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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, 2003
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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 Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant (5,893,259 shares) on June 30, 2003 was
approximately $67,949,276 based on the closing price of the registrant's common
stock as reported on the NASDAQ National Market on June 30, 2003.
As of March 16, 2004, there were 6,886,777 shares of $.01 par value common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement to be delivered to shareholders in
connection with the 2004 Annual Meeting of Shareholders are incorporated by
reference in response to Part III of this Report.
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TABLE OF CONTENTS
Item
Number Page
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Part I
1. Business........................................................................ 3
2. Properties...................................................................... 23
3. Legal Proceedings............................................................... 25
4. Submission of Matters to a Vote of Security Holders............................. 25
Part II
5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................................... 25
6. Selected Financial Data......................................................... 27
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 29
7A. Quantitative and Qualitative Disclosures About Market Risk...................... 69
8. Financial Statements and Supplementary Data..................................... 69
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................................... 69
9A. Controls and Procedures......................................................... 70
Part III
10. Directors and Executive Officers of the Registrant.............................. 71
11. Executive Compensation.......................................................... 71
12. Security Ownership of Certain Beneficial Owners and Management.........................71
13. Certain Relationships and Related Transactions.................................. 71
14. Principal Accounting Fees and Services.......................................... 71
Part IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................ 71
SIGNATURES 75
2
PART I
ITEM 1. BUSINESS
GENERAL
Florida Banks, Inc. (the "Company") was formed in 1997 to create a
statewide community banking system that would focus on the largest and fastest
growing Florida banking markets. The Company began to operate in 1998 after it
completed the acquisition of First National Bank of Tampa, which became the
Company's wholly owned banking subsidiary and was subsequently named Florida
Bank, N.A. (the "Bank"). The Company offers a broad range of traditional banking
products and services, focusing primarily on small to medium-sized businesses
with annual revenues between $5 million and $40 million. The Company currently
operates community-banking offices in the Tampa, Jacksonville, Gainesville, Ft.
Lauderdale, St. Petersburg/Clearwater, Ocala and West Palm Beach markets. As
opportunities arise, it may also expand into other Florida market areas with
demographic characteristics similar to the markets it currently serves.
The Company has a community banking approach that emphasizes responsive
and personalized service to its customers. The management of the Company
("management") believes that the significant consolidation in the Florida
banking market has disrupted customer relationships as the larger out-of-state
financial institutions operating in Florida have increasingly focused on larger
corporate customers and standardized loan and deposit products and services.
Generally, these products and services are offered through less personalized
delivery systems, which has created a need for higher quality services to small
and medium-sized businesses. In addition, consolidation of the Florida banking
market has dislocated experienced and talented management, as well as, lending
personnel. As a result of these factors, management believes that it has a
substantial opportunity to attract additional banking customers and experienced
management and lending personnel both within the markets it currently serves and
in other Florida banking market areas.
The Company's top five senior managers have an average of over 30 years
of banking experience. The Company's growth and focus on small to medium-sized
business customers have attracted strong local management and lending teams who
have significant banking experience, strong community contacts and strong
business development potential in the markets it currently serves and in other
Florida banking market areas. Local bank presidents, who have an average of over
28 years of banking experience, run the Company's community banking offices.
They have a high degree of local decision-making authority, including the
ability to customize products and services to meet the specific needs of the
local market. The Company's management is compensated based on profitability,
growth and loan production goals, and each market area is supported by a local
advisory board of directors, which is provided with financial incentives to
assist in the development of banking relationships throughout the community.
The Company provides a variety of support services to its community
banking offices from its main office located in Jacksonville and its operations
center in Tampa. These services include back office operations, investment
portfolio management, credit administration and review, human resources,
compliance, internal audit, administration, training and strategic planning.
Functions such as core bank data processing, check clearing and other similar
functions are currently outsourced to a major vendor. As a result, the Company
can achieve cost efficiencies, maintain consistency in policies and procedures
and allow its local management teams to concentrate on developing and enhancing
customer relationships. Management believes it can leverage the Company's
current infrastructure and systems to meet its growth and other financial goals.
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The Company's business strategies have resulted in strong growth in
assets and profitability. The Company intends to continue to grow its business
and become more efficient by attracting additional small to medium-sized
business customers in its existing Florida banking markets, leveraging its
existing infrastructure and capacity, utilizing technology to enhance its
customer service and maximize deposit growth, and expanding into additional
Florida banking markets.
The Company has two reporting segments, the commercial bank and the
mortgage bank. The commercial bank segment provides its commercial customers
such products as working capital loans, equipment loans and leases, commercial
real estate loans, and other business related products and services. The
mortgage bank segment originates mortgage loans through its network of mortgage
brokers and sells these loans into the secondary market.
RECENT DEVELOPMENTS
On March 18, 2004, the Company announced that it entered into a
definitive agreement to be acquired by The South Financial Group, Inc. ("South
Financial") in an all-stock transaction. Under terms of the agreement, the
Company's shareholders will receive 0.77 shares of South Financial common stock
for each share of Florida Banks, Inc., subject to certain minimum price levels
for South Financial common stock. In addition, outstanding options to purchase
the Company's stock will be converted into options to acquire South Financial's
common stock at the 0.77 exchange ratio. The transaction is expected to close in
July 2004 and is subject to regulatory and Company shareholder approval. The
Company's subsidiary, Florida Bank, N.A., will merge into South Financial's
Florida banking subsidiary, Mercantile Bank.
GROWTH HISTORY
The Company has grown substantially in both size and profitability
since its formation. The table below presents data relating to the growth of key
areas of the Company's business for the last five fiscal years.
As of and For The Year Ended December 31,
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(Dollars in thousands) 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Assets................................ $944,461 $756,066 $522,323 $372,797 $218,163
Loans held for investment, net of
deferred fees...................... 690,590 550,455 401,444 285,526 157,517
Deposits.............................. 796,613 664,910 451,249 305,239 159,106
Shareholders' equity.................. 57,794 52,964 46,142 38,556 39,235
Net income (loss) applicable to common
shares............................. 4,406 1,327 558 (1,080) (1,847)
Non-performing loans to total loans... 0.38% 0.25% 0.36% 1.44% 1.46%
Net charge-offs to average loans...... 0.19 0.09 0.21 0.12 0.80
The Company's historical financial results for fiscal 1999 to 2000
reflect the development of the Company in its early stages, notably in
connection with initial start-up costs and the raising and retention of capital
to fund its planned growth. In 1999 and 2000, the Company incurred significant
non-interest expenses for the start-up and infrastructure costs described above,
while revenue items gradually increased as it began to source and originate
loans and other earning assets. The Company has maintained profitability and
asset growth throughout the last three fiscal years.
In the fourth quarter of 2002, the Company started its wholesale
mortgage banking division that is managed as a separate line of business. The
Company targets markets in the eastern United States for wholesale origination
of both adjustable and fixed rate mortgage loans. To minimize interest rate
risk, the Company sells the mortgage loans it originates on a servicing-released
basis in the secondary markets to government agencies or other investors. The
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Company has realized the following results in its mortgage banking division
since its formation:
For the Year Ended December 31,
--------------------------------
(Dollars in thousands) ................. 2003 2002
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Mortgage loans originated .............. $1,079,475 $ 98,001
Net interest income .................... 4,073 62
Non-interest income .................... 11,079 1,355
Gain on sale of mortgage loans 8,870 1,093
Mortgage loan processing fees 2,209 262
Non-interest expense ................... 11,025 911
Income before income taxes ............. 4,127 505
THE FLORIDA BANKING MARKET
The favorable demographic and economic characteristics of the Florida
banking markets are key factors in the Company's ability to grow its assets,
achieve its financial goals and create stockholder value. In addition,
management believes that the consolidation in the Florida banking market since
the early 1990s have created an underserved market of Florida-based, small and
medium-sized businesses that the Company can successfully target.
According to the U.S. Census Bureau, Florida is the fourth most
populous state in the country with an estimated population in 2003 of
approximately 17.0 million. In terms of population, Florida is expected to be
among the five fastest-growing states in the U.S. over the period from 2002 to
2007, and the fastest-growing state of the most populous states over that
period. Management believes that Florida's major metropolitan areas will benefit
the most from this expansion. Approximately 37% of the total population and 40%
of the non-farm businesses in Florida are located in the markets the Company
currently serves. According to the Federal Deposit Insurance Corporation (the
"FDIC"), the Florida banking markets have grown over the past four years, with
statewide deposits increasing from $194.2 billion in 1998 to $268.2 billion in
2003. Florida's economy has broadened from a reliance on tourism, agriculture
and retirement living to a diversified base that includes significant levels of
industrial and commercial trade. Accordingly, the Company expects that the local
Florida banking markets will grow faster than most in the U.S. with less
volatility than experienced in the past, providing opportunities for strong
growth and potential profitability for the Company.
The Florida banking market is currently characterized by the dominance
of large out-of-state financial institutions. Today, Florida's ten largest
banking organizations by deposits are headquartered outside of Florida and more
than 75% of the total deposits in the state are controlled by out-of-state
organizations. In the mid 1990s, prior to it being purchased by Nations Bank,
Barnett Bank was the largest in-state financial institution with almost 20% of
the Florida banking market. Today, the largest Florida-based financial
institution holds less than a 2% market share. Management believes that the
continued consolidation within the Florida banking markets has created a unique
opportunity to build a successful, locally oriented banking system. Further,
management believes that many small and medium-sized companies are interested in
banking with a company headquartered, and with decision-making authority, in
Florida with established Florida bankers who have the expertise to act as
trusted advisors. These customers are attractive to the Company because
management believes that, if it can serve these customers properly, it will be
able to establish long-term relationships and provide multiple products to them,
enhancing the Company's overall profitability. The Company's community banking
offices have been built around experienced bankers with lending expertise in the
specific industries found in their market areas, allowing for responsive,
personalized service.
5
STRATEGY
The Company's objective is to further enhance its net income by
continuing to grow and become more efficient. Any important aspect of the
Company's growth strategy is the ability to service and effectively manage a
large number of loans and deposit accounts in multiple markets in Florida.
Accordingly, the Company has an operations infrastructure sufficient to support
statewide lending and banking operations and has developed the following
specific strategies, which are further discussed below:
o Improve profitability by:
o Leveraging existing infrastructure efficiently to support a
larger volume of business and utilizing outsourcing to provide
cost-effective operational support, and
o Maximizing the efficiency and profitability of the wholesale
mortgage banking operation.
o Continue loan growth by:
o Focusing on key metropolitan markets;
o Attracting small and medium-sized business customers that require
the attention and service that a community-oriented bank is well
suited to provide;
o Identifying and retaining local management teams that emphasize a
high level of personalized customer service, and
o Expanding into additional Florida banking markets.
o Utilize technology to enhance customer service and maximize deposit
growth.
IMPROVE PROFITABILITY BY LEVERAGING EXISTING INFRASTRUCTURE EFFICIENTLY TO
SUPPORT A LARGER VOLUME OF BUSINESS AND UTILIZING OUTSOURCING TO PROVIDE
COST-EFFECTIVE OPERATIONAL SUPPORT.
The Company has made significant investments in its infrastructure in
order to centralize many of its critical operations, such as investment
portfolio management, credit administration and review, human resources,
compliance, internal audit, administration, training, strategic planning and
data and loan application processing. Management believes that its existing
infrastructure can accommodate substantial additional growth without substantial
additional capital expenditures. Management further believes that its existing
infrastructure allows the Company to grow its business both geographically and
with respect to the size and number of loan and deposit accounts. Management
also believes that the centralization of its administrative operations enables
the Company to maximize efficiency through economies of scale, while allowing
its bankers to focus on building and maintaining customer relationships.
In addition, the Company utilizes outside service providers where they
can increase the efficiency of its operations. Currently, the Company's data
processing and certain bank operations, and almost all of its internal audit
functions, are provided by outside service providers. The Company intends to
continue to review its operations to determine where it can contain costs by
using third party service providers.
6
IMPROVE PROFITABILITY BY MAXIMIZING THE EFFICIENCY AND PROFITABILITY OF THE
WHOLESALE MORTGAGE BANKING OPERATION.
In the fourth quarter of 2002, the Company launched its wholesale
mortgage banking division by hiring its management staff from HomeSide Lending,
Inc. after HomeSide was acquired by Washington Mutual, Inc. The Company targets
markets in the eastern United States for origination of both adjustable and
fixed rate mortgage loans. During the year ended December 31, 2003, the Company
originated $1.1 billion in mortgage loan volume. The Company offers an extensive
array of residential mortgage products, which are later, sold in the secondary
market to governmental agencies or other investors. To minimize interest rate
risk, these loans are sold on a servicing-released basis. The mortgage loans are
originated primarily through a network of third party mortgage brokers. This
distribution channel allows the Company to generate high levels of loan volume
on a cost-effective basis through its 15 sales personnel who are primarily paid
on a commission-only basis. In addition, as mortgage origination volume has
increased during 2003, the Company has made the strategic decision to hire
predominantly temporary and contract employees to meet this increased volume. As
a result, approximately 25% of the personnel employed in the Company's mortgage
operation are temporary employees and another 13% are commission-only employees.
Management believes this will allow the Company to vary the cost structure of
its mortgage origination platform to maximize profits if overall mortgage
volumes decline in the future.
The Company intends to further leverage its investment in its mortgage
operation by employing additional retail loan officers in its local markets and
wholesale account executives in other major markets outside of Florida. The
Company is emphasizing purchase loan originations in its retail network through
its residential construction-lending program, and in both its retail and
wholesale mortgage lending channels by offering premium pricing and accelerated
service levels. Management also believes this initiative will allow the Company
to continue to leverage its wholesale mortgage operation as interest rates
increase and the volume of refinance activity declines as a percentage of the
overall mortgage loan market.
CONTINUE LOAN GROWTH BY FOCUSING ON KEY METROPOLITAN MARKETS.
The established relationships of the Company's bankers tend to be
centered in the metropolitan areas that were the core business markets of the
large independent Florida banks before the consolidation of the banking industry
in Florida in the 1990s. In addition, these metropolitan areas contain a high
concentration of the Company's core small to medium-sized business customers.
Management believes the nature of the business communities in Florida's
metropolitan markets provides the Company with a broad, diverse customer base
that allows it to spread its lending risks throughout a number of different
borrowers and industries. As a result, the Company intends to focus its
development efforts in these market areas. Management believes its focus on
small to medium-sized businesses and the existing relationships of its bankers
with these core customers provides the Company with a competitive advantage in
the metropolitan market areas. Management further believes this competitive
advantage will enable the Company to continue its growth and compete
successfully in these markets.
CONTINUE LOAN GROWTH BY ATTRACTING SMALL AND MEDIUM-SIZED BUSINESS CUSTOMERS
THAT REQUIRE THE ATTENTION AND SERVICE THAT A COMMUNITY-ORIENTED BANK IS WELL
SUITED TO PROVIDE.
The Company's business strategy concentrates on business customers with
annual revenues between $5 million and $40 million. Management believes these
target customers are currently underserved in Florida. Management further
believes that the Florida operations of many of the large out-of-state banks
generally do not focus on small to medium-sized businesses, preferring instead
to focus on retail consumer banking clients and larger commercial clients with
revenues over $40 million. Smaller community banks, savings and loans, and
credit unions tend to focus on residential mortgage loans, consumer loans and
retail deposit accounts. Small and medium-sized businesses generally have the
size and sophistication to demand customized products and services, which
management believes its bankers are well-equipped to understand and respond to
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due to their experience and personal relationships with their clients.
Management further believes that a significant amount of the growth the Company
has experienced has been due to its concentration on this underserved segment of
the Florida banking markets. By continuing the Company's focus on these
customers, the Company expects to continue to grow in its current markets and to
compete successfully as it enters other Florida banking markets.
CONTINUE LOAN GROWTH BY IDENTIFYING AND RETAINING LOCAL MANAGEMENT TEAMS THAT
EMPHASIZE A HIGH LEVEL OF PERSONALIZED CUSTOMER SERVICE.
The Company has identified individuals in each of the markets it
currently serves who serve as the president of that community banking office.
Management believes that a management team that is familiar with the needs of
its community can provide higher quality personalized service to local
customers. The Company's local management teams have a significant amount of
decision-making authority and are accessible to local customers. In addition,
within each market area, the Company's community banking offices have a local
advisory board that is comprised of prominent members of the community,
including business leaders and other professionals. Certain members of the local
boards may serve as members of the Company's board of directors. The directors
of these local advisory boards act as the Company's representatives within the
community and are expected to promote the business development of each community
banking office. The Company expects the members of its local advisory board and
its lending officers to be active in the civic, charitable and social
organizations in the local communities. Many members of the local management
team hold leadership positions in a number of community organizations and the
Company expects that they will continue to volunteer for other positions in the
future. Management believes that these strong local management teams will
facilitate the growth in the markets the Company currently serves and enable it
to compete successfully as it enters new markets.
CONTINUE LOAN GROWTH BY EXPANDING INTO ADDITIONAL FLORIDA BANKING MARKETS.
The Company has built its community banking system in its existing
markets by assembling a local management team and local advisory board
experienced in that particular market area and establishing a community banking
office in that market either through the opening of a Loan Production Office
("LPO") or a full service bank. In June 2002, the Company opened a LPO in West
Palm Beach, which has been expanded into a full service community banking
office. The Company will also consider expansion into other selected Florida
banking markets if management believes it will enable the Company to grow its
assets and profitability and is otherwise consistent with its strategic goals
and objectives. If the Company expands into additional Florida banking markets,
it intends to establish a local community banking office in that new market
through de novo branching. The Company may, however, acquire existing banks if
an attractive opportunity for such an acquisition becomes available.
The Company may also establish LPO's in new Florida banking markets as
a prelude to establishing full service community banking offices. LPO's would
provide the same lending products and services to the local market as the
community banking office with substantially less overhead expense. These offices
would typically be staffed with a president, a senior lender and one
administrative assistant. By opening LPO's, the Company can begin to generate
loans during the period it is preparing to open a full-service banking
operation, staff the banking office and reduce the overall cost of expansion
into a new market. These offices would also establish local advisory boards,
which would be responsible for promoting the growth of the office.
UTILIZE TECHNOLOGY TO ENHANCE CUSTOMER SERVICE AND MAXIMIZE DEPOSIT GROWTH.
The Company believes that there is a need within its market niche for
consumer and commercial telephone banking and Internet banking. The Company's
customers are provided access to detailed account information via a toll free
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number 24 hours a day and via DirectNet, the Company's Internet banking product.
DirectNet also enables the Company's customers to execute transactions, download
account information, view check images and pay bills electronically. In
addition, DirectNet affords the Company the opportunity of opening deposit
accounts both within and outside of the local markets. The DirectNet banking
service and telephone banking are provided by a third-party data processor.
The Company also offers origination of Automated Clearing House and
Electronic Funds Transfers (ACH/EFT), automated wire transfer services, stored
value cards, check imaging, lockbox services, account reconciliation, and other
services through its Internet site or through other delivery channels.
Management believes that these services assist the Company's community banking
offices in retaining customers.
LENDING ACTIVITIES
The Company oversees all lending activities centrally while still
granting local authority to each community banking office. The Company's Chief
Credit Officer is responsible for maintaining a quality loan portfolio and
developing a strong credit culture throughout the entire organization. The Chief
Credit Officer is also responsible for developing and updating the credit policy
and procedures for the organization. In addition, he works closely with each
lending officer at the community banking offices to ensure that the business
being solicited is of the quality and structure that fits the Company's desired
risk profile. Credit quality is controlled through uniform compliance to credit
policy. The Company's risk-decision process is actively managed in a disciplined
fashion to maintain an acceptable risk profile characterized by soundness,
diversity, quality, prudence, balance and accountability.
The credit approval process consists of a system of dual credit
authority with a cumulative feature for larger credits. The Chief Credit Officer
has the authority to manage and adjust the levels of credit authority within the
Company's banks. The Company utilizes a house-lending limit that limits the
maximum credit exposure to any one borrower. As of December 31, 2003, this limit
was $9.0 million. Within this house-lending limit, the Company utilizes an
exposure matrix methodology that further limits maximum exposure based on a
combination of the assigned risk rating of the credit and a percentage of the
house limit. These limits reflect the Company's desire for diversification and
granularity in its loan portfolio. Any changes to these limits require the
approval of the Company's board of directors. Risk management requires active
involvement with the Company's customers and active management of its portfolio.
The Chief Credit Officer reviews the Company's credit policies with the local
management teams at least annually but will review it more frequently if
necessary. The results of these reviews are then presented to the board of
directors. The purpose of these reviews is to attempt to ensure that the credit
policy remains compatible with the Company's short and long-term business
strategies. The Chief Credit Officer will also generally require all individuals
charged with risk management to reaffirm their familiarity with the credit
policy annually.
The Company focuses its marketing efforts on attracting small to
medium-sized business customers with annual revenues between $5 million and
approximately $40 million, which include:
o professionals, such as physicians and attorneys;
o service companies;
o manufacturing companies; and
o other small to medium-sized businesses with real estate or other
collateral to secure their indebtedness to the Company.
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Because the Company focuses on small to medium-sized business
customers, the majority of its loan portfolio is in the commercial area with an
emphasis placed on commercial and industrial loans secured by real estate,
accounts receivable, inventory, property, plant and equipment. However, in an
effort to maintain a high level of credit quality, the Company attempts to
ensure that the commercial real estate loans are made to borrowers who occupy
the real estate securing the loans or investment properties occupied by
creditworthy tenants or seasoned investment properties. In addition, the Company
has attracted and will continue to attract consumer business. The Company
expects to develop most of its business through its lending officers and local
advisory boards of directors and by pursuing an aggressive strategy of making
calls on customers throughout the market area.
The Company offers a wide range of short to long-term commercial and
consumer loans and has grown its loan portfolio substantially since its
formation. The following table provides information about the growth of the
Company's portfolio of loans held for investment by type of loan for the last
five fiscal years.
December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Commercial real estate $424,498 $313,120 $210,373 $158,654 $69,261
Commercial 176,094 166,122 142,911 102,391 68,991
Residential mortgage 34,120 23,080 22,309 9,796 10,846
Consumer 54,648 45,860 23,158 13,036 7,246
Credit card and other 1,956 2,792 2,912 1,747 1,244
Net deferred loan fees (726) (519) (219) (98) (71)
-------- -------- -------- -------- --------
Loans held for investment, net $690,590 $550,455 $401,444 $285,526 $157,517
======== ======== ======== ======== ========
The Company generally invests a greater proportion of its assets in
commercial loans and commercial real estate loans than other banking
institutions of its size, which typically invest a greater proportion of their
assets in consumer loans and loans secured by single-family residences. At
December 31, 2003, commercial loans, commercial real estate loans, residential
mortgage loans and consumer loans accounted for 25.3%, 61.6%, 4.9% and 8.2%,
respectively, of its total loan portfolio. The Company's commercial loans
generally involve a higher degree of credit risk than commercial or residential
mortgage loans due, in part, to their less readily marketable collateral. Due to
the nature of their collateral, losses incurred on a small number of commercial
loans could have a material adverse impact on its financial condition and
results of operations. In addition, unlike residential mortgage loans, its
commercial loans and commercial real estate loans generally depend on the cash
flow of the borrower's business to service the debt. Furthermore, a significant
portion of its commercial loans is dependent for repayment largely on the
liquidation of assets securing the loan, such as inventory and accounts
receivable. These loans carry incrementally higher risk, since their repayment
is often dependent solely on the financial performance of the borrower's
business. The Company's business plan calls for continued efforts to increase
its assets invested in commercial loans. An increase in non-performing loans
could cause operating losses, impaired liquidity and the erosion of its capital,
and could have a material adverse effect on its business, financial condition or
results of operations.
While risk of loss in the Company's loan portfolio is primarily tied to
the credit quality of the borrowers, risk of loss may also increase due to
factors beyond the Company's control, such as local, regional and/or national
economic downturns. General conditions in the real estate market may also impact
the relative risk in the Company's real estate portfolio. As discussed above, of
the Company's target areas of lending activities, commercial loans are generally
considered to have greater risk than real estate loans or consumer loans. For
this reason, the Company seeks to diversify its commercial loan portfolio by
industry, geographic distribution and size of credits.
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COMMERCIAL REAL ESTATE LOANS
The Company's commercial real estate loan portfolio consists of 1)
loans to owner occupied business customers who secure their indebtedness to the
Company with real, other property, or personal guarantees, and 2) loans to
developers of both commercial and residential properties.
The strategy is to seek to develop long-term relationships with select
businesses, investors and real estate professionals. In making these loans, the
Company utilizes traditional credit analysis to manage credit risk by actively
monitoring such measures as the financial condition of the borrower and debt
service coverage of the property, as well as the advance rate, cash flow,
collateral value and other appropriate credit factors. In the real estate
development area, the Company typically makes loans only to developers that have
an established record of project completion and repayment. The Company closely
monitors the status of each loan and the underlying project throughout its
terms.
At December 31, 2003, commercial real estate loans represented
approximately 61% of the Company's loans held for investment.
COMMERCIAL LOANS
The Company's commercial lending consists primarily of commercial and
industrial loans for the financing of accounts receivable, inventory, property,
plant and equipment, and other commercial assets. The majority of the business
loan portfolio is secured by real estate, accounts receivable, inventory,
equipment and/or general corporate assets of the borrower, as well as the
personal guarantee of the principal.
Commercial loans can contain risk factors unique to the business of
each customer. In order to mitigate these risks and better serve the customers,
the Company seeks to gain an understanding of the business of each customer so
that it can place appropriate value on collateral taken and structure the loan
to maintain collateral values at appropriate levels. The Company manages credit
risk by actively monitoring such measures as advance rate, cash flow, collateral
value, ability to repay and other appropriate credit factors. In addition, the
Company relies on the experience of its bankers and their relationships with its
customers to aid its understanding of the customer and their business.
At December 31, 2003, commercial loans represented approximately 25% of
the Company's loans held for investment.
RESIDENTIAL MORTGAGE LOANS
The Company's residential mortgage loans consist of residential first
and second mortgage loans, residential construction loans and home equity lines
of credit and term loans secured by first and second mortgages on the residences
of borrowers for home improvements, education and other personal expenditures.
At December 31, 2003, residential mortgage loans represented
approximately 5% of the Company's loans held for investment.
11
CONSUMER LOANS
The Company's consumer loans consist of installment loans to
individuals for personal, family and household purposes. In evaluating these
loans, the Company requires the lending officers to review the borrower's level
and stability of income, past credit history, and the impact of these factors on
the ability of the borrower to repay the loan in a timely manner. In addition,
the Company requires that its banking officers maintain an appropriate margin
between the loan amount and collateral value. Many of the Company's consumer
loans are made to the principals of the small to medium-sized businesses for
whom the community banking offices provide banking services.
At December 31, 2003, consumer loans represented approximately 8% of
the Company's loans held for investment.
CREDIT CARD AND OTHER LOANS
The Company has issued credit cards to certain of its customers. In
determining to whom the Company will issue credit cards, the Company evaluates
the borrower's level and stability of income, past credit history and other
factors. Finally, the Company makes additional loans such as overdraft
protection lines of credit, which may not be classified in one of the above
categories. In making such loans, the Company attempts to ensure that the
borrower meets the Company's credit quality standards.
At December 31, 2003, credit card and other loans represented
approximately 0.3% of the Company's loans held for investment.
LOANS HELD FOR SALE
The wholesale mortgage division originates residential mortgage loans
through a network of third party mortgage brokers, and sells them in the
secondary mortgage market. Loans held for sale at December 31, 2003 were
approximately $66 million and consisted entirely of wholesale residential
mortgage loans. Due to the Company's high wholesale mortgage loan origination
volume and the substantially higher volume of mortgage loan origination activity
nationally, the major secondary market purchasers of these loans were unable to
complete loan purchases within their typical time frame. This has resulted in a
higher level of loans held for sale at December 31, 2003. Management believes
that as its volume of activity decreases and the major purchasers of loans
return to their typical purchase schedule, the level of loans held for sale will
decrease. The Company does not retain interests in the portion of the loan
portfolio it sells.
INVESTMENTS
The Company invests primarily in direct obligations of the United
States, obligations guaranteed as to principal and interest by the United
States, obligations of agencies of the United States and mortgage-backed
securities. The Company's current investment policy permits purchases primarily
of securities which are rated investment grade by a nationally recognized rating
agency, and substantially all of the investments in the Company's portfolio at
December 31, 2003 were rated in one of the two highest grades. The Company also
enters into federal funds transactions with its principal correspondent banks,
and acts as a net seller of such funds, which amounts to a short-term loan from
another company. The Company's investment portfolio at December 31, 2003 totaled
$53 million.
FUNDING
The Company funds its lending activities by offering a broad range of
deposit products within the markets it currently serves, including
interest-bearing and noninterest-bearing deposit accounts, such as commercial
and retail checking accounts, money market accounts, individual retirement
accounts, regular and premium rate interest-bearing savings accounts and
12
certificates of deposit with a range of maturity date options. The primary
sources of these deposits are small to medium-sized businesses and individuals.
In each market, senior management has the authority to set rates within
specified parameters in order to remain competitive with other financial
institutions located in the identified market.
In addition to deposits within the local markets, the Company utilizes
brokered certificates of deposits to supplement its funding needs, particularly
with respect to its mortgage banking business. Brokered CDs are sold by various
investment firms, which are paid a fee by the bank for placing the deposit.
Depending on current market conditions, the cost of brokered deposits may be
slightly lower than the cost of the same deposits in the local markets. All
deposits are insured by the FDIC up to the maximum amount permitted by law.
Approximately 58% of the Company's total deposits at December 31, 2003 consisted
of certificates of deposit of $100,000 or more.
The Company also has short term funding available through its various
federal funds lines of credit with other financial institutions and its
membership in the Federal Home Loan Bank of Atlanta, which provides the Company
the availability of participation in loan programs with varying maturities and
terms. At December 31, 2003, the Company had borrowings from the Federal Home
Loan Bank of Atlanta in the amount of $10.7 million.
Finally, the Company has two senior holding company lines of credit
with SunTrust Bank, Atlanta. The first line of credit is revolving with a
borrowing capacity of $7.5 million. The second line of credit is non-revolving
with a borrowing capacity of $2.5 million. At December 31, 2003, the Company had
borrowings from SunTrust Bank, Atlanta in the amount of $10.0 million.
NONINTEREST INCOME
GAINS ON SALE OF LOANS. The Company may originate or purchase a loan at
a price (i.e., interest rate and discount) that may be higher or lower than it
would receive if it immediately sold the loan in the secondary market. These
pricing differences occur principally as a result of competitive pricing
conditions in the primary loan origination market. The Company may also
recognize a gain or loss on sale of a loan as a result of changes in the fair
value of underlying interest rate locks. These changes in fair value result from
changes in interest rates from the time the price commitment is given to the
customer until the time that the Company sells the loan to an investor. To
reduce the effect of interest rate changes on the gain or loss on loan sales,
the Company generally commits to sell all of its warehouse loans (i.e., mortgage
loans that have closed) and its pipeline loans (i.e., mortgage loans which are
not yet closed but for which the interest rate has been established) to
investors for delivery at a future time for a stated price. In addition, the
Company utilizes the services of a third party provider to manage interest rate
risk and execute the Company's pipeline hedging strategy.
MORTGAGE LOAN PROCESSING FEES. Mortgage loan processing fees are
comprised of fees earned on the origination of residential mortgage loans and
fees charged to review loan documents for purchased residential mortgage loan
production.
SERVICE FEES. In order to capture additional noninterest income, the
Company has implemented a service charge fee schedule, which is competitive with
other financial institutions in the community banking offices' market areas,
covering such matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and other similar
fees.
ACH/EFT SERVICES. The Company offers various Automated Clearing House
and Electronic Funds Transfer (ACH/EFT) services to commercial customers
throughout the United States. These services include payroll direct deposits,
payroll tax payments, electronic payments and other funds transfers. The
services are customized to meet the needs of the customer and offer an
economical alternative to paper checks and drafts.
13
STORED VALUE CARDS. The Company offers stored value (prepaid debit)
cards to commercial customers. These cards are issued primarily to facilitate
incentive payments, payroll disbursements, customer loyalty programs, and as
gift cards. The bank derives income from use of the prepaid funds and fee income
from issuing and servicing the cards.
INVESTMENT ADVISORY AND INSURANCE SERVICES. Beginning in the first
quarter of 2003, the Company began to offer certain alternative investment
products through its financial services subsidiary, FB Financial Services, Inc.
These products include equities, fixed-income products, equity and bond mutual
funds, unit investment trusts, life insurance policies, and to the extent
permitted by applicable regulations, fixed and variable annuities. This program
expands the Company's offering of financial products in response to demand from
customers seeking a single source for their financial service needs.
OTHER SERVICES
SPECIALIZED CONSUMER SERVICES. The Company offers specialized products
and services to its customers, such as lock boxes, traveler's checks and safe
deposit services.
COURIER SERVICES. The Company offers courier services to its customers.
Courier services, which may be either provided directly by the Company or
through a third party, permits the Company to provide the convenience and
personalized service by scheduling deposit pick-ups from its customers. The
Company currently offers courier services only to its business customers. The
Company has received regulatory approval for and is currently offering courier
services in all of the markets it currently serves and expects to apply for
approval in other Florida banking market areas.
AUTOMATIC TELLER MACHINES ("ATMS"). Presently, the Company does not
expect to establish an ATM network although the Company currently provides ATMs
in three of the markets it currently services and in the future other banking
offices may provide one or more ATMs in their local Florida banking market. As
an alternative, the Company has made other financial institutions' ATMs
available to its customers and offers customers up to ten free ATM transactions
per month.
OTHER PRODUCTS AND SERVICES. The Company intends to evaluate other
services, such as trust services and other permissible activities, and it
expects to introduce these services in the future as they become economically
viable.
ASSET-LIABILITY MANAGEMENT
The objective is to manage assets and liabilities to provide a
satisfactory level of consistent operating profitability within the framework of
established liquidity, loan, investment, borrowing and capital policies. The
Company's Chief Financial Officer is primarily responsible for monitoring
policies and procedures that were designed to maintain an acceptable composition
of the asset-liability mix while adhering to prudent banking practices. The
overall philosophy of the management is to support loan growth primarily through
growth of core deposits. Management intends to continue to invest the largest
portion of the Company's earning assets in commercial, industrial and commercial
real estate loans.
The Company's asset-liability mix is monitored on a daily basis, with
monthly reports presented to its Asset-Liability Management Committee. The
objective of this policy is to control interest-sensitive assets and liabilities
so as to minimize the impact of substantial movements in interest rates on the
Company's bank's earnings. For further discussion, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Analysis of
Financial Condition - Interest Rate Risk Management."
14
COMPETITION
Competition among financial institutions in Florida is intense. The
Company primarily competes with the Florida operations of large out-of-state
commercial banks and Florida-based regional commercial banks. In addition, the
Company competes with other bank holding companies, state and national
commercial banks, savings and loan associations, consumer finance companies,
credit unions, securities brokerages, insurance companies, mortgage banking
companies, money market mutual funds, asset-based non-bank lenders and other
financial institutions. Many of these competitors have substantially greater
resources and lending limits, larger branch networks, and are able to offer a
broader range of products and services than the Company.
Various legislative actions in recent years have led to increased
competition among financial institutions. As a result of such actions, most
barriers to entry to the Florida banking market by out-of-state financial
institutions have been eliminated. Recent legislative and regulatory changes and
technological advances have enabled customers to conduct banking activities
without regard to geographic barriers through computer and telephone-based
banking and similar services. With the enactment of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 and other laws and regulations
affecting interstate bank expansion, financial institutions located outside of
Florida may now more easily enter the markets currently and proposed to be
served by the Company. In addition, the Gramm-Leach-Bliley Act repealed certain
sections of the Glass-Steagall Act and amended sections of the Bank Holding
Company Act. The future effect of these changes in regulations could be far
ranging in their impact on traditional banking activities. Mergers, partnerships
and acquisitions between banks and other financial and service companies could
dramatically affect competition within the Florida banking markets.
The Company cannot assure you that the United States Congress, the
Florida Legislature or the applicable bank regulatory agencies will not enact
legislation or promulgate rules that may further increase competitive pressures
on it. The Company's failure to compete effectively for deposit, loan and other
banking customers in the Company's market areas could have a material adverse
effect on the Company's financial condition and results of operations.
DATA PROCESSING
The Company currently has an agreement with Metavante Corporation
(formerly M&I Data Services) to provide core processing and certain customer
products. Metavante Corporation, a wholly owned subsidiary of Marshall & Ilsley
Corporation, provides services to more than 5,100 clients including the largest
20 banks in the United States. Management believes that Metavante will be able
to provide state-of-the-art data processing and customer service-related
processing at a competitive price to support the Company's future growth.
Management further believes the Metavante contract to be adequate for the
Company's business expansion plans.
EMPLOYEES
The Company presently employs a combined total of 219 persons on a
full-time basis and 13 persons on a part-time basis and will hire additional
persons, including additional tellers, mortgage loan processors and financial
service representatives, as needed to support the Company's growth.
NONBANKING SUBSIDIARIES
In April 2000, the Company formed FB Financial Services, Inc. for the
purposes of providing non-traditional banking and financial services to its
customers. Beginning in the first quarter of 2003, the Company began to offer
these products, primarily through its Ft. Lauderdale banking office. The
products include equities, fixed-income products, equity and bond mutual funds,
unit investment trusts, life insurance policies, and, to the extent permitted by
applicable regulations, fixed and variable annuities.
15
The Company has the following directly and wholly owned nonbanking
subsidiaries that are currently active:
o Florida Banks Statutory Trust I, a Connecticut business trust,
issued $6 million in trust preferred securities in December 2001;
o Florida Banks Capital Trust II, a Delaware business trust, issued $4
million in trust preferred securities in April 2002;
o Florida Banks Capital Trust I, a Delaware business trust, issued $4
million in trust preferred securities in June 2002;
o Florida Banks Statutory Trust II, a Connecticut business trust,
issued $3 million in trust preferred securities in December 2002;
and
o Florida Banks Statutory Trust III, a Connecticut business trust,
issued $3 million in trust preferred securities in June 2003.
The Company guarantees all of these securities.
RISK FACTORS
RISKS RELATED TO THE COMPANY'S BUSINESS
GENERAL
INTEREST RATE LEVELS SIGNIFICANTLY AFFECT THE COMPANY'S OPERATIONS
Changes in interest rates can have differing effects on various aspects
of the Company's business, particularly in the areas of net interest income and
mortgage loans originated and purchased.
NET INTEREST INCOME
The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between interest income it earns as a
result of interest paid to the Company on loans and investments and interest it
pays to third parties such as the Company's depositors and those from whom it
borrows funds. The Company is affected by changes in general interest rate
levels, which are currently at historically low levels, and by other economic
factors beyond its control. Interest rate risk can result from mismatches
between the dollar amount of repricing or maturing assets and liabilities and
from mismatches in the timing and rate at which the Company's assets and
liabilities reprice. The Company pursues an asset-liability management strategy
designed to control its risk from changes in the market interest rates, given
its current volume and mix of interest-bearing liabilities and interest-earning
assets. However, if market interest rates remain at their present levels for a
prolonged period of time or decline further, the cash flows from continued high
levels of loan prepayments would be reinvested at lower yields while the
Company's cost of funds may remain relatively flat, resulting in a decrease in
its profitability. Although management believes the Company's asset liability
management strategy will reduce the potential effects of changes in interest
rates on its results of operations, this strategy may not always be successful.
In addition, any substantial and prolonged increase in market interest rates
could reduce the Company's customers' desire to borrow money from it or limit
their ability to repay their outstanding loans by increasing their credit costs
since most of the Company's loans have adjustable interest rates that reset
16
periodically. If the Company does not adequately manage the maturities of its
deposits and loans, any substantial change in interest rates could cause its
cost of funds to increase more rapidly than the yield on its loans, thereby
decreasing the Company's net interest income. Any of these events could decrease
the Company's profitability or adversely affect its financial condition.
VOLUME OF MORTGAGE LOANS ORIGINATED AND PURCHASED
In periods of declining interest rates, such as have occurred recently,
demand for mortgage loans typically increases, particularly for mortgage loans
related to refinancing of existing loans. The refinancing of existing loans
currently comprises approximately 72% of the Company's loan volume. In periods
of rising interest rates, demand for mortgage loans typically declines. The
Company's income from its mortgage banking division would significantly decrease
following a decline in demand for mortgage loans in the eastern United States,
which is the area in which the Company originates and purchase the majority of
its loans.
THE COMPANY'S BUSINESS STRATEGY INCLUDES THE CONTINUATION OF SIGNIFICANT GROWTH
PLANS, AND IF IT FAILS TO GROW OR FAIL TO MANAGE ITS GROWTH EFFECTIVELY AS IT
PURSUES ITS STRATEGY, THE COMPANY'S RESULTS OF OPERATION COULD NEGATIVELY BE
AFFECTED.
The Company intends to continue pursuing a significant growth strategy
for its business. The Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in
significant growth stages of development. The Company cannot assure you that it
will be able to expand its market presence in its existing markets or
successfully enter new markets or that any such expansion will not adversely
affect its results of operations. Failure to manage the Company's growth
effectively could have a material adverse effect on its business, future
prospects, financial condition or results of operations, and could adversely
affect its ability to successfully implement its business strategy. Also, if the
Company's growth occurs more slowly than anticipated or declines, its operating
results could be materially adversely affected.
THE COMPANY'S LOAN PORTFOLIO GROWTH IS DEPENDENT ON INCREASED BROKERED DEPOSITS
AND JUMBO CDS.
The Company primarily relies on brokered deposits and Jumbo CDs to fund
its growing operations. The Company cannot assure you that it will be able to
continue to attract brokered deposits at current levels of growth or that it
will be able to fund its growth through Jumbo CDs without having to offer above
market rates. Jumbo CDs and brokered deposits tend to be more price sensitive
and also tend to be more likely to be withdrawn at maturity if a bank encounters
operational or regulatory difficulties. The inability to fund growth of the
Company's loan portfolio through increased brokered deposits or Jumbo CDs would
materially adversely affect its financial condition or results of operations.
BECAUSE THE COMPANY FOCUSES ON COMMERCIAL LENDING, ITS EXPOSURE TO CREDIT RISK
COULD ADVERSELY AFFECT ITS EARNINGS AND FINANCIAL CONDITION.
As of December 31, 2003, commercial loans totaled $600.6 million, or
86.9% of the Company's total loan portfolio. The Company generally invests a
greater proportion of its assets in commercial loans than other banking
institutions of its size, which typically invest a greater proportion of their
assets in loans secured by single-family residences. The Company's commercial
loans generally involve a higher degree of credit risk than residential mortgage
loans due, in part, to their larger average size and generally less readily
marketable collateral. Due to their size and the nature of their collateral,
losses incurred on a small number of commercial loans could have a material
17
adverse impact on the Company's financial condition and results of operations.
In addition, unlike residential mortgage loans, the Company's commercial loans
generally depend on the cash flow of the borrower's business to service the
debt. Furthermore, a significant portion of the Company's loans is dependent for
repayment largely on the liquidation of assets securing the loan, such as
inventory and accounts receivable. These loans carry incrementally higher risk,
since their repayment is often dependent solely on the financial performance of
the borrower's business. The Company's business plan calls for continued efforts
to increase its assets invested in commercial loans. An increase in
non-performing loans could cause operating losses, impaired liquidity and the
erosion of the Company's capital, and could have a material adverse effect on
its business, financial condition or results of operations.
IF THE VALUE OF REAL ESTATE IN THE COMPANY'S CORE FLORIDA MARKETS WERE TO
DECLINE MATERIALLY, A SIGNIFICANT PORTION OF THE COMPANY'S LOAN PORTFOLIO COULD
BECOME UNDER-COLLATERALIZED, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS
BUSINESS.
The market value of real estate, particularly real estate held for
investment, can fluctuate significantly in a short period of time as a result of
market conditions in the geographic area in which the real estate is located. If
the value of the real estate serving as collateral for the Company's loan
portfolio were to decline materially, a significant part of its loan portfolio
could become under-collateralized. As of December 31, 2003, approximately 61.0%
of the Company's loans held for investment were secured by real estate. Of the
commercial real estate loans in the Company's portfolio, approximately $185.3
million represent properties owned and occupied by businesses to which the
Company has extended loans and $239.2 million is secured by real estate held for
investment by the borrower. If the loans that are collateralized by real estate
become troubled during a time when market conditions are declining or have
declined, then the Company may not be able to realize the amount of security
that it anticipated at the time of originating the loan, which could have a
material adverse effect on its provision for loan losses and its operating
results and financial condition.
THE COMPANY'S BUSINESS IS CONCENTRATED IN FLORIDA AND A DOWNTURN IN THE ECONOMY
OF FLORIDA OR OTHER EVENTS IN FLORIDA MAY ADVERSELY AFFECT ITS BUSINESS.
Substantially all of the Company's business is located in Florida. As a
result, the Company's financial condition and results of operations may be
affected by changes in the Florida economy. A prolonged period of economic
recession or other adverse economic conditions in Florida may result in an
increase in nonpayment of the Company's loans and a decrease in collateral
value. In addition, the Company presently generates all of its commercial real
estate mortgage loans in Florida. Therefore, conditions of the Florida
commercial real estate market could strongly influence the level of the
Company's non-performing loans and its results of operations and financial
condition. Real estate values and the demand for mortgages and construction
loans are affected by, among other things, changes in general or local economic
conditions, changes in governmental rules or policies, and the availability of
loans to potential purchasers. In addition, Florida historically has been
vulnerable to certain natural disaster risks, such as floods, hurricanes and
tornadoes, which are not typically covered by the standard hazard insurance
policies maintained by borrowers. Uninsured disasters may adversely impact the
ability of borrowers to repay loans made by the Company. The existence of
adverse economic conditions, declines in real estate values or the occurrence of
such natural disasters in Florida could have a material adverse effect on the
Company's business, future prospects, financial condition or results of
operations.
IF THE COMPANY'S ALLOWANCE FOR LOAN LOSSES WERE NOT SUFFICIENT TO ABSORB ACTUAL
LOSSES, ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD BE ADVERSELY
AFFECTED.
The Company's experience in the banking industry indicates that a
portion of its loans will become delinquent, some of which may only partially be
repaid or may never be repaid at all. The Company's allowance for loan losses
was $9.1 million at December 31, 2003, which represents 1.31% of the Company's
total loan portfolio. Although management believes the Company's allowance for
loan losses is sufficient to cover actual loan losses and it has not received
any communications from regulatory agencies suggesting that the Company's
reserves are inadequate, it cannot assure you that its allowance for loan losses
will be
18
adequate to cover actual loan losses. In addition, the Company also cannot
assure you that it will not experience significant losses in its loan portfolio
from general economic conditions or other factors beyond its control. These
losses may require significant increases to the allowance for loan losses in the
future. Significant and unexpected additions to the Company's allowance for loan
losses would decrease its profitability in that period.
BANK REGULATORS MAY REQUIRE THE COMPANY TO INCREASE ITS ALLOWANCE FOR LOAN
LOSSES, WHICH COULD HAVE A NEGATIVE EFFECT ON ITS FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Federal regulators, as an integral part of their respective supervisory
functions, periodically review the Company's allowance for loan losses. The
regulatory agencies may require the Company to increase its allowance for loan
losses or to recognize further loan charge-offs based upon their judgments,
which may be different from the Company's view. In addition, regulatory agencies
may require additional reserves for loan losses that may not be required under
generally accepted accounting principles. Although the Company has not received
any requests or directions from regulatory agencies to adjust its allowance for
loan losses, any increase in the allowance for loan losses required by these
regulatory agencies could have a negative effect on its financial condition and
results of operations.
LACK OF SEASONING OF THE COMPANY'S LOAN PORTFOLIO MAY INCREASE THE RISK OF
CREDIT DEFAULTS IN THE FUTURE.
Most of the loans in the Company's loan portfolio were originated
within the past three years. In general, loans do not begin to show signs of
credit deterioration or default until they have been outstanding for period of
time, such as between twelve and twenty-four months, a process referred to as
"seasoning." As a result, a portfolio of older loans will usually behave more
predictably than a newer portfolio. Because the Company's loan portfolio is
relatively new, the current level of delinquencies and defaults may not be
representative of the level that will prevail when the portfolio becomes more
seasoned, which is likely to be somewhat higher than current levels. As of
December 31, 2003, 37.8% of the Company's loan portfolio had been originated in
the last twelve months and 13.2% of its loan portfolio had been originated in
the last twenty-four months.
UNTIL THE COMPANY'S PORTFOLIO BECOMES MORE SEASONED, IT MUST RELY IN PART ON THE
HISTORICAL LOAN LOSS EXPERIENCE OF OTHER FINANCIAL INSTITUTIONS AND THE
EXPERIENCE OF ITS MANAGEMENT IN DETERMINING ITS ALLOWANCE FOR LOAN LOSSES, AND
THIS MAY NOT BE COMPARABLE TO THE COMPANY'S LOAN PORTFOLIO.
Because most of the Company's loans in its loan portfolio were
originated relatively recently, its loan portfolio does not provide an adequate
history of loan losses for its management to rely upon in establishing its
allowance for loan losses. When determining the Company's allowance for loan
losses, it must rely to a significant extent upon other financial institutions'
histories of loan losses and their allowance for loan losses, as well as the
Company's management's estimates based on their experience in the banking
industry. The Company cannot assure you that the history of loan losses and the
reserving policies of other financial institutions and its management's judgment
will result in reserving policies that will be adequate for its business and
operations or applicable to its loan portfolio.
THE COMPANY IS DEPENDENT UPON KEY PERSONNEL, INCLUDING ITS LOCAL MANAGEMENT
TEAMS.
The Company's success depends to a significant extent upon certain key
employees, the loss of whom could have an adverse effect on its business. The
Company's key employees include Charles E. Hughes, Jr., its Chief Executive
Officer and President, T. Edwin Stinson, Jr., its Chief Financial Officer, and
Richard B. Kensler, its Chief Credit Officer. Although the Company has entered
into employment agreements with each of these employees, which contain covenants
not to compete, it cannot assure you that it will be successful in retaining
these key employees. The Company is also dependent on its local management
teams. The Company has established relationships with well-trained local senior
management and other employees. The Company's business strategy gives
significant local decision-making authority to its senior officers and managers.
The local bank presidents have entered into covenant not to compete agreements
19
with the Company. However, the Company cannot assure you that it will be able to
retain its current local senior officers or attract new qualified management
personnel. The Company's inability to attract and/or retain qualified management
personnel as it pursues its business strategy could have a material adverse
effect on its financial condition and results of operations.
THE COMPANY COMPETES FOR LOANS AND DEPOSITS WITH MANY LARGER FINANCIAL
INSTITUTIONS THAT HAVE SUBSTANTIALLY GREATER FINANCIAL RESOURCES THAN IT HAS.
Competition among financial institutions in Florida is intense. The
Company primarily competes with the Florida operations of large out-of-state
commercial banks and Florida-based regional commercial banks. In addition, the
Company competes with other bank holding companies, state and national
commercial banks, savings and loan associations, consumer finance companies,
credit unions, securities brokerages, insurance companies, mortgage banking
companies, money market mutual funds, asset-based non-bank lenders and other
financial institutions. Many of these competitors have substantially greater
financial resources, lending limits and larger branch networks than the Company,
and are able to offer a broader range of products and services than it can.
Trends toward the consolidation of the banking industry may make it more
difficult for smaller banks to compete with large national and regional banking
institutions. The Company cannot assure you that it will compete successfully
against its competitors. Failure to compete effectively for deposit, loan and
other banking customers in the Company's markets could cause it to lose market
share, slow its growth rate and may have an adverse effect on its financial
condition and results of operations.
THE COMPANY'S CONTINUED FUTURE PROFITABILITY DEPENDS TO A SIGNIFICANT EXTENT
UPON REVENUE THE COMPANY RECEIVES FROM ITS SMALL TO MEDIUM-SIZED BUSINESS
CUSTOMERS AND THEIR ABILITY TO MEET THEIR LOAN OBLIGATIONS.
At December 31, 2003, a substantial majority of the Company's loan
portfolio was comprised of loans to its small to medium-sized business
customers. For the year ended December 31, 2003, a significant portion of the
Company's total interest income was derived from small to medium-sized business
customers. The Company expects that its future profitability will depend to a
significant extent upon revenue it receives from small to medium-sized business
customers, and their ability to continue to meet existing loan obligations. As a
result, adverse economic conditions or other factors adversely affecting this
market segment may have a greater adverse effect on the Company than on other
financial institutions that have a more diversified customer base.
THE COMPANY MAY RELY ON FLORIDA BANK, N.A. TO FUND ITS OPERATIONS.
The Company has no significant independent sources of revenue. From the
Company's inception to the present, its principal sources of funds have been
capital received in its initial public offering, subsequent issuances of
preferred stock and trust preferred securities and borrowings from its line of
credit. In the future, the Company plans for cash dividends and other payments
that it receives from Florida Bank, N.A. to serve as its principal source of
funds to service indebtedness and to fund operations. The payment of dividends
by the Company's bank to it is subject to the prior approval of the OCC if the
total of all dividends declared by the bank in any calendar year exceeds the sum
of the bank's net profits for that year and its retained net profits for the
preceding two calendar years, less any required transfers to surplus. At
December 31, 2003, the amount of dividends available for Florida Bank, N.A. to
pay to the Company without OCC approval was $9.0 million. In addition, federal
20
law also prohibits a national bank from paying dividends if it is, or such
dividend payments would cause it to become, undercapitalized. The Company's
success and profitability is solely dependent on the success and profitability
of its bank.
THE COMPANY COMPETES IN AN INDUSTRY THAT CONTINUALLY EXPERIENCES TECHNOLOGICAL
CHANGE, AND THE COMPANY MAY HAVE FEWER RESOURCES THAN MANY OF ITS COMPETITORS TO
CONTINUE TO INVEST IN TECHNOLOGICAL IMPROVEMENTS.
The financial services industry is undergoing rapid technological
changes, with frequent introductions of new technology-driven products and
services. In addition to improving the ability to serve customers, the effective
use of technology increases efficiency and enables financial institutions to
reduce costs. The Company's future success will depend, in part, upon its
ability to address the needs of its customers by using technology to enhance its
product and service offering. Many of the Company's competitors have
substantially greater resources to invest in technological improvements. The
Company cannot assure you that it will be able to implement new
technology-driven products and services effectively or be successful in
marketing these products and services to its customers.
SYSTEM FAILURE OR BREACHES OF THE COMPANY'S NETWORK SECURITY COULD SUBJECT IT TO
INCREASED OPERATING COSTS AS WELL AS LITIGATION AND OTHER LIABILITIES.
The computer systems and network infrastructure the Company uses could
be vulnerable to unforeseen problems. The Company's operations are dependent
upon its ability to protect its computer equipment against damage from fire,
power loss, telecommunications failure or a similar catastrophic event. Any
damage or failure that causes an interruption in the Company's operations could
have an adverse effect on its financial condition and results of operations. In
addition, the Company's operations are dependent upon its ability to protect its
computer systems and network infrastructure against damage from physical
break-ins, security breaches and other disruptive problems. In particular, the
Company's systems may be susceptible to attacks, break-ins and viruses launched
from the Internet. Such computer break-ins and other disruptions would
jeopardize the security of information stored in and transmitted through the
Company's computer systems and network infrastructure, which may result in
significant liability to it and deter potential customers. Although the Company,
with the help of third-party service providers, intends to continue to implement
security technology and establish operational procedures to prevent such damage,
it cannot assure you that these security measures will be successful. In
addition, advances in computer capabilities, new discoveries in the field of
cryptography or other developments could result in a compromise or breach of the
algorithms that the Company and its third-party service providers use to protect
customer transaction data. A failure of such security measures could have an
adverse effect on the Company's financial condition and results of operations.
MORTGAGE DIVISION
THE COMPANY'S WHOLESALE RESIDENTIAL MORTGAGE BANKING DIVISION HAS A LIMITED
OPERATING HISTORY AND, AS A RESULT, THE FINANCIAL PERFORMANCE TO DATE OF THIS
DIVISION MAY NOT BE A RELIABLE INDICATOR OF WHETHER THIS BUSINESS DIVISION WILL
CONTINUE TO BE SUCCESSFUL.
The Company commenced its wholesale residential mortgage banking
operations in the fourth quarter of 2002. As a result, the Company has a very
limited historical basis upon which to rely for gauging the business performance
of this division under normalized operations. Also, the limited operating
history of this division has coincided with a period of historically low
interest rates, which has resulted in a significant volume of refinancing for
residential mortgage loans. In periods of rising interest rates, demand for
mortgage loans typically declines, which could cause a decrease in the income
from the Company's wholesale residential mortgage banking division. Accordingly,
21
the financial performance of this division to date may not be representative of
its long-term future performance or indicative of whether the mortgage division
will continue to be successful. A substantial portion of the Company's mortgage
loan volume is related to refinancing activities. For the year ended December
31, 2003, approximately 68% of the Company's mortgage loan volume resulted from
refinancing activities as compared to approximately 32% for purchase loans. For
the year ended December 31, 2002, approximately 83% of the Company's mortgage
loan volume resulted from refinancing activities, as compared to approximately
17% for purchased loans. As interest rates begin to increase, the volume of
refinancing will decrease substantially, resulting in a decrease in the overall
volume of the Company's mortgage bank segment and a reduction in earnings. There
is no assurance that the Company can reduce expenses as the revenue associated
with the lower volume of mortgage loans decreases, or that it can increase its
volume of purchase loans to offset the loss of volume related to refinancing
activities. Although a significant decrease in mortgage refinancing activity due
to higher interest rates would reduce the Company's earnings and could
materially adversely affect the results of its mortgage operations, management
believes this reduction will be partially offset by the benefits of improved
margins resulting from higher rates on its core loan portfolio.
ADJUSTMENTS FOR LOANS HELD FOR SALE MAY ADVERSELY AFFECT THE COMPANY'S PROFITS
In the Company's financial statements it must value, on a quarterly
basis, loans that it originates and classify as held for sale to the lower of
their cost or market value. Depending on market conditions, the Company may be
required to make adjustments that adversely affect its results of operations.
Loans held for sale totaled $66.5 million as of December 31, 2003. This amount
will vary depending on loan production volume and the Company's ability to sell
or securitize its mortgage loans in the secondary market on a timely basis.
THE COMPANY MAY EXPERIENCE LOSSES FROM THE SALE OF ITS MORTGAGE LOANS.
The sale of mortgage loans may result in a loss to the Company. Losses
may result primarily from several factors. The Company may originate or purchase
a loan at a price (i.e., interest and discount), which may be higher or lower
than it receives when the loan is sold in the secondary market. The borrower may
default on the loan while the Company is holding it for sale resulting in the
loan being sold at a greatly reduced price. The borrower may default on the loan
shortly after the sale in the secondary market, which would require the Company
to repurchase the loan and sell it at a greatly reduced price. The Company may
purchase a loan that has been fraudulently originated resulting in a total loss
on the value of the loan. The Company may issue a commitment to a borrower at a
certain interest rate and may commit to sell that same loan to an institutional
investor for delivery at a future time for a stated price. If the Company's
borrower fails to close on the loan, it may have to a pay a fee or incur an
expense for failure to deliver the loan as promised. All or any of these losses,
if they were to occur on a large enough scale, could materially adversely affect
the Company's results of operations.
THE COMPANY HAS NO CONTRACTUAL AGREEMENTS WITH THE BROKERS THAT ORIGINATE A
SIGNIFICANT AMOUNT OF ITS MORTGAGE LOANS AND THE FAILURE TO MAINTAIN ITS
RELATIONSHIPS WITH THESE BROKERS COULD NEGATIVELY AFFECT ITS VOLUME OF LOAN
ORIGINATIONS.
During the year ended December 31, 2003, brokers and correspondents
accounted for substantially all of the mortgage loans originated and purchased
by the Company. None of these brokers or correspondents is contractually
obligated to do business with the Company. Further, the Company's competitors
also have relationships with these brokers and correspondents and actively
compete with it in an effort to expand their broker and correspondent networks.
Accordingly, the Company cannot assure you that it will be successful in
maintaining its existing relationships or expanding its broker and correspondent
networks. The Company originated and purchased loans from a total of 548 brokers
and correspondents in the year ended December 31, 2003. Approximately 15.3% of
the loans the Company originated were provided to it by five of these brokers.
Accordingly, if any of these principal brokers or correspondents ceased to do
business with the Company, the volume of the Company's loan originations and
purchases, as well as its results of operations and financial condition, could
be negatively affected.
22
THE COMPANY'S MORTGAGE BUSINESS COMPETES WITH MANY SOURCES OF MORTGAGES THAT
HAVE SUBSTANTIALLY GREATER RESOURCES THAN IT.
Many sources of mortgages are available to potential borrowers today.
These sources include consumer finance companies, mortgage banking companies,
savings banks, commercial banks, credit unions, thrift institutions, credit card
issuers and insurance companies. Many of these alternative sources are
substantially larger and have considerably greater financial, technical and
marketing resources than the Company. Additionally, many financial services
organizations against which the Company competes for business have formed
national loan origination networks or have purchased home equity lenders. The
Company competes for mortgage loan business in several ways, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of loan, loan origination fees and interest rates. If
any of these competitors significantly expand their activities successfully in
the Company's target markets or if the Company fails to compete effectively with
existing competition, its business could be materially adversely affected.
AVAILABILITY OF REPORTS AND OTHER INFORMATION
The Company's corporate website is http://www.flbk.com. It makes
available on this website, free of charge, access to the Company's Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy
Statement on Schedule 14A and amendments to those materials filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as
soon as reasonably practicable after the Company electronically submits such
material to the Securities and Exchange Commission. In addition, the
Commission's website is HTTP://WWW.SEC.GOV, which makes available on its
website, free of charge, reports, proxy and information statements, and other
information regarding issuers, such as the Company, that file electronically
with the Commission. Information provided on the Company's website or on the
Commission's website is not part of this Annual Report on Form 10-K.
ITEM 2. PROPERTIES
The Company leases its main offices located at 5210 Belfort Road, Suite
310, Concourse II, Jacksonville, Florida 32256, where it occupies 6,613 square
feet. In addition, the Company leases seven banking offices and an operations
center in the following locations: Jacksonville, Tampa, Fort Lauderdale, St.
Petersburg/Clearwater, Ocala, Tampa - Operations Center and West Palm Beach. In
the fall of 2003, the Company's Fort Lauderdale office moved its operations to
leased space in downtown Fort Lauderdale. The Company owns the property for its
offices in Gainesville. The Company also leases the space for its mortgage
division business in Jacksonville.
In September 2002, the Company purchased a parcel of land for the
purpose of constructing its corporate headquarters and the Jacksonville banking
office. In July 2003, the Company sold the land to a developer for construction
of the offices and concurrently entered into a lease to occupy a portion of the
building beginning in May 2004.
The following is a listing of the Company's banking offices:
Florida Bank, N.A. - Alachua County
600 N.W. 43rd Street, Suite A
Gainesville, Florida 32607
Facilities: Owned by the Company - 7,581 sq. ft.
23
Florida Bank, N.A. - Jacksonville - Duval County
5210 Belfort Road, Suite 140
Jacksonville, Florida 32256
Facilities: Leased 6001 sq. ft.
Florida Bank, N.A. - Tampa - Hillsborough County
100 West Kennedy Boulevard
Tampa, Florida 33602
Facilities: Leased 12,573 sq. ft.
Florida Bank, N.A. - Ft. Lauderdale - Broward County
200 Las Olas Boulevard, Suites 150 & 1820
Ft. Lauderdale, Florida 33301
Facilities: Leased 8,777 sq. ft.
Florida Bank, N.A. - Pinellas County
8250 Bryan Dairy Road, Suite 150
Largo, Florida 33777
Facilities: Leased 6,400 sq. ft.
Florida Bank, N.A. - Marion County
2437 SE 17th Street, Suite 101
Ocala, Florida 34470
Facilities: Leased 9,400 sq. ft.
Florida Bank, N.A. - Marion County
Paddock Mall Night Drop Branch
3100 College Road
Ocala, Florida 34474
Facilities: Leased - No sq. ft.
Florida Bank, N.A. - Operations Center
6301 Benjamin Road, Suite 105
Tampa, Florida 33634
Facilities: Leased 11,328 sq. ft.
Florida Bank Mortgage
4815 Executive Park Court, Suite 103
Jacksonville, Florida 32216
Facilities: Leased 13,200 sq. ft.
Florida Bank, N.A. - Palm Beach County
Phillips Point
777 S. Flagler Drive, Suite 128E
West Palm Beach, Florida 33401
Facilities: Leased 4,602 sq. ft.
Additional information concerning the property owned or leased by the
Company and its subsidiaries is incorporated herein by reference from Note 4,
PREMISES AND EQUIPMENT of the Notes to the Consolidated Financial Statements.
24
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
the Bank is a party or of which any of their properties are subject, nor are
there material proceedings known to the Company or the Bank to be threatened or
pending by any governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the three months ended December 31,
2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The NASDAQ National Market
under the symbol "FLBK." The common stock began trading on The NASDAQ National
Market on July 30, 1998. The following table sets forth for the periods
indicated the quarterly high and low sales prices per share as reported by The
NASDAQ National Market. These quotations also reflect inter-dealer prices
without retail mark-ups, markdowns, or commissions.
HIGH LOW
--------------- --------------
Fiscal year ended December 31, 2003
First Quarter $10.25 $8.31
Second Quarter 12.10 9.00
Third Quarter 12.49 11.00
Fourth Quarter 16.30 11.70
Fiscal year ended December 31, 2002
First Quarter 8.90 5.90
Second Quarter 9.64 7.41
Third Quarter 9.00 7.27
Fourth Quarter 8.97 7.58
As of December 31, 2003, there were approximately 510 holders of record
of the Common Stock. Management believes that there are in excess of 3,000
beneficial holders of its Common Stock.
DIVIDENDS
The Company has never declared or paid any dividends on its common
stock. The Company currently anticipates that all of its earnings will be
retained for development of the Company's business, and does not anticipate
paying any cash dividends in the foreseeable future. Future cash dividends on
common stock, if any, will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's future
earnings, operations, capital requirements and surplus, general financial
condition, contractual restrictions, and such other factors as the Board of
Directors may deem relevant.
STOCK REPURCHASE PLANS
In September 1999, the Company's Board of Directors authorized a stock
repurchase plan covering up to ten percent (10%) of the outstanding shares of
common stock (approximately 585,000 shares). The share repurchase plan
authorizes the purchase of common shares at any price below the then current
book value per share. As of December 31, 2003, the Company had repurchased
302,200 shares for a total cost of $1.9 million or an average cost of $6.18 per
share. No shares have been repurchased under this plan during the fiscal year
ended December 31, 2003 and 2002.
25
Pursuant to the stock repurchase plan, on December 10, 2001, the
Company's Board of Directors authorized a pre-programmed stock repurchase
program pursuant to the `safe harbor' guidelines of Rule 10b-18 of the
Securities Exchange Act of 1934. This program provides for repurchase of up to
250,000 shares in the open market when the trading price of the Company's common
stock falls to $5.75 per share or less. No shares have been repurchased under
this plan during the fiscal year ended December 31, 2003.
EQUITY COMPENSATION PLANS
The Company maintains the Amended and Restated1998 Stock Option Plan
(the "1998 Plan"), the Employee Stock Purchase Plan (the "ESPP") and the Amended
and Restated Incentive Compensation Plan (the "Incentive Plan"). Only restricted
common stock is awarded under the Incentive Plan.
The following table gives information about equity awards under the
1998 Plan, the Incentive Plan and the ESPP as of December 31, 2003:
NUMBER OF SHARES TO BE WEIGHTED AVERAGE NUMBER OF SECURITIES
ISSUED UPON THE EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER EQUITY
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
------------- ------------------- ------------------- -----------------------------
Equity Compensation Plans
approved by the shareholders 16,642 (1) $10.20 (2) 221,318 (3)
Equity Compensation Plans not
approved by the shareholders 975,026 (4) $8.64 (5) 110,413 (6)
------------------- ------------------- -----------------------------
TOTALS 991,668 $8.67 331,731
- -------------
(1) Represents an aggregate of 16,642 common shares issuable upon exercise of
options under the ESPP.
(2) Represents weighted-average exercise price of outstanding options under
the ESPP.
(3) Includes 85,186 common shares and 136,132 common shares remaining
available for issuance under the ESPP and the Incentive Plan,
respectively.
(4) Represents the aggregate of common shares issuable upon exercise of
options under the 1998 Plan.
(5) Represents weighted-average exercise price of outstanding options under
the 1998 Plan.
(6) Represents common shares remaining available under the 1998 Plan.
SERIES C PREFERRED STOCK
On December 31, 2002, the Company issued 50,000 shares of Series C
preferred stock for $100.00 per share through a private placement. The Series C
preferred stock is not convertible but is redeemable only as a result of a
change in control.
DIVIDENDS
Non-cumulative cash dividends accrued at five percent annually through
December 31, 2003 and will accrue at 3.75% thereafter and are payable quarterly
in arrears.
26
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of affairs
of the Company, the holders of Series C preferred stock at the time shall
receive $100.00 per share plus an amount equal to accrued and unpaid dividends
thereon through and including the date of distribution prior to any distribution
to holders of common stock. The liquidation preference at December 31, 2003 was
approximately $5.1 million.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company
for the periods indicated. The selected financial data of the Company as of
fiscal years ended and for each of the years then ended are derived from the
financial statements of the Company, which have been audited by Deloitte &
Touche LLP, independent auditors. These selected financial data should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's financial statements and notes
thereto, and financial and other information included elsewhere herein.
Year Ended December 31,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
Summary Income Statement:
Interest income $ 43,568 $ 34,927 $ 31,380 $ 23,766 $ 11,142
Interest expense 16,891 15,584 16,548 13,711 4,696
-------- -------- -------- -------- --------
Net interest income 26,677 19,343 14,832 10,055 6,446
Provision for loan losses 2,936 3,026 1,889 1,912 1,610
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 23,741 16,317 12,943 8,143 4,836
Noninterest income 15,603 4,040 2,048 1,011 583
Noninterest expense 32,198 18,005 13,693 10,886 8,342
-------- -------- -------- -------- --------
Income (loss) before provision for
income taxes 7,146 2,352 1,298 (1,732) (2,923)
Provision (benefit) for income taxes 2,490 885 490 (652) (1,076)
-------- -------- -------- -------- --------
Net income (loss) 4,656 1,467 808 (1,080) (1,847)
-------- -------- -------- -------- --------
Preferred stock dividends 250 140 250 -- --
-------- -------- -------- -------- --------
Net income (loss) applicable to
common shares $ 4,406 $ 1,327 $ 558 $ (1,080) $ (1,847)
======== ======== ======== ======== ========
Earnings (loss) per common share:
Basic $ 0.65 $ 0.21 $ 0.10 $ (0.19) $ (0.32)
Diluted 0.62 0.20 0.10 (0.19) (0.32)
27
December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Summary Balance Sheet Data:
Investment securities $ 56,886 $ 53,652 $ 38,886 $ 36,756 $ 28,511
Loans held for investment, net of deferred loan fees 690,590 550,455 401,444 285,526 157,517
Loans held for sale 66,495 54,674 -- -- --
Earning assets 844,587 721,296 494,987 353,239 205,898
Total assets 944,461 756,066 522,323 372,797 218,163
Noninterest-bearing deposits 134,648 141,395 99,899 41,965 22,036
Total deposits 796,613 664,910 451,249 305,239 159,106
Repurchase agreements and other borrowed funds 57,555 14,576 14,210 26,035 18,279
Total shareholders' equity 57,794 52,964 46,142 38,556 39,235
Performance Ratios:
Net interest margin (1) 3.17 % 3.33 % 3.62 % 3.58 % 4.57 %
Efficiency ratio (2) 76.15 77.00 81.12 98.37 118.68
Return on average assets 0.50 0.22 0.13 (0.36) (1.07)
Return on average equity 7.98 2.79 1.30 (2.83) (3.12)
Asset Quality Ratios:
Allowance for loan losses to total loans held for investment 1.31 % 1.32 % 1.17 % 1.23 % 1.18 %
Non-performing loans to total loans held for investment 0.40 0.25 0.36 1.44 1.46
Net charge-offs to average loans held for investment 0.18 0.09 0.21 0.12 0.80
Capital and Liquidity Ratios:
Total capital to risk-weighted assets 10.95 % 11.92 % 12.70 % 12.73 % 18.19 %
Tier 1 capital to risk-weighted assets 9.73 10.78 11.63 11.58 17.29
Tier 1 capital to average assets 8.24 9.97 10.64 10.28 20.01
Average loans to average deposits 110.76 97.21 99.03 94.90 101.53
Average equity to average total assets 6.04 7.79 9.96 12.80 34.30
- ---------------
(1) Computed by dividing net interest income by average earning assets.
(2) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THE COMPANY AND ITS REPRESENTATIVES MAY FROM TIME TO TIME MAKE WRITTEN OR ORAL
STATEMENTS THAT ARE "FORWARD-LOOKING" AND PROVIDE OTHER THAN HISTORICAL
INFORMATION, INCLUDING STATEMENTS CONTAINED IN THE FORM 10-K, THE COMPANY'S
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR IN COMMUNICATIONS
TO ITS SHAREHOLDERS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO BE MATERIALLY
DIFFERENT FROM ANY RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY ANY FORWARD-LOOKING STATEMENT. THESE FACTORS INCLUDE,
AMONG OTHER THINGS, THE RISK FACTORS LISTED BELOW.
IN SOME CASES, THE COMPANY HAS IDENTIFIED FORWARD-LOOKING STATEMENTS BY SUCH
WORDS OR PHRASES AS "WILL LIKELY RESULT," "IS CONFIDENT THAT," "EXPECTS,"
"SHOULD," "COULD," "MAY," "WILL CONTINUE TO," "BELIEVES," "ANTICIPATES,"
"PREDICTS," "FORECASTS," "ESTIMATES," "PROJECTS," "POTENTIAL," "INTENDS" OR
SIMILAR EXPRESSIONS IDENTIFYING "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, INCLUDING THE NEGATIVE
OF THOSE WORDS AND PHRASES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON
MANAGEMENT'S CURRENT VIEWS AND ASSUMPTIONS REGARDING FUTURE EVENTS, FUTURE
BUSINESS CONDITIONS AND THE OUTLOOK FOR THE COMPANY BASED ON CURRENTLY AVAILABLE
INFORMATION. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN, OR IMPLIED BY, THESE STATEMENTS. THE COMPANY CAUTIONS READERS NOT
TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY
AS OF THE DATE MADE.
IN CONNECTION WITH THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, THE COMPANY IS HEREBY IDENTIFYING IMPORTANT
FACTORS THAT COULD AFFECT THE COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE
THE COMPANY'S ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY
OPINIONS OR STATEMENTS EXPRESSED WITH RESPECT TO FUTURE PERIODS IN ANY CURRENT
STATEMENTS. SEE THE SECTION ON RISK FACTORS THAT THE COMPANY HAS IDENTIFIED,
WHICH ARE DISCUSSED IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
29
EXECUTIVE SUMMARY
OVERVIEW OF OPERATING RESULTS
Florida Banks, Inc. (the "Company") was formed in 1997 to create a
statewide community banking system that would focus on the largest and fastest
growing Florida banking markets. The Company began to operate in 1998 after it
completed the acquisition of First National Bank of Tampa, which became the
Company's wholly owned banking subsidiary and was subsequently named Florida
Bank, N.A.
An important aspect of the Company's growth strategy is the ability to
service and effectively manage a large number of loans and deposit accounts in
multiple markets in Florida. Accordingly, the Company created an operations
infrastructure sufficient to support statewide lending and banking operations.
Management believes that the Company's existing infrastructure allows it to grow
its business both geographically and with respect to the size and number of loan
and deposit accounts without substantial additional capital expenditures.
The Company's historical financial results for fiscal 1998 to 2000
reflect the development of the Company in its early stages, notably in
connection with initial start-up costs and the raising and retention of capital
to fund its planned growth. In 1998 and 1999 the Company incurred significant
noninterest expenses for the start-up and infrastructure costs described above,
while revenue items gradually increased as it began to originate loans and
invest in other earning assets. In the fourth quarter of 2000, the Company
achieved profitability as these costs were spread over a larger asset base. The
Company has maintained profitability and asset growth throughout fiscal 2001,
2002 and fiscal 2003.
In the fourth quarter of fiscal 2002, the Company launched its
wholesale residential mortgage banking division that is managed as a separate
line of business. This mortgage operation significantly increased noninterest
income and noninterest expense and significantly contributed to earnings in
fiscal 2002 and 2003.
The Company's operating results have improved significantly over the
past several years. The table below shows the annual growth rate of its net
interest income, net income, assets, loans and deposits:
AS OF OR FOR AS OF OR FOR
AS OF OR FOR THE ANNUAL THE YEAR ENDED ANNUAL THE YEAR ENDED ANNUAL
YEAR ENDED GROWTH DECEMBER 31, GROWTH DECEMBER 31, GROWTH
(Dollars in Thousands) DECEMBER 31, 2003 RATE (1) 2002 RATE (1) 2001 RATE (1)
----------------- -------- ------------- -------- -------------- --------
Net interest income $26,677 37.9 $19,343 30.4 $14,832 47.5
Net income (loss)
applicable to common
shares 4,406 232.0 1,327 137.8 558 151.7
Total assets 944,461 24.9 756,066 44.8 522,323 40.1
Loans held for investment, net
of deferred fees 690,590 25.5 550,455 37.1 401,444 40.6
Deposits 796,613 19.8 664,910 47.3 451,249 47.8
- ----------
(1) The annual growth rate with respect to this data is the percentage growth
of the item in the year ended shown compared to the most recently
completed prior year end.
30
CRITICAL ACCOUNTING POLICIES
The preparation of the financial statements, on which this management's
discussion and analysis is based, requires the Company to make estimates,
which impact these financial statements. The most critical of these estimates
and accounting policies relate to the allowance for loan losses, other real
estate owned, and derivative financial instruments.
ALLOWANCE FOR LOAN LOSSES
Management carefully monitors the credit quality of the Company's loan
portfolios and makes estimates about the amount of credit losses that have been
incurred at each financial statement reporting date. This process significantly
impacts the financial statements and involves complex, subjective judgments. The
allowance is largely determined based upon the market value of the underlying
collateral. Market values of collateral are generally based upon appraisals
obtained from independent appraisers. If market conditions decline, the
allowance for loan losses would be negatively impacted resulting in a negative
impact on the Company's earnings. The allowance for loan losses is a significant
estimate that can and does change based on management's assumptions about
specific borrowers and applicable economic and environmental conditions, among
other factors.
OTHER REAL ESTATE OWNED
At December 31, 2003, the Company had two real estate properties that
were obtained through a foreclosure. The properties are recorded based upon the
market value determined by an independent appraisal less estimated selling cost.
If market conditions decline in the area in which the properties are located,
then the value of other real estate owned will be negatively impacted, resulting
in a negative impact to the Company's earnings.
DERIVATIVE INSTRUMENTS
The Company has entered into several interest swaps plus a foreign
currency swap and have provided interest rate swaps to loan participants. As a
result of these activities, the Company recognized a net loss on derivative
instruments of $19,000 for the year ended December 31, 2003. The fair market
value of these instruments is determined by quotes obtained from the related
counter parties in combination with a valuation model utilizing discounted cash
flows. The valuation of these derivative instruments is a significant estimate
that is largely affected by changes in interest rates. If interest rates
significantly increase or decrease, the value of these instruments will
significantly change, resulting in an impact on the Company's earnings.
BUSINESS SEGMENTS
Prior to October 2002, the Company had only one reporting segment. In
October 2002, the Company began operating its mortgage banking division, which
is managed as a separate business segment. Accordingly, beginning in 2002, the
Company began to report its results of operations on the following two reporting
segments: the COMMERCIAL BANK and the MORTGAGE BANK. Net interest income per
segment is determined by including interest earned on loans and investments in
that segment, less interest expense of deposits and borrowings used to support
the earning assets of that segment. For more details on the Company's business
segments, see Note 23, SEGMENT REPORTING of the Notes to the Consolidated
Financial Statements.
31
COMMERCIAL BANK
The commercial bank segment offers a wide array of financial services
to its customers, including short and long-term commercial, consumer and
mortgage loans, interest-bearing and noninterest-bearing deposit accounts,
telephone and internet banking, Automated Clearing House and Electronic Funds
Transfer, stored value cards and other specialized products and services. For
the year ended December 31, 2003, the commercial bank segment accounted for
86.6% of consolidated net interest income, 29.0% of consolidated noninterest
income, and 51.8% of consolidated noninterest expense. For the year ended
December 31, 2002, the commercial bank segment accounted for 97.9% of
consolidated net interest income, 66.5% of consolidated noninterest income, and
76.0% of consolidated noninterest expense. As this segment comprises the
majority of the Company's operations, the performance of this segment is
described in the consolidated discussion of financial condition and results of
operations below.
MORTGAGE BANK
The mortgage bank segment originates residential mortgage loans through
a network of third party mortgage brokers and sells these loans on a wholesale
basis into the secondary mortgage loan market. For the year ended December 31,
2003, the mortgage bank segment accounted for 15.3% of consolidated net interest
income, 71.0% of noninterest income, and 34.2% of noninterest expense. The
mortgage bank originated approximately $1.1 billion in mortgage loans, and sold
approximately $1.0 billion in mortgage loans, during the fiscal year ended
December 31, 2003. For the year ended December 31, 2003, this segment
contributed $4.1 million to income before income taxes, excluding any allocation
of parent company costs.
For the year ended December 31, 2002, the mortgage bank segment
accounted for 0.3% of net interest income, 33.5% of noninterest income, and 5.1%
of noninterest expense. The mortgage bank originated approximately $98 million
in mortgage loans, and sold approximately $44 million in mortgage loans, during
the fiscal year ended December