10-K 1 g88163e10vk.txt FLORIDA BANKS FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K --------------------- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2003 ------------------------------ Commission File No. 0-24683 FLORIDA BANKS, INC. A Florida corporation (IRS Employer Identification No. 58-2364573) 5210 Belfort Road Suite 310, Concourse II Jacksonville, Florida 32256 (904) 332-7770 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant (5,893,259 shares) on June 30, 2003 was approximately $67,949,276 based on the closing price of the registrant's common stock as reported on the NASDAQ National Market on June 30, 2003. As of March 16, 2004, there were 6,886,777 shares of $.01 par value common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE The registrant's definitive proxy statement to be delivered to shareholders in connection with the 2004 Annual Meeting of Shareholders are incorporated by reference in response to Part III of this Report. ================================================================================ TABLE OF CONTENTS
Item Number Page ------ ---- Part I 1. Business........................................................................ 3 2. Properties...................................................................... 23 3. Legal Proceedings............................................................... 25 4. Submission of Matters to a Vote of Security Holders............................. 25 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................................................... 25 6. Selected Financial Data......................................................... 27 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................... 29 7A. Quantitative and Qualitative Disclosures About Market Risk...................... 69 8. Financial Statements and Supplementary Data..................................... 69 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................... 69 9A. Controls and Procedures......................................................... 70 Part III 10. Directors and Executive Officers of the Registrant.............................. 71 11. Executive Compensation.......................................................... 71 12. Security Ownership of Certain Beneficial Owners and Management.........................71 13. Certain Relationships and Related Transactions.................................. 71 14. Principal Accounting Fees and Services.......................................... 71 Part IV 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................ 71 SIGNATURES 75
2 PART I ITEM 1. BUSINESS GENERAL Florida Banks, Inc. (the "Company") was formed in 1997 to create a statewide community banking system that would focus on the largest and fastest growing Florida banking markets. The Company began to operate in 1998 after it completed the acquisition of First National Bank of Tampa, which became the Company's wholly owned banking subsidiary and was subsequently named Florida Bank, N.A. (the "Bank"). The Company offers a broad range of traditional banking products and services, focusing primarily on small to medium-sized businesses with annual revenues between $5 million and $40 million. The Company currently operates community-banking offices in the Tampa, Jacksonville, Gainesville, Ft. Lauderdale, St. Petersburg/Clearwater, Ocala and West Palm Beach markets. As opportunities arise, it may also expand into other Florida market areas with demographic characteristics similar to the markets it currently serves. The Company has a community banking approach that emphasizes responsive and personalized service to its customers. The management of the Company ("management") believes that the significant consolidation in the Florida banking market has disrupted customer relationships as the larger out-of-state financial institutions operating in Florida have increasingly focused on larger corporate customers and standardized loan and deposit products and services. Generally, these products and services are offered through less personalized delivery systems, which has created a need for higher quality services to small and medium-sized businesses. In addition, consolidation of the Florida banking market has dislocated experienced and talented management, as well as, lending personnel. As a result of these factors, management believes that it has a substantial opportunity to attract additional banking customers and experienced management and lending personnel both within the markets it currently serves and in other Florida banking market areas. The Company's top five senior managers have an average of over 30 years of banking experience. The Company's growth and focus on small to medium-sized business customers have attracted strong local management and lending teams who have significant banking experience, strong community contacts and strong business development potential in the markets it currently serves and in other Florida banking market areas. Local bank presidents, who have an average of over 28 years of banking experience, run the Company's community banking offices. They have a high degree of local decision-making authority, including the ability to customize products and services to meet the specific needs of the local market. The Company's management is compensated based on profitability, growth and loan production goals, and each market area is supported by a local advisory board of directors, which is provided with financial incentives to assist in the development of banking relationships throughout the community. The Company provides a variety of support services to its community banking offices from its main office located in Jacksonville and its operations center in Tampa. These services include back office operations, investment portfolio management, credit administration and review, human resources, compliance, internal audit, administration, training and strategic planning. Functions such as core bank data processing, check clearing and other similar functions are currently outsourced to a major vendor. As a result, the Company can achieve cost efficiencies, maintain consistency in policies and procedures and allow its local management teams to concentrate on developing and enhancing customer relationships. Management believes it can leverage the Company's current infrastructure and systems to meet its growth and other financial goals. 3 The Company's business strategies have resulted in strong growth in assets and profitability. The Company intends to continue to grow its business and become more efficient by attracting additional small to medium-sized business customers in its existing Florida banking markets, leveraging its existing infrastructure and capacity, utilizing technology to enhance its customer service and maximize deposit growth, and expanding into additional Florida banking markets. The Company has two reporting segments, the commercial bank and the mortgage bank. The commercial bank segment provides its commercial customers such products as working capital loans, equipment loans and leases, commercial real estate loans, and other business related products and services. The mortgage bank segment originates mortgage loans through its network of mortgage brokers and sells these loans into the secondary market. RECENT DEVELOPMENTS On March 18, 2004, the Company announced that it entered into a definitive agreement to be acquired by The South Financial Group, Inc. ("South Financial") in an all-stock transaction. Under terms of the agreement, the Company's shareholders will receive 0.77 shares of South Financial common stock for each share of Florida Banks, Inc., subject to certain minimum price levels for South Financial common stock. In addition, outstanding options to purchase the Company's stock will be converted into options to acquire South Financial's common stock at the 0.77 exchange ratio. The transaction is expected to close in July 2004 and is subject to regulatory and Company shareholder approval. The Company's subsidiary, Florida Bank, N.A., will merge into South Financial's Florida banking subsidiary, Mercantile Bank. GROWTH HISTORY The Company has grown substantially in both size and profitability since its formation. The table below presents data relating to the growth of key areas of the Company's business for the last five fiscal years.
As of and For The Year Ended December 31, ---------------------------------------------------------- (Dollars in thousands) 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- Assets................................ $944,461 $756,066 $522,323 $372,797 $218,163 Loans held for investment, net of deferred fees...................... 690,590 550,455 401,444 285,526 157,517 Deposits.............................. 796,613 664,910 451,249 305,239 159,106 Shareholders' equity.................. 57,794 52,964 46,142 38,556 39,235 Net income (loss) applicable to common shares............................. 4,406 1,327 558 (1,080) (1,847) Non-performing loans to total loans... 0.38% 0.25% 0.36% 1.44% 1.46% Net charge-offs to average loans...... 0.19 0.09 0.21 0.12 0.80
The Company's historical financial results for fiscal 1999 to 2000 reflect the development of the Company in its early stages, notably in connection with initial start-up costs and the raising and retention of capital to fund its planned growth. In 1999 and 2000, the Company incurred significant non-interest expenses for the start-up and infrastructure costs described above, while revenue items gradually increased as it began to source and originate loans and other earning assets. The Company has maintained profitability and asset growth throughout the last three fiscal years. In the fourth quarter of 2002, the Company started its wholesale mortgage banking division that is managed as a separate line of business. The Company targets markets in the eastern United States for wholesale origination of both adjustable and fixed rate mortgage loans. To minimize interest rate risk, the Company sells the mortgage loans it originates on a servicing-released basis in the secondary markets to government agencies or other investors. The 4 Company has realized the following results in its mortgage banking division since its formation:
For the Year Ended December 31, -------------------------------- (Dollars in thousands) ................. 2003 2002 ------------ ------------- Mortgage loans originated .............. $1,079,475 $ 98,001 Net interest income .................... 4,073 62 Non-interest income .................... 11,079 1,355 Gain on sale of mortgage loans 8,870 1,093 Mortgage loan processing fees 2,209 262 Non-interest expense ................... 11,025 911 Income before income taxes ............. 4,127 505
THE FLORIDA BANKING MARKET The favorable demographic and economic characteristics of the Florida banking markets are key factors in the Company's ability to grow its assets, achieve its financial goals and create stockholder value. In addition, management believes that the consolidation in the Florida banking market since the early 1990s have created an underserved market of Florida-based, small and medium-sized businesses that the Company can successfully target. According to the U.S. Census Bureau, Florida is the fourth most populous state in the country with an estimated population in 2003 of approximately 17.0 million. In terms of population, Florida is expected to be among the five fastest-growing states in the U.S. over the period from 2002 to 2007, and the fastest-growing state of the most populous states over that period. Management believes that Florida's major metropolitan areas will benefit the most from this expansion. Approximately 37% of the total population and 40% of the non-farm businesses in Florida are located in the markets the Company currently serves. According to the Federal Deposit Insurance Corporation (the "FDIC"), the Florida banking markets have grown over the past four years, with statewide deposits increasing from $194.2 billion in 1998 to $268.2 billion in 2003. Florida's economy has broadened from a reliance on tourism, agriculture and retirement living to a diversified base that includes significant levels of industrial and commercial trade. Accordingly, the Company expects that the local Florida banking markets will grow faster than most in the U.S. with less volatility than experienced in the past, providing opportunities for strong growth and potential profitability for the Company. The Florida banking market is currently characterized by the dominance of large out-of-state financial institutions. Today, Florida's ten largest banking organizations by deposits are headquartered outside of Florida and more than 75% of the total deposits in the state are controlled by out-of-state organizations. In the mid 1990s, prior to it being purchased by Nations Bank, Barnett Bank was the largest in-state financial institution with almost 20% of the Florida banking market. Today, the largest Florida-based financial institution holds less than a 2% market share. Management believes that the continued consolidation within the Florida banking markets has created a unique opportunity to build a successful, locally oriented banking system. Further, management believes that many small and medium-sized companies are interested in banking with a company headquartered, and with decision-making authority, in Florida with established Florida bankers who have the expertise to act as trusted advisors. These customers are attractive to the Company because management believes that, if it can serve these customers properly, it will be able to establish long-term relationships and provide multiple products to them, enhancing the Company's overall profitability. The Company's community banking offices have been built around experienced bankers with lending expertise in the specific industries found in their market areas, allowing for responsive, personalized service. 5 STRATEGY The Company's objective is to further enhance its net income by continuing to grow and become more efficient. Any important aspect of the Company's growth strategy is the ability to service and effectively manage a large number of loans and deposit accounts in multiple markets in Florida. Accordingly, the Company has an operations infrastructure sufficient to support statewide lending and banking operations and has developed the following specific strategies, which are further discussed below: o Improve profitability by: o Leveraging existing infrastructure efficiently to support a larger volume of business and utilizing outsourcing to provide cost-effective operational support, and o Maximizing the efficiency and profitability of the wholesale mortgage banking operation. o Continue loan growth by: o Focusing on key metropolitan markets; o Attracting small and medium-sized business customers that require the attention and service that a community-oriented bank is well suited to provide; o Identifying and retaining local management teams that emphasize a high level of personalized customer service, and o Expanding into additional Florida banking markets. o Utilize technology to enhance customer service and maximize deposit growth. IMPROVE PROFITABILITY BY LEVERAGING EXISTING INFRASTRUCTURE EFFICIENTLY TO SUPPORT A LARGER VOLUME OF BUSINESS AND UTILIZING OUTSOURCING TO PROVIDE COST-EFFECTIVE OPERATIONAL SUPPORT. The Company has made significant investments in its infrastructure in order to centralize many of its critical operations, such as investment portfolio management, credit administration and review, human resources, compliance, internal audit, administration, training, strategic planning and data and loan application processing. Management believes that its existing infrastructure can accommodate substantial additional growth without substantial additional capital expenditures. Management further believes that its existing infrastructure allows the Company to grow its business both geographically and with respect to the size and number of loan and deposit accounts. Management also believes that the centralization of its administrative operations enables the Company to maximize efficiency through economies of scale, while allowing its bankers to focus on building and maintaining customer relationships. In addition, the Company utilizes outside service providers where they can increase the efficiency of its operations. Currently, the Company's data processing and certain bank operations, and almost all of its internal audit functions, are provided by outside service providers. The Company intends to continue to review its operations to determine where it can contain costs by using third party service providers. 6 IMPROVE PROFITABILITY BY MAXIMIZING THE EFFICIENCY AND PROFITABILITY OF THE WHOLESALE MORTGAGE BANKING OPERATION. In the fourth quarter of 2002, the Company launched its wholesale mortgage banking division by hiring its management staff from HomeSide Lending, Inc. after HomeSide was acquired by Washington Mutual, Inc. The Company targets markets in the eastern United States for origination of both adjustable and fixed rate mortgage loans. During the year ended December 31, 2003, the Company originated $1.1 billion in mortgage loan volume. The Company offers an extensive array of residential mortgage products, which are later, sold in the secondary market to governmental agencies or other investors. To minimize interest rate risk, these loans are sold on a servicing-released basis. The mortgage loans are originated primarily through a network of third party mortgage brokers. This distribution channel allows the Company to generate high levels of loan volume on a cost-effective basis through its 15 sales personnel who are primarily paid on a commission-only basis. In addition, as mortgage origination volume has increased during 2003, the Company has made the strategic decision to hire predominantly temporary and contract employees to meet this increased volume. As a result, approximately 25% of the personnel employed in the Company's mortgage operation are temporary employees and another 13% are commission-only employees. Management believes this will allow the Company to vary the cost structure of its mortgage origination platform to maximize profits if overall mortgage volumes decline in the future. The Company intends to further leverage its investment in its mortgage operation by employing additional retail loan officers in its local markets and wholesale account executives in other major markets outside of Florida. The Company is emphasizing purchase loan originations in its retail network through its residential construction-lending program, and in both its retail and wholesale mortgage lending channels by offering premium pricing and accelerated service levels. Management also believes this initiative will allow the Company to continue to leverage its wholesale mortgage operation as interest rates increase and the volume of refinance activity declines as a percentage of the overall mortgage loan market. CONTINUE LOAN GROWTH BY FOCUSING ON KEY METROPOLITAN MARKETS. The established relationships of the Company's bankers tend to be centered in the metropolitan areas that were the core business markets of the large independent Florida banks before the consolidation of the banking industry in Florida in the 1990s. In addition, these metropolitan areas contain a high concentration of the Company's core small to medium-sized business customers. Management believes the nature of the business communities in Florida's metropolitan markets provides the Company with a broad, diverse customer base that allows it to spread its lending risks throughout a number of different borrowers and industries. As a result, the Company intends to focus its development efforts in these market areas. Management believes its focus on small to medium-sized businesses and the existing relationships of its bankers with these core customers provides the Company with a competitive advantage in the metropolitan market areas. Management further believes this competitive advantage will enable the Company to continue its growth and compete successfully in these markets. CONTINUE LOAN GROWTH BY ATTRACTING SMALL AND MEDIUM-SIZED BUSINESS CUSTOMERS THAT REQUIRE THE ATTENTION AND SERVICE THAT A COMMUNITY-ORIENTED BANK IS WELL SUITED TO PROVIDE. The Company's business strategy concentrates on business customers with annual revenues between $5 million and $40 million. Management believes these target customers are currently underserved in Florida. Management further believes that the Florida operations of many of the large out-of-state banks generally do not focus on small to medium-sized businesses, preferring instead to focus on retail consumer banking clients and larger commercial clients with revenues over $40 million. Smaller community banks, savings and loans, and credit unions tend to focus on residential mortgage loans, consumer loans and retail deposit accounts. Small and medium-sized businesses generally have the size and sophistication to demand customized products and services, which management believes its bankers are well-equipped to understand and respond to 7 due to their experience and personal relationships with their clients. Management further believes that a significant amount of the growth the Company has experienced has been due to its concentration on this underserved segment of the Florida banking markets. By continuing the Company's focus on these customers, the Company expects to continue to grow in its current markets and to compete successfully as it enters other Florida banking markets. CONTINUE LOAN GROWTH BY IDENTIFYING AND RETAINING LOCAL MANAGEMENT TEAMS THAT EMPHASIZE A HIGH LEVEL OF PERSONALIZED CUSTOMER SERVICE. The Company has identified individuals in each of the markets it currently serves who serve as the president of that community banking office. Management believes that a management team that is familiar with the needs of its community can provide higher quality personalized service to local customers. The Company's local management teams have a significant amount of decision-making authority and are accessible to local customers. In addition, within each market area, the Company's community banking offices have a local advisory board that is comprised of prominent members of the community, including business leaders and other professionals. Certain members of the local boards may serve as members of the Company's board of directors. The directors of these local advisory boards act as the Company's representatives within the community and are expected to promote the business development of each community banking office. The Company expects the members of its local advisory board and its lending officers to be active in the civic, charitable and social organizations in the local communities. Many members of the local management team hold leadership positions in a number of community organizations and the Company expects that they will continue to volunteer for other positions in the future. Management believes that these strong local management teams will facilitate the growth in the markets the Company currently serves and enable it to compete successfully as it enters new markets. CONTINUE LOAN GROWTH BY EXPANDING INTO ADDITIONAL FLORIDA BANKING MARKETS. The Company has built its community banking system in its existing markets by assembling a local management team and local advisory board experienced in that particular market area and establishing a community banking office in that market either through the opening of a Loan Production Office ("LPO") or a full service bank. In June 2002, the Company opened a LPO in West Palm Beach, which has been expanded into a full service community banking office. The Company will also consider expansion into other selected Florida banking markets if management believes it will enable the Company to grow its assets and profitability and is otherwise consistent with its strategic goals and objectives. If the Company expands into additional Florida banking markets, it intends to establish a local community banking office in that new market through de novo branching. The Company may, however, acquire existing banks if an attractive opportunity for such an acquisition becomes available. The Company may also establish LPO's in new Florida banking markets as a prelude to establishing full service community banking offices. LPO's would provide the same lending products and services to the local market as the community banking office with substantially less overhead expense. These offices would typically be staffed with a president, a senior lender and one administrative assistant. By opening LPO's, the Company can begin to generate loans during the period it is preparing to open a full-service banking operation, staff the banking office and reduce the overall cost of expansion into a new market. These offices would also establish local advisory boards, which would be responsible for promoting the growth of the office. UTILIZE TECHNOLOGY TO ENHANCE CUSTOMER SERVICE AND MAXIMIZE DEPOSIT GROWTH. The Company believes that there is a need within its market niche for consumer and commercial telephone banking and Internet banking. The Company's customers are provided access to detailed account information via a toll free 8 number 24 hours a day and via DirectNet, the Company's Internet banking product. DirectNet also enables the Company's customers to execute transactions, download account information, view check images and pay bills electronically. In addition, DirectNet affords the Company the opportunity of opening deposit accounts both within and outside of the local markets. The DirectNet banking service and telephone banking are provided by a third-party data processor. The Company also offers origination of Automated Clearing House and Electronic Funds Transfers (ACH/EFT), automated wire transfer services, stored value cards, check imaging, lockbox services, account reconciliation, and other services through its Internet site or through other delivery channels. Management believes that these services assist the Company's community banking offices in retaining customers. LENDING ACTIVITIES The Company oversees all lending activities centrally while still granting local authority to each community banking office. The Company's Chief Credit Officer is responsible for maintaining a quality loan portfolio and developing a strong credit culture throughout the entire organization. The Chief Credit Officer is also responsible for developing and updating the credit policy and procedures for the organization. In addition, he works closely with each lending officer at the community banking offices to ensure that the business being solicited is of the quality and structure that fits the Company's desired risk profile. Credit quality is controlled through uniform compliance to credit policy. The Company's risk-decision process is actively managed in a disciplined fashion to maintain an acceptable risk profile characterized by soundness, diversity, quality, prudence, balance and accountability. The credit approval process consists of a system of dual credit authority with a cumulative feature for larger credits. The Chief Credit Officer has the authority to manage and adjust the levels of credit authority within the Company's banks. The Company utilizes a house-lending limit that limits the maximum credit exposure to any one borrower. As of December 31, 2003, this limit was $9.0 million. Within this house-lending limit, the Company utilizes an exposure matrix methodology that further limits maximum exposure based on a combination of the assigned risk rating of the credit and a percentage of the house limit. These limits reflect the Company's desire for diversification and granularity in its loan portfolio. Any changes to these limits require the approval of the Company's board of directors. Risk management requires active involvement with the Company's customers and active management of its portfolio. The Chief Credit Officer reviews the Company's credit policies with the local management teams at least annually but will review it more frequently if necessary. The results of these reviews are then presented to the board of directors. The purpose of these reviews is to attempt to ensure that the credit policy remains compatible with the Company's short and long-term business strategies. The Chief Credit Officer will also generally require all individuals charged with risk management to reaffirm their familiarity with the credit policy annually. The Company focuses its marketing efforts on attracting small to medium-sized business customers with annual revenues between $5 million and approximately $40 million, which include: o professionals, such as physicians and attorneys; o service companies; o manufacturing companies; and o other small to medium-sized businesses with real estate or other collateral to secure their indebtedness to the Company. 9 Because the Company focuses on small to medium-sized business customers, the majority of its loan portfolio is in the commercial area with an emphasis placed on commercial and industrial loans secured by real estate, accounts receivable, inventory, property, plant and equipment. However, in an effort to maintain a high level of credit quality, the Company attempts to ensure that the commercial real estate loans are made to borrowers who occupy the real estate securing the loans or investment properties occupied by creditworthy tenants or seasoned investment properties. In addition, the Company has attracted and will continue to attract consumer business. The Company expects to develop most of its business through its lending officers and local advisory boards of directors and by pursuing an aggressive strategy of making calls on customers throughout the market area. The Company offers a wide range of short to long-term commercial and consumer loans and has grown its loan portfolio substantially since its formation. The following table provides information about the growth of the Company's portfolio of loans held for investment by type of loan for the last five fiscal years.
December 31, ------------------------------------------------------------ 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Commercial real estate $424,498 $313,120 $210,373 $158,654 $69,261 Commercial 176,094 166,122 142,911 102,391 68,991 Residential mortgage 34,120 23,080 22,309 9,796 10,846 Consumer 54,648 45,860 23,158 13,036 7,246 Credit card and other 1,956 2,792 2,912 1,747 1,244 Net deferred loan fees (726) (519) (219) (98) (71) -------- -------- -------- -------- -------- Loans held for investment, net $690,590 $550,455 $401,444 $285,526 $157,517 ======== ======== ======== ======== ========
The Company generally invests a greater proportion of its assets in commercial loans and commercial real estate loans than other banking institutions of its size, which typically invest a greater proportion of their assets in consumer loans and loans secured by single-family residences. At December 31, 2003, commercial loans, commercial real estate loans, residential mortgage loans and consumer loans accounted for 25.3%, 61.6%, 4.9% and 8.2%, respectively, of its total loan portfolio. The Company's commercial loans generally involve a higher degree of credit risk than commercial or residential mortgage loans due, in part, to their less readily marketable collateral. Due to the nature of their collateral, losses incurred on a small number of commercial loans could have a material adverse impact on its financial condition and results of operations. In addition, unlike residential mortgage loans, its commercial loans and commercial real estate loans generally depend on the cash flow of the borrower's business to service the debt. Furthermore, a significant portion of its commercial loans is dependent for repayment largely on the liquidation of assets securing the loan, such as inventory and accounts receivable. These loans carry incrementally higher risk, since their repayment is often dependent solely on the financial performance of the borrower's business. The Company's business plan calls for continued efforts to increase its assets invested in commercial loans. An increase in non-performing loans could cause operating losses, impaired liquidity and the erosion of its capital, and could have a material adverse effect on its business, financial condition or results of operations. While risk of loss in the Company's loan portfolio is primarily tied to the credit quality of the borrowers, risk of loss may also increase due to factors beyond the Company's control, such as local, regional and/or national economic downturns. General conditions in the real estate market may also impact the relative risk in the Company's real estate portfolio. As discussed above, of the Company's target areas of lending activities, commercial loans are generally considered to have greater risk than real estate loans or consumer loans. For this reason, the Company seeks to diversify its commercial loan portfolio by industry, geographic distribution and size of credits. 10 COMMERCIAL REAL ESTATE LOANS The Company's commercial real estate loan portfolio consists of 1) loans to owner occupied business customers who secure their indebtedness to the Company with real, other property, or personal guarantees, and 2) loans to developers of both commercial and residential properties. The strategy is to seek to develop long-term relationships with select businesses, investors and real estate professionals. In making these loans, the Company utilizes traditional credit analysis to manage credit risk by actively monitoring such measures as the financial condition of the borrower and debt service coverage of the property, as well as the advance rate, cash flow, collateral value and other appropriate credit factors. In the real estate development area, the Company typically makes loans only to developers that have an established record of project completion and repayment. The Company closely monitors the status of each loan and the underlying project throughout its terms. At December 31, 2003, commercial real estate loans represented approximately 61% of the Company's loans held for investment. COMMERCIAL LOANS The Company's commercial lending consists primarily of commercial and industrial loans for the financing of accounts receivable, inventory, property, plant and equipment, and other commercial assets. The majority of the business loan portfolio is secured by real estate, accounts receivable, inventory, equipment and/or general corporate assets of the borrower, as well as the personal guarantee of the principal. Commercial loans can contain risk factors unique to the business of each customer. In order to mitigate these risks and better serve the customers, the Company seeks to gain an understanding of the business of each customer so that it can place appropriate value on collateral taken and structure the loan to maintain collateral values at appropriate levels. The Company manages credit risk by actively monitoring such measures as advance rate, cash flow, collateral value, ability to repay and other appropriate credit factors. In addition, the Company relies on the experience of its bankers and their relationships with its customers to aid its understanding of the customer and their business. At December 31, 2003, commercial loans represented approximately 25% of the Company's loans held for investment. RESIDENTIAL MORTGAGE LOANS The Company's residential mortgage loans consist of residential first and second mortgage loans, residential construction loans and home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for home improvements, education and other personal expenditures. At December 31, 2003, residential mortgage loans represented approximately 5% of the Company's loans held for investment. 11 CONSUMER LOANS The Company's consumer loans consist of installment loans to individuals for personal, family and household purposes. In evaluating these loans, the Company requires the lending officers to review the borrower's level and stability of income, past credit history, and the impact of these factors on the ability of the borrower to repay the loan in a timely manner. In addition, the Company requires that its banking officers maintain an appropriate margin between the loan amount and collateral value. Many of the Company's consumer loans are made to the principals of the small to medium-sized businesses for whom the community banking offices provide banking services. At December 31, 2003, consumer loans represented approximately 8% of the Company's loans held for investment. CREDIT CARD AND OTHER LOANS The Company has issued credit cards to certain of its customers. In determining to whom the Company will issue credit cards, the Company evaluates the borrower's level and stability of income, past credit history and other factors. Finally, the Company makes additional loans such as overdraft protection lines of credit, which may not be classified in one of the above categories. In making such loans, the Company attempts to ensure that the borrower meets the Company's credit quality standards. At December 31, 2003, credit card and other loans represented approximately 0.3% of the Company's loans held for investment. LOANS HELD FOR SALE The wholesale mortgage division originates residential mortgage loans through a network of third party mortgage brokers, and sells them in the secondary mortgage market. Loans held for sale at December 31, 2003 were approximately $66 million and consisted entirely of wholesale residential mortgage loans. Due to the Company's high wholesale mortgage loan origination volume and the substantially higher volume of mortgage loan origination activity nationally, the major secondary market purchasers of these loans were unable to complete loan purchases within their typical time frame. This has resulted in a higher level of loans held for sale at December 31, 2003. Management believes that as its volume of activity decreases and the major purchasers of loans return to their typical purchase schedule, the level of loans held for sale will decrease. The Company does not retain interests in the portion of the loan portfolio it sells. INVESTMENTS The Company invests primarily in direct obligations of the United States, obligations guaranteed as to principal and interest by the United States, obligations of agencies of the United States and mortgage-backed securities. The Company's current investment policy permits purchases primarily of securities which are rated investment grade by a nationally recognized rating agency, and substantially all of the investments in the Company's portfolio at December 31, 2003 were rated in one of the two highest grades. The Company also enters into federal funds transactions with its principal correspondent banks, and acts as a net seller of such funds, which amounts to a short-term loan from another company. The Company's investment portfolio at December 31, 2003 totaled $53 million. FUNDING The Company funds its lending activities by offering a broad range of deposit products within the markets it currently serves, including interest-bearing and noninterest-bearing deposit accounts, such as commercial and retail checking accounts, money market accounts, individual retirement accounts, regular and premium rate interest-bearing savings accounts and 12 certificates of deposit with a range of maturity date options. The primary sources of these deposits are small to medium-sized businesses and individuals. In each market, senior management has the authority to set rates within specified parameters in order to remain competitive with other financial institutions located in the identified market. In addition to deposits within the local markets, the Company utilizes brokered certificates of deposits to supplement its funding needs, particularly with respect to its mortgage banking business. Brokered CDs are sold by various investment firms, which are paid a fee by the bank for placing the deposit. Depending on current market conditions, the cost of brokered deposits may be slightly lower than the cost of the same deposits in the local markets. All deposits are insured by the FDIC up to the maximum amount permitted by law. Approximately 58% of the Company's total deposits at December 31, 2003 consisted of certificates of deposit of $100,000 or more. The Company also has short term funding available through its various federal funds lines of credit with other financial institutions and its membership in the Federal Home Loan Bank of Atlanta, which provides the Company the availability of participation in loan programs with varying maturities and terms. At December 31, 2003, the Company had borrowings from the Federal Home Loan Bank of Atlanta in the amount of $10.7 million. Finally, the Company has two senior holding company lines of credit with SunTrust Bank, Atlanta. The first line of credit is revolving with a borrowing capacity of $7.5 million. The second line of credit is non-revolving with a borrowing capacity of $2.5 million. At December 31, 2003, the Company had borrowings from SunTrust Bank, Atlanta in the amount of $10.0 million. NONINTEREST INCOME GAINS ON SALE OF LOANS. The Company may originate or purchase a loan at a price (i.e., interest rate and discount) that may be higher or lower than it would receive if it immediately sold the loan in the secondary market. These pricing differences occur principally as a result of competitive pricing conditions in the primary loan origination market. The Company may also recognize a gain or loss on sale of a loan as a result of changes in the fair value of underlying interest rate locks. These changes in fair value result from changes in interest rates from the time the price commitment is given to the customer until the time that the Company sells the loan to an investor. To reduce the effect of interest rate changes on the gain or loss on loan sales, the Company generally commits to sell all of its warehouse loans (i.e., mortgage loans that have closed) and its pipeline loans (i.e., mortgage loans which are not yet closed but for which the interest rate has been established) to investors for delivery at a future time for a stated price. In addition, the Company utilizes the services of a third party provider to manage interest rate risk and execute the Company's pipeline hedging strategy. MORTGAGE LOAN PROCESSING FEES. Mortgage loan processing fees are comprised of fees earned on the origination of residential mortgage loans and fees charged to review loan documents for purchased residential mortgage loan production. SERVICE FEES. In order to capture additional noninterest income, the Company has implemented a service charge fee schedule, which is competitive with other financial institutions in the community banking offices' market areas, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and other similar fees. ACH/EFT SERVICES. The Company offers various Automated Clearing House and Electronic Funds Transfer (ACH/EFT) services to commercial customers throughout the United States. These services include payroll direct deposits, payroll tax payments, electronic payments and other funds transfers. The services are customized to meet the needs of the customer and offer an economical alternative to paper checks and drafts. 13 STORED VALUE CARDS. The Company offers stored value (prepaid debit) cards to commercial customers. These cards are issued primarily to facilitate incentive payments, payroll disbursements, customer loyalty programs, and as gift cards. The bank derives income from use of the prepaid funds and fee income from issuing and servicing the cards. INVESTMENT ADVISORY AND INSURANCE SERVICES. Beginning in the first quarter of 2003, the Company began to offer certain alternative investment products through its financial services subsidiary, FB Financial Services, Inc. These products include equities, fixed-income products, equity and bond mutual funds, unit investment trusts, life insurance policies, and to the extent permitted by applicable regulations, fixed and variable annuities. This program expands the Company's offering of financial products in response to demand from customers seeking a single source for their financial service needs. OTHER SERVICES SPECIALIZED CONSUMER SERVICES. The Company offers specialized products and services to its customers, such as lock boxes, traveler's checks and safe deposit services. COURIER SERVICES. The Company offers courier services to its customers. Courier services, which may be either provided directly by the Company or through a third party, permits the Company to provide the convenience and personalized service by scheduling deposit pick-ups from its customers. The Company currently offers courier services only to its business customers. The Company has received regulatory approval for and is currently offering courier services in all of the markets it currently serves and expects to apply for approval in other Florida banking market areas. AUTOMATIC TELLER MACHINES ("ATMS"). Presently, the Company does not expect to establish an ATM network although the Company currently provides ATMs in three of the markets it currently services and in the future other banking offices may provide one or more ATMs in their local Florida banking market. As an alternative, the Company has made other financial institutions' ATMs available to its customers and offers customers up to ten free ATM transactions per month. OTHER PRODUCTS AND SERVICES. The Company intends to evaluate other services, such as trust services and other permissible activities, and it expects to introduce these services in the future as they become economically viable. ASSET-LIABILITY MANAGEMENT The objective is to manage assets and liabilities to provide a satisfactory level of consistent operating profitability within the framework of established liquidity, loan, investment, borrowing and capital policies. The Company's Chief Financial Officer is primarily responsible for monitoring policies and procedures that were designed to maintain an acceptable composition of the asset-liability mix while adhering to prudent banking practices. The overall philosophy of the management is to support loan growth primarily through growth of core deposits. Management intends to continue to invest the largest portion of the Company's earning assets in commercial, industrial and commercial real estate loans. The Company's asset-liability mix is monitored on a daily basis, with monthly reports presented to its Asset-Liability Management Committee. The objective of this policy is to control interest-sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on the Company's bank's earnings. For further discussion, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Analysis of Financial Condition - Interest Rate Risk Management." 14 COMPETITION Competition among financial institutions in Florida is intense. The Company primarily competes with the Florida operations of large out-of-state commercial banks and Florida-based regional commercial banks. In addition, the Company competes with other bank holding companies, state and national commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerages, insurance companies, mortgage banking companies, money market mutual funds, asset-based non-bank lenders and other financial institutions. Many of these competitors have substantially greater resources and lending limits, larger branch networks, and are able to offer a broader range of products and services than the Company. Various legislative actions in recent years have led to increased competition among financial institutions. As a result of such actions, most barriers to entry to the Florida banking market by out-of-state financial institutions have been eliminated. Recent legislative and regulatory changes and technological advances have enabled customers to conduct banking activities without regard to geographic barriers through computer and telephone-based banking and similar services. With the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and other laws and regulations affecting interstate bank expansion, financial institutions located outside of Florida may now more easily enter the markets currently and proposed to be served by the Company. In addition, the Gramm-Leach-Bliley Act repealed certain sections of the Glass-Steagall Act and amended sections of the Bank Holding Company Act. The future effect of these changes in regulations could be far ranging in their impact on traditional banking activities. Mergers, partnerships and acquisitions between banks and other financial and service companies could dramatically affect competition within the Florida banking markets. The Company cannot assure you that the United States Congress, the Florida Legislature or the applicable bank regulatory agencies will not enact legislation or promulgate rules that may further increase competitive pressures on it. The Company's failure to compete effectively for deposit, loan and other banking customers in the Company's market areas could have a material adverse effect on the Company's financial condition and results of operations. DATA PROCESSING The Company currently has an agreement with Metavante Corporation (formerly M&I Data Services) to provide core processing and certain customer products. Metavante Corporation, a wholly owned subsidiary of Marshall & Ilsley Corporation, provides services to more than 5,100 clients including the largest 20 banks in the United States. Management believes that Metavante will be able to provide state-of-the-art data processing and customer service-related processing at a competitive price to support the Company's future growth. Management further believes the Metavante contract to be adequate for the Company's business expansion plans. EMPLOYEES The Company presently employs a combined total of 219 persons on a full-time basis and 13 persons on a part-time basis and will hire additional persons, including additional tellers, mortgage loan processors and financial service representatives, as needed to support the Company's growth. NONBANKING SUBSIDIARIES In April 2000, the Company formed FB Financial Services, Inc. for the purposes of providing non-traditional banking and financial services to its customers. Beginning in the first quarter of 2003, the Company began to offer these products, primarily through its Ft. Lauderdale banking office. The products include equities, fixed-income products, equity and bond mutual funds, unit investment trusts, life insurance policies, and, to the extent permitted by applicable regulations, fixed and variable annuities. 15 The Company has the following directly and wholly owned nonbanking subsidiaries that are currently active: o Florida Banks Statutory Trust I, a Connecticut business trust, issued $6 million in trust preferred securities in December 2001; o Florida Banks Capital Trust II, a Delaware business trust, issued $4 million in trust preferred securities in April 2002; o Florida Banks Capital Trust I, a Delaware business trust, issued $4 million in trust preferred securities in June 2002; o Florida Banks Statutory Trust II, a Connecticut business trust, issued $3 million in trust preferred securities in December 2002; and o Florida Banks Statutory Trust III, a Connecticut business trust, issued $3 million in trust preferred securities in June 2003. The Company guarantees all of these securities. RISK FACTORS RISKS RELATED TO THE COMPANY'S BUSINESS GENERAL INTEREST RATE LEVELS SIGNIFICANTLY AFFECT THE COMPANY'S OPERATIONS Changes in interest rates can have differing effects on various aspects of the Company's business, particularly in the areas of net interest income and mortgage loans originated and purchased. NET INTEREST INCOME The Company's profitability is dependent to a large extent on its net interest income, which is the difference between interest income it earns as a result of interest paid to the Company on loans and investments and interest it pays to third parties such as the Company's depositors and those from whom it borrows funds. The Company is affected by changes in general interest rate levels, which are currently at historically low levels, and by other economic factors beyond its control. Interest rate risk can result from mismatches between the dollar amount of repricing or maturing assets and liabilities and from mismatches in the timing and rate at which the Company's assets and liabilities reprice. The Company pursues an asset-liability management strategy designed to control its risk from changes in the market interest rates, given its current volume and mix of interest-bearing liabilities and interest-earning assets. However, if market interest rates remain at their present levels for a prolonged period of time or decline further, the cash flows from continued high levels of loan prepayments would be reinvested at lower yields while the Company's cost of funds may remain relatively flat, resulting in a decrease in its profitability. Although management believes the Company's asset liability management strategy will reduce the potential effects of changes in interest rates on its results of operations, this strategy may not always be successful. In addition, any substantial and prolonged increase in market interest rates could reduce the Company's customers' desire to borrow money from it or limit their ability to repay their outstanding loans by increasing their credit costs since most of the Company's loans have adjustable interest rates that reset 16 periodically. If the Company does not adequately manage the maturities of its deposits and loans, any substantial change in interest rates could cause its cost of funds to increase more rapidly than the yield on its loans, thereby decreasing the Company's net interest income. Any of these events could decrease the Company's profitability or adversely affect its financial condition. VOLUME OF MORTGAGE LOANS ORIGINATED AND PURCHASED In periods of declining interest rates, such as have occurred recently, demand for mortgage loans typically increases, particularly for mortgage loans related to refinancing of existing loans. The refinancing of existing loans currently comprises approximately 72% of the Company's loan volume. In periods of rising interest rates, demand for mortgage loans typically declines. The Company's income from its mortgage banking division would significantly decrease following a decline in demand for mortgage loans in the eastern United States, which is the area in which the Company originates and purchase the majority of its loans. THE COMPANY'S BUSINESS STRATEGY INCLUDES THE CONTINUATION OF SIGNIFICANT GROWTH PLANS, AND IF IT FAILS TO GROW OR FAIL TO MANAGE ITS GROWTH EFFECTIVELY AS IT PURSUES ITS STRATEGY, THE COMPANY'S RESULTS OF OPERATION COULD NEGATIVELY BE AFFECTED. The Company intends to continue pursuing a significant growth strategy for its business. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. The Company cannot assure you that it will be able to expand its market presence in its existing markets or successfully enter new markets or that any such expansion will not adversely affect its results of operations. Failure to manage the Company's growth effectively could have a material adverse effect on its business, future prospects, financial condition or results of operations, and could adversely affect its ability to successfully implement its business strategy. Also, if the Company's growth occurs more slowly than anticipated or declines, its operating results could be materially adversely affected. THE COMPANY'S LOAN PORTFOLIO GROWTH IS DEPENDENT ON INCREASED BROKERED DEPOSITS AND JUMBO CDS. The Company primarily relies on brokered deposits and Jumbo CDs to fund its growing operations. The Company cannot assure you that it will be able to continue to attract brokered deposits at current levels of growth or that it will be able to fund its growth through Jumbo CDs without having to offer above market rates. Jumbo CDs and brokered deposits tend to be more price sensitive and also tend to be more likely to be withdrawn at maturity if a bank encounters operational or regulatory difficulties. The inability to fund growth of the Company's loan portfolio through increased brokered deposits or Jumbo CDs would materially adversely affect its financial condition or results of operations. BECAUSE THE COMPANY FOCUSES ON COMMERCIAL LENDING, ITS EXPOSURE TO CREDIT RISK COULD ADVERSELY AFFECT ITS EARNINGS AND FINANCIAL CONDITION. As of December 31, 2003, commercial loans totaled $600.6 million, or 86.9% of the Company's total loan portfolio. The Company generally invests a greater proportion of its assets in commercial loans than other banking institutions of its size, which typically invest a greater proportion of their assets in loans secured by single-family residences. The Company's commercial loans generally involve a higher degree of credit risk than residential mortgage loans due, in part, to their larger average size and generally less readily marketable collateral. Due to their size and the nature of their collateral, losses incurred on a small number of commercial loans could have a material 17 adverse impact on the Company's financial condition and results of operations. In addition, unlike residential mortgage loans, the Company's commercial loans generally depend on the cash flow of the borrower's business to service the debt. Furthermore, a significant portion of the Company's loans is dependent for repayment largely on the liquidation of assets securing the loan, such as inventory and accounts receivable. These loans carry incrementally higher risk, since their repayment is often dependent solely on the financial performance of the borrower's business. The Company's business plan calls for continued efforts to increase its assets invested in commercial loans. An increase in non-performing loans could cause operating losses, impaired liquidity and the erosion of the Company's capital, and could have a material adverse effect on its business, financial condition or results of operations. IF THE VALUE OF REAL ESTATE IN THE COMPANY'S CORE FLORIDA MARKETS WERE TO DECLINE MATERIALLY, A SIGNIFICANT PORTION OF THE COMPANY'S LOAN PORTFOLIO COULD BECOME UNDER-COLLATERALIZED, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS BUSINESS. The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for the Company's loan portfolio were to decline materially, a significant part of its loan portfolio could become under-collateralized. As of December 31, 2003, approximately 61.0% of the Company's loans held for investment were secured by real estate. Of the commercial real estate loans in the Company's portfolio, approximately $185.3 million represent properties owned and occupied by businesses to which the Company has extended loans and $239.2 million is secured by real estate held for investment by the borrower. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then the Company may not be able to realize the amount of security that it anticipated at the time of originating the loan, which could have a material adverse effect on its provision for loan losses and its operating results and financial condition. THE COMPANY'S BUSINESS IS CONCENTRATED IN FLORIDA AND A DOWNTURN IN THE ECONOMY OF FLORIDA OR OTHER EVENTS IN FLORIDA MAY ADVERSELY AFFECT ITS BUSINESS. Substantially all of the Company's business is located in Florida. As a result, the Company's financial condition and results of operations may be affected by changes in the Florida economy. A prolonged period of economic recession or other adverse economic conditions in Florida may result in an increase in nonpayment of the Company's loans and a decrease in collateral value. In addition, the Company presently generates all of its commercial real estate mortgage loans in Florida. Therefore, conditions of the Florida commercial real estate market could strongly influence the level of the Company's non-performing loans and its results of operations and financial condition. Real estate values and the demand for mortgages and construction loans are affected by, among other things, changes in general or local economic conditions, changes in governmental rules or policies, and the availability of loans to potential purchasers. In addition, Florida historically has been vulnerable to certain natural disaster risks, such as floods, hurricanes and tornadoes, which are not typically covered by the standard hazard insurance policies maintained by borrowers. Uninsured disasters may adversely impact the ability of borrowers to repay loans made by the Company. The existence of adverse economic conditions, declines in real estate values or the occurrence of such natural disasters in Florida could have a material adverse effect on the Company's business, future prospects, financial condition or results of operations. IF THE COMPANY'S ALLOWANCE FOR LOAN LOSSES WERE NOT SUFFICIENT TO ABSORB ACTUAL LOSSES, ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD BE ADVERSELY AFFECTED. The Company's experience in the banking industry indicates that a portion of its loans will become delinquent, some of which may only partially be repaid or may never be repaid at all. The Company's allowance for loan losses was $9.1 million at December 31, 2003, which represents 1.31% of the Company's total loan portfolio. Although management believes the Company's allowance for loan losses is sufficient to cover actual loan losses and it has not received any communications from regulatory agencies suggesting that the Company's reserves are inadequate, it cannot assure you that its allowance for loan losses will be 18 adequate to cover actual loan losses. In addition, the Company also cannot assure you that it will not experience significant losses in its loan portfolio from general economic conditions or other factors beyond its control. These losses may require significant increases to the allowance for loan losses in the future. Significant and unexpected additions to the Company's allowance for loan losses would decrease its profitability in that period. BANK REGULATORS MAY REQUIRE THE COMPANY TO INCREASE ITS ALLOWANCE FOR LOAN LOSSES, WHICH COULD HAVE A NEGATIVE EFFECT ON ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Federal regulators, as an integral part of their respective supervisory functions, periodically review the Company's allowance for loan losses. The regulatory agencies may require the Company to increase its allowance for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company's view. In addition, regulatory agencies may require additional reserves for loan losses that may not be required under generally accepted accounting principles. Although the Company has not received any requests or directions from regulatory agencies to adjust its allowance for loan losses, any increase in the allowance for loan losses required by these regulatory agencies could have a negative effect on its financial condition and results of operations. LACK OF SEASONING OF THE COMPANY'S LOAN PORTFOLIO MAY INCREASE THE RISK OF CREDIT DEFAULTS IN THE FUTURE. Most of the loans in the Company's loan portfolio were originated within the past three years. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for period of time, such as between twelve and twenty-four months, a process referred to as "seasoning." As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because the Company's loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which is likely to be somewhat higher than current levels. As of December 31, 2003, 37.8% of the Company's loan portfolio had been originated in the last twelve months and 13.2% of its loan portfolio had been originated in the last twenty-four months. UNTIL THE COMPANY'S PORTFOLIO BECOMES MORE SEASONED, IT MUST RELY IN PART ON THE HISTORICAL LOAN LOSS EXPERIENCE OF OTHER FINANCIAL INSTITUTIONS AND THE EXPERIENCE OF ITS MANAGEMENT IN DETERMINING ITS ALLOWANCE FOR LOAN LOSSES, AND THIS MAY NOT BE COMPARABLE TO THE COMPANY'S LOAN PORTFOLIO. Because most of the Company's loans in its loan portfolio were originated relatively recently, its loan portfolio does not provide an adequate history of loan losses for its management to rely upon in establishing its allowance for loan losses. When determining the Company's allowance for loan losses, it must rely to a significant extent upon other financial institutions' histories of loan losses and their allowance for loan losses, as well as the Company's management's estimates based on their experience in the banking industry. The Company cannot assure you that the history of loan losses and the reserving policies of other financial institutions and its management's judgment will result in reserving policies that will be adequate for its business and operations or applicable to its loan portfolio. THE COMPANY IS DEPENDENT UPON KEY PERSONNEL, INCLUDING ITS LOCAL MANAGEMENT TEAMS. The Company's success depends to a significant extent upon certain key employees, the loss of whom could have an adverse effect on its business. The Company's key employees include Charles E. Hughes, Jr., its Chief Executive Officer and President, T. Edwin Stinson, Jr., its Chief Financial Officer, and Richard B. Kensler, its Chief Credit Officer. Although the Company has entered into employment agreements with each of these employees, which contain covenants not to compete, it cannot assure you that it will be successful in retaining these key employees. The Company is also dependent on its local management teams. The Company has established relationships with well-trained local senior management and other employees. The Company's business strategy gives significant local decision-making authority to its senior officers and managers. The local bank presidents have entered into covenant not to compete agreements 19 with the Company. However, the Company cannot assure you that it will be able to retain its current local senior officers or attract new qualified management personnel. The Company's inability to attract and/or retain qualified management personnel as it pursues its business strategy could have a material adverse effect on its financial condition and results of operations. THE COMPANY COMPETES FOR LOANS AND DEPOSITS WITH MANY LARGER FINANCIAL INSTITUTIONS THAT HAVE SUBSTANTIALLY GREATER FINANCIAL RESOURCES THAN IT HAS. Competition among financial institutions in Florida is intense. The Company primarily competes with the Florida operations of large out-of-state commercial banks and Florida-based regional commercial banks. In addition, the Company competes with other bank holding companies, state and national commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerages, insurance companies, mortgage banking companies, money market mutual funds, asset-based non-bank lenders and other financial institutions. Many of these competitors have substantially greater financial resources, lending limits and larger branch networks than the Company, and are able to offer a broader range of products and services than it can. Trends toward the consolidation of the banking industry may make it more difficult for smaller banks to compete with large national and regional banking institutions. The Company cannot assure you that it will compete successfully against its competitors. Failure to compete effectively for deposit, loan and other banking customers in the Company's markets could cause it to lose market share, slow its growth rate and may have an adverse effect on its financial condition and results of operations. THE COMPANY'S CONTINUED FUTURE PROFITABILITY DEPENDS TO A SIGNIFICANT EXTENT UPON REVENUE THE COMPANY RECEIVES FROM ITS SMALL TO MEDIUM-SIZED BUSINESS CUSTOMERS AND THEIR ABILITY TO MEET THEIR LOAN OBLIGATIONS. At December 31, 2003, a substantial majority of the Company's loan portfolio was comprised of loans to its small to medium-sized business customers. For the year ended December 31, 2003, a significant portion of the Company's total interest income was derived from small to medium-sized business customers. The Company expects that its future profitability will depend to a significant extent upon revenue it receives from small to medium-sized business customers, and their ability to continue to meet existing loan obligations. As a result, adverse economic conditions or other factors adversely affecting this market segment may have a greater adverse effect on the Company than on other financial institutions that have a more diversified customer base. THE COMPANY MAY RELY ON FLORIDA BANK, N.A. TO FUND ITS OPERATIONS. The Company has no significant independent sources of revenue. From the Company's inception to the present, its principal sources of funds have been capital received in its initial public offering, subsequent issuances of preferred stock and trust preferred securities and borrowings from its line of credit. In the future, the Company plans for cash dividends and other payments that it receives from Florida Bank, N.A. to serve as its principal source of funds to service indebtedness and to fund operations. The payment of dividends by the Company's bank to it is subject to the prior approval of the OCC if the total of all dividends declared by the bank in any calendar year exceeds the sum of the bank's net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. At December 31, 2003, the amount of dividends available for Florida Bank, N.A. to pay to the Company without OCC approval was $9.0 million. In addition, federal 20 law also prohibits a national bank from paying dividends if it is, or such dividend payments would cause it to become, undercapitalized. The Company's success and profitability is solely dependent on the success and profitability of its bank. THE COMPANY COMPETES IN AN INDUSTRY THAT CONTINUALLY EXPERIENCES TECHNOLOGICAL CHANGE, AND THE COMPANY MAY HAVE FEWER RESOURCES THAN MANY OF ITS COMPETITORS TO CONTINUE TO INVEST IN TECHNOLOGICAL IMPROVEMENTS. The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to improving the ability to serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company's future success will depend, in part, upon its ability to address the needs of its customers by using technology to enhance its product and service offering. Many of the Company's competitors have substantially greater resources to invest in technological improvements. The Company cannot assure you that it will be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to its customers. SYSTEM FAILURE OR BREACHES OF THE COMPANY'S NETWORK SECURITY COULD SUBJECT IT TO INCREASED OPERATING COSTS AS WELL AS LITIGATION AND OTHER LIABILITIES. The computer systems and network infrastructure the Company uses could be vulnerable to unforeseen problems. The Company's operations are dependent upon its ability to protect its computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in the Company's operations could have an adverse effect on its financial condition and results of operations. In addition, the Company's operations are dependent upon its ability to protect its computer systems and network infrastructure against damage from physical break-ins, security breaches and other disruptive problems. In particular, the Company's systems may be susceptible to attacks, break-ins and viruses launched from the Internet. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through the Company's computer systems and network infrastructure, which may result in significant liability to it and deter potential customers. Although the Company, with the help of third-party service providers, intends to continue to implement security technology and establish operational procedures to prevent such damage, it cannot assure you that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms that the Company and its third-party service providers use to protect customer transaction data. A failure of such security measures could have an adverse effect on the Company's financial condition and results of operations. MORTGAGE DIVISION THE COMPANY'S WHOLESALE RESIDENTIAL MORTGAGE BANKING DIVISION HAS A LIMITED OPERATING HISTORY AND, AS A RESULT, THE FINANCIAL PERFORMANCE TO DATE OF THIS DIVISION MAY NOT BE A RELIABLE INDICATOR OF WHETHER THIS BUSINESS DIVISION WILL CONTINUE TO BE SUCCESSFUL. The Company commenced its wholesale residential mortgage banking operations in the fourth quarter of 2002. As a result, the Company has a very limited historical basis upon which to rely for gauging the business performance of this division under normalized operations. Also, the limited operating history of this division has coincided with a period of historically low interest rates, which has resulted in a significant volume of refinancing for residential mortgage loans. In periods of rising interest rates, demand for mortgage loans typically declines, which could cause a decrease in the income from the Company's wholesale residential mortgage banking division. Accordingly, 21 the financial performance of this division to date may not be representative of its long-term future performance or indicative of whether the mortgage division will continue to be successful. A substantial portion of the Company's mortgage loan volume is related to refinancing activities. For the year ended December 31, 2003, approximately 68% of the Company's mortgage loan volume resulted from refinancing activities as compared to approximately 32% for purchase loans. For the year ended December 31, 2002, approximately 83% of the Company's mortgage loan volume resulted from refinancing activities, as compared to approximately 17% for purchased loans. As interest rates begin to increase, the volume of refinancing will decrease substantially, resulting in a decrease in the overall volume of the Company's mortgage bank segment and a reduction in earnings. There is no assurance that the Company can reduce expenses as the revenue associated with the lower volume of mortgage loans decreases, or that it can increase its volume of purchase loans to offset the loss of volume related to refinancing activities. Although a significant decrease in mortgage refinancing activity due to higher interest rates would reduce the Company's earnings and could materially adversely affect the results of its mortgage operations, management believes this reduction will be partially offset by the benefits of improved margins resulting from higher rates on its core loan portfolio. ADJUSTMENTS FOR LOANS HELD FOR SALE MAY ADVERSELY AFFECT THE COMPANY'S PROFITS In the Company's financial statements it must value, on a quarterly basis, loans that it originates and classify as held for sale to the lower of their cost or market value. Depending on market conditions, the Company may be required to make adjustments that adversely affect its results of operations. Loans held for sale totaled $66.5 million as of December 31, 2003. This amount will vary depending on loan production volume and the Company's ability to sell or securitize its mortgage loans in the secondary market on a timely basis. THE COMPANY MAY EXPERIENCE LOSSES FROM THE SALE OF ITS MORTGAGE LOANS. The sale of mortgage loans may result in a loss to the Company. Losses may result primarily from several factors. The Company may originate or purchase a loan at a price (i.e., interest and discount), which may be higher or lower than it receives when the loan is sold in the secondary market. The borrower may default on the loan while the Company is holding it for sale resulting in the loan being sold at a greatly reduced price. The borrower may default on the loan shortly after the sale in the secondary market, which would require the Company to repurchase the loan and sell it at a greatly reduced price. The Company may purchase a loan that has been fraudulently originated resulting in a total loss on the value of the loan. The Company may issue a commitment to a borrower at a certain interest rate and may commit to sell that same loan to an institutional investor for delivery at a future time for a stated price. If the Company's borrower fails to close on the loan, it may have to a pay a fee or incur an expense for failure to deliver the loan as promised. All or any of these losses, if they were to occur on a large enough scale, could materially adversely affect the Company's results of operations. THE COMPANY HAS NO CONTRACTUAL AGREEMENTS WITH THE BROKERS THAT ORIGINATE A SIGNIFICANT AMOUNT OF ITS MORTGAGE LOANS AND THE FAILURE TO MAINTAIN ITS RELATIONSHIPS WITH THESE BROKERS COULD NEGATIVELY AFFECT ITS VOLUME OF LOAN ORIGINATIONS. During the year ended December 31, 2003, brokers and correspondents accounted for substantially all of the mortgage loans originated and purchased by the Company. None of these brokers or correspondents is contractually obligated to do business with the Company. Further, the Company's competitors also have relationships with these brokers and correspondents and actively compete with it in an effort to expand their broker and correspondent networks. Accordingly, the Company cannot assure you that it will be successful in maintaining its existing relationships or expanding its broker and correspondent networks. The Company originated and purchased loans from a total of 548 brokers and correspondents in the year ended December 31, 2003. Approximately 15.3% of the loans the Company originated were provided to it by five of these brokers. Accordingly, if any of these principal brokers or correspondents ceased to do business with the Company, the volume of the Company's loan originations and purchases, as well as its results of operations and financial condition, could be negatively affected. 22 THE COMPANY'S MORTGAGE BUSINESS COMPETES WITH MANY SOURCES OF MORTGAGES THAT HAVE SUBSTANTIALLY GREATER RESOURCES THAN IT. Many sources of mortgages are available to potential borrowers today. These sources include consumer finance companies, mortgage banking companies, savings banks, commercial banks, credit unions, thrift institutions, credit card issuers and insurance companies. Many of these alternative sources are substantially larger and have considerably greater financial, technical and marketing resources than the Company. Additionally, many financial services organizations against which the Company competes for business have formed national loan origination networks or have purchased home equity lenders. The Company competes for mortgage loan business in several ways, including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and term of loan, loan origination fees and interest rates. If any of these competitors significantly expand their activities successfully in the Company's target markets or if the Company fails to compete effectively with existing competition, its business could be materially adversely affected. AVAILABILITY OF REPORTS AND OTHER INFORMATION The Company's corporate website is http://www.flbk.com. It makes available on this website, free of charge, access to the Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statement on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably practicable after the Company electronically submits such material to the Securities and Exchange Commission. In addition, the Commission's website is HTTP://WWW.SEC.GOV, which makes available on its website, free of charge, reports, proxy and information statements, and other information regarding issuers, such as the Company, that file electronically with the Commission. Information provided on the Company's website or on the Commission's website is not part of this Annual Report on Form 10-K. ITEM 2. PROPERTIES The Company leases its main offices located at 5210 Belfort Road, Suite 310, Concourse II, Jacksonville, Florida 32256, where it occupies 6,613 square feet. In addition, the Company leases seven banking offices and an operations center in the following locations: Jacksonville, Tampa, Fort Lauderdale, St. Petersburg/Clearwater, Ocala, Tampa - Operations Center and West Palm Beach. In the fall of 2003, the Company's Fort Lauderdale office moved its operations to leased space in downtown Fort Lauderdale. The Company owns the property for its offices in Gainesville. The Company also leases the space for its mortgage division business in Jacksonville. In September 2002, the Company purchased a parcel of land for the purpose of constructing its corporate headquarters and the Jacksonville banking office. In July 2003, the Company sold the land to a developer for construction of the offices and concurrently entered into a lease to occupy a portion of the building beginning in May 2004. The following is a listing of the Company's banking offices: Florida Bank, N.A. - Alachua County 600 N.W. 43rd Street, Suite A Gainesville, Florida 32607 Facilities: Owned by the Company - 7,581 sq. ft. 23 Florida Bank, N.A. - Jacksonville - Duval County 5210 Belfort Road, Suite 140 Jacksonville, Florida 32256 Facilities: Leased 6001 sq. ft. Florida Bank, N.A. - Tampa - Hillsborough County 100 West Kennedy Boulevard Tampa, Florida 33602 Facilities: Leased 12,573 sq. ft. Florida Bank, N.A. - Ft. Lauderdale - Broward County 200 Las Olas Boulevard, Suites 150 & 1820 Ft. Lauderdale, Florida 33301 Facilities: Leased 8,777 sq. ft. Florida Bank, N.A. - Pinellas County 8250 Bryan Dairy Road, Suite 150 Largo, Florida 33777 Facilities: Leased 6,400 sq. ft. Florida Bank, N.A. - Marion County 2437 SE 17th Street, Suite 101 Ocala, Florida 34470 Facilities: Leased 9,400 sq. ft. Florida Bank, N.A. - Marion County Paddock Mall Night Drop Branch 3100 College Road Ocala, Florida 34474 Facilities: Leased - No sq. ft. Florida Bank, N.A. - Operations Center 6301 Benjamin Road, Suite 105 Tampa, Florida 33634 Facilities: Leased 11,328 sq. ft. Florida Bank Mortgage 4815 Executive Park Court, Suite 103 Jacksonville, Florida 32216 Facilities: Leased 13,200 sq. ft. Florida Bank, N.A. - Palm Beach County Phillips Point 777 S. Flagler Drive, Suite 128E West Palm Beach, Florida 33401 Facilities: Leased 4,602 sq. ft. Additional information concerning the property owned or leased by the Company and its subsidiaries is incorporated herein by reference from Note 4, PREMISES AND EQUIPMENT of the Notes to the Consolidated Financial Statements. 24 ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or the Bank is a party or of which any of their properties are subject, nor are there material proceedings known to the Company or the Bank to be threatened or pending by any governmental authority. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the three months ended December 31, 2003. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on The NASDAQ National Market under the symbol "FLBK." The common stock began trading on The NASDAQ National Market on July 30, 1998. The following table sets forth for the periods indicated the quarterly high and low sales prices per share as reported by The NASDAQ National Market. These quotations also reflect inter-dealer prices without retail mark-ups, markdowns, or commissions.
HIGH LOW --------------- -------------- Fiscal year ended December 31, 2003 First Quarter $10.25 $8.31 Second Quarter 12.10 9.00 Third Quarter 12.49 11.00 Fourth Quarter 16.30 11.70 Fiscal year ended December 31, 2002 First Quarter 8.90 5.90 Second Quarter 9.64 7.41 Third Quarter 9.00 7.27 Fourth Quarter 8.97 7.58
As of December 31, 2003, there were approximately 510 holders of record of the Common Stock. Management believes that there are in excess of 3,000 beneficial holders of its Common Stock. DIVIDENDS The Company has never declared or paid any dividends on its common stock. The Company currently anticipates that all of its earnings will be retained for development of the Company's business, and does not anticipate paying any cash dividends in the foreseeable future. Future cash dividends on common stock, if any, will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's future earnings, operations, capital requirements and surplus, general financial condition, contractual restrictions, and such other factors as the Board of Directors may deem relevant. STOCK REPURCHASE PLANS In September 1999, the Company's Board of Directors authorized a stock repurchase plan covering up to ten percent (10%) of the outstanding shares of common stock (approximately 585,000 shares). The share repurchase plan authorizes the purchase of common shares at any price below the then current book value per share. As of December 31, 2003, the Company had repurchased 302,200 shares for a total cost of $1.9 million or an average cost of $6.18 per share. No shares have been repurchased under this plan during the fiscal year ended December 31, 2003 and 2002. 25 Pursuant to the stock repurchase plan, on December 10, 2001, the Company's Board of Directors authorized a pre-programmed stock repurchase program pursuant to the `safe harbor' guidelines of Rule 10b-18 of the Securities Exchange Act of 1934. This program provides for repurchase of up to 250,000 shares in the open market when the trading price of the Company's common stock falls to $5.75 per share or less. No shares have been repurchased under this plan during the fiscal year ended December 31, 2003. EQUITY COMPENSATION PLANS The Company maintains the Amended and Restated1998 Stock Option Plan (the "1998 Plan"), the Employee Stock Purchase Plan (the "ESPP") and the Amended and Restated Incentive Compensation Plan (the "Incentive Plan"). Only restricted common stock is awarded under the Incentive Plan. The following table gives information about equity awards under the 1998 Plan, the Incentive Plan and the ESPP as of December 31, 2003:
NUMBER OF SHARES TO BE WEIGHTED AVERAGE NUMBER OF SECURITIES ISSUED UPON THE EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER EQUITY PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS ------------- ------------------- ------------------- ----------------------------- Equity Compensation Plans approved by the shareholders 16,642 (1) $10.20 (2) 221,318 (3) Equity Compensation Plans not approved by the shareholders 975,026 (4) $8.64 (5) 110,413 (6) ------------------- ------------------- ----------------------------- TOTALS 991,668 $8.67 331,731
------------- (1) Represents an aggregate of 16,642 common shares issuable upon exercise of options under the ESPP. (2) Represents weighted-average exercise price of outstanding options under the ESPP. (3) Includes 85,186 common shares and 136,132 common shares remaining available for issuance under the ESPP and the Incentive Plan, respectively. (4) Represents the aggregate of common shares issuable upon exercise of options under the 1998 Plan. (5) Represents weighted-average exercise price of outstanding options under the 1998 Plan. (6) Represents common shares remaining available under the 1998 Plan. SERIES C PREFERRED STOCK On December 31, 2002, the Company issued 50,000 shares of Series C preferred stock for $100.00 per share through a private placement. The Series C preferred stock is not convertible but is redeemable only as a result of a change in control. DIVIDENDS Non-cumulative cash dividends accrued at five percent annually through December 31, 2003 and will accrue at 3.75% thereafter and are payable quarterly in arrears. 26 LIQUIDATION PREFERENCE In the event of any liquidation, dissolution or winding up of affairs of the Company, the holders of Series C preferred stock at the time shall receive $100.00 per share plus an amount equal to accrued and unpaid dividends thereon through and including the date of distribution prior to any distribution to holders of common stock. The liquidation preference at December 31, 2003 was approximately $5.1 million. ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected financial data of the Company for the periods indicated. The selected financial data of the Company as of fiscal years ended and for each of the years then ended are derived from the financial statements of the Company, which have been audited by Deloitte & Touche LLP, independent auditors. These selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's financial statements and notes thereto, and financial and other information included elsewhere herein.
Year Ended December 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (Dollars in thousands, except per share amounts) Summary Income Statement: Interest income $ 43,568 $ 34,927 $ 31,380 $ 23,766 $ 11,142 Interest expense 16,891 15,584 16,548 13,711 4,696 -------- -------- -------- -------- -------- Net interest income 26,677 19,343 14,832 10,055 6,446 Provision for loan losses 2,936 3,026 1,889 1,912 1,610 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 23,741 16,317 12,943 8,143 4,836 Noninterest income 15,603 4,040 2,048 1,011 583 Noninterest expense 32,198 18,005 13,693 10,886 8,342 -------- -------- -------- -------- -------- Income (loss) before provision for income taxes 7,146 2,352 1,298 (1,732) (2,923) Provision (benefit) for income taxes 2,490 885 490 (652) (1,076) -------- -------- -------- -------- -------- Net income (loss) 4,656 1,467 808 (1,080) (1,847) -------- -------- -------- -------- -------- Preferred stock dividends 250 140 250 -- -- -------- -------- -------- -------- -------- Net income (loss) applicable to common shares $ 4,406 $ 1,327 $ 558 $ (1,080) $ (1,847) ======== ======== ======== ======== ======== Earnings (loss) per common share: Basic $ 0.65 $ 0.21 $ 0.10 $ (0.19) $ (0.32) Diluted 0.62 0.20 0.10 (0.19) (0.32)
27
December 31, -------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- (Dollars in Thousands) Summary Balance Sheet Data: Investment securities $ 56,886 $ 53,652 $ 38,886 $ 36,756 $ 28,511 Loans held for investment, net of deferred loan fees 690,590 550,455 401,444 285,526 157,517 Loans held for sale 66,495 54,674 -- -- -- Earning assets 844,587 721,296 494,987 353,239 205,898 Total assets 944,461 756,066 522,323 372,797 218,163 Noninterest-bearing deposits 134,648 141,395 99,899 41,965 22,036 Total deposits 796,613 664,910 451,249 305,239 159,106 Repurchase agreements and other borrowed funds 57,555 14,576 14,210 26,035 18,279 Total shareholders' equity 57,794 52,964 46,142 38,556 39,235 Performance Ratios: Net interest margin (1) 3.17 % 3.33 % 3.62 % 3.58 % 4.57 % Efficiency ratio (2) 76.15 77.00 81.12 98.37 118.68 Return on average assets 0.50 0.22 0.13 (0.36) (1.07) Return on average equity 7.98 2.79 1.30 (2.83) (3.12) Asset Quality Ratios: Allowance for loan losses to total loans held for investment 1.31 % 1.32 % 1.17 % 1.23 % 1.18 % Non-performing loans to total loans held for investment 0.40 0.25 0.36 1.44 1.46 Net charge-offs to average loans held for investment 0.18 0.09 0.21 0.12 0.80 Capital and Liquidity Ratios: Total capital to risk-weighted assets 10.95 % 11.92 % 12.70 % 12.73 % 18.19 % Tier 1 capital to risk-weighted assets 9.73 10.78 11.63 11.58 17.29 Tier 1 capital to average assets 8.24 9.97 10.64 10.28 20.01 Average loans to average deposits 110.76 97.21 99.03 94.90 101.53 Average equity to average total assets 6.04 7.79 9.96 12.80 34.30
--------------- (1) Computed by dividing net interest income by average earning assets. (2) Computed by dividing noninterest expense by the sum of net interest income and noninterest income. 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS THE COMPANY AND ITS REPRESENTATIVES MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL STATEMENTS THAT ARE "FORWARD-LOOKING" AND PROVIDE OTHER THAN HISTORICAL INFORMATION, INCLUDING STATEMENTS CONTAINED IN THE FORM 10-K, THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR IN COMMUNICATIONS TO ITS SHAREHOLDERS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO BE MATERIALLY DIFFERENT FROM ANY RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY ANY FORWARD-LOOKING STATEMENT. THESE FACTORS INCLUDE, AMONG OTHER THINGS, THE RISK FACTORS LISTED BELOW. IN SOME CASES, THE COMPANY HAS IDENTIFIED FORWARD-LOOKING STATEMENTS BY SUCH WORDS OR PHRASES AS "WILL LIKELY RESULT," "IS CONFIDENT THAT," "EXPECTS," "SHOULD," "COULD," "MAY," "WILL CONTINUE TO," "BELIEVES," "ANTICIPATES," "PREDICTS," "FORECASTS," "ESTIMATES," "PROJECTS," "POTENTIAL," "INTENDS" OR SIMILAR EXPRESSIONS IDENTIFYING "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, INCLUDING THE NEGATIVE OF THOSE WORDS AND PHRASES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT VIEWS AND ASSUMPTIONS REGARDING FUTURE EVENTS, FUTURE BUSINESS CONDITIONS AND THE OUTLOOK FOR THE COMPANY BASED ON CURRENTLY AVAILABLE INFORMATION. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THESE STATEMENTS. THE COMPANY CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE. IN CONNECTION WITH THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY IS HEREBY IDENTIFYING IMPORTANT FACTORS THAT COULD AFFECT THE COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE COMPANY'S ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINIONS OR STATEMENTS EXPRESSED WITH RESPECT TO FUTURE PERIODS IN ANY CURRENT STATEMENTS. SEE THE SECTION ON RISK FACTORS THAT THE COMPANY HAS IDENTIFIED, WHICH ARE DISCUSSED IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 29 EXECUTIVE SUMMARY OVERVIEW OF OPERATING RESULTS Florida Banks, Inc. (the "Company") was formed in 1997 to create a statewide community banking system that would focus on the largest and fastest growing Florida banking markets. The Company began to operate in 1998 after it completed the acquisition of First National Bank of Tampa, which became the Company's wholly owned banking subsidiary and was subsequently named Florida Bank, N.A. An important aspect of the Company's growth strategy is the ability to service and effectively manage a large number of loans and deposit accounts in multiple markets in Florida. Accordingly, the Company created an operations infrastructure sufficient to support statewide lending and banking operations. Management believes that the Company's existing infrastructure allows it to grow its business both geographically and with respect to the size and number of loan and deposit accounts without substantial additional capital expenditures. The Company's historical financial results for fiscal 1998 to 2000 reflect the development of the Company in its early stages, notably in connection with initial start-up costs and the raising and retention of capital to fund its planned growth. In 1998 and 1999 the Company incurred significant noninterest expenses for the start-up and infrastructure costs described above, while revenue items gradually increased as it began to originate loans and invest in other earning assets. In the fourth quarter of 2000, the Company achieved profitability as these costs were spread over a larger asset base. The Company has maintained profitability and asset growth throughout fiscal 2001, 2002 and fiscal 2003. In the fourth quarter of fiscal 2002, the Company launched its wholesale residential mortgage banking division that is managed as a separate line of business. This mortgage operation significantly increased noninterest income and noninterest expense and significantly contributed to earnings in fiscal 2002 and 2003. The Company's operating results have improved significantly over the past several years. The table below shows the annual growth rate of its net interest income, net income, assets, loans and deposits:
AS OF OR FOR AS OF OR FOR AS OF OR FOR THE ANNUAL THE YEAR ENDED ANNUAL THE YEAR ENDED ANNUAL YEAR ENDED GROWTH DECEMBER 31, GROWTH DECEMBER 31, GROWTH (Dollars in Thousands) DECEMBER 31, 2003 RATE (1) 2002 RATE (1) 2001 RATE (1) ----------------- -------- ------------- -------- -------------- -------- Net interest income $26,677 37.9 $19,343 30.4 $14,832 47.5 Net income (loss) applicable to common shares 4,406 232.0 1,327 137.8 558 151.7 Total assets 944,461 24.9 756,066 44.8 522,323 40.1 Loans held for investment, net of deferred fees 690,590 25.5 550,455 37.1 401,444 40.6 Deposits 796,613 19.8 664,910 47.3 451,249 47.8
---------- (1) The annual growth rate with respect to this data is the percentage growth of the item in the year ended shown compared to the most recently completed prior year end. 30 CRITICAL ACCOUNTING POLICIES The preparation of the financial statements, on which this management's discussion and analysis is based, requires the Company to make estimates, which impact these financial statements. The most critical of these estimates and accounting policies relate to the allowance for loan losses, other real estate owned, and derivative financial instruments. ALLOWANCE FOR LOAN LOSSES Management carefully monitors the credit quality of the Company's loan portfolios and makes estimates about the amount of credit losses that have been incurred at each financial statement reporting date. This process significantly impacts the financial statements and involves complex, subjective judgments. The allowance is largely determined based upon the market value of the underlying collateral. Market values of collateral are generally based upon appraisals obtained from independent appraisers. If market conditions decline, the allowance for loan losses would be negatively impacted resulting in a negative impact on the Company's earnings. The allowance for loan losses is a significant estimate that can and does change based on management's assumptions about specific borrowers and applicable economic and environmental conditions, among other factors. OTHER REAL ESTATE OWNED At December 31, 2003, the Company had two real estate properties that were obtained through a foreclosure. The properties are recorded based upon the market value determined by an independent appraisal less estimated selling cost. If market conditions decline in the area in which the properties are located, then the value of other real estate owned will be negatively impacted, resulting in a negative impact to the Company's earnings. DERIVATIVE INSTRUMENTS The Company has entered into several interest swaps plus a foreign currency swap and have provided interest rate swaps to loan participants. As a result of these activities, the Company recognized a net loss on derivative instruments of $19,000 for the year ended December 31, 2003. The fair market value of these instruments is determined by quotes obtained from the related counter parties in combination with a valuation model utilizing discounted cash flows. The valuation of these derivative instruments is a significant estimate that is largely affected by changes in interest rates. If interest rates significantly increase or decrease, the value of these instruments will significantly change, resulting in an impact on the Company's earnings. BUSINESS SEGMENTS Prior to October 2002, the Company had only one reporting segment. In October 2002, the Company began operating its mortgage banking division, which is managed as a separate business segment. Accordingly, beginning in 2002, the Company began to report its results of operations on the following two reporting segments: the COMMERCIAL BANK and the MORTGAGE BANK. Net interest income per segment is determined by including interest earned on loans and investments in that segment, less interest expense of deposits and borrowings used to support the earning assets of that segment. For more details on the Company's business segments, see Note 23, SEGMENT REPORTING of the Notes to the Consolidated Financial Statements. 31 COMMERCIAL BANK The commercial bank segment offers a wide array of financial services to its customers, including short and long-term commercial, consumer and mortgage loans, interest-bearing and noninterest-bearing deposit accounts, telephone and internet banking, Automated Clearing House and Electronic Funds Transfer, stored value cards and other specialized products and services. For the year ended December 31, 2003, the commercial bank segment accounted for 86.6% of consolidated net interest income, 29.0% of consolidated noninterest income, and 51.8% of consolidated noninterest expense. For the year ended December 31, 2002, the commercial bank segment accounted for 97.9% of consolidated net interest income, 66.5% of consolidated noninterest income, and 76.0% of consolidated noninterest expense. As this segment comprises the majority of the Company's operations, the performance of this segment is described in the consolidated discussion of financial condition and results of operations below. MORTGAGE BANK The mortgage bank segment originates residential mortgage loans through a network of third party mortgage brokers and sells these loans on a wholesale basis into the secondary mortgage loan market. For the year ended December 31, 2003, the mortgage bank segment accounted for 15.3% of consolidated net interest income, 71.0% of noninterest income, and 34.2% of noninterest expense. The mortgage bank originated approximately $1.1 billion in mortgage loans, and sold approximately $1.0 billion in mortgage loans, during the fiscal year ended December 31, 2003. For the year ended December 31, 2003, this segment contributed $4.1 million to income before income taxes, excluding any allocation of parent company costs. For the year ended December 31, 2002, the mortgage bank segment accounted for 0.3% of net interest income, 33.5% of noninterest income, and 5.1% of noninterest expense. The mortgage bank originated approximately $98 million in mortgage loans, and sold approximately $44 million in mortgage loans, during the fiscal year ended December 31, 2002. For the year ended December 31, 2002, this segment contributed $0.5 million to income before income taxes, excluding any allocation of parent company costs. Approximately 68% and 83% of the Company's mortgage loan volume for the years ended December 31, 2003 and 2002, respectively, resulted from refinancing activities. As interest rates begin to increase, the volume of refinancing will decrease substantially, resulting in a decrease in the overall volume of the Company's mortgage bank segment and a reduction in earnings. Initially, the Company will offset a portion of this reduction in earnings by reducing its overhead expenses, including a reduction in temporary and contract employees. To offset this decline in volume, the Company intends to continue to expand its sales force and enter other Florida banking markets. The Company will also emphasize purchase loan originations by offering premium pricing and accelerated service levels for wholesale loans. In addition, the Company, in its initiatives that address the short term effects of lower volumes and the longer term goal of increasing its presence in the Florida banking market will allow it to continue to leverage its wholesale mortgage operation as interest rates increase and the volume of refinance activity declines as a percentage of the overall mortgage loan market. OTHER This category includes the Company's investment securities portfolio, capital, derivative instruments, liquidity and funding activities, risk management and certain other support activities not currently allocated to the abovementioned business segments. 32 Information about reportable segments, and reconciliation of such information to the audited consolidated condensed financial statements as of and for the year ended December 31, 2003 follows:
COMMERCIAL INTER-SEGMENT CONSOLIDATED (Dollars in Thousands) BANK MORTGAGE BANK OTHER ELIMINATIONS TOTAL ---------- ------------- ----- ------------ ------------ Net interest income................. $ 23,115 $ 4,073 $ (511) $ -- $ 26,677 Noninterest income.................. 4,524 11,079 -- -- 15,603 Noninterest expense................. 16,689 11,025 4,484 -- 32,198 Income (loss) before taxes.......... 8,015 4,127 (4,996) -- 7,146 Total assets........................ 869,269 68,991 88,528 (82,327) 944,461 Expenditures for additions to premises and equipment.......... 1,066 423 160 -- 1,649 Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the year ended December 31, 2002 follows:
COMMERCIAL MORTGAGE INTER-SEGMENT CONSOLIDATED (Dollar in Thousands) BANK BANK OTHER ELIMINATIONS TOTAL ---------- --------- ----- ------------ ------------ Net interest income.............. $18,943 $62 $338 $-- $19,343 Noninterest income............... 2,685 1,355 -- -- 4,040 Noninterest expense.............. 13,690 911 3,404 -- 18,005 Income (loss) before taxes....... 4,913 505 (3,066) -- 2,352 Total assets..................... 694,561 55,235 70,291 (64,021) 756,066 Expenditures for additions to premises and equipment........ 2,398 562 8 -- 2,968
"Inter-Segment Elimination" in the tables above represents primarily the holding company's (Florida Banks, Inc.) investments in its subsidiary bank (Florida Bank, N.A.) and its nonbank subsidiaries, and the holding company's deposits held by its subsidiary bank. These eliminations are made pursuant to the presentation of consolidated financial information as discussed in Note 1, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of the Notes to the Consolidated Financial Statements. RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Throughout this section, the Company uses the following terms and meanings to discuss its results of operations: "Net interest income" is the principal component of a commercial bank's income stream and represents the difference or spread between interest and certain fee income generated from earning assets and the interest expense paid on deposits and other borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company had no investments in tax-exempt securities during 2003, 2002 and 2001. Accordingly, no adjustment is necessary to facilitate comparisons on a taxable equivalent basis. "Provision for loan losses" is the expense of providing an allowance or reserve for probable future losses on loans. The amount of the provision for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of loan portfolio quality, the value of loan collateral and general business and economic conditions. "Noninterest income" consists of revenues generated from a broad range of financial services, products and activities, including fee-based services, 33 service fees on deposit accounts and other activities. In addition, gains realized from the sale of the guaranteed portion of Small Business Administration ("SBA") loans, other real estate owned, and available for sale investments are included in noninterest income. "Noninterest expense" consists of items such as salaries and benefits, occupancy and equipment, and other general and administrative expenses. "Net income applicable to common shares" means net income after taxes less any dividends on preferred stock for that period. Preferred stock for the periods presented consists of Series B preferred, which was issued June 29, 2001 and converted to common stock on April 26, 2002, and Series C preferred, which was issued December 31, 2002, and was still outstanding as of December 31, 2003. FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31, 2002 NET INTEREST INCOME increased by $7.3 million, or 37.9% to $26.7 million for the year ended December 31, 2003 from $19.3 million for the year ended December 31, 2002. This is attributable to an increase of $9.8 million in interest on loans for the year ended December 31, 2003, resulting from the growth in the Company's loan portfolio, partially offset by decreases in interest income from investments and Federal funds sold and an increase in interest expense of $1.3 million. The increase in interest expense resulted primarily from an increase of $693,000 in interest on deposits and $549 interest on trust preferred securities, partially offset by decrease in interest on repurchase agreements and borrowed funds. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. Upon the adoption of SFAS No. 150, the Company's obligated mandatorily redeemable preferred securities of subsidiary trusts were reclassified from mezzanine equity to debt. The dividends related to these securities are reflected as interest expense beginning July 1, 2003, on a prospective basis. At December 31, 2003, the Company had $20 million outstanding as company obligated mandatorily redeemable preferred securities of subsidiary trusts. The Company expensed approximately $975,000 related to those instruments of which approximately $549,000 (including amortization of debt issuance costs of approximately $71,000) is recorded as interest expense and $426,000 is recorded as dividends on trust preferred securities in the Consolidated Statement of Operations. The net interest spread increased to 2.85% in 2003 from 2.70% in 2002, as the yield on average earning assets decreased 78 basis points while the cost of interest-bearing liabilities decreased 93 basis points. The net interest spread measures the absolute difference between the yield on average earning assets and the rate paid on average interest-bearing sources of funds. The net interest spread eliminates the impact of noninterest-bearing funds and gives a direct perspective on the effect of market interest rate movements. This measurement allows management to evaluate the variance in market rates and adjust rates or terms as needed to maximize spreads. During recent years, the net interest margins and net interest spreads have been under pressure, due in part to intense competition for funds with non-bank institutions and changing regulatory supervision for some financial intermediaries. The pressure was not unique to the Company and was experienced by the banking industry nationwide. To counter potential declines in the net interest margin and the interest rate risk inherent in the Company's balance sheet, the Company adjusts the rates and terms of the interest-bearing liabilities in response to general market rate changes and the competitive environment. The Company monitors Federal funds sold levels throughout the year, investing any funds not necessary 34 to maintain appropriate liquidity in higher yielding investments such as short-term U.S. government and agency securities. The Company will continue to manage its balance sheet and its interest rate risk based on changing market interest rate conditions. RATE/VOLUME ANALYSIS OF NET INTEREST INCOME The table below presents the changes in interest income and interest expense attributable to volume and rate changes between the fiscal years ended December 31, 2003 and 2002. The effect of a change in average balance has been determined by applying the average rate in 2002 and 2003 to the change in average balance from 2002 to 2003, respectively. The effect of change in rate has been determined by applying the average balance in 2002 and 2003 to the change in the average rate from 2002 to 2003, respectively. The net change attributable to the combined impact of the volume and rate has been allocated to both components in proportion to the relationship of the absolute dollar amounts of the change in each.
YEAR ENDED DECEMBER 31, ----------------------------------------- 2003 VS. 2002 INCREASE/(DECREASE) DUE TO: ---------------------------------------- VOLUME YIELD/RATE TOTAL ------- ------- ------- INTEREST EARNED ON: Taxable securities $ 369 $(1,239) $ (870) Federal funds sold 60 (240) (180) Net loans 15,689 (5,930) 9,759 Repurchase agreements 39 (107) (68) ------- ------- ------- Total earning assets 16,157 (7,516) 8,641 ------- ------- ------- INTEREST PAID ON: Money-market and interest-bearing demand deposits 721 (574) 147 Savings deposits 140 (537) (397) Time deposits 6,294 (5,352) 942 Repurchase agreements 95 (213) (118) Trust preferred securities (1) 549 -- 549 Other borrowed funds 282 (97) 185 ------- ------- ------- Total interest-bearing liabilities 8,081 (6,774) 1,307 ------- ------- ------- Net interest income $ 8,076 (742) 7,334 ======= ======= =======
------------- (1) Effective July 1, 2003, dividends on trust preferred securities are reported as interest expense on a prospective basis. Previously such dividends were reported as noninterest expense. The change in interest expense on trust preferred securities has been reflected in the table as attributable to volume. PROVISION FOR LOAN LOSSES charged to operations decreased by approximately $90,000 or 3.0% to $2.9 million for the year ended December 31, 2003 from $3.0 million for the year ended December 31, 2002. This decrease is primarily a result of an increase in specific reserves in 2002 for loans that were charged off in the first quarter of 2003, offset by the growth of the Company's overall loan portfolio in the fiscal year ended December 31, 2003 as compared to the fiscal 2002. For a more detailed discussion of the provision for loan losses, see "-- Analysis of Financial Condition -- Allowance for Loan Losses and Net Charge-offs. 35 The following table presents an analysis of the NONINTEREST INCOME for the fiscal years ended December 31, 2003 and 2002 with respect to each major category of noninterest income:
FOR THE YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 $ CHANGE % CHANGE ------- ------- -------- ---------- Gain on sale of mortgage loans $ 8,767 $ 1,093 $ 7,674 702.1 Mortgage loan origination fees 3,357 805 2,552 317.0 Service fees 2,316 1,719 597 34.7 Gain on sale of commercial loans -- 43 (43) (100.0) Loss on sale of available for sale investment securities, net -- (4) 4 100.0 Other noninterest income 1,163 384 779 203.0 ------- ------- -------- ----- Total $15,603 $ 4,040 $ 11,563 286.2 ------- ------- -------- -----
NONINTEREST INCOME increased by $11.6 million, or 286.2% to $15.6 million for the year ended December 31, 2003 from $4.0 million for the year ended December 31, 2002. This increase primarily resulted from gains on sale of mortgage loans of $8.8 million and mortgage loan origination fees of $3.4 million for the year ended December 31, 2003, compared to $1.1 million and $805,000 for these categories for the year ended December 31, 2002. These income categories relate to the Company's wholesale mortgage division, which commenced operations in the fourth quarter of 2002. Due to the short time this division has been in operation, and the substantial portion of its revenue attributable to mortgage refinance activity; the Company cannot assure you that the current levels of income or growth will continue in the future. Service fees on deposits increased by $597,000, or 34.7%, to $2.3 million for the year ended December 31, 2003 from $1.7 million for the year ended December 31, 2002. This increase is primarily attributable to an increase in deposit accounts. Other noninterest income increased by $779,000, or 203.0% to $1.2 million for the year ended December 31, 2003 from $384,000 for the year ended December 31, 2002. The increase in other noninterest income is primarily a result of an increase in the cash surrender value of Bank owned life insurance. The following table presents an analysis of the NONINTEREST EXPENSE for fiscal years ended December 31, 2003 and 2002 with respect to each major category of noninterest expense:
FOR THE YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 $ CHANGE % CHANGE ------- ------- -------- --------- Salaries and benefits $21,930 $11,038 $ 10,892 98.7 Occupancy and equipment 2,809 2,106 703 33.4 Communications 1,583 1,144 439 38.4 Data processing 1,134 873 261 29.9 Professional 966 524 442 84.5 Dividends on preferred securities of subsidiary trusts 426 633 (207) (32.7) Other 3,349 1,687 1,662 98.5 ------- ------- -------- ----- Total $32,198 $18,005 $ 14,193 78.8 ------- ------- -------- -----
----------- (1) Effective July 1, 2003, dividends on trust preferred securities are reported as interest expense on a prospective basis. Previously such dividends were reported as noninterest expense. NONINTEREST EXPENSE increased by $14.2 million, or 78.8%, to $32.2 million for 2003 compared to $18.0 for 2002. The increase resulted primarily from increases in salaries and benefits, occupancy and equipment and other 36 expenses. Salaries and benefits expenses increased primarily due to the addition of staff associated with the overall growth of the Company's business and with the addition of the mortgage banking division. Commission incentives associated with loan volume originated by the Company's mortgage banking division totaled $4.6 million, or 21%, of the Company's total salary and benefits for the year ended December 31, 2003. Dividends on preferred securities of subsidiary trusts decreased during 2003 compared to 2002 primarily due to the change in classification of such dividends effective July 1, 2003, from noninterest expense to interest expense upon adoption of SFAS No. 150. Trust preferred securities increased from $17.0 million at December 31, 2002 to $20.0 million at December 31, 2003. Total dividends paid on the trust preferred securities totaled $975,000 in 2003 of which $549,000 (including amortization of debt issuance costs of approximately $71,000) is recorded as interest expense and $426,000 is recorded as dividends on trust preferred securities in the Consolidated Statement of Operations. Accordingly, total dividends on trust preferred securities increased from $633,000 in 2002 to $975,000 due to the increase in the average balance outstanding. The increase in other expenses is primarily attributed to the expenses associated with supporting operations related to the Company's overall growth. Specific operational expenses that increased include recruitment expenses and postage/courier expenses. Other expenses related to the Company's intranet, internet and facsimile facilities, continue to increase in relation to the overall growth of its business. Recruitment expenses in 2003 related primarily to the recruiting of personnel with specific skills and experiences to staff its mortgage banking division. During the fiscal year ended December 31, 2003, non-interest expense was accounted for by compensation paid to temporary and contract employees for its mortgage business. Recruiting expenses for the mortgage banking division should be primarily of a non-recurring nature. Because its physical locations are spread over a large geographic area, postage/courier expenses tend to be significant, because of the need for written communication among the Company's banking facilities, operations center, and customers. These costs will tend to rise in relation to the overall growth of its business. A PROVISION FOR INCOME TAXES of $2.5 million was recognized for the year ended December 31, 2003 compared to $885,000 for the year ended December 31, 2002. These provisions for income taxes represent an estimated effective annual tax rate of approximately 34.8% and 37.6% respectively. The decrease in the effective tax rate results from a tax credit obtained from a charitable contribution the Company made in the second quarter of 2003. Certain income and expense items are recognized in different periods for financial reporting purposes and for income tax return purposes. Deferred income tax assets and liabilities reflect the differences between the values of certain assets and liabilities for financial reporting purposes and for income tax purposes, computed at the current tax rates. Deferred income tax expense is computed as the change in the Company's deferred tax assets, net of deferred tax liabilities and the valuation allowance. The Company's deferred income tax assets consist principally of net operating loss carryforwards and the allowance for loan losses. A deferred tax valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be realized. No valuation allowance was considered necessary at December 31, 2003 or 2002. First National Bank of Tampa reported losses from operations each year from its inception in 1988 through 1994. These losses primarily resulted from loan losses and high overhead costs. Management of First National Bank of Tampa was replaced during 1992 and additional capital of $1.6 million was raised through a private placement of common stock during 1993. Largely as a result of these changes, First National Bank of Tampa became profitable in 1995. In order to reflect this fresh start, the bank elected to restructure its capital accounts through a quasi-reorganization. A quasi-reorganization is an accounting procedure that allows a company to restructure its capital accounts to remove an accumulated deficit without undergoing a legal reorganization. Accordingly, First National Bank of Tampa charged against additional paid-in capital its accumulated deficit of $8.1 million at December 31, 1995. As a result of the quasi-reorganization, the future benefit from the utilization of the net operating loss carryforward generated prior to the date of the quasi-reorganization was required to be accounted for as an increase to 37 additional paid-in capital. Such benefits are not considered to have resulted from First National Bank of Tampa's results of operations subsequent to the quasi-reorganization. The following table presents the components of net deferred tax assets: AS OF DECEMBER 31, --------------------- 2003 2002 ------ ------ Deferred tax assets $4,953 $4,436 Deferred tax liabilities 355 527 Valuation allowance -- -- ------ ------ Net deferred tax assets $4,598 $3,909 ====== ====== As of December 31, 2003, the Company had approximately $3.9 million in net operating loss carryforwards available to reduce future taxable earnings at December 31, 2003, which resulted in net deferred tax assets of $1.4 million. This net operating loss carryforward will expire in varying amounts in the years 2007 through 2018 unless fully utilized by the Company. Based on management's estimate of future earnings and the expiration dates of the net operating loss carryforward as of December 31, 2003 and 2002, it was determined that it is more likely than not that the benefit of the deferred tax assets will be realized. The utilization of the net operating loss carryforwards reduces the amount of the related deferred tax asset by the amount of such utilization at the current enacted tax rates. Other deferred tax items resulting in temporary differences in the recognition of income and expenses such as the allowance for loan losses, loan fees, accumulated depreciation and cash to accrual adjustments will fluctuate from year-to-year. As a result of the Company's acquisition of First National Bank of Florida through the merger, the Company has the use of its net operating loss carryforwards. However, the portion of the Company's net operating loss carryforwards that becomes usable each year is limited under provisions of Section 382 of the Internal Revenue Code relating to the change in control. The annual limitation is based upon the purchase price multiplied by the applicable long-term tax-exempt rate (as defined in the Internal Revenue Code) at the date of acquisition. Based upon the applicable long-term tax-exempt rate for December 1998 acquisitions, this annual limitation is approximately $700,000. Management believes it is more likely than not that it will produce sufficient taxable income to allow the Company to fully utilize its net operating loss carryforwards prior to their expiration. NET INCOME APPLICABLE TO COMMON SHARES increased by $3.1 million, or 232.1%, to $4.4 million for the year ended December 31, 2003 from $1.3 million for the year ended December 31, 2002. Basic and diluted earnings per common share for the year ended December 31, 2003 was $0.65 and $0.62, respectively compared to $0.21 and $0.20, respectively, for the year ended December 31, 2002. The increase in net income applicable to common shares can be attributed to an increase in net interest income and non-interest income, partially offset by increases in interest and noninterest expense. The Company's earnings performance is reflected in the calculations of net income as a percentage of average total assets (return on average assets) and net income as a percentage of average shareholders' equity (return on average equity). Return on average assets and return on average equity are computed using net income applicable to common shares. For the fiscal year ended December 31, 2003 and 2002, the return on average assets was 0.50% and 0.22%, respectively. For the same periods, the return on average equity was 7.98% and 2.79%, respectively. The Company's ratio of total equity to total assets decreased to 6.1% at December 31, 2003 from 7.01% at December 31, 2002, primarily as a result of growth from branch operations. 38 FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 31, 2001 NET INTEREST INCOME increased by $4.5 million, or 30.4% to $19.3 million for the year ended December 31, 2002 from $14.8 million for the year ended December 31, 2001. This increase is attributable to growth in loan volume due to ongoing branch operations, new loan production office operations, and the new wholesale mortgage operation. These increases were partially offset by the growth in time deposits, repurchase agreements and other borrowed funds. The trend in net interest income is commonly evaluated using net interest margin and net interest spread. The net interest margin, or net yield on average earning assets, is computed by dividing fully taxable equivalent net interest income by average earning assets. The net interest margin decreased 29 basis points to 3.33% in 2002 on average earning assets of $581.0 million from 3.62% in 2001 on average earning assets of $409.8 million. This decrease was primarily due to the fact that the average yield on earning assets decreased slightly more than the average rates on interest-bearing liabilities decreased. There was an 170 basis point decrease in the average yield on earning assets to 5.96% in 2002 from 7.66% in 2001 and a 162 basis point decrease in the average rate paid on interest-bearing liabilities to 3.25% in 2002 from 4.87% in 2001. The decreased yield on earning assets was primarily the result of lower market rates on loans and investment securities, prompted by a decrease in the Prime Rate during November 2002, from 4.75% to 4.25%, combined with ongoing weakness in other loan indices, including LIBOR and various mortgage rate indices. The decrease in the average cost of interest-bearing liabilities is attributable to decreases in market rates on interest-bearing demand deposits, savings and time deposits, money market accounts and other borrowed funds. RATE/VOLUME ANALYSIS OF NET INTEREST INCOME The table below presents the changes in interest income and interest expense attributable to volume and rate changes between the fiscal years ended December 31, 2002 and 2001. The effect of a change in average balance has been determined by applying the average rate in 2001 and 2002 to the change in average balance from 2001 to 2002, respectively. The effect of change in rate has been determined by applying the average balance in 2001 and 2002 to the change in the average rate from 2001 to 2002, respectively. The net change attributable to the combined impact of the volume and rate has been allocated to both components in proportion to the relationship of the absolute dollar amounts of the change in each.
YEAR ENDED DECEMBER 31, 2002 VS. 2001 INCREASE/DECREASE DUE TO: ---------------------------------------- VOLUME YIELD/RATE TOTAL ------- ----------- ------- INTEREST EARNED ON: Taxable securities $ 267 $ (681) $ (414) Federal funds sold 511 (713) (202) Net loans 11,669 (7,508) 4,161 Repurchase agreements 287 (250) 37 ------- ------- ------- Total earning assets 12,734 (9,152) 3,582 ------- ------- ------- INTEREST PAID ON: Money-market and interest-bearing demand deposits 424 (80) 344 Savings deposits 650 (1,206) (556) Time deposits 5,221 (5,300) (79) Repurchase agreements 149 (852) (703) Other borrowed funds 133 (68) 65 ------- ------- ------- Total interest-bearing liabilities 6,577 (7,506) (929) ------- ------- ------- Net interest income $ 6,157 $(1,646) $ 4,511 ======= ======= =======
39 PROVISION FOR LOAN LOSSES charged to operations for the year ended December 31, 2002 increased by $1.1 million, or 60.2%, to $3.0 million from $1.9 million during the year ended December 31, 2001. The increase in the provision from 2001 to 2002 was generally due to the increase in the amount of loans outstanding. In addition, in December 2002, a provision of approximately $0.5 million was charged to establish a specific reserve for an overdraft related to one of the Company's Automated Clearing House processors. This overdraft was charged off in the first quarter of 2003. For additional information regarding provision for loan losses, charge-offs and allowance for loan losses, see "-- Financial Condition--Asset Quality." The following table presents an analysis of the NONINTEREST INCOME for the fiscal years ended December 31, 2002 and 2001 with respect to each major category of noninterest income:
FOR THE YEAR ENDED DECEMBER 31, ----------------------- 2002 2001 $ CHANGE % CHANGE ------- ------ -------- ---------- Gain on sale of mortgage loans $ 1,093 $ -- $ 1,093 100.0 Mortgage loan origination fees 805 235 570 242.5 Service fees 1,719 1,224 495 40.4 Gain on sale of commercial loans 43 104 (61) (58.8) Loss on sale of available for sale investment securities, net (4) 74 (78) (105.4) Other noninterest income 384 411 (27) 6.6 ------- ------ ------- ------- Total $ 4,040 $2,048 $ 1,992 97.3 ======= ====== ======= =======
NONINTEREST INCOME increased by $2.0 million, or 97.3%, to $4.0 million for the year 2002 from $2.0 in 2001. This change resulted from an increase in the amount of service fees on deposit accounts, an increase in mortgage loan origination fees, and the income generated by the wholesale mortgage division, partially offset by a loss on the sale of investment securities available for sale, a smaller gain on sale of commercial loans, and lower other noninterest income. Service fees on deposit accounts increased in 2002 from 2001 due to an increase in the volume of business and personal transaction accounts and increased volume in the number of services transacted for customers subject to service charges. Gain on sale of mortgage loans in 2002 totaled $1.1 million, and mortgage loan origination fees increased in 2002 compared to 2001. This was due to the wholesale mortgage division commencing operations in the fourth quarter of 2002. Other income, which includes various recurring noninterest income items such as debit card fees, decreased in 2002 from 2001. The net interest spread decreased to 2.71% in 2002 from 2.79% 2001, as the yield on average earning assets decreased 170 basis points while the cost of interest-bearing liabilities decreased 162 basis points. 40 The following table presents an analysis of the NONINTEREST EXPENSE for fiscal years ended December 31, 2002 and 2001 with respect to each major category of noninterest expense:
FOR THE YEAR ENDED DECEMBER 31, ----------------------- 2002 2001 $ CHANGE % CHANGE ------- ------- ---------- --------- Salaries and benefits $11,038 $ 8,761 $2,277 26.0 Occupancy and equipment 2,106 1,786 320 17.9 Communications 1,144 970 174 17.9 Data processing 873 678 195 28.7 Professional 524 431 93 21.6 Dividends on preferred securities of subsidiary trusts 633 13 620 4,769.2 Other 1,687 1,054 633 60.1 ------- ------- ------ ---- Total $18,005 $13,693 $4,312 31.5 ======= ======= ====== ====
Noninterest expense increased by $4.3 million, or 31.5%, to $18.0 million for the year 2002 from $13.7 million in 2001. These increases are primarily attributable to increases in personnel, occupancy, data processing and other expenses relating to the establishment of the wholesale mortgage division and the West Palm Beach loan production office. Increases are also due to increased dividends on preferred securities of the Company's subsidiary trusts, together with increases in personnel and other expenses related to it's the overall growth of the mortgage banking division. Salaries and benefits increased in 2002 from 2001. This increase is primarily attributable to increases in the overall number of personnel, and additional employees related to the wholesale mortgage division. Occupancy and equipment expense increased in 2002 from 2001, primarily as a result of the activities of the wholesale mortgage division, which began operations in the fourth quarter of 2002. Data processing expense increased in 2002 from 2001, which is primarily attributable to the growth in loan and deposit transactions and the addition of new services. Dividends on preferred securities of the Company's subsidiary trusts increased in 2002 from in 2001 due to an increase in the amount of such securities outstanding to $17.0 million at December 31, 2002 from $6.0 million at the prior year-end. Also, the securities outstanding at December 31, 2001 were issued on December 18, 2001, so only thirteen days' interest accrued with respect to those securities in 2001. Other operating expenses increased 36.7% to $3.4 million in 2002 from $2.5 million in 2001. This increase is attributable primarily to an increase of $0.1 million in other real estate owned expenses, an increase of $0.1 million in audit, tax and accounting expense, an increase of $90,000 in communication expense and an increase of $89,000 in Automated Clearing House and bank service charge expense. These expenses are primarily attributable to opening of the wholesale residential mortgage division and an overall increase in the size and volume of business conducted by Florida Bank, N.A. A PROVISION FOR INCOME TAXES of $885,000 was recognized for the year ended December 31, 2002 compared to $489,000 for the year ended December 31, 2002. These provisions for income taxes represent an estimated effective annual tax rate of 37.6% for fiscal years ended December 31, 2002 and 2001. The Company paid no income taxes during fiscal 2002 and 2001 due to the availability of net operating loss carryforward. The following table presents the components of net deferred tax assets as of December 31, 2002 and 2001: AS OF DECEMBER 31, --------------------- 2002 2001 ------ ------ Deferred tax assets $4,436 $4,365 Deferred tax liabilities 527 348 Valuation allowance -- -- ------ ------ Net deferred tax assets $3,909 $4,017 ====== ====== The Company's deferred income taxes consist principally of net operating loss carryforwards and the allowance for loan losses. As of December 31, 2002 and 2001, the Company had approximately $4.6 million and $7.1 million, respectively, in net operating loss carryforward available to reduce future 41 taxable earnings, which resulted in net deferred tax assets of $1.7 million and $2.7 million, respectively. This net operating loss carryforwards will expire in varying amounts in the years 2006 through 2018 unless fully utilized by the Company. Based on management's estimate of future earnings and the expiration dates of the net operating loss carryforward as of December 31, 2002 and 2001, it was determined that it is more likely than not that the benefit of the deferred tax assets will be realized. NET INCOME APPLICABLE TO COMMON SHARES increased by $769,000, or 137.7%, to $1.3 million for the year ended December 31, 2002 from $558,000 for the year ended December 31, 2001. Basic and diluted earnings per common share for the year ended December 31, 2002 were $0.21 and $0.20. Basic and diluted earnings per common share for the year ended December 31, 2001 were $0.10. This increase was primarily attributable to an increase in net interest income and noninterest income, partially offset by an increase in noninterest expenses. Net interest income increased to $19.3 million in 2002 from $14.8 million in 2001, an increase of 30.4%. The provision for loan losses increased 60.1% to $3.0 million in 2002, from $1.9 million in 2001. Noninterest income increased 97.3% to $4.0 million in 2002 from $2.0 million in 2001. Noninterest expense increased to $18.0 million in 2002 from $13.7 million in 2001, an increase of 31.5%. The Company's earnings performance is reflected in the calculations of net income as a percentage of average total assets (return on average assets) and net income as a percentage of average shareholders' equity (return on average equity). Return on average assets and return on average equity are computed using net income applicable to common shares. For the fiscal year ended December 31, 2002 and 2001, the return on average assets was 0.22% and 0.13%, respectively. For the same periods, the return on average equity was 2.79% and 1.30%, respectively. The Company's ratio of total equity to total assets decreased to 7.0% at December 31, 2002 from 8.8% at December 31, 2001, primarily as a result of growth from branch operations. ANALYSIS OF FINANCIAL CONDITION AS OF DECEMBER 31, 2003 AND 2002 TOTAL ASSETS increased by $188.4 million at December 31, 2003, or 24.9%, to $944.5 million from $756.1 million at December 31, 2002. The increase in total assets primarily resulted from the growth in loans outstanding and mortgage loans held for sale that were funded by new deposit growth and other borrowed funds. Total investment securities decreased by $3.2 million, or 6.0%, to $56.9 million at December 31, 2003 as compared to $53.7 million at December 31, 2002. Federal funds sold decreased by $31.9 million or 51.0% to $30.6 million at December 31, 2003 from $62.5 million at December 31, 2002. Other assets increased by $13.0 million to $13.4 million at December 31, 2003 from $344,000 at December 31, 2002. This increase in other assets results principally from a $10 million investment in bank owned life insurance for certain of the Company's executives. LOANS increased by $140.1 million, or 25.5%, to $690.6 million at December 31, 2003, from $550.5 at December 31, 2002. Mortgage loans held for sale increased by $11.8 million, or 21.6%, to $66.5 million at December 31, 2003 from $54.7 million at December 31, 2002. The increase in loans was funded by increases in depository accounts, repurchase agreements sold and other borrowings. The allowance for loan losses increased by $2.9 million, or 24.7%, at December 31, 2003 from $7.3 million at December 31, 2002. The increase primarily resulted from additional provision of $1.8 million during this period, offset by charge-offs. The allowance for loan losses as a percentage of total loans held for investment was 1.31% at December 31, 2003 and 1.32% at December 31, 2002. Management believes that such allowance for loan losses is sufficient to cover estimated losses in the Company's bank's loan portfolio. The Company has a policy of transferring certain non-performing loans to NONACCRUAL status when they become more than 90 days past due on either principal or interest. At December 31, 2003, nonaccrual loans amount to $2.6 million, compared with $1.5 million at December 31, 2002. The increase of $1.1 million is due to the overall increase in loans held for investment. Management believes the specific reserves placed against these loans are adequate. In addition, payment on these loans is being sought from secondary sources, such as the sale of collateral. 42 DEPOSITS increased by $131.7 million, or 19.8%, to $796.6 million at December 31, 2003 from $664.9 million at December 31, 2002. The increase in total deposits primarily resulted from increases in the following types of interest-bearing deposits:
DECEMBER 31, ------------------------- 2003 2002 $ CHANGE % CHANGE -------- -------- -------- -------- Interest-bearing demand $ 59,057 $ 52,803 $ 6,254 11.8 Regular savings 97,679 66,941 30,738 45.9 Money market accounts 31,676 19,211 12,465 64.9 Time $100,000 and over 382,091 314,853 67,238 21.4 Other time 91,462 69,707 21,755 31.2 -------- -------- -------- ---- Total $661,965 $523,515 $138,450 26.4 -------- -------- -------- ----
Time deposits often fluctuate in response to interest rate changes and can vary rather significantly as a result. The increase in time deposits of $100,000 and over resulted primarily from an increase in brokered deposits. Noninterest-bearing deposits decreased as a result of fewer transfers of funds into demand deposit accounts that were previously invested in repurchase agreements sold. This transfer is related to certain of the Company's customers' intangible tax strategy. These funds flowed back into repurchase agreements after year-end, as can be seen by comparing the relative balances of demand deposits and repurchase agreements sold at December 31, 2003 and December 31, 2002. Similar fluctuations can be observed relative to prior year-ends, and management believes fluctuations will continue in similar fashion in the future. The growth in savings and money market accounts is primarily attributable to continued expansion of the Company's customer base as a result of ongoing marketing and savings activities. REPURCHASE AGREEMENTS AND OTHER BORROWED FUNDS sold increased by $28.9 million, or 620.0%, to $33.5 million at December 31, 2003 from $4.7 million at December 31, 2002, for reasons discussed in the previous section on Deposits, and due to continued expansion of the Company's customer base. Other borrowed funds increased by $14.1 million, or 142.4%, to $24.0 million at December 31, 2003 from $9.9 million at December 31, 2002. This increase is primarily attributable to borrowings of $10.0 million under a line of credit with SunTrust Bank, Atlanta, which was used as additional capital for the Company of which$2.5 million is non-revolving. The other $7.5 million is a revolving line of credit, which the Company can repay in full or in part from time to time and draw on it from time to time as need for these funds dictates. ACCOUNTS PAYABLE AND ACCRUED EXPENSES increased by $5.1 million, or 107.1%, to $9.9 million at December 31, 2003 from $4.8 million at December 31, 2002. This increase is primarily attributable to accrued commissions and incentives related to the mortgage banking division. SHAREHOLDERS' EQUITY increased by $4.8 million, or 9.1%, to $57.8 at December 31, 2003, from $53.0 at December 31, 2002. This increase is the result of net income applicable to common shares for the year ended December 31, 2003 of $4.4 million, in addition to stock issued under the Company's Employee Stock Purchase Plan of $102,000, stock option and warrant exercises of $160,000, and stock grants of $339,000. These increases were partially offset by a decrease in other comprehensive income related to an unrealized loss in the Company's bond portfolio of $361,000. The following table reflects information related to the Company's average balance sheet, yields on average earning assets, and average rates on interest-bearing liabilities. This information will facilitate the discussions of financial condition that follows this section. The yields and rates have been calculated by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from the daily balances during the year ended December 31, 2003 and 2002. 43
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------- 2003 2002 ------------------------------------- ------------------------------------- AVERAGE REVENUE/ AVERAGE REVENUE/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE --------- ------- ---- --------- ------- ---- ASSETS: Total loans (1) $ 722,560 $41,611 5.76% $ 484,132 $31,853 6.58% Investment securities (2) 50,378 1,370 2.72 43,264 2,239 5.18 Federal Funds sold and other investments 58,641 587 1.00 53,623 835 1.56 --------- ------- ---- --------- ------- ------ Total earning assets 831,579 43,568 5.24 581,019 34,927 6.01 Cash and due from banks 27,959 20,169 Premises and equipment, net 5,465 4,382 Other assets, net 21,085 9,750 Allowance for loan losses (8,002) (5,747) --------- --------- Total assets (3) $ 878,086 $ 609,573 ========= ========= LIABILITIES: Interest-bearing transaction accounts $ 84,256 858 1.02 $ 41,817 710 1.70 Savings deposits 78,990 1,047 1.34 72,145 1,443 2.00 Time deposits 477,452 13,410 2.81 317,305 12,469 3.93 Repurchase agreements sold 44,836 384 0.86 37,726 502 1.33 Trust preferred securities (4) 18,616 1,305 5.56 11,037 704 6.38 Other borrowed funds 16,347 643 3.93 10,143 460 4.54 --------- ------- ---- --------- ------- ------ Total interest-bearing liabilities 720,497 17,377 2.41 490,173 16,288 3.32 Demand deposits 93,136 66,769 Accrued interest and other liabilities 9,209 5,143 Shareholders' equity 55,244 47,488 --------- --------- Total liabilities and shareholders' equity $ 878,086 $ 609,573 ========= ========= Net interest income $26,191 $18,639 ======= ======= Net interest spread 2.83 2.69 Net interest margin 3.15 3.21
----------- (1) The average balance of total loans includes mortgage loans held for sale and nonaccrual loans. At December 31, 2003 and 2002, $2.6 million and $1.5 million, respectively, in loans were accounted for on a nonaccrual basis. (2) Stated at amortized cost. Does not reflect unrealized gains or losses. All securities are taxable. The Company does not have trading account securities. (3) All yields are considered taxable equivalent, as the Company does not have tax-exempt assets. (4) Dividends on Trust Preferred Securities are included in interest expense for the entire year of 2003 and 2002 for purposes of the table above. AVERAGE EARNING ASSETS Average earning assets increased by $250.6 million, or 43.1% to $831.6 million for the year ended December 31, 2003, as compared to $581.0 million for the year ended December 31, 2002. Average loans, including mortgage loans held for sale, net of deferred loan fees, represent 86.8% of average earning assets at December 31, 2003. Investment securities and Federal Funds sold and other investments represent 6.1 and 7.1, respectively, of average earning assets at 44 December 31, 2003. At December 31, 2002, average loans, net of deferred loan fees, represented 83.4% of average earning assets, investment securities comprised 7.4%, and federal funds sold and other investments comprised 9.2%. Growth in earning assets was funded primarily through an increase in total deposits due to expanded branch operations and the selling of additional brokered deposits, and the issuance of trust preferred securities. LOAN PORTFOLIO Total loans held for investment increased by $140.1 million, or 25.5%, to $690.6 million at December 31, 2003, from $550.5 million at December 31, 2002. Mortgage loans held for sale increased by $11.8 million, or 21.6%, to $66.5 million at December 31, 2003 from $54.7 million at December 31, 2002. Average total loans in 2003 increased by $238.4 million, or 49.2%, to $722.6 million from $484.1 million in 2002. These increases in loans were funded by increases in depository accounts, repurchase agreements sold and other borrowings. The Company engages in a full complement of lending activities, including commercial, real estate construction, real estate mortgage, home equity, installment, SBA and USDA guaranteed loans and credit card loans. The following table presents various categories of loans contained in the Company's portfolio of loans held for investment for the periods indicated, the total amount of all loans for such periods, and the percentage of total loans represented by each category for such periods:
BALANCE / % OF TOTAL AS OF DECEMBER 31, ------------------------------------------------------------------------------------- TYPE OF LOAN 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- Commercial real estate $ 424,498 $ 313,120 $ 210,373 $ 158,654 $ 69,261 61.4% 56.8% 52.4% 55.6% 43.9% Commercial 176,094 166,122 142,911 102,391 68,991 25.5% 30.2% 35.6% 35.8% 43.8% Residential mortgage 34,120 23,080 22,309 9,796 10,846 4.9% 4.2% 5.6% 3.4% 6.9% Consumer 54,648 45,860 23,158 13,036 7,246 7.9% 8.3% 5.7% 4.6% 4.6% Credit cards and other 1,957 2,792 2,912 1,747 1,244 0.3% 0.5% 0.7% 0.6% 0.8% --------- --------- --------- --------- --------- Total $ 691,317 $ 550,974 $ 401,663 $ 285,624 $ 157,588 ========= ========= ========= ========= ========= 100.0% 100.0% 100.0% 100.0% 100.0% ========= ========= ========= ========= ========= Net deferred loan fees $ (727) $ (519) $ (219) $ (98) $ (71) Loans, net of deferred fees 690,590 550,455 401,444 285,526 157,517 Allowance for loan losses (9,057) (7,263) (4,692) (3,511) (1,858) Net loans held for investment 681,533 543,192 396,752 282,015 155,659
The Company's only area of credit concentration is commercial and commercial real estate loans. The Company has not invested in loans to finance 45 highly leveraged transactions, such as leveraged buy-out transactions, as defined by the Federal Reserve Board and other regulatory agencies. In addition, the Company had no loans to foreign countries or to lesser-developed countries as of December 31, 2003. While risk of loss in the Company's loan portfolio is primarily tied to the credit quality of its borrowers, risk of loss may also increase due to factors beyond its control, such as local, regional and/or national economic downturns. General conditions in the real estate market may also impact the relative risk in the Company's real estate portfolio. Of the Company's target areas of lending activities, commercial loans are generally considered to have greater risk than real estate loans or consumer loans. For this reason the Company seeks to diversify its commercial loan portfolio by industry, geographic distribution and size of credits. From time to time, the Company has originated certain loans, which, because they exceeded its internally established or legal lending limit, were sold to other institutions. As a result of growth, the Company has an increased lending limit and repurchased certain loan participations, thereby increasing earning assets. The Company also purchases participations from other institutions. When the Company purchases these participations, such loans are subjected to its underwriting standards as if it had originated the loan. Accordingly, management does not believe that loan participations purchased from other institutions pose any greater risk of loss than loans that the Company originates. The repayment of loans in the Company's loan portfolio as they mature is a source of liquidity for the Company. The following table sets forth the maturity of the Company's loan portfolio held for investment within specified intervals as of December 31, 2003:
DUE IN 1 YEAR DUE AFTER 1 DUE AFTER 5 TYPE OF LOAN OR LESS TO 5 YEARS YEARS TOTAL ------------ ------------- ------------ ------------ -------- Commercial real estate $ 70,490 $186,128 $167,880 $424,498 Commercial 98,738 71,648 5,708 176,094 Residential mortgage 13,161 18,448 2,511 34,120 Consumer 5,743 47,962 943 54,648 Credit card and other loans 1,957 -- -- 1,957 -------- -------- -------- -------- Total $190,089 $324,186 $177,042 $691,317 ======== ======== ======== ========
The following table presents the maturity distribution as of December 31, 2003 for loans with predetermined fixed interest rates and floating interest rates by various maturity periods:
DUE IN 1 YEAR DUE AFTER 1 DUE AFTER INTEREST CATEGORY OR LESS TO 5 YEARS 5 YEARS TOTAL ----------------- ------- ---------- ------- ----- Predetermined rate $ 56,599 $183,510 $123,220 $363,329 Variable rate 133,490 140,676 53,822 327,988 -------- -------- -------- -------- Total $190,089 $324,186 $177,042 $691,317 ======== ======== ======== ========
ASSET QUALITY Nonaccrual loans were $2.6 million at December 31, 2003, an increase of $1.1 million, or 70.2%, compared to the balance of $1.5 million at December 31, 2002. These loans were reclassified under the bank's policy of transferring loans to nonaccrual status when they become more than 90 days past due on either principal or interest. The Company believes the specific reserves placed against these loans are adequate, and payment is being sought from secondary sources, such as the sale of collateral. 46 At December 31, 2003, loans totaling $1.9 million were considered restructurings, compared to $3.1 million at December 31, 2002. For further information, see the NON-PERFORMING ASSETS discussion below. The Company substantially reduced its SBA lending operations in 1998 due to the cost of maintaining this specialized lending practice and recent charge-offs in the unguaranteed portion of the SBA loans that were retained. As of December 31, 2003, there were no loans other than those disclosed above that were classified for regulatory purposes as doubtful or substandard which (1) represented or resulted from trends or uncertainties that management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (2) represented material credits about which management is aware of any information, which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. There are no loans other than those disclosed above where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with loan repayment terms. ALLOWANCE FOR LOAN LOSSES AND NET CHARGE-OFFS The allowance for loan losses represents management's estimate of an amount adequate to provide for potential losses inherent in the loan portfolio. In its evaluation of the allowance and its adequacy, management considers loan growth, changes in the composition of the loan portfolio, the loan charge-off experience, the amount of past due and non-performing loans, current and anticipated economic conditions, underlying collateral values securing loans and other factors. While it is the Company's policy to provide for a full reserve or charge-off for loans in the period in which a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, management's judgment as to the adequacy of the allowance is necessarily approximate and imprecise. Management determines the allowance for loan losses by establishing a general allowance by loan pool determined for groups of smaller, homogenous loans possessing similar characteristics and non-homogeneous loans that are not classified. There is no unallocated portion of the Company's allowance for loan losses. All classified loans are reviewed on an individual basis, resulting in a specific allowance. General Allowance. It is difficult in a bank of this size to use migration analysis or other more sophisticated approaches due to the small size of the loan portfolio, the short history of Florida Bank, N.A., and the loan problems, which surfaced in the early years of the Bank's preceding operation, First National Bank of Tampa. For this reason, a reasonable indicator of the Bank's potential future losses in the non-classified and homogeneous pools of loans is the historical performance of the Bank's peer group on a rolling four-quarter basis. This information is gathered quarterly from the UNIFORM BANK PERFORMANCE REPORT provided by the Federal Financial Institutions Examination Council. As the bank matures, and growth stabilizes, it is management's intention to replace this peer group methodology with the actual loss experience of Florida Bank, N.A. Added to the peer group historical performance are those current conditions that are probable to impact future loan losses. To account for these current conditions, management has reviewed various factors to determine the impact on the current loan portfolio. These adjustments reflect management's best estimate of the level of loan losses resulting from these conditions by determining a range for each current condition adjustment, "lower range to upper range". This allows the Bank to "shock" the loan portfolio and look at the level of allowances required should an "upper range" scenario start to unfold. The following current condition factors were considered in this analysis: 47 o Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices. o Changes in national and local economic and business conditions, including the condition of various market segments. o Changes in the nature and volume of the portfolio. o Changes in the experience, ability, and depth of lending management and staff. o Changes in the volume and severity of past due and classified loans; and the volume of non-accruals, trouble debt restructurings and other loan modifications. o The existence and effect of any concentrations of credit, and changes in the level of such conditions. o The effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank's portfolio. Specific Allowance. Management feels that given the small number of classified loans, type of historical loan losses, and the nature of the underlying collateral, creating specific allowances for classified assets results in the most accurate and objective allowance. Should the number of these types of assets grow substantially, other methods may have to be considered. The method used in setting the specific allowance uses current appraisals as a starting point, based on the Bank's possible liquidation of the collateral. On assets other than real estate, which tend to depreciate rapidly, another current valuation is used. For instance, in the case of commercial loans collateralized by automobiles, the current NADA wholesale value is used. On collateral such as over-the-road equipment, trucks or heavy equipment, valuations are sought from firms or persons knowledgeable in the area, and adjusted for the probable condition of the collateral. Other collateral such as furniture, fixtures and equipment, accounts receivable, and inventory, are considered separately with more emphasis given to the borrower's financial condition and trends rather than the collateral support. The value of the collateral is then discounted for estimated selling cost. The various methodologies included in this analysis take into consideration the historic loan losses and specific allowances. In addition, the allowance incorporates the results of measuring impaired loans as provided by Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. Specific allowances totaled $572,000 at December 31, 2003. The range for the allowance for loan losses at December 31, 2003, including specific allowances, were determined to be between $7.8 million or 1.13% of loans (low range) and $12.3 million or 1.78% of loans (high range). The allowance for loan losses totaled $9.1 million or 1.31% of loans at December 31, 2003 48 An analysis of the Company's loan loss experience is furnished in the following table for the last five fiscal years, as well as a detail of the allowance for loan losses:
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- Balance at beginning of period $ 7,263 $ 4,692 $ 3,511 $ 1,858 $ 1,073 Charge-offs: Commercial real estate (1,120) -- (400) (4) -- Commercial -- (435) (362) (388) (819) Residential mortgage (23) -- -- -- (5) Consumer (44) (51) (66) -- (19) Credit cards and other -- -- -- (9) (14) ------- ------- ------- ------- ------- Total charge-offs (1,187) (486) (828) (401) (857) ------- ------- ------- ------- ------- Recoveries: Commercial real estate 6 11 12 18 15 Commercial 31 20 105 74 14 Residential mortgage -- -- -- 50 2 Consumer 7 -- 3 -- -- Credit cards and other 1 -- -- -- 1 ------- ------- ------- ------- ------- Total recoveries: 45 31 120 142 32 ------- ------- ------- ------- ------- Net charge-offs (1,142) (455) (708) (259) (825) Provision for loan losses 2,936 3,026 1,889 1,912 1,610 ------- ------- ------- ------- ------- Balance at end of period $ 9,057 $ 7,263 $ 4,692 $ 3,511 $ 1,858 ======= ======= ======= ======= ======= Net charge-offs as a percentage of average loans held for investment 0.16% 0.09% 0.21% 0.12% 0.80% Allowance for loan losses as a percentage of total loans 1.31% 1.32% 1.17% 1.23% 1.18%
Net charge-offs were $1.1 million, or 0.16% of average loans outstanding at December 31, 2003, as compared to net charge-offs of $455,000 or 0.09% of average loans held for investment outstanding at December 31, 2002. Allowance for loan losses increased 24.7% to $9.1 million, or 1.31% of loans held for investment outstanding at December 31, 2003, from $7.3 million or 1.32% of loans held for investment outstanding at December 31, 2002. Allowance for loan losses as a multiple of net loans charged-off was 7.9x for the year ended December 31, 2003 as compared to 16.0x for the year ended December 31, 2002. The increase in the provision was generally due to increases in the amount of loans held for investment outstanding, together with the mix and performance of those loans. The increase in net charge-offs in 2003 is related primarily to a specific $591,000 net charge-off for an overdraft incurred by one of the Company's Automated Clearing House processors. See "-- Asset Quality" above. In assessing the adequacy of the allowance, management relies predominantly on its ongoing review of the loan portfolio, which is undertaken to ascertain whether there are probable losses that must be charged-off and to assess the risk characteristics of the portfolio in the aggregate. This review encompasses the judgment of management, utilizing internal loan rating standards, guidelines provided by the banking regulatory authorities governing the Company, and their loan portfolio reviews as part of the Company's examination process. Statement of Financial Accounting Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN (SFAS 114) requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The Company adopted SFAS 114 on January 1, 1995. At December 31, 2003 and 2002, the Company held impaired loans as defined by 49 SFAS 114 of $2.6 million and $1.4 million, respectively, for which specific allocations of $572,000 and $690,000, respectively, have been established within the allowance for loan losses that have been measured based upon the fair value of the collateral. Such reserves have been allocated between commercial loans and commercial real estate. Of these impaired loans, $0 and $535,000 have also been classified by the Company as loans past due over 90 days at December 31, 2203 and 2002, respectively. Interest income on such impaired loans during 2003 and 2002 was not significant. As shown in the table below, the Company determined that as of December 31, 2003 and 2002, respectively, 55.3% and 56.0% of the allowance for loan losses was related to commercial real estate loans, 33.5 % and 31.0% was related to commercial loans, 5.6% and 4.2% was related to residential mortgage loans, 4.7% and 8.3% was related to consumer loans, 0.9% and 0.5% to credit card and other loans. The fluctuations in the allocation of the allowance for loan losses between 2003 and 2002 is attributed to the establishment of specific allowances totaling $2.5 million and $2.2 million at December 31, 2003 and 2002, respectively, and the changing mix of the loan portfolio as previously discussed. For the last five fiscal years, the allowance was allocated as follows:
2003 2002 2001 2000 1999 --------------- --------------- ----------------- ----------------- ---------------- % OF % OF % OF % OF % OF BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Commercial real estate $5,009 55.3 $4,067 56.0 $2,348 52.4 $1,300 55.6 $ 636 43.9 Commercial 3,031 33.5 2,252 31.0 1,814 35.6 1,775 35.8 1,027 43.8 Residential mortgage 507 5.6 305 4.2 240 5.6 317 3.4 89 6.9 Consumer 422 4.6 603 8.3 261 5.7 69 4.6 77 4.6 Credit cards and other 88 1.0 36 0.5 29 0.7 50 0.6 29 0.8 Unallocated -- 0.0 -- 0.0 -- 0.0 -- 0.0 -- 0.0 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total $9,057 100.0 $7,263 100.0 $4,692 100.0 $3,511 100.0 $1,858 100.0 ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
In considering the adequacy of the Company's allowance for loan losses, management has focused on the fact that as of December 31, 2003, 55.3% of outstanding loans held for investment are in the category of commercial real estate and 33.5% are in commercial loans. Commercial loans are generally considered by management to have greater risk than other categories of loans in the Company's loan portfolio. Generally, such loans are secured by accounts receivable, marketable securities, deposit accounts, equipment and other fixed assets that reduce the risk of loss present in commercial loans. Commercial real estate loans inherently have a higher risk due to depreciation of the facilities, limited purposes of the facilities and the effect of general economic conditions. The Company attempts to limit this risk by generally lending no more than 75% of the appraised value of the property held as collateral. Residential mortgage loans constituted 5.6% of outstanding loans held for investment at December 31, 2003. The majority of the loans in this category represent residential real estate mortgages where the amount of the original loan generally does not exceed 80% of the appraised value of the collateral. These loans are considered by management to be well secured with a low risk of loss. At December 31, 2003, the majority of the Company's consumer loans were secured by collateral, primarily consisting of automobiles, boats and other personal property. Management believes that these loans involve less risk than commercial loans, due to the marketability and nature of the underlying collateral. At December 31, 2002, the allowance for loan losses contained an additional provision of $450,000 for an overdraft related to one of the Company's ACH processors. The Company facilitates ACH transactions for a variety of processors in its normal course of business. These transactions involve 50 preauthorized transfers of funds from a purchaser's bank account to a seller's bank account. In November and December of 2002, one of the Company's processors experienced an extreme number of returns, or refused transactions, and failed to cover the overdraft these returns caused. This overdraft was charged off in the first quarter of 2003. An internal credit review of the loan portfolio is conducted on an ongoing basis. The purpose of this review is to assess the risk in the loan portfolio and to determine the adequacy of the allowance for loan losses. The review includes analyses of historical performance, the level of nonconforming and rated loans, loan volume and activity, review of loan files and consideration of economic conditions and other pertinent information. In addition to the above credit review, the Company's primary regulator, the OCC, also conducts a periodic examination of the loan portfolio. Upon completion, the OCC presents its report of examination to the Company's board of directors and management. Information provided from these reviews, together with other information provided by management and other information known to members of the Company's board of directors, is utilized by its board of directors to monitor the loan portfolio and the allowance for loan losses. Specifically, the Company's board of directors attempts to identify risks inherent in the loan portfolio (e.g., problem loans, probable problem loans and loans to be charged off), assess the overall quality and collectibility of the loan portfolio, and determine amounts of the allowance for loan losses and the provision for loan losses to be reported based on the results of their review. The credit policy committee of the Company's board of directors must approve all loans in excess of the matrix levels established by Florida Bank, N.A. credit policy, and any exceptions to the credit policy. This committee also reviews all criticized or classified assets in excess of $100,000, reviews trends in the Company's bank's loan portfolio, and reviews all reports on credit quality prepared by the Company's bank's personnel or the OCC. NON-PERFORMING ASSETS The following table presents components of non-performing assets:
AS OF DECEMBER 31, -------------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ Nonaccrual loans $2,613 $1,535 $1,090 $1,547 $1,100 Accruing loans past due 90 days or more -- -- -- 2,555 293 Other real estate owned 1,769 653 2,778 -- --
Nonaccrual loans were $2.6 million at December 31, 2003, an increase of $1.1 million, or 70.2%, compared to the balance of $1.5 million at December 31, 2002. These loans were reclassified under the Company's policy of transferring loans to non-accrual status when they become more than 90 days past due on either principal or interest. Management believes the specific reserves placed against these loans are adequate, and payment is being sought from secondary sources, such as the sale of collateral. Loans totaling $1.9 million and $3.1 million were considered troubled debt restructurings at December 31, 2003 and 2002, respectively. A troubled debt restructuring is a loan where the Company has changed the original terms of the agreement. The loans classified as troubled debt restructurings at December 31, 2003 and 2002 were restructured to extend maturities or to add guarantee terms. At December 31, 2003 and 2002, the Company has items categorized as other real estate owned, with a carrying value of $1.8 million and $653,000, respectively. The Company has policies, procedures and underwriting guidelines intended to assist in maintaining the overall quality of its loan portfolio. The Company monitors its delinquency levels for any adverse trends. Non-performing assets consist of loans on nonaccrual status, real estate and other assets acquired in partial or full satisfaction of loan obligations and loans that are past due 90 days or more. 51 The Company's policy generally is to place a loan on nonaccrual status when it is contractually past due 90 days or more as to payment of principal or interest. A loan may be placed on nonaccrual status at an earlier date when concerns exist as to the ultimate collections of principal or interest. At the time a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed and charged against current earnings. Recognition of any interest after a loan has been placed on nonaccrual status is accounted for on a cash basis. Loans that are contractually past due 90 days or more, which are well secured or guaranteed by financially responsible third parties and are in the process of collection generally are not placed on nonaccrual status. INVESTMENT PORTFOLIO The following table presents the carrying amount of the Company's investment securities, including mortgage-backed securities as of December 31, 2003 and 2002:
AS OF DECEMBER 31, --------------------------------------------------- 2003 2002 --------------------- --------------------- INVESTMENT CATEGORY BALANCE % BALANCE % ------------------- ------- ----- ------- ----- Available for sale: U. S. Treasury and other U.S. agency obligations $23,679 41.6 $ 6,775 12.6 State and municipal securities 657 1.2 1,051 2.0 Mortgage-backed securities 21,673 38.1 37,913 70.7 Marketable equity securities 7,273 12.8 5,192 9.7 ------- ----- ------- ----- 53,282 93.7 50,931 95.0 ------- ----- ------- ----- Other investments 3,604 6.3 2,493 4.6 ------- ----- ------- ----- Held to maturity: U. S. Treasury and other U.S. agency obligations -- -- -- -- Mortgage-backed securities -- -- 229 0.4 ------- ----- ------- ----- -- -- 229 0.4 ------- ----- ------- ----- Total $56,886 100.0 $53,652 100.0 ======= ===== ======= =====
Total investment securities increased by $3.2 million, or 6.0%, to $56.9 million at December 31, 2003 from $53.7 million at December 31, 2002. Investment securities available for sale totaled $53.3 million at December 31, 2003 compared to $50.9 million at December 31, 2002. At December 31, 2003 and 2002, investment securities available for sale had net unrealized gains of $197,000 and $775,000, respectively, comprised of gross unrealized losses of $121,000 and $11,000, respectively, and gross unrealized gains of $318,000 and $786,000, respectively. Investments with unrealized losses at December 31, 2003 are comprised of a mutual fund and six agency notes and mortgage-backed securities from the Federal National Mortgage Association, the Federal Home Loan Bank and the Federal Home Loan Mortgage Corporation. Volatility in the home loan mortgage market throughout the period combined with timing of investment purchases have lead to the investment's temporary impairment. At December 31, 2003, the Company had no investments that have been in a continuous unrealized loss position for greater than twelve months. The Company invests primarily in direct obligations of the United States, obligations guaranteed as to principal and interest by the United States, obligations of agencies of the United States and mortgage-backed securities. In addition, the Company enters into federal funds transactions with its principal correspondent banks, and act as a net seller of such funds. The sale of federal funds amounts to a short-term loan from the Company to another company. 52 Proceeds from sales, paydowns and maturities of available for sale and held to maturity investment securities increased 55.8% to $46.4 million in 2003 from $29.8 million in 2002, with a resulting net loss on sale of securities of $0 and $4,000 in 2002 and 2003, respectively. Such proceeds are generally used to reinvest in additional investment securities. Other investments include Independent Bankers Bank stock, Federal Reserve Bank stock and Federal Home Loan Bank stock that are required for the Company to be a member of and to conduct business with such institutions. Dividends on such investments are determined by the institutions and are payable semi-annually or quarterly. Other investments increased 44.5% to $3.6 million at December 31, 2003 from $2.5 million at December 31, 200. Other investments are carried at cost; as such investments do not have readily determinable fair values. At December 31, 2003 and 2002, the investment portfolio included $10.2 million and $29.1 million, respectively, in collateralized mortgage obligations, and $11.5 million and $8.8 million, respectively, other mortgage-backed securities. The Company utilizes its available for sale investment securities, along with cash and Federal Funds sold, to meet its liquidity needs. As of December 31, 2003, $21.7 million, or 40.7%, of the investment securities portfolio consisted of mortgage-backed securities compared to $37.9 million, or 74.1% of the investment securities portfolio as of December 31, 2002. In accordance with Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (SFAS 115), the Company has segregated its investment securities portfolio into securities held to maturity and those available for sale. Investments held to maturity are those for which management has both the ability and intent to hold to maturity and are carried at amortized cost. At December 31, 2003, the Company did not hold any investments classified as held to maturity. At December 31, 2002, investments classified as held to maturity totaled $228,000 at amortized cost and $229,000 at fair value. Investments available for sale are securities identified by management as securities that may be sold prior to maturity in response to various factors including liquidity needs, capital compliance, changes in interest rates or portfolio risk management. The available for sale investment securities provide interest income and serve as a source of liquidity for the Company. These securities are carried at fair market value, with unrealized gains and losses, net of taxes, reported as other comprehensive income, a separate component of shareholders' equity. Investment securities with a carrying value of approximately $45.0 million and $41.3 million at December 31, 2003 and December 31, 2002, respectively, were pledged to secure deposits of public funds, repurchase agreements, interest rate swap agreements and certain other deposits as provided by law. The maturities and weighted average yields of debt securities at 53 December 31, 2003 are presented in the following table using primarily the stated maturities, excluding the effects of prepayments:
WEIGHTED AVERAGE AVAILABLE FOR SALE AMOUNT YIELD (1) ------------------ ------ --------- U.S. Treasury and other U.S. agency obligations: 0-- 1 year $16,580 2.38 Over 1 through 5 years 7,099 2.12 Over 5 years -- -- ------- Total $23,679 ------- State and municipal: 0-- 1 year -- -- Over 1 through 5 years 622 7.09 Over 5 years 35 7.62 ------- Total $ 657 ------- Mortgage-backed securities: 0-- 1 year 163 1.32 Over 1 through 5 years 20,980 3.09 Over 5 years 444 1.38 Over 10 years 86 9.54 ------- Total $21,673 ------- Total available for sale debt securities $46,009 =======
---------- (1) The Company has not invested in any tax-exempt obligations. As of December 31, 2003, the Company's investment securities portfolio did not contain any debt securities held to maturity. As of December 31, 2003, except for the U.S. Government and its agencies, there was not any issuer within the investment portfolio who represented 10% or more of the Company's shareholders' equity. DEPOSITS AND SHORT-TERM BORROWINGS The Company's average deposits increased by 47.3%, or $235.8 million, to $733.8 million for the fiscal year ended December 31, 2003 from $498.0 million for the fiscal year ended December 31, 2002. This growth is attributed to a 39.5% increase in average noninterest-bearing demand deposits, a 101.5% increase in average interest-bearing transaction account deposits, a 9.5% increase in average savings deposits, and a 50.5%increase in average time deposits. Average noninterest-bearing demand deposits increased by 39.5% to $93.1 million for the fiscal year ended December 31, 2003 from $66.8 million for the fiscal year ended December 31, 2002. As a percentage of average total deposits, these deposits represent 12.7% and 13.4%, respectively, at December 31, 2003 and 2002. The increased volume of noninterest-bearing demand deposits is primarily attributable to large business deposits retained by the Company. 54 Average interest-bearing transaction accounts increased by 101.5% to $84.3 million for the fiscal year ended December 31, 2003 from $41.8 million in the fiscal year ended December 31, 2002. Average savings deposits increased 9.5% to $79.0 million for the year ended December 31, 2003 from $72.1 million in the fiscal year ended December 31, 2002. Average balances of certificates of deposit increased by 50.5% to $477.5 million for the fiscal year ended December 31, 2003 from $317.3 million in the fiscal year ended December 31, 2002. The increases in overall deposit balances result primarily from new deposits obtained as a result of growth in existing markets. Since 1999, the Company has utilized brokered certificates of deposit as a component of its funding. These deposits range in term from three months to ten years. Longer-term fixed rate certificates are typically matched to fixed-rate loans of similar duration to assure a desired spread between the yield on that loan and the cost of funding it over its term, in the event of fluctuating interest rates. Longer-term fixed rate certificates may also be matched to interest rate swaps, which are derivative instruments whose effect is to convert the Company's cost in the certificate to a floating rate. Certificates with shorter terms, typically less than five years, are normally fixed rate instruments. It has consistently been the Company's experience that these funds are readily obtainable at rates lower than the competitive rates paid for time deposits of the same duration in its local markets. It has also been the Company's experience that brokered time deposits are no more sensitive to competitive market rates than local time deposits. In both cases, a bank must pay a competitive rate to obtain or retain the deposit. Because brokered certificates of deposit are normally obtained in denominations of five million dollars or more, the Company's transaction and maintenance costs for a brokered deposit are significantly less than for same amount obtained in its local markets through several smaller transactions. The use of brokered deposits has had a positive impact on the Company's net interest margin, by allowing the Company to tailor its time deposit portfolio more closely to its funding requirements, and lowering its cost of funds. Management believes they will continue to do so. It is the intent of management to continue utilizing brokered deposits as a significant funding source and as a component of the Company's asset-liability management strategy. The following table presents, for the years ended December 31, 2003 and 2002, the average amount of and average rate paid on each of the following deposit categories:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2003 2002 -------------------------- ---------------------------- AVERAGE AVERAGE AVERAGE AVERAGE DEPOSIT CATEGORY BALANCE RATE BALANCE RATE ---------------- ------- -------- ------- ------- Noninterest-bearing demand $ 93,136 -- $ 66,769 -- Interest-bearing demand 57,661 0.9 28,874 1.6 Money market 26,595 1.2 12,943 2.0 Savings 78,990 1.3 72,145 2.1 Certificates of deposit of $100,000 or more 387,221 2.7 234,983 3.9 Other time 90,231 3.1 82,322 3.8 -------- --- -------- ---- Total $733,834 2.1 $498,036 2.94 ======== === ======== ====
Interest-bearing deposits, including certificates of deposit, will continue to be a major source of funding for the Company. During 2003, aggregate average balances of time deposits of $100,000 and over comprised 52.8% of total deposits compared to 47.2% for the prior year. The average rate on certificates of deposit of $100,000 or more decreased to 2.73% in 2003, compared to 3.96% in 2002. 55 The following table indicates amounts outstanding of time certificates of deposit of $100,000 or more and their respective contractual maturities:
AS OF DECEMBER 31, -------------------------------------------------------------- 2003 2002 --------------------------- ---------------------------- AVERAGE AVERAGE AVERAGE AMOUNT RATE AMOUNT RATE -------- --------- -------- --------- 3 months or less $ 91,511 1.65 $ 37,465 2.93 3-- 6 months 94,011 1.84 83,569 2.00 6-- 12 months 45,538 1.74 47,795 3.10 Over 12 months 151,031 3.28 146,024 3.86 -------- ---- -------- ---- Total $382,091 2.43 $314,853 3.26 ======== ==== ======== ====
Average short-term borrowings increased 27.8% to $61.2 million for the year ended December 31, 2003 from $47.9 million for the year ended December 31, 2002. Short-term borrowings consist of treasury tax and loan deposits, Federal Home Loan Bank borrowings, borrowings under lines of credit, and repurchase agreements with certain customers. In addition, the Company has securities sold under agreements to repurchase, which are classified as secured borrowings. Average treasury tax and loan deposits decreased 23.0% to $1.5 for the year ended December 31, 2003 from $2.0 million for the year ended December 31, 2002. Average Federal Home Loan Bank borrowings increased 18.8% for the year ended December 31, 2003 to $9.7 million from $8.1 million for the year ended December 31, 2002. Average repurchase agreements with customers increased 18.8% to $44.8 million for the year ended December 31, 2003from $37.7 million for the year ended December 31, 2002. The treasury tax and loan deposits provide an additional liquidity resource to the Company as such funds are invested in Federal funds sold. The repurchase agreements represent an accommodation to certain customers that seek to maximize their return on liquid assets. The Company invests these funds primarily in securities purchased under agreements to resell at the nationally quoted rate for such investments. The year-end balance of repurchase agreements increased 620.0% to $33.5 million at December 31, 2003 from $4.7 million at December 31, 2002. Securities sold under repurchase agreements are instruments by which the Company provides large deposit customers with the opportunity to earn interest on funds in excess of their immediate cash needs for short periods of time, typically overnight. These transactions are collateralized by marketable securities from the Company's investment portfolio pledged to this purpose. This product is an added service to the Company's customers, and allows it to retain these funds in exchange for payment of an overnight interest rate, which is typically lower than the rates paid on savings accounts or certificates of deposit. Should these customers withdraw these funds, it would not significantly impact the Company's liquidity, because such a withdrawal would free the marketable securities previously pledged to those repurchase agreements, allowing them to be sold or pledged to other borrowings if needed. The Company's customers do not typically move funds between demand deposits and repurchase agreements based on interest rate changes or liquidity needs because demand deposits and repurchase agreements are typically of comparable liquidity and interest rate changes are typically reflected in repurchase agreements as well as demand deposits. Customers in Florida do, however, often move funds between demand deposits and repurchase agreements at year-end to manage state intangible tax exposure. The Company believes that this pattern of movement between demand deposits and repurchase agreements will continue in the future. 56 The following table presents the components of short-term borrowings and average rates for such borrowings for the years ended December 31, 2003 and 2002:
MAXIMUM AMOUNT OUTSTANDING AVERAGE AT ANY MONTH AVERAGE AVERAGE ENDING RATE AT END BALANCE RATE BALANCE PERIOD END -------------- ------- ---- ------- ---------- YEAR ENDED DECEMBER 31, 2003: Treasury tax and loan deposits $2,290 $1,547 0.93 $3,354 0.83 Repurchase agreements 56,968 44,836 0.86 33,508 0.88 Federal Home Loan Bank 10,700 9,663 4.90 10,693 4.48 Borrowings under line of credit 10,000 5,137 3.03 10,000 3.29 ------- ------- ------- Total $79,958 $61,183 $57,555 ======= ======= ======= YEAR ENDED DECEMBER 31, 2002: Treasury tax and loan deposits $2,808 $2,008 1.27 $2,422 0.96 Repurchase agreements 49,542 37,726 1.33 4,654 0.93 Federal Home Loan Bank 7,500 8,135 5.33 7,500 5.53 ------- ------- ------- Total $59,850 $47,869 $14,576 ======= ======= =======
57 In addition to the outstanding borrowings shown from the Federal Home Loan Bank ("FHLB"), the Company has available an additional credit limit from the FHLB in the amount of $28.5 million. This limit is secured by a lien on the Company's one- to four-family residential mortgage loans held for investment. LIQUIDITY AND CAPITAL RESOURCES Liquidity, as defined by the SEC, is the ability of a company to generate adequate amounts of cash to meet the Company's needs for day-to-day operating expenses and material commitments on both a long- and short-term basis. Liquidity management involves maintaining the Company's ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. The Company does not know of any trends, demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the Company's liquidity increasing or decreasing in any material way. The primary function of asset-liability management is not only to assure adequate liquidity in order for the Company to meet the needs of its customer base, but also to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that the Company can profitably deploy its assets. Both assets and liabilities are considered sources of liquidity funding and both are, therefore, monitored on a daily basis. The greatest risk addressed by asset-liability management is disintermediation - when the margin between an institution's cost of liabilities and its yield on earning assets narrows to an unacceptable level. During the year ended December 31, 2003, when the prime loan rate dropped from 6.8% to 4.0%, the Company demonstrated the ability to maintain its net interest margin at an acceptable level through constant attention to asset-liability management. As discussed under "Interest Rate Risk Management" below, the Company frequently evaluates its assets and liabilities in relation to different interest rate movement scenarios. Based on these projections, management believes the Company's assets and liabilities are balanced in such a way that the risk of disintermediation is held to a minimum. Given current historically low interest rate levels, the Company has given significant attention to the risks posed by rising interest rates, which would increase its cost of funds. The Company's balance sheet is structured in such a way that these increased costs are projected to be exceeded by increased income from variable-rate loans. As pointed out in the previous paragraph, even if interest rates doubled from their current levels, they would still be lower than two and a half years ago, when they were considered moderate. All financial institutions compete for time deposits, primarily on interest rates. It is the Company's experience that an institution must pay the market rate to obtain deposits in any rate environment. Since inception, the Company has not had significant difficulty attracting deposits and raising other sources of funds at reasonable rates. The Company knows of no factors, which would reduce its ability to do so in the future in any material way. 58 In September of 1999, the Company's board of directors authorized a stock repurchase plan covering up to ten percent (10%) of the outstanding shares of its common stock (approximately 585,000 shares). The stock repurchase plan authorizes the purchase of the Company's common stock at any price below the then current book value per share. Pursuant to the stock repurchase plan, on December 10, 2001, the Company's board of directors authorized a pre-programmed stock repurchase program pursuant to the "safe harbor" guidelines of Rule 10b-18 of the Securities Exchange Act of 1934. This program provides for the repurchase of up to 250,000 shares in the open market when the trading price of the Company's common stock falls to $5.75 per share or less. As of December 31, 2003, the Company had repurchased 302,200 shares for a total cost of $1.9 million or an average cost of $6.18 per share, none of which had been repurchased under the pre-programmed stock repurchase program. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table presents, as of December 31, 2003, a summary of the Company's future contractual obligations. Each of these categories is further described in the Company's consolidated financial statements, which are included in ITEM 8 of this Form 10-K:
PAYMENTS DUE BY PERIOD -------------------------------------------------------------- LESS THAN ONE TO FOUR TO AFTER FIVE CONTRACTUAL OBLIGATIONS TOTAL ONE YEAR THREE YEARS FIVE YEARS YEARS ----------------------- ----- -------- ----------- ---------- ---------- Time deposits $473,553 $278,941 $97,366 $85,494 $11,753 Federal Home Loan Bank advances 10,693 27 80 153 10,433 SunTrust Lines of Credit 10,000 10,000 -- -- -- Trust preferred securities 20,000 -- -- -- 20,000 Operating leases 6,153 920 1,591 1,225 2,417 Treasury tax and loan deposits 3,354 3,354 -- -- -- -------- -------- ------- ------- ------- Total contractual obligations $523,753 $293,242 $99,037 $86,872 $44,603 ======== ======== ======= ======= =======
The following table presents, as of December 31, 2003, a summary of the Company's commercial commitments. These categories are further described in the Company's consolidated financial statements, which are included in ITEM 8 of this Form 10-K:
COMMITMENT EXPIRATIONS BY PERIOD LESS THAN ONE TO FOUR TO AFTER FIVE COMMERCIAL COMMITMENTS TOTAL ONE YEAR THREE YEARS FIVE YEARS YEARS Commitments to fund loans $ 62,504 $ 62,504 $ -- $-- $-- Lines of credit 221,790 163,790 58,000 -- -- Standby letters of credit 11,035 11,035 -- -- -- -------- -------- ------- --- --- Total other commitments $295,329 $237,329 $58,000 $-- $-- ======== ======== ======= === ===
Management believes the Company's ability to raise funds through deposits, borrowings, trust preferred securities, capital, and other sources of liquidity is adequate to allow it to meet its commitments and contractual obligations going forward. 59 OFF-BALANCE SHEET ARRANGEMENTS The Company originates financial instruments with off-balance sheet risk in the normal course of business, usually for a fee, primarily to meet the financing needs of its customers. The financial instruments include commitments to fund loans, letters of credit and unused lines of credit. These commitments involve varying degrees of credit risk, however, management does not anticipate losses upon the fulfillment of these commitments. At December 31, 2003, financial instruments having credit risk in excess of that reported in the balance sheet totaled approximately $221.8 million. SHAREHOLDERS' EQUITY Shareholders' equity increased by $4.8 million to $57.8 million at December 31, 2003, from $53.0 million at December 31, 2002. This increase is the result of net income for the year ended December 31, 2003 of $4.4 million, combined with the issuance of stock under the Employee Stock Purchase Plan of $223,000, and the issuance of stock related to exercise of options and warrants and stock grants of $498,000. These increases were partially offset by a decrease in other comprehensive income related to an unrealized loss on available for sale investment securities of $361,000, and the payment of stock dividends on the Series C preferred stock of $186,000. PREFERRED STOCK In 2001, the Company issued 102,283 shares of series B preferred stock for $68.00 per share through a private placement. Each share of Series B preferred stock was convertible into ten shares of the Company's common stock at a price of $6.80 per share (subject to adjustment for stock splits, stock dividends, etc.). The Series B preferred stock was subject to automatic conversion to common stock upon the following events: 1) change in control; 2) if the average closing price of the Company's common stock for any 30 consecutive trading day period was at or above $8.00 per share; or 3) the consummation of an underwritten public offering at a price of $8.00 per share or greater of the Company's common stock. Cumulative cash dividends accrued at 7% annually and were payable quarterly in arrears. On April 26, 2002, all 102,383 shares of the Company's Series B preferred stock automatically converted into 1,022,830 shares of common stock as a result of the average closing price of the Company's common stock closing above $8.00 for the period from March 4, 2002 through April 15, 2002. On December 31, 2002, the Company issued 50,000 shares of series C preferred stock for $100.00 per share to a single shareholder through a private placement. Shares of the Company's Series C preferred stock are non-convertible or redeemable except as a result of a chance in control. Non-cumulative cash dividends accrued at 5.0% annually through December 31, 2003, and will accrue at 3.75% annually thereafter. These dividends are payable quarterly in arrears. In the event of any liquidation, dissolution or winding up of affairs of the Company, the holders of Series C preferred stock at the time shall receive $100.00 per share plus an amount equal to accrued and unpaid dividends thereon through and including the date of distribution prior to any distribution to holders of common stock. The liquidation preference at December 31, 2003 was approximately $5.1 million. 60 TRUST PREFERRED SECURITIES By issuing trust preferred securities, the Company is able to increase its Tier 1 capital for regulatory purposes without diluting the ownership interests of the Company's common shareholders. Also, dividends paid on trust preferred securities are deductible as interest expense for income tax purposes. The net proceeds from all pooled trust preferred offerings included in the calculation of Tier 1 capital for regulatory purposes was approximately $20.0 million and $17.0 million, respectively, at December 31, 2003 and 2002. The terms of the trust preferred securities at December 31, 2003 are summarized as follows:
DIVIDEND CALL OPTION MATURITY PREFERRED TRUST AMOUNT DIVIDEND RATE PAYMENT DATES DATE DATE --------------- ------ ------------- ------------- ----------- --------- Statutory Trust I $6,000 3-month LIBOR plus 3.60% 3/18, 6/18, 12/18/2006 12/18/2031 (4.75% at December 31, 2003) 9/18, 12/18 Statutory Trust II 3,000 3-month LIBOR plus 3.25% 3/26, 6/26, 12/26/2007 12/19/2032 (4.90% at December 31, 2003) 9/26, 12/26 Statutory Trust III 3,000 3-month LIBOR plus 3.10% 3/26, 6/26, 6/26/2008 6/26/2033 (4.25% at December 31, 2003) 9/26, 12/26 Capital Trust I 4,000 3-month LIBOR plus 3.65% 3/30, 6/30, 6/30/2007 6/28/2032 (4.80% at December 31, 2003) 9/30, 12/30 Capital Trust II 4,000 6-month LIBOR plus 3.70% 4/22, 10/22 4/22/2007 4/10/2032 (4.92% at December 31, 2003) --------- $20,000 =========
The various federal bank regulators, including the Federal Reserve and the FDIC, have risk-based capital requirements for assessing bank capital adequacy. These standards define capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risks. Capital is classified into two tiers. Tier 1 Capital (or "core" capital) consists of common shareholders' equity, qualifying perpetual preferred stock and minority interests in the common equity accounts of consolidated subsidiaries, reduced by goodwill, other intangible assets and certain investments in other corporations. Tier 2 Capital consists of Tier 1 Capital, as well as a limited amount of the allowance for possible loan losses, certain hybrid capital instruments (such as mandatory convertible debt), subordinated and perpetual debt and preferred stock that does not qualify for inclusion in Tier 1 Capital. At December 31, 1994, a risk-based capital measure and a minimum ratio standard was fully phased in, with a minimum total capital ratio of 8.00% and Tier 1 Capital equal to at least 50% of total capital. The Federal Reserve also has a minimum leverage ratio of Tier 1 Capital to total assets of 3.00%. The 3.00% Tier 1 Capital to total assets ratio constitutes the leverage standard for bank holding companies and Bank Insurance Fund ("BIF")-insured, state-chartered, non-member banks, and will be used in conjunction with the risk-based ratio in determining the overall capital adequacy of banking organizations. The FDIC has similar capital requirements for BIF-insured, state-chartered, non-member banks. The Federal Reserve and the FDIC have emphasized that the foregoing standards are supervisory minimums and that an institution would be permitted to maintain such minimum levels of capital only if it were rated a composite "one" under the regulatory rating systems for bank holding companies and banks. All other bank holding companies are required to maintain a leverage ratio of 3.00% plus at least 1.00% to 2.00% of additional capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The Federal Reserve continues to consider a "tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 Capital less all intangibles, to total average assets less all intangibles. 61
REGULATORY CAPITAL CALCULATION AS OF DECEMBER 31, ----------------------------------------- 2003 2002 ------------------ ------------------ AMOUNT % AMOUNT % ------- ---- ------- ---- TIER 1 RISK-BASED: Actual $77,088 9.73 $68,953 10.78 Minimum required 31,681 4.00 25,580 4.00 ------- ---- ------- Excess above minimum $45,407 5.73 $43,373 6.78 TOTAL RISK-BASED: Actual $86,727 10.95 $76,216 11.92 Minimum required 63,362 8.00 51,160 8.00 ------- ---- ------- Excess above minimum $23,365 2.95 $25,056 3.92 LEVERAGE: Actual $77,088 8.24 $68,953 9.97 Minimum required 37,400 4.00 27,655 4.00 ------- ---- ------- Excess above minimum $39,688 4.24 $41,298 5.97 Total risk-based assets 792,026 639,498 Total average assets 877,986 609,573
The Company's Tier 1 Capital ratio decreased to 9.7% in 2003 from 10.8% in 2002. The Company's total risk-based capital ratio decreased to 10.9% in 2003 from 11.9% in 2002. These ratios exceed the minimum capital adequacy guidelines imposed by regulatory authorities on banks and bank holding companies, which are 4.00% for Tier 1 Capital and 8.00% for total risk-based capital. The ratios also exceed the minimum guidelines imposed by the same regulatory authorities to be considered "well-capitalized," which are 6.00% of Tier 1 Capital and 10.00% for total risk-based capital. The Company does not have any commitments that management believes would reduce the Company's capital to levels inconsistent with the regulatory definition of a "well capitalized" financial institution. The Company's rapid growth since inception has required it to increase its capital resources from time to time as discussed above. While it is the Company's intention to continue to expand prudently, there can be no assurance that the Company will continue to grow at the same rate as the Company has in past years. Should the Company fail to attract sufficient capital resources, it would limit its growth in order to remain a "well capitalized" institution. A positive trend related to the Company's capital resources is its increased earnings. Prior to 2001, the Company operated at a loss. In 2001, it reported net income applicable to common shares of $558,000. In 2002, the Company reported net income applicable to common shares of $1.3 million. For the year ended December 31, 2003, the Company reported net income applicable to common shares of $4.4 million. While there can be no assurance that this trend will continue, this level of income has provided internally generated capital. Internally generated capital, such as earnings retained by the company, enhances its tier 1 regulatory capital position and defers the need to raise additional capital from outside sources. Subsequent to this offering, the Company does not expect, nor can it presently foresee, any events, trends, or commitments, which would materially change the mix and relative costs of its capital resources and debt. 62 INTEREST RATE RISK MANAGEMENT Interest rate sensitivity is a function of the repricing characteristics of the Company's portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments. Interest rate sensitivity management focuses on repricing relationships of assets and liabilities during periods of changes in market interest rates. Interest rate sensitivity is managed with a view to maintaining a mix of assets and liabilities that respond to changes in interest rates within an acceptable time frame, thereby managing the effect of interest rate movements on net interest income. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities that are subject to repricing at various time horizons. The differences are interest sensitivity gaps: less than one month, one to three months, four to twelve months, one to five years, over five years and on a cumulative basis. The following table shows interest sensitivity gaps for these different intervals as of December 31, 2003. The effects of derivative instruments (foreign currency swap and interest rate swaps) have been incorporated into this table by revising the repricing intervals of the underlying assets and liabilities so they are shown repricing at the next strike date, where that differed from their contractual repricing interval.
ONE ONE TO MONTH OR THREE FOUR TO ONE TO FIVE OVER FIVE NON-INTEREST LESS MONTHS TWELVE MONTHS YEARS YEARS SENSITIVE TOTAL ------- ------- ------------ ---------- -------- ------------- ------- Interest Sensitive Assets: Available for sale investment securities $ 7,310 291 10,719 14,881 23,685 -- $ 56,886 Loans held for sale 66,495 -- -- -- -- -- 66,495 Federal funds sold and repurchase agreements 30,616 -- -- -- -- -- 30,616 Loans held for investment net of deferred fees 254,766 101,970 46,543 193,188 91,123 -- 690,590 ------- ------- ------ ------- ------ -------- ------- Total earning assets 359,187 102,261 57,262 208,069 117,808 -- 844,587 ------- ------- ------ ------- ------ -------- ------- Interest Sensitive Liabilities: Interest-bearing demand deposits 59,056 -- -- -- -- -- 59,056 Savings deposits 94,036 -- -- -- -- 3,644 97,680 Money market deposits -- -- -- -- -- 31,676 31,676 Certificates of deposit of $100,000 or more 35,710 36,872 143,974 152,529 13,006 -- 382,091 Other time deposits 24,064 10,723 27,749 25,314 3,613 -- 91,462 Repurchase agreements -- -- -- -- -- 33,508 33,508 Trust preferred securities -- -- -- -- 20,000 -- 20,000 Other borrowed funds 3,354 -- -- -- 10,693 -- 14,057 ------- ------- ------ ------- ------ -------- ------- Total interest-bearing liabilities 216,220 47,595 171,723 177,843 47,312 68,828 729,521 ------- ------- ------ ------- ------ -------- ------- Interest sensitivity gap: Amount 142,967 54,666 (114,461) 30,226 70,496 (68,828) 115,066 ------- ------- ------ ------- ------ -------- ------- Cumulative amount 142,967 197,633 83,172 113,398 183,894 115,066 -- ------- ------- ------ ------- ------ -------- ------- Percent of total earning assets 16.93% 6.47% (13.55)% 3.58% 8.35% (8.15)% 13.62% Cumulative percent of total earning assets 16.93% 23.40% 9.85% 13.43% 21.77% 13.62% -- Ratio of rate sensitive assets to rate sensitive liabilities 1.66 2.15 0.33 1.17 2.49 -- -- Cumulative ratio of rate sensitive assets to rate sensitive liabilities 1.66 1.75 1.19 1.18 1.28 -- --
63 In the current interest rate environment, the liquidity and maturity structure of the Company's assets and liabilities are important to the maintenance of acceptable performance levels. A decreasing rate environment negatively impacts earnings as the Company's rate-sensitive assets generally reprice faster than its rate-sensitive liabilities. Conversely, in an increasing rate environment, earnings are positively impacted. This asset-liability mismatch in pricing is referred to as gap ratio and is measured as rate sensitive assets divided by rate sensitive liabilities for a defined time period. A gap ratio of 1.00 means that assets and liabilities are perfectly matched as to repricing. The Company has specified gap ratio guidelines for a one year time horizon of between 0.60 and 1.20. At December 31, 2003, the Company had cumulative gap ratios of approximately 1.19. Thus, over the next twelve months, rate-sensitive assets will reprice slightly faster than rate-sensitive liabilities. At December 31, 2002, the Company had cumulative gap ratios of approximately 1.29. However, relative repricing frequency of rate-sensitive assets versus rate-sensitive liabilities is not the sole indicator of changes in net interest income in a fluctuating interest rate environment, as further discussed below. The allocations used for the interest rate sensitivity report above were based on the contractual maturity (or next repricing opportunity, whichever comes sooner) for loans and deposits and the duration schedules for investment securities. All interest-bearing demand deposits were allocated to the one-month or less category with the exception of personal savings deposit accounts, which were allocated to the noninterest sensitive category because the rate paid on these accounts typically is not sensitive to movements in market interest rates. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the net interest spread between an asset and its supporting liability can vary significantly while the timing of repricing for both the asset and the liability remain the same, thus impacting net interest income. This is referred to as basis risk and, generally, relates to the possibility that the repricing characteristics of short-term assets tied to the Company's prime lending rate are different from those of short-term funding sources such as certificates of deposit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest sensitivity analysis report. Prepayments may have significant effects on the Company's net interest margin. Because of these factors and in a static test, interest sensitivity gap reports may not provide a complete assessment of the Company's exposure to changes in interest rates. Management utilizes computerized interest rate simulation analysis to determine the Company's interest rate sensitivity. The table above on interest sensitivity gaps indicates that the Company is in a liability sensitive gap position for the first year, then moves into a matched position through the five year period. Overall, due to the factors cited, current simulations results indicate a relatively low sensitivity to parallel shifts in interest rates. A liability sensitive company will generally benefit from a falling interest rate environment as the cost of interest-bearing liabilities falls faster than the yields on interest-bearing assets, thus creating a widening of the net interest margin. Conversely, an asset sensitive company will benefit from a rising interest rate environment as the yields on earning assets rise faster than the costs of interest-bearing liabilities. Management also evaluates economic conditions, the pattern of market interest rates and competition to determine the appropriate mix and repricing characteristics of assets and liabilities required to produce a targeted net interest margin. In addition to the gap analysis, management uses rate shock simulation to measure the rate sensitivity of the Company's balance sheet. Rate shock simulation is a modeling technique used to estimate the impact of changes in rates on the Company's net interest margin. The Company measures its interest rate risk by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of plus or minus 200 basis points over a period of twelve months. The Company's most recent rate shock simulation analysis, which was performed as of February 29, 2004, indicates that a 200 basis point decrease in rates would cause a decrease in net interest income of $2.9 million over the next twelve-month period. Conversely, a 200 basis point increase in rates would cause an increase in net interest income of $5.9 million. 64 This simulation is based on management's assumption as to the effect of interest rate changes on assets and liabilities and assumes a parallel shift of the yield curve. It also includes certain assumptions about the future pricing of loans and deposits in response to changes in interest rates. Further, it assumes that delinquency rates would not change as a result of changes in interest rates although the Company cannot assure you that this will be the case. While this simulation is a useful measure of the Company's sensitivity to changing rates, it is not a forecast of the future results and is based on many assumptions that, if changed, could cause a different outcome. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to net interest income than indicated above. Generally, the Company's commercial and commercial real estate loans are indexed to the prime rate. A portion of the Company's investments in mortgage-backed securities is indexed to U.S. Treasury rates. Accordingly, any changes in these indices will have a direct impact on the Company's interest income. Certificates of deposit are generally priced based upon current market conditions, which include changes in the overall interest rate environment and pricing of such deposits by competitors. Other interest-bearing deposits are not priced against any particular index; but rather, reflect changes in the overall interest rate environment. Repurchase agreements are indexed to the nationally quoted repurchase agreement rate and other borrowed funds are indexed to U.S. Treasury rates. The Company adjusts the rates and terms of its loans and interest-bearing liabilities in response to changes in the interest rate environment. The Company does not currently engage in trading activities. The Company adopted Statement of Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (SFAS 133), as amended, on January 1, 2001. SFAS 133 requires all derivative instruments to be recorded on the balance sheet at fair value. At December 31, 2003, the following instruments qualify as derivatives as defined by SFAS 133:
WEIGHTED WEIGHTED CONTRACT/NOTIONAL AVERAGE PAYING AVERAGE AMOUNT FAIR VALUE RATES RECEIVING RATES ------------------ ------------ -------------- --------------- Interest rate swap agreements............ $166,521,000 $151,523 1.22% 4.40% Foreign currency swap agreements............ 2,000,000 (185,716) 1.79% 2.47% Mortgage loan interest rate locks................. 62,503,000 1,529,571 N/A N/A Mandatory mortgage delivery forwards.............. 55,791,000 (231,953) N/A N/A
65 Interest rate swap agreements at December 31, 2003 consist of twenty-four agreements, which effectively convert the interest rate on certain certificates of deposit from a fixed rate to a variable rate to more closely match the interest rate sensitivity of the Company's assets and liabilities. The Company has designated and assessed the derivatives as highly effective fair value hedges, as defined by SFAS 133. Additionally, the Company entered into a foreign currency swap agreement during the first quarter of 2001. This swap agreement does not qualify for hedge accounting under SFAS No. 133. Accordingly, all changes in the fair value of the foreign currency swap agreement are reflected in earnings. The Company recognized losses of $198,000 during the year ended December 31, 2003 as a result of changes in the fair value of the foreign currency agreement and the related translation adjustment. The five counter parties to these derivatives are large, credit-worthy financial services companies experienced in derivative operations. If a counter party were to default on one of the interest rate swap agreements, the practical impact of that default would be to revert the Company's cost on the underlying certificate of deposit to its fixed coupon rate. As per the preceding table, this would raise the Company's effective cost on the underlying deposit by an average rate of 3.18% as of December 31, 2003. However, most of these underlying certificates contain a provision allowing the Company to cancel the certificate of deposit in the event the related swap agreement is unwound, and the Company would probably do so to avoid the increase in cost of these funds. The default risk, therefore, on these interest rate swaps is limited. If the Company was to cancel the underlying certificate of deposit, the Company might need to replace it in the brokered deposit market, depending on its funding needs at the time. There can be no assurance the Company could replace such a deposit on terms as favorable as the cancelled deposit and the related interest rate swap had provided. If the counter party for the foreign currency swap were to default, the Company would have to use another process to convert the foreign currency payments into dollars, which might entail some additional costs, but in management's judgment, these would not be significant. The Company currently has no agreements with its counter parties to hold collateral to secure the positive value of these instruments, and management does not believe such agreements would present any real financial advantage. At December 31, 2003, in management's opinion there was no significant risk of loss in the event of nonperformance of the counter parties to these financial instruments. At December 31, 2002, the following instruments qualify as derivatives as defined by SFAS 133:
WEIGHTED CONTRACT/NOTIONAL WEIGHTED AVERAGE AVERAGE AMOUNT FAIR VALUE PAYING RATES RECEIVING RATES ---------------- ---------- ---------------- --------------- Interest rate swap agreements $85,500,000 $2,308,044 1.96% 4.88% Foreign currency swap agreements............. 2,000,000 12,599 3.34 3.79
Interest rate swap agreements consist of agreements that qualify for the fair value method of hedge accounting under the "short-cut method" based on the guidelines established by SFAS 133. At December 31, 2001, the Company had in place several loan participation agreements accounted for as derivatives, which do not qualify for hedge accounting. The Company recognized a gain of approximately $50,000 during the year ended December 31, 2001 as a result of changes in the fair value of those loan participation agreements. These participation agreements were unwound during 2002, and accordingly, the Company recognized a loss of approximately $50,000 during the year ended December 31, 2002, because the fair value of these agreements was reduced to zero. Additionally, the Company entered into a foreign currency swap agreement during the first quarter of 2001. This swap agreement does not qualify for hedge accounting under SFAS 133. Accordingly, all changes in the fair value of the foreign currency swap agreement will be reflected in the Company's earnings. The Company recognized a loss of approximately $67,000 during the year ended December 31, 2002, as a result of changes in the fair value of the foreign currency agreement. At December 31, 2002, the Company had made and received 66 certain commitments related to the origination and sale of mortgage loans through its wholesale mortgage division. The Company accounted for these commitments as derivative instruments where applicable in accordance with Derivatives Implementation Group Implementation Issue C13, WHEN A LOAN COMMITMENT IS INCLUDED IN THE SCOPE OF STATEMENT NO. 133 (DIG C13). The fair value of these commitments is included in the balance of mortgage loans held for sale at December 31, 2002. For the year ended December 31, 2002, the Company recognized a gain in connection with the recording of the fair value of these instruments. For the year ended December 31, 2002, there were no realized gains or losses on terminated interest rate swaps, with the exception of the loss on terminated loan participation agreements as discussed above. The Company has no off-balance sheet activities with unconsolidated or limited purpose entities. RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This Statement nullifies Emerging Issues Task Force ("EITF") No. 94-3 and requires that a liability for costs associated with an exit or disposal activity be recognized only when the liability is incurred. SFAS No. 146 is effective for exit and disposal activities that are initiated after December 31, 2002. The Company adopted the Statement effective January 1, 2003 and it did not have an impact on the Company's consolidated financial position and consolidated results of operations. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, which expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. This Interpretation requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition requirements of FIN 45 apply prospectively to guarantees issued or modified after December 31, 2002. The Company adopted the disclosure requirements of FIN 45 for the fiscal year ended December 31, 2002, and the recognition provisions on January 1, 2003. Significant guarantees that have been entered into by the Company are discussed in Note 22, GUARANTEES, to the Company's Consolidated Financial Statements for the year ended December 31, 2003. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. This Interpretation applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise held a variable interest that is acquired on or before January 31, 2003. The Company adopted FIN 46 on July 1, 2003 and based on a reasoned judgment, concluded that FIN 46 permits a sponsor to consolidate trust-preferred vehicles and, accordingly, continued to consolidate the vehicles after the application of FIN 46. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003) CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46(R)"). This Interpretation defines trust-preferred vehicles as variable interest entities and requires traditional trust preferred vehicles to be deconsolidated effective the first reporting period ending after March 15, 2004. Upon adoption if FIN 46(R), investment in trust preferred vehicles totaling $620,000 at December 31, 2003 will no longer be eliminated in consolidation. In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 149"). SFAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In addition, the statement clarifies when a contract is a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is generally effective prospectively for contracts entered into or modified, and hedging relationships designated, after June 30, 2003. The Company adopted the statement effective July1, 2003 and it did not have an impact on the Company's consolidated financial position, results of operations or cash flows. 67 In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS 150 are generally effective for financial instruments entered into or modified after May 31, 2003. Additionally, the Company must apply the provisions of SFAS 150 to all financial instruments on July 1, 2003. Upon the adoption of SFAS 150, the Company's obligated mandatorily redeemable preferred securities of subsidiary trusts were reclassified from mezzanine equity to debt. The dividends related to these securities are reflected as interest expense on a prospective basis. At December 31, 2003, the Company had $20 million outstanding as company obligated mandatorily redeemable preferred securities of subsidiary trusts. The Company expensed approximately $975,000 related to those instruments of which approximately $549,000 (including amortization of debt issuance costs of approximately $71,000) is recorded as interest expense and $426,000 is recorded as dividends on trust preferred securities in the Consolidated Statement of Operations. In December 2003, the FASB issued a revision of SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, which amends SFAS No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS and SFAS No. 88 EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. This Statement amends the disclosure requirements of SFAS No. 132 to require more complete information in both annual and interim financial statements about pension and postretirement benefits as well as to increase the transparency of the financial reporting related to those plans and benefits. The Company adopted the revised provisions of SFAS No. 132 as of December 31, 2003. In March of 2004, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 105, APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN COMMITMENTS, Topic 5: DD. This Bulletin summarizes the views of the SEC regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments and must be applied to all loan commitments accounted for as derivatives entered into after March 31, 2004. The Company will adopt the Bulletin on March 31, 2004 and is currently assessing the impact of adoption on the Company's consolidated financial position, results of operations or cash flows. EFFECTS OF INFLATION AND CHANGING PRICES Inflation generally increases the cost of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions' increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders' equity. Mortgage originations and refinancings tend to slow as interest rates increase, and can reduce the Company's earnings from such activities and the income from the sale of residential mortgage loans in the secondary market. MONETARY POLICIES The Company's results of operations will be affected by credit policies of monetary authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. Government securities, changes in the discount rate on member company borrowings, changes in reserve requirements against member company deposits and limitations on interest rates which member company may pay on time and savings deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates or the Company's deposit levels, loan demand, business and earnings. 68 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to "Liquidity Management and Interest Rate Sensitivity" in Item 7, Management's Discussion and Analysis for discussion of interest rate fluctuations. DERIVATIVE FINANCIAL INSTRUMENTS The Company is exposed to market risks, including fluctuations in interest rates, variability in spread relationships (Prime to LIBOR spreads), mismatches of repricing intervals between finance receivables and related funding obligations, and variability in currency exchange rates. The Company has established policies, procedures and internal processes governing its management of market risks and the use of financial instruments to manage its exposure to such risks. Sensitivity of earnings to these risks are managed by entering into securitization transactions, issuing debt obligations with appropriate price and term characteristics, and utilizing derivative financial instruments. These derivative financial instruments consist primarily of interest rate swaps and foreign currency swaps. The Company does not use derivative financial instruments for trading purposes. The Company uses interest rate swap agreements to change the characteristics of its fixed and variable rate exposures and to manage the Company's asset/liability match. The Company's interest rate swap portfolio is an integral element of its risk management policy, and as such, all swaps are linked to an underlying debt. The Company entered into a foreign currency swap agreement during the first quarter of 2001. The purpose of this transaction is to mitigate fluctuations in the exchange rate of the dollar and the Japanese yen, which might otherwise adversely affect the interest income on a loan denominated in Japanese Yen and tied to Japanese interest rates. This swap agreement does not qualify for hedge accounting under SFAS No. 133. Accordingly, all changes in the fair value of the foreign currency swap agreement will be reflected in the earnings of the Company. Refer to "Interest Rate Sensitivity and Liquidity Management" in Item 7, Management Discussion and Analysis for discussion of derivative instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements are filed with this report: Consolidated Balance Sheets - December 31, 2003 and 2002 Consolidated Statements of Operations - Years ended December 31, 2003, 2002 and 2001 Consolidated Statements of Shareholders' Equity - Years ended December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows - Years ended December 31, 2003, 2002 and 2001 Notes to Consolidated Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no occurrence requiring a response to this Item. 69 ITEM 9A. CONTROLS AND PROCEDURES In order to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis, the Company has formalized its disclosure controls and procedures. The Company's principal executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2003 (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. Since the Evaluation Date, there have not been any significant changes in the internal controls of the Company, or in other factors that could significantly affect these controls subsequent to the Evaluation Date. 70 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information relating to directors and executive officers of the Company contained in the Company's definitive proxy statement to be delivered to shareholders in connection with the 2004 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information relating to executive compensation contained in the Company's definitive proxy statement to be delivered to shareholders in connection with the 2004 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information relating to security ownership of certain beneficial owners and management contained in the Company's definitive proxy statement to be delivered to shareholders in connection with the 2004 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information relating to related party transactions contained in the registrant's definitive proxy statement to be delivered to shareholders in connection with the 2004 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information relating to principal accounting fees and services contained in the registrant's definitive proxy statement to be delivered to shareholders in connection with the 2004 Annual Meeting of Shareholders is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS. The following financial statements and accountants' reports have been filed as Item 8 in Part II of this Report: Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 2003 and 2002 Consolidated Statements of Operations - Years ended December 31, 2003, 2002 and 2001 Consolidated Statements of Shareholders' Equity - Years ended December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows - Years ended December 31, 2003, 2002 and 2002 Notes to Consolidated Financial Statements 71 2. EXHIBITS. -------- 3.1 Articles of Incorporation of the Company, as amended(1) 3.1.1 Second Amended and Restated Articles of Incorporation of the Company(1) 3.1.2 Amendment to Second Amended and Restated Articles of Incorporation of the Company(2) 3.1.3 Articles of Amendment to Second and Amended and Restated Articles of Incorporation of the Company(3) 3.2 Amended and Restated By-Laws of the Company(1) 4.1 Specimen Common Stock Certificate of the Company(1) 4.2 See Exhibits 3.1.1 and 3.2 for provisions of the Articles of Incorporation and By-Laws of the Company defining rights of the holders of the Company's Common Stock(1) 4.3 Indenture, dated December 18, 2001, between the Company and State Street Bank and Trust Company of Connecticut, National Association(4) 4.4 Amended and Restated Declaration of Trust, dated December 18, 2001, by and among State Street Bank and Trust Company of Connecticut, National Association, the Company and the administrators named therein(4) 4.5 Indenture, dated as of April 10, 2002, between the Company and Wilmington Trust Company, as trustee(5) 4.6 The Amended and Restated Declaration of Trust, dated as of April 10, 2002, among the Company, as sponsor, the Administrator(s) named therein and Wilmington Trust Company, as Delaware Trustee and Institutional Trustee, and the holders from time to time of undivided beneficial interests in the assets of Florida Banks Capital Trust II(5) 4.7 Indenture, dated as of June 27, 2002, between the Company and Wells Fargo Delaware Trust Company, as trustee(5) 4.8 The Amended and Restated Trust Agreement dated as of June 27, 2002 among the Company, as depositor, the Administrative Trustees named therein and Wells Fargo Bank, N.A., as property trustee, Wells Fargo Delaware Trust Company, as resident trustee, and the holders from time to time of undivided beneficial interests in the assets of Florida Banks Capital Trust II(5) 4.8 Indenture, dated December 19, 2002, between the Company and State Street Bank and Trust Company of Connecticut, National Association(7) 4.9 Amended and Restated Declaration of Trust, dated December 19, 2002, by and among State Street Bank and Trust Company of Connecticut, National Association, the Company and the administrators named therein(7) 4.10 Indenture, dated June 26, 2003, between Florida Banks, Inc. and State Street Bank and U.S. Bank National Association.(8) 4.11 Amended and Restated Declaration of Trust, dated June 26, 2003, by and among State Street Bank and U.S. Bank National Association, Florida Banks, Inc. and the administrators named therein.(8) 10.1 Form of Employment Agreement between the Company and Charles E. Hughes, Jr.(1) 10.2 The Company's 1998 Stock Option Plan(1) 72 10.2.1 Form of Incentive Stock Option Agreement(1) 10.2.2 Form of Non-qualified Stock Option Agreement(1) 10.3 The Company's Amended and Restated Incentive Compensation Plan(6) 10.4 Form of Employment Agreement between the Company and T. Edwin Stinson, Jr., Don D. Roberts and Richard B. Kensler(1) 10.5 Placement Agreement, dated December 4, 2001, between the Company, First Tennessee Capital Markets and Keefe, Bruyette & Woods, Inc. (4) 10.6 Subscription Agreement, dated December 18, 2001, between the Company, Florida Banks Statutory Trust I and Preferred Term Securities IV, Ltd. (4) 10.7 Guarantee Agreement, dated December 18, 2001, by and between the Company and State Street Bank and Trust Company of Connecticut(4) 10.8 Placement Agreement, dated as of March 26, 2002, between the Company and Florida Banks Capital Trust II and Salomon Smith Barney Inc. (5) 10.9 Debenture Subscription Agreement, dated as of April 10, 2002, between the Company and Florida Banks Capital Trust II(5) 10.10 Capital Securities Subscription Agreement, dated March 26, 2002, among the Company, Florida Banks Capital Trust II and MM Community Funding III, Ltd. (5) 10.11 Common Securities Subscription Agreement, dated April 10, 2002, between the Company and Florida Banks Capital Trust II(5) 10.12 Guarantee Agreement, dated as of April 10, 2002, between the Company and Wilmington Trust Company, as trustee(5) 10.13 Subscription Agreement, dated as of June 27, 2002, between the Company, Florida Banks Capital Trust II and Bear, Stearns & Co. (5) 10.14 Placement Agreement, dated as of June 27, 2002, between the Company and Florida Banks Capital Trust II and SAMCO Capital Markets, a division of Service Asset Management Company(5) 10.15 Trust Preferred Securities Guarantee Agreement, dated as of June 27, 2002, between the Company and Wells Fargo, as trustee(5) 10.16 Placement Agreement, dated December 11, 2002, between the Company, Florida Banks Statutory Trust II, FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc. (7) 10.17 Subscription Agreement, dated December 19, 2002, between the Company, Florida Banks Statutory Trust II and Preferred Term Securities VIII, Ltd. (7) 10.18 Guarantee Agreement, dated December 19, 2002, by and between the Company and State Street Bank and Trust Company of Connecticut(7) 10.19 Placement Agreement, dated June 16, 2003, between Florida Banks, Inc., FTN Capital Markets and Keefe, Bruyette & Woods, Inc.(8) 10.20 Subscription Agreement, dated June 26, 2003, between Florida Banks, Inc., Florida Banks Statutory Trust III and Preferred Term Securities X, Ltd.(8) 10.21 Guarantee Agreement, dated June 26, 2003, by and between Florida Banks, Inc. and State Street Bank and U.S. Bank National Association.(8) 10.22 Subscription Agreement for Series C Preferred Stock, dated December 31, 2002(3) 73 21.1 Subsidiaries of the Registrant(9) 23.1 Consent of Deloitte & Touche LLP(9) 31.1 Certifications by Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002(9) 31.2 Certifications by Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002(9) 32.1 Certifications by Chief Executive Officer and Chief Financial Officer under Section 906 of Sarbanes-Oxley Act of 2002 (furnished but not filed)(9) ---------- (1) Incorporated by reference to the Company's Registration Statement on Form S-1, previously filed by the Company (Registration Statement No. 333-50867). (2) Incorporated by reference to Exhibit to the Registration Statement on Form S-3, previously filed by the Company (Registration Statement No. 333-67372). (3) Incorporated by reference to the Form 8-K dated January 2, 2003, previously filed by the Company. (4) Incorporated by references to the Form 10-Q for the quarter ended March 31, 2002, previously filed by the Company. (5) Incorporated by reference to the Form 10-Q for quarter ended June 30, 2002, previously filed by the Company. (6) Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8, previously filed by the Company (Registration Statement No. 333-70442). (7) Incorporated by reference to the Form 10-K for the year ended December 31, 2002, previously filed by the Company. (8) Incorporated by reference to the Form 10-Q for the quarter ended June 30, 2003, previously filed by the Company. (9) Filed herewith. (b) No reports on Form 8-K were filed in the quarter covered by this report. 74 SIGNATURES In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, in the City of Jacksonville, State of Florida on March 25, 2004. FLORIDA BANKS, INC. By: /s/ CHARLES E. HUGHES, JR. -------------------------------- Charles E. Hughes, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE ------------------------------------------- ---------------------------------- ------------------------------------- /s/ CHARLES E. HUGHES, JR. President, Chief Executive March 25, 2004 --------------------------------------- Officer and Director (Principal Charles E. Hughes, Jr. Executive Officer) /s/ T. EDWIN STINSON, JR. Chief Financial Officer, March 25, 2004 --------------------------------------- Secretary, Treasurer and T. Edwin Stinson, Jr. Director (Principal Financial and Accounting Officer) /s/ M.G. SANCHEZ Chairman of the Board March 25, 2004 --------------------------------------- M. G. Sanchez /s/ T. STEPHEN JOHNSON Vice-Chairman of the Board March 25, 2004 --------------------------------------- T. Stephen Johnson /s/ CLAY M. BIDDINGER Director March 25, 2004 --------------------------------------- Clay M. Biddinger /s/ P. BRUCE CULPEPPER Director March 25, 2004 --------------------------------------- P. Bruce Culpepper /s/ DR. ADAM F. HERBERT, JR. Director March 25, 2004 --------------------------------------- Dr. Adam F. Herbert, Jr. /s/ W. ANDREW KRUSEN, JR. Director March 25, 2004 --------------------------------------- W. Andrew Krusen, Jr. /s/ NANCY E. LAFOY Director March 25, 2004 --------------------------------------- Nancy E. LaFoy /s/ WILFORD C. LYON, JR. Director March 25, 2004 --------------------------------------- Wilford C. Lyon, Jr. /s/ DAVID MCINTOSH Director March 25, 2004 --------------------------------------- David McIntosh
75 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------ ---------------------- 21.1 Subsidiaries of the Registrant 23.1 Consent of Deloitte & Touche, LLP 31.1 Certifications by Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certifications by Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002. 32.1 Certification by Chief Executive Officer and Chief Financial Officer under Section 906 of Sarbanes-Oxley Act of 2002 (furnished but not filed). 76 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders of Florida Banks, Inc. Jacksonville, Florida We have audited the accompanying consolidated balance sheets of Florida Banks, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Florida Banks, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company reclassified trust preferred securities effective July 1, 2003 in accordance with the adoption of Financial Accounting Standards Board Statement of Financial Accounting Standard No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. /s/ Deloitte & Touche LLP Certified Public Accountants Jacksonville, Florida March 16, 2004 F-1 FLORIDA BANKS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 --------------------------------------------------------------------------------
2003 2002 ------------- ------------- ASSETS CASH AND CASH EQUIVALENTS: Cash and due from banks $ 81,513,673 $ 26,964,504 Federal funds sold and repurchase agreements 30,616,000 62,515,000 ------------- ------------- Total cash and cash equivalents 112,129,673 89,479,504 INVESTMENT SECURITIES: Available for sale, at fair value (cost $53,085,489 and $50,155,158 at December 31, 2003 and 2002) 53,282,085 50,930,650 Held to maturity (fair value $0 and $299,475 at December 31, 2003 and 2002) -- 227,925 Other investments 3,604,050 2,493,350 ------------- ------------- Total investment securities 56,886,135 53,651,925 MORTGAGE LOANS HELD FOR SALE 66,495,468 54,674,248 LOANS, net of allowance for loan losses of $9,056,665 and $7,263,029 at December 31, 2003 and 2002, respectively 681,533,481 543,192,040 PREMISES AND EQUIPMENT, NET 5,008,664 5,466,332 ACCRUED INTEREST RECEIVABLE 2,684,599 2,375,102 DEFERRED INCOME TAXES, NET 4,597,922 3,908,751 DERIVATIVE INSTRUMENTS -- 2,321,643 OTHER REAL ESTATE OWNED 1,768,569 652,500 OTHER ASSETS 13,356,388 343,505 ------------- ------------- TOTAL ASSETS $ 944,460,899 $ 756,065,550 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS: Noninterest-bearing $ 134,647,508 $ 141,395,150 Interest-bearing 661,965,351 523,514,558 ------------- ------------- Total deposits 796,612,859 664,909,708 REPURCHASE AGREEMENTS 33,508,157 4,653,878 OTHER BORROWED FUNDS 24,046,860 9,921,898 TRUST PREFERRED SECURITIES 20,000,000 -- ACCRUED INTEREST PAYABLE 2,364,087 2,377,963 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 9,869,871 4,765,136 DERIVATIVE INSTRUMENTS 265,144 -- ------------- ------------- Total liabilities 886,666,978 686,628,583 ------------- ------------- COMPANY OBLIGATED MANDITORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS -- 16,473,092 ------------- ------------- COMMITMENTS (NOTE 10) SHAREHOLDERS' EQUITY: Series C preferred stock, $100.00 par value, 50,000 shares authorized, 50,000 shares issued and outstanding at December 31, 2003 and 2002 5,000,000 5,000,000 Common stock, $.01 par value; 30,000,000 shares authorized 6,838,271 and 6,768,362 shares issued, respectively 68,383 67,684 Additional paid-in capital 53,008,095 52,287,390 Accumulated deficit (deficit of $8,134,037 eliminated upon quasi-reorganization on December 31, 1995) (405,174) (4,874,873) Accumulated other comprehensive income, net of tax 122,617 483,674 ------------- ------------- Total shareholders' equity 57,793,921 52,963,875 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 944,460,899 $ 756,065,550 ============= =============
See notes to consolidated financial statements. F-2 FLORIDA BANKS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 --------------------------------------------------------------------------------
2003 2002 2001 ------------ ------------ ------------ INTEREST INCOME: Loans, including fees $ 41,610,943 $ 31,852,739 $ 27,692,486 Investment securities 1,369,518 2,239,454 2,653,164 Federal funds sold 402,756 582,723 819,741 Repurchase agreements 184,692 252,245 214,787 ------------ ------------ ------------ Total interest income 43,567,909 34,927,161 31,380,178 ------------ ------------ ------------ INTEREST EXPENSE: Deposits 15,315,217 14,622,492 14,948,191 Borrowed funds 643,191 460,027 395,131 Trust preferred 549,316 -- -- Repurchase agreements 383,666 501,638 1,204,752 ------------ ------------ ------------ Total interest expense 16,891,390 15,584,157 16,548,074 ------------ ------------ ------------ NET INTEREST INCOME 26,676,519 19,343,004 14,832,104 PROVISION FOR LOAN LOSSES 2,935,921 3,025,775 1,889,079 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 23,740,598 16,317,229 12,943,025 ------------ ------------ ------------ NONINTEREST INCOME: Gain on sale of mortgage loans 8,766,776 1,092,911 -- Mortgage loan origination fees 3,357,688 805,264 234,810 Service fees 2,316,130 1,718,888 1,224,020 Gain on sale of commercial loans -- 42,888 104,151 (Loss) gain on sale of available for sale investment securities -- (3,967) 73,976 Other noninterest income 1,162,817 383,775 411,046 ------------ ------------ ------------ 15,603,411 4,039,759 2,048,003 ------------ ------------ ------------ NONINTEREST EXPENSES: Salaries and benefits 21,929,864 11,037,925 8,761,416 Occupancy and equipment 2,809,565 2,105,683 1,785,996 Communications 1,583,313 1,144,290 969,842 Data processing 1,133,570 872,630 677,963 Professional 966,399 523,652 430,826 Dividends on preferred security of subsidiary trust 425,835 633,580 12,995 Other noninterest expense 3,349,146 1,687,049 1,054,151 ------------ ------------ ------------ 32,197,692 18,004,809 13,693,189 ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 7,146,317 2,352,179 1,297,839 PROVISION FOR INCOME TAXES 2,490,317 885,121 489,400 ------------ ------------ ------------ NET INCOME 4,656,000 1,467,058 808,439 PREFERRED STOCK DIVIDENDS (250,000) (140,058) (250,901) ------------ ------------ ------------ NET INCOME APPLICABLE TO COMMON SHARES $ 4,406,000 $ 1,327,000 $ 558,348 ============ ============ ============ EARNINGS PER COMMON SHARE: Basic $ 0.65 $ 0.21 $ 0.10 ============ ============ ============ Diluted $ 0.62 $ 0.20 $ 0.10 ============ ============ ============
See notes to consolidated financial statements. F-3 FLORIDA BANKS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 --------------------------------------------------------------------------------
Accumulated Other Compre- hensive Preferred Stock Common Stock Additional Income -------------------- -------------------- Paid-in Accumulated (Loss), Shares Par Value Shares Par Value Capital Deficit Net of Tax Total ------- ---------- --------- --------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2000 5,688,651 $56,887 $45,245,904 $(6,760,222) $ 13,870 $38,556,439 Comprehensive income: Net income -- -- -- -- -- 808,439 -- 808,439 Unrealized gain on available for sale investment securities, net of tax of $138,968 -- -- -- -- -- -- 230,332 230,332 Comprehensive income -- -- -- -- -- -- -- 1,038,771 Issuance of common stock under employee stock purchase plan -- -- 50,109 501 226,587 -- -- 227,088 Issuance of Series B preferred stock, net 102,283 6,955,244 -- -- (148,774) -- -- 6,806,470 Series B preferred stock cash dividends paid -- -- -- -- -- (127,373) -- (127,373) Purchase and retirement of common stock -- -- (61,100) (611) (358,750) -- -- (359,361) ------- ---------- --------- ------- ----------- ----------- --------- ----------- BALANCE, DECEMBER 31, 2001 102,283 6,955,244 5,677,660 56,777 44,964,967 (6,079,156) 244,202 46,142,034 Comprehensive income: Net income -- -- -- -- -- 1,467,058 -- 1,467,058 Unrealized gain on available for sale investment securities, net of tax of $144,482 -- -- -- -- -- -- 239,472 239,472 ----------- Comprehensive income -- -- -- -- -- -- -- 1,706,530 Conversion of Series B preferred stock into common stock (102,283) (6,955,244) 1,022,830 10,228 6,945,016 -- -- -- Exercise of stock options -- -- 7,063 71 46,401 -- -- 46,472 Issuance of common stock under employee stock purchase plan -- -- 41,133 411 210,359 -- -- 210,770 Issuance of restricted stock -- -- 19,676 197 120,647 -- -- 120,844 Issuance of Series C preferred stock, net 50,000 5,000,000 -- -- -- -- -- 5,000,000 Series B preferred stock dividends paid -- -- -- -- -- (262,775) -- (262,775) ------- ---------- --------- ------- ----------- ----------- --------- ----------- BALANCE, DECEMBER 31, 2002 50,000 5,000,000 6,768,362 67,684 52,287,390 (4,874,873) 483,674 52,963,875 Comprehensive income: Net income -- -- -- -- -- 4,656,000 -- 4,656,000 Unrealized loss on available for sale investment securities, net of tax of $217,839 -- -- -- -- -- -- (361,057) (361,057) ----------- Comprehensive income -- -- -- -- -- -- -- 4,294,943 Exercise of stock options -- -- 6,498 65 31,491 -- -- 31,556 Exercise of stock warrants -- -- 12,800 128 127,872 -- -- 128,000 Issuance of common stock under employee stock purchase plan -- -- 30,935 309 222,835 -- -- 223,144 Issuance of restricted stock -- -- 19,676 197 338,507 -- -- 338,704 Series C preferred stock dividends paid -- -- -- -- -- (186,301) -- (186,301) ------- ---------- --------- ------- ----------- ----------- --------- ----------- BALANCE, DECEMBER 31, 2003 50,000 $5,000,000 6,838,271 $68,383 $53,008,095 $ (405,174) $ 122,617 $57,793,921 ======= ========== ========= ======= =========== =========== ========= ===========
See notes to consolidated financial statements. F-4 FLORIDA BANKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 --------------------------------------------------------------------------------
2003 2002 2001 ------------- ------------- ------------- OPERATING ACTIVITIES: Net income $ 4,656,000 $ 1,467,058 $ 808,439 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 983,000 863,886 756,426 Restricted stock grants 338,704 120,844 -- Loss on disposition of furniture and equipment 18,573 -- 17,628 Deferred income tax (benefit) expense (471,332) (36,447) 449,400 Loss (gain) on sale of securities -- 3,967 (73,976) (Gain) loss on sale of real estate owned (8,834) 6,703 (24,928) (Gain) loss on foreign currency translation (217,634) 23,650 206,151 Gain on mortgage loan interest rate lock derivative instruments (1,519,571) (730,104) -- Gain on bank owned life insurance (467,159) -- -- Loss on mandatory mortgage forwards 230,953 -- -- Loss (gain) on interest rate swap derivative instruments 198,313 43,258 (262,008) Amortization (accretion) of premiums (discount) on investments, net 946,268 131,708 (295,582) Amortization of premiums on loans 86,153 123,055 196,651 Amortization of debt issuance costs 131,304 70,445 -- Provision for loan losses 2,935,921 3,025,775 1,889,079 Net increase in mortgage loans held for sale (10,301,649) (53,944,144) -- (Increase) decrease in accrued interest receivable (309,497) (652,356) 174,557 (Increase) decrease in other assets (2,150,120) 194,083 (2,180) (Decrease) increase in accrued interest payable (13,876) (485,919) 657,503 Increase in accounts payable and accrued expenses 5,104,735 2,726,341 1,279,801 ------------- ------------- ------------- Net cash provided by (used in) operating activities 170,252 (47,048,197) 5,776,961 ------------- ------------- ------------- INVESTING ACTIVITIES: Proceeds from sales, paydowns and maturities of investment securities: Available for sale 46,161,180 27,068,362 15,808,333 Held to maturity 227,925 2,700,791 4,154,215 Purchases of investment securities: Available for sale (50,037,779) (43,858,241) (17,193,780) Held to maturity -- -- (3,361,015) Other (1,110,700) (428,800) (798,550) Net increase in loans held for investment (142,342,955) (150,265,325) (119,896,460) Purchase of bank owned life insurance (10,000,000) -- -- Purchases of premises and equipment (1,649,035) (2,968,336) (839,608) Proceeds from the sale of premises and equipment 1,105,130 -- 3,841 Proceeds from the sale of real estate owned 66,190 2,771,124 114,928 ------------- ------------- ------------- Net cash used in investing activities (157,580,044) (164,980,425) (122,008,096) ------------- ------------- ------------- FINANCING ACTIVITIES: Net increase in demand deposits, money market accounts and savings accounts 45,114,197 91,014,976 86,829,039 Net increase in time deposits 88,993,268 120,771,110 59,390,096 Proceeds from issuance of preferred stock, net -- 5,000,000 6,806,470 Proceeds from issuance of trust preferred securities, net 3,000,000 10,583,647 5,819,000 Proceeds from the exercise of stock options and warrants, net 159,556 46,472 -- Purchase and retirement of common stock -- -- (359,361) Preferred dividends paid (186,301) (262,775) (127,373) Proceeds from advances 13,200,000 10,000,000 9,500,000 Repayment of advances (6,667) (10,000,000) (7,000,000) Increase (decrease) in repurchase agreements 28,854,279 158,331 (14,316,831) Increase (decrease) in other borrowed funds 931,629 207,206 (8,710) ------------- ------------- ------------- Net cash provided by financing activities 180,059,961 227,518,967 146,532,330 ------------- ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 22,650,169 15,490,345 30,301,195 CASH AND CASH EQUIVALENTS: Beginning of year 89,479,504 73,989,159 43,687,964 ------------- ------------- ------------- End of year $ 112,129,673 $ 89,479,504 $ 73,989,159 ============= ============= =============
See notes to consolidated financial statements. F-5 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Florida Banks, Inc. (the "Company") was incorporated on October 15, 1997 for the purpose of becoming a bank holding company and acquiring First National Bank of Tampa (the "Bank"). On August 4, 1998, the Company completed its initial public offering and its merger with the Bank pursuant to which the Bank was merged with and into Florida Bank No. 1, N.A., a wholly owned subsidiary of the Company, and renamed Florida Bank, N.A. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The following summarizes these policies and practices: USE OF ESTIMATES--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses and the valuation of other real estate owned, deferred tax assets, and derivative instruments. CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash and due from banks, Federal funds, sold, and repurchase agreements all of which mature within 90 days. Generally, Federal funds and repurchase agreements are sold for one-day periods. INVESTMENT SECURITIES--Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Securities are classified as trading securities if bought and held principally for the purpose of selling them in the near future. No investments are held for trading purposes. Securities not classified as held to maturity are classified as available for sale, and reported at fair value with unrealized gains and losses excluded from earnings and reported net of tax as a separate component of other comprehensive income or loss until realized. Other investments, which include Federal Reserve Bank stock and Federal Home Loan Bank stock, are carried at cost as such investments are not readily marketable. Realized gains and losses on sales of investment securities are recognized in the statements of operations upon disposition based upon the adjusted cost of the specific security. Declines in value of investment securities judged to be other than temporary are recognized as losses in the statements of operations. LOANS HELD FOR INVESTMENT--Loans held for investment are stated at the principal amount outstanding, net of unearned income and an allowance for loan losses. Interest income on all loans is accrued based on the outstanding daily balances. F-6 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- Management has established a policy to discontinue accruing interest on a loan after it has become 90 days delinquent as to payment of principal or interest unless the loan is considered to be well collateralized and the Company is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent if management believes that the borrower's financial condition is such that collection of interest or principal is doubtful. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the loan is estimated to be uncollectible. Interest income on nonaccrual loans is recognized only as received. Nonrefundable fees and certain direct costs associated with originating or acquiring loans are recognized over the life of the related loans on the interest method. MORTGAGE LOANS HELD FOR SALE--Mortgage loans held for sale are residential mortgage loans originated by the Company which management either intends to sell at some point in the future or which are committed to be sold to various institutions under agreements obtained at the time the Company extends commitments to borrowers. Mortgage loans held for sale are reported at the lower of cost or estimated fair value, determined on an aggregate basis. ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and larger balance real estate and other loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. F-7 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and smaller balance residential loans for impairment disclosures. PREMISES AND EQUIPMENT--Premises and equipment are stated at cost less accumulated depreciation computed on the straight-line method over the estimated useful lives. Leasehold improvements are amortized on the straight-line method over the shorter of their estimated useful life or the period the Company expects to occupy the related leased space. Maintenance and repairs are charged to operations as incurred. INCOME TAXES--Deferred tax liabilities are recognized for temporary differences that will result in amounts taxable in the future and deferred tax assets are recognized for temporary differences and tax benefit carryforwards that will result in amounts deductible or creditable in the future. Net deferred tax liabilities or assets are recognized through charges or credits to the deferred tax provision. A deferred tax valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be realized. Subsequent to the Company's quasi-reorganization (see Note 19) reductions in the deferred tax valuation allowance are credited to additional paid-in capital. DERIVATIVE INSTRUMENTS--The Company enters into derivative contracts to hedge certain assets, liabilities, and probable forecasted transactions. On the date the Company enters into a derivative contract, the derivative instrument is designated as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (a "fair value" hedge), or (2) a hedge of the variability in expected future cash flows associated with an existing recognized asset or liability or a forecasted transaction (a "cash flow" hedge). In a fair value hedge, changes in the fair value of the hedging derivative recognized in earnings are offset by recognizing changes in the fair value of the hedged item attributable to the risk being hedged. To the extent that the hedging derivative is ineffective, the changes in fair value will not offset and the difference is reflected in earnings. In a cash flow hedge, the effective portion of the changes in the fair value of the hedging derivative is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings. The Company formally documents the relationship between the hedging instruments and hedged items, as well as its risk management objective and strategy before undertaking the hedge. To qualify for hedge accounting, the derivatives and related hedged items must be designated as a hedge. Both at the inception of the hedge and on an ongoing basis, the Company assesses whether the hedging relationship is expected to be highly effective in offsetting changes in fair value or cash flows of hedged items. If it is determined that the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued. The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the designated hedge item, F-8 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- (2) the derivative expires or is sold, or (3) the derivative is de-designated as a fair value or cash flow hedge. OTHER REAL ESTATE OWNED--Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. OTHER BORROWED FUNDS--Other borrowed funds consist of Federal Home Loan Bank borrowings, SunTrust revolving and nonrevolving credit lines and treasury tax and loan deposits. Treasury tax and loan deposits generally are repaid within 1 to 120 days from the transaction date. REPURCHASE AGREEMENTS--Repurchase agreements consist of agreements with customers to pay interest daily on funds swept into a repo account based on a rate of .75% to 1.00% below the federal funds rate. Such agreements generally mature within one to four days from the transaction date. In addition, the Company has securities sold under agreements to repurchase, which are classified as secured borrowings. Such borrowings generally mature within 1 to 30 days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. Information concerning repurchase agreements for the years ended December 31, 2003 and 2002 is summarized as follows:
2003 2002 ------------- ------------ Average balance during the year $ 44,836,145 $ 37,725,667 Average interest rate during the year .86% 1.33% Maximum month-end balance during the year $ 56,968,233 $ 49,542,093
COMPREHENSIVE INCOME--Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are presented in the consolidated statements of shareholders' equity. TRANSFERS OF FINANCIAL ASSETS--Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. F-9 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE--Basic earnings per common share ("EPS") excludes dilution and is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects additional common shares that would have been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and convertible preferred stock. The potential common shares are determined using the treasury stock method for outstanding stock options and the if-converted method for preferred stock. STOCK OPTIONS--The Company accounts for stock based compensation utilizing the intrinsic value based method under Accounting Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. In January 2003, the Company's Board of Directors approved the Amended and Restated 1998 Stock Option Plan (the "1998 Plan"), which provides for the grant of incentive or nonqualified stock options to certain directors, officers, and key employees who participate in the plan. The exercise price of each stock option equaled the market price of the Company's stock on the date of grant. An aggregate of 1,100,000 shares of common stock are reserved for issuance pursuant to the 1998 Plan. During 2003, 2002, and 2001, the Company granted 92,600, 94,900, and 62,650 options, respectively, at various exercise prices based on the fair value of the stock at the time of grant. Pursuant to the disclosure requirements of Statement of Financial Accounting Standard ("SFAS") No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, the following table provides an expanded reconciliation for all periods presented that adds back to reported net income the recorded expense under APB No. 25, net of related income tax effects, deducts the total fair value expense under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, net of related income tax effects and shows the reported and pro forma earnings per share amounts. See NOTE 12 - SHAREHOLDERS' EQUITY for additional information regarding the Company's stock options.
2003 2002 2001 ------------- ------------- ----------- Net income applicable to common shares As reported $ 4,406,000 $ 1,327,000 $ 558,348 Total stock-based employee compensation cost included in the determination of net income, net of related tax effects 211,250 75,370 -- Total stock-based employee compensation cost determined under fair value method for all awards, net of related tax effects (409,614) (219,434) (243,347) ------------- ------------- ----------- Pro forma net income applicable to common shares $ 4,207,636 $ 1,182,936 $ 315,001 ============= ============= =========== Earnings per share - Basic As reported $ 0.65 $ 0.21 $ 0.10 Pro forma 0.62 0.18 0.06 Earnings per share - Dilutive As reported $ 0.62 $ 0.20 $ 0.10 Pro forma 0.60 0.18 0.06
F-10 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- PENSION BENEFITS--The Company records pension costs and liabilities, including an additional minimum liability in accordance with SFAS No. 187, EMPLOYER'S ACCOUNTING FOR PENSIONS. Several estimates and assumptions are required to record these costs and liabilities, including discount rates, salary increases and longevity and service lives of employees. Management reviews and updates these assumptions periodically. See NOTE 11 - EMPLOYEE BENEFIT PLANS, for the disclosure required by SFAS. No. 132 (revised 2003), EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. RECENT ACCOUNTING PRONOUNCEMENTS--In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This statement nullifies Emerging Issues Task Force No. 94-3 and requires that a liability for costs associated with an exit or disposal activity be recognized only when the liability is incurred. SFAS No. 146 is effective for exit and disposal activities that are initiated after December 31, 2002. The Company adopted the statement effective January 1, 2003 and it did not have an impact on the Company's consolidated financial position and consolidated results of operations. In November 2002, the FASB issued Interpretation No. ("FIN") 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, which expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. This interpretation requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition requirements of FIN 45 apply prospectively to guarantees issued or modified after December 31, 2002. The Company adopted the disclosure requirements of FIN 45 for the fiscal year ended December 31, 2002, and the recognition provisions on January 1, 2003. Significant guarantees that have been entered into by the Company are discussed in Note 22. In January 2003, the FASB issued FIN 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES. This interpretation applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise held a variable interest that is acquired on or before January 31, 2003. The Company adopted FIN 46 on July 1, 2003 and based on a reasoned judgment, concluded that FIN 46 permits a sponsor to consolidate trust-preferred vehicles and, accordingly, continued to consolidate the vehicles after the application of FIN 46. In December 2003, the FASB issued FIN 46 (revised December 2003) CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46(R)"). This interpretation defines trust preferred vehicles as variable interest entities and requires traditional trust preferred vehicles to be deconsolidated effective the first reporting period ending after March 15, 2004. Upon adoption of FIN 46(R), investment in trust preferred vehicles totaling $620,000 at December 31, 2003 will no longer be eliminated in consolidation. F-11 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In addition, the statement clarifies when a contract is a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective prospectively for contracts entered into or modified, and hedging relationships designated, after June 30, 2003. The Company adopted the statement effective July1, 2003 and it did not have an impact on the Company's consolidated financial position, results of operations, or cash flows. In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are generally effective for financial instruments entered into or modified after May 31, 2003. Additionally, the Company must apply the provisions of SFAS No. 150 to all financial instruments on July 1, 2003. Upon the adoption of SFAS No. 150, the Company's obligated mandatorily redeemable preferred securities of subsidiary trusts were reclassified from mezzanine equity to debt. The dividends related to these securities are reflected as interest expense on a prospective basis. At December 31, 2003, the Company had $20 million outstanding as company obligated mandatorily redeemable preferred securities of subsidiary trusts. The Company expensed approximately $975,000 related to those instruments of which approximately $549,000 (including amortization of debt issuance costs of approximately $71,000) is recorded as interest expense and $426,000 is recorded as dividends on trust preferred securities in the Consolidated Statement of Operations. In December 2003, the FASB issued a revision of SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, which amends SFAS No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS and SFAS No. 88, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. This statement amends the disclosure requirements of SFAS No. 132 to require more complete information in both annual and interim financial statements about pension and postretirement benefits as well as to increase the transparency of the financial reporting related to those plans and benefits. The Company adopted the revised provisions of SFAS No. 132 as of December 31, 2003. In March of 2004, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 105, APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN COMMITMENTS, Topic 5: DD. This bulletin summarizes the views of the SEC regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments and must be applied to all loan commitments accounted for as derivatives entered into after March 31, 2004. The Company will adopt the bulletin on March 31, 2004 and is currently assessing the impact of adoption on the Company's consolidated financial position, results of operations or cash flows. RECLASSIFICATIONS--Certain reclassifications have been made to the 2002 and 2001 consolidated financial statements to conform with the presentation adopted in 2003. F-12 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- 2. INVESTMENT SECURITIES The amortized cost and estimated fair value of available for sale and held to maturity investment securities as of December 31, 2003 and 2002 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- December 31, 2003 Available for sale: U.S. Treasury securities and other U.S. agency obligations $23,660,004 $ 37,876 $ (19,135) $23,678,745 State and municipal 610,000 47,025 -- 657,025 Mortgage-backed securities 21,505,841 232,872 (65,265) 21,673,448 ----------- ----------- ----------- ----------- Total debt securities 45,775,845 317,773 (84,400) 46,009,218 Mutual fund 7,309,644 -- (36,777) 7,272,867 ----------- ----------- ----------- ----------- Total securities available for sale $53,085,489 $ 317,773 $ (121,177) $53,282,085 =========== =========== =========== ===========
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- December 31, 2002 Available for sale: U.S. Treasury securities and other U.S. agency obligations $ 6,721,835 $ 52,718 -- $ 6,774,553 State and municipal 990,000 60,527 -- 1,050,527 Mortgage-backed securities 37,263,079 660,553 $ (10,571) 37,913,061 ----------- ----------- ----------- ----------- Total debt securities 44,974,914 773,798 (10,571) 45,738,141 Mutual fund 5,180,244 12,265 -- 5,192,509 ----------- ----------- ----------- ----------- Total securities available for sale $50,155,158 $ 786,063 $ (10,571) $50,930,650 =========== =========== =========== =========== Held to maturity: Mortgage-backed securities $ 227,925 $ 1,550 $ -- $ 229,475 =========== =========== =========== ===========
F-13 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- The gross unrealized losses and fair value, aggregated by investment category for those securities that have been in a continuous unrealized loss position for less than twelve months, at December 31, 2003, are shown below: Available for Sale ----------------------------- Unrealized Fair Losses Value ----------- ----------- U.S. Treasury securities and other U.S. agency obligations $ (19,135) $10,562,175 Mortgage-backed securities (65,265) 9,975,643 Mutual fund (36,777) 7,272,867 ----------- ----------- Total $ (121,177) $27,810,685 =========== =========== The U.S. Treasury securities and other U.S agency obligations with unrealized losses as of December 31, 2003 are comprised of six agency notes from the Federal National Mortgage Association, the Federal Home Loan Bank and the Federal Home Loan Mortgage Corporation. The mortgage-backed securities with unrealized losses are comprised of nine mortgage-backed securities from the U.S. agencies discussed above, including fixed rate collateralized mortgage obligations, fixed and variable rate mortgage backed securities and variable rate whole loans. The mutual fund with unrealized losses is comprised of one adjustable rate mortgage fund. Volatility in the home loan mortgage market throughout the period combined with timing of investment purchases have lead to the investment's temporary impairment. At December 31, 2003, the Company had no investments that have been in a continuous unrealized loss position for greater than twelve months. Expected maturities of debt securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The amortized cost and estimated fair value of debt securities, at December 31, 2003, by contractual maturity, are shown below:
Available for Sale ---------------------------- Amortized Fair Cost Value ----------- ----------- Due before one year $16,553,541 $16,579,665 Due after one year through five years 7,681,463 7,720,424 Due after five years through ten years -- -- Due after ten years 35,000 35,681 ----------- ----------- 24,270,004 24,335,770 Mortgage-backed securities 21,505,841 21,673,448 ----------- ----------- Total $45,775,845 $46,009,218 =========== ===========
Investment securities with a carrying value of $45,042,604 and $41,259,412 were pledged as security for certain borrowed funds and public deposits held by the Company at December 31, 2003 and 2002, respectively. F-14 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- 3. LOANS Loans at December 31 are summarized as follows: 2003 2002 ------------- ------------- Commercial real estate $ 424,498,020 $ 313,120,588 Commercial 176,094,389 166,122,230 Residential mortgage 34,119,945 23,080,140 Consumer 54,648,116 45,859,704 Credit card and other loans 1,956,431 2,791,678 ------------- ------------- Total loans 691,316,901 550,974,340 Allowance for loan losses (9,056,665) (7,263,029) Net deferred loan fees (726,755) (519,271) ------------- ------------- Net loans $ 681,533,481 $ 543,192,040 ============= ============= Changes in the allowance for loan losses are summarized as follows: 2003 2002 ----------- ----------- Balance, beginning of year $ 7,263,029 $ 4,692,216 Provision for loan losses 2,935,921 3,025,775 Charge-offs (1,187,747) (485,950) Recoveries 45,462 30,988 ----------- ----------- Balance, end of year $ 9,056,665 $ 7,263,029 =========== =========== The Company's primary lending area is the state of Florida. Although the Company's loan portfolio is diversified, a significant portion of its loans are collateralized by real estate. Therefore, the Company could be susceptible to economic downturns and natural disasters. It is the Company's lending policy to collateralize real estate loans based upon certain loan to appraised value ratios. Nonaccrual loans totaled approximately $2,613,000 and $1,535,000 of which approximately $0 and $151,000 is guaranteed by the Small Business Administration ("SBA") at December 31, 2003 and 2002, respectively. The effects of carrying nonaccrual loans during 2003, 2002, and 2001 resulted in a reduction of interest income of approximately $139,000, $67,000, and $147,000, respectively. F-15 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- The following is a summary of information pertaining to impaired loans:
December 31, -------------------------- 2003 2002 ---------- ---------- (approximately) Impaired loans with a valuation allowance $2,609,000 $1,415,000 Impaired loans without a valuation allowance -- -- ---------- ---------- Total impaired loans $2,609,000 $1,415,000 ========== ========== Valuation allowance related to impaired loans $ 572,000 $ 690,000
Years Ended December 31, ------------------------------------------ 2003 2002 2001 ---------- ---------- ---------- (Approximately) Average investment in impaired loans $2,012,000 $1,300,000 $1,065,000 ========== ========== ==========
The interest income recognized on impaired loans for the years ended December 31, 2003, 2002, and 2001 was not significant. No additional funds are committed to be advanced in connection with impaired loans. At December 31, 2003 and 2002, restructured loans amounted to approximately $1,860,000 and $3,124,000, respectively. No additional funds are committed to be advanced in connection with restructured loans. 4. PREMISES AND EQUIPMENT Major classifications of these assets are as follows: 2003 2002 ----------- ----------- Land $ 1,050,815 $ 2,009,387 Buildings 705,795 660,315 Leasehold improvements 1,165,066 1,014,555 Furniture, fixtures, and equipment 5,838,068 4,736,652 ----------- ----------- 8,759,744 8,420,909 Accumulated depreciation and amortization (3,751,080) (2,954,577) ----------- ----------- $ 5,008,664 $ 5,466,332 =========== =========== Depreciation and amortization amounted to $983,000, $863,886, and $756,426 for the years ended December 31, 2003, 2002, and 2001, respectively. F-16 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- The range of estimated useful lives of each major asset category is as follows: Range ------------- Buildings 15 - 39 years Leasehold improvements 15 - 39 years Furniture, fixtures, and equipment 3 - 7 years 5. OTHER ASSETS Other assets are composed of Bank Owned Life Insurance ("BOLI"), deposits, debt issuance costs, and prepaid items expected to be utilized in the next twelve months. In 2003, the Company purchased a $10,000,000 whole-life insurance policy on key employees whereby the Company is the sole beneficiary. Income related to the policy was approximately $467,000 for 2003. Under certain loan sales agreements, the Company must maintain funds on deposit to facilitate the sale of mortgage loans. Deposits totaled $750,000 at December 31, 2003. Unamortized debt issuance costs of approximately $486,000 at December 31, 2003 are included in "Other Assets". Prior to the adoption of SFAS No. 150, these costs were included in "Company Obligated Manditorily Redeemable Preferred Securities of Subsidiary Trusts". Effective July 1, 2003, such costs are amortized to interest expense over the respective term of the debt instruments and totaled approximately $71,000 in 2003. In April of 2003, Florida Bank, N.A. initiated a Supplemental Executive Retirement Plan (the "SERP Plan") as discussed in Note 11. As a result, an intangible pension asset of approximately $634,000 is recorded in "Other Assets" at December 31, 2003. 6. DERIVATIVE INSTRUMENTS The following instruments qualify as derivatives as defined by SFAS No. 133:
December 31, 2003 ------------------------------------ Contract/Notional Fair Amount Value ----------------- ------------ Interest rate swap agreements $166,521,000 $ 151,523 Foreign currency swap agreements 2,000,000 (185,714) Mortgage loan interest rate locks 62,503,665 1,519,571 Mandatory mortgage delivery forwards 55,791,000 (230,953)
F-17 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- Interest rate swap agreements consist of numerous agreements, which effectively convert the interest rate on certain certificates of deposit from a fixed rate to a variable rate to more closely match the interest rate sensitivity of the Company's assets and liabilities. The Company has designated and assessed the derivatives as highly effective fair value hedges, as defined by SFAS No. 133. Additionally, the Company entered into a foreign currency swap agreement during the first quarter of 2001. This swap agreement does not qualify for hedge accounting under SFAS No. 133. Accordingly, all changes in the fair value of the foreign currency swap agreement are reflected in the earnings of the Company. The Company recognized a loss of approximately $198,000 and $67,000 for the years ended December 31, 2003 and 2002, respectively, as a result of changes in the fair value of the foreign currency agreement. The Company enters into commitments to make loans whereby the interest rate on the loan is set prior to funding (rate lock commitment). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Therefore, they are recorded, at fair value, in mortgage loans held for sale on the accompanying consolidated balance sheets with changes in fair value recorded in gain on sale of mortgage loans on the accompanying consolidated statement of operations. In measuring the fair value of rate lock commitments, the amount of the expected gain on sale of the loans is included in the valuation. This value is calculated adjusting for an anticipated fallout factor for loan commitments that will never be funded. This policy of recognizing the value of the derivative has the effect of recognizing the gain from mortgage loans before the loans are sold. Rate lock commitments expose the Company to interest rate risk. The Company manages that risk by entering into forward sales contracts, which are recorded at fair value with changes in fair value reported in gain on sale of mortgage loans. 7. INCOME TAXES The components of the provision for income tax expenses for the years ended December 31, 2003, 2002, and 2001 are as follows:
2003 2002 2001 ----------- ----------- ----------- Current: Federal provision $ 2,568,349 $ 774,868 $ 40,000 State provision 393,300 146,700 -- ----------- ----------- ----------- 2,961,649 921,568 40,000 ----------- ----------- ----------- Deferred: Federal (benefit) provision (395,351) (31,120) 383,716 State (benefit) provision (75,981) (5,327) 65,684 ----------- ----------- ----------- (471,332) (36,447) 449,400 ----------- ----------- ----------- $ 2,490,317 $ 885,121 $ 489,400 =========== =========== ===========
F-18 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- Income taxes for the years ended December 31, 2003, 2002, and 2001 differ from the amount computed by applying the federal statutory corporate rate to earnings before income taxes as summarized below:
2003 2002 2001 ----------- ----------- ----------- Provision based on Federal income tax rate $ 2,416,181 $ 799,741 $ 441,265 State income taxes net of Federal benefit 211,750 85,384 49,731 Nontaxable income, net (137,325) -- -- Other (289) (4) (1,596) ----------- ----------- ----------- $ 2,490,317 $ 885,121 $ 489,400 =========== =========== ===========
The components of net deferred income taxes at December 31, 2003 and 2002 are as follows:
2003 2002 ---------- ---------- Deferred income tax assets: Net operating loss carryforwards $1,471,322 $1,728,963 Allowance for loan losses 3,206,242 2,473,645 Loan fees 273,479 195,402 Other 1,493 37,769 ---------- ---------- 4,952,536 4,435,779 ---------- ---------- Deferred income tax liabilities: Accumulated depreciation 226,850 150,108 Unrealized gain on investment securities 73,979 291,818 Other 53,785 85,102 ---------- ---------- 354,614 527,028 ---------- ---------- Deferred income tax assets, net $4,597,922 $3,908,751 ========== ==========
At December 31, 2003 and 2002, the Company had tax net operating loss carryforwards of approximately $3,910,000 and $4,595,000, respectively. Such carryforwards expire as follows: $1,550,000 in 2007, $1,620,000 in 2008, $92,000 in 2009, $369,000 in 2012, and $279,000 in 2018. A change in ownership on August 4, 1998, as defined in section 382 of the Internal Revenue Code, limits the amount of net operating loss carryforwards utilized each year to approximately $700,000. Unused limitations from each year accumulate in successive years. F-19 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- At December 31, 2003 and 2002, the Company assessed its earnings history and trends over the past three years, its estimate of future earnings, and the expiration dates of the loss carryforwards and has determined that it is more likely than not that the deferred tax assets will be realized. Accordingly, no valuation allowance is recorded at December 31, 2003 and 2002. 8. DEPOSITS Interest-bearing deposits at December 31, 2003 and 2002 are summarized as follows: 2003 2002 ------------ ------------ Interest-bearing demand $ 59,056,481 $ 52,803,427 Regular savings 97,679,405 66,940,672 Money market accounts 31,676,249 19,210,512 Time $100,000 and over 382,091,082 314,852,717 Other time 91,462,134 69,707,230 ------------ ------------ $661,965,351 $523,514,558 ============ ============ At December 31, 2003, the scheduled maturities of time deposits are as follows: 2004 $278,940,833 2005 62,009,236 2006 35,356,570 2007 55,585,789 2008 29,908,258 Thereafter 11,752,530 ------------ Total $473,553,216 ============ F-20 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- 9. OTHER BORROWED FUNDS Other borrowed funds at December 31, 2003 and 2002 are summarized as follows:
2003 2002 ----------- ----------- Treasury tax and loan deposits $ 3,353,526 $ 2,421,898 Federal Home Loan Bank advance, principal due upon maturity on July 6, 2010, subject to early termination; interest, due quarterly, is fixed at 5.90% 5,000,000 5,000,000 Federal Home Loan Bank advance, principal due upon maturity on September 14, 2011, subject to early termination; interest, due quarterly, is fixed at 4.80% 2,500,000 2,500,000 Federal Home Loan Bank advance, principal due upon maturity on April 29, 2008, subject to early termination; interest, due monthly, is fixed at 3.36% 2,800,000 -- Federal Home Loan Bank advance, principal payments of $6,667 due quarterly until maturity on July 16, 2018; interest, due monthly, is fixed at 4.27% 393,334 -- SunTrust Revolving Line of Credit, principal due upon maturity on July 31, 2004; interest, due quarterly, is adjustable based on the 30-day LIBOR plus 1.75%, 2.87% at December 31, 2003 7,500,000 -- SunTrust Non-Revolving Line of Credit, principal due upon maturity on March 31, 2004; interest, due quarterly, is adjustable based on the 30-day LIBOR plus 3.00%, 4.12% at December 31, 2003 2,500,000 -- ----------- ----------- $24,046,860 $ 9,921,898 =========== ===========
Treasury tax and loan deposits are generally repaid within 1 to 120 days from the transaction date. The Federal Home Loan Bank of Atlanta has the option to convert the $2,500,000 advance outstanding at December 31, 2003 into a three-month LIBOR-based floating rate advance September 14, 2006, and any payment date thereafter with at least two business days' prior notice to the Company. If the Federal Home Loan Bank elects to convert the advance, then the Company may elect, with at least two-business days' prior written notice, to terminate in whole or in part the transaction without payment of a termination amount on any subsequent payment date. The Company may elect to terminate the advance and pay a prepayment penalty, with two days' prior written notice, if the Federal Home Loan Bank does not elect to convert this advance. F-21 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- The Federal Home Loan Bank advances are secured by certain mortgage loans receivable of approximately $36,922,000 at December 31, 2003. The SunTrust Revolving Line of Credit and the SunTrust Non-Revolving Line of Credit are secured by first assignment of 100% of subsidiary bank stock, Florida Bank, N.A. at December 31, 2003. In addition, any funds raised either through the issuance of common stock or convertible preferred securities are first to be applied to paying down this loan. 10. COMMITMENTS LEASES--The Company has entered into certain noncancelable operating leases and subleases for office space and office property. Lease terms are generally for 5 to 20 years, and in many cases, provide for renewal options. Rental expense for 2003, 2002, and 2001 was approximately $1,148,000, $852,000, and $705,000, respectively. Rental income for 2003, 2002, and 2001 was approximately $7,000, $27,000, and $45,000, respectively. Both rental expense and rental income are included in net occupancy and equipment expense in the accompanying consolidated statements of operations. The following is a schedule of future minimum lease payments at December 31, 2003: Payments for Operating Leases ----------------- 2004 $ 920,000 2005 785,000 2006 806,000 2007 714,000 2008 511,000 Thereafter 2,417,000 ---------- $6,153,000 FEDERAL RESERVE REQUIREMENT--The Federal Reserve Board requires that certain banks maintain reserves, based on their average deposits, in the form of vault cash and average deposit balances at a Federal Reserve Bank. The requirement as of December 31, 2003 and 2002 was approximately $12,234,000 and $8,946,000, respectively. LITIGATION--Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will not have a material effect on the Company's consolidated financial statements. INCENTIVE AGREEMENT--Senior management of the Mortgage Banking Division of Florida Bank, N.A. has an incentive compensation agreement whereby they are entitled to a percentage of the pretax profits of the Mortgage Banking Division based on predetermined incentive targets. In 2003 and 2002, approximately $3,697,000 and $79,000, respectively, was expensed related to this agreement. F-22 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- 11. EMPLOYEE BENEFIT PLANS In April 2003, the Florida Bank, N.A. initiated the SERP Plan in which participation is limited to selected executives of the Florida Bank, N.A. who elect to participate in the SERP Plan. The SERP Plan provides defined benefits based on years of service and final average compensation. Florida Bank, N.A. uses a December 31 measurement date for the SERP Plan. The following table presents a reconciliation of prior and ending balances of the Projected Benefit Obligation and the fair market value of plan assets: 2003 ----------- Change in benefit obligation: Benefit obligation as of April 1, 2003 $ 1,061,208 Service cost 191,884 Interest cost 53,258 Actuarial losses 261,726 ----------- Benefit obligation at end of year 1,568,076 ----------- Fair value of plan assets at end of year -- ----------- Funded status (1,568,076) Unrecognized prior service costs 1,011,256 Unrecognized net actuarial loss 261,726 ----------- Net amount recognized $ (295,094) =========== Amounts recognized in the consolidated statement of financial position consist of: 2003 --------- Accrued benefit liability $(929,162) Intangible asset 634,068 --------- Net amount recognized $(295,094) ========= The projected benefit obligation, the accumulated benefit obligation, and the fair value of plan assets for the SERP Plan at December 31, 2003 was approximately $1,568,000, $929,000, and $0, respectively. The following table provides the components of net periodic pension cost: 2003 --------- Service cost $ 191,884 Interest cost 53,258 Amortization of prior service cost 49,952 --------- Net Periodic Pension costs $ 295,094 ========= F-23 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- In order to determine the benefit obligations at December 31, 2003, a discount rate of 6.00% and a rate of compensation increase of 5.00% were used. A discount rate of 7.00% and a rate of compensation increase of 5.00% were used to determine the net periodic benefit cost for the year ended December 31, 2003. Florida Bank, N.A. does not expect to contribute to its SERP Plan in 2004. The Company has a 401(k) defined contribution benefit plan (the "401(k) Plan") which covers substantially all of its employees. The Company matches 50% of employee contributions to the 401(k) Plan, up to 6% of all participating employees' compensation. The Company contributed approximately $211,000, $144,000, and $136,000 to the 401(k) Plan in 2003, 2002, and 2001, respectively. 12. SHAREHOLDERS' EQUITY SERIES B PREFERRED STOCK On June 29, 2001, the Company issued 100,401 shares of Series B preferred stock. On July 24, 2001, the Company issued an additional 1,882 shares of Series B preferred stock. All Series B preferred shares were issued for $68.00 per share through a private placement. CONVERSION RIGHTS--Each share of preferred stock is convertible into ten shares of the Company's common stock at a price of $6.80 per share (subject to adjustment for stock splits, stock dividends, etc.). The preferred stock will be automatically converted to common stock upon the following events: 1) change in control, 2) if the average closing price of the Company's common stock for any 30 consecutive trading day period is at or above $8.00 per share, or 3) the consummation of an underwritten public offering at a price of $8.00 per share or greater of the Company's common stock. DIVIDENDS--Cumulative cash dividends accrue at 7% annually and are payable quarterly in arrears. On April 16, 2002, all 102,283 shares of Series B preferred stock automatically converted into 1,022,830 shares of common stock as a result of the average closing price of the Company's common stock exceeding $8.00 for the period from March 4, 2002 through April 15, 2002. SERIES C PREFERRED STOCK On December 31, 2002, the Company issued 50,000 shares of Series C preferred stock for $100.00 per share through a private placement. The Series C preferred stock is not convertible or redeemable except as a result of a change in control. DIVIDENDS--Noncumulative cash dividends accrue at 5% annually through December 31, 2003 and at 3.75% annually thereafter. Dividends are payable quarterly in arrears. LIQUIDATION PREFERENCE--In the event of any liquidation, dissolution, or winding up of affairs of the Company, the holders of Series C preferred stock at the time shall receive $100.00 per share plus an amount equal to accrued and unpaid dividends thereon through and including the date of distribution prior to any distribution to holders of common stock. The liquidation preference at December 31, 2003 was $5,063,699. F-24 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- WARRANTS In 1998, in connection with the sale of common stock, warrants to purchase 80,800 shares of common stock at $10.00 per share were issued to accredited foreign investors. Such warrants have been valued at an aggregate price of approximately $165,000, or $2.04 per share, as determined by an independent appraisal and have been recorded as additional paid-in capital. The warrants are exercisable through February 3, 2008. In 2003, 12,800 warrants were exercised, leaving 68,000 warrants outstanding as of December 31, 2003. The shares of Company common stock delivered upon exercise have not been registered with the Securities and Exchange Commission, and the transfer of such shares is restricted. INCENTIVE STOCK During 2001, the Company's Board of Directors approved the Amended and Restated Incentive Compensation Plan (the "Incentive Plan") for all full-time senior officers and other officers and employees so designated by the Chief Executive Officer. The amendments to this Incentive Plan permit the issuance of common stock to officers and employees as incentive awards. Previously, the incentive awards were paid in cash. The Company has reserved 300,000 shares of common stock for issuance pursuant to the Incentive Plan. Upon attainment of the required goals, the officer would be awarded shares in the Company based on a pre-established vesting schedule. In 2003 and 2002, the Company awarded 104,839 and 59,029 shares under the Incentive Plan at a weighted average grant price of $10.81 and $6.14, respectively, based upon the closing share price on the date of grant. Compensation expense included in earnings is approximately $339,000 and $121,000 for 2003 and 2002, respectively. EMPLOYEE STOCK PURCHASE PLAN On January 22, 1999, the Board of Directors of the Company adopted the Employee Stock Purchase Plan (the "Plan"). The Plan was approved by the Company's shareholders at the Company's 1999 Annual Meeting of Shareholders on April 23, 1999. The Plan provides for the sale of not more than 200,000 shares of common stock to eligible employees of the Company pursuant to one or more offerings under the Plan. The purchase price for shares purchased pursuant to the Plan is the lesser of (a) 85% of the fair market value of the common stock on the grant date or, if no shares were traded on that day, on the last day prior thereto on which shares were traded or (b) an amount equal to 85% of the fair market value of the common stock on the exercise date or, if no shares were traded on that day, on the last day prior thereto on which shares were traded. Shares purchased by employees were approximately 31,000, 41,000, and 50,000 for the years ended December 31, 2003, 2002, and 2001, respectively. F-25 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- STOCK OPTIONS The Company applies the intrinsic value-based method of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, to account for its stock plans. See Stock Options in NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for a presentation of pro forma net income and earnings per share information pursuant to the disclosure requirements of SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, and a description of the Amended and Restated 1998 Stock Option Plan. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for options granted in 2003, 2002, and 2001, respectively: dividend yield of 0%, expected volatility of 29.54%, 32.08%, and 32.27%, risk-free interest rate of 2.15%, 3.48%, and 4.57%, and an expected life of three years. A summary of the status of fixed stock option grants under the Company's stock-based compensation plans as of December 31, 2003, 2002, and 2001 and changes during the years ending on those dates is presented below:
2003 2002 2001 ----------------------- ---------------------- ------------------------------- Weighted - Weighted - Weighted - Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- --------- ------- --------- ------- --------- Outstanding - Beginning of year 904,098 $8.68 850,348 $8.63 816,948 $8.76 Granted 92,600 9.10 94,900 7.93 62,650 6.52 Cancelled (15,174) 7.72 (34,087) 9.09 (29,250) 7.73 Exercised (6,498) 6.50 (7,063) 6.58 -- -- ------ ------ ------- Outstanding - End of year 975,026 $8.64 904,098 $8.68 850,348 $8.63 ======= ======= ======== == Options exercisable at year end 815,867 $8.64 730,833 $8.84 652,291 $9.04 Weighted average fair value of options granted during the year $2.09 $2.07 $1.80
The following table summarizes information related to stock options outstanding at December 31, 2003:
Weighted- Average Exercise Options Remaining Exercise Options Exercise Price Outstanding Life Price Exercisable Price -------------- ----------- --------- -------- ----------- -------- $5.25 - $6.75 325,369 6.45 $ 6.42 298,266 $ 6.40 $7.98 - $11.37 649,657 5.62 $ 9.75 517,601 $ 9.94
F-26 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (CONTINUED) -------------------------------------------------------------------------------- 13. RESTRICTION ON DIVIDENDS, LOANS, AND ADVANCES Federal and state bank regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10% of the Bank's capital stock and surplus on a secured basis. At December 31, 2003, the Bank's retained earnings available for the payment of dividends was approximately $11,207,000. Accordingly, approximately $69,809,000 of the Company's equity in the net assets of the Bank was restricted at December 31, 2003. Funds available for loans or advances by the Bank to the Company amounted to approximately $6,971,000. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company originates financial instruments with off-balance sheet risk in the normal course of business, usually for a fee, primarily to meet the financing needs of its customers. The financial instruments include commitments to fund loans, letters of credit, and unused lines of credit. These commitments involve varying degrees of credit risk; however, management does not anticipate losses upon the fulfillment of these commitments. At December 31, 2003, financial instruments having credit risk in excess of that reported in the balance sheet totaled approximately $221,790,000. 15. TRUST PREFERRED SECURITIES As of December 31, 2003, the Company has participated in five pooled trust preferred offerings. In connection with the transaction, the Company, through its subsidiary trusts, Florida Banks Statutory Trust I ("Statutory Trust 1"), Florida Banks Statutory Trust II ("Statutory Trust II"), Florida Banks Statutory Trust III ("Statutory Trust III"), Florida Banks Capital Trust I ("Capital Trust I"), and Florida Banks Capital Trust II ("Capital Trust II"), issued $20,000,000 in trust preferred securities. F-27 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- The terms of the trust preferred offerings are summarized as follows:
Preferred Trust Amount Dividend Rate Par Call Option Maturity --------------- ------ ------------- --------------- -------- Statutory Trust I $ 6,000,000 3-month LIBOR plus 3.60% December 18, 2006 December 18, 2031 (4.75% at December 31, 2003) Statutory Trust II 3,000,000 3-month LIBOR plus 3.75% December 26, 2007 December 19, 2032 (4.90% at December 31, 2003) Statutory Trust III 3,000,000 3-month LIBOR plus 3.10% June 26, 2008 June 26, 2033 (4.25% at December 31, 2003) Capital Trust I 4,000,000 3-month LIBOR plus 3.65% June 30, 2007 June 28, 2032 (4.80% at December 31, 2003) Capital Trust II 4,000,000 6-month LIBOR plus 3.70% April 22, 2007 April 10, 2032 ------------ (4.92% at December 31, 2003) $ 20,000,000 ============
In accordance with SFAS No. 150, the trust preferred securities are reflected as a liability in the Company's accompanying consolidated balance sheets as of December 31, 2003. 16. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION Supplemental disclosure of cash flow information:
2003 2002 2001 ----------- ----------- ----------- Cash paid during the year for interest on deposits and borrowed funds $15,963,308 $15,630,556 $15,890,571 Cash paid for income taxes, net of refunds $ 2,552,572 $ 275,000 $ --
Supplemental schedule of noncash investing and financing activities:
2003 2002 2001 ----------- ----------- ----------- Proceeds from demand deposits used to purchase shares of common stock under the employee stock purchase plan $ 223,144 $ 210,770 $ 227,088 Loans transferred to real estate owned $ 1,173,425 $ 652,500 $ 2,867,827 Increase in fair market value of derivative instruments used to hedge interest rate exposure on time deposits $(2,181,170) $ 2,085,117 $ 17,776
F-28 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- 17. QUASI-REORGANIZATION Effective December 31, 1995, the Bank completed a quasi-reorganization of its capital accounts. A quasi-reorganization is an accounting procedure provided for under current banking regulations that allows a bank to restructure its capital accounts to remove a deficit in undivided profits without undergoing a legal reorganization. A quasi-reorganization allows a bank that has previously suffered losses and subsequently corrected its problems to restate its records as if it had been reorganized. A quasi-reorganization is subject to regulatory approval and is contingent upon compliance with certain legal and accounting requirements of the banking regulations. The Bank's quasi-organization was authorized by the Office of the Comptroller of the Currency upon final approval of the Bank's shareholders which was granted November 15, 1995. As a result of the quasi-reorganization, the Bank charged against additional paid-in capital its accumulated deficit through December 31, 1995 of $8,134,037. 18. CONDENSED FINANCIAL INFORMATION OF FLORIDA BANKS, INC. (PARENT ONLY) The following represents the parent only condensed balance sheets as of December 31, 2003 and 2002 and the related condensed statements of operations and cash flows for the years ending December 31, 2003, 2002, and 2001.
Condensed Balance Sheets 2003 2002 ------------ ------------ Assets: Cash and repurchase agreements $ 557,422 $ 1,951,961 Available for sale investment securities, at fair value (cost $733,242 and $3,292,213, respectively) 768,279 3,418,212 Premises and equipment, net 263,699 170,091 Accrued interest receivable 3,436 21,591 Deferred income taxes, net 4,658,717 2,555,217 Prepaid and other assets 583,465 52,301 Investment in bank subsidiary 80,997,712 61,585,109 Investment in other subsidiaries 695,317 536,215 ------------ ------------ Total Assets $ 88,528,047 $ 70,290,697 ============ ============ Liabilities and Shareholders' Equity: Subordinated debentures payable to subsidiary trust $ 20,134,395 $ 17,000,092 Other borrowed funds 10,000,000 -- Accounts payable and accrued expenses 599,731 326,730 Shareholders' Equity: Preferred stock 5,000,000 5,000,000 Common stock 68,383 67,684 Additional paid-in capital 53,008,095 52,287,390 Accumulated deficit (405,174) (4,874,873) Accumulated other comprehensive income, net of tax 122,617 483,674 ------------ ------------ Total Liabilities and Shareholders' Equity $ 88,528,047 $ 70,290,697 ============ ============
F-29 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) --------------------------------------------------------------------------------
Condensed Statements of Operations 2003 2002 2001 ------------ ------------ ------------ Interest income on loans, including fees $ 496 $ 18,719 Interest income on investment securities $ 117,436 318,230 666,051 Other interest income 5,136 34,811 80,748 Other income -- -- 436,948 ------------ ------------ ------------ Total income 122,572 353,537 1,202,466 ------------ ------------ ------------ Equity in undistributed income of bank subsidiary 7,735,263 3,379,436 1,654,552 Equity in undistributed income (loss) of subsidiary 58,672 (151) (155) Expenses (5,118,334) (3,419,569) (2,557,156) Income tax benefit 1,857,827 1,153,805 508,732 ------------ ------------ ------------ Net income $ 4,656,000 $ 1,467,058 $ 808,439 ============ ============ ============ CONDENSED STATEMENTS OF CASH FLOWS Operating activities: Net income $ 4,656,000 $ 1,467,058 $ 808,439 Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed income of Florida Bank, N.A (7,735,263) (3,379,436) (1,654,552) Equity in (income) loss of Florida Bank Financial Servicies, Inc. (58,672) 151 155 Depreciation and amortization 71,215 62,618 65,353 Restricted stock grants 338,704 120,844 -- Deferred income tax benefit (2,069,271) (1,428,805) (548,731) Transfer from affiliate, net (5,265) (3,079) -- Gain on sale of investment securities -- -- (73,988) Accretion of discounts on investments, net (15,196) (15,466) (16,687) Amortization of debt issuance costs 131,304 70,445 -- Benefit for loan losses -- -- (10,000) Amortization of loan premiums -- -- 1,225 Decrease in accrued interest receivable 18,155 17,312 41,150 (Decrease) increase in due to Florida Bank, N.A -- (92,318) 92,318 (Increase) decrease in prepaid and other assets (531,164) 173,277 (92,775) Increase in accounts payable and accrued expenses 273,001 145,997 98,253 ------------ ------------ ------------ Net cash used in operating activities (4,926,452) (2,861,402) (1,289,840) ------------ ------------ ------------ Investing activities: Purchase of premises and equipment (159,558) (8,410) (62,353) Proceeds from sales, paydowns, and maturities of investment securities 2,574,167 2,928,012 5,865,516 Net decrease in loans -- -- 1,073,535 Purchase of common stock of Florida Bank Preferred Trusts (93,000) (341,000) (186,000) Capital contributed to Florida Bank Financial Services, Inc. (7,430) -- -- Capital contributed to Florida Bank, N.A (11,981,664) (14,000,000) (9,500,000) ------------ ------------ ------------ Net cash used in investing activities (9,667,485) (11,421,398) (2,809,302) ------------ ------------ ------------
F-30 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) --------------------------------------------------------------------------------
2003 2002 2001 ------------ ------------ ------------ Financing activities: Decrease in repurchase agreements $ (1,000,000) $ (9,143,000) Payment of debt issuance costs $ (90,001) (196,353) -- Proceeds from issuance of common stock, net 223,144 210,770 227,088 Proceeds from the issuance of preferred stock, net -- 5,000,000 6,806,470 Proceeds from the issuance of subordinated debt, net 3,093,000 11,121,000 6,005,000 Proceeds from other borrowings 10,000,000 -- -- Preferred dividends paid (186,301) (262,775) (127,373) Proceeds from the exercise of stock options/warrants, net 159,556 46,472 -- Purchase and retirement of common stock -- -- (359,361) ------------ ------------ ------------ Net cash provided by financing activities 13,199,398 14,919,114 3,408,824 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (1,394,539) 636,314 (690,318) Cash and cash equivalents at beginning of year 1,951,961 1,315,647 2,005,965 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 557,422 $ 1,951,961 $ 1,315,647 ============ ============ ============
19. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2003 and 2002, notifications from the Office of the Comptroller of the Currency categorized the Bank as well capitalized, under the regulatory framework for prompt corrective action. To be categorized as adequately or well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. F-31 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- The Company's and Bank's actual capital amounts and ratios are presented in the following table.
To Be Well Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------ -------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio As of December 31, 2003: Total capital (to risk-weighted assets) Florida Banks, Inc. $86,727,000 10.95% > $ 63,362,000 > 8.00% N/A N/A - - Florida Bank, N.A. 89,949,000 11.41 > 63,067,000 > 8.00 > $ 78,834,000 > 10.00% - - - - Tier I capital (to risk-weighted assets) Florida Banks, Inc. 77,088,000 9.73 > 31,681,000 > 4.00 N/A N/A - - Florida Bank, N.A. 80,892,000 10.26 > 31,534,000 > 4.00 > 47,300,000 > 6.00 - - - - Tier I capital (to average assets) Florida Banks, Inc. 77,088,000 8.24 > 37,400,000 > 4.00 N/A N/A - - Florida Bank, N.A. 80,892,000 8.65 > 37,400,000 > 4.00 > 46,750,000 > 5.00 - - - -
To Be Well Capitalized Under for Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------------- --------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio AS OF DECEMBER 31, 2002: Total capital (to risk-weighted assets) Florida Banks, Inc. $ 76,216,000 11.92% > $ 51,160,000 > 8.00% N/A N/A - - Florida Bank, N.A. 68,443,000 10.75 > 50,920,000 > 8.00 > $ 63,650,000 > 10.00% - - - - Tier I capital (to risk-weighted assets) Florida Banks, Inc. 68,953,000 10.78 > 25,580,000 > 4.00 N/A N/A - - Florida Bank, N.A. 61,180,000 9.6 > 25,460,000 > 4.00 > 38,190,000 > 6.00 - - - - Tier I capital (to average assets) Florida Banks, Inc. 68,953,000 9.9 > 27,655,000 > 4.00 N/A N/A - - Florida Bank, N.A. 61,180,000 8.9 > 27,280,000 > 4.00 > 34,100,000 > 5.00 - - - -
F-32 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- 20. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating financial instrument fair values: GENERAL COMMENT--The financial statements include various estimated fair value information as required by SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in SFAS No. 107 and does not purport to represent the aggregate net fair value of the Company. Furthermore, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions and which are subject to change. CASH AND CASH EQUIVALENTS--Cash and due from banks, federal funds sold, and repurchase agreements are repriced on a short-term basis; as such, the carrying value closely approximates fair value. INVESTMENT SECURITIES--Fair values for available for sale and held to maturity securities are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. OTHER INVESTMENT SECURITIES--Fair value of the Bank's investment in Federal Reserve Bank stock and Federal Home Loan Bank stock is based on its redemption value, which is its cost of $100 per share. MORTGAGE LOANS HELD FOR SALE--Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. LOANS HELD FOR INVESTMENT--For variable rate loans that reprice frequently, the carrying amount is a reasonable estimate of fair value. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. DERIVATIVE INSTRUMENTS--Fair values of derivative instruments are based on quoted market prices, if available. If quoted market prices are not available, fair values are determined based on a cash flow model using market assumptions. DEPOSITS--The fair value of demand deposits, savings deposits, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly time deposit maturities. REPURCHASE AGREEMENTS--The carrying amounts of repurchase agreements approximates the estimated fair value of such liabilities due to the short maturities of such instruments. OTHER BORROWED FUNDS--For treasury tax and loan deposits, the carrying amount approximates the estimated fair value of such liabilities due to the short maturities of such instruments. The fair value of the Federal Home Loan Bank advances are based on quoted market prices. The carrying value of the SunTrust Lines of Credit approximated fair value as the interest rates adjust monthly. TRUST PREFERRED SECURITIES--The fair value of the Company's trust preferred securities approximates the estimated fair value as such liabilities reprice frequently based on a quoted market rate of interest. F-33 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- A comparison of the carrying amount to the fair values of the Company's significant financial instruments as of December 31, 2003 and 2002 is as follows:
2003 2002 ---------------------- ---------------------- Carrying Fair Carrying Fair (Amounts in Thousands) Amount Value Amount Value -------- ------ --------- ------- Financial assets: Cash and cash equivalents $112,130 $112,130 $ 89,480 $ 89,480 Available for sale investment securities 53,282 53,282 50,931 50,931 Held to maturity investment securities -- -- 228 299 Other investments 3,604 3,604 2,493 2,493 Mortgage loans held for sale 66,495 66,495 54,674 54,674 Loans held for investment 691,317 705,563 550,974 551,469 Derivative instruments -- -- 2,322 2,322 Financial liabilities: Deposits $796,613 $799,137 $664,910 $667,897 Repurchase agreements 33,508 33,508 4,654 4,654 Other borrowed funds 24,047 23,553 9,922 8,831 Derivative instruments 265 265 -- -- Trust preferred securities 20,000 20,000 16,473 16,473 Off-balance sheet credit related financial instruments: Commitments to extend credit $221,790 $221,790 $193,443 $193,443
21. EARNINGS PER COMMON SHARE Earnings per common share have been computed based on the following.
2003 2002 2001 ----------- ----------- ----------- Net income $ 4,656,000 $ 1,467,058 $ 808,439 Less preferred stock dividends (250,000) (140,058) (250,091) ----------- ----------- ----------- Net income applicable to common stock $ 4,406,000 $ 1,327,000 $ 558,348 =========== =========== =========== Weighted average number of common shares outstanding - Basic 6,800,776 6,442,022 5,703,524 Incremental shares from the assumed conversion of stock options 264,110 89,597 2,738 ----------- ----------- ----------- Total - Diluted 7,064,886 6,531,619 5,706,262 =========== =========== ===========
F-34 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- The incremental shares from the assumed conversion of stock options were determined using the treasury stock method under which the assumed proceeds were equal to (1) the amount that the Company would receive upon the exercise of the options plus (2) the amount of the tax benefit that would be credited to additional paid-in capital assuming exercise of the options. The convertible preferred stock was determined to be anti-dilutive and is therefore excluded from the computation of diluted earnings per share. 22. GUARANTEES The Company issues standby letters of credit to provide credit support for some creditors in case of default. As of December 31, 2003, the carrying amount of the liability was $66,000 and the maximum potential payment was $11,035,000. The Company also sells loans without recourse that may have to be subsequently repurchased due to defects that occurred during the loan's origination process. The defects are categorized as documentation errors, underwriting error, and fraud. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no defects, the Company has no commitment to repurchase the loan. The maximum exposure to cover the estimated loss exposure related to the loan origination process defects that are inherent within this portfolio as of December 31, 2003 represents the principal balance of the loan portfolio (approximately $1,098,980,000). The fair value of the liability recorded in the accompanying consolidated balance sheets as of December 31, 2003 is approximately $86,000. 23. SEGMENT REPORTING Prior to October 1, 2002, the Company had one reporting segment. However, in October 2002, the Company started a mortgage banking division which is managed as a segment. Accordingly, during 2002 the Company has two reporting segments, the commercial bank, and the mortgage bank. The commercial bank segment provides its commercial customers such products as working capital loans, equipment loans and leases, commercial real estate loans, and other business related products and services. This segment also offers mortgage loans to principals of its commercial customers. The mortgage bank segment originates mortgage loans through its network of mortgage brokers and sells these loans (on a wholesale basis) into the secondary market. F-35 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- Information about reportable segments and reconciliation of such information to the consolidated financial statements as of and for the year ended December 31, follows:
2003 Commercial Mortgage Intersegment Consolidated Bank Bank Other Eliminations Total ------------ ------------ ------------ ------------ ------------ Net interest income $ 23,115,028 $ 4,072,917 $ (511,426) $ -- $ 26,676,519 Noninterest income 4,524,644 11,078,767 -- -- 15,603,411 Noninterest expense 16,688,814 11,024,542 4,484,336 -- 32,197,692 Income (loss) before taxes 8,014,937 4,127,142 (4,995,762) -- 7,146,317 Assets 869,268,635 68,990,933 88,528,047 (82,326,716) 944,460,899 Expenditures for additions to premises and equipment 1,066,062 423,415 159,558 -- 1,649,035
2002 Commercial Mortgage Intersegment Consolidated Bank Bank Other Eliminations Total ------------ ------------ ------------ ------------ ------------ Net interest income $ 18,943,155 $ 61,645 $ 338,204 $ -- $ 19,343,004 Noninterest income 2,684,723 1,355,036 -- -- 4,039,759 Noninterest expense 13,689,351 911,222 3,404,236 -- 18,004,809 Income (loss) before taxes 4,912,752 505,459 (3,066,032) -- 2,352,179 Assets 694,561,605 55,234,735 70,290,697 (64,021,487) $756,065,550 Expenditures for additions to premises and equipment 2,398,326 561,600 8,410 -- 2,968,336
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and accordingly requires different technology and marketing strategies. The Company derives a majority of its revenues from interest income and gain on sale of mortgage loans and the chief operating decision maker relies primarily on net income before taxes to assess the performance of the segments and make decisions about resources to be allocated to the segments. Therefore, the segments are reported above using net income before taxes. The Company does not allocate income taxes to the segments. F-36 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- The Company does not have operating segments other than those reported. Parent Company financial information is included in the other category above and is deemed to represent an overhead function rather than an operating segment. The Company does not have a single external customer from which it derives 10% or more of its revenues and operates in one geographical area. 24. RELATED PARTY TRANSACTIONS The Company lends to shareholders, directors, officers, and their related business interests on substantially the same terms as loans to other individuals and businesses of comparable credit worthiness. Such loans outstanding were approximately $5,321,000 and $2,364,000 at December 31, 2003 and 2002, respectively. Deposits from related parties held by the Company at December 31, 2003 and 2002 were approximately $18,033,000 and $3,772,000, respectively. On September 9, 2002, Florida Bank, N.A. purchased a parcel of land for the purpose of future construction of a corporate headquarters and the Jacksonville banking office. A director of the Company was among the 11 sellers of the property. The purchase price was $905,084, which did not exceed an independent appraisal of the property which was conducted prior to the purchase. This property was subsequently sold during 2003. F-37 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONTINUED) -------------------------------------------------------------------------------- 25. SUMMARIZED QUARTERLY DATA (UNAUDITED) Following is a summary of the quarterly results of operations for the years ended December 31, 2003 and 2002:
Fiscal Quarter -------------------------------------------------------------------- First Second Third Fourth Total -------- -------- -------- -------- -------- $ in Thousands, Except Per Share Amounts 2003 Interest income $ 9,799 $ 11,161 $ 11,215 $ 11,393 $ 43,568 Interest expense 3,940 4,183 4,425 4,343 16,891 -------- -------- -------- -------- -------- Net interest income 5,859 6,978 6,790 7,050 26,677 Provision for loan losses 889 964 599 484 2,936 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 4,970 6,014 6,191 6,566 23,741 Noninterest income 3,684 5,168 3,328 3,423 15,603 Noninterest expense 7,435 9,142 7,691 7,930 32,198 -------- -------- -------- -------- -------- Income before income taxes 1,219 2,040 1,828 2,059 7,146 Income tax expense 426 671 655 738 2,490 -------- -------- -------- -------- -------- Net income 793 1,369 1,173 1,321 4,656 Preferred stock dividends (62) (62) (63) (63) (250) -------- -------- -------- -------- -------- Net income applicable to common shares $ 731 $ 1,307 $ 1,110 $ 1,258 $ 4,406 ======== ======== ======== ======== ======== Basic income per share $ 0.11 $ 0.19 $ 0.16 $ 0.19 $ 0.65 Diluted income per share $ 0.11 $ 0.19 $ 0.16 $ 0.16 $ 0.62
F-38 FLORIDA BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (CONCLUDED) --------------------------------------------------------------------------------
Fiscal Quarter -------------------------------------------------------------------- First Second Third Fourth Total -------- -------- -------- -------- -------- $ in Thousands, Except Per Share Amounts 2002 Interest income $ 8,008 $ 8,676 $ 9,067 $ 9,176 $ 34,927 Interest expense 3,729 3,688 4,126 4,041 15,584 -------- -------- -------- -------- -------- Net interest income 4,279 4,988 4,941 5,135 19,343 Provision for loan losses 380 1,028 699 919(1) 3,026 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 3,899 3,960 4,242 4,216 16,317 Noninterest income 537 569 755 2,179 4,040 Noninterest expense 3,633 4,270 4,578 5,524 18,005 -------- -------- -------- -------- -------- Income before income taxes 803 259 419 871 2,352 Income tax expense 307 97 153 328 885 -------- -------- -------- -------- -------- Net income 496 162 266 543 1,467 Preferred stock dividends (120) (20) (140) (140) -------- -------- -------- -------- -------- Net income applicable to common shares $ 376 $ 142 $ 266 $ 543 $ 1,327 ======== ======== ======== ======== ======== Basic income per share $ 0.07 $ 0.02 $ 0.04 $ 0.08 $ 0.21 Diluted income per share $ 0.07 $ 0.02 $ 0.04 $ 0.08 $ 0.20
(1) Includes an additional provision for loan losses of approximately $530,000 related to the specific reserve established against a customer's uncollected ACH account. ****** F-39