FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-24683
FLORIDA BANKS, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 58-2364573
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 212 SOUTHPOINT SQUARE II
4110 SOUTHPOINT BOULEVARD
JACKSONVILLE, FL
32216-0925
(Address of principal executive offices)
(904) 296-2329
(Registrants telephone number, including area code)
Not applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No[X]
Indicate the number of shares outstanding of each of the registrants classes of
common stock, as of the latest practicable date.
Title Outstanding
COMMON STOCK, $.01 PAR VALUE OUTSTANDING AT SEPTEMBER 30, 1998
PER SHARE 5,852,756
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FLORIDA BANKS, INC.
CONDENSED BALANCE SHEET (Unaudited)
- - --------------------------------------------------------------------------------
September 30, December 31,
1998 1997
ASSETS
CASH AND DUE FROM BANKS $ 2,377,063 $ 2,788,211
FEDERAL FUNDS SOLD 6,115,000 10,245,000
REPURCHASE AGREEMENTS PURCHASED 18,000,000
---------- ----------
Total cash and cash equivalents 26,492,063 13,033,211
INVESTMENTS SECURITIES:
Available for sale, at fair value
(cost $23,541,536 and $10,445,885 at
September 30, 1998 and December 31, 1997,
respectively) 23,558,027 10,452,185
Other investments 291,850 313,050
LOANS:
Commercial real estate 15,915,636 15,281,442
Commercial 19,288,139 13,157,905
Residential mortgage 4,179,615 3,268,704
Consumer 1,129,396 1,222,045
Credit card and other loans 1,300,433 869,031
---------- ----------
Total loans 41,813,219 33,799,127
Allowance for loan losses (611,053) (481,462)
Net deferred loan fees (100,364) (78,765)
---------- ----------
Net loans 41,101,802 33,238,900
PREMISES AND EQUIPMENT, NET 715,881 511,503
ACCRUED INTEREST RECEIVABLE 482,425 332,031
DEFERRED INCOME TAXES, NET 2,390,224 2,420,271
OTHER ASSETS 159,109 94,628
----------- -----------
TOTAL ASSETS $95,191,381 $60,395,779
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing demand $ 5,734,585 $ 6,441,785
Interest-bearing demand 3,391,046 3,073,535
Regular savings 7,862,425 5,874,911
Money market accounts 1,274,257 1,348,431
Time $100,000 and over 10,822,829 10,214,403
Other time 18,105,546 18,507,107
----------- -----------
Total deposits 47,190,688 45,460,172
REPURCHASE AGREEMENTS SOLD 3,395,646 5,911,513
TREASURY TAX AND LOANS 607,193 2,405,604
ACCRUED INTEREST PAYABLE 200,250 198,817
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 145,456 106,038
----------- -----------
Total Liabilities 51,539,233 54,082,144
----------- -----------
SHAREHOLDERS' EQUITY:
Common Stock 58,528 12,152
Additional paid-in capital 46,090,851 5,537,996
Preferred stock 606,000
Warrants 164,832
Retained earnings (accumulated deficit)
(deficit of $8,434,037 eliminated upon
quasi-reorganization on December 31, 1995 (3,278,287) 759,707
Unrealized gain on available for sale
investment securities, net of tax 10,224 3,780
----------- -----------
Total shareholders' equity 43,652,148 6,313,63
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $95,191,381 $60,395,779
=========== ===========
See notes to condensed financial statements.
2
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FLORIDA BANKS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
- - --------------------------------------------------------------------------------
Three Month Period Ended Nine Month Period Ended
September 30, September 30,
------------------------ -----------------------
1998 1997 1998 1997
------------------------ -----------------------
INTEREST INCOME:
Loans, including fees $ 960,137 $ 854,843 $2,636,837 $2,507,961
Investment securities 328,406 145,727 648,702 424,393
Federal funds sold 208,450 84,716 385,888 283,744
---------- ---------- ---------- ----------
Total interest income 1,496,993 1,085,286 3,671,427 3,216,098
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 533,360 521,824 1,548,958 1,557,975
Repurchase agreements 47,642 45,395 167,374 133,601
Borrowed funds 26,034 9,739 73,602 25,158
---------- ---------- ---------- ----------
Total interest expense 607,036 576,958 1,789,934 1,716,734
---------- ---------- ---------- ----------
NET INTEREST INCOME 889,957 508,328 1,881,493 1,499,364
PROVISION FOR LOAN LOSSES 77,000 15,000 107,000 45,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 812,957 493,328 1,774,493 1,454,364
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service fees 102,283 83,540 288,522 235,136
Gain on sale of loans 80,349 9,192 100,058 118,117
Gain on sale of securities -- 244 8,197 7,635
Other noninterest income 21,459 10,153 75,136 32,246
---------- ---------- ---------- ----------
204,091 103,129 471,913 393,134
---------- ---------- ---------- ----------
NONINTEREST EXPENSES:
Salaries and benefits 3,694,526 253,773 4,329,413 766,658
Occupancy and equipment 139,652 62,305 303,097 182,950
Data processing 30,582 22,913 79,822 69,012
Other 1,236,873 125,769 1,543,518 362,988
---------- ---------- ---------- ----------
5,101,633 464,760 6,225,850 1,381,608
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES (4,084,585) 131,697 (4,009,444) 465,890
PROVISION (BENEFIT) FOR
INCOME TAX EXPENSES -- 50,225 28,550 177,782
---------- ---------- ---------- ----------
NET INCOME (LOSS) $(4,084,585) $ 81,442 $(4,037,994) $ 288,108
=========== ========== =========== ==========
EARNINGS (LOSS) PER SHARE:
Basic $ (0.94) $ 0.07 $ (1.25) $ 0.24
=========== ========== =========== ==========
Dilited N/A $ 0.06 N\A $ 0.22
========== ==========
See notes to condensed financial statements.
3
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<TABLE>
<CAPTION>
FLORIDA BANKS, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
- - --------------------------------------------------------------------------------
Unrealized
(Loss) Gain on
Available
Warrants Retained for Sale
Additional to Acquire Earnings Investment
Preferred Stock Common Stock Paid-In Common (Accumulated Securities,
Shares Par Value Shares Par Value Capital Stock Deficit) Net of Tax Total
------ --------- ------ --------- ------- ----- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECMEBER 31, 1997 1,215,194 $12,152 $ 5,537,996 $ 759,707 $ 3,780 $ 6,313,635
Net income (4,037,994) (4,037,994)
Proceeds from
Initial Public Offering, net 4,100,000 41,000 37,351,950 37,392,950
Exercise of stock options 159,806 1,598 238,402 240,000
Issuance of Common Stock
to Founders
Issuance of Common Stock
to Founders 297,000 2,970 2,155,718 2,158,688
Issuance of Units 80,800 808 807,192 $164,832 972,832
Issuance of preferred stock 60,600 $606,000 606,000
Unrealized gain on available
for sale investment securities,
net 6,444 6,444
Purchase of fractional shares (44) (407) (407)
------ -------- --------- ------- ----------- -------- ----------- ------- -----------
BALANCE, SEPTEMBER 30, 1998
(UNAUDITED) 60,600 $606,000 5,852,756 $58,528 $46,090,851 $164,832 $(3,278,287) $10,224 $43,652,148
====== ======== ========= ======= =========== ======== =========== ======= ===========
</TABLE>
See notes to Condensed Financial Statements.
4
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<TABLE>
<CAPTION>
FLORIDA BANKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
- - --------------------------------------------------------------------------------
Nine Month Period Ended
September 30,
-----------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (4,037,994) $ 288,108
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Noncash compensation and financing costs 3,939,054 --
Depreciation and amortization 111,604 79,227
Deferred income taxes 23,330 --
Gain on sale of securities (8,197) (7,635)
Amortizaiton of premiums on investments, net (45,878) (15,667)
Provision for loan losses 107,000 45,000
Increase in accrued interest receivable (150,394) (37,597)
Increase in accrued interest payable 1,443 13,679
Increase in other assets (64,481) (325,735)
Decrease (increase) in other liabilities (120,362) 301,579
------------ ------------
Net cash (used in) provided by
operating activites (244,875) 518,743
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales, paydowns and maturities
of investment securities:
Available for sale 6,325,899 12,172,441
Other 28,600 --
Purhcases of investment securities:
Available for sale (19,364,505) (13,525,642)
Other investments (7,400) (42,200)
Net increas in loans (7,969,902) (2,883,583)
Cash resulting from Merger 163,971 --
Purchases of premises and equipment (275,495) (87,105)
------------ ------------
Net cash used in investing activities (21,098,832) (4,366,089)
------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
money market accounts and savings accounts 1,523,651 (449,899)
Net increase (decrease) in time deposits 206,865 (375,157)
Increase (decrease) in repurchase agreements (2,515,867) 200,864
Increase (decrease) in other borrowed funds (1,798,411) 387,503
Exercise of stock options 240,000 --
Proceeds from Initial Public Offering 38,129,551 --
Proceeds from sale of Units 3,778 --
Offering costs (737,008) --
Payment of Note Payable (250,000) --
------------ ------------
Net cash provided by (used in)
financiing activities 34,802,559 (236,689)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS: 13,458,852 (4,084,035)
CASH AND CASH EQUIVALENTS:
Beginning of period 13,033,211 14,898,784
------------ ------------
End of Period $ 26,492,063 $ 10,814,749
============ ============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,788,501 $ 1,696,745
============ ============
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
- - --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
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.
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 condensed financial statements have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission related
to interim financial statements. These unaudited condensed financial
statements do not include all disclosures provided in the annual financial
statements. The condensed financial statements should be read in
conjunction with the financial statements and notes thereto contained in
the Companys Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission. All adjustments of a normal recurring
nature which, in the opinion of management, are necessary to fairly present
the results of the interim periods have been made. Results of operations
for the nine month period ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
2. NON-RECURRING EXPENSES
The Company incurred a non-recurring non-cash, charge of $3,939,054 related
to the February 3, 1998 sale of common stock and warrants included in the
Units sold to foreign investors and the February 11, 1998 sale of the
297,000 shares of common stock to 14 officers, directors, and consultants.
The Company recorded such non-cash compensation expense and financing costs
measured as the difference between the fair value of common stock, based
upon the initial public offering price of $10.00 per share, and the sale
price or allocated proceeds of $.01 per share. These non-cash charges were
recorded with a corresponding increase in additional paid-in capital and
therefore had no effect on the Companys total shareholders equity or book
value.
6
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) (Continued)
- - --------------------------------------------------------------------------------
3. SHAREHOLDERS EQUITY
On February 3, 1998, the Company sold 101 Units to accredited foreign
investors. Each Unit was comprised of (i) 600 shares of Series A Preferred
Stock, (ii) 800 shares of Common Stock, and (iii) Warrants to purchase 800
shares of Common Stock at the initial public offering price, at the price
of $6,008 per Unit. The net proceeds to the Company from this private
placement was approximately $600,000. The Series A Preferred Stock has been
valued at its redemption value of $606,000. The Company is in the process
of redeeming the Series A Preferred Stock at a redemption price of $10.00
per share using a portion of the proceeds from the initial public offering.
The Series A. Preferred Stock is non-voting. The Company recorded a
nonrecurring noncash charge of $972,000 relating to the issuance of the
Common Stock and Warrants, with a corresponding increase to shareholders
equity. Financing costs relating to the Common Stock have been measured as
the difference between the fair value of the Common Stock, based on the
initial public offering price of $10.00 per share, and the allocated
proceeds of $.01 per share. The Warrants have been valued at an aggregate
price of $164,832 or $2.04 per share, as determined by an independent
appraisal. The proceeds from the issuance of such Units provided funding
for the Companys development stage operations.
On August 4, 1998, the Company completed its initial public offering of
4,000,000 shares at an offering price of $10.00 per share and completed its
Merger with the Bank. See Note 1.
On September 1, 1998, the Underwriters exercised a portion of their
over-allotment and purchased an additional 100,000 shares of the Companys
common stock, $.01 par value per share, at a price of $10.00 per share,
less underwriting discounts and commissions.
4. EARNINGS PER SHARE
The following is a reconciliation of the denominator used in the
computation of basic and diluted earnings per common share.
<TABLE>
<CAPTION>
Three Month Period Ended Nine Month Period Ended
September 30, September 30,
------------------------ -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding - Basic 4,349,423 1,215,194 2,222,661 1,215,194
Incremental shares from the assumed
conversion of stock options -- 85,903 -- 85,903
--------- --------- --------- ---------
Total - Diluted 4,349,423 1,301,097 2,222,661 1,301,097
========= ========= ========= =========
</TABLE>
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 Bank
7
<PAGE>
FLORIDA BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) (Continued)
- - --------------------------------------------------------------------------------
would receive upon the exercise of the options plus (2) the amount of tax
benefit that would be credited to additional paid-in capital assuming
exercise of the options. The assumed proceeds are used to purchase
outstanding common shares at the Companys offering price of $10.00 per
share for 1998 and an assumed fair value equal to the Banks average book
value per common share for 1997 as the Banks stock was not actively traded
and limited trades during 1997 indicated that book value was a reasonable
estimate of fair value.
5. NEW ACCOUNTING PRONOUNCEMENTS
During the quarter ended March 31, 1998, the Bank adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
(SFAS 130). This Statement establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 does not require a specific format for the financial
statement but requires that an enterprise display an amount representing
total comprehensive income for the period in the financial statement.
Additionally, SFAS 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. This Statement is effective for
fiscal years beginning after December 15, 1997. Total comprehensive loss
for the three months and nine months ended September 30, 1998 was
$(4,063,307) and $(4,031,550), respectively. Other comprehensive loss was
comprised solely of the change in unrealized gains (loss) on available for
sale investment securities, net.
6. SUBSEQUENT EVENTS
The Company opened a community banking office in Jacksonville, Florida on
August 6, 1998. The Jacksonville office was created as a de novo branch of
the Bank.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the financial
statements and related notes appearing elsewhere in this Form 10-Q.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
The Company's net income for the third quarter of 1998 decreased $(4.2) million
to a net loss of $(4.1) million for the three month period ending September 30,
1998, from net income of $81,000 for the three month period ended September 30,
1997. Basic earnings per share for the third quarter of 1998 was a loss of
$(.94) compared to basic and diluted earnings per share of $.07 and $.06
respectively for the third quarter of 1997. Included in the loss of $(4.1)
million for the third quarter of 1998 were non-recurring compensation and
financing expenses of $3.9 million or $(.91) per share. These expenses were
related to the February 3, 1998 sale of common stock and warrants included in
the units sold to foreign investors and the February 11, 1998 sale of the
297,000 shares of common stock to 14 officers, directors and consultants. The
Company recorded such non-cash compensation expense and financing costs measured
as the difference between the fair value of common stock, based upon the initial
public offering price of $10.00 per share, and the sale price or allocated
proceeds of $.01 per share. These non-cash charges were recorded with a
corresponding increase in additional paid in capital and therefore had no effect
on the Companys total shareholders equity or book value.
Operating losses, net of non-recurring expenses of $3.9 million, were $(146,000)
for the three month period ended September 30, 1998 compared to a net income of
$81,000 for the three month period ended September 30, 1997. The operating
losses in the third quarter of 1998 primarily resulted from non-recurring
expenses associated with the merger transaction with First National Bank of
Tampa, in which the Company acquired the Bank, and the opening of the
Jacksonville, Florida offices of the Company and Bank.
The increase in net interest income of $382,000, or 75.1%, to $890,000 for the
three month period ended September 30, 1998, from $508,000 for the three month
period ended September 30, 1997, consists of an increase in interest income of
$412,000, or 37.9%, and an increase in interest expense of $30,000, or 5.2%. The
increase in interest income of $412,000 in the third quarter of 1998 is
primarily attributable to an increase of $256,000 in interest on investments and
federal funds sold resulting from the investment of the net proceeds of the
public offering.
The provision for loan losses charged to operations increased $62,000 to $77,000
for the three month period ended September 30, 1998, from $15,000 for the three
month period ended September 30, 1997. This increase represents the additional
reserves resulting from new loan growth.
Non-interest income increased 97.9%, or $101,000, to $204,000 for the three
month period ended September 30, 1998 from $103,000 for the three months ended
September 30, 1997. The increase in non-interest income primarily resulted from
an increase of $71,000 in the gain on sale of SBA guaranteed loans to $80,000
for the third quarter of 1998 compared to $9,000 for the third quarter of 1997.
Loans sold in the third quarter of 1998 were originated in prior periods and
sold in conjunction with the Companys established holding periods. Increases in
other non-interest income and service fees of $30,000, reflect an increase in
deposit account fees and ACH/EFT service fees.
Non-interest expense increased $4.6 million to $5.1 million for the three month
period ended September 30, 1998 compared to $465,000 for the three month
period ended September 30, 1997. The increase in non-interest expense resulted
9
<PAGE>
primarily from increases in salaries and benefits, occupancy and equipment, and
other expenses. Salaries and benefits expenses increased $3.4 million to $3.7
million for the third quarter of 1998 compared to $254,000 for the third quarter
of 1997. This increase resulted from non-recurring, non-cash compensation
expense of $3.0 million related to the sale of common stock to 14 officers,
directors and consultants, normal salary increases and the additional staff
associated with the opening of the Jacksonville banking office and the staff for
the holding company. Included in salaries and benefits expense for the third
quarter of 1998 are non-recurring expenses of $99,000 associated with the
relocation of executive officers of the Company.
The increase in occupancy and equipment expense of $77,000, or 124.1%, resulted
from the additional leased space for the Bank's SBA department, startup costs
and lease expense for the Jacksonville banking and holding company office, and
from additional depreciation and maintenance expenses resulting from the
purchase of additional computer equipment. Data processing expenses increased
$8,000 or 33.5% to $31,000 for the three months ended September 30, 1998 as
compared to $23,000 for the same period in 1997. This increase resulted from the
conversion and implementation of several new products and the additional
processing expenses for the Company in connection with the opening of the
Jacksonville banking office. Other expenses increased $1.1 million, to $1.2
million for three month period ended September 30, 1998, compared to $126,000
for the three month period ended September 30, 1997. This increase resulted
primarily from a non-recurring financing cost of $972,000 related to the
February 3, 1998 sale of common stock and warrants included in the units sold to
foreign investors. Additional other expenses for the third quarter of 1998
compared to the third quarter of 1997 include costs associated with the opening
of the Jacksonville banking office and legal, accounting and other professional
fees associated with the acquisition of First National Bank of Tampa.
No provision or benefit for income taxes was recognized for the three month
period ended September 30, 1998 as compared to a provision for income taxes of
$50,000 for the same period ended September 30, 1997. Included in the loss of
$(4.1) million for the third quarter of 1998 are non-tax deductible expenses of
$ 3.9 million associated the sale of common stock and warrants included in the
units sold to foreign investors and the sale of common stock to officers,
directors and consultants. Therefore, no tax benefit is recognized for the
period ending September 30, 1998. The provision for income taxes of $50,000 for
the third quarter of 1997 represents an estimated effective annual tax rate of
38%.
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September
30, 1997
The Company's net income for the nine months ended September 30, 1998 decreased
$(4.3) million to a net loss of $(4.0) million for the nine month period ending
September 30,1998, from net income of $288,000 for the nine month period ended
September 30, 1997. Basic earnings per share for the nine months ended September
30, 1998 was a loss $(1.25) compared to basic and diluted earnings per share of
$.24 and $.22, respectively, for the nine months ended September 30, 1997.
Included in the loss of $(4.0) million for the first nine months of 1998 were
non-recurring expenses of $3.9 million or $(1.22) per share. These expenses were
related to the February 3, 1998 sale of common stock and warrants included in
the units sold to foreign investors and the February 11, 1998 sale of the
297,000 shares of common stock to 14 officers, directors and consultants. The
Company recorded such non-cash compensation expense and financing costs measured
as the difference between the fair value of common stock, based upon the initial
public offering price of $10.00 per share, and the sale price or allocated
proceeds of $.01 per share. These non-cash charges were recorded with a
corresponding increase in additional paid in capital and therefore had no effect
on the Companys total shareholders equity or book value.
Operating losses, net of non-recurring expenses of $3.9 million, were $(99,000)
for the nine month period ended September 30, 1998 compared to a net income of
$288,000 for the nine month period ended September 30, 1997. The operating
losses incurred in the first nine months of 1998 primarily resulted from
non-recurring
10
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expenses associated with the merger transaction in which the Company acquired
First National Bank of Tampa and the opening of the Jacksonville, Florida
offices of the Company and the Bank.
The increase in net interest income of $382,000, or 25.5%, to $1.9 million for
the nine months ended September 30, 1998 compared $1.5 million for the same
period in 1997, consists of an increase in interest income of $455,000, or
14.2%, and an increase in interest expense of $73,000, or 4.3%. The increase in
interest income for the first nine months of 1998 is primarily attributable to
an increase of $326,000 in interest on investments and federal funds sold
resulting from the investment of the net proceeds of the public offering.
The provision for loan losses charged to operations increased $62,000 to
$107,000 for the period ended September 30, 1998 from $45,000 for the same
period in 1997. This increase represents the additional reserves resulting from
new loan growth.
Non-interest income increased $79,000, or 20.0%, to $472,000 for the nine month
period ended September 30, 1998 from $393,000 for the same period in 1997. The
increase in non-interest income resulted from an increase in service fee income
of $53,000, an increase in other income of $43,000, partially offset by a
decrease in the gain on sale of loans of $18,000. Increases in other
non-interest income and service fees of $96,000 reflects an increase in deposit
account fees and ACH/EFT service fees.
Non-interest expense increased $4.8 million to $6.2 million for the nine month
period ended September 30, 1998 compared to $1.4 million for the nine month
period ended September 30, 1997. The increase in non-interest expense resulted
primarily from increases in salaries and benefits, occupancy and equipment, data
processing, and other expenses. Salaries and benefits expenses increased $3.6
million to $4.3 million for the nine months ended September 30, 1998 compared to
$767,000 for the same period in 1997. This increase resulted from non-recurring
non-cash compensation expense of $3.0 million related to the sale of common
stock to 14 officers, directors and consultants, normal salary increases and the
additional staff associated with the opening of the Jacksonville banking office
and the staff for the holding company. Included in salaries and benefits expense
for the nine month period in 1998 are non-recurring expenses of $99,000
associated with the relocation of executive officers of the company.
The increase in occupancy and equipment expense of $120,000, or 65.7%, resulted
from the additional leased space for the Bank's SBA department, startup costs
and lease expense for the Jacksonville banking and holding company office, and
from additional depreciation and maintenance expenses resulting from the
purchase of additional computer equipment. Data processing expenses increased
$11,000 or 15.7% to $80,000 for the nine months ended September 30, 1998 as
compared to $69,000 for the same period in 1997. This increase resulted from the
conversion and implementation of several new products and the additional
processing expenses for the Company in connection with the opening of the
Jacksonville banking office. Other expenses increased $1.2 million, to $1.5
million for the nine months ended September 30, 1998 compared to $363,000 for
the same period in 1997. This increase resulted primarily from a financing cost
of $972,000 related to the February 3, 1998 sale of common stock and warrants
included in the units sold to foreign investors. Additional other operating
expenses for the nine months ended September 30, 1998 compared to the same
period in 1997, included costs associated with to the opening of the
Jacksonville banking office and legal, accounting and other professional fees
associated with the acquisition of First National Bank of Tampa.
A provision for income taxes of $29,000 was recognized for the nine month period
ended September 30, 1998 as compared to a provision for income taxes of $178,000
for the same period ended September 30, 1997. Included in the loss of $(4.0)
million for the nine month period in 1998 are non-tax deductible expenses
11
<PAGE>
of $3.9 million associated the sale of common stock and warrants included in the
units sold to foreign investors and the sale of common stock to officers,
directors and consultants. Therefore, no benefit for income taxes is recognized
for the period ending September 30, 1998. The provision for income taxes of
$29,000 for the nine month period ended September 30, 1998 represents
managements estimate of the alternative minimum tax for this period. The
provision for income taxes of $178,000 for the same period in 1997 represents an
estimated effective annual tax rate of 38%.
FINANCIAL CONDITION
Total assets at September 30, 1998 were $95.2 million, an increase of $34.8
million or 57.6%, from $60.4 million at December 31, 1997. The increase in total
assets primarily resulted from the injection of funds from the public offering
on August 4, 1998. Total Federal Funds sold decreased $4.8 million or 47.1% to
$5.4 million at September 30, 1998 as compared to $10.2 million at December 31,
1997. Funds which were previously invested in Federal Funds to maintain excess
liquidity, were reinvested in longer term assets or loans after the capital
injection. Repurchase agreements purchased increased to $18.0 million at
September 30, 1998 from $0 at December 31, 1998. These assets represent short
term investment of the excess proceeds of the public offering reserved for
future capitalization of the Bank and the funding of loan growth. Investment
securities increased $13.1 million or 121.5% to $23.8 million from $10.8 million
at December 31, 1997. The increase in investment securities also reflects the
investment of the excess proceeds of the public offering reserved for future
capitalization of the Bank and the funding of loan growth.
Total loans increased $8.0 million, or 23.7%, to $41.8 million at September 30
1998, from $33.8 million at December 31, 1997. The increase in total loans was
funded by the proceeds of the capital offering. The allowance for loan losses
increased $130,000, or 26.9%, to $611,000 at September 30, 1998 from $481,000 at
December 31, 1997. The increase resulted from recoveries of previously
charged-off loans of $23,000 and additional provisions of $107,000, during the
nine month period ended 1998. The allowance for loan losses as a percentage of
total loans increased slightly form 1.42% at December 31, 1997 to 1.46% at
September 30, 1998 Management believes that such allowance for loan losses is
sufficient to cover estimated losses in the Banks loan portfolio.
Deposits increased $1.7 million, or 3.8%, to $47.2 million at September 30, 1998
from $45.5 million at December 31, 1997. The increase in total deposits resulted
from a decrease of $707,000, or 11.0%, in non-interest deposits, a decrease of
$74,000, or 5.5%, in money market deposits, offset by an increase of $318,000,
or 10.3%, in interest bearing demand deposits, an increase of $2.0 million, or
33.8%, in savings deposits, and an increase of $207,000, or 0.7%, in total time
deposits. Time deposits often fluctuate in response to interest rate changes and
can vary rather significantly on a quarterly basis. The decrease in non-interest
and interest-bearing demand deposits reflects the normal seasonal fluctuations
for these types of accounts.
Shareholders equity increased by $37.3 million to $43.7 million at September 30,
1998, from $6.3 million at December 31, 1997. This increase resulted from the
net proceeds from the Initial Public Offering of $38.1 million, the exercise of
stock options on May 28, 1998 whereby 240,000 shares of common stock were
purchased at an exercise price, or $1.00 per share, partially offset by
operating losses, net of compensation and financing costs, of $99,000.
Non-accrual loans increased to $393,000 at September 30, 1998, compared to $0 at
December 31, 1997. These nonaccrual loans represent five commercial loans, four
of which are SBA guaranteed loans of which $298,000 is guaranteed by the SBA,
subject to certain conditions. The Bank reflected these loans as nonaccrual as
they are over 90 days past-due and in liquidation at September 30, 1998. These
loans were classified as impaired loans at December 31, 1997 which an allowance
for loan losses for the Bank's estimated exposure on these loans.
12
<PAGE>
LIQUIDITY
The Company, through its subsidiary, the Bank has traditionally maintained
levels of liquidity above levels required by regulatory authorities. The Bank's
operational needs, demand for loan disbursements, and savings withdrawals can be
met by loan principal and interest payments received, new deposits, and excess
liquid assets. Significant loan demand, deposit withdrawal, increased
delinquencies and increased real estate acquired in settlement of loans could
alter this condition. Management does not foresee any liquidity problems for
1998.
Liquidity and Sources of Capital
- - --------------------------------
Liquidity is the Companys ability to meet all deposit withdrawals immediately,
while also providing for the credit needs of customers. The September 30, 1998
financial statements evidence a satisfactory liquidity position as total cash
and cash equivalents amounted to $26.5 million, representing 27.8% of total
assets. Investment securities amounted to $23.8 million, representing 25.1% of
total assets. These securities provide a secondary source of liquidity since
they can be converted into cash in a timely manner. The Companys ability to
maintain and expand its deposit base and borrowing capabilities are also a
source of liquidity. For the nine-month period ended September 30, 1998, total
deposits increased from $45.5 million at December 31, 1997 to $47.2 million,
representing an annualized increase of 3.8%. There can be no assurance that the
Company will be able to maintain this level of growth. The Companys management
closely monitors and maintains appropriate levels of interest earning assets and
interest bearing liabilities so that maturities of assets are such that adequate
funds are provided to meet customer withdrawals and loan demand. There are no
trends, demands, commitments, events or uncertainties that will result in. or
are reasonably likely to result in, the Companys liquidity increasing or
decreasing in any material way.
Management is committed to maintaining capital at a level sufficient to protect
depositors, provide for reasonable growth, and fully comply with all regulatory
requirements. Managements strategy to achieve this goal is to retain sufficient
earnings while providing a reasonable return on equity.
The table below illustrates the Banks regulatory capital ratios at September 30,
1998:
Mimimum
September 30, regulatory
Bank 1998 requirement
---- ------------- -----------
Tier 1 46.60% 4.00%
===== ====
Total risk-based capital ratio 47.96% 8.00%
===== ====
Leverage ratio 24.75% 3.00%
===== ====
Note that with respect to the leverage ratio, the OCC expects a minimum of 5.0
percent to 6.0 percent ratio for banks that are not rated CAMEL 1. Although the
Bank is not rated CAMEL 1, its leverage ratio of 24.75% is well above the
required minimum.
13
<PAGE>
Year 2000 Compliance Disclosure
As the year 2000 ("Year 2000") approaches, an important business issue has
emerged regarding existing application software programs and operating systems.
Many existing application software products, including the Bank's, were designed
to accommodate a two-digit year. For example, "98" is stored on the system and
represents 1998 and "00" represents 1900. The Bank primarily utilizes M&I Data
Services, Inc. ("M&I"), a third-party vendor, to provide its primary banking
applications, including core processing systems. In addition, the Bank also uses
M&I's software for certain ancillary computer applications. M&I has committed
substantial resources in the process of modifying, upgrading or replacing its
computer applications to ensure timely Year 2000 compliance. M&I has notified
the Bank that it has successfully completed the conversion of its banking
systems to a Year 2000-ready platform. Prior to the actual conversion, both the
Bank and M&I conducted comprehensive awareness, assessment, renovation, and
testing phases as part of their respective Year 2000 projects. Each of these
phases helped both organizations ensure that that they understood the scope of
the year 2000 impact on their day-to-day business. In August 1998, M&I Data
Services Year 2000 Outsourcing Solution, the Banks core processing systems, was
certified by the Information Technology of America (ITAA). ITAA 2000 is the
banking industrys century date change certification program. The program
examines processes and methods used by companies to perform their Year 2000
software conversion. M&I Data Services has provided all upgrades, modifications
and systems enhancements to the Bank in accordance with its data processing
agreement and without additional costs to the Bank.
In addition to its core processing systems, the Company and the Bank have
implemented a Year 2000 compliance program whereby the Bank is reviewing the
Year 2000 issues that may be faced by its other third-party vendors and loan and
deposit customers. Under such program, the Company will examine the need for
modifications or replacement of all non-Year 2000 compliant pieces of software.
This process is ongoing, however, to date the Bank has not identified any
mission critical software systems that are not Year 2000 compliant or in the
process of being modified for compliance. Within the last nine months, the Bank
has made a physical inventory of its computer and other hardware and equipment
to determine if such hardware is Year 2000 compliant. As part of this process,
the Company and Bank have replaced certain equipment and hardware at a cost of
$34,000. The Bank has also established a reserve in the amount of $10,000 for
the cost of outside solution providers to review, assess and provide testing of
its internal computer network and other internal systems. Management of the
Company does not currently expect that the cost of its and the Bank's Year 2000
compliance program will exceed the amount of the established reserves nor will
any costs in excess of these reserves be material to its financial condition.
An area of concern by the Company, Bank and its primary regulator, the Office of
the Comptroller of the Currency, Administrator of National Banks is the effect
of Year 2000 issues on its deposit and loan customers. Failure to address Year
2000 related issues could have significant impact on the ability of certain
customers of the Bank to continue operations. The Banks loan portfolio could be
negatively impacted if customers are unable to honor loan agreements and
defaults occur as a result of failure to address Year 2000 issues. In February
of 1998, the Bank conducted a review of all loan relationships in excess of
$25,000 to determine the potential effect of Year 2000 issues on the customers
systems. The primary focus of this review was a determination of the readiness
of the customer to address Year 2000 problems and the effect of such readiness
on the customers ability to repay loans. Management identified a small number of
customers which could be potentially be affected by Year 2000 issues, and has
addressed the Banks concern with these customers. Continuing monitoring of these
customer relationships will be made to ensure that the necessary modifications
to systems will be made on a timely basis. In addition, the Bank now reviews
Year 2000 related issues, as part of its normal underwriting criteria and loan
approval process. The Bank also includes Year 2000 compliance requirements and
covenants requiring compliance within its standard loan agreements. Although the
Company and Bank have taken extensive steps to address Year 2000 customer
related issues; there can be no assurance that these customers will be Year 2000
compliant. Failure of certain customers to adequately address these issues could
result in loan defaults which would negatively impact the Companys earnings.
14
<PAGE>
The Company believes that its mission critical systems are currently or will be
Year 2000 compliant by December 31, 1998 and expects that it will satisfy such
compliance program without material disruption of its operations. Management of
the Company has also evaluated the potential effect on M&I's data processing
systems should events beyond M&Is control such as power and communications
failures occur as a result of Year 2000 issues. In addition, the Banks internal
systems could fail as a result of undetected system or software errors or
failure of certain infrastructure which is beyond the control of the Bank. The
Bank has prepared a Year 2000 Contingency Strategy and Policy (the Plan) to
address the various recovery solutions for Year 2000-related issues, which may
arise from the most likely Year 2000 scenarios, based on current available
information. The Plan identifies and classifies areas within the organization
which could potentially be effected by Year 2000 issues. The identified areas
are assigned a status of Mission Critical, Long-Term Mission Critical, or
Non-Mission Critical. Based on these classifications, contingency plans are
prepared to provide at level a minimum acceptable level of service on an ongoing
basis to the Banks customers. Outside solution providers will review the Plan
and testing on mission critical functions will be completed by the end of the
first quarter of 1999.
Although the Company and Bank have taken extensive steps to address Year 2000
related issues, there can be no assurance that all necessary modifications will
be identified and corrected or that unforeseen difficulties or costs will not
arise. In addition, there can be no assurance that the failure of the Banks
internal systems or the systems provided by M&I or other companies on which the
Company's systems rely will not negatively impact the Company's systems or
operations.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs concerning future
events, including, but not limited to, statements regarding growth in sales of
the Company's products, profit margins and the sufficiency of the Company's cash
flow for its future liquidity and capital resource needs, These forward looking
statements are further qualified by important factors that could cause actual
results to differ materially from those in the forward looking statements.
Item 3. Changes in Information About Market Risk
Not Applicable.
Part II. Other Information
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
15
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibit is filed with this Report.
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. No report on Form 8-K was filed during the
quarter ended September 30, 1998.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Florida Banks, Inc.
Date: November 12, 1998 By: /s/Charles E. Hughes, Jr.
-----------------------
Charles E. Hughes, Jr.
President and Chief Executive Officer
Date: November 12, 1998 By: /s/T. Edwin Stinson, Jr
-----------------------
T. Edwin Stinson, Jr.
Chief Financial Officer
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of Florida Banks, Inc. for the nine month period from
January 1, 1998 through September 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,377,063
<INT-BEARING-DEPOSITS> 18,000,000
<FED-FUNDS-SOLD> 6,115,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,558,027
<INVESTMENTS-CARRYING> 291,850
<INVESTMENTS-MARKET> 0
<LOANS> 41,813,219
<ALLOWANCE> 611,053
<TOTAL-ASSETS> 95,191,381
<DEPOSITS> 47,190,688
<SHORT-TERM> 4,348,545
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
606,000
<COMMON> 58,528
<OTHER-SE> 43,593,620
<TOTAL-LIABILITIES-AND-EQUITY> 95,191,381
<INTEREST-LOAN> 2,636,837
<INTEREST-INVEST> 648,702
<INTEREST-OTHER> 385,899
<INTEREST-TOTAL> 3,671,427
<INTEREST-DEPOSIT> 1,548,958
<INTEREST-EXPENSE> 1,789,934
<INTEREST-INCOME-NET> 1,881,493
<LOAN-LOSSES> 107,000
<SECURITIES-GAINS> 8,197
<EXPENSE-OTHER> 6,255,850
<INCOME-PRETAX> (4,009,444)
<INCOME-PRE-EXTRAORDINARY> (4,009,444)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,037,994)
<EPS-PRIMARY> (1.25)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 393,000
<LOANS-PAST> 520,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 414,000
<ALLOWANCE-OPEN> 481,463
<CHARGE-OFFS> 0
<RECOVERIES> 22,590
<ALLOWANCE-CLOSE> 611,053
<ALLOWANCE-DOMESTIC> 611,053
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
