,964
Exercise of stock warrants 40,000
Series C Preferred Stock offering costs (10,677)
Exercise of stock options and issue of stock grants 149,431
Series C Preferred Stock dividends paid (61,644) (61,644)
------------ --------- ------------
BALANCE, June 30, 2003 (Unaudited) $ (2,774,546) $ 258,550 $55,119,796
============ ========= ============
See notes to condensed financial statements.
-5-
FLORIDA BANKS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Six-Month Period Ended
June 30,
-------------------------------
OPERATING ACTIVITIES: 2003 2002
------------- -------------
Net income $ 2,161,971 $ 657,823
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization 463,803 417,627
Reinvested dividends on investment securities (52,536) (69,062)
Deferred income tax provision 480,957 392,089
Accretion of premium on investments, net (286,903) (39,124)
Amortization of premium on loans 21,229 42,223
Provision for loan losses 1,852,725 1,407,950
(Gain) loss on foreign currency translation (24,181) 17,349
Loss on derivative instruments 14,100 49,643
Increase in mortgage loans held for sale (51,928,106)
Increase in accrued interest receivable (137,272) (233,837)
Decrease (increase) in accrued interest payable 210,229 (616,369)
(Increase) decrease in other assets (1,118,786) 136,745
Increase in other liabilities 2,526,952 68,739
------------- -------------
Net cash (used in) provided by operating activities (45,815,818) 2,231,796
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, paydowns and maturities of investment securities:
Available for sale 19,119,671 12,600,564
Held to maturity 227,925 1,110,385
Purchases of investment securities:
Available for sale (14,352,772) (14,200,037)
Other investments (810,700) (188,800)
Net increase in loans held for investment (77,291,904) (84,993,268)
Increase in bank owned life insurance (10,214,499)
Proceeds from sale of other real estate owned 242,979
Purchases of premises and equipment (822,231) (1,199,159)
------------- -------------
Net cash used in investing activities (84,144,510) (86,627,336)
------------- -------------
FINANCING ACTIVITIES:
Net decrease in demand deposits, money market accounts and savings accounts (34,994,421) (23,729,780)
Net increase in time deposits 137,261,532 97,761,976
Increase in repurchase agreements 46,312,558 33,710,229
Increase (decrease) in borrowed funds 8,945,551 (3,011,004)
Proceeds from FHLB advances 3,000,000
Preferred stock offering costs (10,677)
Proceeds from exercise of stock options 149,431 63,969
Preferred dividends paid (61,644) (262,776)
Proceeds from exercise of stock warrants 40,000
Proceeds from issuance of trust preferred securities, net 3,061,151 7,706,201
------------- -------------
Net cash provided by financing activities 160,703,481 115,238,815
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 30,743,153 30,843,275
CASH AND CASH EQUIVALENTS:
Beginning of period 89,479,504 73,989,159
------------- -------------
End of period $ 120,222,657 $ 104,832,434
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 7,912,528 $ 8,033,203
============= =============
Cash paid for income taxes $ 1,254,868
============= =============
NONCASH FINANCING ACTIVITIES:
Proceeds from demand deposits used to purchase shares of
common stock under Employee Stock Purchase Plan $ 101,964 $ 86,549
============= =============
See notes to condensed financial statements.
-6-
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX-MONTH PERIODS ENDED
JUNE 30, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Florida Banks, Inc. (the "Company") was incorporated October 15,
1997 to become a bank holding company and acquire First National
Bank of Tampa (the "Bank"). On August 4, 1998, the Company
completed its initial public offering and its merger (the "Merger")
with the Bank pursuant to which the Bank was merged with and into
Florida Bank No.1, N.A., a wholly-owned subsidiary of the Company,
and renamed Florida Bank, N.A.
The condensed consolidated financial statements have been prepared
in accordance with the rules and regulations of the Securities and
Exchange Commission related to interim financial statements. These
unaudited condensed consolidated financial statements do not
include all disclosures provided in the annual financial
statements. The condensed consolidated financial statements should
be read in conjunction with the financial statements and notes
thereto contained in the Company's Annual Report to Shareholders
incorporated by reference into the Company's Form 10-K for the year
ended December 31, 2002. All adjustments of a normal recurring
nature which, in the opinion of management, are necessary to fairly
present the results of the interim periods have been made. Results
of operations for the three and six-month periods ended June 30,
2003 are not necessarily indicative of the results to be expected
for the full year. The condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
2. EARNINGS PER COMMON SHARE
The following is a reconciliation of the denominator used in the
computation of basic and diluted earnings per common share.
Three-Month Period Ended Six-Month Period Ended
June 30, June 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Weighted average number of common
shares outstanding - Basic 6,785,506 6,552,607 6,784,051 6,124,728
Incremental shares from the assumed
conversion of stock options 209,580 16,497 148,256 16,497
--------- --------- --------- ---------
Total - Diluted 6,995,086 6,569,104 6,932,307 6,141,225
--------- --------- --------- ---------
The incremental shares from the assumed conversion of stock options
for the three and six-month periods ended June 30, 2003 and 2002
were determined using the treasury stock method, under which the
assumed proceeds were equal to (1) the amount that the Company
would receive upon exercise of the options plus (2) the amount of
tax benefit that would be credited to additional paid-in capital
assuming exercise of the options. The assumed proceeds are used to
purchase outstanding common shares at the Company's average market
value for the period.
- 7 -
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX-MONTH PERIODS ENDED
JUNE 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
3. DERIVATIVE INSTRUMENTS
The following instruments qualify as derivatives as defined by
Statement of Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended:
June 30, 2003
------------------------------------
Contract/Notional Fair
Amount Value
Interest rate swap agreements $131,000,000 $2,640,526
Foreign currency swap agreements $ 2,000,000 $ 36,780
Commitments to fund mortgage loans $153,688,618 $ 595,097
Interest rate swap agreements at June 30, 2003 consist of twenty
agreements, which effectively convert the interest rate on certain
certificates of deposit from a fixed rate to a variable rate to
more closely match the interest rate sensitivity of the Company's
assets and liabilities. The Company has designated and assessed the
derivatives as highly effective fair value hedges, as defined by
SFAS No. 133. Additionally, the Company entered into a foreign
currency swap agreement during the first quarter of 2001 that does
not qualify for hedge accounting under SFAS No. 133. Accordingly,
all changes in the fair value of the foreign currency swap
agreement are reflected in the earnings of the Company. The Company
recognized gains of $2,714 and $10,081, respectively, during the
three- and six-month periods ended June 30, 2003 as a result of
changes in the fair value of the foreign currency agreement and the
related translation adjustment.
The Company has adopted the provisions of the Derivatives
Implementation Group, Implementation Issue C13, When a Loan
Commitment is Included in the Scope of Statement No. 133 ("DIG
C13"). DIG C13 requires that loan commitments that relate to the
origination or acquisition of mortgage loans that will be held for
resale must be accounted for as derivative instruments in
accordance with SFAS No. 133. The fair value of commitments to fund
mortgage loans is included in mortgage loans held for sale.
4. PREFERRED STOCK
On December 31, 2002, the Company issued 50,000 shares of Series C
preferred stock for $100.00 per share to a single shareholder
through a private placement. The Series C preferred stock is not
convertible or redeemable, except as a result of a change in
control. Non-cumulative dividends accrue at five percent annually
and are payable quarterly in arrears. In the event of any
liquidation, dissolution or winding up of affairs of the Company,
holders of Series C preferred stock at the time shall receive
$100.00 per share plus an amount equal to accrued and unpaid
dividends thereon through and including the date of distribution
prior to any distribution to holders of common stock. The
- 8 -
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX-MONTH PERIODS ENDED
JUNE 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
liquidation preference at June 30, 2003 was $5,063,356.
In August 2003, subject to regulatory approval, the Company intends
to exchange all of the Series C preferred stock for shares of
Series D preferred stock, which will be substantially similar to
the Series C preferred stock, except the Series D preferred stock
will be immediately converted into 500,000 shares of the Company's
common stock. The preferred shareholder has formally applied for
the necessary regulatory approvals for this exchange.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Guarantees of Indebtedness of Others. This Interpretation addresses
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. In
addition, the Interpretation clarifies the requirements related to
the recognition of a liability by a guarantor at the inception of a
guarantee for the obligations that the guarantor has undertaken in
issuing the guarantee. The Company adopted the disclosure
requirements of FIN 45 for the fiscal year ended December 31, 2002,
and the recognition provisions on January 1, 2003. Adoption of this
Interpretation did not have a material impact on the Company's
consolidated financial position, results of operations or cash
flows.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46"), Consolidation of Variable Interest Entities. This
Interpretation applies to variable interest entities created after
January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. FIN 46 applies in
the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise held a
variable interest that is acquired on or before January 31, 2003.
The Company will adopt the FIN 46 as of July 31, 2003, however
management does not expect adoption to have an impact on the
Company's consolidated financial position, results of operations or
cash flows.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities (SFAS 149).
SFAS 149 amends and clarifies the accounting for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. In addition, the
statement clarifies when a contract is a derivative and when a
derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS 149 is generally
effective prospectively for contracts entered into or modified, and
hedging relationships designated, after June 30, 2003. Management
adopted the statement effective July 1, 2003 and does not expect
adoption to have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
- 9 -
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX-MONTH PERIODS ENDED
JUNE 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity, and imposes certain
additional disclosure requirements. The provisions of SFAS 150 are
generally effective for financial instruments entered into or
modified after May 31, 2003. Additionally, the Company must apply
the provisions of SFAS 150 to all financial instruments on July 1,
2003. Upon the adoption of SFAS 150, the company's obligated
mandatorily redeemable preferred securities of subsidiary trusts
will be reclassified from mezzanine equity to debt. The dividends
related to these securities will be reflected as interest expense
on a prospective basis. At June 30, 2003, the Company had $16.5
million outstanding as company obligated mandatorily redeemable
preferred securities of subsidiary trusts. The Company paid
dividends related to those instruments of approximately $204
thousand and $426 thousand for the three- and six-month periods
ended June 30, 2003, respectively. Additionally, on June 26, 2003,
the Company entered into a $3 million trust preferred offering,
which is classified as a liability at June 30, 2003.
6. TRUST PREFERRED SECURITIES
On June 26, 2003, the Company participated in a pooled trust
preferred offering. In connection with the transaction, the
Company, through its subsidiary trust, Florida Banks Statutory
Trust III (the "Statutory Trust III"), issued $3,000,000 in trust
preferred securities. The Statutory Trust III also issued $93
thousand of common securities to the Company and used the total
proceeds to purchase $3,093,000 in 30-year subordinated debentures
of the Company. The trust preferred securities pay dividends at an
initial rate of 4.16% through September 26, 2003. The rate then
becomes a floating rate based on 3-month LIBOR plus 3.10%, adjusted
quarterly after each dividend payment date. Dividend payment dates
are March 26, June 26, September 26 and December 26 of each year.
There is a par call option beginning June 26, 2008. In accordance
with SFAS 150, the trust preferred securities are reflected as a
liability in the company's condensed consolidated financial
statements.
7. GUARANTEES
The Company issues standby letters of credit to provide credit
support for some creditors in case of default. As of June 30, 2003,
the carrying amount of the liability was $0 and the maximum
potential payment was $10,575,257.
- 10 -
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX-MONTH PERIODS ENDED
JUNE 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
8. SEGMENT REPORTING
Prior to October 1, 2002, the Company had one reporting segment. In
October, 2002, the Company started a mortgage banking division
which is managed as a segment. Accordingly, from October 2002
forward, the Company has two reporting segments, the commercial
bank and the mortgage bank. The commercial bank segment provides
its commercial customers such products as working capital loans,
equipment loans and leases, commercial real estate loans and other
business related products and services. This segment also offers
mortgage loans to principals of its commercial customers. The
mortgage bank segment originates mortgage loans through a network
of mortgage brokers and sells these loans (on a wholesale basis)
into the secondary market. Information about reportable segments,
and reconciliation of such information to the consolidated
financial statements as of and for the three-month period ended
June 30, 2003 follows:
Commercial Mortgage Intersegment Consolidated
Bank Bank Other Eliminations Total
------------ ------------ ------------ ------------ ------------
Net interest income $ 5,749,975 $ 1,192,436 $ 35,339 $ 6,977,750
Noninterest income 1,223,368 3,926,686 17,976 5,168,030
Provision for loan losses 963,686 963,686
Noninterest expense 4,451,941 3,367,485 1,322,261 9,141,687
Income (loss) before taxes 1,557,716 1,751,637 (1,268,946) 2,040,407
Assets 806,484,010 108,629,995 83,933,588 (77,234,771) $921,812,822
Expenditures for additions
to premises and equipment 228,328 265,720 70,828 564,876
- 11 -
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX-MONTH PERIODS ENDED
JUNE 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
Information about reportable segments, and reconciliation of such
information to the consolidated financial statements as of and for
the six-month period ended June 30, 2003 follows:
Commercial Mortgage Intersegment Consolidated
Bank Bank Other Eliminations Total
------------ ------------ ------------ ------------ ------------
Net interest income $ 10,954,868 $ 1,788,589 $ 93,179 $ 12,836,636
Noninterest income 2,148,343 6,675,866 27,630 8,851,839
Provision for loan losses 1,852,725 1,852,725
Noninterest expense 8,470,833 5,736,337 2,369,601 16,576,771
Income (loss) before taxes 2,779,653 2,728,118 (2,248,792) 3,258,979
Assets 806,484,010 108,629,995 83,933,588 (77,234,771) $921,812,822
Expenditures for additions
to premises and equipment 457,330 293,951 70,950 822,231
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies found
in footnote 1 of the Company's consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000 filed in
conjunction with the Company's annual report on form 10-K for the
year ended December 31, 2002. The Company evaluates performance
based on profit or loss from operations before income taxes.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each segment appeals to different markets and accordingly
requires different technology and marketing strategies.
The Company derives a majority of its revenues from interest income
and gain on sale of mortgage loans and the chief operating decision
maker relies primarily on net income before taxes to assess the
performance of the segments and make decisions about resources to
be allocated to the segments. Therefore, the segments are reported
above using net income before taxes. The Company does not allocate
income taxes to the segments. The Company does not have operating
segments other than those reported. Parent Company financial
information is included in the other category above and is deemed
to represent an overhead function rather than an operating segment.
The Company does not have a single external customer from which it
derives 10 percent or more of its revenues and operates in one
geographical area.
- 12 -
FLORIDA BANKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX-MONTH PERIODS ENDED
JUNE 30, 2003 AND 2002 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
9. STOCK OPTIONS
Pursuant to the disclosure requirements of SFAS No. 148, the
following table provides an expanded reconciliation for all periods
presented that adds back to reported net income the recorded
expense under Accounting Principles Board Opinion ("APB") No. 25,
net of related income tax effects, deducts the total fair value
expense under SFAS No. 123, net of related income tax effects and
shows the reported and pro forma earnings per share amounts.
Three-Month Period Ended Six-Month Period Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
Net income applicable to common shares
As reported $ 1,306,852 $ 141,493 $ 2,037,998 $ 517,765
Total stock-based employee com pensation
cost included in the determination of net
income, net of related tax effects 46,877 37,685 87,112 37,685
Total stock-based employee compensation
cost determined under fair value method
for all awards, net of related tax effects (48,838) (57,134) (88,319) (106,725)
----------- ----------- ----------- -----------
Pro form a net income applicable
to common shares $ 1,304,891 $ 122,044 $ 2,036,791 $ 448,725
=========== =========== =========== ===========
Earnings per share - Basic
As reported $ 0.19 $ 0.02 $ 0.30 $ 0.08
Pro forma $ 0.19 $ 0.02 $ 0.30 $ 0.07
Earnings per share - Diluted
As reported $ 0.18 $ 0.02 $ 0.29 $ 0.08
Pro forma $ 0.18 $ 0.02 $ 0.29 $ 0.07
Shares used for computation
Basic 6,785,506 6,552,607 6,784,051 6,124,728
Diluted 6,995,086 6,569,104 6,932,307 6,141,225
10. SUBSEQUENT EVENT
On July 16, 2003, the Company filed a registration statement with
the Securities and Exchange Commission for a planned underwritten
follow-on primary public offering of its common stock. The
registration statement covers 2,300,000 shares (including 300,000
shares which may be issued solely to cover over-allotments) of
common stock for sale.
- 13 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q.
Critical Accounting Policies
The preparation of the condensed consolidated financial statements, on which
this Management's Discussion and Analysis is bases, requires Management to make
estimates, which impact these condensed consolidated financial statements. The
most critical of these estimates and accounting policies relate to the allowance
for loan losses, other real estate owned, and derivative financial instruments.
For a more complete discussion of these and other accounting policies, see Note
1 to the Company's consolidated financial statements for December 31, 2002, 2001
and 2000, and the years then ended, filed in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
Allowance for Loan Losses - The Company carefully monitors the credit quality of
loan portfolios and makes estimates about the amount of credit losses that have
been incurred at each financial statement reporting date. This process
significantly impacts the financial statements and involves complex, subjective
judgments. The allowance is largely determined based upon the market value of
the underlying collateral. Market values of collateral are generally based upon
appraisals obtained from independent appraisers. If market conditions decline,
the allowance for loan losses would be negatively impacted resulting in a
negative impact on the Company's earnings. The allowance for loan losses is a
significant estimate that can and does change based on management's assumptions
about specific borrowers and applicable economic and environmental conditions,
among other factors.
Other Real Estate Owned - The Company obtains real estate through foreclosure.
Such property is recorded based upon the market value determined by an
independent appraisal less estimated selling cost. If market conditions decline
in the area in which the property is located, then the value of other real
estate owned will be negatively impacted, resulting in a negative impact to the
Company's earnings.
Derivative Instruments - The Company has entered into several interest swaps, a
foreign currency swap and had provided interest rate swaps to loan participants.
As a result of these activities the Company recognizes income and expense
related to such derivative instruments as determined by the change in the fair
market value of these derivative instruments. The fair market value of these
instruments is determined by quotes obtained from the related counter parties in
combination with a valuation model utilizing discounted cash flows. The
valuation of these derivative instruments is a significant estimate that is
largely affected by changes in interest rates. If interest rates significantly
increase or decrease, the value of these instruments will significantly change,
resulting in an impact on the earnings of the Company.
Commitments to Originate Mortgage Loans - The Company enters into commitments to
originate mortgage loans whereby the interest rate on the loans is determined
prior to funding (rate lock commitments). Rate lock commitments on loans that
are intended to be sold are considered to be derivatives and are therefore,
recorded at fair value with changes in fair value recorded in earnings. The fair
value of these commitments is included in mortgage loans held for sale.
- 14 -
RESULTS OF OPERATIONS
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
The Company's net income applicable to common shares for the second quarter of
2003 was $1.4 million, compared to $142 thousand for the second quarter of 2002.
Basic and diluted income per common share for the second quarter of 2003 was
$.19 compared to $.02 for the second quarter of 2002. The increase in net income
can be attributed to increased net interest income, and increased non-interest
income, partially offset by an increase in the provision for loan losses and an
increase in non-interest expenses.
The increase in net interest income of $2.0 million or 39.9%, to $7.0 million
for the second quarter of 2003 compared to $5.0 million for the second quarter
of 2002, consists of an increase in interest income of $2.5 million, or 28.6%,
and an increase in interest expense of $495 thousand, or 13.4%. The increase in
interest income in the second quarter of 2003 is primarily attributable to an
increase of $2.8 million in interest and fees on loans resulting from the growth
in the loan portfolio, partially offset by decreases in interest income from
investments and federal funds sold. The increase in interest expense resulted
primarily from an increase of $452 thousand in interest on deposits, and an
increase of $62 thousand in interest on borrowed funds, partially offset by a
decrease in interest on repurchase agreements. The increase in interest expense
on deposits and borrowed funds is primarily attributable to an increase in these
liabilities, partially offset by a decrease in market interest rates. The
decrease in interest expense on repurchase agreements is primarily attributable
to the decline in market interest rates on these instruments.
The provision for loan losses charged to operations decreased $64 thousand to
$964 thousand for the second quarter of 2003 from $1.0 million in the second
quarter of 2002. This decrease primarily reflects a slowing in the growth of the
portfolio of loans held for investment in the second quarter of 2003 as compared
to the second quarter of 2002. For a more detailed discussion of the provision
for loan losses, see "Allowance for Loan Losses" in the "Financial Condition"
section below.
Non-interest income increased 809.0% or $4.6 million, to $5.2 million for the
three months ended June 30, 2003 from $569 thousand for the three months ended
June 30, 2002. The increase in non-interest income primarily resulted from gains
on sale of mortgage loans of $3.1 million and mortgage loan processing fees of
$858 thousand for the second quarter, compared to zero for these categories for
the same period in 2002. These income categories relate to the wholesale
mortgage division of Florida Bank, N.A., ("the Bank"), which commenced
operations in the fourth quarter of 2002. Due to the short time that this
division has been in operation, and the substantial portion of its revenue
attributable to mortgage refinance activity, there can be no assurance that the
current levels of income will continue in the future. Service fees on deposits
increased $197 thousand or 49.2% to $598 thousand for the three months ended
June 30, 2003 from $401 thousand for the three months ended June 30, 2002. This
increase is primarily attributable to an increase in deposit accounts. Mortgage
loan origination fees attributable to the commercial bank increased $261
thousand or 328.0% to $341 thousand for the three months ended June 30, 2003
from $80 thousand for the three months ended June 30, 2002. This increase is
primarily attributable to increased volume in residential mortgage loans. Other
non-interest income increased $214 thousand, or 243.2% to $302 thousand for the
three months ended June 30, 2003 from $88 thousand for the same period in 2002.
The increase in other non-interest income is primarily attributable to increases
in Automated Clearing House fees, and other non-deposit related service charges.
Non-interest expense increased $4.9 million or 114.1% to $9.1 million for the
three-month period ended June 30, 2003 compared to $4.3 million for the
three-month period ended June 30, 2002. The increase in non-interest expense
resulted primarily from increases in salaries and benefits, dividends on
- 15 -
preferred security of subsidiary trust, and other expenses. Salaries and
benefits expenses increased $3.9 million to $6.4 million for the second quarter
of 2003 compared to $2.5 million for the second quarter of 2002. This increase
is primarily the result of additional staff associated with the overall growth
of the Company's business and with the addition of staff for the wholesale
mortgage division, who were hired beginning in the third quarter of 2002.
Dividends on preferred securities of subsidiary trusts increased $63 thousand or
44.8% to $204 thousand for the second quarter of 2003, compared to $141 thousand
for the second quarter of 2002. This increase was due to an increase in the
amount of these securities outstanding. Other expenses increased $717 thousand,
or 79.6% to $1.6 million for the second quarter of 2003 compared to $900
thousand for the second quarter of 2002. This increase is primarily attributed
to the expenses associated with supporting operations related to the overall
growth of the Company. Specific operational expenses which increased include
communications, recruitment expenses and postage/courier expenses.
A provision for income taxes of $671 thousand was recognized for the second
quarter of 2003 compared to $97 thousand for the same period in 2002. These
provisions for income taxes represent an estimated effective annual tax rate of
approximately 33% and 38% respectively. The decrease in the effective tax rate
results from a tax credit obtained from a charitable contribution the Company
made in the second quarter of 2003.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
The Company's net income applicable to common shares for the six months ended
June 30, 2003 was $2.0 million, compared to $518 thousand for the same period in
2002. Basic and diluted income per common share for the first half of 2003 was
$.30 and $.29, respectively, compared to $.08 and $.08, respectively, for the
first half of 2002. The increase in net income can be attributed to increased
net interest income, and increased non-interest income, partially offset by an
increase in the provision for loan losses and an increase in non-interest
expenses.
The increase in net interest income of $3.6 million or 38.5%, to $12.8 million
for the first half of 2003 compared to $9.3 million for the first half of 2002,
consists of an increase in interest income of $4.3 million, or 25.6%, partially
offset by an increase in interest expense of $706 thousand, or 9.5%. The
increase in interest income in the first half of 2003 is primarily attributable
to an increase of $4.8 million in interest and fees on loans resulting from the
growth in the loan portfolio, partially offset by decreases in interest income
from investments and federal funds sold. The increase in interest expense
resulted primarily from an increase of $700 thousand in interest on deposits,
partially offset by decreases in interest on repurchase agreements and borrowed
funds. The increase in interest expense on deposits is primarily attributable to
an increase in deposits, partially offset by a decrease in market interest rates
on deposits. The decrease in interest expense on repurchase agreements and
borrowed funds is primarily attributable to the decline in market interest rates
on these instruments.
The provision for loan losses charged to operations increased $445 thousand to
$1.9 million for the six months ended June 30, 2003 from $1.4 million for the
same period in 2002. This increase primarily reflects growth of the overall loan
portfolio in the first six months of 2003 as compared to the first six months of
2002. For a more detailed discussion of the provision for loan losses, see
"Allowance for Loan Losses" in the "Financial Condition" section below.
-------------------------
Non-interest income increased 700.5% or $7.7 million, to $8.9 million for the
six months ended June 30, 2003 from $1.1 million for the six months ended June
30, 2002. The increase in non-interest income primarily resulted from gains on
sale of mortgage loans of $5.3 million and mortgage loan processing fees of $1.3
million for the six months ended June 30, 2003, compared to zero for these
categories for the same period in 2002. These income categories relate to the
Bank's wholesale mortgage division, which commenced operation in the fourth
- 16 -
quarter of 2002. Due to the short time that this division has been in operation,
and the substantial portion of its revenue attributable to mortgage refinance
activity, there can be no assurance that the current levels of income will
continue in the future. Service fees on deposits increased $347 thousand or
45.1% to $1.1 million for the six months ended June 30, 2003 from $770 thousand
for the six months ended June 30, 2002. This increase is primarily attributable
to an increase in deposit accounts. Mortgage loan origination fees increased
$351 thousand or 203.9% to $523 thousand for the six months ended June 30, 2003
from $172 thousand for the six months ended June 30, 2002. This increase is
primarily attributable to increased volume in residential mortgage loans. Other
non-interest income increased $372 thousand, or 226.8% to $536 thousand for the
six months ended June 30, 2003 from $164 thousand for the six months ended June
30, 2002. The increase in other non-interest income is primarily attributable to
increases in Automated Clearing House fees, and other non-deposit related
service charges.
Non-interest expense increased $8.7 million or 109.8% to $16.6 million for the
six-month period ended June 30, 2003 compared to $7.9 million for the six-month
period ended June 30, 2002. The increase in non-interest expense resulted
primarily from increases in salaries and benefits, dividends on preferred
security of subsidiary trust, and other expenses. Salaries and benefits expenses
increased $6.8 million to $11.5 million for the first half of 2003 compared to
$4.7 million for the first half of 2002. This increase is primarily the result
of additional staff associated with the overall growth of the Company's business
and with the addition of the staff of the wholesale mortgage division who were
hired beginning in the third quarter of 2002. Dividends on preferred securities
of subsidiary trusts increased $202 thousand or 90.3% to $426 thousand for the
first six months of 2003, compared to $224 thousand for the same period in 2002.
This increase was due to an increase in the amount of these securities
outstanding. Other expenses increased $1.2 million, or 77.0% to $2.8 million for
the first half of 2003 compared to $1.6 million for the first half of 2002. This
increase is primarily attributed to the expenses associated with supporting
operations related to the overall growth of the Company. Specific operational
expenses which increased include communications, recruitment expenses and
postage/courier expenses.
A provision for income taxes of $1.1 million was recognized for the first six
months of 2003 compared to $404 thousand for the same period in 2002. These
provisions for income taxes represent an estimated effective annual tax rate of
approximately 34% and 38% respectively. The decrease in the effective tax rate
results from a tax credit obtained from a charitable contribution the Company
made in the second quarter of 2003.
FINANCIAL CONDITION
Total assets at June 30, 2003 were $921.8 million, an increase of $165.7 million
or 21.9%, from $756.1 million at December 31, 2002. The increase in total assets
primarily resulted from the growth in loans outstanding and mortgage loans held
for sale which were funded by new deposit growth and other borrowed funds. Total
investment securities decreased $4.2 million or 7.8% to $49.4 million at June
30, 2003 as compared to $53.7 million at December 31, 2002. Federal funds sold
decreased $35.1 million or 56.2% to $27.4 million at June 30, 2003 from $62.5
million at December 31, 2002.
Loans held for investment increased $76.2 million, or 13.8%, to $626.6 million
at June 30, 2003, from $551.0 million at December 31, 2002. Mortgage loans held
for sale increased $51.9 million or 95.0% to $106.6 million at June 30, 2003
from $54.7 million at December 31, 2002. These increases in loans were funded by
increases in depository accounts, repurchase agreements sold and other
borrowings. The allowance for loan losses increased $734 thousand or 10.1%
during the first six months of 2003. The increase resulted from net charge-offs
of loans of $1.1 million plus additional provisions of $1.8 million during that
period. The allowance for loan losses as a percent of total loans held for
investment was 1.28% at June 30, 2003 and 1.32% at December 31, 2002. Management
believes that such allowance for loan losses is sufficient to cover estimated
- 17 -
losses in the Bank's loan portfolio. For further information, see "Allowance for
-------------
Loan Losses" below.
- -----------
Deposits increased $102.5 million, or 15.4%, to $767.4 million at June 30, 2003
from $664.9 million at December 31, 2002. The increase in total deposits
primarily resulted from an increase of $115.2 million or 36.6% in time deposits
$100,000 and over, combined with an increase of $22.1 million or 31.7% in other
time deposits. Time deposits often fluctuate in response to interest rate
changes and can vary rather significantly on a quarterly basis. The increase in
time deposits $100,000 and over resulted primarily from an increase in brokered
deposits. Noninterest-bearing deposits decreased $46.5 million or 32.9%. This is
a result of the transfer of funds into demand deposit accounts which were
previously invested in repurchase agreements sold. This transfer is related to
the customer's intangible tax strategy. These funds flowed back into repurchase
agreements after year-end, as can be seen by comparing the relative balances of
demand deposits and repurchase agreements sold at June 30, 2003 and December 31,
2002. Savings deposits increased $6.8 million or 10.2%. Money market accounts
increased $6.7 million or 34.8%. Growth in money market accounts are primarily
attributable to continued expansion of the Company's customer base as a result
of ongoing marketing activities.
Repurchase agreements sold increased $46.3 million, or 995.1%, to $51.0 million
at June 30, 2003 from $4.7 million at December 31, 2002, for reasons discussed
in the previous paragraph, together with continued expansion of the Company's
customer base. Other borrowed funds increased $8.9 million or 90.2% to $18.9
million at June 30, 2003 from $9.9 million at December 31, 2002. Accrued
interest payable increased $210 thousand or 8.8%, to $2.6 million at June 30,
2003 from $2.4 million at December 31, 2002. This increase is due primarily to
an increase in interest-bearing deposits and other interest-bearing liabilities
highlighted herein.
Accounts payable and accrued expenses increased $2.5 million or 53.0% to $7.3
million at June 30, 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 $2.2 million to $55.1 million at June 30,
2003, from $53.0 million at December 31, 2002. This increase is the result of
net income for the first six months of 2003 of $2.2 million, combined with the
issue of stock under the Company's Employee Stock Purchase Plan of $102
thousand, and the issue of stock related to exercise of warrants and options and
the issue of stock grants of $189 thousand. These increases were partially
offset by a decrease in other comprehensive income related to an unrealized gain
in the Company's bond portfolio of $225 thousand, the payment of dividends on
the Series C Preferred Stock of $62 thousand, and the recording of offering
expenses of the Series C Preferred Stock issue to additional paid-in capital of
$11 thousand.
Non-accrual loans were $439 thousand at June 30, 2003, a decrease of $1.1
million or 71.4%, compared to the balance of $1.5 million at December 31, 2002.
These loans were reclassified under the Bank's policy of transferring loans to
non-accrual status when they become more than 90 days past due on either
principal or interest. The Company believes the specific reserves placed against
these loans are adequate, and payment is being sought from secondary sources,
such as the sale of collateral.
Allowance for Loan Losses
- -------------------------
Management determines the allowance for loan losses by establishing a general
allowance by loan pool determined for groups of smaller, homogenous loans
possessing similar characteristics and non-homogeneous loans that are not
classified. All classified loans are reviewed on an individual basis.
- 18 -
General Allowance
It is difficult for a lending institution the size of the Bank to use migration
analysis or other more sophisticated approaches due to the small size of the
loan portfolio, and the significant changes in the lending strategy and mix of
the loan portfolio from the date of the Merger. For this reason, a reasonable
indicator of the Bank's potential future losses in the non-criticized and
non-specialized pools of loans is the historical performance of the Bank's peer
group on a rolling four-quarter basis. This information is gathered quarterly
from the Uniform Bank Performance Report provided by the Federal Financial
----------------------------------
Institutions Examination Council. As the bank matures, and growth stabilizes, it
is management's intention to replace this peer group methodology with the actual
loss experience of the Bank.
Added to the peer group historical performance are those current conditions that
are probable to impact future loan losses. To account for these current
conditions, management has reviewed various factors to determine the impact on
the current loan portfolio. This methodology involves determining a range for
each current condition adjustment, "lower range to upper range". The "lower
range" represents management's opinion of a higher near term probability. The
"upper range" represents management's opinion of a lower near term probability
that allows management to "shock" the loan portfolio and look at the level of
reserves required should an "upper range" scenario start to unfold. The
following current condition factors were considered in this analysis:
o Changes in lending policies and procedures, including underwriting
standards and collection, charge-off, and recovery practices.
o Changes in national and local economic and business conditions,
including the condition of various market segments.
o Changes in the nature and volume of the portfolio.
o Changes in the experience, ability, and depth of lending management
and staff.
o Changes in the volume and severity of past due and classified
loans; and the volume of non-accruals, trouble debt restructurings
and other loan modifications.
o The existence and effect of any concentrations of credit, and
changes in the level of such conditions.
o The effect of external factors, such as competition and legal and
regulatory requirements, on the level of estimated credit losses in
the Bank's portfolio.
Specific Allowance
Management believes that given the small number of classified loans, type of
historical loan losses, and the nature of the underlying collateral, creating
specific allowances for classified assets results in the most accurate and
objective allowance. Should the number of these types of assets grow
substantially, other methods may have to be considered.
The method used in setting the specific allowance uses current appraisals as a
starting point, based on the Bank's possible liquidation of the collateral. On
assets other than real estate, which tend to depreciate rapidly, another current
valuation is used. For instance, in the case of commercial loans collateralized
by automobiles, the current NADA wholesale value is used. On collateral such as
over-the-road equipment, trucks or heavy equipment, valuations are sought from
firms or persons knowledgeable in the area, and adjusted for the probable
condition of the collateral. Other collateral such as furniture, fixtures and
- 19 -
equipment, accounts receivable, and inventory, are considered separately with
more emphasis given to the borrower's financial condition and trends rather than
the collateral support. The value of the collateral is then discounted for
estimated selling cost.
Summary
"Loans" in the following two paragraphs refers to loans held for investment.
-------------------------
The various methodologies included in this analysis take into consideration the
historic loan losses and specific allowances. In addition, the allowance
incorporates the results of measuring impaired loans as provided by Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures". These accounting standards
prescribe the measurement methods, income recognition and disclosures related to
impaired loans. Specific allowances totaled $2.6 million at June 30, 2003. The
range for the allowance for loan losses at June 30, 2003, including specific
allowances, was determined to be between $6.3 million or 1.00% of loans (low
range) and $10.3 million or 1.64% of loans (high range).
At June 30, 2003, the Bank's total allowance for loan losses was $8.0 million or
1.28% of loans as compared to $7.3 million or 1.32% of loans at December 31,
2002. Criticized/Classified assets have decreased when measured against loans
outstanding. This is primarily attributable to the charge-off during the first
quarter of certain credits for which specific reserves were established at the
end of 2002. At June 30, 2003, this benchmark (Criticized/Classified) was 3.50%
of loans outstanding compared to 4.5% at December 31, 2002. Past due loans have
increased to .68% of loans outstanding at June 30, 2003 compared to .14% at
December 31, 2002. Non-Performing Assets have declined as a percentage of total
loans including other real estate owned to .17% at June 30, 2003 versus .78% at
December 31, 2002. Net loan losses for the first six months of 2003 were $1.1
million or .19% of average loans outstanding for the period, compared to $131
thousand, or .03% of average loans for the same period in 2002.
LIQUIDITY
The Company, through its subsidiary, the Bank, has traditionally maintained
levels of liquidity above levels required by regulatory authorities. The Bank's
operational needs, demand for loan disbursements, and savings withdrawals can be
met by loan principal and interest payments received, new deposits, and excess
liquid assets. Significant loan demand, deposit withdrawal, increased
delinquencies and increased real estate acquired in settlement of loans could
alter this condition. Management does not foresee any liquidity problems for the
remainder of 2003.
Liquidity and Sources of Capital
- --------------------------------
Liquidity is the Company's ability to meet all deposit withdrawals immediately,
while also providing for the credit needs of customers. The June 30, 2003
balance sheet evidences a satisfactory liquidity position as total cash and cash
equivalents amounted to $120.2 million, representing 13.0% of total assets.
Investment securities available for sale amounted to $46.1 million, representing
5.0% of total assets. These securities provide a secondary source of liquidity
since they can be converted into cash in a timely manner. The Company's ability
to maintain and expand its deposit base and borrowing capabilities are also a
source of liquidity. For the six-month period ended June 30, 2003, total
deposits increased from $664.9 million at December 31, 2002 to $767.4 million,
or 15.4%. During this period, repurchase agreements sold increased from $4.7
million to $51.0 million, or 995.1%, and other borrowed funds increased from
$9.9 million to $18.9 million, or 90.2%. There can be no assurance that the
Company will be able to maintain this level of growth. The Company's management
closely monitors and maintains appropriate levels of interest earning assets and
- 20 -
interest bearing liabilities so that maturities of assets are such that adequate
funds are provided to meet customer withdrawals and loan demand. There are no
trends, demands, commitments, events or uncertainties that will result in, or
are reasonably likely to result in, the Company's liquidity increasing or
decreasing in any material way.
The Company's Board of Directors and executive officers are committed to
maintaining capital at a level sufficient to protect depositors, provide for
reasonable growth, and fully comply with all regulatory requirements.
In December 2001, April 2002, June 2002, December 2002, and June 2003, the
Company participated in pooled trust preferred offerings. By issuing trust
preferred securities through its subsidiary trusts, the Company was able to
increase its Tier 1 capital for regulatory purposes without diluting the
ownership interests of its common shareholders. Also, dividends paid on trust
preferred securities are deductible as interest expense for income tax purposes.
For the specific transactions, terms and rates of the Company's trust preferred
securities issues, please refer to footnote 6 of Item 1 above, together with
footnote 13 of the Company's consolidated financial statements for the years
ended December 31, 2002, 2001 and 2000 filed in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. At June 30,
2003, the net proceeds from pooled trust preferred trust offerings included in
the calculation of Tier 1 capital for regulatory purposes is $19.5 million.
The table below illustrates the Bank's regulatory capital ratios at June 30,
2003:
Minimum
June 30, Regulatory
Bank 2003 Requirement
- ---- ----------------- -----------------
Tier 1 Capital 9.99% 4.00%
Total risk-based capital ratio 11.06% 8.00%
Leverage ratio 8.70% 4.00%
Neither the Company nor its subsidiaries have historically incurred off-balance
sheet obligations through the use of or investment in off-balance sheet
derivative financial instruments or structured finance or special purpose
entities organized as corporations, partnerships or limited liability companies
or trusts.
On July 16, 2003, the Company filed a registration statement with the Securities
and Exchange Commission for a planned underwritten follow-on primary public
offering of its common stock. The registration statement covers 2,300,000 shares
(including 300,000 shares which may be issued solely to cover over-allotments)
of common stock for sale.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
The Company and its representatives may from time to time make written or oral
statements that are "forward-looking" and provide other than historical
information, including statements contained in the Form 10-Q, the Company's
other filings with the Securities and Exchange Commission or in communications
to its shareholders. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different from any results, levels of activity, performance or achievements
expressed or implied by any forward-looking statement. These factors include,
among other things, the risk factors listed below.
In some case, the Company has identified forward-looking statements by such
words or phrases as "will likely result," "is confident that," "expects,"
"should," "could," "may," "will continue to," "believes," "anticipates,"
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"predicts," "forecasts," "estimates," "projects," "potential," "intends" or
similar expressions identifying "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, including the negative
of those words and phrases. These forward-looking statements are based on
management's current views and assumptions regarding future events, future
business conditions and the outlook for the Company based on currently available
information. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed in, or implied by, these statements. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying important
factors that could affect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. Among the factors that could have an impact on the Company's ability
to achieve operating results and growth plan goals are:
o Management's ability to reduce and effectively manage interest rate
risk and the impact of interest rates in general on the volatility
of the Company's net interest income;
o Fluctuations in the value of the Company's investment securities;
o The ability to attract and retain senior management experienced in
banking and financial services;
o The sufficiency of allowances for possible loan losses to absorb
the amount of actual future losses inherent in the existing
portfolio of loans;
o The Company's ability to adapt successfully to technological
changes to compete effectively in the marketplace;
o Credit risks and risks from concentrations (by geographic area and
by industry) within the Bank's loan portfolio;
o The effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and
other mutual funds and other financial institutions operating in
the Company's market or elsewhere or providing similar services;
o The failure of assumptions underlying the establishment of reserves
for loan losses and estimations of values of collateral and various
financial assets and liabilities;
o Volatility of rate sensitive deposits;
o Operational risks, including data processing system failures or
fraud;
o Asset/liability matching risks and liquidity risks;
o The limited operating history of our wholesale residential mortgage
banking division;
o Risks associated with the operation of our wholesale residential
mortgage banking division;
o Changes in the economic environment, competition or other factors
that may influence the anticipated growth rate of loans and
deposits, the quality of the loan portfolio and loan and deposit
pricing and Company's ability to successfully pursue acquisition
and expansion strategies;
o The impact from liabilities arising from legal or administrative
proceedings the financial condition of the Company;
o Governmental monetary and fiscal policies, as well as legislative
and regulatory changes, that may result in the imposition of costs
and constraints on the Company through higher FDIC insurance
premiums, significant fluctuations in market interest rates and
operational limitations;
o Changes in general economic or industry conditions, nationally or
in the communities in which the Bank conducts business;
o Changes in accounting principles, policies or guidelines affecting
the businesses conducted by the Company or its affiliates;
o Acts of war or terrorism; and
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o Other economic, competitive, governmental, regulatory and technical
factors affecting the Bank's operations, products, services, and
prices.
The Company wishes to caution that the foregoing list of important factors may
not be all-inclusive and specifically declines to undertake any obligation to
publicly update or revise any forward-looking statements that have been made to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company's financial performance is subject to risk from interest rate
fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-earning liabilities
subject to repricing over a specified period and the amount of change in
individual interest rates. In the current interest rate environment, the
liquidity and maturity structure of the Company's assets and liabilities are
important to the maintenance of acceptable performance levels. A decreasing rate
environment negatively impacts earnings as the Company's rate-sensitive assets
generally reprice faster than its rate-sensitive liabilities. Conversely, in an
increasing rate environment, earnings are positively impacted. This
asset/liability mismatch in pricing is referred to as gap ratio and is measured
as rate sensitive assets divided by rate sensitive liabilities for a defined
time period. A gap ratio of 1.00 means that assets and liabilities are perfectly
matched as to repricing. Management has targeted gap ratio guidelines for a
one-year time horizon of between .80 and 1.20 for the Bank. At June 30, 2003,
the Bank had a cumulative gap ratio of approximately 1.18 for the one-year
period ending June 30, 2004, and a cumulative gap ratio of 2.05 for the
three-month time period. Given these gap ratios, over the next three-month
period, rate-sensitive assets will reprice faster than rate-sensitive
liabilities, and for the following nine-month period, rate sensitive liabilities
will reprice faster than rate-sensitive assets.
Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities, which are not reflected in the interest
sensitivity analysis. Prepayments may have significant effects on the Company's
net interest margin. Because of these factors, in a static test, interest
sensitivity gap reports may not provide a complete assessment of the Company's
exposure to changes in interest rates. Accordingly, management also utilizes
computerized interest rate simulation analysis to determine the Company's
interest rate sensitivity. The Company is in an asset sensitive gap position for
the first year, then moves into a matched position through the five year period.
Overall, due to the factors cited, current simulation results indicate a
relatively low sensitivity to parallel shifts in interest rates. A liability
sensitive company will generally benefit from a falling interest rate
environment as the cost of interest-bearing liabilities falls faster than the
yields on interest-bearing assets, thus creating a widening of the net interest
margin. Conversely, an asset sensitive company will benefit from a rising
interest rate environment as the yields on earning assets rise faster than the
costs of interest-bearing liabilities. Management also evaluates economic
conditions, the pattern of market interest rates and competition to determine
the appropriate mix and repricing characteristics of assets and liabilities
required to produce a targeted net interest margin.
In addition to the gap analysis, management uses rate shock simulation to
measure the rate sensitivity of its balance sheet. Rate shock simulation is a
modeling technique used to estimate the impact of changes in rates on the
Company's net interest margin. The Company measures its interest rate risk by
estimating the changes in net interest income resulting from instantaneous and
sustained parallel shifts in interest rates of plus or minus 200 basis points
over a period of twelve months. The Company's most recent rate shock simulation
analysis, performed as of June 30, 2003, indicates that a 200 basis point
increase in rates would cause an increase in net interest income of $4.8 million
over the next twelve-month period. Conversely, a 200 basis point decrease in
rates would cause a decrease in net interest income of $2.5 million over a
twelve-month period.
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This simulation is based on management's assumption as to the effect of interest
rate changes on assets and liabilities and assumes a parallel shift of the yield
curve. It also includes certain assumptions about the future pricing of loans
and deposits in response to changes in interest rates. Further, it assumes that
delinquency rates would not change as a result of changes in interest rates
although there can be no assurance that this will be the case. While this
simulation is a useful measure of the Company's sensitivity to changing rates,
it is not a forecast of the future results and is based on many assumptions that
if changed, could cause a different outcome. In addition, a change in U.S.
Treasury rates in the designated amounts accompanied by a change in the shape of
the Treasury yield curve would cause significantly different changes to net
interest income than indicated above.
At June 30, 2003, the Company was not engaged in trading activities.
The Company enters into interest rate swap agreements to manage its exposure to
changes in interest rates and to convert the fixed rate on certain brokered
certificates of deposit to a floating rate in order to more closely match
interest rate sensitivity between selected assets and liabilities. The Company
does not use derivative financial instruments for speculative purposes. As is
customary for these types of instruments, the Company does not require
collateral or other security from other parties to these instruments. By their
nature all such instruments involve risk, including the credit risk of
nonperformance by counterparties. However, at June 30, 2003, in management's
opinion there was no significant risk of loss in the event of nonperformance of
the counterparties to these financial instruments.
Item 4. Controls and Procedures
In order to ensure that the information we must disclose in our filings with the
Securities and Exchange Commission is recorded, processed, summarized, and
reported on a timely basis, we have formalized our disclosure controls and
procedures. Our Chief Executive Officer and Chief Financial Officer have
reviewed and evaluated the effectiveness of our disclosure controls and
procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of June
30, 2003. Based on such evaluation, such officers have concluded that, as of
June 30, 2003, our disclosure controls and procedures were effective in timely
alerting them to material information relating to us (and our consolidated
subsidiaries) required to be included in our periodic SEC filings. There has
been no change in our internal control over financial reporting during the
quarter ended June 30, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
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Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the Company's shareholders, three items were
submitted to a vote of the common shareholders:
(a) Clay M. Biddinger, Wilford C. Lyon, Jr., M.G. Sanchez and T. Edwin
Stinson, Jr. were re-elected as directors of the Company, to succeed
themselves for a term of three years, expiring at the annual meeting
of shareholders in 2006. Each of the directors received a minimum of
5,477,743 votes to re-elect, or 95% of the shares voted at the
meeting.
(b) An amendment to the Company's Second Amended and Restated Incentive
Compensation Plan was approved by the shareholders, with 2,133,214
shares, or 77% of the shares voted on this proposal at the meeting,
voting in favor of the amendment, 624,783 shares voting against,
17,855 shares abstaining, and 2,789,029 shares recorded as broker
non-votes.
(c) An amendment to the Company's 1998 Stock Option Plan was approved by
the shareholders, with 2,166,201, or 79% of the shares voted on this
proposal at the meeting, voting in favor of the amendment, 588,549
shares voting against, 21,102 shares abstaining and 2,789,029 shares
recorded as broker non-votes.
(d) An amendment to the Company's Employee Stock Purchase Plan was
approved by the shareholders, with 2,574,320 shares, or 93% of the
shares voted on this proposal at the meeting voting for approval,
164,927 shares voting against, 36,605 shares abstaining, and 2,789,029
shares recorded as broker non-votes.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
4.1 Indenture, dated June 26, 2003, between Florida Banks, Inc.
and State Street Bank and U.S. Bank National Association.
4.2 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.
10.1 Placement Agreement, dated June 16, 2003, between Florida
Banks, Inc., FTN Capital Markets and Keefe, Bruyette & Woods,
Inc.
10.2. Subscription Agreement, dated June 26, 2003, between Florida
Banks, Inc., Florida Banks Statutory Trust III and Preferred
Term Securities X, Ltd.
10.3 Guarantee Agreement, dated June 26, 2003, by and between
Florida Banks, Inc. and State Street Bank and U.S. Bank
National Association.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
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32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On April 25, 2003, the Company filed a report on Form 8-K
(furnishing information under Items 7 and 12) to release
financial results for the quarter ended March 31, 2003 and
announce conference call information.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Florida Banks, Inc.
Date: August 14, 2003 By: /s/ Charles E. Hughes, Jr.
--------------------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
Date: August 14, 2003 By: /s/ T. Edwin Stinson, Jr.
-------------------------
T. Edwin Stinson, Jr.
Chief Financial Officer
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Exhibits.
4.1 Indenture, dated June 26, 2003, between Florida Banks, Inc.
and State Street Bank and U.S. Bank National Association.
4.2 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.
10.1 Placement Agreement, dated June 16, 2003, between Florida
Banks, Inc., FTN Capital Markets and Keefe, Bruyette & Woods,
Inc.
10.2 Subscription Agreement, dated June 26, 2003, between Florida
Banks, Inc., Florida Banks Statutory Trust III and Preferred
Term Securities X, Ltd.
10.3 Guarantee Agreement, dated June 26, 2003, by and between
Florida Banks, Inc. and State Street Bank and U.S. Bank
National Association.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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