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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002
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Commission File No. 0-24683
FLORIDA BANKS, INC.
A Florida corporation
(IRS Employer Identification No. 58-2364573)
5210 Belfort Road
Suite 310, Concourse II
Jacksonville, Florida 32256
(904) 332-7770
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $.01 par value
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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
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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
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The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (5,903,489 shares) on June 28, 2002 was
approximately $48,703,784, based on the closing price of the registrant's common
stock as reported on the NASDAQ National Market on June 28, 2002. For the
purposes of this response, officers, directors and holders of 5% or more of the
registrant's common stock are considered the affiliates of the registrant at
that date.
As of February 26, 2003, there were 6,783,603 shares of $.01 par value common
stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the registrant's definitive proxy statement to be delivered to
shareholders in connection with the 2002 Annual Meeting of Shareholders
scheduled to be held on May 22, 2003 are incorporated by reference in response
to Part III of this Report.
Table of Contents
Part I
Item 1. Business..................................................... Page 3
Item 2. Properties .................................................. Page 16
Item 3. Legal Proceedings ........................................... Page 17
Item 4. Submission of Matters to a Vote of Security Holders ......... Page 17
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ......................................... Page 18
Item 6. Selected Financial Data ..................................... Page 20
Item 7. Management's discussion and Analysis of Financial
Condition and Results of Operations ......................... Page 22
Item 7A Quantitative and Qualitative Disclosures about
Market Risk ............................................... Page 55
Item 8. Financial Statements and Supplementary Data ................. Page 56
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... Page 56
Part III
Item 10. Directors and Executive Officers of the Registrant .......... Page 56
Item 11. Executive Compensation ...................................... Page 56
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................. Page 56
Item 13. Certain Relationships and Related Transactions .............. Page 56
Part IV
Item 14. Controls and Procedures ..................................... Page 56
Item 15. Exhibits, Financial Statements and Reports on Form
8-K ........................................................ Page 57
PART I
Item 1. Business
General
Florida Banks, Inc. (the "Company") was formed on October 15, 1997 to
create a statewide community banking system focusing on the largest and fastest
growing markets in Florida. The Company operates through its wholly owned
banking subsidiary, Florida Bank, N.A. (the "Bank"). The Company currently
operates community banking offices in the Tampa, Jacksonville, Alachua County
(Gainesville), Broward County (Ft. Lauderdale), Pinellas County (St Petersburg -
Clearwater) and Marion County (Ocala) markets, and a loan production office in
West Palm Beach. Future business plans include expansion of the loan production
office in West Palm Beach into a full service community banking office and entry
into the market of Orlando (the "Identified Market"). As opportunities arise,
the Company may also expand into other Florida market areas with demographic
characteristics similar to the Identified Market. Within the Identified Market,
the Company expects to offer a broad range of traditional banking products and
services, focusing primarily on small and medium-sized businesses. See
"--Strategy of the Company--Market Expansion" and "--Products and Services."
The Company has a community banking approach that emphasizes responsive and
personalized service to its customers. Management's expansion strategy includes
attracting strong local management teams who have significant banking
experience, strong community contacts and strong business development potential
in the Identified Market. Once local management teams are identified, the
Company intends to establish community banking offices in the remaining
Identified Market. Each management team will operate one or more community
banking offices within its particular market area, will have a high degree of
local decision-making authority and will operate in a manner that provides
responsive, personalized services similar to an independent community bank. The
Company maintains centralized credit policies and procedures as well as
centralized back office functions from its operations center in Tampa to support
the community banking offices. Upon the Company's entry into a new market area,
it undertakes a marketing campaign utilizing an officer calling program and
community-based promotions. In addition, management is compensated based on
profitability, growth and loan production goals, and each market area is
supported by a local board of advisory directors, which is provided with
financial incentives to assist in the development of banking relationships
throughout the community. See "--Model `Local Community Bank.'"
Management of the Company believes that the significant consolidation in
the banking industry in Florida has disrupted customer relationships as the
larger regional financial institutions increasingly focus on larger corporate
customers, standardized loan and deposit products and other 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 personnel due to the
elimination of redundant functions and the need to achieve cost savings. As a
result of these factors, management believes the Company has a unique
opportunity to attract and maintain its targeted banking customers and
experienced management personnel within the Identified Market and possibly other
Florida market areas.
The community banking offices within each market area are supported by
centralized back office operations. From the Company's main offices located in
Jacksonville and its operations center in Tampa, the Company provides a variety
of support services to each of the community banking offices, including back
office operations, investment portfolio management, credit administration and
review, human resources, compliance, internal audit, administration, training
and strategic planning. Core processing, check clearing and other similar
functions are currently outsourced to major vendors. As a result, these
operating strategies enable the Company to achieve cost efficiencies and to
maintain consistency in policies and procedures and allow the local management
teams to concentrate on developing and enhancing customer relationships.
The Company expects to establish community banking offices in new market
areas, primarily by opening new branch offices of the Bank. Management will
also, however, evaluate opportunities for strategic acquisitions of financial
institutions in markets that are consistent with its business plan.
In the fourth quarter of 2002, the Bank started a mortgage banking division
which is managed as a segment. Accordingly, beginning in 2002, the Company has
two reporting segments, the commercial bank and the mortgage bank. For more
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details on segment disclosures, please see Note 21 - Segment Reporting in the
Notes to the Consolidated Financial Statements.
Strategy of the Company
General
The Company's business strategy is to create a statewide community banking
system in Florida. The major elements of this strategy are to:
o Establish community banking offices in additional markets including the
remaining Identified Market when local management teams are identified;
o Establish community banking offices with locally responsive management
teams emphasizing a high level of personalized customer service;
o Target small and medium-sized business customers that require the attention
and service that a community-oriented bank is well suited to provide;
o Provide a broad array of traditional banking products and services;
o Provide non-traditional products and services through strategic
partnerships with third party vendors;
o Utilize technology to provide a higher level of customer service and
enhance deposit growth;
o Maintain centralized support functions, including back office operations,
credit policies and procedures, investment portfolio management,
administration, compliance, internal audit, human resources and training,
to maximize operating efficiencies and facilitate responsiveness to
customers; and
o Outsource core processing and back room operations to increase
efficiencies.
Model "Local Community Bank"
In order to achieve its expansion strategy, the Company intends to
establish community banking offices in the remaining Identified Markets by
opening new branch offices of the Bank. The Company may, however, accomplish its
expansion strategy by acquiring existing banks within an Identified Market if an
opportunity for such an acquisition becomes available. Although each community
banking office is legally a branch of the Bank, the community banking office(s)
located within each market operates as if it were an independent community bank.
Prior to expanding into a new market area, management of the Company first
identifies an individual who will serve as the president of that particular
market area, as well as those individuals who will serve on the local board of
directors. The Company believes that a management team that is familiar with the
needs of its community can provide higher quality personalized service to their
customers. The local management teams have a significant amount of
decision-making authority and are accessible to their customers. As a result of
the consolidation trend in Florida, management of the Company believes there are
significant opportunities to attract experienced bank managers who would like to
join an institution promoting a community banking concept.
Within each market area, the community banking offices have a local board
of directors that are comprised of prominent members of the community, including
business leaders and professionals. Certain members of the local boards may
serve as members of the Board of Directors of the Bank. These directors act as
representatives of the Bank within the community and are expected to promote the
business development of each community banking office.
The Company encourages both the members of its local boards of directors as
well as its lending officers to be active in the civic, charitable and social
organizations located in the local communities. Many members of the local
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management team hold leadership positions in a number of community
organizations, and will continue to volunteer for other positions in the future.
Upon the Company's entry into a new market area, it undertakes a marketing
campaign utilizing an officer calling program, and community-based promotions
and media advertising. A primary component of management compensation is based
on loan production goals. Such campaigns emphasize each community banking
office's local responsiveness, local management team and special focus on
personalized service.
The community banking office established in a market will typically have
the following banking personnel: a President, a Senior Lender, an Associate
Lending Officer, a Credit Analyst, a Branch/Operations Manager and an
appropriate number of financial service managers and tellers. The number of
financial service managers and tellers necessary will be dependent upon the
volume of business generated by that particular community banking office. Each
community banking office will also be staffed with enough administrative
assistants to assist the officers effectively in their duties and to enable them
to market products and services actively outside of the office.
The lending officers are primarily responsible for the sales and marketing
efforts of the community banking offices. Management emphasizes relationship
banking whereby each customer will be assigned to a specific officer, with other
local officers serving as backup or in supporting roles. Through its experience
in the Florida banking industry, management believes that the most frequent
customer complaints pertain to a lack of personalized service and turnover in
lending personnel, which limits the customer's ability to develop a relationship
with his or her lending officer. The Company has and will continue to hire an
appropriate number of lending officers necessary to facilitate the development
of strong customer relationships.
Management has and will continue to offer salaries to the lending officers
that are competitive with other financial institutions in each market area. The
salaries of the lending officers are comprised of base compensation plus an
incentive payment structure that is based upon the achievement of Bank income
and certain loan production goals. Those goals will be reevaluated on an annual
basis and paid annually as a percentage of base salary. Management of the
Company believes that such a compensation structure provides greater motivation
for participating officers.
The community banking offices are located in commercial areas in each
market where the local management team determines there is the greatest
potential to reach the maximum number of small and medium-sized businesses. It
is expected that these community banking offices will develop in the areas
surrounding office complexes and other commercial areas, but not necessarily in
a market's downtown area. Such determinations will depend upon the customer
demographics of a particular market area and the accessibility of a particular
location to its customers. Management of the Company expects to lease facilities
of approximately 4,000 to 7,000 square feet at market rates for each community
banking office. The Company currently leases its facilities in the Tampa,
Jacksonville, Ft. Lauderdale, St. Petersburg-Clearwater, Ocala/Marion County and
West Palm Beach markets. To better serve the Alachua County (Gainesville)
market, the Company has built and owns a free-standing office with traditional
drive-in and lobby banking facilities. The Company plans to lease facilities in
the other Identified Markets to avoid investing significant amounts of capital
in property and facilities.
Loan Production Offices
In order to achieve its expansion strategy in a timely manner, the Company
may establish loan production offices ("LPO") as a prelude to establishing full
service community banking offices in the remaining Identified Markets and other
locations. Loan production offices 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 the
President, Senior Lender and one administrative assistant.
By opening loan production offices, the Company can begin to generate loans
during the period it is preparing to open, staff the banking office and reduce
the overall cost of expansion into a new market. The same philosophy of
marketing, growth, customer service and incentive based compensation would be
followed in a loan production office. These offices would also establish local
boards which would be responsible for promoting the growth of the office.
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Market Expansion
The Company intends to expand into the largest and fastest growing
communities in Florida as well as other markets within the state which offer
strategic opportunities. In order to achieve its expansion strategy, the Company
intends to establish community banking offices through the de novo branching of
the Bank. The Company may, however, accomplish its expansion strategy by
acquiring existing banks if an opportunity for such an acquisition becomes
available. Once the Company has assembled a local management team and local
advisory board of directors for a particular market area, the Company intends to
establish a community banking office in that market either through the opening
of an LPO or a full service bank. The Company has established community banking
offices in the Tampa, Jacksonville, Alachua County (Gainesville), Broward County
(Ft. Lauderdale), Pinellas County (St. Petersburg - Clearwater) and Marion
County (Ocala) markets. The Company has established a loan production office in
West Palm Beach. The other market into which the Company presently intends to
expand is Orlando. Management has identified the Orlando and Greater Palm Beach
markets as providing the most favorable opportunities for growth and intends to
establish full-service community banking offices within these markets as soon as
practicable. Management is also considering expansion into other selected
Florida metropolitan areas.
Customers
Management believes that the ongoing bank consolidation within Florida
provides a community-oriented bank significant opportunities to build a
successful, locally-oriented franchise. Management of the Company further
believes that many of the larger financial institutions do not emphasize a high
level of personalized service to the smaller commercial or individual retail
customers. The Company focuses its marketing efforts on attracting small and
medium-sized businesses which include: professionals, such as physicians and
attorneys, service companies, manufacturing companies and commercial real estate
developers. Because the Company focuses on small and medium-sized businesses,
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 where a creditworthy tenant is involved.
Although the Company has concentrated on lending to commercial businesses,
management has attracted and will continue to attract consumer business. Many of
its retail customers are the principals of the small and medium-sized businesses
for whom a community banking office provides banking services. Management
emphasizes "relationship banking" in order that each customer can identify and
establish a comfort level with the bank officers within a community banking
office. Management intends to further develop its retail business with
individuals who appreciate a higher level of personal service, contact with
their lending officer and responsive decision-making. It is expected that most
of the Company's business will be developed 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.
Products and Services
The Company currently offers a broad array of traditional banking products
and services to its customers through the Bank. The Bank currently provides
products and services that are substantially similar to those set forth below.
For additional information with respect to the Bank's current operations, see
"Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Loans. The Bank offers a wide range of short to long-term commercial and
consumer loans. As of December 31, 2002, the Bank has established an internal
limit for loans of up to $7.4 million to any one borrower.
Commercial. The Bank'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. In
making these loans, the Bank manages its credit risk by actively monitoring
such measures as advance rate, cash flow, collateral value and other
appropriate credit factors.
Commercial Real Estate. The Bank offers commercial real estate loans
to developers of both commercial and residential properties. In making
these loans, the Bank manages its credit risk by actively monitoring such
6
measures as advance rate, cash flow, collateral value and other appropriate
credit factors. See "--Operations of the Holding Company--Credit
Administration."
Residential Mortgage. The Bank's real estate 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. The Bank makes mortgage loans with a
variety of terms, including fixed and floating to variable rates and a
variety of maturities. These loans are made consistent with the Bank's
appraisal policy and real estate lending policy which detail maximum
loan-to-value ratios and maturities. Management believes that these
loan-to-value ratios are sufficient to compensate for fluctuations in the
real estate market to minimize the risk of loss. Mortgage loans that do not
conform to the Bank's asset/liability mix policies are sold in the
secondary markets.
Consumer Loans. The Bank's consumer loans consist primarily of
installment loans to individuals for personal, family and household
purposes. In evaluating these loans, the Bank requires its 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 Bank requires that its banking
officers maintain an appropriate margin between the loan amount and
collateral value. Many of the Bank's consumer loans are made to the
principals of the small and medium-sized businesses for whom the community
banking offices provide banking services.
Credit Card and Other Loans. The Bank has issued credit cards to
certain of its customers. In determining to whom it will issue credit
cards, the Bank evaluates the borrower's level and stability of income,
past credit history and other factors. Finally, the Bank makes additional
loans which may not be classified in one of the above categories. In making
such loans, the Bank attempts to ensure that the borrower meets its credit
quality standards.
Loans Held for Sale. In the fourth quarter of 2002, the Bank's newly
established wholesale mortgage division commenced operations. This division
originates residential mortgage loans through its network of independent
mortgage brokers, and sells them in the secondary mortgage market. Loans
held for sale at December 31, 2002 consist entirely of these residential
mortgage loans.
Deposits. The Bank offers a broad range of interest-bearing and
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non-interest-bearing deposit accounts, including commercial and retail checking
accounts, money market accounts, individual retirement accounts, regular and
premium rate interest-bearing savings accounts and certificates of deposit with
a range of maturity date options. The primary sources of deposits are small and
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 additional to deposits within the local markets, the Bank utilizes brokered
certificates of deposits to supplement its funding needs. 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.
In addition, the Bank 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.
Specialized Consumer Services. The Bank offers specialized products and
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services to its customers, such as lock boxes, traveler's checks and safe
deposit services.
Courier Services. The Bank offers courier services to its customers.
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Courier services, which the Bank may either provide directly or through a third
party, permit the Bank to provide the convenience and personalized service its
customers require by scheduling pick-ups of deposits. The Bank currently offers
courier services only to its business customers. The Bank has received
regulatory approval for and is currently offering courier services in all of its
existing markets and expects to apply for approval in other market areas.
Telephone Banking. The Bank believes that there is a need within its market
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niche for consumer and commercial telephone banking. These services allow
customers to access detailed account information, via a toll free number 24
hours a day. Management believes that telephone banking services assist their
community banking offices in retaining customers and also encourages its
customers to maintain their total banking relationships with the community
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banking offices. This service is provided through the Bank's third-party data
processor.
Internet Banking. In the fourth quarter of 1999, the Bank began offering
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its "DirectNet" Internet banking product. This service allows customers to
access detailed account information, execute transactions, download account
information, and pay bills electronically. Management believes that this service
is particularly attractive for its commercial customers since most transactions
can be handled over the Internet rather than over the phone or in person. In
addition, DirectNet offers the opportunity of opening deposit accounts both
within and outside of the local markets. The Bank intends to expand its Internet
banking services in the future to offer additional bank services as well as
non-traditional products and services. The DirectNet banking service is provided
by the Bank's third-party data processor.
ACH EFT Services. The Bank offers various Automated Clearing House and
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Electronic Funds Transfer services to its commercial customers. 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.
Stored Value Cards. The Bank offers stored value (prepaid debit) cards to
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its 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.
Automatic Teller Machines ("ATMs"). Presently, management does not expect
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to establish an ATM network although certain banking offices may provide one or
more ATMs in the local market. As an alternative, management has made other
financial institutions' ATMs available to its customers and offers customers up
to ten free ATM transactions per month.
Investment Advisory and Insurance Services. Beginning in 2003, the Company
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plans to offer, through its financial services subsidiary, certain alternative
investment products. These 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 Bank's offering of financial products in response to demand
from customers seeking to satisfy their financial service needs in one place.
Other Products and Services. The Bank intends to evaluate other services,
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such as trust services and other permissible activities. Management expects to
introduce these services in the future as they become economically viable.
Operations of the Holding Company
From its main offices in Jacksonville and its operations center in Tampa,
the Company provides a variety of support services for each of the community
banking offices. These services include back office operations, investment
portfolio management, credit administration and review, human resources,
compliance, internal audit, administration, training and strategic planning.
The Company uses the Bank's facilities for its data processing, operational
and back office support activities. The community banking offices utilize the
operational support provided by the Bank to perform account processing, loan
accounting, loan support, network administration and other functions. The Bank
has developed extensive procedures for many aspects of its operations, including
operating procedure manuals and audit and compliance procedures. Management
believes that the Bank's existing operations and support management are capable
of providing continuing operational support for all of the community banking
offices.
Outsourcing. Management of the Company believes that by outsourcing certain
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functions of its back room operations, it can realize greater efficiencies and
economies of scale. In addition, various products and services, especially
technology-related services, can be offered through third-party vendors at a
substantially lower cost than the costs of developing these products internally.
The Bank is currently utilizing Metavante, (formerly M&I Data Services, Inc.) to
provide its core data processing and certain customer products. The Company and
the Bank also utilize a qualified consulting firm to perform most internal audit
tasks.
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Credit Administration. The Company oversees all credit operations while
----------------------
still granting local authority to each community banking office. The Company's
Chief Credit Officer is primarily 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 Company's credit approval process consists of specific authorities
granted to the lending officers. Loans exceeding a particular lending officer's
level of authority are reviewed and considered for approval by the next level of
authority. The Chief Credit Officer has ultimate credit decision-making
authority, subject to review by the Chief Executive Officer and the Board of
Directors. Risk management requires active involvement with the Company's
customers and active management of the Company's portfolio. The Chief Credit
Officer reviews the Company's credit policy 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 short and long-term business strategies of the Company. The Chief Credit
Officer will also generally require all individuals charged with risk management
to reaffirm their familiarity with the credit policy annually.
Asset/Liability Management
The objective of the Bank 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
Chief Financial Officer of the Company is primarily responsible for monitoring
policies and procedures that are designed to maintain an acceptable composition
of the asset/liability mix while adhering to prudent banking practices. The
overall philosophy of management is to support asset growth primarily through
growth of core deposits. Management intends to continue to invest the largest
portion of the Bank's earning assets in commercial, industrial and commercial
real estate loans.
The Bank's asset/liability mix is monitored on a daily basis, with monthly
reports presented to the Bank's Board of Directors. 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 Bank's earnings. See
"Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition--Interest Rate Sensitivity and Liquidity
Management."
Competition
Competition among financial institutions in Florida and the markets into
which the Company may expand is intense. The Company and the Bank compete 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 and the Bank.
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 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
the State of Florida may now more easily enter the markets currently and
proposed to be served by the Company and the Bank. In addition, the
Gramm-Leach-Bliley Act repeals certain sections of the Glass-Steagall Act and
amends sections of the Bank Holding Company Act. See "---Supervision and
Regulation". 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 Bank's markets.
9
There can be no assurance 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 the Company. The Company's failure to compete effectively for deposit, loan
and other banking customers in its market areas could have a material adverse
effect on the Company's business, future prospects, financial condition or
results of operations. See "--Strategy of the Company--Market Expansion."
Data Processing
The Bank currently has an agreement with Metavante (formerly M&I) to
provide its core processing and certain customer products. The Company 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. The Company believes the Metavante contract to be
adequate for its business expansion plans. See "Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Employees
The Company and the Bank presently employ a combined total of 179 persons
on a full-time basis and 12 persons on a part-time basis. The Company and the
Bank will hire additional persons as needed to support its growth, including
additional tellers and financial service representatives.
Supervision and Regulation
The Company and the Bank operate in a highly regulated environment, and
their business activities will be governed by statute, regulation, and
administrative policies. The business activities of the Company and the Bank are
closely supervised by a number of regulatory agencies, including the Federal
Reserve Board, the Office of the Comptroller of the Currency (the "OCC"), the
Florida Department of Banking and Finance (the "Florida Banking Department") (to
a limited extent) and the FDIC.
The Company is regulated by the Federal Reserve Board under the Federal
Bank Holding Company Act, which requires every bank holding company to obtain
the prior approval of the Federal Reserve Board before acquiring more than 5% of
the voting shares of any bank or all or substantially all of the assets of a
bank, and before merging or consolidating with another bank holding company. The
Federal Reserve Board (pursuant to regulation and published policy statements)
has maintained that a bank holding company must serve as a source of financial
strength to its subsidiary banks. In adhering to the Federal Reserve Board
policy, the Company may be required to provide financial support to a subsidiary
bank at a time when, absent such Federal Reserve Board policy, the Company may
not deem it advisable to provide such assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, the Company and any other bank holding company located in Florida is able
to acquire a bank located in any other state, and a bank holding company located
outside Florida can acquire any Florida-based bank, in either case subject to
certain other restrictions. In addition, adequately capitalized and managed bank
holding companies may consolidate their multi-state bank operations into a
single bank subsidiary and may branch interstate through acquisitions unless an
individual state has elected to prohibit out-of-state banks from operating
interstate branches within its territory. De novo branching by an out-of-state
bank is lawful only if it is expressly permitted by the laws of the host state.
Entry into Florida by out-of-state financial institutions is permitted only by
acquisition of existing banks. The authority of a bank to establish and operate
branches within a state remains subject to applicable state branching laws.
Until March 2000, a bank holding company was generally prohibited from
acquiring control of any company which was not a bank and from engaging in any
business other than the business of banking or managing and controlling banks.
In April 1997, the Federal Reserve Board revised and expanded the list of
permissible non-banking activities in which a bank holding company could engage,
however limitations continued to exist under certain laws and regulations. The
Gramm-Leach-Bliley Act repeals certain regulations pertaining to Bank Holding
Companies and eliminates many of the previous prohibitions. Specifically, Title
I of the Gramm-Leach-Bliley Act repeals sections 20 and 32 of the Glass-Steagall
Act (12 U.S.C. ss.ss. 377 and 78, respectively) and is intended to facilitate
affiliations among banks, securities firms, insurance firms, and other financial
companies. To further this goal, the Gramm-Leach-Bliley Act amends section 4 of
the Bank Holding Company Act (12 U.S.C.ss. 1843) ("BHC Act") to authorize bank
holding companies and foreign banks that qualify as "financial holding
companies" to engage in securities, insurance and other activities that are
10
financial in nature or incidental to a financial activity. The activities of
bank holding companies that are not financial holding companies would continue
to be limited to activities authorized currently under the BHC Act, such as
activities that the Federal Reserve Board previously has determined in
regulations and orders issued under section 4(c)(8) of the BHC Act to be closely
related to banking and permissible for bank holding companies.
The Gramm-Leach-Bliley Act defines a financial holding company as a bank
holding company that meets certain eligibility requirements. In order for a bank
holding company to become a financial holding company and be eligible to engage
in the new activities authorized under the Gramm-Leach-Bliley Act, the Act
requires that all depository institutions controlled by the bank holding company
be well capitalized and well managed.
To become a financial holding company, the Gramm-Leach-Bliley Act requires
a bank holding company to submit to the Federal Reserve Board a declaration that
the company elects to be a financial holding company and a certification that
all of the depository institutions controlled by the company are well
capitalized and well managed. The Act also provides that a Bank holding
company's election to become a financial holding company will not be effective
if the Board finds that, as of the date the company submits its election to the
Board, not all of the insured depository institutions controlled by the company
have achieved at least a "satisfactory" rating at the most recent examination of
the institution under the Community Reinvestment Act (12 U.S.C.ss. 2903 et
seq.).
The Gramm-Leach-Bliley Act grants the Federal Reserve Board discretion to
impose limitations on the conduct or activities of any financial holding company
that controls a depository institution that does not remain both well
capitalized and well managed following the company's elections to be a financial
holding company.
New rules by the Federal Reserve Board and the Office of the Comptroller of
the Currency under the Gramm-Leach-Bliley Act could substantially affect the
Company's future business strategies, including its products and services. On
June 22, 2000, the Federal Reserve Bank of Atlanta approved the Company's
application to become a Financial Holding Company. The Company currently meets
the requirements of the rules, however, there can be no assurance that it will
continue to meet these requirements on an ongoing basis.
The State of Florida has adopted an interstate banking statute that allows
banks to branch interstate through mergers, consolidations and acquisitions.
Establishment of de novo bank branches in Florida by out-of-state financial
institutions is not permitted under Florida law.
The Company is also regulated by the Florida Banking Department under the
Florida Banking Code, which requires every bank holding company to obtain the
prior approval of the Florida Commissioner of Banking before acquiring more than
5% of the voting shares of any Florida bank or all or substantially all of the
assets of a Florida bank, or before merging or consolidating with any Florida
bank holding company. A bank holding company is generally prohibited from
acquiring ownership or control of 5% or more of the voting shares of any Florida
bank or Florida bank holding company unless the Florida bank or all Florida bank
subsidiaries of the bank holding company to be acquired have been in existence
and continuously operating, on the date of the acquisition, for a period of
three years or more. However, approval of the Florida Banking Department is not
required if the bank to be acquired or all bank subsidiaries of the Florida bank
holding company to be acquired are national banks.
The Bank is also subject to the Florida banking and usury laws restricting
the amount of interest which it may charge in making loans or other extensions
of credit. In addition, the Bank, as a subsidiary of the Company, is subject to
restrictions under federal law in dealing with the Company and other affiliates.
These restrictions apply to extensions of credit to an affiliate, investments in
the securities of an affiliate and the purchase of assets from an affiliate.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person if the loans and extensions of credit are not fully
secured by collateral having a market value at least equal to their face amount.
A national bank may grant loans and extensions of credit to such person up to an
additional 10% of its unimpaired capital and surplus, provided that the
transactions are fully secured by readily marketable collateral having a market
value determined by reliable and continuously available price quotations, at
least equal to the amount of funds outstanding. This 10% limitation is separate
11
from, and in addition to, the 15% limitation for unsecured loans. Loans and
extensions of credit may exceed the general lending limit if they qualify under
one of several exceptions. Such exceptions include certain loans or extensions
of credit arising from the discount of commercial or business paper, the
purchase of bankers' acceptances, loans secured by documents of title, loans
secured by U.S. obligations and loans to or guaranteed by the federal
government. In addition, national banks with the highest supervisory ratings are
currently permitted to lend up to 25 percent of capital to single borrowers for
certain small business loans and for loans secured by a perfected first-lien
security interest in 1 to 4 family real estate, limited to 80% of the property's
appraised value.
Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the OCC. The Federal
Reserve Board and the OCC have issued risk-based capital guidelines for bank
holding companies and banks which make regulatory capital requirements more
sensitive to differences in risk profiles of various banking organizations. The
capital adequacy guidelines issued by the Federal Reserve Board are applied to
bank holding companies on a consolidated basis with the banks owned by the
holding company. The OCC's risk capital guidelines apply directly to national
banks regardless of whether they are a subsidiary of a bank holding company.
Both agencies' requirements (which are substantially similar) provide that
banking organizations must have capital equivalent to at least 8% of
risk-weighted assets. The risk weights assigned to assets are based primarily on
credit risks. Depending upon the risk of a particular asset, it is assigned to a
risk category. For example, securities with an unconditional guarantee by the
United States government are assigned to the lowest risk category, while a risk
weight of 50% is assigned to loans secured by owner-occupied one to four family
residential mortgages, provided that certain conditions are met. The aggregate
amount of assets assigned to each risk category is multiplied by the risk weight
assigned to that category to determine the weighted values, which are added
together to determine total risk-weighted assets. Both the Federal Reserve Board
and the OCC have also implemented new minimum capital leverage ratios to be used
in tandem with the risk-based guidelines in assessing the overall capital
adequacy of banks and bank holding companies. Under these rules, banking
institutions are required to maintain a ratio of at least 3% "Tier 1" capital to
total weighted risk assets (net of goodwill). Tier 1 capital includes common
shareholders equity, non-cumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries. Tier 2 capital includes Tier 1 capital plus certain categories of
subordinated debt and intermediate-term preferred stock not included in Tier 1
capital, together with a portion of the Bank's allowance for loan losses, not to
exceed 1.25% of gross risk-weighted assets.
Both the risk-based capital guidelines and the leverage ratio are minimum
requirements, applicable only to top-rated banking institutions. Institutions
operating at or near these levels are expected to have well-diversified risks,
excellent control systems high asset quality, high liquidity, good earnings and
in general, must be considered strong banking organizations, rated composite 1
under the CAMELS rating system for banks. Institutions with lower ratings and
institutions with high levels of risk or experiencing or anticipating
significant growth would be expected to maintain ratios 100 to 200 basis points
above the stated minimums.
The OCC's guidelines provide that intangible assets are generally deducted
from Tier 1 capital in calculating a bank's risk-based capital ratio. However,
certain intangible assets which meet specified criteria ("qualifying
intangibles") are retained as a part of Tier 1 capital. The OCC has modified the
list of qualifying intangibles, currently including only purchased credit card
relationships and mortgage and non-mortgage servicing assets. The OCC's
guidelines formerly provided that the amount of such qualifying intangibles that
may be included in Tier 1 capital was strictly limited to a maximum of 50% of
total Tier 1 capital. The OCC has amended its guidelines to increase the
limitation on such qualifying intangibles from 50% to 100% of Tier 1 capital, of
which no more than 25% may consist of purchased credit card relationships and
non-mortgage servicing assets.
In addition, the OCC has adopted rules which clarify treatment of asset
sales with recourse not reported on a bank's balance sheet. Among assets
affected are mortgages sold with recourse under Fannie Mae, Freddie Mac and
Farmer Mac programs. The rules clarify that even though those transactions are
treated as asset sales for bank Call Report purposes, those assets will still be
subject to a capital charge under the risk-based capital guidelines.
The risk-based capital guidelines of the OCC, the Federal Reserve Board and
the FDIC explicitly include provisions to limit a bank's exposure to declines in
the economic value of its capital due to changes in interest rates to ensure
that the guidelines take adequate account of interest rate risk. Interest rate
risk is the adverse effect that changes in market interest rates may have on a
bank's financial condition and is inherent to the business of banking. The
exposure of a bank's economic value generally represents the change in the
12
present value of its assets, less the change in the value of its liabilities,
plus the change in the value of its interest rate off-balance sheet contracts.
Concurrently, the agencies issued a joint policy statement to bankers, effective
June 26, 1996, to provide guidance on sound practices for managing interest rate
risk. In the policy statement, the agencies emphasize the necessity of adequate
oversight by a bank's board of directors and senior management and of a
comprehensive risk management process. The policy statement also describes the
critical factors affecting the agencies' evaluations of a bank's interest rate
risk when making a determination of capital adequacy. The agencies' risk
assessment approach used to evaluate a bank's capital adequacy for interest rate
risk relies on a combination of quantitative and qualitative factors. Banks that
are found to have high levels of exposure and/or weak management practices will
be directed by the agencies to take corrective action.
The Comptroller, the Federal Reserve Board and the FDIC recently added a
provision to the risk-based capital guidelines that supplements and modifies the
usual risk-based capital calculations to ensure that institutions with
significant exposure to market risk maintain adequate capital to support that
exposure. Market risk is the potential loss to an institution resulting from
changes in market prices. The modifications are intended to address two types of
market risk: general market risk, which includes changes in general interest
rates, equity prices, exchange rates, or commodity prices, and specific market
risk, which includes particular risks faced by the individual institution, such
as event and default risks. The provision defines a new category of capital,
Tier 3, which includes certain types of subordinated debt. The provision
automatically applies only to those institutions whose trading activity, on a
worldwide consolidated basis, equals either (i) 10% or more of total assets or
(ii) $1 billion or more, although the agencies may apply the provision's
requirements to any institution for which application of the new standard is
deemed necessary or appropriate for safe banking practices. For institutions to
which the modifications apply, Tier 3 capital may not be included in the
calculation rendering the 8% credit risk ratio; the sum of Tier 2 and Tier 3
capital may not exceed 100% of Tier 1 capital; and Tier 3 capital is used in
both the numerator and denominator of the normal risk-based capital ratio
calculation to account for the estimated maximum amount that the value of all
positions in the institution's trading account, as well as all foreign exchange
and commodity positions, could decline within certain parameters set forth in a
model defined by the statute. Furthermore, beginning no later than January 1,
1999, covered institutions must "backtest," comparing the actual net trading
profit or loss for each of its most recent 250 days against the corresponding
measures generated by the statutory model. Once per quarter, the institution
must identify the number of times the actual net trading loss exceeded the
corresponding measure and must then apply a statutory multiplication factor
based on that number for the next quarter's capital charge for market risk.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"), enacted on December 19, 1991, provides for a number of reforms
relating to the safety and soundness of the deposit insurance system,
supervision of domestic and foreign depository institutions and improvement of
accounting standards. One aspect of the FDICIA involves the development of a
regulatory monitoring system requiring prompt action on the part of banking
regulators with regard to certain classes of undercapitalized institutions.
While the FDICIA does not change any of the minimum capital requirements, it
directs each of the federal banking agencies to issue regulations putting the
monitoring plan into effect. The FDICIA creates five "capital categories" ("well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized") which are defined in the
FDICIA and which will be used to determine the severity of corrective action the
appropriate regulator may take in the event an institution reaches a given level
of undercapitalization. For example, an institution which becomes
"undercapitalized" must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institution's
compliance. Before a capital restoration plan will be approved, any entity
controlling a bank (i.e., holding companies) must guarantee compliance with the
plan until the institution has been adequately capitalized for four consecutive
calendar quarters. The liability of the holding company is limited to the lesser
of five percent of the institution's total assets or the amount which is
necessary to bring the institution into compliance with all capital standards.
In addition, "undercapitalized" institutions will be restricted from paying
management fees, dividends and other capital distributions, will be subject to
certain asset growth restrictions and will be required to obtain prior approval
from the appropriate regulator to open new branches or expand into new lines of
business.
As an institution's capital levels decline, the extent of action to be
taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.
The FDICIA also provides that banks have to meet new safety and soundness
standards. In order to comply with the FDICIA, the Federal Reserve Board, the
OCC and the FDIC have adopted regulations defining operational and managerial
13
standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits.
Both the capital standards and the safety and soundness standards which the
FDICIA seeks to implement are designed to bolster and protect the deposit
insurance fund.
In response to the directive issued under the FDICIA, the regulators have
established regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established by the FDICIA.
The following table reflects the capital thresholds:
Total Risk-Based Tier 1 Risk-Based Tier 1
Capital Ratio Capital Ratio Leverage Ratio
Well Capitalized (1)..................... 10.0% 6.0% 5.0%
Adequately Capitalized (1)............... 8.0% 4.0% 4.0%(2)
Undercapitalized (3)..................... < 8.0% < 4.0% < 4.0%(4)
Significantly Undercapitalized (3)....... < 6.0% < 3.0% < 3.0%
Critically Undercapitalized.............. - - < 2.0%(5)
- ---------------------------
(1) An institution must meet all three minimums.
(2) 3.0% for composite 1-rated institutions subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
(4) Less than 3.0% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
(5) Ratio of tangible equity to total assets.
As a national bank, the Bank is subject to examination and review by the
OCC. This examination is typically completed on-site at least every twelve
months and is subject to off-site review at call. The OCC, at will, can access
quarterly reports of condition, as well as such additional reports as may be
required by the national banking laws.
As a bank holding company, the Company is required to file with the Federal
Reserve Board an annual report of its operations at the end of each fiscal year
and such additional information as the Federal Reserve Board may require
pursuant to the Act. The Federal Reserve Board may also make examinations of the
Company and each of its subsidiaries.
The scope of regulation and permissible activities of the Company and the
Bank is subject to change by future federal and state legislation. In addition,
regulators sometimes require higher capital levels on a case-by-case basis based
on such factors as the risk characteristics or management of a particular
institution. The Company and the Bank are not aware of any attributes of their
operating plan that would cause regulators to impose higher requirements.
Nonbanking Subsidiaries
The Company has the following directly and wholly-owned nonbanking
subsidiaries that are currently active: Florida Banks Statutory Trust I, a
Connecticut business trust, issued $6 million in trust preferred securities in
2001, which are guaranteed by the Company. Florida Banks Capital Trust II, a
Delaware business trust, issued $4 million in trust preferred securities in
2002, which are guaranteed by the Company. Florida Banks Capital Trust I, a
Delaware business trust, issued $4 million in trust preferred securities in
2002, which are guaranteed by the Company. Florida Banks Statutory Trust II, a
Connecticut business trust, issued $3 million in trust preferred securities in
2002, which are guaranteed by the Company.
On February 21, 2003, the Company formed FLBK Foundation, Inc. (the
"Foundation"), a Florida nonprofit corporation, for the purpose of making grants
to tax-exempt charitable organizations. The board of the Foundation will consist
of affiliates of the Company. On March 7, 2003, the Foundation filed for
recognition of exemption under section 501(C)(3) of the Internal Revenue Code.
The Foundation has not yet engaged in any grants or other activities.
14
Availability of Reports and Other Information
Our corporate website is http://www.flbk.com. We make available on this
website, free of charge, access to our 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 we electronically submit such material to the Securities and
Exchange Commission. In addition, the Commission's website is
http://www.sec.gov. The Commission makes available on its website, free of
charge, reports, proxy and information statements, and other information
regarding issuers, such as us, that file electronically with the Commission.
Information provided on our website or on the Commission's website is not part
of this Annual Report on Form 10-K.
15
Item 2. Properties
The Company's occupies 5,113 sq. ft. of leased space for its main offices
located at 5210 Belfort Road, Suite 310, Concourse II, Jacksonville, Florida
32256. The Bank operates seven banking offices and an operations center in the
following locations:
Florida Bank, N.A. - Alachua County (1)
600 N.W. 43rd Street, Suite A
Gainesville, Florida 32607
Facilities: Owned by the Bank - 7,581 sq. ft.
Florida Bank, N.A. - Jacksonville
5210 Belfort Road, Suite 140
Jacksonville, Florida 32256
Facilities: Leased 6001 sq. ft.
Florida Bank, N.A. - Tampa (2)
100 West Kennedy Boulevard
Tampa, Florida 33602
Facilities: Leased 12,573 sq. ft.
Florida Bank, N.A. - Broward County
600 North Pine Island Rd., Suite 350
Plantation, Florida 33324
Facilities: Leased 4,893 sq. ft.
Florida Bank, N.A. - Pinellas County
8250 Bryan Dairy Road, Suite 150
Largo, Florida 33777
Facilities: Leased 5,428 sq. ft.
Florida Bank, N.A. - Marion County
2437 SE 17th Street, Suite 101
Ocala, Florida 34471
Facilities: Leased 5,485 sq. ft.
Florida Bank, N.A. - Operations Center
6301 Benjamin Road, Suite 105
Tampa, Florida 33634
Facilities: Leased 5,056 sq. ft.
Palm Beach Gardens Loan Production Office
7108 Airway Drive, Suite 225
Palm Beach Gardens, Florida 33418
Facilities: Leased 1,400 sq. ft.
(1) The Alachua County Bank leased approximately 1,600 square feet of its
facility to a local health and fitness center until needed for future
expansion by the Bank.
(2) Approximately 5,546 sq. ft. of the Tampa Bank facility has been subleased
to a local law firm. The term of the sublease expires on June 30, 2003 in
conjunction with the expiration of Bank's lease.
16
Additional information concerning the property owned or leased by the Company
and its subsidiaries is incorporated herein by reference from Note 4 of the
Notes to the Consolidated Financial Statements included in Item 8 of this Form
10-K.
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 fourth quarter ended December 31, 2002
to a vote of security holders of the Company.
17
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, mark-downs, or commissions.
High Low
---- ---
Fiscal year ended December 31, 2001
First Quarter $7.188 $5.250
Second Quarter 6.500 5.290
Third Quarter 6.400 5.550
Fourth Quarter 6.250 5.510
Fiscal year ended December 31, 2002
First Quarter $8.900 $5.900
Second Quarter 9.640 7.410
Third Quarter 9.000 7.270
Fourth Quarter 8.968 7.580
As of December 31, 2002, there were approximately 224 holders of record of
the Common Stock. Management of the Company believes that there are in excess of
2,800 beneficial holders of its Common Stock.
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.
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 March 14, 2003, the Company has repurchased 302,200
shares for a total cost of $1,866,197 or an average cost of $6.18 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 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 March 14, 2003, no shares had been repurchased under the
Rule 10b-18 program.
Equity Compensation Plans
The Company maintains the 1998 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, 2002:
18
Number of Securities
Number of Shares Weighted Average remaining available for
to be issued upon the Exercise Price of future issuance under
Exercise of Outstanding Outstanding Options, Equity Compensation
Plan Category Options, Warrants and Rights Warrants and Rights Plans
- ------------- ---------------------------- ------------------- -----
Equity Compensation Plans 14,842 (1) $6.87 (2) 258,892 (3)
approved by the shareholders
Equity Compensation Plans
not approved by the
shareholders 904,098 (4) $8.68 87,442
--------------------------- ------------------------ ------------------------
TOTALS 918,940 $8.65 346,334
(1) Represents an aggregate of 14,842 common shares issuable upon exercise of
options under the ESPP.
(2) Represents weighted-average exercise price of outstanding options under the
ESPP.
(3) Includes 17,921 common shares and 240,971 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 received $5 million in gross proceeds
from a private placement of 50,000 shares of Series C Preferred Stock at a price
of $100.00 per share to an institutional investor. Series C shares are
non-convertible. Non-cumulative cash dividends accrue at five percent annually
and are payable quarterly in arrears. During the first quarter of 2003, the
institutional investor and the Company intend to consider an exchange of Series
C Preferred shares for shares of a new series of preferred stock, which would be
substantially similar to the Series C Preferred shares, except the new shares
would be convertible into the Company's common stock at $10.00 per share. Any
such change would be subject to necessary regulatory approvals. The sale of the
Series C Preferred Stock was made in reliance on an exemption from registration
under the Securities Act of 1933 provided in Regulation D and Section 4(2)
thereunder. With respect to such reliance, certain inquiries were made by the
Company and certain representations and warranties were received by the investor
to establish that such exemption was available.
19
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company for
the periods indicated. Florida Banks, Inc. was incorporated on October 15, 1997
for the purpose of becoming a bank holding company and acquiring First National
Bank of Tampa. On August 4, 1998, the Company completed its initial public
offering and its merger (the "Merger") with the Bank pursuant to which the Bank
was merged with and into Florida Bank No. 1, N.A., a wholly-owned subsidiary of
the Company, and renamed Florida Bank, N.A. Shareholders of the Bank received
1,375,000 shares of common stock of the Company valued at $13,750,000. The
Merger was considered a reverse acquisition for accounting purposes, with the
Bank identified as the accounting acquiror. The Merger has been accounted for as
a purchase, but no goodwill has been recorded in the Merger and the financial
statements of the Bank have become the historical financial statements of the
Company.
The number of shares of common stock, the par value of common stock and per
share amounts have been restated to reflect the shares exchanged in the Merger.
The selected financial data of the Company as of December 31, 2002, 2001,
2000, 1999 and 1998 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,
--------------------------------------------------
2002 2001 2000 1999 1998
(Dollars in thousands except per share amounts)
Summary Income Statement:
Interest income $ 34,927 $ 31,380 $ 23,766 $ 11,142 $ 5,413
Interest expense 15,584 16,548 13,711 4,696 2,436
----- ----- ----- ----- -----
Net interest income 19,343 14,832 10,055 6,446 2,977
Provision for loan losses 3,026 1,889 1,912 1,610 629
----- ----- ----- ----- -----
Net interest income after
provision for loan losses 16,317 12,943 8,143 4,836 2,348
Noninterest income 4,040 2,048 1,011 583 613
Noninterest expense (1) 18,005 13,693 10,886 8,342 7,903
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes 2,352 1,298 (1,732) (2,923) (7,943)
Provision (benefit) for income taxes 885 490 (652) (1,076) (350)
----- ----- ----- ----- -----
Net income (loss) 1,467 808 (1,080) (1,847) (4,593)
----- ----- ----- ----- -----
Preferred stock dividends 140 250 - - -
----- ----- ----- ----- -----
Net income (loss) applicable to common
shares $ 1,327 $ 558 $ (1,080) $ (1,847) $ (4,593)
1,327 558 (1,080 (1,847 (4,593
Earnings (loss) per common share:
Basic $ 0.21 $ 0.10 $ (0.19) $ (0.32) $ (1.46)
Diluted 0.20 0.10 (0.19) (0.32) (1.46)
(1) Noninterest expense for the Company for 1998 includes a nonrecurring,
noncash charge of $3,939,000, relating to the February 3, 1998 sale of
common stock and warrants included in the Units sold to accredited foreign
investors and the February 11, 1998 sale of 297,000 shares of common stock
to 14 officers, directors and consultants.
20
At December 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
----- ----- ---- ---- ----
(Dollars in Thousands)
Summary Balance Sheet Data:
Investment securities $ 53,652 $ 38,886 $36,756 28,511 22,242
Loans held for investment, net of deferred loan fees 550,455 401,444 285,526 157,517 67,131
Loans held for sale 54,674 - - - -
Earning assets 721,296 494,987 353,239 205,898 106,022
Total assets 756,066 522,323 372,797 218,163 113,566
Noninterest-bearing deposits 141,395 99,899 41,965 22,036 11,840
Total deposits 664,910 451,249 305,239 159,106 64,621
Other borrowed funds 14,576 14,210 26,035 18,279 5,718
Total shareholders' equity 52,964 46,142 38,556 39,235 42,588
Performance Ratios:
Net interest margin (1) 3.33% 3.62% 3.58% 4.57% 4.28%
Efficiency ratio (2) 77.00 81.12 98.37 118.68 220.18
Return on average assets 0.22 0.13 (0.36) (1.07) (5.42)
Return on average equity 2.79 1.30 (2.83) (3.12) (16.54)
Asset Quality Ratios:
Allowance for loan losses to total loans held for investment 1.32% 1.17% 1.23% 1.18% 1.60%
Non-performing loans to total loans held for investment 0.25 0.36 1.44 1.46 2.80
Net charge-offs to average loans held for investment 0.09 0.21 0.12 0.80 0.09
Capital and Liquidity Ratios:
Total capital to risk-weighted assets 11.92% 12.70% 12.73% 18.19% 63.25%
Tier 1 capital to risk-weighted assets 10.78 11.63 11.58 17.29 61.59
Tier 1 capital to average assets 9.97 10.64 10.28 20.01 36.44
Average loans to average deposits 97.21 99.03 94.90 101.53 81.04
Average equity to average total assets 7.79 9.96 12.80 34.30 32.80
- --------------------------------------------------
(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.
21
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 case, the Company has identified forward-looking statements by such
words or phrases as "will likely result," "is confident that," "expects,"
"should," "could," "may," "will continue to," "believes," "anticipates,"
"predicts," "forecasts," "estimates," "projects," "potential," "intends" or
similar expressions identifying "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995, including the negative
of those words and phrases. These forward-looking statements are based on
management's current views and assumptions regarding future events, future
business conditions and the outlook for the Company based on currently available
information. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed in, or implied by, these statements. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying important
factors that could affect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. Among the factors that could have an impact on the Company's ability
to achieve operating results and growth plan goals are:
o Management's ability to reduce and effectively manage interest rate risk
and the impact of interest rates in general on the volatility of the
Company's net interest income;
o Fluctuations in the value of the Company's investment securities;
o The ability to attract and retain senior management experienced in banking
and financial services;
o The sufficiency of allowances for possible loan losses to absorb the amount
of actual future losses inherent in the existing portfolio of loans;
o The Company's ability to adapt successfully to technological changes to
compete effectively in the marketplace;
o Credit risks and risks from concentrations (by geographic area and by
industry) within the Bank's loan portfolio;
o The effects of competition from other commercial banks, thrifts, mortgage
banking firms, consumer finance companies, credit unions, securities
brokerage firms, insurance companies, money market and other mutual funds
and other financial institutions operating in the Company's market or
elsewhere or providing similar services;
o The failure of assumptions underlying the establishment of reserves for
loan losses and estimations of values of collateral and various financial
assets and liabilities;
o Volatility of rate sensitive deposits;
o Operational risks, including data processing system failures or fraud;
o Asset/liability matching risks and liquidity risks;
o Changes in the economic environment, competition or other factors that may
influence the anticipated growth rate of loans and deposits, the quality of
the loan portfolio and loan and deposit pricing and Company's ability to
successfully pursue acquisition and expansion strategies;
o The impact from liabilities arising from legal or administrative
proceedings the financial condition of the Company;
o Governmental monetary and fiscal policies, as well as legislative and
regulatory changes, that may result in the imposition of costs and
22
constraints on the Company through higher FDIC insurance premiums,
significant fluctuations in market interest rates and operational
limitations;
o Changes in general economic or industry conditions, nationally or in the
communities in which the Bank conducts business;
o Changes in accounting principles, policies or guidelines affecting the
businesses conducted by the Company or its affiliates;
o Acts of war or terrorism; and
o Other economic, competitive, governmental, regulatory and technical factors
affecting the Bank's operations, products, services, and prices.
The Company wishes to caution that the foregoing list of important factors may
not be all-inclusive and specifically declines to undertake any obligation to
publicly update or revise any forward-looking statements that have been made to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
The Company
The Company was incorporated on October 15, 1997 to acquire or establish a
bank in Florida. Prior to the consummation of the merger with First National
Bank of Tampa (the "Merger"), the Company had no operating activities. The
Merger was consummated immediately prior to the closing of the Company's initial
public offering (the "Offering") on August 4, 1998. After the consummation of
the Merger, the Bank's shareholders owned greater than 50% of the outstanding
Common Stock of the Company, excluding the issuance of the shares in connection
with the Offering. Accordingly, the Merger was accounted for as if the Bank had
acquired the Company. The financial statements of the Bank have become the
historical financial statements of the Company and no goodwill was recorded as a
result of the Merger. In addition, the operating results of the Company incurred
prior to the Merger, which consisted of organizational and start-up costs, are
not included in the consolidated operating results.
The Company funded its start-up and organization costs through the sale of
units, consisting of Common Stock, Preferred Stock and warrants to purchase
shares of Common Stock. As the Company was not formed until 1997, the term
"Company" used throughout "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the Company and the Bank for the
periods ended December 31, 1998 and later, and for the Bank only for the period
ended December 31, 1997 and prior periods. Unless otherwise indicated, the
"Bank" refers to Florida Bank, N.A., formerly First National Bank of Tampa.
Summary
The Company reported net income of $1.5 million and net income applicable
to common shareholders of $1.3 million for fiscal 2002, compared to net income
of $808,000 and net income applicable to common shareholders of $558,000 for
fiscal 2001. The Company had no preferred stock issued or outstanding prior to
2001. The Company's net loss for fiscal 2000 was $1.1 million. Basic and diluted
earnings (loss) per common share were $.21, $.10, and ($.19) for the years ended
December 31, 2002, 2001 and 2000. Diluted earnings (loss) per common share were
$.20, $.10, and ($.19) for the years ended December 31, 2002, 2001 and 2000.
Diluted earnings per common share reflects the dilutive effect of outstanding
options.
The increase in the Company's net income in 2002, compared to 2001, was
primarily attributable to an increase in net interest income and an increase in
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 60.2% to $3.0
million in 2002, from $1.9 million in 2001. Noninterest income increased 97.2%
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 recorded a provision for income taxes in 2002 of $885,000, compared to
$490,000 in 2001.
The improvement in the Company's performance to net income in 2001,
compared to a net loss in 2000, was primarily attributable to an increase in net
interest income and an increase in noninterest income, partially offset by an
increase in noninterest expenses. Net interest income increased to $14.8 million
in 2001 from $10.0 million in 2000, an increase of 47.5%. The provision for loan
losses decreased 1.2% to $1.9 million in 2001, from $1.9 million in 2000.
23
Noninterest income increased 102.5% to $2.0 million in 2001 from $1.0 million in
2000. Noninterest expense increased to $13.7 million in 2001 from $10.9 million
in 2000, an increase of 25.9%. The Company recorded a provision for income taxes
in 2001 of $490,000, compared to a benefit for income taxes of $652,000 in 2000.
Total assets at December 31, 2002 were $756.1 million, an increase of
$233.7 million, or 44.8%, over the prior year. Total loans held for investment
increased 37.1% to $550.9 million at December 31, 2002, from $401.7 million at
December 31, 2001. Total deposits increased $213.7 million, or 47.3%, to $664.9
million at December 31, 2002 from $451.2 million at December 31, 2001.
Shareholders' equity increased to $53.0 million at December 31, 2002 from $46.1
million at December 31, 2001, an increase of 14.8%. These increases were
primarily attributable to the establishment of the wholesale mortgage division
and the Palm Beach Gardens loan production office, together with maturity of the
Company's locations in its other markets and continued successful implementation
of its long-term strategies, more fully discussed in the section entitled
"Business" in Part 1, Item 1 above.
The earnings performance of the Company 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. During 2002, the Return
on Average Assets and Return on Average Equity were 0.22% and 2.79%
respectively, compared to 0.13% and 1.30%, respectively, for 2001. The Company's
ratio of total equity to total assets decreased to 7.01% at December 31, 2002
from 8.83% at December 31, 2001, primarily as a result of growth from branch
operations.
Total assets at December 31, 2001 were $522.3 million, an increase of
$149.5 million, or 40.11%, over the prior year. Total loans increased 40.6% to
$401.4 million at December 31, 2001, from $285.5 million at December 31, 2000.
Total deposits increased $146.0 million, or 47.8%, to $451.2 million at December
31, 2001 from $305.2 million at December 31, 2000. Shareholders' equity
increased to $46.1 million at December 31, 2001 from $38.6 million at December
31, 2000, an increase of 19.7%. These increases were primarily attributable to
the conversion of the Marion County office to a full service branch in its first
full year of operations, together with maturity of the Company's locations in
its other markets and continued successful implementation of its long-term
strategies, more fully discussed in the section entitled "Business" in Part 1,
Item 1 above.
During 2001, the Return on Average Assets and Return on Average Equity were
0.13% and 1.30% respectively, compared to (0.36%) and (2.83%), respectively, for
2000. The Company's ratio of total equity to total assets decreased to 8.83% at
December 31, 2001 from 10.3% at December 31, 2000, primarily as a result of
growth from branch operations.
Results of Operations
Net Interest Income
The following three tables set forth, for the periods indicated, certain
information related to the Company's average balance sheet, its yields on
average earning assets and its average rates on interest-bearing liabilities.
Such yields and rates are derived by dividing income or expense by the average
balance of the corresponding assets or liabilities. Average balances have been
derived from the daily balances throughout the periods indicated.
24
Year Ended
December 31, 2002 Income/
Average Balance Expense Yield / Cost
(Dollars in thousands)
ASSETS:
Total loans (1) $484,132 $31,853 6.58%
Investment securities (2) 43,264 2,239 5.18%
Federal funds sold & other investments 53,623 835 1.56%
------ ---
Total earning assets 581,019 34,927 5.96%
Cash and due from banks 20,169
Premises and equipment, net 4,382
Other assets, net 9,750
Allowance for loan losses (5,747)
-------
Total Assets (3) $609,573
========
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing transaction accounts $41,817 710 1.70%
Savings deposits 72,145 1,443 2.00%
Time deposits 317,305 12,469 3.93%
Repurchase agreements sold 37,726 502 1.33%
Other borrowed funds 10,143 460 4.54%
------ ---
Total interest bearing liabilities 479,136 15,584 3.25%
Demand deposits 66,769
Accrued interest and other liabilities 16,180
Shareholders' equity 47,488
------
Total liabilities and shareholders' equity $609,573
========
Net interest income $19,343
=======
Net interest spread 2.71%
Net interest margin 3.33%
Non-interest expense $18,005
Overhead ratio 2.95%
Non-interest income $4,040
Non-interest income ratio 0.66%
(1) - Average loans include nonaccrual loans. At December 31, 2002, $1.5
million of loans were accounted for on a non-accrual basis. All loans and
deposits are domestic.
(2) - Stated at amortized cost. Does not reflect unrealized gains or losses.
All securities are taxable. The Company has no trading account securities
(3) - All yields are considered taxable equivalent because the Company has no
tax exempt assets.
25
Year Ended
December 31, 2001 Income/
Average Balance Expense Yield/Cost
(Dollars in thousands)
ASSETS:
Total loans (1) $340,778 $27,692 8.13%
Investment securities (2) 39,297 2,653 6.75%
Federal funds sold & other investments 29,746 1,035 3.48%
------ -----
Total earning assets 409,821 31,380 7.66%
Cash and due from banks 12,598
Premises and equipment, net 3,355
Other assets, net 7,833
Allowance for loan losses (4,046)
-------
Total Assets (3) $429,561
========
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing transaction accounts $19,439 366 1.89%
Savings deposits 54,602 2,034 3.72%
Time deposits 223,905 12,548 5.60%
Repurchase agreements sold 33,568 1,205 3.59%
Other borrowed funds 7,585 395 5.21%
----- ---
Total interest bearing liabilities 339,099 16,548 4.87%
Demand deposits 44,038
Accrued interest and other liabilities 3,415
Shareholders' equity 43,009
------
Total liabilities and shareholders' equity $429,561
========
Net interest income $14,832
=======
Net interest spread 2.79%
Net interest margin 3.62%
Non-interest expense $13,693
Overhead ratio 3.19%
Non-interest income $2,048
Non-interest income ratio 0.48%
- ----------
(1) - Average loans include nonaccrual loans. At December 31, 2001, $1.1
million of loans were accounted for on a non-accrual basis. All loans and
deposits are domestic.
(2) - Stated at amortized cost. Does not reflect unrealized gains or losses.
All securities are taxable. The Company has no trading account securities
(3) - All yields are considered taxable equivalent because the Company has no
tax exempt assets.
26
Year Ended
December 31, 2000 Income /
Average Balance Expense Yield / Cost
(Dollars in thousands)
ASSETS:
Total loans (1) $224,317 $20,073 8.95%
Investment securities (2) 37,416 2,477 6.62%
Federal funds sold & other investments 19,084 1,216 5.53%
------ -----
Total earning assets 280,817 23,766 8.46%
Cash and due from banks 9,311
Premises and equipment, net 2,805
Other assets, net 5,675
Allowance for loan losses (2,676)
-------
Total Assets (3) $295,932
========
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing transaction accounts $11,641 219 1.58%
Savings deposits 38,101 2,092 5.49%
Time deposits 156,150 10,083 6.46%
Repurchase agreements sold 14,956 903 6.04%
Other borrowed funds 6,824 414 6.07%
----- ---
Total interest bearing liabilities 227,672 13,711 6.02%
Demand deposits 27,677
Accrued interest and other liabilities 2,343
Shareholders' equity 38,240
------
Total liabilities and shareholders' equity $295,932
=========
Net interest income $10,055
=======
Net interest spread 2.44%
Net interest margin 3.58%
Non-interest expense $10,886
Overhead ratio 3.67%
Non-interest income $1,011
Non-interest income ratio 0.34%
(1) - Average loans include nonaccrual loans. At December 31, 2000, $1.5
million of loans were accounted for on a non-accrual basis. All loans
and deposits are domestic.
(2) - Stated at amortized cost. Does not reflect unrealized gains or losses.
All securities are taxable. The Company has no trading account
securities
(3) - All yields are considered taxable equivalent because the Company has
no tax exempt assets.
27
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 2002, 2001 and 2000. Accordingly, no adjustment is
necessary to facilitate comparisons on a taxable equivalent basis.
Net interest income increased 30.4% to $19.3 million in 2002 from $14.8
million in 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 are 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 is 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
indexes, including LIBOR (London Inter-Bank Offered Rate) and various mortgage
rate indexes. 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.
Net interest income increased 47.5% to $14.8 million in 2001 from $10.1
million in 2000. This increase is attributable to growth in loan volume due to
new branch operations, and is 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 increased 4 basis points to 3.62% in 2001 on average earning
assets of $409.8 million from 3.58% in 2000 on average earning assets of $280.8
million. This increase is primarily due to the fact that the average rates paid
on interest bearing liabilities decreased more than the average yield on earning
assets decreased. There was an 80 basis point decrease in the average yield on
earning assets to 7.66% in 2001 from 8.46% in 2000 and a 115 basis point
decrease in the average rate paid on interest-bearing liabilities to 4.87% in
2001 from 6.02% in 2000. The decreased yield on earning assets was primarily the
result of lower market rates on loans and investment securities, prompted by
eleven decreases in the Prime Rate during 2001, from 9.5% to 4.75%. 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.
The net interest spread decreased to 2.71% in 2002 from 2.79% in 2001, as
the yield on average earning assets decreased 170 basis points while the cost of
interest-bearing liabilities decreased 162 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.
The net interest spread increased 35 basis points to 2.79% in 2001 from
2.44% in 2000, as the yield on average earning assets decreased 80 basis points
while the cost of interest-bearing liabilities decreased 115 basis points.
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 balance sheet, the Company adjusts the rates and terms
of its interest-bearing liabilities in response to general market rate changes
28
and the competitive environment. The Company monitors Federal funds sold levels
throughout the year, investing any funds not necessary 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 2001 and 2002, between
2000 and 2001 and between 1999 and 2000. The effect of a change in average
balance has been determined by applying the average rate in 2001, 2000 and 1999
to the change in average balance from 2000 to 2001 to 2002 and from 1999 to 2000
to 2001, respectively. The effect of change in rate has been determined by
applying the average balance in 2001, 2000 and 1999 to the change in the average
rate from 2000 to 2001 to 2002 and from 1999 to 2000 to 2001, 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 Year Ended