Item 1. Business.
General
Florida Banks, Inc. (the "Company") was formed on October 15, 1997 to create a statewide community banking system focusing on the largest and fastest growing markets in Florida. The Company operates through its wholly owned banking subsidiary, Florida Bank, N.A. (the "Bank"). The Company currently operates community banking offices in the Tampa, Jacksonville, Alachua County (Gainesville), Broward County (Ft. Lauderdale), Pinellas County (St Petersburg - Clearwater) and Marion County (Ocala) markets. Future business plans include entry into the markets of Orlando and the greater Palm Beach area (collectively, the "Identified Markets"). As opportunities arise, the Company may also expand into other Florida market areas with demographic characteristics similar to the Identified Markets. Within each of the Identified Markets, the Company expects to offer a broad range of traditional banking products and services, focusing primarily on small and medium-sized businesses. See "--Strategy of the Company--Market Expansion" and "--Products and Services."
The Company has a community banking approach that emphasizes responsive and personalized service to its customers. Management's expansion strategy includes attracting strong local management teams who have significant banking experience, strong community contacts and strong business development potential in the Identified Markets. Once local management teams are identified, the Company intends to establish community banking offices in each of the remaining Identified Markets. Each management team will operate one or more community banking offices within its particular market area, will have a high degree of local decision-making authority and will operate in a manner that provides responsive, personalized services similar to an independent community bank. The Company maintains centralized credit policies and procedures as well as centralized back office functions from its operations center in Tampa to support the community banking offices. Upon the Company's entry into a new market area, it undertakes a marketing campaign utilizing an officer calling program and community-based promotions. In addition, management is compensated based on profitability, growth and loan production goals, and each market area is supported by a local board of advisory directors, which is provided with financial incentives to assist in the development of banking relationships throughout the community. See "--Model `Local Community Bank.'"
Management of the Company believes that the significant consolidation in the banking industry in Florida has disrupted customer relationships as the larger regional financial institutions increasingly focus on larger corporate customers, standardized loan and deposit products and other services. Generally, these products and services are offered through less personalized delivery systems which has created a need for higher quality services to small and medium-sized businesses. In addition, consolidation of the Florida banking market has dislocated experienced and talented management personnel due to the elimination of redundant functions and the need to achieve cost savings. As a result of these factors, management believes the Company has a unique opportunity to attract and maintain its targeted banking customers and experienced management personnel within the Identified Markets.
The community banking offices within each market area are supported by centralized back office operations. From the Company's main offices located in Jacksonville and its operations center in Tampa, the Company provides a variety of support services to each of the community banking offices, including back office operations, investment portfolio management, credit administration and review, human resources, compliance, internal audit, administration, training and strategic planning. Core processing, check clearing and other similar functions are currently outsourced to major vendors. As a result, these operating strategies enable the Company to achieve cost efficiencies and to maintain consistency in policies and procedures and allow the local management teams to concentrate on developing and enhancing customer relationships.
The Company expects to establish community banking offices in new market areas, primarily by opening new branch offices of the Bank. Management will also, however, evaluate opportunities for strategic acquisitions of financial institutions in markets that are consistent with its business plan.
Strategy of the Company
General
The Company's business strategy is to create a statewide community banking system in Florida. The major elements of this strategy are to:
o Establish community banking offices in additional markets including the remaining Identified Markets as soon as local management teams are identified;
o Establish community banking offices with locally responsive management teams emphasizing a high level of personalized customer service;
o Target small and medium-sized business customers that require the attention and service that a community-oriented bank is well suited to provide;
o Provide a broad array of traditional banking products and services;
o Provide non-traditional products and services through strategic partnerships with third party vendors;
o Utilize technology to provide a higher level of customer service and enhance deposit growth;
o Maintain centralized support functions, including back office operations, credit policies and procedures, investment portfolio management, administration, compliance, internal audit, human resources and training, to maximize operating efficiencies and facilitate responsiveness to customers; and
o Outsource core processing and back room operations to increase efficiencies.
Model "Local Community Bank"
In order to achieve its expansion strategy, the Company intends to establish community banking offices in the remaining Identified Markets by opening new branch offices of the Bank. The Company may, however, accomplish its expansion strategy by acquiring existing banks within an Identified Market if an opportunity for such an acquisition becomes available. Although each community banking office is legally a branch of the Bank, the Company's business strategy envisions that community banking office(s) located within each market will operate as if it were an independent community bank.
Prior to expanding into a new market area, management of the Company first identifies an individual who will serve as the president of that particular market area, as well as those individuals who will serve on the local board of directors. The Company believes that a management team that is familiar with the needs of its community can provide higher quality personalized service to their customers. The local management teams have a significant amount of decision-making authority and are accessible to their customers. As a result of the consolidation trend in Florida, management of the Company believes there are significant opportunities to attract experienced bank managers who would like to join an institution promoting a community banking concept.
Within each market area, the community banking offices have a local board of directors that are comprised of prominent members of the community, including business leaders and professionals. It is anticipated that certain members of the local boards may serve as members of the Board of Directors of the Bank and of the Company. These directors act as representatives of the Bank within the community and are expected to promote the business development of each community banking office.
The Company encourages both the members of its local boards of directors as well as its lending officers to be active in the civic, charitable and social organizations located in the local communities. Many members of the local management team hold leadership positions in a number of community organizations, and will continue to volunteer for other positions in the future.
Upon the Company's entry into a new market area, it undertakes a marketing campaign utilizing an officer calling program, and community-based promotions and media advertising. A primary component of management compensation is based
on loan production goals. Such campaigns emphasize each community banking office's local responsiveness, local management team and special focus on personalized service.
The community banking office established in a market will typically have the following banking personnel: a President, a Senior Lender, an Associate Lending Officer, a Credit Analyst, a Branch/Operations Manager and an appropriate number of financial service managers and tellers. The number of financial service managers and tellers necessary will be dependent upon the volume of business generated by that particular community banking office. Each community banking office will also be staffed with enough administrative assistants to assist the officers effectively in their duties and to enable them to market products and services actively outside of the office.
The lending officers are primarily responsible for the sales and marketing efforts of the community banking offices. Management emphasizes relationship banking whereby each customer will be assigned to a specific officer, with other local officers serving as backup or in supporting roles. Through its experience in the Florida banking industry, management believes that the most frequent customer complaints pertain to a lack of personalized service and turnover in lending personnel, which limits the customer's ability to develop a relationship with his or her lending officer. The Company has and will continue to hire an appropriate number of lending officers necessary to facilitate the development of strong customer relationships.
Management has and will continue to offer salaries to the lending officers that are competitive with other financial institutions in each market area. The salaries of the lending officers are comprised of base compensation plus an incentive payment structure that is based upon the achievement of Bank income and certain loan production goals. Those goals will be reevaluated on an annual basis and paid annually as a percentage of base salary. Management of the Company believes that such a compensation structure provides greater motivation for participating officers.
The community banking offices are located in commercial areas in each market where the local management team determines there is the greatest potential to reach the maximum number of small and medium-sized businesses. It is expected that these community banking offices will develop in the areas surrounding office complexes and other commercial areas, but not necessarily in a market's downtown area. Such determinations will depend upon the customer demographics of a particular market area and the accessibility of a particular location to its customers. Management of the Company expects to lease facilities of approximately 4,000 to 7,000 square feet at market rates for each community banking office. The Company currently leases its facilities in the Tampa, Jacksonville, Ft. Lauderdale, St. Petersburg-Clearwater and Ocala/Marion County markets. To better serve the Alachua County (Gainesville) market, the Company has built and owns a free-standing office with traditional drive-in and lobby banking facilities. The Company plans to lease facilities in the other Identified Markets to avoid investing significant amounts of capital in property and facilities.
Loan Production Offices
In order to achieve its expansion strategy in a timely manner, the Company may establish loan production offices ("LPO") as a prelude to establishing full service community banking offices in the remaining Identified Markets and other locations. Loan production offices would provide the same lending products and services to the local market as the community banking office with substantially less overhead expense. These offices would typically be staffed with the President, Senior Lender and one administrative assistant.
By opening loan production offices, the Company can begin to generate loans during the period it is preparing to open, staff the banking office and reduce the overall cost of expansion into a new market. The same philosophy of marketing, growth, customer service and incentive based compensation would be followed in a loan production office. These offices would also establish local boards which would be responsible for promoting the growth of the office.
Market Expansion
The Company intends to expand into the largest and fastest growing communities in Florida as well as other markets within the state which offer strategic opportunities. In order to achieve its expansion strategy, the Company intends to establish community banking offices through the de novo branching of the Bank. The Company may, however, accomplish its expansion strategy by acquiring existing banks if an opportunity for such an acquisition becomes available. Once the Company has assembled a local management team and local
advisory board of directors for a particular market area, the Company intends to establish a community banking office in that market either through the opening of an LPO or a full service bank. The Company has established community banking offices in the Tampa, Jacksonville, Alachua County (Gainesville), Broward County (Ft. Lauderdale), Pinellas County (St. Petersburg - Clearwater) and Marion County (Ocala) markets. The other markets into which the Company presently intends to expand are Orlando and the greater Palm Beach area. Management has identified these markets as providing the most favorable opportunities for growth and intends to establish community banking offices within these markets as soon as practicable. Management is also considering expansion into other selected Florida metropolitan areas.
Customers
Management believes that the ongoing bank consolidation within Florida provides a community-oriented bank significant opportunities to build a successful, locally-oriented franchise. Management of the Company further believes that many of the larger financial institutions do not emphasize a high level of personalized service to the smaller commercial or individual retail customers. The Company focuses its marketing efforts on attracting small and medium-sized businesses which include: professionals, such as physicians and attorneys, service companies, manufacturing companies and commercial real estate developers. Because the Company focuses on small and medium-sized businesses, the majority of its loan portfolio is in the commercial area with an emphasis placed on commercial and industrial loans secured by real estate, accounts receivable, inventory, property, plant and equipment. However, in an effort to maintain a high level of credit quality, the Company attempts to ensure that the commercial real estate loans are made to borrowers who occupy the real estate securing the loans or where a creditworthy tenant is involved.
Although the Company has concentrated on lending to commercial businesses, management has attracted and will continue to attract consumer business. Many of its retail customers are the principals of the small and medium-sized businesses for whom a community banking office provides banking services. Management emphasizes "relationship banking" in order that each customer can identify and establish a comfort level with the bank officers within a community banking office. Management intends to further develop its retail business with individuals who appreciate a higher level of personal service, contact with their lending officer and responsive decision-making. It is expected that most of the Company's business will be developed through its lending officers and local advisory boards of directors and by pursuing an aggressive strategy of making calls on customers throughout the market area.
Products and Services
The Company currently offers a broad array of traditional banking products and services to its customers through the Bank. The Bank currently provides products and services that are substantially similar to those set forth below. For additional information with respect to the Bank's current operations, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Loans. The Bank offers a wide range of short to long-term commercial and ----- consumer loans. As of December 31, 2001, the Bank has established an internal limit for loans of up to $5.7 million to any one borrower.
Commercial. The Bank's commercial lending consists primarily of commercial and industrial loans for the financing of accounts receivable, inventory, property, plant and equipment, and other commercial assets. In making these loans, the Bank manages its credit risk by actively monitoring such measures as advance rate, cash flow, collateral value and other appropriate credit factors.
Commercial Real Estate. The Bank offers commercial real estate loans to developers of both commercial and residential properties. In making these loans, the Bank manages its credit risk by actively monitoring such measures as advance rate, cash flow, collateral value and other appropriate credit factors. See "--Operations of the Holding Company--Credit Administration."
Residential Mortgage. The Bank's real estate loans consist of residential first and second mortgage loans, residential construction loans and home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for home improvements, education and other personal expenditures. The Bank makes mortgage loans with a variety of terms, including fixed and floating to variable rates and a variety of maturities. These loans are made consistent with the Bank's appraisal policy and real estate lending policy which detail maximum loan-to-value ratios and maturities. Management believes that these loan-to-value ratios are sufficient to compensate for fluctuations in the real estate market to minimize the risk of loss. Mortgage loans that do not conform to the Bank's asset/liability mix policies are sold in the secondary markets.
Consumer Loans. The Bank's consumer loans consist primarily of installment loans to individuals for personal, family and household purposes. In evaluating these loans, the Bank requires its lending officers to review the borrower's level and stability of income, past credit history and the impact of these factors on the ability of the borrower to repay the loan in a timely manner. In addition, the Bank requires that its banking officers maintain an appropriate margin between the loan amount and collateral value. Many of the Bank's consumer loans are made to the principals of the small and medium-sized businesses for whom the community banking offices provide banking services.
Credit Card and Other Loans. The Bank has issued credit cards to certain of its customers. In determining to whom it will issue credit cards, the Bank evaluates the borrower's level and stability of income, past credit history and other factors. Finally, the Bank makes additional loans which may not be classified in one of the above categories. In making such loans, the Bank attempts to ensure that the borrower meets its credit quality standards.
Deposits. The Bank offers a broad range of interest-bearing and -------- non-interest-bearing deposit accounts, including commercial and retail checking accounts, money market accounts, individual retirement accounts, regular and premium rate interest-bearing savings accounts and certificates of deposit with a range of maturity date options. The primary sources of deposits are small and medium-sized businesses and individuals. In each market, senior management has the authority to set rates within specified parameters in order to remain competitive with other financial institutions located in the identified market. In additional to deposits within the local markets, the Bank utilizes brokered certificates of deposits to supplement its funding needs. Brokered CDs are sold by various investment firms which are paid a fee by the Bank for placing the deposit. Depending on current market conditions, the cost of brokered deposits may be slightly lower than the cost of the same deposits in the local markets. All deposits are insured by the FDIC up to the maximum amount permitted by law. In addition, the Bank has implemented a service charge fee schedule, which is competitive with other financial institutions in the community banking offices' market areas, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and other similar fees.
Specialized Consumer Services. The Bank offers specialized products and ------------------------------ services to its customers, such as lock boxes, traveler's checks and safe deposit services.
Courier Services. The Bank offers courier services to its customers. ----------------- Courier services, which the Bank may either provide directly or through a third party, permit the Bank to provide the convenience and personalized service its customers require by scheduling pick-ups of deposits. The Bank currently offers courier services only to its business customers. The Bank has received regulatory approval for and is currently offering courier services in all of its existing markets and expects to apply for approval in other market areas.
Telephone Banking. The Bank believes that there is a need within its market ----------------- niche for consumer and commercial telephone banking. These services allow customers to access detailed account information, via a toll free number 24 hours a day. Management believes that telephone banking services assist their community banking offices in retaining customers and also encourages its customers to maintain their total banking relationships with the community banking offices. This service is provided through the Bank's third-party data processor.
Internet Banking. In the fourth quarter of 1999, the Bank began offering ----------------- its "DirectNet" Internet banking product. This service allows customers to access detailed account information, execute transactions, download account information, and pay bills electronically. Management believes that this service is particularly attractive for its commercial customers since most transactions can be handled over the Internet rather than over the phone or in person. In addition, DirectNet offers the opportunity of opening deposit accounts both within and outside of the local markets. The Bank intends to expand its Internet
banking services in the future to offer additional bank services as well as non-traditional products and services. The DirectNet banking service is provided by the Bank's third-party data processor.
ACH EFT Services. The Bank offers various Automated Clearing House and ---------------- Electronic Funds Transfer services to its commercial customers. These services include payroll direct deposits, payroll tax payments, electronic payments and other funds transfers. The services are customized to meet the needs of the customer and offer an economical alternative to paper checks and drafts.
Stored Value Cards. The Bank offers stored value (prepaid debit) cards to ------------------ its commercial customers. These cards are issued primarily to facilitate incentive payments, payroll disbursements, customer loyalty programs, and as gift cards. The Bank derives income from use of the prepaid funds and fee income from issuing and servicing the cards.
Automatic Teller Machines ("ATMs"). Presently, management does not expect ---------------------------------- to establish an ATM network although certain banking offices may provide one or more ATMs in the local market. As an alternative, management has made other financial institutions' ATMs available to its customers and offers customers up to ten free ATM transactions per month.
Other Products and Services. The Bank intends to evaluate other services ---------------------------- such as trust services, brokerage and investment services, insurance, and other permissible activities. Management expects to introduce these services in the future as they become economically viable.
Operations of the Holding Company
From its main offices in Jacksonville and its operations center in Tampa, the Company provides a variety of support services for each of the community banking offices. These services include back office operations, investment portfolio management, credit administration and review, human resources, compliance, internal audit, administration, training and strategic planning.
The Company uses the Bank's facilities for its data processing, operational and back office support activities. The community banking offices utilize the operational support provided by the Bank to perform account processing, loan accounting, loan support, network administration and other functions. The Bank has developed extensive procedures for many aspects of its operations, including operating procedure manuals and audit and compliance procedures. Management believes that the Bank's existing operations and support management are capable of providing continuing operational support for all of the community banking offices.
Outsourcing. Management of the Company believes that by outsourcing certain ----------- functions of its back room operations, it can realize greater efficiencies and economies of scale. In addition, various products and services, especially technology-related services, can be offered through third-party vendors at a substantially lower cost than the costs of developing these products internally. The Bank is currently utilizing Metavante, (formerly M&I Data Services, Inc.) to provide its core data processing and certain customer products. The Company and the Bank also utilize a qualified consulting firm to perform most internal audit tasks.
Credit Administration. The Company oversees all credit operations while ---------------------- still granting local authority to each community banking office. The Company's Chief Credit Officer is primarily responsible for maintaining a quality loan portfolio and developing a strong credit culture throughout the entire organization. The Chief Credit Officer is also responsible for developing and updating the credit policy and procedures for the organization. In addition, he works closely with each lending officer at the community banking offices to ensure that the business being solicited is of the quality and structure that fits the Company's desired risk profile. Credit quality is controlled through uniform compliance to credit policy. The Company's risk-decision process is actively managed in a disciplined fashion to maintain an acceptable risk profile characterized by soundness, diversity, quality, prudence, balance and accountability.
The Company's credit approval process consists of specific authorities granted to the lending officers. Loans exceeding a particular lending officer's level of authority are reviewed and considered for approval by the next level of authority. The Chief Credit Officer has ultimate credit decision-making
authority, subject to review by the Chief Executive Officer and the Board of Directors. Risk management requires active involvement with the Company's customers and active management of the Company's portfolio. The Chief Credit Officer reviews the Company's credit policy with the local management teams at least annually but will review it more frequently if necessary. The results of these reviews are then presented to the Board of Directors. The purpose of these reviews is to attempt to ensure that the credit policy remains compatible with the short and long-term business strategies of the Company. The Chief Credit Officer will also generally require all individuals charged with risk management to reaffirm their familiarity with the credit policy annually.
Asset/Liability Management
The objective of the Bank is to manage assets and liabilities to provide a satisfactory level of consistent operating profitability within the framework of established liquidity, loan, investment, borrowing and capital policies. The Chief Financial Officer of the Company is primarily responsible for monitoring policies and procedures that are designed to maintain an acceptable composition of the asset/liability mix while adhering to prudent banking practices. The overall philosophy of management is to support asset growth primarily through growth of core deposits. Management intends to continue to invest the largest portion of the Bank's earning assets in commercial, industrial and commercial real estate loans.
The Bank's asset/liability mix is monitored on a daily basis, with monthly reports presented to the Bank's Board of Directors. The objective of this policy is to control interest-sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on the Bank's earnings. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition--Interest Rate Sensitivity and Liquidity Management."
Competition
Competition among financial institutions in Florida and the markets into which the Company may expand is intense. The Company and the Bank compete with other bank holding companies, state and national commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerages, insurance companies, mortgage banking companies, money market mutual funds, asset-based non-bank lenders and other financial institutions. Many of these competitors have substantially greater resources and lending limits, larger branch networks, and are able to offer a broader range of products and services than the Company and the Bank.
Various legislative actions in recent years have led to increased competition among financial institutions. As a result of such actions, most barriers to entry to the Florida market by out-of-state financial institutions have been eliminated. Recent legislative and regulatory changes and technological advances have enabled customers to conduct banking activities without regard to geographic barriers through computer and telephone-based banking and similar services. With the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and other laws and regulations affecting interstate bank expansion, financial institutions located outside of the State of Florida may now more easily enter the markets currently and proposed to be served by the Company and the Bank. In addition, the Gramm-Leach-Bliley Act repeals certain sections of the Glass-Steagall Act and amends sections of the Bank Holding Company Act. See "---Supervision and Regulation". The future effect of these changes in regulations could be far ranging in their impact on traditional banking activities. Mergers, partnerships and acquisitions between banks and other financial and service companies could dramatically affect competition within the Bank's markets.
There can be no assurance that the United States Congress, the Florida Legislature or the applicable bank regulatory agencies will not enact legislation or promulgate rules that may further increase competitive pressures on the Company. The Company's failure to compete effectively for deposit, loan and other banking customers in its market areas could have a material adverse effect on the Company's business, future prospects, financial condition or results of operations. See "--Strategy of the Company--Market Expansion."
Data Processing
The Bank currently has an agreement with Metavante (formerly M&I) to provide its core processing and certain customer products. The Company believes that Metavante will be able to provide state-of-the-art data processing and customer service-related processing at a competitive price to support the Company's future growth. The Company believes the Metavante contract to be
adequate for its business expansion plans. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Employees
The Company presently employs 12 persons on a full-time basis and 3 persons on a part-time basis. The Company will hire additional persons as needed to support its growth.
The Bank presently employs 108 persons on a full-time basis and 9 persons on a part-time basis, including 45 officers. The Bank will hire additional persons as needed, including additional tellers and financial service representatives. Management believes the relations with employees are generally satisfactory.
Supervision and Regulation
The Company and the Bank operate in a highly regulated environment, and their business activities will be governed by statute, regulation, and administrative policies. The business activities of the Company and the Bank are closely supervised by a number of regulatory agencies, including the Federal Reserve Board, the Office of the Comptroller of the Currency (the "OCC"), the Florida Department of Banking and Finance (the "Florida Banking Department") (to a limited extent) and the FDIC.
The Company is regulated by the Federal Reserve Board under the Federal Bank Holding Company Act, which requires every bank holding company to obtain the prior approval of the Federal Reserve Board before acquiring more than 5% of the voting shares of any bank or all or substantially all of the assets of a bank, and before merging or consolidating with another bank holding company. The Federal Reserve Board (pursuant to regulation and published policy statements) has maintained that a bank holding company must serve as a source of financial strength to its subsidiary banks. In adhering to the Federal Reserve Board policy, the Company may be required to provide financial support to a subsidiary bank at a time when, absent such Federal Reserve Board policy, the Company may not deem it advisable to provide such assistance.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the Company and any other bank holding company located in Florida is able to acquire a bank located in any other state, and a bank holding company located outside Florida can acquire any Florida-based bank, in either case subject to certain other restrictions. In addition, adequately capitalized and managed bank holding companies may consolidate their multi-state bank operations into a single bank subsidiary and may branch interstate through acquisitions unless an individual state has elected to prohibit out-of-state banks from operating interstate branches within its territory. De novo branching by an out-of-state bank is lawful only if it is expressly permitted by the laws of the host state. Entry into Florida by out-of-state financial institutions is permitted only by acquisition of existing banks. The authority of a bank to establish and operate branches within a state remains subject to applicable state branching laws.
Until March 2000, a bank holding company was generally prohibited from acquiring control of any company which was not a bank and from engaging in any business other than the business of banking or managing and controlling banks. In April 1997, the Federal Reserve Board revised and expanded the list of permissible non-banking activities in which a bank holding company could engage, however limitations continued to exist under certain laws and regulations. The Gramm-Leach-Bliley Act repeals certain regulations pertaining to Bank Holding Companies and eliminates many of the previous prohibitions. Specifically, Title I of the Gramm-Leach-Bliley Act repeals sections 20 and 32 of the Glass-Steagall Act (12 U.S.C. ss.ss. 377 and 78, respectively) and is intended to facilitate affiliations among banks, securities firms, insurance firms, and other financial companies. To further this goal, the Gramm-Leach-Bliley Act amends section 4 of the Bank Holding Company Act (12 U.S.C.ss. 1843) ("BHC Act") to authorize bank holding companies and foreign banks that qualify as "financial holding companies" to engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity. The activities of bank holding companies that are not financial holding companies would continue to be limited to activities authorized currently under the BHC Act, such as activities that the Federal Reserve Board previously has determined in regulations and orders issued under section 4(c)(8) of the BHC Act to be closely related to banking and permissible for bank holding companies.
The Gramm-Leach-Bliley Act defines a financial holding company as a bank holding company that meets certain eligibility requirements. In order for a bank holding company to become a financial holding company and be eligible to engage
in the new activities authorized under the Gramm-Leach-Bliley Act, the Act requires that all depository institutions controlled by the bank holding company be well capitalized and well managed.
To become a financial holding company, the Gramm-Leach-Bliley Act requires a bank holding company to submit to the Federal Reserve Board a declaration that the company elects to be a financial holding company and a certification that all of the depository institutions controlled by the company are well capitalized and well managed. The Act also provides that a Bank holding company's election to become a financial holding company will not be effective if the Board finds that, as of the date the company submits its election to the Board, not all of the insured depository institutions controlled by the company have achieved at least a "satisfactory" rating at the most recent examination of the institution under the Community Reinvestment Act (12 U.S.C.ss. 2903 et seq.)
The Gramm-Leach-Bliley Act grants the Federal Reserve Board discretion to impose limitations on the conduct or activities of any financial holding company that controls a depository institution that does not remain both well capitalized and well managed following the company's elections to be a financial holding company.
New rules by the Federal Reserve Board and the Office of the Comptroller of the Currency under the Gramm-Leach-Bliley Act could substantially affect the Company's future business strategies, including its products and services. On June 22, 2000, the Federal Reserve Bank of Atlanta approved the Company's application to become a Financial Holding Company. The Company currently meets the requirements of the rules, however, there can be no assurance that it will continue to meet these requirements on an ongoing basis.
The State of Florida has adopted an interstate banking statute that allows banks to branch interstate through mergers, consolidations and acquisitions. Establishment of de novo bank branches in Florida by out-of-state financial institutions is not permitted under Florida law.
The Company is also regulated by the Florida Banking Department under the Florida Banking Code, which requires every bank holding company to obtain the prior approval of the Florida Commissioner of Banking before acquiring more than 5% of the voting shares of any Florida bank or all or substantially all of the assets of a Florida bank, or before merging or consolidating with any Florida bank holding company. A bank holding company is generally prohibited from acquiring ownership or control of 5% or more of the voting shares of any Florida bank or Florida bank holding company unless the Florida bank or all Florida bank subsidiaries of the bank holding company to be acquired have been in existence and continuously operating, on the date of the acquisition, for a period of three years or more. However, approval of the Florida Banking Department is not required if the bank to be acquired or all bank subsidiaries of the Florida bank holding company to be acquired are national banks.
The Bank is also subject to the Florida banking and usury laws restricting the amount of interest which it may charge in making loans or other extensions of credit. In addition, the Bank, as a subsidiary of the Company, is subject to restrictions under federal law in dealing with the Company and other affiliates. These restrictions apply to extensions of credit to an affiliate, investments in the securities of an affiliate and the purchase of assets from an affiliate.
Loans and extensions of credit by national banks are subject to legal lending limitations. Under federal law, a national bank may grant unsecured loans and extensions of credit in an amount up to 15% of its unimpaired capital and surplus to any person if the loans and extensions of credit are not fully secured by collateral having a market value at least equal to their face amount. A national bank may grant loans and extensions of credit to such person up to an additional 10% of its unimpaired capital and surplus, provided that the transactions are fully secured by readily marketable collateral having a market value determined by reliable and continuously available price quotations, at least equal to the amount of funds outstanding. This 10% limitation is separate from, and in addition to, the 15% limitation for unsecured loans. Loans and extensions of credit may exceed the general lending limit if they qualify under one of several exceptions. Such exceptions include certain loans or extensions of credit arising from the discount of commercial or business paper, the purchase of bankers' acceptances, loans secured by documents of title, loans secured by U.S. obligations and loans to or guaranteed by the federal government. In addition, national banks with the highest supervisory ratings are currently permitted to lend up to 25 percent of capital to single borrowers for certain small business loans and for loans secured by a perfected first-lien security interest in 1 to 4 family real estate, limited to 80% of the property's appraised value.
Both the Company and the Bank are subject to regulatory capital requirements imposed by the Federal Reserve Board and the OCC. The Federal Reserve Board and the OCC have issued risk-based capital guidelines for bank holding companies and banks which make regulatory capital requirements more sensitive to differences in risk profiles of various banking organizations. The capital adequacy guidelines issued by the Federal Reserve Board are applied to bank holding companies on a consolidated basis with the banks owned by the holding company. The OCC's risk capital guidelines apply directly to national banks regardless of whether they are a subsidiary of a bank holding company. Both agencies' requirements (which are substantially similar) provide that banking organizations must have capital equivalent to at least 8% of risk-weighted assets. The risk weights assigned to assets are based primarily on credit risks. Depending upon the risk of a particular asset, it is assigned to a risk category. For example, securities with an unconditional guarantee by the United States government are assigned to the lowest risk category, while a risk weight of 50% is assigned to loans secured by owner-occupied one to four family residential mortgages, provided that certain conditions are met. The aggregate amount of assets assigned to each risk category is multiplied by the risk weight assigned to that category to determine the weighted values, which are added together to determine total risk-weighted assets. Both the Federal Reserve Board and the OCC have also implemented new minimum capital leverage ratios to be used in tandem with the risk-based guidelines in assessing the overall capital adequacy of banks and bank holding companies. Under these rules, banking institutions are required to maintain a ratio of at least 3% "Tier 1" capital to total weighted risk assets (net of goodwill). Tier 1 capital includes common shareholders equity, non-cumulative perpetual preferred stock and related surplus, and minority interests in the equity accounts of consolidated subsidiaries. Tier 2 capital includes Tier 1 capital plus certain categories of subordinated debt and intermediate-term preferred stock not included in Tier 1 capital, together with a portion of the Bank's allowance for loan losses, not to exceed 1.25% of gross risk-weighted assets.
Both the risk-based capital guidelines and the leverage ratio are minimum requirements, applicable only to top-rated banking institutions. Institutions operating at or near these levels are expected to have well-diversified risks, excellent control systems high asset quality, high liquidity, good earnings and in general, must be considered strong banking organizations, rated composite 1 under the CAMELS rating system for banks. Institutions with lower ratings and institutions with high levels of risk or experiencing or anticipating significant growth would be expected to maintain ratios 100 to 200 basis points above the stated minimums.
The OCC's guidelines provide that intangible assets are generally deducted from Tier 1 capital in calculating a bank's risk-based capital ratio. However, certain intangible assets which meet specified criteria ("qualifying intangibles") are retained as a part of Tier 1 capital. The OCC has modified the list of qualifying intangibles, currently including only purchased credit card relationships and mortgage and non-mortgage servicing assets. The OCC's guidelines formerly provided that the amount of such qualifying intangibles that may be included in Tier 1 capital was strictly limited to a maximum of 50% of total Tier 1 capital. The OCC has amended its guidelines to increase the limitation on such qualifying intangibles from 50% to 100% of Tier 1 capital, of which no more than 25% may consist of purchased credit card relationships and non-mortgage servicing assets.
In addition, the OCC has adopted rules which clarify treatment of asset sales with recourse not reported on a bank's balance sheet. Among assets affected are mortgages sold with recourse under Fannie Mae, Freddie Mac and Farmer Mac programs. The rules clarify that even though those transactions are treated as asset sales for bank Call Report purposes, those assets will still be subject to a capital charge under the risk-based capital guidelines.
The risk-based capital guidelines of the OCC, the Federal Reserve Board and the FDIC explicitly include provisions to limit a bank's exposure to declines in the economic value of its capital due to changes in interest rates to ensure that the guidelines take adequate account of interest rate risk. Interest rate risk is the adverse effect that changes in market interest rates may have on a bank's financial condition and is inherent to the business of banking. The exposure of a bank's economic value generally represents the change in the present value of its assets, less the change in the value of its liabilities, plus the change in the value of its interest rate off-balance sheet contracts. Concurrently, the agencies issued a joint policy statement to bankers, effective June 26, 1996, to provide guidance on sound practices for managing interest rate risk. In the policy statement, the agencies emphasize the necessity of adequate oversight by a bank's board of directors and senior management and of a comprehensive risk management process. The policy statement also describes the critical factors affecting the agencies' evaluations of a bank's interest rate risk when making a determination of capital adequacy. The agencies' risk assessment approach used to evaluate a bank's capital adequacy for interest rate risk relies on a combination of quantitative and qualitative factors. Banks that are found to have high levels of exposure and/or weak management practices will be directed by the agencies to take corrective action.
The Comptroller, the Federal Reserve Board and the FDIC recently added a provision to the risk-based capital guidelines that supplements and modifies the usual risk-based capital calculations to ensure that institutions with significant exposure to market risk maintain adequate capital to support that exposure. Market risk is the potential loss to an institution resulting from changes in market prices. The modifications are intended to address two types of market risk: general market risk, which includes changes in general interest rates, equity prices, exchange rates, or commodity prices, and specific market risk, which includes particular risks faced by the individual institution, such as event and default risks. The provision defines a new category of capital, Tier 3, which includes certain types of subordinated debt. The provision automatically applies only to those institutions whose trading activity, on a worldwide consolidated basis, equals either (i) 10% or more of total assets or (ii) $1 billion or more, although the agencies may apply the provision's requirements to any institution for which application of the new standard is deemed necessary or appropriate for safe banking practices. For institutions to which the modifications apply, Tier 3 capital may not be included in the calculation rendering the 8% credit risk ratio; the sum of Tier 2 and Tier 3 capital may not exceed 100% of Tier 1 capital; and Tier 3 capital is used in both the numerator and denominator of the normal risk-based capital ratio calculation to account for the estimated maximum amount that the value of all positions in the institution's trading account, as well as all foreign exchange and commodity positions, could decline within certain parameters set forth in a model defined by the statute. Furthermore, beginning no later than January 1, 1999, covered institutions must "backtest," comparing the actual net trading profit or loss for each of its most recent 250 days against the corresponding measures generated by the statutory model. Once per quarter, the institution must identify the number of times the actual net trading loss exceeded the corresponding measure and must then apply a statutory multiplication factor based on that number for the next quarter's capital charge for market risk.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"), enacted on December 19, 1991, provides for a number of reforms relating to the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions and improvement of accounting standards. One aspect of the FDICIA involves the development of a regulatory monitoring system requiring prompt action on the part of banking regulators with regard to certain classes of undercapitalized institutions. While the FDICIA does not change any of the minimum capital requirements, it directs each of the federal banking agencies to issue regulations putting the monitoring plan into effect. The FDICIA creates five "capital categories" ("well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized") which are defined in the FDICIA and which will be used to determine the severity of corrective action the appropriate regulator may take in the event an institution reaches a given level of undercapitalization. For example, an institution which becomes "undercapitalized" must submit a capital restoration plan to the appropriate regulator outlining the steps it will take to become adequately capitalized. Upon approving the plan, the regulator will monitor the institution's compliance. Before a capital restoration plan will be approved, any entity controlling a bank (i.e., holding companies) must guarantee compliance with the plan until the institution has been adequately capitalized for four consecutive calendar quarters. The liability of the holding company is limited to the lesser of five percent of the institution's total assets or the amount which is necessary to bring the institution into compliance with all capital standards. In addition, "undercapitalized" institutions will be restricted from paying management fees, dividends and other capital distributions, will be subject to certain asset growth restrictions and will be required to obtain prior approval from the appropriate regulator to open new branches or expand into new lines of business.
As an institution's capital levels decline, the extent of action to be taken by the appropriate regulator increases, restricting the types of transactions in which the institution may engage and ultimately providing for the appointment of a receiver for certain institutions deemed to be critically undercapitalized.
The FDICIA also provides that banks have to meet new safety and soundness standards. In order to comply with the FDICIA, the Federal Reserve Board, the OCC and the FDIC have adopted regulations defining operational and managerial standards relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits.
Both the capital standards and the safety and soundness standards which the FDICIA seeks to implement are designed to bolster and protect the deposit insurance fund.
In response to the directive issued under the FDICIA, the regulators have established regulations which, among other things, prescribe the capital thresholds for each of the five capital categories established by the FDICIA. The following table reflects the capital thresholds:
As a national bank, the Bank is subject to examination and review by the OCC. This examination is typically completed on-site at least every twelve months and is subject to off-site review at call. The OCC, at will, can access quarterly reports of condition, as well as such additional reports as may be required by the national banking laws.
As a bank holding company, the Company is required to file with the Federal Reserve Board an annual report of its operations at the end of each fiscal year and such additional information as the Federal Reserve Board may require pursuant to the Act. The Federal Reserve Board may also make examinations of the Company and each of its subsidiaries.
The scope of regulation and permissible activities of the Company and the Bank is subject to change by future federal and state legislation. In addition, regulators sometimes require higher capital levels on a case-by-case basis based on such factors as the risk characteristics or management of a particular institution. The Company and the Bank are not aware of any attributes of their operating plan that would cause regulators to impose higher requirements.
CERTAIN EVENTS THAT MAY AFFECT FUTURE RESULTS
Our business may be affected by a number of events, including the events discussed below. You should consider the events described below, together with all other information in this Annual Report on Form 10-K.
Expansion and Management of Growth
The Company intends to pursue an aggressive growth strategy for the foreseeable future, and future results of operations will be affected by its ability to, among other things, identify suitable markets and sites for new community banking offices, build its customer base, attract qualified bank management, negotiate agreements with acceptable terms in connection with the acquisition of existing banks and maintain adequate working capital. Failure to manage growth effectively or to attract and retain qualified personnel could have a material adverse effect on the Company's business, future prospects, financial condition or results of operations, and could adversely affect the Company's ability to implement its business strategy successfully. There can also be no assurance that the Company will be able to expand its market presence in the Bank's existing markets or successfully enter new markets or that any such expansion will not adversely affect the Company. In entering new markets, the Company will encounter competitors with greater knowledge of such local markets and greater financial and operational resources. In addition, although the Company intends to expand primarily through selective new Bank branch openings, the Company intends to regularly evaluate potential acquisition transactions that would complement or expand the Company's business. In doing so, the Company expects to compete with other potential bidders, many of which have greater financial resources than the Company.
When entering new geographic markets, the Company will need to establish relationships with additional well-trained local senior management and other employees. In order to effect the Company's business strategy, the Company will be substantially reliant upon local management, and accordingly, it will be necessary for the Company to give significant local decision-making authority to its senior officers and managers in any new bank office location. There can be no assurance that the Company will be able to establish such local affiliations and attract qualified management personnel. The process of opening new bank locations and evaluating, negotiating and integrating acquisition transactions may divert management time and resources. There can be no assurance that the Company will be able to establish any future new branch office or acquire any additional financial institutions. Moreover, there can be no assurance that the Company will be able to integrate successfully or operate profitably any newly established branch office or acquired financial institution. There can be no assurance that the Company will not incur disruption and unexpected expenses in integrating newly established operations. The Company's ability to manage growth as it pursues its expansion strategy will also be dependent upon, among other factors, its ability to (i) maintain appropriate policies, procedures and systems to ensure that the Company's loan portfolio maintains an acceptable level of credit risk and loss and (ii) manage the costs associated with expanding its infrastructure, including systems, personnel and facilities. The Company's inability to manage growth as it pursues its expansion strategy could have a material adverse effect on the Company's business, future prospects, financial condition or results of operations.
Intense Competition in the Market Areas of the Bank
Vigorous competition exists in all areas where the Bank presently engages in business. The Bank faces intense competition in its market areas from major banking and financial institutions, including many which have substantially greater resources, name recognition and market presence than the Bank. Other banks, many of which have higher legal lending limits, actively compete for loans, deposits and other services which the Bank offers. Competitors of the Bank include commercial banks, savings banks, savings and loan associations, insurance companies, asset-based non-bank lenders, finance companies, credit unions, mortgage companies and other financial institutions. Trends toward the consolidation of the banking industry may make it more difficult for smaller banks, such as the Bank, to compete with large national and regional banking institutions. The Company's failure to compete effectively for deposit, loan and other banking customers in its market areas could have a material adverse effect on the Company's business, future prospects, financial condition or results of operations.
Credit Risk
There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks resulting from changes in economic and industry conditions risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. The risk of nonpayment of loans is inherent in commercial banking. Moreover, the Bank expects to focus on loans to small and medium-sized businesses, which may result in a large concentration by the Bank of loans to such businesses. Management will attempt to minimize the Bank's credit exposure by carefully monitoring the concentration of its loans within specific industries and through prudent loan application approval procedures, but there can be no assurance that such monitoring and procedures will reduce such lending risks. Moreover, as the Company expands into new geographic markets, the Company's credit administration and loan underwriting policies will be required to adapt to the local lending and economic environments of these new markets. There is no assurance that the Company's credit administration personnel, policies and procedures will adequately adapt to such new geographic markets. At December 31, 2001, real estate loans, which included construction and commercial loans secured by real estate and residential mortgages, comprised 58.0% of the Bank's total loan portfolio, net of deferred loan fees. The Bank presently generates all of its real estate mortgage loans in Florida. Therefore, conditions of the Florida real estate market could strongly influence the level of the Bank's non-performing mortgage loans and the results of operations and financial condition of the Company and the Bank. 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 Bank. 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. The failure by the Company to adapt its credit policies and procedures on an adequate and timely basis to new markets or to provide sufficient oversight to its lending activities could result in an
increase in nonperforming assets, thereby causing operating losses, impairing liquidity and eroding capital, and could have a material adverse effect on the Company's business, future prospects, financial condition or results of operations.
Allowance for Loan Losses
Industry experience indicates that a portion of the loans of the Bank will become delinquent and a portion of the loans will require partial or entire charge off. Regardless of the underwriting criteria utilized by the Bank or its predecessors, losses may be experienced as a result of various factors beyond the Bank's control, including, among others, changes in market conditions affecting the value of collateral and problems affecting the credit of the borrower. Due to the concentration of loans in Florida, adverse economic conditions in that area could result in a decrease in the value of a significant portion of the Bank's collateral. Although management of the Bank believes that the allowance for loan losses is currently adequate to absorb losses on any existing loans that may become uncollectible, there can be no assurance that the Bank will not experience significant losses in its loan portfolios which may require significant additions to the loan loss allowance.
Effect of Interest Rates
The operations of the Bank, and of commercial banks in general, are significantly influenced by general economic conditions, by the related monetary and fiscal policies of the federal government and, in particular, the FDIC and the FRB. Deposit flows and the cost of funds are influenced by interest rates of competing investments and general market rates of interest. Lending activities are affected by the demand for commercial and residential mortgage financing and for other types of loans, which in turn is affected by the interest rates at which such financing may be offered and by other factors affecting the supply of office space and housing and the availability of funds.
At December 31, 2001, the Bank's liabilities which would reprice within the next twelve months exceeded the assets (which would re-price during that time) by approximately $7.2 million, or 1.5% of total earning assets. As a result of this difference, an increase in market interest rates is likely to result in a decrease in net interest income for the Bank because the level of interest paid on interest-bearing liabilities is likely to increase more rapidly than the level of interest earned on interest-earning assets over the coming year. Increases in the level of interest rates may reduce loan demand, and thereby the amount of loans that can be originated by the Bank and, similarly, the amount of loan and commitment fees, as well as the value of the investment securities and other interest-earning assets of the Bank. Moreover, volatility in interest rates can result in disintermediation, which is the flow of funds away from banks into direct investments, such as corporate securities and other investment vehicles which, because of the absence of federal deposit insurance, generally pay higher rates of return than bank deposits, or the transfer of funds within the bank from a lower yielding savings accounts to higher yielding certificates of deposit.
Unpredictable Economic Conditions
Commercial banks and other financial institutions are affected by economic and political conditions, both domestic and international, and by governmental monetary policies. Conditions such as inflation, recession, unemployment, high interest rates, restricted money supply, scarce natural resources, international disorders and other factors beyond the control of the Company and the Bank may adversely affect their profitability. The Company's success will significantly depend upon general economic conditions in Florida, the Bank's individual markets, and the other market areas into which the Company may expand. A prolonged economic dislocation or recession, whether in Florida generally or in any or all of the Bank's markets, could cause the Company's non-performing assets to increase, thereby causing operating losses, impaired liquidity and the erosion of capital. Such an economic dislocation or recession could result from a variety of causes, including natural disasters such as hurricanes, floods or tornadoes, or a prolonged downturn in various industries upon which the economies of Florida and/or particular markets of the Bank depend. Future adverse changes in the Florida economy or the local economies of the Identified Markets could have a material adverse effect on the Company's business, future prospects, financial condition or results of operations.
Limitation on Dividends; Reliance on the Bank
The Company has never declared or issued a dividend on its common stock. The Company has no current plans to distribute any cash dividends to its common shareholders. Earnings of the Bank, if any, are expected to be retained by the Bank to enhance its capital structure or distributed to the Company to pay its operating costs. As the Company has no independent sources of revenue, the Company's principal source of funds to pay dividends on the common stock and its other securities, to service indebtedness and to fund operations will be cash dividends and other payments that the Company receives from the Bank. The payment of dividends by the Bank to the Company is subject to certain restrictions imposed by federal banking laws, regulations and authorities.
Impact of Technological Advances; Upgrade to Company's Internal Systems
The banking industry is undergoing, and management believes will continue to undergo, technological changes with frequent introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Company's future success will depend, in part, on its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to enhance efficiencies in the Company's operations. Management believes that keeping pace with technological advances is important for the Company, as long as its emphasis on personalized services is not adversely impacted. Many of the Company's competitors will have substantially greater resources than the Company to invest in technological and infrastructure improvements. There can be no assurance that the Bank will be able to implement new technology-driven products and services effectively or to market successfully such products and services to its clients. Furthermore, the Company and the Bank outsource many of their core technology-related systems. The Bank's failure to acquire, implement or market new technology could have a material adverse effect on the Company's business, future prospects, financial condition or results of operations. The Company, therefore, is dependent upon these outside vendors to provide many of its technology-related products and services.
Anti-takeover Provisions
The Company's Second Amended and Restated Articles of Incorporation (the "Articles of Incorporation") contain provisions requiring supermajority shareholder approval to effect certain extraordinary corporate transactions with Interested Persons, which are defined in the Articles of Incorporation as those persons who own greater than 5% or more of the shares of the Company's stock entitled to vote in election of directors, unless that transaction is approved by three quarters of the Company's Board of Directors. This approval is in addition to any other required approval of the Board of Directors or shareholders. In addition, the Articles of Incorporation provide for the Board of Directors to be classified into three staggered classes, as nearly equal in number as possible. Directors are elected to serve for three-year terms. The Company's Amended and Restated By-Laws (the "By-Laws") also contain provisions which (i) authorize the Board to determine the precise number of members of the Board and authorize either the Board or the shareholders to fill vacancies on the Board, (ii) authorize any action required or permitted to be taken by the Company's shareholders to be effected by consent in writing; and (iii) establish certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at an annual or special meeting of shareholders. The issuance of preferred stock by the Company could also have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in the Company and could adversely affect the voting power or other rights of holders of the common stock. These provisions may have the effect of impeding the acquisition of control of the Company by means of a tender offer, a proxy fight, open-market purchases or otherwise, without approval of such acquisition by the Board of Directors. Certain of these provisions also make it more difficult to remove the Company's current Board of Directors and management.
Future Capital Needs
The Board of Directors may determine from time to time a need to obtain additional capital through the issuance of additional shares of common stock or other securities. Such issuance may dilute the ownership interests in the Company of the investors in the offering.
Government Regulation
The Company and the Bank operate in a highly regulated environment and are subject to supervision and regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, the OCC, the Federal Deposit Insurance Corporation, the Florida Department of Banking and Finance and the Securities and Exchange Commission (SEC). These regulatory agencies, with the exception of the SEC, are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders. The Company and the Bank are subject to future legislation and government policy, including bank deregulation and interstate expansion, which could materially adversely affect the banking industry as a whole, including the operations of the Company and the Bank. The establishment of branches or the acquisitions of banks in Identified Markets and other market areas is subject to the prior receipt of certain regulatory approvals. Failure to obtain such regulatory approvals could have a material adverse effect on the Company's business, future prospects, financial condition or results of operations.
Dependence on Key Personnel
The success of the Bank depends to a significant extent upon the performance of its respective Chairmen, President and Executive Vice Presidents, the loss of any of whom could have a materially adverse effect on the Bank. The Bank believes that its future success will depend in large part upon its ability to retain such personnel. There can be no assurance that the Bank will be successful in retaining such personnel.
Item 2.
Item 2. Properties. - -------------------
The Company's occupies 5,113 sq. ft. of leased space for its main offices located at 5210 Belfort Road, Suite 310, Concourse II, Jacksonville, Florida 32256. The Bank operates six banking offices and an operations center in the following locations:
Florida Bank, N.A. - Alachua County (1) 600 N.W. 43rd Street, Suite A Gainesville, Florida 32607 Facilities: Owned by the Bank - 7,581 sq. ft.
Florida Bank, N.A. - Jacksonville 5210 Belfort Road, Suite 140 Jacksonville, Florida 32256 Facilities: Leased 6001 sq. ft.
Florida Bank, N.A. - Tampa (2) 100 West Kennedy Boulevard Tampa, Florida 33602 Facilities: Leased 12,573 sq. ft.
Florida Bank, N.A. - Broward County 600 North Pine Island Rd., Suite 350 Plantation, Florida 33324 Facilities: Leased 4,893 sq. ft.
Florida Bank, N.A. - Pinellas County 8250 Bryan Dairy Road Suite 150 Largo, Florida 33777 Facilities: Leased 5,428 sq. ft.
Florida Bank, N.A. - Marion County 2437 SE 17th Street Suite 101 Ocala, Florida 34471 Facilities: Leased 5,485 sq. ft.
Florida Bank, N.A. - Operations Center 6301 Benjamin Road Suite 105 Tampa, Florida 33634 Facilities: Leased 5,056 sq. ft.
(1) The Alachua County Bank leased approximately 1,600 square feet of its facility to a local health and fitness center until needed for future expansion by the Bank.
(2) Approximately 5,546 sq. ft. of the Tampa Bank facility has been subleased to a local law firm. The term of the sublease expires on June 30, 2003 in conjunction with the expiration of Bank's lease.
Item 3.
Item 3. Legal Proceedings. - ------- ------------------
On November 6, 2001, a company and its owners filed a suit in the Circuit Court of Hillsborough County against the Company and two of its officers. The plaintiffs sought damages, fees and expenses purported to have been caused by the failure to consummate the Company's proposed acquisition of their business. On February 4, 2002, the plaintiffs dismissed this action in exchange for a payment of $35,000.
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.
Item 4. Submission of Matters to a Vote of Security Holders. - ------- ----------------------------------------------------
No matter was submitted during the fourth quarter ended December 31, 2001 to a vote of security holders of the Company.
PART II
Item 5.
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 sale prices per share as reported by the NASDAQ National Market. These quotations also reflect inter-dealer prices without retail mark-ups, mark-downs, or commissions.
High Low ---- ---
Fiscal year ended December 31, 2000 First Quarter $7.500 $4.875 Second Quarter 6.000 4.875 Third Quarter 6.000 5.000 Fourth Quarter 6.938 5.063
Fiscal year ended December 31, 2001 First Quarter $7.188 $5.250 Second Quarter 6.500 5.290 Third Quarter 6.400 5.550 Fourth Quarter 6.250 5.510
As of February 13, 2002, there were approximately 168 holders of record of the Common Stock. Management of the Company believes that there are in excess of 2,500 beneficial holders of its Common Stock.
The Company has never declared or paid any dividends on its common stock. The Company currently anticipates that all of its earnings will be retained for development of the Company's business, and does not anticipate paying any cash dividends in the foreseeable future. Future cash dividends on common stock, if any, will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's future earnings, operations, capital requirements and surplus, general financial condition, contractual restrictions, and such other factors as the Board of Directors may deem relevant.
In September of 1999, the Company's Board of Directors authorized a stock repurchase plan covering up to ten percent (10%) of the outstanding shares of common stock (approximately 585,000 shares). The share repurchase plan authorizes the purchase of common shares at any price below the then current book value per share. As of March 14, 2002, the Company has repurchased 302,200 shares for a total cost of $1,866,197 or an average cost of $6.18 per share. Pursuant to the stock repurchase plan, on December 10, 2001, the Company's Board of Directors authorized a pre-programmed stock repurchase program pursuant to the `safe harbor' guidelines of Rule 10b-18 of the Securities Exchange Act of 1934. This program provides for repurchase of up to 250,000 shares in the open market when the trading price of the Company's common stock falls to $5.75 per share or less. As of March 14, 2002, no shares had been repurchased under the Rule 10b-18 program.
Item 6.
Item 6. Selected Financial Data. - ------- ------------------------
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Company for the periods indicated. Florida Banks, Inc. was incorporated on October 15, 1997 for the purpose of becoming a bank holding company and acquiring First National Bank of Tampa. On August 4, 1998, the Company completed its initial public offering and its merger (the "Merger") with the Bank pursuant to which the Bank was merged with and into Florida Bank No. 1, N.A., a wholly-owned subsidiary of the Company, and renamed Florida Bank, N.A. Shareholders of the Bank received
1,375,000 shares of common stock of the Company valued at $13,750,000. The Merger was considered a reverse acquisition for accounting purposes, with the Bank identified as the accounting acquiror. The Merger has been accounted for as a purchase, but no goodwill has been recorded in the Merger and the financial statements of the Bank have become the historical financial statements of the Company.
The number of shares of common stock, the par value of common stock and per share amounts have been restated to reflect the shares exchanged in the Merger.
The selected financial data of the Company as of December 31, 2001, 2000, 1999, 1998 and 1997 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.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations. --------------
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements appear in a number of places in this Report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) potential acquisitions by the Company; (ii) trends affecting the Company's financial condition or results of operations; and (iii) the Company's business and growth strategies. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. These factors include, but are not limited to the following: (a) competitive pressure in the banking industry; (b) changes in the interest rate environment; (c) the fact that general economic conditions may be less favorable than the Company expects; and (d) changes in The Company's regulatory environment. The accompanying information contained in this Report, including, without limitation, the information set forth under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as in the Company's Securities Act filings, identifies important additional factors that could adversely affect actual results and performance. Prospective investors are urged to carefully consider such factors.
All forward-looking statements attributable to the Company are expressly qualified in their entirety by the foregoing cautionary statements.
The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company (including the notes thereto) contained elsewhere in this Report. The following discussion compares results of operations for the years ended December 31, 2001, 2000 and 1999.
The Company
The Company was incorporated on October 15, 1997 to acquire or establish a bank in Florida. Prior to the consummation of the merger with First National Bank of Tampa (the "Merger"), the Company had no operating activities. The Merger was consummated immediately prior to the closing of the Company's initial public offering (the "Offering") on August 4, 1998. After the consummation of the Merger, the Bank's shareholders owned greater than 50% of the outstanding Common Stock of the Company, excluding the issuance of the shares in connection with the Offering. Accordingly, the Merger was accounted for as if the Bank had acquired the Company, the financial statements of the Bank have become the historical financial statements of the Company and no goodwill was recorded as a result of the Merger. In addition, the operating results of the Company incurred prior to the Merger, which consisted of organizational and start-up costs, are not included in the consolidated operating results.
The Company funded its start-up and organization costs through the sale of units, consisting of Common Stock, Preferred Stock and warrants to purchase shares of Common Stock. As the Company was not formed until 1997, the term "Company" used throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" refers to the Company and the Bank for the periods ended December 31, 2001, 2000, 1999 and 1998, and for the Bank only for the period ended December 31, 1997 and prior periods. Unless otherwise indicated, the "Bank" refers to Florida Bank, N.A., formerly First National Bank of Tampa.
Summary
The Company reported net income of $808,000 and net income applicable to common shareholders of $558,000 for fiscal 2001, compared to a loss of $1.08 million in 2000. The Company had no preferred stock issued or outstanding prior to 2001. The Company's net loss for fiscal 2000 decreased $767,000 to a loss of $1.08 million or 49.6% from $1.8 million in 1999. Basic and diluted earnings (loss) per common share were $.10, ($.19), and ($.32) for the years ended December 31, 2001, 2000 and 1999. Diluted earnings per common share reflects the dilutive effect of outstanding options.
The improvement in the Company's performance to net income in 2001, compared to a net loss in 2000, was primarily attributable to an increase in net interest income and an increase in noninterest income, partially offset by an increase in noninterest expenses. Net interest income increased to $14.8 million in 2001 from $10.0 million in 2000, an increase of 47.5%. The provision for loan losses decreased by 1.2% to $1.89 million in 2001, from $1.91 million in 2000. Noninterest income increased 102.5% to $2.05 million in 2001 from $1.01 million in 2000. Noninterest expense increased to $13.7 million in 2001 from $10.9 million in 2000, an increase of 25.9%. The Company recorded a provision for income taxes in 2001 of $489,000, compared to a benefit for income taxes of ($652,000) in 2000.
The decrease in net losses from 1999 to 2000 was primarily attributable to an increase in net interest income and an increase in noninterest income, partially offset by increases in the provision for loan losses and noninterest expenses. Net interest income increased to $10.1 million in 2000 from $6.5 million in 1999, an increase of 56.0%. The provision for loan losses increased by 18.8% to $1.9 million in 2000 from $1.6 million in 1999. Noninterest income increased 73.6% to $1.01 million in 2000 from $543,000 in 1999. Noninterest expense increased to $10.9 million in 2000 from $8.3 million in 1999, an increase of 30.5%. The benefit for income taxes decreased to $652,000 in 2000 from $1.1 million in 1999, a decrease of 39.4%.
Total assets at December 31, 2001 were $522.3 million, an increase of $149.5 million, or 40.11%, over the prior year. Total loans increased 40.6% to $401.7 million at December 31, 2001, from $285.6 million at December 31, 2000. Total deposits increased $146.0 million, or 47.8%, to $451.2 million at December 31, 2001 from $305.2 million at December 31, 2000. Shareholders' equity increased to $46.1 million at December 31, 2001 from $38.6 million at December 31, 2000, an increase of 19.7%. These increases were primarily attributable to the conversion of the Marion County office to a full service branch in its first full year of operations, together with maturity of the Company's locations in its other markets and continued successful implementation of its long-term strategies, more fully discussed in Part 1, Item 1 above.
The earnings performance of the Company is reflected in the calculations of net income (loss) as a percentage of average total assets ("Return on Average Assets") and net income (loss) as a percentage of average shareholders' equity ("Return on Average Equity"). Return on Average Assets and Return on Average Equity are computed using Net Income Applicable to Common Shares. During 2001, the Return on Average Assets and Return on Average Equity were 0.13% and 1.30% respectively, compared to (0.36%) and (2.83%), respectively, for 2000. The Company's ratio of total equity to total assets decreased to 8.83% at December 31, 2001 from 10.3% at December 31, 2000, primarily as a result of growth from branch operations.
Total assets at December 31, 2000 were $372.8 million, an increase of $154.7 million, or 70.9%, over the prior year. Total loans increased 81.2% to $285.6 million at December 31, 2000, from $157.6 million at December 31, 1999. Total deposits increased $146.1 million, or 91.8%, to $305.2 million at December 31, 2000 from $159.1 million at December 31, 1999. Shareholders' equity decreased to $38.6 million at December 31, 2000 from $39.2 million at December 31, 1999, a decrease of 1.7%. These increases and decrease were primarily attributable to the opening of the Marion County branch and a full year of start-up operations for the Pinellas and Broward County branches.
The earnings performance of the Company is reflected in the calculations of net loss as a percentage of average total assets ("Return on Average Assets") and net loss as a percentage of average shareholders' equity ("Return on Average Equity"). During 2000, the Return on Average Assets and Return on Average Equity were (0.36%) and (2.83%) respectively, compared to (1.07%) and (3.12%), respectively, for 1999. The Company's ratio of total equity to total assets decreased to 10.3% at December 31, 2000 from 18.0% at December 31, 1999, primarily as a result of growth from the new branch operations.
Results of Operations
Net Interest Income
The following three tables set forth, for the periods indicated, certain information related to the Company's average balance sheet, its yields on average earning assets and its average rates on interest-bearing liabilities. Such yields and rates are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from the daily balances throughout the periods indicated.
Net interest income is the principal component of a commercial bank's income stream and represents the difference or spread between interest and certain fee income generated from earning assets and the interest expense paid on deposits and other borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities, can materially impact net interest income. The Company had no investments in tax-exempt securities during 2001, 2000 and 1999. Accordingly, no adjustment is necessary to facilitate comparisons on a taxable equivalent basis.
Net interest income increased 47.5% to $14.8 million in 2001 from $10.1 million in 2000. This increase is attributable to growth in loan volume due to new branch operations, and is partially offset by the growth in time deposits, repurchase agreements and other borrowed funds. The trend in net interest income is commonly evaluated using net interest margin and net interest spread. The net interest margin, or net yield on average earning assets, is computed by dividing fully taxable equivalent net interest income by average earning assets. The net interest margin increased 4 basis points to 3.62% in 2001 on average earning assets of $409.8 million from 3.58% in 2000 on average earning assets of $280.8 million. This increase is primarily due to the fact that the average rates paid on interest bearing liabilities decreased more than the average yield on earning assets decreased. There was an 80 basis point decrease in the average yield on earning assets to 7.66% in 2001 from 8.46% in 2000 and a 115 basis point decrease in the average rate paid on interest-bearing liabilities to 4.87% in 2001 from 6.02% in 2000. The decreased yield on earning assets was primarily the result of lower market rates on loans and investment securities, prompted by eleven decreases in the Prime Rate during 2001, from 9.5% to 4.75%. The decrease in the average cost of interest-bearing liabilities is attributable to decreases in market rates on interest-bearing demand deposits, savings and time deposits, money market accounts and other borrowed funds.
Net interest income increased 55.0% to $10.1 million in 2000 from $6.5 million in 1999. This increase is attributable to growth in loan volume due to new branch operations, and is partially offset by the growth in time deposits and repurchase agreements. The trend in net interest income is commonly evaluated using net interest margin and net interest spread. The net interest margin, or net yield on average earning assets, is computed by dividing fully taxable equivalent net interest income by average earning assets. The net interest margin decreased 99 basis points to 3.58% in 2000 on average earning assets of $280.8 million from 4.57% in 1999 on average earning assets of $142.1 million. This decrease is primarily due to the fact that the average rates paid on interest bearing liabilities increased more than the average yield on earning assets increased. There was a 59 basis point increase in the average yield on earning assets to 8.46% in 2000 from 7.87% in 1999 and a 108 basis point increase in the average rate paid on interest-bearing liabilities to 6.02% in 2000 from 4.94% in 1999. The increased yield on earning assets was primarily the result of higher market rates on loans and investment securities. The increase in the cost of interest-bearing liabilities is attributable to increases in rates on interest-bearing demand deposits, other time deposits, money market accounts and other borrowed funds.
The net interest spread increased 35 basis points to 2.79% in 2001 from 2.44% in 2000, as the yield on average earning assets decreased 80 basis points while the cost of interest-bearing liabilities decreased 115 basis points. The net interest spread measures the absolute difference between the yield on average earning assets and the rate paid on average interest-bearing sources of funds. The net interest spread eliminates the impact of noninterest-bearing funds and gives a direct perspective on the effect of market interest rate movements. This measurement allows management to evaluate the variance in market rates and adjust rates or terms as needed to maximize spreads.
The net interest spread decreased 49 basis points to 2.44% in 2000 from 2.93% in 1999, as the yield on average earning assets increased 59 basis points while the cost of interest-bearing liabilities increased 108 basis points.
During recent years, the net interest margins and net interest spreads have been under pressure, due in part to intense competition for funds with non-bank institutions and changing regulatory supervision for some financial intermediaries. The pressure was not unique to the Company and was experienced by the banking industry nationwide.
To counter potential declines in the net interest margin and the interest rate risk inherent in the balance sheet, the Company adjusts the rates and terms of its interest-bearing liabilities in response to general market rate changes and the competitive environment. The Company monitors Federal funds sold levels throughout the year, investing any funds not necessary to maintain appropriate liquidity in higher yielding investments such as short-term U.S. government and
agency securities. The Company will continue to manage its balance sheet and its interest rate risk based on changing market interest rate conditions.
Rate/Volume Analysis of Net Interest Income
The table below presents the changes in interest income and interest expense attributable to volume and rate changes between 2000 and 2001, between 1999 and 2000 and between 1998 and 1999. The effect of a change in average balance has been determined by applying the average rate in 2000, 1999 and 1998 to the change in average balance from 1999 to 2000 to 2001 and from 1998 to 1999 to 2000, respectively. The effect of change in rate has been determined by applying the average balance in 2000, 1999 and 1998 to the change in the average rate from 1999 to 2000 to 2001 and from 1998 to 1999 to 2000, respectively.
The net change attributable to the combined impact of the volume and rate has been allocated to both components in proportion to the relationship of the absolute dollar amounts of the change in each.
Provision for Loan Losses
The provision for loan losses is the expense of providing an allowance or reserve for anticipated future losses on loans. The amount of the provision for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of loan portfolio quality, the value of loan collateral and general business and economic conditions.
The provision for loan losses charged to operations in 2001 was $1.9 million, approximately the same amount as 2000. The provision for loan losses charged to operations in 1999 was $1.6 million. The increase in the provision from 1999 to 2000 was generally due to the increase in the amount of loans outstanding.
For additional information regarding provision for loan losses, charge-offs and allowance for loan losses, see "-- Financial Condition--Asset Quality."
Noninterest Income
Noninterest income consists of revenues generated from a broad range of financial services, products and activities, including fee-based services, service fees on deposit accounts and other activities. In addition, gains realized from the sale of the guaranteed portion of SBA loans, other real estate owned, and available for sale investments are included in noninterest income.
Noninterest income increased 102.5% to $2.05 million in 2001 from $1.01 million in 2000. This change resulted from an increase in the amount of service fees on deposit accounts, a gain from the sale of loans, an increase in the net gain from the sale of available for sale securities, and an increase in other noninterest income. Service fees on deposit accounts increased 73.5% to $1.2 million in 2001 from $706,000 in 2000 due to an increase in the volume of business and personal transaction accounts and increased volume in the number of services transacted for customers subject to service charges. Sale of available for sale securities resulted in a net gain of $74,000 in 2001, compared to $10,000 in 2000, an increase of 649.9%. Sale of loans resulted in a gain of $104,000 in 2001, compared to zero in 2000. Other income, which includes various recurring noninterest income items such as residential mortgage loan origination fees (broker fees) and debit card fees, increased 118.4% to $646,000 in 2001 from $296,000 in 2000.
Noninterest income increased 73.6% to $1.0 million in 2000 from $583,000 in 1999. This change resulted from an increase in the amount of service fees on deposit accounts and a net gain from the sale of available for sale securities. Service fees on deposit accounts increased 55.2% to $706,000 in 2000 from $455,000 in 1999 due to an increase in the volume of business and personal transaction accounts and increased volume in the number of services transacted for customers which are subject to service charges. Sale of available for sale securities resulted in a net gain of $10,000 in 2000, compared to a net loss of $4,000 in 1999. Other income, which includes various recurring noninterest income items such as service fee income on SBA (Small Business Administration) loans originated by the Bank, and residential mortgage loan origination fees, increased 125.6% to $296,000 in 2000 from $131,000 in 1999.
The following table presents an analysis of the noninterest income for the periods indicated with respect to each major category of noninterest income:
Noninterest Expense
Noninterest expense increased 25.8% to $13.7 million in 2001 from $10.9 million in 2000. These increases are primarily attributable to increases in personnel, occupancy, data processing and other expenses relating to conversion of the Marion County office to a full-service branch, the first full year of operation of the Marion County banking office, together with increases in
personnel and expenses related to the overall growth of the Company. Salaries and benefits increased 28.6% to $8.8 million in 2001 from $6.8 million in 2000. This increase is primarily attributable increases in the overall number of personnel, and additional employees related to the Marion County office. Occupancy and equipment expense increased 16.9% to $1.8 million in 2001 from $1.5 million in 2000, primarily as a result of the addition of the Marion County full-service branch, together with an increase in space for the Holding Company. Data processing expense increased 48.4% to $678,000 in 2001 from $457,000 in 2000, which is primarily attributable to the growth in loan and deposit transactions and the addition of new services. Other operating expenses increased 17.6% to $2.5 million in 2001 from $2.1 million in 2000. This increase is attributable primarily to an increase of $104,000 in postage and courier expenses, an increase of $37,000 in communications expense and an increase of $45,000 in legal fees. These expenses are primarily attributable to opening of new banking offices and an overall increase in the size and volume of business conducted by the Bank.
Noninterest expense increased 30.5% to $10.9 million in 2000 from $8.3 million in 1999. These increases are primarily attributable to increases in personnel, occupancy, data processing and other expenses relating to opening of the Marion County banking office, and the first full year of operation of the Broward County and Pinellas County banking offices. Salaries and benefits increased 23.8% to $6.8 million in 2000 from $5.5 million in 1999. This increase is primarily attributable increases in the overall number of personnel, and for the Marion County office. Occupancy and equipment expense increased 60.6% to $1.5 million in 2000 from $951,000 in 1999, primarily as a result of the addition of the Marion County banking office, and the first full year of operation of the Broward and Pinellas County banking offices. Data processing expense increased 72.1% to $457,000 in 2000 from $265,000 in 1999, which is primarily attributable to the growth in loan and deposit transactions and the addition of new services. Other operating expenses increased 28.6% to $2.1 million in 2000 from $1.6 million in 1999. This increase is attributable primarily to an increase of $118,000 in postage and courier expenses, an increase of $114,000 in loan closing expenses, an increase of $95,000 in communications expense and an increase of $60,000 in legal fees. These expenses are primarily attributable to opening of new banking offices and an overall increase in the size and volume of business conducted by the Bank.
The following table presents an analysis of the noninterest expense for the periods indicated with respect to each major category of noninterest expense:
Provision for Income Taxes
The provision for income taxes was $489,000 for 2001, compared to a benefit for income taxes of ($652,000) for 2000. The effective tax rate for 2001 and 2000 was 37.6%. The Company paid no income taxes during 2001 and 2000 due to the availability of net operating loss carryforwards.
The benefit for income taxes was $652,000 for 2000 compared to $1.1 million for 1999. The effective tax rate for 2000 was a benefit of 37.6% as compared to 1999, which was a benefit of 36.8%. The increase in the effective tax rate is due to the effect of a slightly higher level of nondeductible expenses in 1999 as compared to 2000. The Company paid no income taxes during 2000 and 1999 due to the availability of net operating loss carryforwards.
Certain income and expense items are recognized in different periods for financial reporting purposes and for income tax return purposes. Deferred income tax assets and liabilities reflect the differences between the values of certain assets and liabilities for financial reporting purposes and for income tax purposes, computed at the current tax rates. Deferred income tax expense is computed as the change in the Company's deferred tax assets, net of deferred tax liabilities and the valuation allowance. The Company's deferred income tax assets consist principally of net operating loss carryforwards. A deferred tax valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be realized.
First National Bank of Tampa reported losses from operations each year from its inception in 1988 through 1994. These losses primarily resulted from loan losses and high overhead costs. Management of First National Bank of Tampa was replaced during 1992 and additional capital of $1.6 million was raised through a private placement of common stock during 1993. Largely as a result of these changes, the Company became profitable in 1995. In order to reflect this fresh start, the Bank elected to restructure its capital accounts through a quasi-reorganization. A quasi-reorganization is an accounting procedure that allows a company to restructure its capital accounts to remove an accumulated deficit without undergoing a legal reorganization. Accordingly, the Bank charged against additional paid-in capital its accumulated deficit of $8.1 million at December 31, 1995. As a result of the quasi-reorganization, the future benefit from the utilization of the net operating loss carryforwards generated prior to the date of the quasi-reorganization was required to be accounted for as an increase to additional paid-in capital. Such benefits are not considered to have resulted from the Bank's results of operations subsequent to the quasi-reorganization.
As of December 31, 2001, the Company had approximately $7.1 million in net operating loss carryforwards available to reduce future taxable earnings, which resulted in net deferred tax assets of $4.0 million. These net operating loss carryforwards will expire in varying amounts in the years 2006 through 2020 unless fully utilized by the Company. Based on management's estimate of future earnings and the expiration dates of the net operating loss carry forwards as of December 31, 2001 and 2000, it was determined that it is more likely than not that the benefit of the deferred tax assets will be realized.
The utilization of the net operating loss carryforwards reduces the amount of the related deferred tax asset by the amount of such utilization at the current enacted tax rates. Other deferred tax items resulting in temporary differences in the recognition of income and expenses such as the allowance for loan losses, loan fees, accumulated depreciation and cash to accrual adjustments will fluctuate from year-to-year.
As a result of the Merger, the Company has the use of the Bank's net operating loss carryforwards. However, the portion of the Company's net operating loss carryforwards which become usable each year is limited under provisions of Section 382 of the Internal Revenue Code relating to the change in control. The annual limitation is based upon the purchase price of the Company multiplied by the applicable Long-Term Tax-Exempt Rate (as defined in the
Internal Revenue Code) at the date of acquisition. Based upon the applicable Long-Term Tax-Exempt Rate for December 1998 acquisitions, this annual limitation is approximately $700,000. Management believes it is more likely than not that the Company will produce sufficient taxable income to allow the Company to fully utilize its net operating loss carryforwards prior to their expiration.
Net Income
The Company reported net income of $808,000 and net income applicable to common shares of $558,000 in 2001, compared to a net loss of $1.08 million in 2000. The Company had no preferred stock issued or outstanding prior to 2001. The improvement in profitability was primarily attributable to an increase in net interest income and an increase in noninterest income, partially offset by an increase in noninterest expenses. Basic income (loss) per common share was $.10 for 2001 and ($.19) for 2000.
The Company reported a net loss of $1.1 million in 2000 compared to a net loss of $1.8 million in 1999. The net loss for 2000 resulted primarily from the opening of the Marion County banking office, and the first full year of operation of Broward and Pinellas County Banking offices. Basic loss per common share was $.19 for 2000 and $.32 for 1999.
Return on Average Assets and Return on Average Equity are computed using Net Income Applicable to Common Shares. Return on Average Assets for 2001 increased 49 basis points to 0.13%, compared to a deficit of (0.36%) in 2000. Return on Average Assets increased 71 basis points to a deficit of (0.36%) in 2000 from a deficit of (1.07%) in 1999. Return on Average Equity increased 413 basis points to 1.30% in 2001, compared to a deficit of (2.83%) in 2000. Return on Average Equity increased 29 basis points to a deficit of (2.83%) in 2000, compared to a deficit of (3.12%) in 1999.
Financial Condition
Earning Assets
Average earning assets increased 45.9% to $409.8 million in 2001 from $280.8 million in 2000. During 2001, loans, net of deferred loan fees, represented 83.3% of average earning assets, investment securities comprised 9.5%, and Federal funds sold and other investments comprised 7.2%. In 2000, loans, net of deferred loan fees, comprised 79.9% of average earning assets, investment securities comprised 13.3%, and Federal funds sold and other investments comprised 6.8%. The change in the mix of earning assets is primarily attributable to the growth in the Company's loan portfolio. The Company manages its securities portfolio and additional funds to minimize the effects of interest rate fluctuation risk and to provide liquidity.
In 2001, growth in earning assets was funded primarily through an increase in total deposits due to expanded branch operations.
Loan Portfolio
The Company's total loans outstanding increased 40.6% to $401.7 million as of December 31, 2001 from $285.6 million as of December 31, 2000. Loan growth for 2001 was funded primarily through growth in average deposits. The growth in the loan portfolio primarily was a result of an increase in commercial and commercial real estate loans of $92.2 million, or 35.3%, from December 31, 2000 to December 31, 2001. Average total loans in 2001 were $340.8 million, $60.9 million less than the year end balance of $401.7 million due to the increase in loan production for the third and fourth quarters of 2001. The Company engages in a full complement of lending activities, including commercial, real estate construction, real estate mortgage, home equity, installment, SBA and USDA guaranteed loans and credit card loans.
The following table presents various categories of loans contained in the Company's loan portfolio for the periods indicated, the total amount of all loans for such periods, and the percentage of total loans represented by each category for such periods:
Commercial Real Estate. Commercial real estate loans consist of loans secured by owner-occupied commercial properties, income-producing properties and construction and land development. At December 31, 2001, commercial real estate loans represented 52.4% of outstanding loan balances, compared to 55.6% at December 31, 2000. The decrease in commercial real estate loans corresponds with management's strategy to diversify risk.
Commercial. This category of loans includes loans made to individual, partnership or corporate borrowers, and obtained for a variety of business purposes. Beginning in 2001, the Company also offers insurance premium financing to commercial and professional customers. At December 31, 2001, commercial loans represented 35.6% of outstanding loan balances, compared to 35.8% at December 31, 2000. The decrease in commercial loans corresponds with management's strategy to diversify risk.
Residential Mortgage. The Company's residential mortgage loans consist of first and second mortgage loans and construction loans. At December 31, 2001, residential mortgage loans represented 5.6% of outstanding loan balances, compared to 3.4% at December 31, 2000. The Company does not actively market residential mortgages and its portfolio primarily consists of loans to the principals of other commercial relationships. Growth in this category during 2001 is primarily attributable to the large number of home mortgages driven by significant reductions in market interest rates.
Consumer. The Company's consumer loans consist primarily of installment loans to individuals for personal, family and household purposes, education and other personal expenditures. At December 31, 2001, consumer loans represented 5.7% of outstanding loan balances, compared to 4.6% at December 31, 2000. The Company does not actively market consumer loans and its portfolio primarily consists of loans to the principals of other commercial relationships. Growth in this category during 2001 is primarily attributable to maturing relationships with commercial customers, which lead to meeting of additional, non-commercial credit needs for these customers, together with the growing operations of the full-service banking facilities in Marion and Alachua Counties.
Credit Card and Other Loans. This category of loans consists of borrowings by customers using credit cards, overdrafts and overdraft protection lines. At December 31, 2001, credit card and other loans represented 0.7% of outstanding loan balances as compared to 0.6% at December 31, 2000. These credits are primarily extended to the principals of commercial customers.
The Company's only area of credit concentration is commercial and commercial real estate loans. The Company has not invested in loans to finance highly-leveraged transactions, such as leveraged buy-out transactions, as defined by the Federal Reserve Board and other regulatory agencies. In addition, the Company had no foreign loans or loans to lesser developed countries as of December 31, 2001.
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. Of the Company's target areas of lending activities, commercial loans are generally considered to have
greater risk than real estate loans or consumer loans. For this reason the Company seeks to diversify its commercial loan portfolio by industry, geographic distribution and size of credits.
From time to time, management of the Company has originated certain loans which, because they exceeded the Company's legal lending limit, were sold to other institutions. As a result of growth, the Company has an increased lending limit and has repurchased certain loan participations, thereby increasing earning assets.
The Company also purchases participations from other institutions. When the Company purchases these participations, such loans are subjected to the Company's underwriting standards as if the loan was originated by the Company. Accordingly, management of the Company does not believe that loan participations purchased from other institutions pose any greater risk of loss than loans that the Company originates.
The repayment of loans in the loan portfolio as they mature is a source of liquidity for the Company. The following table sets forth the maturity of the Company's loan portfolio within specified intervals as of December 31, 2001:
The following table presents the maturity distribution as of December 31, 2001 for loans with predetermined fixed interest rates and floating interest rates by various maturity periods:
Asset Quality
At December 31, 2001, $1.09 million of loans were accounted for on a non-accrual basis as compared to $1.5 million at December 31, 2000. Included in the non-accrual loans as of December 31, 2001 were $681,000 of SBA guaranteed loans compared to $872,000 at December 31, 2000. The SBA loans consist of the remaining balance of liquidated loans pending payment of the SBA guarantee. At December 31, 2001, no loans past due 90 days or more were still accruing interest, compared to $2.6 million at December 31, 2000. No SBA loans were past due 90 days at December 31, 2001 or December 31, 2000. At December 31, 2001, loans totaling $1.1 million were considered troubled debt restructurings, compared to zero at December 31, 2000. See "Non-performing Assets" below.
First National Bank of Tampa started its SBA lending program in August 1994. Under this program, the Company originates commercial and commercial real estate loans to borrowers that qualify for various SBA guaranteed loan products. The guaranteed portion of such loans generally ranges from 75% to 85% of the principal balance, the majority of which the Company sells in the secondary market. The majority of the Company's SBA loans provide a servicing fee of 1.00%
of the outstanding principal balance. Certain SBA loans provide servicing fees of up to 2.32% of the outstanding principal balance. The Company records the premium received upon the sale of the guaranteed portion of SBA loans as gain on sale of loans. The Company does not defer a portion of the gain on sale of such loans as a yield adjustment on the portion retained, nor does it record a retained interest, as such amounts are not considered significant. The principal balance of internally originated SBA loans in the Company's loan portfolio at December 31, 2000 totaled $2.9 million, including the SBA guaranteed portion of $2.2 million, compared to an outstanding balance of $3.2 million at December 31, 2000, including the SBA guaranteed portion of $3.0 million. At December 31, 2001, the principal balance of the guaranteed portion of SBA loans cumulatively sold in the secondary market since the commencement of the SBA program totaled $4.0 million.
The Company generally repurchases the SBA guaranteed portion of loans in default to fulfill the requirements of the SBA guarantee or in certain cases, when it is determined to be in the Company's best interest, to facilitate the liquidation of the loans. The guaranteed portion of the SBA loans are repurchased at the current principal balance plus accrued interest through the date of repurchase. Upon liquidation, in most cases, the Company is entitled to recover up to 120 days of accrued interest from the SBA on the guaranteed portion of the loan paid. In certain cases, the Company has the option of charging-off the non-SBA guaranteed portion of the loan retained by the Company and requesting payment of the SBA guaranteed portion. In such cases, the Company will have determined that insufficient collateral exists, or the cost of liquidating the business exceeds the anticipated proceeds to the Company. In all liquidations, the Company seeks the advice of the SBA and submits a liquidation plan for approval prior to the commencement of liquidation proceedings. The payment of any guarantee by the SBA is dependent upon the Company following the prescribed SBA procedures and maintaining complete documentation on the loan and any liquidation services. The Company did not repurchase any guaranteed portion of SBA loans repurchased during 2001 and 2000.
The Company substantially reduced SBA lending operations in 1998 due to the cost of maintaining this specialized lending practice and due to recent charge-offs in the unguaranteed portion of the SBA loans that were retained by the Bank.
As of December 31, 2001, there were no loans other than those disclosed above that were classified for regulatory purposes as doubtful or substandard which (i) represented or resulted from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (ii) represented material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. There are no loans other than those disclosed above where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with loan repayment terms.
Allowance for Loan Losses and Net Charge-Offs
The allowance for loan losses represents management's estimate of an amount adequate to provide for potential losses inherent in the loan portfolio. In its evaluation of the allowance and its adequacy, management considers loan growth, changes in the composition of the loan portfolio, the loan charge-off experience, the amount of past due and non-performing loans, current and anticipated economic conditions, underlying collateral values securing loans and other factors. While it is the Company's policy to provide for a full reserve or charge-off for loans in the period in which a loss is considered probable, there are additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, management's judgment as to the adequacy of the allowance is necessarily approximate and imprecise.
Net charge-offs were $708,000, or .21% of average loans outstanding in 2001 as compared to net charge-offs of $259,000 or .12% of average loans outstanding in 2000. The allowance for loan losses increased 33.7% to $4.7 million or 1.17% of loans outstanding at December 31, 2001 from $3.5 million or 1.23% of loans outstanding at December 31, 2001. The allowance for loan losses as a multiple of net loans charged-off was 6.62x for the year ended December 31, 2001 as compared to 13.6x for the year ended December 31, 2001. The decrease in the provision from 2000 to 2001 was generally due to the mix and performance of loans outstanding. Also, the balance of the allowance for loan losses at December 31, 2000 contained a provision for certain loans charged off in 2001. See "Asset Quality" below.
Net charge-offs were $259,000, or .12% of average loans outstanding in 2000 as compared to net charge-offs of $825,000 or .80% of average loans outstanding in 1999. The allowance for loan losses increased 89.0% to $3.5 million or 1.23% of loans outstanding at December 31, 2000 from $1.9 million or 1.18% of loans outstanding at December 31, 1999. The allowance for loan losses as a multiple of net loans charged-off was 13.6x for the year ended December 31, 2000 as compared to 2.3x for the year ended December 31, 1999. The increase in the provision from 1999 to 2000 was generally due to increases in the amount of loans outstanding.
In assessing the adequacy of the allowance, management relies predominantly on its ongoing review of the loan portfolio, which is undertaken to ascertain whether there are probable losses which must be charged off and to assess the
risk characteristics of the portfolio in the aggregate. This review encompasses the judgment of management, utilizing internal loan rating standards, guidelines provided by the banking regulatory authorities governing the Company, and their loan portfolio reviews as part of the company examination process.
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114") requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The Company adopted SFAS 114 on January 1, 1995. At December 31, 2001, the Company held impaired loans as defined by SFAS 114 of $1.2 million (none of such balance is guaranteed by the SBA) for which specific allocations of $295,000 have been established within the allowance for loan losses which have been measured based upon the fair value of the collateral. Such reserve is allocated between commercial and commercial real estate. A portion of these impaired loans have also been classified by the Company as loans past due over 90 days ($65,000) and $1.1 million have been classified as troubled debt restructurings. At December 31, 2000, the Company held impaired loans as defined by SFAS 114 of $946,000 ($147,000 of such balance is guaranteed by the SBA) for which specific allocations of $329,000 have been established within the allowance for loan losses which have been measured based upon the fair value of the collateral. Such reserve is allocated between commercial and commercial real estate. A portion of these impaired loans have also been classified by the Company as loans past due over 90 days ($603,000) and none have been classified as troubled debt restructurings. Interest income on such impaired loans during 2000 and 1999 was not significant.
As shown in the table below, management determined that as of December 31, 2001, 50.0% of the allowance for loan losses was related to commercial real estate loans, 38.6% was related to commercial loans, 5.1% was related to residential mortgage loans, 5.6% was related to consumer loans, 0.6% to credit card and other loans and 0.0% was unallocated. As shown in the table below, management determined that as of December 31, 2000, 55.6% of the allowance for loan losses was related to commercial real estate loans, 50.6% was related to commercial loans, 9.0% was related to residential mortgage loans, 2.0% was related to consumer loans, 1.4% to credit card and other loans and 0.0% was unallocated. The fluctuations in the allocation of the allowance for loan losses between 2001 and 2000 is attributed to the establishment of specific allowances totaling $295,000 at December 31,2001, and the changing mix of the loan portfolio as previously discussed.
For the periods indicated, the allowance was allocated as follows:
In considering the adequacy of the Company's allowance for loan losses, management has focused on the fact that as of December 31, 2001, 52.4% of outstanding loans are in the category of commercial real estate and 35.6% are in commercial loans. Commercial loans are generally considered by management to have greater risk than other categories of loans in the Company's loan portfolio. Generally, such loans are secured by accounts receivable, marketable securities, deposit accounts, equipment and other fixed assets which reduces the risk of loss present in commercial loans. Commercial real estate loans inherently have a higher risk due to depreciation of the facilities, limited purposes of the facilities and the effect of general economic conditions. The Company attempts to limit this risk by generally lending no more than 75% of the appraised value of the property held as collateral.
Residential mortgage loans constituted 5.6% of outstanding loans at December 31, 2001. The majority of the loans in this category represent residential real estate mortgages where the amount of the original loan generally does not exceed 80% of the appraised value of the collateral. These loans are considered by management to be well secured with a low risk of loss.
At December 31, 2001, the majority of the Company's consumer loans were secured by collateral, primarily consisting of automobiles, boats and other personal property. Management believes that these loans involve less risk than commercial loans, due to the marketability and nature of the underlying collateral.
An internal credit review of the loan portfolio is conducted on an ongoing basis. The purpose of this review is to assess the risk in the loan portfolio and to determine the adequacy of the allowance for loan losses. The review includes analyses of historical performance, the level of nonconforming and rated loans, loan volume and activity, review of loan files and consideration of economic conditions and other pertinent information. In addition to the above credit review, the Company's primary regulator, the OCC, also conducts a periodic examination of the loan portfolio. Upon completion, the OCC presents its report of examination to the Board and management of the Company. Information provided from these reviews, together with other information provided by the management of the Company and other information known to members of the Board, are utilized by the Board to monitor the loan portfolio and the allowance for loan losses. Specifically, the Board attempts to identify risks inherent in the loan portfolio (e.g., problem loans, probable problem loans and loans to be charged off), assess the overall quality and collectability of the loan portfolio, and determine amounts of the allowance for loan losses and the provision for loan losses to be reported based on the results of their review. The Credit Policy Committee of the Board must approve all loans in excess of the matrix levels established by the Bank's credit policy, and any exceptions to the credit policy. This committee also reviews all criticized or classified assets in excess of $100,000, reviews trends in the Bank's loan portfolio, and reviews all reports on credit quality prepared by Bank personnel or the OCC.
Non-performing Assets
At December 31, 2001, $1.09 million of loans were accounted for on a nonaccrual basis as compared to $1.5 million at December 31, 2000. The remaining balance of non-accrual loans which is guaranteed by the SBA was $655,000 at December 31, 2001 compared to $872,000 at December 31, 2000. At December 31, 2000, no loans were accruing interest and were contractually past due 90 days or more as to principal and interest payments, compared to six loans totaling $2.6 million which were accruing interest and were contractually past due 90 days or more at December 31, 2000. No loans past due 90 days at December 31, 2001 or December 31, 2000 were guaranteed by the SBA.
At December 31, 2001, loans totaling $1.1 million were considered troubled debt restructurings. At December 31, 2000, no loans were considered troubled debt restructurings.
At December 31, 2001, the Company held one item categorized as Other Real Estate Owned, with a carrying value of $2.8 million, compared to no Other Real Estate Owned at December 31, 2000.
The Company has policies, procedures and underwriting guidelines intended to assist in maintaining the overall quality of its loan portfolio. The Company monitors its delinquency levels for any adverse trends. Non-performing assets consist of loans on non-accrual status, real estate and other assets acquired in partial or full satisfaction of loan obligations and loans that are past due 90 days or more.
The Company's policy generally is to place a loan on nonaccrual status when it is contractually past due 90 days or more as to payment of principal or interest. A loan may be placed on nonaccrual status at an earlier date when concerns exist as to the ultimate collections of principal or interest. At the time a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed and charged against current earnings. Recognition of any interest after a loan has been placed on nonaccrual is accounted for on a cash basis. Loans that are contractually past due 90 days or more which are well secured or guaranteed by financially responsible third parties and are in the process of collection generally are not placed on nonaccrual status.
Investment Portfolio
Total investment securities increased $2.1 million, or 5.8% to $38.9 million in 2001 from $36.8 million in 2000. At December 31, 2001, investment securities available for sale totaled $34.0 million compared to $32.1 million at December 31, 2000. At December 31, 2001, investment securities available for sale had net unrealized gains of $392,000, comprised of gross unrealized losses of $135,000 and gross unrealized gains of $526,000. At December 31, 2000, investment securities available for sale had net unrealized gains of $22,000, comprised of gross unrealized losses of $249,000 and gross unrealized gains of $271,000. Investment securities held to maturity at December 31, 2001 were $2.9 million, compared to $3.5 million at December 31, 2000. The carrying value of held to maturity securities represents cost. Average investment securities as a percentage of average earning assets decreased to 9.6% in 2000 from 13.2% in 2000.
The Company invests primarily in direct obligations of the United States, obligations guaranteed as to principal and interest by the United States, obligations of agencies of the United States and mortgage-backed securities. In addition, the Company enters into Federal funds transactions with its principal correspondent banks, and acts as a net seller of such funds. The sale of Federal funds amounts to a short-term loan from the Company to another company.
Proceeds from sales, paydowns and maturities of available for sale and held to maturity investment securities increased 49.6% to $20.0 million in 2001 from $13.3 million in 2000, with a resulting net gain on sales of $74,000 in 2001 and $10,000 in 2000. Such proceeds are generally used to reinvest in additional investment securities.
Other investments include Independent Bankers Bank stock, Federal Reserve Bank stock and Federal Home Loan Bank stock that are required for the Company to be a member of and to conduct business with such institutions. Dividends on such investments are determined by the institutions and is payable semi-annually or quarterly. Other investments increased 63.1% to $2.1 million at December 31, 2001 from $1.3 million at December 31, 2000. Other investments are carried at cost as such investments do not have readily determinable fair values.
At December 31, 2001, the investment portfolio included $18.7 million in CMOs compared to $12.7 million at December 31, 2000. At December 31, 2001, the investment portfolio included $10.0 million in other mortgage-backed securities compared to $16.1 million at December 31, 2000. The following table presents, for the periods indicated, the carrying amount of the Company's investment securities, including mortgage-backed securities.
The Company utilizes its available for sale investment securities, along with cash and Federal funds sold, to meet its liquidity needs.
As of December 31, 2000, $28.7 million, or 73.8%, of the investment securities portfolio consisted of mortgage-backed securities compared to $28.9 million, or 78.5%, of the investment securities portfolio as of December 31, 2000. During 2002, approximately $817,000 of mortgage-backed securities will mature.
In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), the Company has segregated its investment securities portfolio into securities held to maturity and those available for sale. Investments held to maturity are those for which management has both the ability and intent to hold to maturity and are carried at amortized cost. At December 31, 2001, investments classified as held to maturity totaled $2.87 million at amortized cost and $2.93 million at fair value. At December 31, 2000, investments classified as held to maturity totaled $3.4 million at amortized cost and $3.5 million at fair value. Investments available for sale are securities identified by management as securities which may be sold prior to maturity in response to various factors including liquidity needs, capital compliance, changes in interest rates or portfolio risk management. The available for sale investment securities provide interest income and serve as a source of liquidity for the Company. These securities are carried at fair market value, with unrealized gains and losses, net of taxes, reported as other comprehensive income, a separate component of shareholders' equity.
Investment securities with a carrying value of approximately $27.3 million and $21.0 million at December 31, 2001 and 2000, respectively, were pledged to secure deposits of public funds, repurchase agreements and certain other deposits as provided by law.
The maturities and weighted average yields of debt securities at December 31, 2001 are presented in the following table using primarily the stated maturities, excluding the effects of prepayments.
As of December 31, 2001, except for the U.S. Government and its agencies, there was not any issuer within the investment portfolio who represented 10% or more of the shareholders' equity.
Deposits and Short-Term Borrowings
The Company's average deposits increased 46.8%, or $109.4 million, to $343.0 million during 2001 from $236.5 million during 2000. This growth is attributed to a 59.1% increase in average noninterest-bearing demand deposits, a 67.0% increase in average interest-bearing transaction account deposits, a 43.3% increase in average savings deposits, a 43.1% increase in average certificates of deposits of $100,000 or more and a 43.8% increase in other time deposits.
Average noninterest-bearing demand deposits increased 59.1% to $44.0 million in 2001 from $27.7 million in 2000. As a percentage of average total deposits, these deposits increased to 12.9% in 2001 from 11.7% in 2000. This increase is primarily attributable to large business deposits retained by the Company during 2001. The year-end balance of noninterest-bearing demand deposits increased 138.1 % to $99.9 million at December 31, 2001, from $42.0 million at December 31, 2000. This increase is primarily attributable to the movement of large business deposits from customer repurchase agreements to demand deposits on the last day of the year as part of their intangible tax strategy.
Average interest-bearing demand deposits increased 67.0% to $19.4 million in 2001 from $11.6 million in 2000. Average savings deposits increased 43.3% to $54.6 million in 2001, from $41.0 million in 2000. The increase in average savings deposits is primarily attributable to an increase in the Company's prime investments account, which is a specialized savings account featuring rates that are tiered according to account balance. This account pays interest at rates above those paid on interest-bearing demand deposits and regular savings deposits. Average money market deposits increased 236.8% to $4.5 million for 2001 from $1.8 million in 2000. The year-end balance of money market deposits increased 126.9% to $6.3 million at December 31, 2001 from $2.8 million at December 31, 2000. This increase is attributable primarily to increases in commercial deposit balances. Average balances of certificates of deposit of $100,000 or more increased 43.1% to $134.6 million for 2001 from $94.0 million in 2000. The year-end balance of certificates of deposit of $100,000 or more increased 66.1% to $194.0 million at December 31, 2001 from $116.8 million at December 31, 2000. The average balance for other time deposits increased 43.8% to $89.3 million for 2001 from $62.1 million in 2000. The year-end balance of other time deposits decreased 20.9% to $67.5 million at December 31, 2001 compared to $85.3 million at December 31, 2000. The increases in overall deposit balances results primarily from new deposits obtained as a result of growth in existing markets.
The following table presents, for the periods indicated, the average amount of and average rate paid on each of the following deposit categories:
Interest-bearing deposits, including certificates of deposit, will continue to be a major source of funding for the Company. During 2001, aggregate average balances of time deposits of $100,000 and over comprised 39.1% of total deposits
compared to 40.3% for the prior year. The average rate on certificates of deposit of $100,000 or more decreased to 5.46% in 2001, compared to 6.53% in 2000.
Average short-term borrowings increased 88.5% to $41.2 million in 2001 from $21.8 million in 2000. Short-term borrowings consist of treasury tax and loan deposits, Federal Home Loan Bank borrowings, and repurchase agreements with certain customers. In addition, the Company has securities sold under agreements to repurchase, which are classified as secured borrowings. Average treasury tax and loan deposits decreased 5.6% to $1.7 million in 2001 from $1.8 million in 2000. Average Federal Home Loan Bank borrowings increased 18.0% to $5.9 million in 2001 compared with $5.0 million during 2000. Average repurchase agreements with customers increased 124.0% to $33.6 million in 2001 from $15.0 million in 2000. The treasury tax and loan deposits provide an additional liquidity resource to the Company as such funds are invested in Federal funds sold. The repurchase agreements represent an accommodation to certain customers that seek to maximize their return on liquid assets. The Company invests these funds primarily in securities purchased under agreements to resell at the nationally quoted rate for such investments. The year-end balance of repurchase agreements decreased 81.4% to $4.5 million at December 31, 2001 from $18.8 million at December 31, 2000.
The following table presents the components of short-term borrowings and average rates for such borrowing for the years ended December 31, 2001, 2000 and 1999:
Capital Resources
Shareholders' equity increased 19.7% to $46.1 million in 2001 from $38.6 million in 2000. This increase results primarily from proceeds of $6.96 million from issuance of Series B Preferred Stock, net income for the year of $808,000, and an increase in accumulated other comprehensive income to $244,000 at December 31, 2001 from $14,000 at December 31, 2000, representing a change in the unrealized gain/loss (after tax effect) on available for sale securities, partially offset by the repurchase of 61,100 shares of its stock totaling $359,000, and preferred stock dividends declared in the amount of $127,000 . The Company's income from operations is sufficient to meet its capital commitments.
Average shareholders' equity as a percentage of total average assets is one measure used to determine capital strength. The ratio of average shareholders' equity to average assets decreased to 10.0% in 2001 from 12.8% in 2000.
In 2001, the Company issued 102,283 shares of Series B Preferred stock for $68.00 per share through a private placement. Each share of preferred stock is convertible into ten shares of the Company's common stock at a price of $6.80 per share (subject to adjustment for stock splits, stock dividends, etc.). The preferred stock will be automatically converted to common stock upon the following events: 1) change in control; 2) if the average closing price of the Company's common stock for any 30 consecutive trading day period is at or above $8.00 per share; or 3) the consummation of an underwritten public offering at a price of $8.00 per share or greater of the Company's common stock. Cumulative cash dividends accrue at seven percent annually and are payable quarterly in arrears.
In the event of any liquidation, dissolution or winding up of the affairs of the Company, the holders of Series B preferred stock at that time shall receive $68.00 per share plus an amount equal to accrued and unpaid dividends thereon through and including the date of distribution prior to any distribution to holders of common stock. The liquidation preference at December 31, 2001 was $7,077,962.
On December 18, 2001, the Company participated in pooled trust preferred offering. By issuing trust preferred securities, the Company is able to increase its Tier 1 capital for regulatory purposes without diluting the ownership interests of its common stockholders. Also, dividends paid on trust preferred securities are deductible as interest expense for income tax purposes. In connection with this transaction, the Company, through its wholly-owned subsidiary trust, Florida Banks Statutory Trust I (the "Trust"), issued $6,000,000 in trust preferred securities. The Trust also issued $186,000 of common securities to the Company and used the total proceeds to purchase $6,186,000 in 30-year subordinated debentures of the Company. The preferred securities pay dividends at an initial rate of 5.60% through March 17, 2002. The rate then becomes a floating rate based on 3-month LIBOR plus 3.60%, adjusted quarterly after each dividend payment date. Dividend payment dates are March 18, June 18, September 18 and December 18 of each year. These preferred securities include a par call option beginning December 18, 2006. The subordinated debentures are the sole asset of the Trust and are eliminated, along with the related income statement effects, in the Company's consolidated financial statements. The net proceeds from the pooled trust preferred offering included in the calculation of Tier 1 capital for regulatory purposes are $5,819,000.
The various federal bank regulators, including the Federal Reserve and the FDIC, have risk-based capital requirements for assessing bank capital adequacy. These standards define capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risks. Capital is classified into two tiers. For banks, Tier 1 or "core" capital consists of common shareholders' equity, qualifying perpetual preferred stock and minority interests in the common equity accounts of consolidated subsidiaries, reduced by goodwill, other intangible assets and certain investments in other corporations ("Tier 1 Capital"). Tier 2 Capital consists of Tier 1 Capital, as well as a limited amount of the allowance for possible loan losses, certain hybrid capital instruments (such as mandatory convertible debt), subordinated and perpetual debt and preferred stock which does not qualify for inclusion in Tier 1 capital ("Tier 2 Capital").
At December 31, 1994, a risk-based capital measure and a minimum ratio standard was fully phased in, with a minimum total capital ratio of 8.00% and Tier 1 Capital equal to at least 50% of total capital. The Federal Reserve also has a minimum leverage ratio of Tier 1 Capital to total assets of 3.00%. The 3.00% Tier 1 Capital to total assets ratio constitutes the leverage standard for bank holding companies and BIF(Bank Insurance Fund)-insured state-chartered non-member banks, and will be used in conjunction with the risk-based ratio in determining the overall capital adequacy of banking organizations. The FDIC has similar capital requirements for BIF-insured state-chartered non-member banks.
The Federal Reserve and the FDIC have emphasized that the foregoing standards are supervisory minimums and that an institution would be permitted to maintain such minimum levels of capital only if it were rated a composite "one" under the regulatory rating systems for bank holding companies and banks. All other bank holding companies are required to maintain a leverage ratio of 3.00% plus at least 1.00% to 2.00% of additional capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The Federal Reserve continues to consider a "tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 Capital less all intangibles, to total average assets less all intangibles.
The Company's Tier 1 (to risk-weighted assets) capital ratio decreased to 11.63% in 2001 from 11.58% in 2000. The Company's total risk based capital ratio decreased to 12.70% in 2001 from 12.73% in 2000. These ratios exceed the minimum capital adequacy guidelines imposed by regulatory authorities on banks and bank holding companies, which are 4.00% for Tier 1 capital and 8.00% for total risk based capital. The ratios also exceed the minimum guidelines imposed by the same regulatory authorities to be considered "well-capitalized," which are 6.00% of Tier 1 capital and 10.00% for total risk based capital.
The Company does not have any commitments which it believes would reduce its capital to levels inconsistent with the regulatory definition of a "well capitalized" financial institution. See "Business--Supervision and Regulation."
Liquidity Management and Interest Rate Sensitivity
Liquidity is the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Company's ability to meet the day-to-day cash flow requirements of its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. We know of no reason why liquidity will be a problem.
The primary function of asset/liability management is not only to assure adequate liquidity in order for the Company to meet the needs of its customer base, but to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that the Company can profitably deploy its assets. Both assets and liabilities are considered sources of liquidity funding and both are, therefore, monitored on a daily basis.
The following table presents, as of December 31, 2001, a summary of the Company's future contractual obligations. Each of these categories is further described in the Company's consolidated financial statements, which are incorporated herein by reference.
The following table presents, as of December 31, 2001, a summary of the Company's commercial commitments. These categories are further described in the Company's consolidated financial statements, which are incorporated herein by reference.
Interest rate sensitivity is a function of the repricing characteristics of the Company's portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments. Interest rate sensitivity management focuses on repricing relationships of assets and liabilities during periods of changes in market interest rates. Interest rate sensitivity is managed with a view to maintaining a mix of assets and liabilities that respond to changes in interest rates within an acceptable time frame, thereby managing the effect of interest rate movements on net interest income. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities that are subject to repricing at various time horizons. The differences are interest sensitivity gaps: less than one month, one to three months, four to twelve months, one to five years, over five years and on a cumulative basis.
The following table shows interest sensitivity gaps for these different intervals as of December 31, 2001. The effects of derivative instruments (foreign currency swap and interest rate swaps) have been incorporated into this table by revising the repricing intervals of the underlying assets and liabilities so they are shown repricing at the next strike date, where that differed from their contractual repricing interval.
In the current interest rate environment, the liquidity and maturity structure of the Company's assets and liabilities are important to the maintenance of acceptable performance levels. A decreasing rate environment negatively impacts earnings as the Company's rate-sensitive assets generally reprice faster than its rate-sensitive liabilities. Conversely, in an increasing rate environment, earnings are positively impacted. This asset/liability mismatch in pricing is referred to as gap ratio and is measured as rate sensitive assets divided by rate sensitive liabilities for a defined time period. A gap ratio of 1.00 means that assets and liabilities are perfectly matched as to repricing. Management has specified gap ratio guidelines for a one year time horizon of between .60 and 1.20 years for the Company. At December 31, 2001, the Company had cumulative gap ratios of approximately 1.44 for the three month time period and .96 for the one year period ending December 31, 2002. Thus, over the next twelve months, rate-sensitive liabilities will reprice slightly faster than rate-sensitive assets. However, relative repricing frequency of rate-sensitive assets vs. rate-sensitive liabilities is not the sole indicator of changes in net interest income in a fluctuating interest rate environment, as further discussed below.
The allocations used for the interest rate sensitivity report above were based on the contractual maturity (or next repricing opportunity, whichever comes sooner) for the loans and deposits and the duration schedules for the investment securities. All interest-bearing demand deposits were allocated to the one month or less category with the exception of personal savings deposit accounts which were allocated to the noninterest sensitive category because the rate paid on these accounts typically is not sensitive to movements in market interest rates. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the net interest spread between an asset and its supporting liability can vary significantly while the timing of repricing for both the asset and the liability remain the same, thus impacting net interest income. This is referred to as basis risk and, generally, relates to the possibility that the repricing characteristics of short-term assets tied to the Company's prime lending rate are different from those of short-term funding sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity analysis report. Prepayments may have significant effects on the Company's net interest margin. Because of these factors and in a static test, interest sensitivity gap reports may not provide a complete assessment of the Company's exposure to changes in interest rates. Management utilizes computerized interest rate simulation analysis to determine the Company's interest rate sensitivity. The table above indicates the Company is in a liability sensitive gap position for the first year, then moves into a matched position through the five year period. Overall, due to the factors cited, current simulations results indicate a relatively low sensitivity to parallel shifts in interest rates. A liability sensitive company will generally benefit from a falling interest rate environment as the cost of interest-bearing liabilities falls faster than the yields on interest-bearing assets, thus creating a widening of the net interest margin. Conversely, an asset sensitive company will benefit from a rising interest rate environment as the yields on earning assets rise faster than the costs of interest-bearing liabilities. Management also evaluates economic conditions, the pattern of market interest rates and competition to determine the appropriate mix and repricing characteristics of assets and liabilities required to produce a targeted net interest margin.
In addition to the gap analysis, management uses rate shock simulation to measure the rate sensitivity of its balance sheet. Rate shock simulation is a modeling technique used to estimate the impact of changes in rates on the Company's net interest margin. The Company measures its interest rate risk by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of plus or minus 200 basis points over a period of twelve months. The Company's most recent rate shock simulation analysis, which was performed as of December 31, 2001, indicates that a 200 basis point decrease in rates would cause a decrease in net interest income of $1.2 million over the next twelve-month period. Conversely, a 200 basis point increase in rates would cause an increase in net interest income of $1.0 million over a twelve-month period.
This simulation is based on management's assumption as to the effect of interest rate changes on assets and liabilities and assumes a parallel shift of the yield curve. It also includes certain assumptions about the future pricing of loans and deposits in response to changes in interest rates. Further, it assumes that delinquency rates would not change as a result of changes in interest rates although there can be no assurance that this will be the case. While this simulation is a useful measure of the Company's sensitivity to changing rates, it is not a forecast of the future results and is based on many assumptions that, if changed, could cause a different outcome. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to net interest income than indicated above.
Generally, the Company's commercial and commercial real estate loans are indexed to the prime rate. A portion of the Company's investments in mortgage-backed securities are indexed to U.S. Treasury rates. Accordingly, any changes in these indices will have a direct impact on the Company's interest income. Certificates of deposit are generally priced based upon current market conditions which include changes in the overall interest rate environment and pricing of such deposits by competitors. Other interest-bearing deposits are not priced against any particular index, but rather, reflect changes in the overall interest rate environment. Repurchase agreements are indexed to the nationally quoted repurchase agreement rate and other borrowed funds are indexed to U.S. Treasury rates. The Company adjusts the rates and terms of its loans and interest-bearing liabilities in response to changes in the interest rate environment.
The Company does not currently engage in trading activities.
The Company adopted Statement of Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, on January 1, 2001. This statement requires all derivative instruments to be recorded on the balance sheet at fair value.
The following instruments qualify as derivatives as defined by SFAS No. 133:
Interest rate swap agreements consist of an agreement which qualifies for the fair value method of hedge accounting under the "short-cut method" based on the guidelines established by SFAS No. 133, and several loan participation agreements accounted for as derivatives which do not qualify for hedge accounting. The Company recognized a gain of approximately $50,000 during the year ended December 31, 2001 as a result of changes in the fair value of those loan participation agreements. Additionally, the Company entered into a foreign currency swap agreement during the first quarter of 2001. This swap agreement does not qualify for hedge accounting under SFAS No. 133. Accordingly, all changes in the fair value of the foreign currency swap agreement will be reflected in the earnings of the Company. The Company recognized a gain of approximately $6,000 during the year ended December 31, 2001, as a result of changes in the fair value of the foreign currency agreement.
At December 31, 2000, the estimated net fair value of the Company's outstanding interest rate swaps was $794,000. For the year ended December 31, 2001, there were no realized gains or losses on terminated interest rate swaps.
At December 31, 2001, available for sale debt securities with a carrying value of approximately $21.5 million are scheduled to mature within the next five years. Of this amount, $996,000 is scheduled to mature within one year. The Company's main source of liquidity is Federal funds sold and repurchase agreements. Average Federal funds sold and repurchase agreements were $29.7 million in 2001, or 7.3% of average earning assets, compared to $11.9 million in 2000, or 7.8% of average earning assets. Federal funds sold and repurchase agreements totaled $54.7 million at December 31, 2001, or 11.0% of earning assets, compared to $31.0 million at December 31, 2000, or 8.8% of earning assets.
At December 31, 2001, loans with a carrying value of approximately $293.2 million are scheduled to mature within the next five years. Of this amount, $101.5 million is scheduled to mature within one year.
The Company's average loan-to-deposit ratio increased 41 basis points to 99.0% for 2001 from 94.9% for 2000. The Company's total loan-to-deposit ratio decreased 46 basis points to 89.0% at December 31, 2001 from 93.6% at December 31, 2000.
The Company has short-term funding available through various Federal Funds lines of credit with other financial institutions and its membership in the Federal Home Loan Bank of Atlanta ("FHLBA"). Further, the FHLBA membership provides the availability of participation in loan programs with varying maturities and terms. At December 31, 2001, the Company had borrowings from the FHLBA in the amount of $7.5 million.
There are no known trends, demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in liquidity increasing or decreasing in any material way.
The Company has no off-balance sheet activities with unconsolidated or limited purpose entities.
It is anticipated that the Company will find it necessary to raise additional capital during 2002 to maintain its classification by regulatory authorities as "well capitalized". This results from the rate of growth of the Company. Management and the Board of Directors are currently evaluating several alternatives for raising capital.
Critical Accounting Policies
The preparation of the financial statements, on which this Management's Discussion and Analysis is bases, requires Management 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. For a more complete discussion of these and other accounting policies, see Note 1 to the Company's consolidated financial statements.
Allowance for Loan Losses - The Company carefully monitors the credit quality of 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, 2001, the Company had one piece of real estate that was obtained through a foreclosure. The property has been 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 property is located (Hillsborough County, Florida), 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, a foreign currency swap and has provided interest rate swaps to loan participants. As a result of these activities the Company recognized a net gain on derivative instruments of $84,000 for the year ended December 31, 2001 determined by the change in the fair market value of these derivative instruments. 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 earnings of the Company.
Recent Accounting Pronouncements
In July of 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 establishes accounting and reporting standards for business combinations. This Statement eliminates the use of the pooling-of-interests method of accounting for business combinations, requiring future business combinations to be accounted for using the purchase method of accounting. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method of accounting for which the date of acquisition is July 1, 2001 or later. The Statement will not have an impact on the Company's consolidated financial position and results of operations.
SFAS No. 142 establishes accounting and reporting standards for goodwill and other intangible assets. With the adoption of this Statement, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value based test. SFAS No. 142 is required to be adopted for fiscal years beginning after December 15, 2001. As the Company currently has no goodwill or intangible assets, the adoption of the Statement will not have an impact on the Company's consolidated financial position and results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived assets. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid, and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Statement will not have an impact on the Company's consolidated financial position and results of operations.
In August 2001, the FASB issued SFAS No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. It does not appear the Statement will have a material impact on the Company's consolidated financial position and results of operations.
In July 2001, the SEC released Staff Accounting Bulletin ("SAB") No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues". SAB No. 102 expresses the SEC Staff's views on the development, documentation and application of a systematic methodology in determining a GAAP allowance for loan losses. The SAB stresses that the methodology for computing the allowance be both disciplined and consistent, and emphasizes that the documentation supporting the allowance and provision must be sufficient. SAB No. 102 provides guidance that is consistent with the Federal Financial Institutions Examination Council's (FFIEC") Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions, which was also issued in July 2001. SAB No. 102 is applicable to all registrants with material loan portfolios while the parallel guidance of the FFIEC is applicable only to banks and savings institutions. The adoption of this bulletin did not have a material impact on the reported consolidated financial position or results of operations of the Company.
Effects of Inflation and Changing Prices
Inflation generally increases the cost of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions' increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely effect liquidity, earnings, and shareholders' equity. Mortgage originations and refinancings tend to slow as interest rates increase, and can reduce the Company's earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.
Monetary Policies
The results of operations of the Company will be affected by credit policies of monetary authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. Government securities, changes in the discount rate on member Company borrowings, changes in reserve requirements against member Company deposits and limitations on interest rates which member Company may pay on time and savings deposits. In view of changing conditions in the national economy and in the money markets, as well as the effect of action by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Company or the Company.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. --------------------------------------------------------------------
Refer to "Liquidity Management and Interest Rate Sensitivity" in Item 7. Management Discussion and Analysis for discussion of interest rate fluctuations.
Derivative Financial Instruments
The Company is exposed to market risks, including fluctuations in interest rates, variability in spread relationships (Prime to LIBOR spreads), mismatches of repricing intervals between finance receivables and related funding
obligations, and variability in currency exchange rates. The Company has established policies, procedures and internal processes governing its management of market risks and the use of financial instruments to manage its exposure to such risks. Sensitivity of earnings to these risks are managed by entering into securitization transactions, issuing debt obligations with appropriate price and term characteristics, and utilizing derivative financial instruments. These derivative financial instruments consist primarily of interest rate swaps and foreign currency swaps. The Company does not use derivative financial instruments for trading purposes.
The Company uses interest rate swap agreements to change the characteristics of its fixed and variable rate exposures and to manage the Company's asset/liability match. The Company's interest rate swap portfolio is an integral element of its risk management policy, and as such, all swaps are linked to an underlying debt. The Company entered into a foreign currency swap agreement during the first quarter of 2001. The purpose of this transaction is to mitigate fluctuations in the exchange rate of the dollar and the Japanese yen, which might otherwise adversely affect the interest income on a loan denominated in Japanese Yen and tied to Japanese interest rates. This swap agreement does not qualify for hedge accounting under SFAS No. 133. Accordingly, all changes in the fair value of the foreign currency swap agreement will be reflected in the earnings of the Company.
Refer to "Interest Rate Sensitivity and Liquidity Management" in Item 7., Management Discussion and Analysis for discussion of derivative instruments.
Item 8.
Item 8. Financial Statements and Supplementary Data. - ------- --------------------------------------------
The following financial statements are filed with this report:
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Operations - Years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of Florida Banks, Inc. Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Florida Banks, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the companies as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
February 8, 2002
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 - --------------------------------------------------------------------------------
l. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Florida Banks, Inc. (the "Company") was incorporated on October 15, 1997 for the purpose of becoming a bank holding company and acquiring First National Bank of Tampa (the "Bank"). On August 4, 1998, the Company completed its initial public offering and its merger (the "Merger") with the Bank pursuant to which the Bank was merged with and into Florida Bank No. 1, N.A., a wholly-owned subsidiary of the Company, and renamed Florida Bank, N.A.
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The following summarizes these policies and practices:
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses and the valuation of other real estate owned, deferred tax assets and embedded derivative instruments.
Cash and Cash Equivalents - Cash and cash equivalents include cash and due from banks, Federal funds sold and repurchase agreements all of which mature within ninety days. Generally, Federal funds and repurchase agreements are sold for one day periods.
Investment Securities - Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Securities are classified as trading securities if bought and held principally for the purpose of selling them in the near future. No investments are held for trading purposes. Securities not classified as held to maturity are classified as available for sale, and reported at fair value with unrealized gains and losses excluded from earnings and reported net of tax as a separate component of other comprehensive income or loss until realized. Other investments, which include Federal Reserve Bank stock and Federal Home Loan Bank stock, are carried at cost as such investments are not readily marketable.
Realized gains and losses on sales of investment securities are recognized in the statements of operations upon disposition based upon the adjusted cost of the specific security. Declines in value of investment securities judged to be other than temporary are recognized as losses in the statement of operations.
Loans - Loans are stated at the principal amount outstanding, net of unearned income and an allowance for loan losses. Interest income on all loans is accrued based on the outstanding daily balances.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
Management has established a policy to discontinue accruing interest (nonaccrual status) on a loan after it has become 90 days delinquent as to payment of principal or interest unless the loan is considered to be well collateralized and the Company is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent if management believes that the borrower's financial condition is such that collection of interest or principal is doubtful. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is estimated to be uncollectible. Interest income on nonaccrual loans is recognized only as received.
Nonrefundable fees and certain direct costs associated with originating or acquiring loans are recognized over the life of the related loans on the interest method.
Allowance for Loan Losses - The determination of the balance in the allowance for loan losses is based on an analysis of the loan portfolio and reflects an amount which, in management's judgment, is adequate to provide for probable loan losses after giving consideration to the growth and composition of the loan portfolio, current economic conditions, past loss experience, evaluation of probable losses in the current loan portfolio and such other factors that warrant current recognition in estimating loan losses.
Loans which are considered to be uncollectible are charged-off against the allowance. Recoveries on loans previously charged-off are added to the allowance.
Impaired loans are loans for which it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Impairment losses are measured by the present value of expected future cash flows discounted at the loan's effective interest rate, or, as a practical expedient, at either the loan's observable market price or the fair value of the collateral. Interest income on impaired loans is recognized only as received.
Large groups of smaller balance homogeneous loans (consumer loans) are collectively evaluated for impairment. Commercial loans and larger balance real estate and other loans are individually evaluated for impairment.
Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation computed on the straight-line method over the estimated useful lives of 3 to 20 years. Leasehold improvements are amortized on the straight-line method over the shorter of their estimated useful life or the period the Company expects to occupy the related leased space. Maintenance and repairs are charged to operations as incurred.
Income Taxes - Deferred tax liabilities are recognized for temporary differences that will result in amounts taxable in the future and deferred tax assets are recognized for temporary differences and tax benefit carryforwards that will result in amounts deductible or creditable in the future. Net deferred tax liabilities or assets are recognized through charges or credits to the deferred tax provision. A deferred tax valuation
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be realized. Subsequent to the Company's quasi-reorganization (see note 18) reductions in the deferred tax valuation allowance are credited to additional paid-in capital.
Derivative Instruments - As part of the its asset/liability management policy, the Company uses derivatives to manage interest and foreign currency exchange rate exposures by modifying the characteristics of the related balance sheet instruments. In accordance with Statement of Financial Accounting Standard ("SFAS") 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 138, derivatives are carried at fair value. The accounting for changes in the fair value (that is, gains or losses) of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and the hedged items are recognized in earnings. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded to other comprehensive income and are recognized in the statement of operations when the hedged item affects earnings. See Note 5 for additional information regarding derivative instruments.
Other Real Estate Owned - Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.
Repurchase Agreements - Repurchase agreements consist of agreements with customers to pay interest daily on funds swept into a repo account based on a rate of .75% to 1.00% below the Federal funds rate. Such agreements generally mature within one to four days from the transaction date. In addition, the Company has securities sold under agreements to repurchase, which are classified as secured borrowings. Such borrowings generally mature within one to thirty days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. Information concerning repurchase agreements for the years ended December 31, 2001 and 2000 is summarized as follows:
2001 2000
Average balance during the year $ 33,568,040 $ 14,955,704 Average interest rate during the year 3.59% 6.04% Maximum month-end balance during the year $ 44,576,894 $ 21,240,341
Other Borrowed Funds - Other borrowed funds consist of Federal Home Loan Bank borrowings and treasury tax and loan deposits. Treasury tax and loan deposits generally are repaid within one to 120 days from the transaction date.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
Stock Options - The Company has elected to account for its stock options under the intrinsic value based method with pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting defined in SFAS No. 123 Accounting for Stock Based Compensation, had been applied. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period.
Comprehensive Income - Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are presented in the consolidated statements of shareholders' equity.
Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Earnings Per Common Share - Basic earnings per common share ("EPS") excludes dilution and is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects additional common shares that would have been issued, as well as any adjustment to income that would result form the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and convertible preferred stock and are determined using the treasury stock method.
Recent Accounting Pronouncements - In July of 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 Business Combinations and SFAS No. 142 Goodwill and Other Intangible Assets. SFAS No. 141 establishes accounting and reporting standards for business combinations. This Statement eliminates the use of the pooling-of-interests method of accounting for business combinations, requiring future business combinations to be accounted for using the purchase method of accounting. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method of accounting for which the date of acquisition is July 1, 2001 or later. The Statement did not have an impact on the Company's consolidated financial position and consolidated results of operations in 2001.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
SFAS No. 142 establishes accounting and reporting standards for goodwill and other intangible assets. With the adoption of this Statement, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value based test. SFAS No. 142 is required to be adopted for fiscal years beginning after December 15, 2001. As the Company currently has no goodwill or intangible assets, the adoption of the Statement will not have an impact on the Company's consolidated financial position and consolidated results of operations.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived assets. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid, and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Statement will not have an impact on the Company's consolidated financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. It does not appear the Statement will have a material impact on the Company's consolidated financial position and results of operations.
In July 2001, the SEC released Staff Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. SAB No. 102 expresses the SEC Staff's views on the development, documentation and application of a systematic methodology in determining a generally accepted accounting policies ("GAAP") allowance for loan losses. The SAB stresses that the methodology for computing the allowance be both disciplined and consistent, and emphasizes that the documentation supporting the allowance and provision must be sufficient. SAB No. 102 provides guidance that is consistent with the Federal Financial Institutions Examination Council's ("FFIEC") Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Saving Institutions, which was also issued in July 2001. SAB No. 102 is applicable to all registrants with material loan portfolios while the parallel guidance of the FFIEC is applicable only to banks and savings institution. The adoption of this bulletin did not have a material impact on reported results of operations of the Company.
Reclassifications - Certain reclassifications have been made to the 2000 and 1999 consolidated financial statements to conform with the presentation adopted in 2001.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of available for sale and held to maturity investment securities as of December 31, 2001 and 2000 are as follows:
Expected maturities of debt securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The amortized cost and
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
estimated fair value of debt securities available for sale, at December 31, 2001, by contractual maturity, are shown below:
Investment securities with a carrying value of $27,335,655 and $21,032,693 were pledged as security for certain borrowed funds and public deposits held by the Company at December 31, 2001 and 2000, respectively.
3. LOANS
Loans at December 31, are summarized as follows:
Changes in the allowance for loan losses are summarized as follows:
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
The Company's primary lending area is the state of Florida. Although the Company's loan portfolio is diversified, a significant portion of its loans are collateralized by real estate. Therefore the Company could be susceptible to economic downturns and natural disasters. It is the Company's lending policy to collateralize real estate loans based upon certain loan to appraised value ratios.
Nonaccrual loans totaled approximately $1,090,000 and $1,547,000 of which approximately $681,000 and $872,000 is guaranteed by the SBA at December 31, 2001 and 2000, respectively. The effects of carrying nonaccrual loans during 2001, 2000, and 1999 resulted in a reduction of interest income of approximately $147,000, $151,000 and $76,000, respectively.
The following is a summary of information pertaining to impaired loans:
The interest income recognized on impaired loans for the years ended December 31, 2001, 2000 and 1999 was not significant.
No additional funds are committed to be advanced in connection with impaired loans.
At December 31, 2001, restructured loans amounted to approximately $1,095,000. There were no restructured loans at December 31, 2000. No additional funds are committed to be advanced in connection with restructured loans.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
4. PREMISES AND EQUIPMENT
Major classifications of these assets are as follows:
Depreciation and amortization amounted to $756,426, $647,891 and $350,204 for the years ended December 31, 2001, 2000 and 1999, respectively.
5. DERIVATIVE INSTRUMENTS
The Company adopted SFAS No. 133, as amended by SFAS 138, on January 1, 2001. This statement requires all derivative instruments to be recorded on the balance sheet at fair value.
The following instruments qualify as derivatives as defined by SFAS No. 133:
Interest rate swap agreements consist of one agreement which qualifies for the fair value method of hedge accounting under the "short-cut method" based on the guidelines established by SFAS No. 133, and several embedded swap arrangements contained in loan participation agreements accounted for as derivatives which do not qualify for hedge accounting. The Company recognized a gain of approximately $50,000 for the year ended December 31, 2001 as a result of changes in the fair value of the embedded derivatives contained in the loan participation agreements. Additionally, the Company entered into a foreign currency swap agreement during the first quarter of 2001. This swap agreement does not qualify for hedge accounting under SFAS No. 133. Accordingly, all changes in the fair value of the foreign currency swap agreement are reflected in the earnings of the Company. The Company recognized a gain of approximately $6,000 for the year ended December 31, 2001 as a result of changes in the fair value of the foreign currency agreement.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
6. INCOME TAXES
The components of the provision (benefit) for income tax expenses for the years ended December 31, 2001, 2000 and 1999 are as follows:
Income taxes for the years ended December 31, 2001, 2000 and 1999, differ from the amount computed by applying the federal statutory corporate rate to earnings before income taxes as summarized below:
The components of net deferred income taxes at December 31, 2001 and 2000 are as follows:
At December 31, 2001 and 2000, the Bank had tax net operating loss carryforwards of approximately $7,098,000 and $9,429,000, respectively. Such carryforwards expire as follows: $1,039,000 in 2006, $1,919,000 in 2007, $1,620,000 in 2008, $92,000 in 2009, $643,000 in 2018, $1,619,000 in 2019, and $167,000 in 2020. A change in ownership on August 4, 1998, as defined in section 382 of the Internal
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
Revenue Code, limits the amount of net operating loss carryforwards utilized each year to approximately $700,000. Unused limitations from each year accumulate in successive years.
At December 31, 2001 and 2000, the Bank assessed its earnings history and trends over the past three years, its estimate of future earnings, and the expiration dates of the loss carryforwards and has determined that it is more likely than not that the deferred tax assets will be realized. Accordingly, no valuation allowance is recorded at December 31, 2001 and 2000.
7. DEPOSITS
Interest-bearing deposits at December 31 are summarized as follows:
At December 31, 2001, the scheduled maturities of time deposits are as follows:
8. OTHER BORROWED FUNDS
Other borrowed funds at December 31, 2001 and 2000 are summarized as follows:
Treasury tax and loan deposits are generally repaid within one to 120 days from the transaction date.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
The Federal Home Loan Bank of Atlanta has the option to convert the $2,500,000 advance outstanding at December 31, 2001 into a three-month LIBOR-based floating rate advance September 14, 2006, and any payment date thereafter with at least two business days prior notice to the Company.
If the Federal Home Loan Bank elects to convert the advance, then the Company may elect, with at least two business days prior written notice, to terminate in whole or part the transaction without payment of a termination amount on any subsequent payment date. The Company may elect to terminate the advance and pay a prepayment penalty, with two days prior written notice, if the Federal Home Loan Bank does not elect to convert this advance.
The Federal Home Loan Bank advances are secured by certain mortgage loans receivable of approximately $25,182,000 at December 31, 2001.
9. COMMITMENTS
Leases - The Company has entered into certain noncancellable operating leases and subleases for office space and office property. Lease terms are generally for five to twenty years, and in many cases, provide for renewal options. Rental expense for 2001, 2000 and 1999 was approximately $705,000, $659,000 and $455,000, respectively. Rental income for 2001 and 2000 was approximately $45,000 and $55,000, respectively. There was no rental income in 1999. Both rental expense and rental income are included in net occupancy and equipment expense in the accompanying consolidated statements of operations. The following is a schedule of future minimum lease payments and future minimum lease revenues under the sublease at December 31, 2001.
Federal Reserve Requirement - The Federal Reserve Board requires that certain banks maintain reserves, based on their average deposits, in the form of vault cash and average deposit balances at a Federal Reserve Bank. The requirement as of December 31, 2001 and 2000 was approximately $2,750,000 and $416,000, respectively.
Litigation - Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will not have a material effect on the Company's consolidated financial statements.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
10. SHAREHOLDERS' EQUITY
Preferred Stock
On June 29, 2001 the Company issued 100,401 shares of Series B preferred stock. On July 24, 2001, the Company issued an additional 1,882 shares of Series B preferred stock. All Series B preferred shares were issued for $68.00 per share through a private placement.
Conversion Rights - Each share of preferred stock is convertible into ten shares of the Company's common stock at a price of $6.80 per share (subject to adjustment for stock splits, stock dividends, etc.). The preferred stock will be automatically converted to common stock upon the following events:
1) change in control; 2) if the average closing price of the Company's common stock for any 30 consecutive trading day period is at or above $8.00 per share; or 3) the consummation of an underwritten public offering at a price of $8.00 per share or greater of the Company's common stock.
Dividends - Cumulative cash dividends accrue at seven percent annually and are payable quarterly in arrears.
Liquidation Preference - In the event of any liquidation, dissolution or winding up of the affairs of the Company, the holders of Series B preferred stock at that time shall receive $68.00 per share plus an amount equal to accrued and unpaid dividends thereon through and including the date of distribution prior to any distribution to holders of common stock. The liquidation preference at December 31, 2001 was $7,077,962.
Warrants
In 1998, as part of a sale of 101 units to accredited foreign investors, warrants to purchase 80,800 shares of Common Stock at $10.00 per share were issued. Such warrants have been valued at an aggregate price of approximately $165,000, or $2.04 per share, as determined by an independent appraisal and have been recorded as additional paid-in capital. The warrants are exercisable through February 3, 2008.
Stock Options
During 1994, the Bank's Board of Directors approved a Stock Option Plan (the "Plan") for certain key officers, employees and directors whereby 300,000 shares of the Bank's common stock were made available through qualified incentive stock options and non-qualified stock options. The Plan specifies that the exercise price per share of common stock under each option shall not be less than the fair market value of the common stock on the date of the grant, except for qualified stock options granted to individuals who own either directly or indirectly more than 10% of the outstanding stock of the Bank. For qualified stock options granted to those individuals owning more than 10% of the Bank's outstanding stock, the exercise price shall not be less than 110% of the fair market value of the common stock on the date of grant. Options issued under the Plan expire ten years after the date of grant, except for qualified stock options granted to more than 10% shareholders as defined above. For qualified stock options granted to more than 10% shareholders, the expiration date shall be five years from the date of grant or earlier if specified in the option agreement.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
On June 4, 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan"), effective March 31, 1998, which provides for the grant of incentive or non-qualified stock options to certain directors, officers and key employees who participate in the plan. An aggregate of 900,000 shares of common stock are reserved for issuance pursuant to the 1998 Plan. During 1999, the Company granted stock options to purchase 98,350 shares of the Company's common stock at an exercise price of $10.00 per share. During 2001 and 2000, the Company granted 62,650 and 277,900 options, respectively, at various exercise prices based on the fair value of the stock at the time of grant.
If compensation cost for stock options granted in 2001, 2000 and 1999 was determined based on the fair value at the grant date consistent with the method prescribed by SFAS No. 123, the Company's net loss and loss per share would have been adjusted to the pro forma amounts indicated below:
Under SFAS No. 123, the fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for options granted in 2001, 2000 and 1999, respectively: dividend yield of 0%, expected volatility of 32.27%, 32.64% and 27.50%, risk-free interest rate of 4.57%, 6.44% and 4.30%, and an expected life of 10 years.
A summary of the status of fixed stock option grants under the Company's stock-based compensation plans as of December 31, 2001, 2000 and 1999, and changes during the years ending on those dates is presented below:
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
The following table summarizes information related to stock options outstanding at December 31, 2001:
11. RESTRICTION ON DIVIDENDS, LOANS AND ADVANCES
Federal and State bank regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10 percent of the Bank's capital stock and surplus on a secured basis.
At December 31, 2001, the Bank's retained earnings available for the payment of dividends was approximately $172,000. Accordingly, approximately $43,838,000 of the Company's equity in the net assets of the Bank was restricted at December 31, 2001. Funds available for loans or advances by the Bank to the Company amounted to approximately $4,371,000.
In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements.
12. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company originates financial instruments with off-balance sheet risk in the normal course of business, usually for a fee, primarily to meet the financing needs of its customers. The financial instruments include commitments to fund loans, letters of credit and unused lines of credit. These commitments involve varying degrees of credit risk, however, management does not anticipate losses upon the fulfillment of these commitments.
At December 31, 2001, financial instruments having credit risk in excess of that reported in the balance sheet totaled approximately $162,683,000.
13. TRUST PREFERRED SECURITIES
On December 18, 2001, the Company participated in a pooled trust preferred offering. In connection with the transaction, the Company, through its subsidiary trust, Florida Banks Statutory Trust I (the "Trust"), issued $6,000,000 in trust preferred securities. The Trust also issued $186,000 of common securities to the Company and used the total proceeds to purchase $6,186,000 in 30-year subordinated debentures of the Company. The preferred securities pay dividends at an initial rate of 5.60% through March 17, 2002. The rate then becomes a floating rate based on 3-month LIBOR plus 3.60%, adjusted quarterly after each dividend payment date.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
Dividend payment dates are March 18, June 18, September 18 and December 18 of each year. There is a par call option beginning December 18, 2006. The subordinated debentures are the sole assets of the Trust and are eliminated, along with the related income statement effects, in the Company's consolidated financial statements.
14. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
Supplemental disclosure of cash flow information:
Supplemental schedule of noncash investing and financing activities:
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
15. CONDENSED FINANCIAL INFORMATION OF FLORIDA BANKS, INC. (PARENT ONLY)
The following represents the parent only condensed balance sheets as of December 31, 2001 and 2000 and the related condensed statements of operations and cash flows for the years ending December 31, 2001, 2000 and 1999.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
16. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2001 and 2000, notifications from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately or well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's and
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
Bank's actual capital amounts and ratios are also presented in the following table.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating financial instrument fair values:
General Comment - The financial statements include various estimated fair value information as required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments. Such information, which pertains to the Company's financial instruments is based on the requirements set forth in SFAS 107 and does not purport to represent the aggregate net fair value of the Company. Furthermore, the fair value estimates are based on various assumptions, methodologies and subjective considerations, which vary widely among different financial institutions and which are subject to change.
Cash and Cash Equivalents - Cash and due from banks, federal funds sold and repurchase agreements are repriced on a short-term basis; as such, the carrying value closely approximates fair value.
Investment Securities - Fair values for available for sale and held to maturity securities are based on quoted market prices, if available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Other Investment Securities - Fair value of the Bank's investment in Federal Reserve Bank stock and Federal Home Loan Bank stock is based on its redemption value, which is its cost of $100 per share.
Loans - For variable rate loans that reprice frequently, the carrying amount is a reasonable estimate of fair value. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities.
Derivative Instruments - Fair values of derivative instruments are based on quoted market prices, if available. If quoted market prices are not available, fair values are determined based on a cash flow model using market assumptions.
Deposits - The fair value of demand deposits, savings deposits and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected monthly time deposit maturities.
Repurchase Agreements - The carrying amounts of repurchase agreements approximates the estimated fair value of such liabilities due to the short maturities of such instruments.
Other Borrowed Funds - For treasury tax and loan deposits, the carrying amount approximates the estimated fair value of such liabilities due to the short maturities of such instruments. The fair value of the Federal Home Loan Bank advances are based on quoted market prices.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
A comparison of the carrying amount to the fair values of the Company's significant financial instruments as of December 31, 2001 and 2000 is as follows:
18. QUASI-REORGANIZATION
Effective December 31, 1995, the Bank completed a quasi-reorganization of its capital accounts. A quasi-reorganization is an accounting procedure provided for under current banking regulations that allows a bank to restructure its capital accounts to remove a deficit in undivided profits without undergoing a legal reorganization. A quasi-reorganization allows a bank that has previously suffered losses and subsequently corrected its problems to restate its records as if it had been reorganized. A quasi-reorganization is subject to regulatory approval and is contingent upon compliance with certain legal and accounting requirements of the banking regulations. The Bank's quasi-organization was authorized by the Office of the Comptroller of the Currency upon final approval of the Bank's shareholders which was granted November 15, 1995.
As a result of the quasi-reorganization, the Bank charged against additional paid-in capital its accumulated deficit through December 31, 1995 of $8,134,037.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
19. EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the following.
The incremental shares from the assumed conversion of stock options were determined using the treasury stock method under which the assumed proceeds were equal to (1) the amount that the Company would receive upon the exercise of the options plus (2) the amount of the tax benefit that would be credited to additional paid-in capital assuming exercise of the options. The convertible preferred stock was determined to be anti-dilutive and is therefore excluded from the computation of diluted earnings per share.
20. BENEFIT PLAN
The Company has a 401(k) defined contribution benefit plan (the "Plan") which covers substantially all of its employees. The Company matches 50% of employee contributions to the Plan, up to 6% of all participating employees compensation. The Company contributed $136,000, $110,092 and $63,055 to the Plan in 2001, 2000 and 1999, respectively.
21. EMPLOYEE STOCK PURCHASE PLAN
On January 22, 1999, the Board of Directors of the Company adopted the Employee Stock Purchase Plan (the "Plan"). The Plan was approved by the Company's shareholders at the Company's 1999 Annual Meeting of Shareholders on April 23, 1999. The Plan provides for the sale of not more than 200,000 shares of common stock to eligible employees of the Company pursuant to one or more offerings under the Plan. The purchase price for shares purchased pursuant to the Plan is the lesser of (a) 85% of the fair market value of the common stock on the grant date, or if no shares were traded on that day, on the last day prior thereto on which shares were traded, or (b) an amount equal to 85% of the fair market value of the common stock on the exercise date, or if no shares were traded on that day, on the last day prior thereto on which shares were traded. Shares purchased by employees were approximately 93,000 and 76,000 for the years ended December 31, 2001 and 2000, respectively. For the year ended December 31, 1999, there were no purchases of common stock pursuant to the Plan.
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Continued) - --------------------------------------------------------------------------------
22. RELATED PARTY TRANSACTIONS
The Company lends to shareholders, directors, officers, and their related business interests on substantially the same terms as loans to other individuals and businesses of comparable credit worthiness. Such loans outstanding were approximately $1,274,000 and $1,222,000 at December 31, 2001 and 2000. During the year ended December 31, 2001, such shareholders, directors, officers and their related business interest borrowed approximately $1,657,000 from the Company and repaid approximately $1,605,000.
Deposits from related parties held by the Company at December 31, 2001 and 2000 were approximately $489,000 and $872,000, respectively.
23. SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000:
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (Concluded) - --------------------------------------------------------------------------------
* * * * * *
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- ------------------------------------------------------------------ Financial Disclosure. ---------------------
There has been no occurrence requiring a response to this Item.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant. - -------- ---------------------------------------------------
The information relating to directors and executive officers of the Company contained in the Company's definitive proxy statement to be delivered to shareholders in connection with the 2002 Annual Meeting of Shareholders scheduled to be held May 31, 2002 is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation. - -------- -----------------------
The information relating to executive compensation contained in the Company's definitive proxy statement to be delivered to shareholders in connection with the 2002 Annual Meeting of Shareholders scheduled to be held May 31, 2002 is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------- ---------------------------------------------------------------
The information relating to security ownership of certain beneficial owners and management contained in the Company's definitive proxy statement to be delivered to shareholders in connection with the 2002 Annual Meeting of Shareholders scheduled to be held May 31, 2002 is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions. - -------- -----------------------------------------------
The information relating to related party transactions contained in the registrant's definitive proxy statement to be delivered to shareholders in connection with the 2002 Annual Meeting of Shareholders scheduled to be held May 31, 2002 is incorporated herein by reference.
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. - -------- ----------------------------------------------------------------
(a) 1. Financial Statements. The following financial statements and accountants' reports have been filed as Item 8 in Part II of this Report:
Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 2001 and 2000 Consolidated Statements of Operations - Years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Shareholders' Equity - Years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements
2. Exhibits. ---------
Exhibit Number Description of Exhibits ------ -----------------------
*3.1 - Articles of Incorporation of the Company, as amended
*3.1.1 - Second Amended and Restated Articles of Incorporation
*3.1.2 - Amendment to Second Amended and Restated Articles of Incorporation
*3.2.1 - Amended and Restated By-Laws of the Company
*4.1 - Specimen Common Stock Certificate
*4.2 - See Exhibits 3.1.1 and 3.2.1 for provisions of the Articles of Incorporation and By-Laws of the Company defining rights of the holders of the Company's Common Stock
*10.1 - Form of Employment Agreement between the Company and Charles E. Hughes, Jr.
*10.2 - The Company's 1998 Stock Option Plan
*10.2.1 - Form of Incentive Stock Option Agreement
*10.2.2 - Form of Non-qualified Stock Option Agreement
*10.3 - Form of Employment Agreement between the Company and T. Edwin Stinson, Jr., Don D. Roberts and Richard B. Kensler
**21.1 - Subsidiaries of the Registrant
**23.1 - Consent of Deloitte & Touche LLP
(b) Reports on Form 8-K.
* Incorporated by reference to the Company's Registration Statement on Form S-1, Commission File No. 333-5087
** Filed herewith
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, in the City of Jacksonville, State of Florida on March 22, 2002.
FLORIDA BANKS, INC.
By: /s/ Charles E. Hughes, Jr. --------------------- Charles E. Hughes, Jr. President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Charles E. Hughes, Jr. President, Chief Executive March 22, 2002 - -------------------------- Charles E. Hughes, Jr. Officer and Director (Principal Executive Officer)
/s/ T. Edwin Stinson, Jr. Chief Financial Officer, March 22, 2002 - ------------------------- T. Edwin Stinson, Jr. Secretary, Treasurer and Director (Principal Financial and Accounting Officer)
/s/ M.G. Sanchez Chairman of the Board March 22, 2002 - ---------------- M. G. Sanchez
/s/ T. Stephen Johnson Vice-Chairman of the Board March 22, 2002 - ---------------------- T. Stephen Johnson
/s/ Clay M. Biddinger Director March 22, 2002 - --------------------- Clay M. Biddinger
/s/ P. Bruce Culpepper Director March 22, 2002 - ---------------------- P. Bruce Culpepper
/s/ J. Malcolm Jones, Jr. Director March 22, 2002 - ------------------------- J. Malcolm Jones, Jr.
/s/ W. Andrew Krusen, Jr. Director March 22, 2002 - ------------------------- W. Andrew Krusen, Jr.
/s/ Nancy E. LaFoy Director March 22, 2002 - ------------------ Nancy E. LaFoy
March 22, 2002 /s/ Wilford C. Lyon, Jr. Director - ------------------------ Wilford C. Lyon, Jr.
/s/ David McIntosh Director March 22, 2002 - ------------------ David McIntosh
EXHIBIT INDEX
Exhibit Number Description of Exhibit - ------ ----------------------
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP