10-Q 1 flabanks10q.txt INITIAL FILING 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, 2001 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 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 OUTSTANDING AT JUNE 29, 2001 PER SHARE 5,709,004 Item 1. Financial Statements FLORIDA BANKS, INC. CONDENSED BALANCE SHEETS (Unaudited) ------------------------------------------------------------------------------------------------------------------------------------ June 30, December 31, 2001 2000 ASSETS CASH AND DUE FROM BANKS $ 18,839,207 $ 12,730,964 FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS PURCHASED 50,747,000 30,957,000 ---------- ---------- Total cash and cash equivalents 69,586,207 43,687,964 INVESTMENT SECURITIES: Available for sale, at fair value (cost $33,684,088 and $32,039,307 at June 30, 2001 and December 31, 2000) 34,068,873 32,061,545 Held to maturity, at cost (fair value $4,460,118 and $3,486,595 at June 30, 2001 and December 31, 2000) 4,315,117 3,428,558 Other investments 1,402,700 1,266,000 --------- --------- Total Investment Securities 39,786,690 36,756,103 LOANS: Commercial real estate 172,082,422 158,653,667 Commercial 126,429,879 102,391,117 Residential mortgage 14,085,321 9,795,665 Consumer 17,635,998 13,036,447 Credit card and other loans 1,649,699 1,747,145 --------- --------- Total loans 331,883,319 285,624,041 Allowance for loan losses (4,000,898) (3,510,677) Net deferred loan fees (173,695) (98,421) -------- ------- Net loans 327,708,726 282,014,943 PREMISES AND EQUIPMENT, NET 3,360,304 3,300,170 ACCRUED INTEREST RECEIVABLE 1,981,917 1,897,303 DEFERRED INCOME TAXES, NET 4,393,762 4,605,153 DERIVATIVE INSTRUMENTS 398,198 OTHER ASSETS 555,804 535,408 ------- ------- TOTAL ASSETS $ 447,771,608 $ 372,797,044 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS: Noninterest-bearing demand $ 45,068,303 $ 41,965,131 Interest-bearing demand 17,998,133 12,259,897 Regular savings 55,042,716 46,121,007 Money market accounts 4,601,680 2,795,661 Time $100,000 and over 143,256,920 116,824,179 Other time 85,663,613 85,273,577 ---------- ---------- Total deposits 351,631,365 305,239,452 REPURCHASE AGREEMENTS SOLD 40,656,501 18,812,378 OTHER BORROWED FUNDS 7,241,017 7,223,402 ACCRUED INTEREST PAYABLE 1,764,296 2,206,379 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 789,418 758,994 ------- ------- Total liabilities 402,082,597 334,240,605 ----------- ----------- SHAREHOLDERS' EQUITY: Series B Preferred Stock, $68.00 par value, 1,000,000 shares authorized, 100,401 6,827,268 and 0 shares issued and outstanding, respectively Common stock, $.01 par value; 30,000,000 shares authorized; 59,501 59,298 5,950,104 and 5,929,751 shares issued, respectively Additional paid-in capital 46,705,771 46,750,329 Accumulated deficit (deficit of $8,434,037 eliminated upon quasi-reorganization on December 31, 1995) (6,636,683) (6,760,222) Treasury stock, 241,100 shares at cost (1,506,836) (1,506,836) Accumulated other comprehensive income, net of tax 239,990 13,870 ------- ------ Total shareholders' equity 45,689,011 38,556,439 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 447,771,608 $ 372,797,044 ============= ============= See notes to condensed financial statements.
2 FLORIDA BANKS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) ------------------------------------------------------------------------------------------------------------------------------------ Three-Month Period Ended Six-Month Period Ended June 30, June 30, ------------------------------ ------------------------------- 2001 2000 2001 2000 -------------- -------------- -------------- -------------- INTEREST INCOME: Loans, including fees $6,643,186 $4,744,894 $13,410,101 $8,453,565 Investment securities 655,886 633,698 1,353,715 1,189,205 Federal funds sold 239,248 367,929 531,216 583,762 ------- ------- ------- ------- Total interest income 7,538,320 5,746,521 15,295,032 10,226,532 ========= ========= ========== ========== INTEREST EXPENSE: Deposits 3,756,127 2,893,003 7,701,825 4,996,496 Repurchase agreements 349,675 212,142 741,334 383,701 Borrowed funds 92,477 96,983 188,634 196,458 ------ ------ ------- ------- Total interest expense 4,198,279 3,202,128 8,631,793 5,576,655 --------- --------- --------- --------- NET INTEREST INCOME 3,340,041 2,544,393 6,663,239 4,649,877 PROVISION FOR LOAN LOSSES 384,029 339,328 623,413 709,456 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,956,012 2,205,065 6,039,826 3,940,421 --------- --------- --------- --------- NONINTEREST INCOME: Service fees 291,333 141,114 515,580 265,228 Loss on sale of available for sale investment (12) (2,725) (12) (8,950) securities Other noninterest income 112,111 63,620 206,783 96,307 ------- ------ ------- ------ 403,432 202,009 722,351 352,585 ------- ------- ------- ------- NONINTEREST EXPENSES: Salaries and benefits 2,003,631 1,766,043 4,164,968 3,451,384 Occupancy and equipment 426,887 377,699 863,372 731,375 Data processing 168,178 115,998 331,447 191,963 Other 658,274 531,499 1,203,886 978,915 ------- ------- --------- ------- 3,256,970 2,791,239 6,563,673 5,353,637 --------- --------- --------- --------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 102,474 (384,165) 198,504 (1,060,631) PROVISION (BENEFIT) FOR INCOME TAXES 39,495 (139,427) 74,965 (399,115) ------ -------- ------ -------- NET INCOME (LOSS) $62,979 $(244,738) $123,539 $(661,516) ======= ========= ======== ========= INCOME (LOSS) PER COMMON SHARE: Basic $0.01 $(0.04) $0.02 $(0.12) ===== ====== ===== ====== Diluted $0.01 $(0.04) $0.02 $(0.12) ===== ====== ===== ====== See notes to condensed financial statements.
3 Preferred Stock Common Stock Additional ------------------------------------------------------- Paid-In Shares Par Value Shares Par Value Capital BALANCE, JANUARY 1, 2000 5,853,756 $58,538 $46,383,936 Comprehensive loss: Net loss Unrealized gain on available for sale investment securities, net of tax of $411,821 Comprehensive loss Issuance of common stock to Employee Stock Purchase Plan 75,995 760 366,393 Purchase of treasury stock -------- -------- -------- -------- -------- BALANCE, DECEMBER 31, 2000 5,929,751 59,298 46,750,329 Comprehensive income: Net Income Unrealized gain on available for sale investment securities, net of tax of $ 125,184 Comprehensive income Issuance of common stock to Employee Stock Purchase Plan 20,353 203 91,792 Issuance of Series B Preferred Stock 100,401 $6,827,268 (136,350) Purchase of treasury stock ======= ========== ========= ======= =========== BALANCE, JUNE 30, 2001 100,401 $6,827,268 5,950,104 $59,501 $46,705,711 Accumulated Other Comprehensive Accumulated Treasury Income (loss) Deficit Stock Net of Tax Total BALANCE, JANUARY 1, 2000 ($5,680,069) ($858,844) ($668,706) $ 39,234,855 Comprehensive loss: Net loss (1,080,153) (1,080,153) Unrealized gain on available for sale investment securities, net of tax of $ 411,821 682,576 682,576 ------- Comprehensive loss (397,577) Issuance of common stock to Employee Stock Purchase Plan 367,153 Purchase of treasury stock (647,992) (647,992) -------- -------- -------- -------- BALANCE, DECEMBER 31, 2000 (6,760,222) (1,506,836) 13,870 38,556,439 Comprehensive income: Net Income 123,539 123,539 Unrealized gain on available for sale investment securities, net of tax of $ 125,184 226,120 226,120 ------- Comprehensive income 349,659 Issuance of common stock to Employee Stock Purchase Plan 91,995 Issuance of Series B Preferred Stock 6,690,918 Purchase of treasury stock - =========== =========== ========= ============ BALANCE, JUNE 30, 2001 $(6,636,683) $(1,506,836) $ 239,990 $ 45,689,011
4 FLORIDA BANKS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) ------------------------------------------------------------------------------------------------------------------------------------ Six-Month Period Ended June 30, -------------------------------------- OPERATING ACTIVITIES: 2001 2000 -------------------------------------- Net income (loss) $ 123,539 $ (661,516) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 372,441 305,175 Loss on disposition of furniture and equipment 6,577 Deferred income tax provision (benefit) 74,965 (399,115) Loss on sale of securities 8,950 Amortization of premiums on investments, net (113,285) (64,716) Provision for loan losses 623,413 709,456 Loss on derivative instruments 4,620 Increase in accrued interest receivable (84,614) (514,146) (Decrease) increase in accrued interest payable (442,083) 893,908 (Increase) decrease in other assets (20,396) 48,983 Increase (decrease) in other liabilities 30,424 (72,709) ------ ------- Net cash provided by operating activities 575,601 254,270 ------- ------- INVESTING ACTIVITIES: Proceeds from sales, paydowns and maturities of investment securities: Available for sale 6,314,181 6,182,146 Held to maturity 2,579,079 Purchases of investment securities: Available for sale (7,950,301) (11,118,249) Held to maturity (3,361,015) (3,069,472) Other investments (136,700) (166,850) Net increase in loans (46,432,802) (65,280,846) Purchases of premises and equipment (439,152) (673,331) -------- -------- Net cash used in investing activities (49,426,710) (74,126,602) ----------- ----------- FINANCING ACTIVITIES: Net increase in demand deposits, money market accounts and savings accounts 19,661,131 6,164,966 Net increase in time deposits 26,535,565 76,566,922 Increase in repurchase agreements 21,844,123 4,229,420 Increase (decrease) in borrowed funds 17,615 (29,395) Purchase of treasury stock (647,992) Proceeds from sale of Series B preferred stock 6,690,918 --------- --------- Net cash provided by financing activities 74,749,352 86,283,921 ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 25,898,243 12,411,589 CASH AND CASH EQUIVALENTS: Beginning of period 43,687,964 25,958,628 ---------- ---------- End of period $ 69,586,207 $ 38,370,217 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 9,073,876 $ 4,772,436 NONCASH FINANCING ACTIVITIES: Proceeds from demand deposits used to purchase shares of common stock under Employee Stock Purchase Plan $ 91,995 $ 161,497
5 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION Florida Banks, Inc. (the "Company") was incorporated on October 15, 1997 for the purpose of becoming a bank holding company and acquiring First National Bank of Tampa (the "Bank"). On August 4, 1998, the Company completed its initial public offering and its merger (the "Merger") with the Bank pursuant to which the Bank was merged with and into Florida Bank No. 1, N.A., a wholly-owned subsidiary of the Company, and renamed Florida Bank, N.A. Shareholders of the Bank received 1,375,000 shares of common stock of the Company valued at $13,750,000. The Merger was considered a reverse acquisition for accounting purposes, with the Bank identified as the accounting acquiror. The Merger has been accounted for as a purchase, but no goodwill has been recorded in the Merger and the financial statements of the Bank have become the historical financial statements of the Company. The condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission related to interim financial statements. These unaudited condensed financial statements do not include all disclosures provided in the annual financial statements. The condensed financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report to Shareholders incorporated by reference into the Company's Form 10-K for the year ended December 31, 2000. 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, 2001, are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 2. EARNINGS PER COMMON SHARE The following is a reconciliation of the denominator used in the computation of basic and diluted earnings per common share. Three-Month Period Ended Six-Month Period Ended June 30, June 30, -------------------------------- -------------------------------- 2001 2000 2001 2000 --------------- --------------- --------------- --------------- Weighted average number of common shares outstanding - Basic 5,709,004 5,644,137 5,700,233 5,681,919 Incremental shares from the assumed conversion of stock options 2,093 - 3,329 - ----- ----- ----- ----- Total - Diluted 5,711,097 5,644,137 5,703,562 5,681,919 ========= ========= ========= =========
6 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (Continued) -------------------------------------------------------------------------------- The incremental shares from the assumed conversion of stock options for the three and six-month periods ended June 30, 2001 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. The exercise prices of stock options outstanding in the three and six-month periods ended June 30, 2000 was above the fair market value of the stock during that period, therefore the options are considered anti-dilutive for purposes of calculating the loss per share. 3. DERIVATIVE INSTRUMENTS The Company adopted Statement of Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, on January 1, 2001. This statement requires all derivative instruments to be recorded on the balance sheet at fair value. The following instruments qualify as derivatives as defined by SFAS No. 133: June 30, 2001 ------------------------------ Contract/Notional Fair Amount Value Interest rate swap agreements $5,000,000 $ 287,212 Foreign Currency Swap Agreements $2,000,000 $ 110,986 Interest rate swap agreements consist of two separate agreements which qualify for the fair value method of hedge accounting under the "short-cut method" based on the guidelines established by SFAS No. 133. Additionally, the Company entered into a foreign currency swap agreement during the first quarter of 2001. This swap agreement does not qualify for hedge accounting under SFAS No. 133. Accordingly, all changes in the fair value of the foreign currency swap agreement will be reflected in the earnings of the Company. The Company recognized a gain of $1,778 during the first quarter of 2001, and a loss of $6,398 during the second quarter of 2001 as a result of changes in the fair value of the foreign currency agreement. On January 1, 2001, the Company recorded an increase in total assets of $794,221 with a corresponding increase in liabilities as a result of the adoption of SFAS No. 133. As the fair value hedge is assumed to be completely effective under the "short-cut method", hedging gains and losses netted to zero at January 1, 2001 and the adoption of SFAS No. 133 had no effect on the earnings of the Company. 7 4. PREFERRED STOCK On June 29, 2001 the Company issued 100,401 shares of Series B Preferred stock for $68.00 per share in 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 Compounding, cumulative, cash dividends accrue at seven percent annually and are payable quarterly in arrears. Liquidation Preference In the event of any liquidation, dissolution or winding up of the affairs of the Company, the holders of Series B preferred stock at that time shall receive $68.00 per share plus an amount equal to accrued and unpaid dividends thereon through and including the date of distribution prior to any distribution to holders of common stock. The liquidation preference at June 30, 2001 was $6,828,577. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the financial statements and related notes appearing elsewhere in this Form 10-Q. RESULTS OF OPERATIONS Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 The Company's net income for the second quarter of 2001 was $62,979, compared to a loss of ($245,000) for the three-month period ending June 30, 2000. Basic income per share for the second quarter of 2001 was $.01 compared to basic loss per share of ($.04) for the second quarter of 2000. The increase in net income can be primarily attributed to increased net interest income. The increase in net interest income of $796,000 or 31.3%, to $3.3 million for the second quarter of 2001 compared to $2.5 million the second quarter in 2000, consists of an increase in interest income of $1.8 million, or 31.2%, and an increase in interest expense of $1.0 million, or 31.1%. The increase in interest income in the second quarter of 2001 is primarily attributable to an increase of $1.9 million in interest and fees on loans resulting from the growth in the loan portfolio. The increase in interest expense resulted primarily from an increase of $863,000 in interest on deposits attributable to the growth in deposits. The provision for loan losses charged to operations increased $45,000 to $384,000 for the second quarter of 2001 from $339,000 in the second quarter of 2000. This increase reflects the growth of the overall loan portfolio. Non-interest income increased 99.7% or $201,000 to $403,000 for the three months ended June 30, 2001 from $202,000 for the three months ended June 30, 2000. The increase in non-interest income primarily resulted from an increase in service fees of $150,000 to $291,000 at June 30, 2001 from $141,000 at June 30, 2000. The increase in service fees resulted primarily from an increase in deposits. Non-interest expense increased $466,000 or 16.7% to $3.3 million for the three-month period ended June 30, 2001 compared to $2.8 million for the three-month period ended June 30, 2000. The increase in non-interest expense resulted primarily from increases in salaries and benefits, data processing expenses, and other expenses. Salaries and benefits expenses increased $238,000 to $2.0 million for the second quarter of 2001 compared to $1.8 million for the second quarter of 2000. This increase is primarily the result of additional staff associated with the overall growth of the Company's business. Data processing expenses increased $52,000 or 45.0% to $168,000 for the three months ended June 30, 2001 as compared to $116,000 for the same period in 2000. This increase resulted primarily from the additional processing expenses associated with the increased volume of loans and deposit accounts. Other expenses increased $127,000, or 23.9% to $658,000 for the second quarter of 2001 compared to $531,000 for the second quarter of 2000. 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 postage and courier expenses, and accounting and legal expenses. A provision for income taxes of $39,000 was recognized for the three-month period ended June 30, 2001 as compared to a benefit for income taxes of ($139,000) for the same period ended June 30, 2000. These provisions and benefits for income taxes represent an estimated effective annual tax rate of approximately 38%. 9 Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 The Company's net income for the first half of 2001 was $124,000, compared to a loss of ($662,000) for the six-month period ending June 30, 2000. Basic income per share for the first half of 2001 was $.02 compared to basic loss per share of ($.12) for the first half of 2000. The increase in net income can be primarily attributed to increased net interest income. The increase in net interest income of $2.0 million or 43.3%, to $6.7 million for the first half of 2001 compared to $4.6 million the first half in 2000, consists of an increase in interest income of $5.0 million, or 49.6%, and an increase in interest expense of $3.0 million, or 54.8%. The increase in interest income in the first half of 2001 is primarily attributable to an increase of $5.0 million in interest and fees on loans resulting from the growth in the loan portfolio. The increase in interest expense for the first half of 2001 is primarily attributable to an increase of $2.7 million in interest on deposits resulting from the growth in deposits. The provision for loan losses charged to operations decreased $86,000 to $623,000 for the first half of 2001 from $709,000 in the first half of 2000. This decrease reflects a slowing in the rate of growth of the overall loan portfolio. Non-interest income increased 104.8% or $370,000 to $722,000 for the six months ended June 30, 2001 from $353,000 for the six months ended June 30, 2000. The increase in non-interest income primarily resulted from an increase in service fees of $250,000 to $516,000 at June 30, 2001 from $265,000 at June 30, 2000. The increase in service fees resulted primarily from an increase in deposits. Other noninterest income increased $110,000 to $207,000 for the six months ended June 30, 2001 from $96,000 for the same period in 2000. This increase was primarily attributable to an increase in ACH/EFT (Automated Clearing House/Electronic Funds Transfer) activities. Non-interest expense increased $1.2 million or 22.6% to $6.6 million for the six-month period ended June 30, 2001 compared to $5.4 million for the six-month period ended June 30, 2000. The increase in non-interest expense resulted primarily from increases in salaries and benefits, data processing, and other expenses. Salaries and benefits expenses increased $714,000 to $4.2 million for the first half of 2001 compared to $3.5 million for the first half of 2000. This increase is primarily the result of additional staff associated with the overall growth of the Company's business. Data processing expenses increased $139,000 or 72.7% to $331,000 for the six months ended June 30, 2001 as compared to $192,000 for the same period in 2000. This increase resulted primarily from the additional processing expenses associated with the increased volume of loans and deposit accounts. Other expenses increased $225,000, or 23.0% to $1.2 million for the first half of 2001 compared to $979,000 for the first half of 2000. 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 included postage and courier expenses, travel, accounting and legal expenses and taxes and licenses. A provision for income taxes of $75,000 was recognized for the six-month period ended June 30, 2001 as compared to a benefit for income taxes of ($399,000) for the same period ended June 30, 2000. These provisions and benefits for income taxes represent an estimated effective annual tax rate of approximately 38%. 10 FINANCIAL CONDITION Total assets at June 30, 2001 were $447.8 million, an increase of $75.0 million or 20.1%, from $372.8 million at December 31, 2000. The increase in total assets primarily resulted from the investment of new deposit growth and other borrowed funds in loans and investment securities. Federal Funds sold increased $19.8 or 63.9% to $50.7 million at June 30, 2001 as compared to $31.0 million at December 31, 2000. These assets represent short-term reserves for future funding of loan growth. Investment securities increased $3.0 million or 8.25% to $39.8 million from $36.8 million at December 31, 2000. The increase in investment securities reflects investment of the proceeds of deposit and borrowings growth during the second half in excess of loan growth. Total loans increased $46.3 million, or 16.2%, to $331.9 million at June 30, 2001, from $285.6 million at December 31, 2000. The increase in total loans was funded by increases in depository accounts. The allowance for loan losses increased $490,000 or 14.0% for the first half of 2001. The increase resulted from net charge-offs of loans of $133,000 plus additional provisions of $623,000, during the six-month period ended June 30, 2001. The allowance for loan losses as a percent of total loans was 1.21% at June 30, 2001 and 1.23% at December 31, 2000. Management believes that such allowance for loan losses is sufficient to cover estimated losses in the Bank's loan portfolio. Deposits increased $46.4 million, or 15.2%, to $351.6 million at June 30, 2001 from $305.2 million at December 31, 2000. The increase in total deposits resulted from an increase of $3.1 million or 7.4% in non-interest deposits, an increase of $5.7 million or 46.8% in interest-bearing demand, an increase of $8.9 million or 19.3% in savings, an increase of $1.8 million or 64.6% in money market accounts, an increase of $26.4 million or 22.6% in time deposits $100,000 and over, and an increase of $390,000, or 0.5%, 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 resulted primarily from an increase in brokered deposits. Repurchase agreements sold increased $21.8 million, or 116.1%, to $40.7 million at June 30, 2001 from $18.8 million at December 31, 2000. This increase is primarily due to increased use of these instruments to help fund continued loan growth. Accrued interest payable decreased $442,000 or 20.0%, to $1.8 million at June 30, 2001 from $2.2 million at December 31, 2000. This decrease is due to a combination of factors, including a change in the mix of interest bearing liabilities, with more growth in categories which pay interest monthly or at other intervals prior to maturity, and a dramatic reduction in overall interest rates. Shareholders' equity increased by $7.1 million to $45.7 million at June 30, 2001, from $38.6 million at December 31, 2000. This increase is primarily the result of the private placement of $6.8 million of Series B Preferred Stock during the second quarter, combined with an increase in other comprehensive income related to an unrealized gain in the Company's bond portfolio of $226,000, and net income for the first half of 2001 of $124,000. Non-accrual loans increased $2.4 million to $3.9 million at June 30, 2001, compared to $1.5 million at December 31, 2000. The increase primarily resulted from loans outstanding to three customers being changed from accrual to non-accrual status during the first half of 2001. 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. 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 11 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 2001. 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, 2001 financial statements evidence a satisfactory liquidity position as total cash and cash equivalents amounted to $69.6 million, representing 15.5% of total assets. Investment securities amounted to $39.8 million, representing 8.9% 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, 2001, total deposits increased from $305.2 million at December 31, 2000 to $351.6 million, or 15.2%. 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 interest bearing liabilities so that maturities of assets are such that adequate funds are provided to meet customer withdrawals and loan demand. There are no trends, demands, commitments, events or uncertainties that will result in, or are reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way. The Company's Board and executive officers are committed to maintaining capital at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements. The table below illustrates the Bank's regulatory capital ratios at June 30, 2001: June 30, Regulatory Bank 2001 Requirement --------------------- ------------------- Tier 1 Capital 9.86 % 4.00 % Total risk-based capital ratio 11.01 % 8.00 % ===== ==== Leverage ratio 8.77 % 4.00 % ==== ==== 12 CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS The foregoing Management's Discussion and Analysis contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events, including, but not limited to, statements regarding growth in sales of the Company's products, profit margins and the sufficiency of the Company's cash flow for its future liquidity and capital resource needs. These forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. 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, 2001, the Company had a cumulative gap ratio of approximately .78 for the one-year period ending June 30, 2002. While this is slightly outside the targeted range, the faster repricing of liabilities is desirable in the falling rate environment which financial markets have experienced so far in 2001. The Company is closely monitoring the situation, and it should be able to bring the one-year gap back into the targeted range in the near future. At June 30, 2001, the Company had a cumulative gap ratio of 1.36 for the three-month time period. The Company has not established specific gap ratio guidelines 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 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 Company is in a liability sensitive gap position for the first year, then moves into a matched position through the five year period. Overall, due to the factors cited, current simulations results indicate a relatively low sensitivity to parallel shifts in interest rates. A liability sensitive company will generally benefit from a falling interest rate environment as the cost of interest-bearing liabilities falls faster than the yields on interest-bearing assets, thus creating a widening of the net interest margin. Conversely, an asset sensitive company will benefit from a rising interest rate environment as the yields on earning assets rise faster than the costs of interest-bearing liabilities. Management also evaluates economic conditions, the pattern of market interest rates and competition to determine the appropriate mix and repricing characteristics of assets and liabilities required to produce a targeted net interest margin. In addition to the gap analysis, management uses rate shock simulation to measure the rate sensitivity of its balance sheet. Rate shock simulation is a modeling technique used to estimate the impact of changes in rates on the Company's net interest margin. The Company measures its interest rate risk by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of plus or minus 200 basis points over a period of twelve months. The Company's most recent rate shock simulation 13 analysis, performed as of June 30, 2001, indicates that a 200 basis point increase in rates would cause an increase in net interest income of $478,000 over the next twelve-month period. Conversely, a 200 basis point decrease in rates would cause a decrease in net interest income of $651,000 over a twelve-month period. This simulation is based on management's assumption as to the effect of interest rate changes on assets and liabilities and assumes a parallel shift of the yield curve. It also includes certain assumptions about the future pricing of loans and deposits in response to changes in interest rates. Further, it assumes that delinquency rates would not change as a result of changes in interest rates although there can be no assurance that this will be the case. While this simulation is a useful measure of the Company's sensitivity to changing rates, it is not a forecast of the future results and is based on many assumptions that if changed, could cause a different outcome. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to net interest income than indicated above. At June 30, 2001, 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, 2001, in management's opinion there was no significant risk of loss in the event of nonperformance of the counterparties to these financial instruments. Part II. Other Information Item 1. Legal Proceedings No disclosure required. Item 2. Changes in Securities No disclosure required. Item 3. Defaults Upon Senior Securities No disclosure required. Item 4. Submission of Matters to a Vote of Security Holders At the annual meeting of the Company's shareholders, three items were submitted to a vote of the common shareholders: (a) Bruce J. Culpepper, Charles E. Hughes, Jr., W. Andrew Krusen, Jr. and David McIntosh 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 2004. Each of the directors received a minimum of 5,087,142 votes to re-elect, or 98% of the shares voted at the meeting. (b) The Company's Amended and Restated Incentive Compensation Plan was approved by the shareholders, with 4,739,384 shares, or 93% of the shares voted at the meeting, voting in favor of the Plan, 349,880 shares voting against and 26,760 shares abstaining. 14 (c) The shareholders ratified the Audit Committee's engagement of Deloitte & Touche, LLP as the Company's independent auditors, with 5,108,614, or 99% of the shares voted at the meeting voting for approval, 3,160 shares voting against and 4,250 shares abstaining. Item 5. Other Information No disclosure required. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. No Exhibits were required to be filed with this Report. (b) Reports on Form 8-K. No report on Form 8-K was filed by the Company for the three months ended June 30, 2001. 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 10, 2001 By: _________________________________ Charles E. Hughes, Jr. President and Chief Executive Officer Date: August 10, 2001 By: ___________________ T. Edwin Stinson, Jr. Chief Financial Officer 15