FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-24683
FLORIDA BANKS, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 58-2364573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5210 BELFORT ROAD, SUITE 310
JACKSONVILLE, FL
32256
(Address of principal executive offices)
(904) 332-7770
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding
COMMON STOCK, $.01 PAR VALUE OUTSTANDING AT SEPTEMBER 30, 2002
PER SHARE 6,751,420
PART I. Financial Information
Item 1. Financial Statements
FLORIDA BANKS, INC.
CONDENSED BALANCE SHEETS (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2002 2001
CASH AND DUE FROM BANKS $ 30,590,467 $ 19,332,159
FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS 76,465,000 54,657,000
------------ --------------
Total cash and cash equivalents 107,055,467 73,989,159
INVESTMENT SECURITIES:
Available for sale, at fair value (cost $45,938,056 and $33,562,507
at September 30, 2002 and December 31, 2001) 46,796,983 33,954,045
Held to maturity, at cost (fair value $558,871 and $2,934,245
at September 30, 2002 and December 31, 2001) 551,638 2,867,163
Other investments 2,253,350 2,064,550
------------ --------------
Total investment securities 49,601,971 38,885,758
LOANS:
Commercial real estate 289,837,209 210,373,284
Commercial 159,496,235 142,910,691
Residential mortgage 22,050,991 22,308,820
Consumer 41,004,553 23,158,053
Credit card and other loans 2,290,457 2,911,884
------------ --------------
Total loans 514,679,445 401,662,732
Allowance for loan losses (6,384,650) (4,692,216)
Net deferred loan fees (471,131) (218,821)
------------ --------------
Net loans 507,823,664 396,751,695
PREMISES AND EQUIPMENT, NET 5,411,999 3,361,882
ACCRUED INTEREST RECEIVABLE 2,354,383 1,722,746
DEFERRED INCOME TAXES, NET 3,288,869 4,016,786
DERIVATIVE INSTRUMENTS 2,649,634 279,784
OTHER REAL ESTATE OWNED 3,187,348 2,777,827
OTHER ASSETS 497,100 537,588
------------ --------------
TOTAL ASSETS $681,870,435 $ 522,323,225
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand $ 74,720,584 $ 99,899,425
Interest-bearing demand 49,226,495 19,164,133
Regular savings 63,925,493 64,338,080
Money market accounts 22,415,092 6,342,009
Time $100,000 and over 269,493,975 194,016,109
Other time 83,064,794 67,489,519
------------ --------------
Total deposits 562,846,433 451,249,275
REPURCHASE AGREEMENTS SOLD 42,098,751 4,495,547
OTHER BORROWED FUNDS 10,308,781 9,714,692
ACCRUED INTEREST PAYABLE 2,566,281 2,863,882
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 3,092,724 2,038,795
------------ --------------
Total liabilities 620,912,970 470,362,191
------------ --------------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES 13,537,016 5,819,000
------------ --------------
OF SUBSIDIARY TRUST
SHAREHOLDERS' EQUITY:
Series B Preferred Stock, $68.00 par value, 1,000,000 shares authorized,
102,283 shares issued and outstanding at December 31, 2001 6,955,244
Common stock, $.01 par value; 30,000,000 shares authorized;
7,053,620 and 5,979,860 shares issued, respectively 70,537 59,799
Additional paid-in capital 54,099,061 46,828,142
Accumulated deficit (deficit of $8,434,037
eliminated upon quasi-reorganization on December 31, 1995) (5,418,664) (6,079,156)
Treasury stock 302,200 shares at cost (1,866,197) (1,866,197)
Accumulated other comprehensive income, net of tax 535,712 244,202
------------ --------------
Total shareholders' equity 47,420,449 46,142,034
------------ --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $681,870,435 $ 522,323,225
============ ==============
See notes to condensed financial statements.
-2-
FLORIDA BANKS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
------------------------ -----------------------
2002 2001 2002 2001
----- ---- ---- ----
INTEREST INCOME:
Loans, including fees $ 8,208,741 $ 7,022,541 $ 23,386,476 $ 20,432,642
Investment securities 570,382 696,435 1,716,879 2,050,150
Federal funds sold 287,774 303,339 647,361 834,555
------------ ------------ ------------ ------------
Total interest income 9,066,897 8,022,315 25,750,713 23,317,347
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits 3,899,450 3,711,474 10,839,723 11,413,299
Repurchase agreements 128,367 272,910 379,825 1,014,244
Borrowed funds 98,299 87,942 323,402 276,576
------------ ------------ ------------ ------------
Total interest expense 4,126,116 4,072,326 11,542,950 12,704,119
------------ ------------ ------------ ------------
NET INTEREST INCOME 4,940,781 3,949,989 14,207,763 10,613,228
PROVISION FOR LOAN LOSSES 699,286 820,257 2,107,236 1,443,670
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,241,495 3,129,732 12,100,527 9,169,558
------------ ------------ ------------ ------------
NONINTEREST INCOME:
Service fees 431,390 336,020 1,200,908 851,600
Gain (loss) on sale of available for sale investment securities (3,967) 73,988 (3,967) 73,976
Gain on sale of loans 42,888 42,888
Other noninterest income 284,778 180,999 621,015 387,782
------------ ------------ ------------ ------------
755,089 591,007 1,860,844 1,313,358
------------ ------------ ------------ ------------
NONINTEREST EXPENSES:
Salaries and benefits 2,799,217 2,154,002 7,510,262 6,318,970
Occupancy and equipment 532,467 460,054 1,505,757 1,323,426
Data processing 224,260 179,484 621,456 510,931
Dividends on preferred security of subsidiary trust 205,126 428,866
Other 817,120 573,296 2,414,724 1,777,182
------------ ------------ ------------ ------------
4,578,190 3,366,836 12,481,065 9,930,509
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 418,394 353,903 1,480,306 552,407
PROVISION FOR INCOME TAXES 152,950 133,930 557,039 208,895
------------ ------------ ------------ ------------
NET INCOME $ 265,444 $ 219,973 $ 923,267 $ 343,512
============ ============ ============ ============
PREFERRED STOCK DIVIDENDS (127,373) (140,058) (127,373)
------------ ------------ ------------ ------------
NET INCOME APPLICABLE TO COMMON SHARES $ 265,444 $ 92,600 $ 783,209 $ 216,139
============ ============ ============ ============
INCOME PER COMMON SHARE:
Basic $ 0.04 $ 0.02 $ 0.12 $ 0.04
============ ============ ============ ============
Diluted $ 0.04 $ 0.02 $ 0.12 $ 0.04
============ ============ ============ ============
See notes to condensed financial statements.
-3-
FLORIDA BANKS, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
---------------------------------------- Paid-In Accumulated Treasury
Shares Par Value Shares Par Value Capital Deficit Stock
BALANCE, JANUARY 1, 2001 5,929,751 $59,298 $46,750,329 $(6,760,222) $(1,506,836)
Comprehensive income:
Net Income 808,439
Unrealized gain on available for sale
investment securities,
net of tax of $160,168
Comprehensive income
Issuance of common stock to Employee
Stock Purchase Plan 50,109 501 226,587
Issuance of Series B Preferred Stock 102,283 $ 6,955,244 (148,774)
Series B Preferred Stock Dividends Paid (127,373)
Purchase of treasury stock (359,361)
_______ ___________ _________ ______ ___________ ___________ ___________
BALANCE, JANUARY 1, 2002 102,283 6,955,244 5,979,860 59,799 46,828,142 (6,079,156) (1,866,197)
Comprehensive income:
Net Income 923,267
Unrealized gain on available for sale
investment securities,
net of tax of $337,502
Comprehensive income
Issuance of common stock to Employee
Stock Purchase Plan 41,133 412 210,359
Series B Preferred Stock Dividends Paid (262,775)
Conversion of Series B Preferred
Stock to Common (102,283) (6,955,244) 1,022,830 10,228 6,945,015
Exercise of stock options and
issue of stock grants 9,797 98 115,545
_______ ___________ _________ _______ ___________ ___________ ___________
BALANCE, September 30, 2002 (Unaudited) - $ - 7,053,620 $70,537 $54,099,061 $(5,418,664) $(1,866,197)
======= =========== ========= ======= =========== =========== ===========
Accumulated
Other
Comprehensive
(loss) income
Net of Tax Total
BALANCE, JANUARY 1, 2001 $ 13,870 $38,556,439
Comprehensive income:
Net Income 808,439
Unrealized gain on available for sale
investment securities,
net of tax of $160,168 230,332 230,332
Comprehensive income 1,038,771
Issuance of common stock to Employee
Stock Purchase Plan 227,088
Issuance of Series B Preferred Stock 6,806,470
Series B Preferred Stock Dividends Paid (127,373)
Purchase of treasury stock (359,361)
________ ___________
BALANCE, JANUARY 1, 2002 244,202 46,142,034
Comprehensive income:
Net Income 923,267
Unrealized gain on available for sale
investment securities,
net of tax of $337,502 291,510 291,510
___________
Comprehensive income 1,214,777
Issuance of common stock to Employee
Stock Purchase Plan 210,771
Series B Preferred Stock Dividends Paid (262,775)
Conversion of Series B Preferred
Stock to Common
Exercise of stock options and
issue of stock grants 115,643
________ ___________
BALANCE, September 30, 2002 (Unaudited) $535,712 $47,420,449
======== ===========
See notes to condensed financial statements.
- 4 -
FLORIDA BANKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
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Nine-Month Period Ended
September 30,
----------------------------------
OPERATING ACTIVITIES: 2002 2001
----------------------------------
Net income $ 923,267 $ 343,512
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 579,343 569,660
Reinvested dividends on investment securities (116,826)
Deferred income tax provision 537,751 208,894
Loss on disposition of furniture and equipment 14,518
Amortization of premium on investments, net (37,177) (227,180)
Amortization of premium on loans 95,356
Loss (gain) on sale of securities 3,967 (73,976)
Provision for loan losses 2,107,236 1,443,670
Loss on foreign currency translation 41,675
Gain on derivative instruments (43,056) (31,654)
Increase in accrued interest receivable (631,637) (119,861)
(Decrease) increase in accrued interest payable (297,601) 253,620
Decrease (increase) in other assets 40,488 55,296
Increase in other liabilities 1,053,929 538,283
------------- -------------
Net cash provided by operating activities 4,256,715 2,974,782
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, paydowns and maturities of investment securities:
Available for sale 16,271,660 12,196,782
Held to maturity 2,360,879 3,579,079
Purchases of investment securities:
Available for sale (28,528,240) (9,985,910)
Held to maturity (3,361,015)
Other investments (188,800) (355,900)
Net increase in loans (113,968,736) (75,685,755)
Proceeds from sale of other real estate owned 242,979
Purchases of premises and equipment (2,629,460) (586,408)
------------- -------------
Net cash used in investing activities (126,439,718) (74,199,127)
------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits, money market accounts and savings accounts 20,754,787 27,893,750
Net increase in time deposits 88,726,347 42,940,995
Increase in repurchase agreements 37,603,204 15,010,827
(Decrease) increase in borrowed funds (2,405,911) 2,482,935
Proceeds from FHLB advances 3,000,000
Proceeds from exercise of stock options and issuance of stock grants 115,643
Purchase of treasury stock (241,411)
Proceeds from sale of Series B preferred stock 6,817,669
Preferred dividends paid (262,775)
Proceeds from issuance of trust preferred securities, net 7,718,016
------------- -------------
Net cash provided by financing activities 155,249,311 94,904,765
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33,066,308 23,680,420
CASH AND CASH EQUIVALENTS:
Beginning of period 73,989,159 43,687,964
------------- -------------
End of period $ 107,055,467 $ 67,368,384
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 11,840,551 $ 12,450,499
============= =============
NONCASH FINANCING ACTIVITIES:
Proceeds from demand deposits used to purchase shares of
common stock under Employee Stock Purchase Plan $ 210,771 $ 227,088
============= =============
See notes to condensed financial statements.
- 5 -
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Florida Banks, Inc. (the "Company") was incorporated October 15, 1997 to
become a bank holding company and acquire First National Bank of Tampa
(the "Bank"). On August 4, 1998, the Company completed its initial public
offering and its merger (the "Merger") with the Bank pursuant to which the
Bank was merged with and into Florida Bank No. 1, N.A., a wholly-owned
subsidiary of the Company, and renamed Florida Bank, N.A.
The condensed financial statements have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission
related to interim financial statements. These unaudited condensed
financial statements do not include all disclosures provided in the annual
financial statements. The condensed financial statements should be read in
conjunction with the financial statements and notes thereto contained in
the Company's Annual Report to Shareholders incorporated by reference into
the Company's Form 10-K for the year ended December 31, 2001. All
adjustments of a normal recurring nature which, in the opinion of
management, are necessary to fairly present the results of the interim
periods have been made. Results of operations for the three- and
nine-month periods ended September 30, 2002, are not necessarily
indicative of the results to be expected for the full year.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
2. EARNINGS PER COMMON SHARE
The following is a reconciliation of the denominator used in the
computation of basic and diluted earnings per common share.
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- --------------
Weighted average number of common
shares outstanding - Basic 6,751,156 5,726,851 6,335,832 5,709,203
Incremental shares from the assumed
conversion of stock options 97,729 1,514 85,233 2,531
--------- --------- --------- ---------
Total - Diluted 6,848,885 5,728,365 6,421,065 5,711,734
========= ========= ========= =========
The incremental shares from the assumed conversion of stock options for
the three- and nine-month periods ended September 30, 2002 and 2001 were
determined using the treasury stock method, under which the assumed
proceeds were equal to (1) the amount that the Company would receive upon
exercise of the options plus (2) the amount of tax benefit that would be
credited to additional paid-in capital assuming exercise of the options.
The assumed proceeds are used to purchase outstanding common shares at the
Company's average market value for the period. The convertible preferred
- 6 -
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
stock outstanding at September 30, 2001 was considered to be anti-dilutive
and is therefore excluded from the computation of diluted earnings per
share.
3. DERIVATIVE INSTRUMENTS
The Company adopted Statement of Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended,
on January 1, 2001. This statement requires all derivative instruments to
be recorded on the balance sheet at fair value.
The following instruments qualify as derivatives as defined by SFAS No.
133:
September 30, 2002
-------------------------------------
Contract/Notional Fair
Amount Value
Interest rate swap agreements $ 42,500,000 $ 2,584,240
Foreign currency swap agreements $ 2,000,000 $ 65,394
Interest rate swap agreements at September 30, 2002 consist of seven
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. The
Company recognized losses of $0 and $49,643 during the three-month and
nine-month periods ended September 30, 2002 as a result of changes in the
fair value of loan participation agreements, which contained imbedded
derivatives at December 31, 2001, and were no longer in place at September
30, 2002. 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 gains of $34,855 and
$17,506 during the three-month and nine-month periods ended September 30,
2002 as a result of changes in the fair value of the foreign currency
agreement and the related translation adjustment.
4. 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. 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 being above $8.00 for the period from March
4, 2002 through April 15, 2002.
- 7 -
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
5. RECENT ACCOUNTING PRONOUNCEMENTS
In July of 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 141 establishes accounting and reporting standards for business
combinations. This Statement eliminates the use of the
pooling-of-interests method of accounting for business combinations,
requiring future business combinations to be accounted for using the
purchase method of accounting. The provisions of this Statement apply to
all business combinations initiated after June 30, 2001. This Statement
also applies to all business combinations accounted for using the purchase
method of accounting for which the date of acquisition is July 1, 2001 or
later. The Statement had no impact on the Company's consolidated financial
position and results of operations.
SFAS No. 142 establishes accounting and reporting standards for goodwill
and other intangible assets. With the adoption of this Statement, goodwill
is no longer subject to amortization over its estimated useful life.
Rather, goodwill will be subject to at least an annual assessment for
impairment by applying a fair-value based test. The Company adopted SFAS
No. 142 on January 1, 2002. As the Company currently has no goodwill or
intangible assets, the adoption of the Statement did not have an impact on
the Company's consolidated financial position and results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred and requires that the amount recorded as a liability
be capitalized by increasing the carrying amount of the related long-lived
assets. Subsequent to initial measurement, the liability is accreted to
the ultimate amount anticipated to be paid, and is also adjusted for
revisions to the timing or amount of estimated cash flows. The capitalized
cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143
is required to be adopted for fiscal years beginning after June 15, 2002,
with earlier application encouraged. The Statement will not have an impact
on the Company's consolidated financial position and results of
operations.
In August, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supersedes
SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The adoption of the
Statement did not have a material impact on the Company's consolidated
financial position and results of operations.
- 8 -
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". This Statement rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an
amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement also rescinds SFAS No.
44, "Accounting for Intangible Assets of Motor Carriers". This Statement
amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement
also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability
under changed conditions. This Statement will be effective for the year
ended December 31, 2003 and for transactions entered into after May 15,
2002. It does not appear that this statement will have a material effect
on the financial position, operations or cash flows of the Company.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities".
This Statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Under Issue 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. It does not appear
that this statement will have a material effect on the financial position,
operations or cash flows of the Company.
6. TRUST PREFERRED SECURITIES
On April 10, 2002, the Company participated in a pooled trust preferred
offering. In connection with the transaction, the Company, through its
subsidiary trust, Florida Banks Capital II (the "Trust II"), issued
$4,000,000 in trust preferred securities. The Trust II also issued
$124,000 of common securities to the Company and used the total proceeds
to purchase $4,124,000 in 30-year subordinated debentures of the Company.
The trust preferred securities pay dividends at an initial rate of 6.02%
through October 22, 2002. The rate then becomes a floating rate based on
6-month LIBOR plus 3.70%, adjusted semi-annually after each dividend
payment date. Dividend payment dates are April 22 and October 22 of each
year. There is a par call option beginning April 22, 2007. The
subordinated debentures are the sole assets of the Trust II and are
eliminated, along with the related income statement effects, in the
Company's consolidated financial statements.
On June 28, 2002, the Company participated in an additional pooled trust
preferred offering. In connection with the transaction, the Company,
through its subsidiary trust, Florida Banks Capital I (the "Trust I"),
issued $4,000,000 in trust preferred securities. The Trust I also issued
- 9 -
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) (Continued)
- --------------------------------------------------------------------------------
$124,000 of common securities to the Company and used the total proceeds
to purchase $4,124,000 in 30-year subordinated debentures of the Company.
The trust preferred securities pay dividends at an initial rate of 5.48%
through September 30, 2002. The rate then becomes a floating rate based on
3-month LIBOR plus 3.75%, adjusted quarterly after each dividend payment
date. Dividend payment dates are March 30, June 30, September 30 and
December 30 of each year. There is a par call option beginning June 30,
2007. The subordinated debentures are the sole assets of the Trust I and
are eliminated, along with the related income statement effects, in the
Company's consolidated financial statements.
7. SUBSEQUENT EVENT
On November 1, 2002, the Company sold one of the two parcels of Other Real
Estate Owned which were carried on the balance sheet at September 30,
2002. This parcel had a carrying value of $2,534,848. The net proceeds of
the sale were $2,528,145, resulting in a loss on the disposal of $6,703.
The carrying amount of the remaining parcel is $652,500.
- 10 -
PART II. Other Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and related notes appearing elsewhere in this Quarterly Report on
Form 10-Q.
Critical Accounting Policies
The accounting and reporting policies for the Company and its subsidiaries are
in accordance with accounting principles generally accepted in the United States
and conform to general practices within the banking industry. The more critical
accounting and reporting policies include the Company's accounting for the
allowance for loan losses, other real estate owned and derivative instruments.
In particular, the accounting for these areas requires significant judgments to
be made by management. Different assumptions in the application of these
policies could result in material changes in the Company's consolidated
financial position or consolidated results of operations. See "Allowance for
Loan Losses" herein for a complete discussion. Please also refer to Note 1 in
the "Notes to Consolidated Financial Statements" in the Company's Annual Report
and "Critical Accounting Policies" in management's discussion and analysis
section of the Company's Form 10-K for the year ended December 31, 2001 on file
with the Securities and Exchange Commission for details regarding all of the
Company's critical and significant accounting policies.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
The Company's net income applicable to common shares for the third quarter of
2002 was $265,444, compared to $92,600 for the third quarter of 2001. Basic
income per common share for the third quarter of 2002 was $.04 compared to $.02
for the third quarter of 2001. The increase in net income can be attributed to
increased net interest income, increased non-interest income, and a reduction in
the provision for loan losses, partially offset by an increase in non-interest
expenses.
The increase in net interest income of $991,000 or 25.1%, to $4.9 million for
the third quarter of 2002 compared to $3.9 million for the third quarter of
2001, consists of an increase in interest income of $1.0 million, or 13.0%, and
an increase in interest expense of $54,000, or 1.3%. The increase in interest
income in the third quarter of 2002 is primarily attributable to an increase of
$1.2 million in interest and fees on loans resulting from the growth in the loan
portfolio. The increase in interest expense resulted primarily from an increase
of $188,000 in interest on deposits and a decrease of $145,000 in interest on
repurchase agreements. The increase in interest expense on deposits is primarily
attributable to an increase in deposits, partially offset by a decrease in
market interest rates on deposits. The decrease in interest expense on
repurchase agreements is primarily attributable to the decline in market
interest rates on repurchase agreements.
The provision for loan losses charged to operations decreased $121,000 to
$699,000 for the third quarter of 2002 from $820,000 in the third quarter of
2001. This decrease primarily reflects slower growth of the overall loan
portfolio in the third quarter of 2002 as compared to the third quarter of 2001.
For a more detailed discussion of the provision for loan losses, see "Allowance
for Loan Losses" in the "Financial Condition" section below.
Non-interest income increased 27.8% or $164,000 to $755,000 for the three months
ended September 30, 2002 from $591,000 for the three months ended September 30,
2001. The increase in non-interest income primarily resulted from an increase in
- 11 -
other noninterest income of $104,000 to $285,000 for the three months ended
September 30, 2002 from $181,000 for the three months ended September 30, 2001,
combined with a $43,000 gain on sale of loans for the three-month period ended
September 30, 2002, compared to $0 for the same period in 2001. The increase in
other non-interest income is primarily attributable to increases in mortgage
loan origination fees and Automated Clearing House fees. These increases in
non-interest income were partially offset by a decrease in gains on sale of
available for sale securities. Income on sale of available for sale securities
decreased $78,000, or 105.4%, to a loss of ($4,000) for the three months ended
September 30, 2002, compared to a gain of $74,000 for the same period in 2001.
Non-interest expense increased $1.0 million or 29.9% to $4.6 million for the
three-month period ended September 30, 2002 compared to $3.4 million for the
three-month period ended September 30, 2001. The increase in non-interest
expense resulted primarily from increases in salaries and benefits, dividends on
preferred security of subsidiary trust, and other expenses. Salaries and
benefits expenses increased $645,000 to $2.8 million for the third quarter of
2002 compared to $2.2 million for the third quarter of 2001. This increase is
primarily the result of additional staff associated with the overall growth of
the Company's business and with the addition in the third quarter of 2002 of a
wholesale mortgage division. Dividends on trust preferred securities of
subsidiary trust were $205,000 for the third quarter of 2002. The Company had no
subsidiary trust securities outstanding during the third quarter of 2001. Other
expenses increased $244,000, or 42.5% to $817,000 for the third quarter of 2002
compared to $574,000 for the third quarter of 2001. This increase is primarily
attributed to the expenses associated with supporting operations related to the
overall growth of the Company. Specific operational expenses which increased
include communications, recruitment expenses and expenses related to other real
estate owned.
A provision for income taxes of $153,000 was recognized for the third quarter of
2002 compared to $134,000 for the same period in 2001. These provisions for
income taxes represent an estimated effective annual tax rate of approximately
38%.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
The Company's net income applicable to common shares for the first nine months
of 2002 was $783,000, compared to $216,000 for same period in 2001. Basic income
per common share for the first nine months of 2002 was $.12 compared to $.04 for
the same period 2001. The increase in net income can be attributed to increased
net interest income and increased non-interest income, partially offset by an
increase in the provision for loan losses and increased non-interest expenses.
The increase in net interest income of $3.6 million or 33.9%, to $14.2 million
for the first nine months of 2002, compared to $10.6 million the same period in
2001, consists of an increase in interest income of $2.4 million, or 10.4%, and
a decrease in interest expense of $1.1 million, or 9.1%. The increase in
interest income in the first nine months of 2002 is primarily attributable to an
increase of $3.0 million in interest and fees on loans resulting from the growth
in the loan portfolio. The decrease in interest expense for the first nine
months of 2002 is primarily attributable to a decrease of $574,000 in interest
on deposits and a decrease of $634,000 in interest on repurchase agreements.
These decreases in interest expense are attributable to the decline in market
interest rates on deposits and repurchase agreements.
The provision for loan losses charged to operations increased $664,000 to $2.1
million for the first nine months of 2002 from $1.4 million in the first nine
months of 2001. This increase primarily reflects the growth of the overall loan
portfolio. For a more detailed discussion of the provision for loan losses, see
"Allowance for Loan Losses" in the "Financial Condition" section below.
- --------------------------
- 12 -
Non-interest income increased 41.7% or $548,000 to $1.9 million for the nine
months ended September 30, 2002 from $1.3 million for the nine months ended
September 30, 2001. The increase in non-interest income primarily resulted from
an increase in service fees of $349,000 to $1.2 million for the nine months
ended September 30, 2002 from $852,000 for the nine months ended September 30,
2001. The increase in service fees resulted primarily from an increase in
deposits. Other noninterest income increased $233,000 to $621,000 for the nine
months ended September 30, 2002 from $388,000 for the same period in 2001. This
increase was primarily attributable to increases in mortgage loan origination
fees and Automated Clearing House fees.
Non-interest expense increased $2.1 million or 21.4% to $12.5 million for the
nine-month period ended September 30, 2002 compared to $9.9 million for the same
period in 2001. The increase in non-interest expense resulted primarily from
increases in salaries and benefits, dividends on preferred security of
subsidiary trust, and other expenses. Salaries and benefits expenses increased
$1.2 million to $7.5 million for the first nine months of 2002 compared to $6.3
million for the first nine months of 2001. This increase is primarily the result
of additional staff associated with the overall growth of the Company's
business, together with the addition of a wholesale mortgage division during the
third quarter of 2002. Dividends on trust preferred securities of subsidiary
trust were $429,000 for the first nine months of 2002. The Company had no
subsidiary trust securities outstanding during the first nine months of 2001.
Other expenses increased $638,000, or 35.9% to $2.4 million for the first nine
months of 2002 compared to $1.8 million for the first nine months of 2001. This
increase is primarily attributed to the expenses associated with supporting
operations related to the overall growth of the Company. Specific operational
expenses which increased include Automated Clearing House expenses and expenses
related to other real estate owned.
A provision for income taxes of $557,000 was recognized for the nine-month
period ended September 30, 2002 as compared to $209,000 for the same period in
2001. These provisions for income taxes represent an estimated effective annual
tax rate of approximately 38%.
FINANCIAL CONDITION
Total assets at September 30, 2002 were $681.9 million, an increase of $159.5
million or 30.6%, from $522.3 million at December 31, 2001. The increase in
total assets primarily resulted from the investment of new deposit growth and
other borrowed funds in loans and investment securities. Securities available
for sale increased $12.8 million or 37.8% to $46.8 million at September 30, 2002
as compared to $34.0 million at December 31, 2001. Federal funds sold increased
$21.8 million or 39.9% to $76.5 million at September 30, 2002 from $54.7 million
at December 31, 2001. The increase in federal funds sold reflects additional
deposit growth late in the second quarter that had not yet been deployed in loan
growth.
Total loans increased $113.0 million, or 28.1%, to $514.7 million at September
30, 2002, from $401.7 million at December 31, 2001. The increase in total loans
was funded by increases in depository accounts, repurchase agreements sold and
other borrowings. The allowance for loan losses increased $1.7 million or 36.1%
during the first nine months of 2002. The increase resulted from net charge-offs
of loans of $415,000 plus additional provisions of $2.1 million during that
period. The allowance for loan losses as a percent of total loans was 1.24% at
September 30, 2002 and 1.17% at December 31, 2001. Management believes that such
allowance for loan losses is sufficient to cover estimated losses in the Bank's
loan portfolio.
Deposits increased $111.6 million, or 24.7%, to $562.8 million at September 30,
2002 from $451.2 million at December 31, 2001. The increase in total deposits
primarily resulted from an increase of $75.5 million or 38.9% in time deposits
$100,000 and over, combined with an increase of $30.1 million or 156.9% in
interest-bearing demand deposits. Time deposits often fluctuate in response to
interest rate changes and can vary rather significantly on a quarterly basis.
- 13 -
The increase in time deposits $100,000 and over resulted primarily from an
increase in brokered deposits. Noninterest-bearing deposits decreased $25.2
million or 25.2%. This is a result of the transfer of almost all repurchase
agreements sold into demand deposit accounts by our customers at December 31,
2001 as part of their intangible tax strategy. These funds flowed back into
repurchase agreements after year-end, as can be seen by comparing the relative
balances of demand deposits and repurchase agreements sold at September 30, 2002
and December 31, 2001. Savings deposits decreased $413,000 or 0.6%. Money market
accounts increased $16.0 million or 253.4%. Growth in money market accounts are
primarily attributable to continued expansion of the Company's customer base as
a result of ongoing marketing activities.
Repurchase agreements sold increased $37.6 million, or 836.5%, to $42.1 million
at September 30, 2002 from $4.5 million at December 31, 2001, for reasons
discussed in the previous paragraph, together with continued expansion of the
Company's customer base. Other borrowed funds increased $594,000 or 6.1% to
$10.3 million at September 30, 2002 from $9.7 million at December 31, 2001.
Accrued interest payable decreased $298,000 or 10.4%, to $2.6 million at
September 30, 2002 from $2.9 million at December 31, 2001. This decrease is due
primarily to a reduction in overall interest rates.
Accounts payable and accrued expenses increased $1.1 million or 51.7% to $3.1
million at September 30, 2002 from $2.0 million at December 31, 2001.
Shareholders' equity increased by $1.3 million to $47.4 million at September 30,
2002, from $46.1 million at December 31, 2001. This increase is the result of
net income for the first nine months of 2002 of $923,000, combined with the
issue of stock under the Company's employee stock purchase plan of $211,000, the
issue of stock related to exercise of options and issue of stock grants of
$116,000, and an increase in other comprehensive income related to an unrealized
gain in the Company's bond portfolio of $292,000. These increases were partially
offset by cash dividends paid on Series B preferred stock of $263,000.
Non-accrual loans were $355,000 at September 30, 2002, a decrease of $735,000 or
67.4%, compared to the balance of $1.1 million at December 31, 2001. These loans
were reclassified under the Bank's policy of transferring loans to non-accrual
status when they become more than 90 days past due on either principal or
interest. The Company believes the specific reserves placed against these loans
are adequate, and payment is being sought from secondary sources, such as the
sale of collateral.
Allowance for Loan Losses
- -------------------------
Management determines the allowance for loan losses by establishing a general
allowance by loan pool determined for groups of smaller, homogenous loans
possessing similar characteristics and non-homogeneous loans that are not
classified. All classified loans are reviewed on an individual basis.
General Allowance
It is difficult for a lending institution the size of the Bank to use migration
analysis or other more sophisticated approaches due to the small size of the
loan portfolio, and the significant changes in the lending strategy and mix of
the loan portfolio from the date of the Merger. For this reason, a reasonable
indicator of the Bank's potential future losses in the non-criticized and
non-specialized pools of loans is the historical performance of the Bank's peer
group on a rolling four-quarter basis. This information is gathered quarterly
from the Uniform Bank Performance Report provided by the Federal Financial
----------------------------------
Institutions Examination Council. As the bank matures, and growth stabilizes, it
is management's intention to replace this peer group methodology with the actual
loss experience of the Bank.
- 14 -
Added to the peer group historical performance are those current conditions that
are probable to impact future loan losses. To account for these current
conditions, management has reviewed various factors to determine the impact on
the current loan portfolio. This methodology involves determining a range for
each current condition adjustment, "lower range to upper range". The "lower
range" represents management's opinion of a higher near term probability. The
"upper range" represents management's opinion of a lower near term probability
that allows management to "shock" the loan portfolio and look at the level of
reserves required should an "upper range" scenario start to unfold. The
following current condition factors were considered in this analysis:
o Changes in lending policies and procedures, including underwriting
standards and collection, charge-off, and recovery practices.
o Changes in national and local economic and business conditions,
including the condition of various market segments.
o Changes in the nature and volume of the portfolio.
o Changes in the experience, ability, and depth of lending management
and staff.
o Changes in the volume and severity of past due and classified loans;
and the volume of non-accruals, trouble debt restructurings and
other loan modifications.
o The existence and effect of any concentrations of credit, and
changes in the level of such conditions.
o The effect of external factors, such as competition and legal and
regulatory requirements, on the level of estimated credit losses in
the Bank's portfolio.
Specific Allowance
Management believes that given the small number of classified loans, type of
historical loan losses, and the nature of the underlying collateral, creating
specific allowances for classified assets results in the most accurate and
objective allowance. Should the number of these types of assets grow
substantially, other methods may have to be considered.
The method used in setting the specific allowance uses current appraisals as a
starting point, based on the Bank's possible liquidation of the collateral. On
assets other than real estate, which tend to depreciate rapidly, another current
valuation is used. For instance, in the case of commercial loans collateralized
by automobiles, the current NADA wholesale value is used. On collateral such as
over-the-road equipment, trucks or heavy equipment, valuations are sought from
firms or persons knowledgeable in the area, and adjusted for the probable
condition of the collateral. Other collateral such as furniture, fixtures and
equipment, accounts receivable, and inventory, are considered separately with
more emphasis given to the borrower's financial condition and trends rather than
the collateral support. The value of the collateral is then discounted for
estimated selling cost.
Summary
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
- 15 -
prescribe the measurement methods, income recognition and disclosures related to
impaired loans. Specific allowances totaled $1.7 million at September 30, 2002.
The range for the allowance for loan losses at September 30, 2002, including
specific allowances, was determined to be between $5.7 million or 1.17% of loans
(low range) and $9.0 million or 1.86% of loans (high range).
At September 30, 2002, the Bank's total allowance for credit losses is $6.4
million or 1.24% of loans as compared to $4.7 million or 1.17% of loans at
December 31, 2001. Criticized/Classified assets have increased when measured
against loans outstanding. This is primarily attributable to specific reserves
resulting from the classification of additional credits during the second and
third quarters of 2002. At September 30, 2002, this benchmark was 4.7% of loans
outstanding compared to 2.27% at December 31, 2001. Past due loans have
decreased to .11% of loans outstanding at September 30, 2002 compared to .20% at
December 31, 2001. Non-Performing Assets have declined as a percentage of total
loans including other real estate owned to .70% at September 30, 2002 versus
..96% at December 31, 2001. Net loan losses for the first nine months of 2002
were $415,000 or .09% of average loans outstanding for the period, compared to
$718,000, or .22% of average loans for the same nine-month period in 2001.
LIQUIDITY
The Company, through its subsidiary, the Bank, has traditionally maintained
levels of liquidity above levels required by regulatory authorities. The Bank's
operational needs, demand for loan disbursements, and savings withdrawals can be
met by loan principal and interest payments received, new deposits, and excess
liquid assets. Significant loan demand, deposit withdrawal, increased
delinquencies and increased real estate acquired in settlement of loans could
alter this condition. Management does not foresee any liquidity problems for the
remainder of 2002.
Liquidity and Sources of Capital
- --------------------------------
Liquidity is the Company's ability to meet all deposit withdrawals immediately,
while also providing for the credit needs of customers. The September 30, 2002
financial statements evidence a satisfactory liquidity position as total cash
and cash equivalents amounted to $107.1 million, representing 15.7% of total
assets. Investment securities available for sale amounted to $46.8 million,
representing 6.9% of total assets. These securities provide a secondary source
of liquidity since they can be converted into cash in a timely manner. The
Company's ability to maintain and expand its deposit base and borrowing
capabilities are also a source of liquidity. For the nine-month period ended
September 30, 2002, total deposits increased from $451.2 million at December 31,
2001 to $562.8 million, or 24.7%. During this period, repurchase agreements sold
increased from $4.5 million to $42.1 million, or 836.5%, and other borrowed
funds increased $594,000 from $9.7 million to $10.3 million, or 6.1%. There can
be no assurance that the Company will be able to maintain this level of growth.
The Company's management closely monitors and maintains appropriate levels of
interest earning assets and interest bearing liabilities so that maturities of
assets are such that adequate funds are provided to meet customer withdrawals
and loan demand. There are no trends, demands, commitments, events or
uncertainties that will result in, or are reasonably likely to result in, the
Company's liquidity increasing or decreasing in any material way.
The Company's Board and executive officers are committed to maintaining capital
at a level sufficient to protect depositors, provide for reasonable growth, and
fully comply with all regulatory requirements.
In December 2001, April 2002, and June 2002, the Company participated in pooled
trust preferred offerings. By issuing trust preferred securities through its
subsidiary trusts, the Company was able to increase its Tier 1 capital for
regulatory purposes without diluting the ownership interests of its common
shareholders. Also, dividends paid on trust preferred securities are deductible
as interest expense for income tax purposes. For the specific transactions,
terms and rates of the Company's trust preferred securities issues, please refer
- 16 -
to footnote 6 of Item 1 above, together with footnote 13 of the Company's
consolidated financial statements for the years ended December 31, 1999, 2000
and 2001 filed in conjunction with the Company's annual report on form 10-K for
the year ended December 31, 2001. At September 30, 2002, the net proceeds from
pooled trust preferred trust offerings included in the calculation of Tier 1
capital for regulatory purposes is $13.5 million.
The table below illustrates the Bank's regulatory capital ratios at September
30, 2002:
Minimum
September 30, Regulatory
Bank 2002 Requirement
- ----
------------- -----------
Tier 1 Capital 8.93% 4.00%
==== ====
Total risk-based capital ratio 10.02% 8.00%
===== ====
Leverage ratio 8.17% 4.00%
==== ====
Neither the Company nor its subsidiaries have historically incurred off-balance
sheet obligations through the use of or investment in off-balance sheet
derivative financial instruments or structured finance or special purpose
entities organized as corporations, partnerships or limited liability companies
or trusts.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
This Report contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) potential acquisitions by the Company; (ii) trends
affecting the Company's financial condition or results of operations; and (iii)
the Company's business and growth strategies. Investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements as a result of various
factors. These factors include, but are not limited to the following: (a)
competitive pressure in the banking industry; (b) changes in the interest rate
environment; (c) the fact that general economic conditions may be less favorable
than the Company expects; and (d) changes in the Company's regulatory
environment. The accompanying information contained in this Report, including,
without limitation, the information set forth under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as
well as in the Company's Securities Act filings, identifies important additional
factors that could adversely affect actual results and performance. Prospective
investors are urged to carefully consider such factors.
All forward-looking statements attributable to the Company are expressly
qualified in their entirety by the foregoing cautionary statements. The
foregoing discussion should be read in conjunction with the Condensed
Consolidated Financial Statements of the Company (including the notes thereto)
contained elsewhere in this Report.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company's financial performance is subject to risk from interest rate
fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-earning liabilities
subject to repricing over a specified period and the amount of change in
individual interest rates. In the current interest rate environment, the
liquidity and maturity structure of the Company's assets and liabilities are
important to the maintenance of acceptable performance levels. A decreasing rate
- 17 -
environment negatively impacts earnings as the Company's rate-sensitive assets
generally reprice faster than its rate-sensitive liabilities. Conversely, in an
increasing rate environment, earnings are positively impacted. This
asset/liability mismatch in pricing is referred to as gap ratio and is measured
as rate sensitive assets divided by rate sensitive liabilities for a defined
time period. A gap ratio of 1.00 means that assets and liabilities are perfectly
matched as to repricing. Management has targeted gap ratio guidelines for a
one-year time horizon of between .80 and 1.20 for the Bank. At September 30,
2002, the Bank had a cumulative gap ratio of approximately 1.31 for the one-year
period ending September 30, 2003. This is primarily due to the Bank's receipt at
the end of June of approximately $22.8 million dollars in brokered deposits,
which were temporarily invested in Federal Funds sold. These deposits were
obtained to take advantage of historically low funding costs. It is anticipated
that the bulk of these deposits will be deployed into loans in the coming
months, and prior to the end of the year, the Bank's one-year cumulative gap
ratio will again be within the targeted range. At September 30, 2002, the
Company had a cumulative gap ratio of 1.73 for the three-month time period.
Given these gap ratios, over the next three-month period, rate-sensitive assets
will reprice faster than rate-sensitive liabilities, and for the following
nine-month period, rate sensitive liabilities will reprice faster than
rate-sensitive assets.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities, which are not reflected in the
interest sensitivity analysis. Prepayments may have significant effects on the
Company's net interest margin. Because of these factors, in a static test,
interest sensitivity gap reports may not provide a complete assessment of the
Company's exposure to changes in interest rates. Accordingly, management also
utilizes computerized interest rate simulation analysis to determine the
Company's interest rate sensitivity. The Company is in an asset sensitive gap
position for the first year, then moves into a matched position through the five
year period. Overall, due to the factors cited, current simulation results
indicate a relatively low sensitivity to parallel shifts in interest rates. A
liability sensitive company will generally benefit from a falling interest rate
environment as the cost of interest-bearing liabilities falls faster than the
yields on interest-bearing assets, thus creating a widening of the net interest
margin. Conversely, an asset sensitive company will benefit from a rising
interest rate environment as the yields on earning assets rise faster than the
costs of interest-bearing liabilities. Management also evaluates economic
conditions, the pattern of market interest rates and competition to determine
the appropriate mix and repricing characteristics of assets and liabilities
required to produce a targeted net interest margin.
In addition to the gap analysis, management uses rate shock simulation to
measure the rate sensitivity of its balance sheet. Rate shock simulation is a
modeling technique used to estimate the impact of changes in rates on the
Company's net interest margin. The Company measures its interest rate risk by
estimating the changes in net interest income resulting from instantaneous and
sustained parallel shifts in interest rates of plus or minus 200 basis points
over a period of twelve months. The Company's most recent rate shock simulation
analysis, performed as of September 30, 2002, indicates that a 200 basis point
increase in rates would cause an increase in net interest income of $860,000
over the next twelve-month period. Conversely, a 200 basis point decrease in
rates would cause a decrease in net interest income of $1.3 million over a
twelve-month period.
This simulation is based on management's assumption as to the effect of
interest rate changes on assets and liabilities and assumes a parallel shift of
the yield curve. It also includes certain assumptions about the future pricing
of loans and deposits in response to changes in interest rates. Further, it
assumes that delinquency rates would not change as a result of changes in
interest rates although there can be no assurance that this will be the case.
While this simulation is a useful measure of the Company's sensitivity to
changing rates, it is not a forecast of the future results and is based on many
assumptions that if changed, could cause a different outcome. In addition, a
change in U.S. Treasury rates in the designated amounts accompanied by a change
- 18 -
in the shape of the Treasury yield curve would cause significantly different
changes to net interest income than indicated above.
At September 30, 2002, the Company was not engaged in trading activities.
The Company enters into interest rate swap agreements to manage its exposure to
changes in interest rates and to convert the fixed rate on certain brokered
certificates of deposit to a floating rate in order to more closely match
interest rate sensitivity between selected assets and liabilities. The Company
does not use derivative financial instruments for speculative purposes. As is
customary for these types of instruments, the Company does not require
collateral or other security from other parties to these instruments. By their
nature all such instruments involve risk, including the credit risk of
nonperformance by counterparties. However, at September 30, 2002, in
management's opinion there was no significant risk of loss in the event of
nonperformance of the counterparties to these financial instruments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer
and Chief Financial Officer have reviewed and evaluated the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules
240.13a-14(c) and 15a-14(c)) as of a date within 90 days before the filing date
of this quarterly report. Based on that evaluation, the Chief Executive Officer
and the Chief Financial officer have concluded that our current disclosure
controls and procedures are effective in providing them with material
information required to be disclosed in reports filed by the Company under the
Exchange Act.
Changes In Internal Controls. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of this evaluation.
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
- 19 -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certifying Statement of the Chief Executive Officer pursuant to
Section 1350 of Title 18 of the United States Code
99.2 Certifying Statement of the Chief Financial Officer pursuant to
Section 1350 of Title 18 of the United States Code
(b) Reports on Form 8-K.
No report on Form 8-K was filed during the quarter ended
September 30, 2002.
- 20 -
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Florida Banks, Inc.
Date: November 12, 2002 By: /s/ Charles E. Hughes, Jr.
--------------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
Date: November 12, 2002 By: /s/ T. Edwin Stinson, Jr.
-------------------------
T. Edwin Stinson, Jr.
Chief Financial Officer
- 21 -
Certification by the Chief Executive Officer pursuant to Sarbanes-Oxley Section
302(a):
I, Charles E. Hughes, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Florida Banks,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 By: /s/ Charles E. Hughes, Jr.
-----------------------------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
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Certification by the Chief Financial Officer pursuant to Sarbanes-Oxley Section
302(a):
I, T. Edwin Stinson, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Florida Banks,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002 By: /s/ T. Edwin Stinson, Jr.
---------------------------
T. Edwin Stinson, Jr.
Chief Financial Officer
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