10-Q 1 fla10q.txt INITIAL FILING 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, 2003 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-24683 FLORIDA BANKS, INC. (Exact name of registrant as specified in its charter) FLORIDA 58-2364573 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5210 BELFORT ROAD, SUITE 310 JACKSONVILLE, FL 32256 (Address of principal executive offices) (904) 332-7770 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |_| No |X| Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Title Outstanding COMMON STOCK, $.01 PAR VALUE 6,814,628 OUTSTANDING AT OCTOBER 23, 2003 PER SHARE -1- Table of Contents Part I Financial Information Item 1. Financial Statements......................................... Page 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... Page 14 Item 3. Qualitative and Quantitative Disclosures about Market Risk ............................................... Page 23 Item 4. Controls and Procedures...................................... Page 24 Part II Other Information Item 1. Legal Proceedings............................................ Page 25 Item 2. Changes in Securities........................................ Page 25 Item 3. Defaults Upon Senior Securities.............................. Page 25 Item 4. Submission of Matters to a Vote of Security Holders.......... Page 25 Item 5. Other Information............................................ Page 25 Item 6. Exhibits and Reports on Form 8-K............................. Page 25 Signatures ........................................................... Page 27 Exhibits ............................................................ Page 28 -2- PART I. Financial Information, Item 1. Financial Statements FLORIDA BANKS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) ------------------------------------------------------------------------------------------------------------------------------------ September 30, December 31, ASSETS 2003 2002 CASH AND DUE FROM BANKS $ 118,456,915 $ 26,964,504 FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS 47,485,000 62,515,000 ------------- ------------- Total cash and cash equivalents 165,941,915 89,479,504 INVESTMENT SECURITIES: Available for sale, at fair value (cost $45,727,698 and $50,155,158 at September 30, 2003 and December 31, 2002) 42,358,807 50,930,650 Held to maturity, at cost (fair value $0 and $229,475 at September 30, 2003 and December 31, 2002) 227,925 Other investments 3,304,050 2,493,350 ------------- ------------- Total investment securities 45,662,857 53,651,925 MORTGAGE LOANS HELD FOR SALE 71,182,230 54,674,248 LOANS: Commercial real estate 415,558,472 313,120,588 Commercial 162,614,539 166,122,230 Residential mortgage 33,143,631 23,080,140 Consumer 51,029,440 45,859,704 Credit card and other loans 2,248,192 2,791,678 ------------- ------------- Total loans 664,594,274 550,974,340 Allowance for loan losses (8,587,417) (7,263,029) Net deferred loan fees (710,077) (519,271) ------------- ------------- Net loans 655,296,780 543,192,040 PREMISES AND EQUIPMENT, NET 4,921,669 5,466,332 ACCRUED INTEREST RECEIVABLE 2,396,520 2,375,102 DEFERRED INCOME TAXES, NET 4,232,535 3,908,751 DERIVATIVE INSTRUMENTS 1,777,685 2,321,643 OTHER REAL ESTATE OWNED 652,500 652,500 OTHER ASSETS 13,014,116 343,505 ------------- ------------- TOTAL ASSETS $ 965,078,807 $ 756,065,550 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS: Noninterest-bearing demand $ 100,602,517 $ 141,395,150 Interest-bearing demand 83,795,480 52,803,427 Regular savings 83,706,296 66,940,672 Money market accounts 29,140,737 19,210,512 Time $100,000 and over 422,955,846 314,852,717 Other time 91,429,118 69,707,230 ------------- ------------- Total deposits 811,629,994 664,909,708 REPURCHASE AGREEMENTS SOLD 43,513,648 4,653,878 OTHER BORROWED FUNDS 19,919,686 9,921,898 ACCRUED INTEREST PAYABLE 2,858,417 2,377,963 MANDATORY MORTGAGE FORWARD DELIVERY CONTRACTS 1,072,391 TRUST PREFERRED SECURITIES 20,000,000 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 9,683,856 4,765,136 ------------- ------------- Total liabilities 908,677,992 686,628,583 ------------- ------------- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST 16,473,092 SHAREHOLDERS' EQUITY: Series C Preferred Stock, $100.00 par value, 50,000 shares authorized, 50,000 5,000,000 5,000,000 shares issued and outstanding Common stock, $.01 par value; 30,000,000 shares authorized; 6,814,628 and 6,768,362 shares issued, respectively 68,147 67,684 Additional paid-in capital 52,874,202 52,287,390 Accumulated deficit (deficit of $8,134,037 eliminated upon quasi-reorganization on December 31, 1995) (1,663,028) (4,874,873) Accumulated other comprehensive income, net of tax 121,494 483,674 ------------- ------------- Total shareholders' equity 56,400,815 52,963,875 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 965,078,807 $ 756,065,550 ============= =============

See notes to condensed financial statements -3- FLORIDA BANKS, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) ----------------------------------------------------------------------------------------------------------------------------------- Three-Month Period Ended Nine-Month Period Ended September 30, September 30, --------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ---------- INTEREST INCOME: Loans, including fees $10,753,474 $ 8,208,741 $30,772,718 $23,386,476 Investment securities 300,696 570,382 1,018,185 1,716,879 Federal funds sold 160,348 287,774 383,008 647,361 ----------- ----------- ----------- ----------- Total interest income 11,214,518 9,066,897 32,173,911 25,750,713 ----------- ----------- ----------- ----------- INTEREST EXPENSE: Deposits 3,907,489 3,899,450 11,548,058 10,839,723 Repurchase agreements 106,382 128,367 292,620 379,825 Interest on Trust Preferred Securities 245,612 245,612 Borrowed Funds 186,023 98,299 460,937 323,402 ----------- ----------- ----------- ----------- Total interest expense 4,424,470 4,126,116 12,547,227 11,542,950 ----------- ----------- ----------- ----------- NET INTEREST INCOME 6,790,048 4,940,781 19,626,684 14,207,763 PROVISION FOR LOAN LOSSES 599,433 699,286 2,452,158 2,107,236 ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,190,615 4,241,495 17,174,526 12,100,527 ----------- ----------- ----------- ----------- NONINTEREST INCOME: Service fees 621,412 431,390 1,738,148 1,200,908 Gain on sale of mortgage loans 1,626,442 6,966,677 Mortgage loan processing fees 441,418 1,777,049 Mortgage loan origination fees 330,686 150,445 853,712 322,577 Gain on sale of commercial loans 42,888 42,888 Other noninterest income 308,471 130,366 844,682 294,471 ----------- ----------- ----------- ----------- Total noninterest income 3,328,429 755,089 12,180,268 1,860,844 ----------- ----------- ----------- ----------- NONINTEREST EXPENSE: Salaries and benefits 5,069,423 2,799,217 16,573,806 7,510,262 Occupancy and equipment 699,905 532,467 1,981,662 1,505,757 Data processing 288,184 224,260 825,418 621,456 Dividends on preferred securities of subsidiary trusts 205,126 425,835 428,866 Other 1,633,397 817,120 4,460,959 2,414,724 ----------- ----------- ----------- ----------- Total noninterest expense 7,690,909 4,578,190 24,267,680 12,481,065 ----------- ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 1,828,135 418,394 5,087,114 1,480,306 PROVISION FOR INCOME TAXES 654,973 152,950 1,751,981 557,039 ----------- ----------- ----------- ----------- NET INCOME 1,173,162 265,444 3,335,133 923,267 ----------- ----------- ----------- ----------- PREFERRED STOCK DIVIDENDS 63,014 186,987 140,058 ----------- ----------- ----------- ----------- NET INCOME APPLICABLE TO COMMON SHARES $ 1,110,148 $ 265,444 $ 3,148,146 $ 783,209 =========== =========== =========== =========== INCOME PER COMMON SHARE: Basic $ 0.16 $ 0.04 $ 0.46 $ 0.12 =========== =========== =========== =========== Diluted $ 0.16 $ 0.04 $ 0.45 $ 0.12 =========== =========== =========== ===========

See notes to condensed financial statements. -4- FLORIDA BANKS, INC. CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) ------------------------------------------------------------------------------------------------------------------------------------ Preferred Stock Common Stock Additional ------------------------------------------------------------- Paid-In Shares Par Value Shares Par Value Capital BALANCE, JANUARY 1, 2002 102,283 $6,955,244 5,677,660 $56,777 $44,964,967 Comprehensive income: Net income Unrealized gain on available for sale investment securities, net of tax of $144,482 Comprehensive income Conversion of Series B Preferred Stock into common stock (102,283) (6,955,244) 1,022,830 10,228 6,945,016 Exercise of stock options 7,063 71 46,401 Issuance of common stock under Employee Stock Purchase Plan 41,133 411 210,359 Issuance of restricted stock 19,676 197 120,647 Issuance of Series C Preferred Stock, net 50,000 5,000,000 Series B Preferred Stock dividends paid ________ __________ _________ _________ ___________ BALANCE, DECEMBER 31, 2002 50,000 5,000,000 6,768,362 67,684 52,287,390 Comprehensive income: Net income Unrealized loss on available for sale investment securities, net of tax of $218,516 Comprehensive income Issuance of common stock under Employee Stock Purchase Plan 30,935 309 222,835 Exercise of stock warrants 12,800 128 127,872 Series C Preferred Stock offering costs (10,677) Exercise of stock options and issue of stock grants 2,531 26 246,782 Series C Preferred Stock dividends paid ________ __________ _________ _________ ___________ BALANCE, September 30, 2003 (Unaudited) 50,000 $5,000,000 6,814,628 $ 68,147 $52,874,202 Accumulated Other Comprehensive Accumulated (loss) income Deficit Net of Tax Total BALANCE, JANUARY 1, 2002 $(6,079,156) $ 244,202 $ 46,142,034 Comprehensive income: Net income 1,467,058 1,467,058 Unrealized gain on available for sale investment securities, net of tax of $144,482 239,472 239,472 Comprehensive income 1,706,530 Conversion of Series B Preferred Stock into common stock Exercise of stock options 46,472 Issuance of common stock under Employee Stock Purchase Plan 210,770 Issuance of restricted stock 120,844 Issuance of Series C Preferred Stock, net 5,000,000 Series B Preferred Stock dividends paid (262,775) (262,775) ___________ _____________ ______________ BALANCE, DECEMBER 31, 2002 (4,874,873) 483,674 52,963,875 Comprehensive income: Net income 3,335,133 3,335,133 Unrealized loss on available for sale investment securities, net of tax of $218,516 (362,180) (362,180) Comprehensive income 2,972,953 Issuance of common stock under Employee Stock Purchase Plan 223,144 Exercise of stock warrants 128,000 Series C Preferred Stock offering costs (10,677) Exercise of stock options and issue of stock grants 246,808 Series C Preferred Stock dividends paid (123,288) (123,288) ___________ _____________ ______________ BALANCE, September 30, 2003 (Unaudited) $(1,663,028) $ 121,494 $ 56,400,815 =========== ============= ==============

See notes to condensed financial statements. -5- FLORIDA BANKS, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) ------------------------------------------------------------------------------------------------------------------------------------ Nine-Month Period Ended September 30, ----------------------------------- OPERATING ACTIVITIES: 2003 2002 ---------------------------------- Net income $ 3,335,133 $ 923,267 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 655,150 579,343 Reinvested dividends on investment securities (90,301) (116,826) Deferred income tax provision (benefit) (105,268) 537,751 Accretion of premium on investments, net (689,170) (37,177) Amortization of premium on loans 67,945 95,356 Loss on sale of available for sale investment securities 3,967 Provision for loan losses 2,452,158 2,107,236 Loss on foreign currency translation 124,139 41,675 Gain on derivative instruments (86,120) (43,056) Increase in mortgage loans held for sale (16,507,982) Increase in accrued interest receivable (21,418) (631,637) Decrease (increase) in accrued interest payable 480,454 (297,601) (Increase) decrease in other assets (635,231) 40,488 Increase in other liabilities 4,918,720 1,053,929 ------------- ------------- Net cash (used in) provided by operating activities (6,101,791) 4,256,715 ------------- ------------- INVESTING ACTIVITIES: Proceeds from sales, paydowns and maturities of investment securities: Available for sale 28,861,721 16,271,660 Held to maturity 227,925 2,360,879 Purchases of investment securities: Available for sale (20,091,102) (28,528,240) Other investments (810,700) (188,800) Net increase in loans held for investment (114,524,353) (113,968,736) Increase in bank owned life insurance (10,333,757) Proceeds from sale of other real estate owned 242,979 Proceeds from sale of premises and equipment 1,089,326 Purchases of premises and equipment (1,200,453) (2,629,460) ------------- ------------- Net cash used in investing activities (116,781,393) (126,439,718) ------------- ------------- FINANCING ACTIVITIES: Net decrease in demand deposits, money market accounts and savings accounts 16,895,269 20,754,787 Net increase in time deposits 129,825,017 88,726,347 Increase in repurchase agreements 38,859,770 37,603,204 Increase (decrease) in borrowed funds 9,597,788 (2,405,911) Proceeds from FHLB advances 400,000 3,000,000 Preferred stock offering costs (10,677) Proceeds from exercise of stock options and issuance of stock grants 246,808 115,643 Preferred dividends paid (123,288) (262,775) Proceeds from exercise of stock warrants 128,000 Proceeds from issuance of trust preferred securities, net 3,526,908 7,718,016 ------------- ------------- Net cash provided by financing activities 199,345,595 155,249,311 ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 76,462,411 33,066,308 CASH AND CASH EQUIVALENTS: Beginning of period 89,479,504 73,989,159 ------------- ------------- End of period $ 165,941,915 $ 107,055,467 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 12,066,773 $ 11,840,551 ============= ============= Cash paid for income taxes $ 2,043,449 $ ============= ============= NONCASH FINANCING ACTIVITIES: Proceeds from demand deposits used to purchase shares of common stock under Employee Stock Purchase Plan $ 223,144 $ 210,771 ============= =============

See notes to condensed financial statements. -6- FLORIDA BANKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION Florida Banks, Inc. (the "Company") was incorporated October 15, 1997 to become a bank holding company and acquire First National Bank of Tampa (the "Bank"). On August 4, 1998, the Company completed its initial public offering and its merger (the "Merger") with the Bank pursuant to which the Bank was merged with and into Florida Bank No.1, N.A., a wholly-owned subsidiary of the Company, and renamed Florida Bank, N.A. The condensed consolidated 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 consolidated financial statements do not include all disclosures provided in the annual financial statements. The condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report to Shareholders incorporated by reference into the Company's Form 10-K for the year ended December 31, 2002. All adjustments of a normal recurring nature which, in the opinion of management, are necessary to fairly present the results of the interim periods have been made. Results of operations for the three and nine-month periods ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 2. EARNINGS PER COMMON SHARE The following is a reconciliation of the denominator used in the computation of basic and diluted earnings per common share. Three-Month Period Ended Nine-Month Period Ended September 30, September 30, -------------------------------- ------------------------------- 2003 2002 2003 2002 --------------- --------------- -------------- -------------- Weighted average number of common shares outstanding - Basic 6,812,029 6,751,156 6,793,479 6,335,832 Incremental shares from the assumed conversion of stock options 256,823 97,729 201,625 85,233 --------- --------- --------- --------- Total - Diluted 7,068,852 6,848,885 6,995,104 6,421,065 ========= ========= ========= =========

The incremental shares from the assumed conversion of stock options for the three and nine-month periods ended September 30, 2003 and 2002 were determined using the treasury stock method, under which the assumed proceeds were equal to (1) the amount that the Company would receive upon exercise of the options plus (2) the amount of tax benefit that would be credited to additional paid-in capital assuming exercise of the options. The assumed proceeds are used to purchase outstanding common shares at the Company's average market value for the period. -7- FLORIDA BANKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued) -------------------------------------------------------------------------------- 3. DERIVATIVE INSTRUMENTS The following instruments qualify as derivatives as defined by Statement of Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities, as amended: September 30, 2003 ----------------------------------- Contract/Notional Fair Amount Value Interest rate swap agreements $ 148,500,000 $ 1,889,225 Foreign currency swap agreements $ 2,000,000 $ (111,540) Commitments to fund mortgage loans $ 58,748,408 $ 334,918 Interest rate swap agreements at September 30, 2003 consist of twenty-one agreements, which effectively convert the interest rate on certain certificates of deposit from a fixed rate to a variable rate to more closely match the interest rate sensitivity of the Company's assets and liabilities. The Company has designated and assessed the derivatives as highly effective fair value hedges, as defined by SFAS No. 133. Additionally, the Company entered into a foreign currency swap agreement during the first quarter of 2001 that 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 loss of $1,422 and a gain of $8,660, respectively, during the three- and nine-month periods ended September 30, 2003 as a result of changes in the fair value of the foreign currency agreement and the related translation adjustment. The Company has adopted the provisions of the Derivatives Implementation Group, Implementation Issue C13, When a Loan Commitment is Included in the Scope of Statement No. 133 ("DIG C13"). DIG C13 requires that loan commitments that relate to the origination or acquisition of mortgage loans that will be held for resale must be accounted for as derivative instruments in accordance with SFAS No. 133. The fair value of commitments to fund mortgage loans is included in mortgage loans held for sale. 4. PREFERRED STOCK On December 31, 2002, the Company issued 50,000 shares of Series C preferred stock for $100.00 per share to a single shareholder through a private placement. The Series C preferred stock is not convertible or redeemable, except as a result of a change in control. Non-cumulative dividends accrue at five percent annually and are payable quarterly in arrears. In the event of any liquidation, dissolution or winding up of affairs of the Company, holders of Series C preferred stock at the time shall receive $100.00 per share plus an amount equal to accrued and unpaid dividends thereon through and including the date of distribution prior to any distribution to holders of common stock. The liquidation preference at September 30, 2003 was $5,061,643. -8- FLORIDA BANKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued) -------------------------------------------------------------------------------- Subject to regulatory approval, the Company intends to exchange all of the Series C preferred stock for shares of Series D preferred stock, which will be substantially similar to the Series C preferred stock, except the Series D preferred stock will be immediately converted into 500,000 shares of the Company's common stock at $10.00 per share. The preferred shareholder intends to formally apply for the necessary regulatory approvals for this exchange. 5. RECENT ACCOUNTING PRONOUNCEMENTS In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others. This Interpretation addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. In addition, the Interpretation clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations that the guarantor has undertaken in issuing the guarantee. The Company adopted the disclosure requirements of FIN 45 for the fiscal year ended December 31, 2002, and the recognition provisions on January 1, 2003. Adoption of FIN 45 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. This Interpretation applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. FIN 46 applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise held a variable interest that is acquired on or before January 31, 2003. The Company adopted FIN 46 as of July 31, 2003. Adoption of FIN 46 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In addition, the statement clarifies when a contract is a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is generally effective prospectively for contracts entered into or modified, and hedging relationships designated, after June 30, 2003. The Company adopted SFAS 149 effective July 1, 2003. Adoption of SFAS 149 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. -9- FLORIDA BANKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued) -------------------------------------------------------------------------------- In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS 150 are generally effective for financial instruments entered into or modified after May 31, 2003. Additionally, the Company must apply the provisions of SFAS 150 to all financial instruments on July 1, 2003. Upon the adoption of SFAS 150, the company's obligated mandatorily redeemable preferred securities of subsidiary trusts have been reclassified from mezzanine equity to debt. The dividends related to these securities after July 1, 2003 are reflected as interest expense on a prospective basis. At September 30, 2003, the Company had $20.0 million outstanding as company obligated mandatorily redeemable preferred securities of subsidiary trusts. The Company paid dividends related to those instruments of approximately $246 thousand (classified as interest expense) and $671 thousand (six months classified as noninterest expense and three months classified as interest expense) for the three- and nine-month periods ended September 30, 2003, respectively. 6. GUARANTEES The Company issues standby letters of credit to provide credit support for some creditors in case of default. As of September 30, 2003, the carrying amount of the liability was $10,544 and the maximum potential payment was $10,477,317. 7. SEGMENT REPORTING Prior to October 1, 2002, the Company had one reporting segment. In October 2002, the Company started a mortgage banking division which is managed as a segment. Accordingly, from October 2002 forward, the Company has two reporting segments, the commercial bank and the mortgage bank. The commercial bank segment provides its commercial customers such products as working capital loans, equipment loans and leases, commercial real estate loans and other business related products and services. This segment also offers mortgage loans to principals of its commercial customers. The mortgage bank segment originates mortgage loans through a network of third party mortgage brokers and sells these loans (on a wholesale basis) into the secondary market. -10- FLORIDA BANKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued) -------------------------------------------------------------------------------- Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the three-month period ended September 30, 2003 follows: Commercial Mortgage Intersegment Consolidated Bank Bank Other Eliminations Total ---------------- ------------------ ----------------- ------------------ ---------------- Net interest income $ 5,904,673 $ 1,168,988 $ (283,613) $ 6,790,048 Noninterest income 1,231,200 2,067,860 29,369 3,328,429 Provision for loan losses 599,433 599,433 Noninterest expense 4,415,916 2,539,801 735,192 7,690,909 Income (loss) before taxes 2,120,524 697,047 (989,436) 1,828,135 Assets 884,565,054 72,847,211 85,077,735 (77,863,584) $964,626,416 Expenditures for additions to premises and equipment 209,904 84,134 84,184 378,222

Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the nine-month period ended September 30, 2003 follows: Commercial Mortgage Intersegment Consolidated Bank Bank Other Eliminations Total -------------- ------------- -------------- ---------------- --------------- Net interest income $ 16,859,541 $ 2,957,577 $ (190,434) $ 19,626,684 Noninterest income 3,379,543 8,743,726 56,999 12,180,268 Provision for loan losses 2,452,158 2,452,158 Noninterest expense 12,886,749 8,276,138 3,104,793 24,267,680 Income (loss) before taxes 4,900,177 3,425,165 (3,238,228) 5,087,114 Assets 884,565,054 73,919,602 84,457,735 (77,863,584) $965,078,807 Expenditures for additions to premises and equipment 667,234 378,085 155,134 $ 1,200,453

-11- FLORIDA BANKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued) -------------------------------------------------------------------------------- The accounting policies of the segments are the same as those described in the summary of significant accounting policies found in Note 1 of the Company's consolidated financial statements for the years ended December 31, 2002, 2001 and 2000 filed in conjunction with the Company's annual report on form 10-K for the year ended December 31, 2002. The Company evaluates performance based on profit or loss from operations before income taxes. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and accordingly requires different technology and marketing strategies. The Company derives a majority of its revenues from interest income and gain on sale of mortgage loans and the chief operating decision maker relies primarily on net income before taxes to assess the performance of the segments and make decisions about resources to be allocated to the segments. Therefore, the segments are reported above using net income before taxes. The Company does not allocate income taxes to the segments. The Company does not have operating segments other than those reported. Parent Company financial information is included in the Other category in the table above and is deemed to represent an overhead function rather than an operating segment. The Company does not have a single external customer from which it derives 10 percent or more of its revenues and operates in one geographical area. 8. STOCK OPTIONS Pursuant to the disclosure requirements of SFAS No. 148, the following table provides an expanded reconciliation for all periods presented that adds back to reported net income the recorded expense under Accounting Principles Board Opinion No. 25, net of related income tax effects, deducts the total fair value expense under SFAS No. 123, net of related income tax effects and shows the reported and pro forma earnings per share amounts. -12- FLORIDA BANKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED) (Continued) -------------------------------------------------------------------------------- Three-Month Period Ended Nine-Month Period Ended September 30, September 30, ------------------------------ ------------------------------ 2003 2002 2003 2002 Net income applicable to common shares As reported $ 1,110,148 $ 265,444 $ 3,148,146 $ 783,209 Total stock-based employee compensation cost included in the determination of net income, net of related tax effects 57,425 18,843 144,537 56,528 Total stock-based employee compensation cost determined under fair value method for all awards, net of related tax effects (44,770) (53,363) (133,089) (160,088) ----------- ----------- ----------- ----------- Pro forma net income applicable to common shares $ 1,122,803 $ 230,924 $ 3,159,594 $ 679,649 =========== =========== =========== =========== Earnings per share - Basic As reported $ 0.16 $ 0.04 $ 0.46 $ 0.12 Pro forma $ 0.16 $ 0.03 $ 0.47 $ 0.11 Earnings per share - Diluted As reported $ 0.16 $ 0.04 $ 0.45 $ 0.12 Pro forma $ 0.16 $ 0.03 $ 0.45 $ 0.11 Shares used for computation Basic 6,812,029 6,751,156 6,793,479 6,335,832 Diluted 7,068,852 6,848,885 6,995,104 6,421,065

9. SUBSEQUENT EVENT On October 2, 2003, the Company announced it was postponing the planned public offering of its common stock for which it filed a registration statement with the Securities and Exchange Commission on July 16, 2003. However, the Company will evaluate its capital plans during the remainder of 2003 and early in 2004 and may raise additional capital during this time period. -13- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes appearing in Part 1, Item 1 of this Quarterly Report on Form 10-Q. Critical Accounting Policies The preparation of the condensed consolidated financial statements, on which this Management's Discussion and Analysis is based, requires Management to make estimates, which impact these condensed consolidated 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 for December 31, 2002, 2001 and 2000, and the years then ended, filed in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2002. 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 - The Company obtains real estate through foreclosure. Such property is 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, 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 had provided interest rate swaps to loan participants. As a result of these activities the Company recognizes income and expense related to such derivative instruments as 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. Commitments to Originate Mortgage Loans - The Company enters into commitments to originate mortgage loans whereby the interest rate on the loans is determined prior to funding (rate lock commitments). Rate lock commitments on loans that are intended to be sold are considered to be derivatives and are therefore, recorded at fair value with changes in fair value recorded in earnings. The fair value of these commitments is included in mortgage loans held for sale. -14- RESULTS OF OPERATIONS Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002 The Company's net income applicable to common shares for the third quarter of 2003 was $1.1 million, compared to $265 thousand for the third quarter of 2002. Basic and diluted income per common share for the third quarter of 2003 was $.16 compared to $.04 for the third quarter of 2002. The increase in net income can be attributed to increased net interest income, and increased non-interest income, partially offset by an increase in non-interest expenses. The increase in net interest income of $1.9 million or 37.4%, to $6.8 million for the third quarter of 2003 compared to $4.9 million for the third quarter of 2002, consists of an increase in interest income of $2.1 million, or 23.7%, and an increase in interest expense of $298 thousand, or 7.2%. The increase in interest income in the third quarter of 2003 is primarily attributable to an increase of $2.5 million in interest and fees on loans resulting from the growth in the loan portfolio, partially offset by decreases in interest income from investments and federal funds sold. The increase in interest expense resulted primarily from an increase of $246 thousand in interest on trust preferred securities, an increase of $88 thousand in borrowed funds, and an increase of $8 thousand in interest on deposits, partially offset by a decrease in interest on repurchase agreements. The increase in interest expense on deposits and borrowed funds is primarily attributable to an increase in these liabilities, partially offset by a decrease in market interest rates. The increase in interest on trust preferred securities results primarily from the reclassification of this expense as interest expense under SFAS 150 (see Note 5 to the "Notes to Consolidated Condensed Financial Statements: contained in Part 1 Item 1). The decrease in interest expense on repurchase agreements is primarily attributable to the decline in market interest rates on these instruments. The provision for loan losses charged to operations decreased $100 thousand to $599 thousand for the third quarter of 2003 from $699 thousand in the third quarter of 2002. This decrease primarily reflects a slowing in the growth of the portfolio of loans held for investment in the third quarter of 2003 as compared to the third quarter of 2002. For a more detailed discussion of the provision for loan losses, see "Allowance for Loan Losses" in the "Financial Condition" -------------------------- section below. Non-interest income increased 340.8% or $2.6 million, to $3.3 million for the three months ended September 30, 2003 from $755 thousand for the three months ended September 30, 2002. The increase in non-interest income primarily resulted from gains on sale of mortgage loans of $1.6 million and mortgage loan processing fees of $441 thousand for the third quarter, compared to zero for these categories for the same period in 2002. These income categories relate to the wholesale mortgage division of Florida Bank, N.A., (the "Bank"), which commenced operations in the fourth quarter of 2002. Due to the short time that this division has been in operation, and the substantial portion of its revenue attributable to mortgage refinance activity, there can be no assurance that the current levels of income will continue in the future. Service fees on deposits increased $190 thousand or 44.1% to $621 thousand for the three months ended September 30, 2003 from $431 thousand for the three months ended September 30, 2002. This increase is primarily attributable to an increase in deposit accounts. Mortgage loan origination fees attributable to the commercial bank increased $180 thousand or 119.8% to $331 thousand for the three months ended September 30, 2003 from $150 thousand for the three months ended September 30, 2002. This increase is primarily attributable to increased volume in residential mortgage loans. Gain on sale of commercial loans for the three months ended September 30, 2003 was zero, compared to $43 thousand for the same period in 2002. The gain resulted from the sale of a commercial loan in the third quarter of 2002. Other non-interest income increased $178 thousand, or 136.6% to $308 thousand for the three months ended September 30, 2003 from $130 thousand for the same period in 2002. The increase in other non-interest income is primarily attributable to increases in Automated Clearing House fees, and other non-deposit related service charges. -15- Non-interest expense increased $3.1 million or 68.0% to $7.7 million for the three months ended September 30, 2003 compared to $4.6 million for the three months ended September 30, 2002. The increase in non-interest expense resulted primarily from increases in salaries and benefits, dividends on preferred security of subsidiary trust, and other expenses. Salaries and benefits expenses increased $2.3 million to $5.1 million for the third quarter of 2003 compared to $2.8 million for the third quarter of 2002. This increase is primarily the result of additional staff associated with the overall growth of the Company's business and with the addition of staff for the wholesale mortgage division, who were hired beginning in the third quarter of 2002. Dividends on preferred securities of subsidiary trusts are zero for the third quarter of 2003, compared to $205 thousand for the third quarter of 2002, because this item is now classified as interest expense. Other expenses increased $816 thousand, or 99.9% to $1.6 million for the third quarter of 2003 compared to $817 thousand for the third quarter of 2002. This increase is primarily attributed to the expenses associated with supporting operations related to the overall growth of the Company. Specific operational expenses which increased include communications, loan expenses and postage/courier expenses. A provision for income taxes of $655 thousand was recognized for the third quarter of 2003 compared to $153 thousand for the same period in 2002. These provisions for income taxes represent an estimated effective annual tax rate of approximately 31% and 37% respectively. The decrease in the effective tax rate results from a tax credit obtained from a charitable contribution the Company made in the second quarter of 2003, reducing the Company's year-to-date tax rate, which effectively reduced the tax rate for the second and third quarters of 2003. Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002 The Company's net income applicable to common shares for the nine months ended September 30, 2003 was $3.1 million, compared to $783 thousand for the same period in 2002. Basic and diluted income per common share for the first nine months of 2003 was $.46 and $.45, respectively, compared to $.12 and $.12, respectively, for the first nine months of 2002. The increase in net income can be attributed to increased net interest income, and increased non-interest income, partially offset by an increase in the provision for loan losses and an increase in non-interest expenses. The increase in net interest income of $5.4 million or 38.1%, to $19.6 million for the first nine months of 2003 compared to $14.2 million for the first nine months of 2002, consists of an increase in interest income of $6.4 million, or 24.9%, partially offset by an increase in interest expense of $1.0 million, or 8.7%. The increase in interest income in the first nine months of 2003 is primarily attributable to an increase of $7.4 million in interest and fees on loans resulting from the growth in the loan portfolio, partially offset by decreases in interest income from investments and federal funds sold. The increase in interest expense resulted primarily from an increase of $708 thousand in interest on deposits, a $246 thousand increase in interest on trust preferred securities, and a $138 thousand increase in interest on repurchase agreements, partially offset by a decrease in interest on borrowed funds. The increase in interest expense on deposits is primarily attributable to an increase in deposits, partially offset by a decrease in market interest rates on deposits. The increase in interest on trust preferred securities results primarily from the reclassification of this expense as interest expense under SFAS 150 (see Note 5 to the "Notes to Consolidated Condensed Financial Statements: contained in Part 1 Item 1 ). The increase in interest expense on borrowed funds results from an increase in the balances of these liabilities, partially offset by a decline in interest rates. The decrease in interest expense on repurchase agreements is primarily attributable to the decline in market interest rates on these instruments. The provision for loan losses charged to operations increased $345 thousand to $2.5 million for the nine months ended September 30, 2003 from $2.1 million for the same period in 2002. This increase primarily reflects growth of the overall -16- loan portfolio in the first nine months of 2003 as compared to the first nine months of 2002. For a more detailed discussion of the provision for loan losses, see "Allowance for Loan Losses" in the "Financial Condition" section below. Noninterest income increased 554.6% or $10.3 million, to $12.2 million for the nine months ended September 30, 2003 from $1.9 million for the nine months ended September 30, 2002. The increase in noninterest income primarily resulted from gains on sale of mortgage loans of $7.0 million and mortgage loan processing fees of $1.8 million for the nine months ended September 30, 2003, compared to zero for these categories for the same period in 2002. These income categories relate to the Bank's wholesale mortgage division, which commenced operation in the fourth quarter of 2002. Due to the short time that this division has been in operation, and the substantial portion of its revenue attributable to mortgage refinance activity, there can be no assurance that the current levels of income will continue in the future. Service fees on deposits increased $537 thousand or 44.7% to $1.7 million for the nine months ended September 30, 2003 from $1.2 million for the nine months ended September 30, 2002. This increase is primarily attributable to an increase in deposit accounts. Mortgage loan origination fees attributable to the commercial bank increased $531 thousand or 164.7% to $854 thousand for the nine months ended September 30, 2003 from $323 thousand for the nine months ended September 30, 2002. This increase is primarily attributable to increased volume in residential mortgage loans. Gain on sale of commercial loans for the nine months ended September 30, 2003 was zero, compared to $43 thousand for the same period in 2002. This results from the sale of a commercial loan in the third quarter of 2002. Other non-interest income increased $550 thousand, or 186.8% to $845 thousand for the nine months ended September 30, 2003 from $294 thousand for the nine months ended September 30, 2002. The increase in other noninterest income is primarily attributable to increases in Automated Clearing House fees, and other non-deposit related service charges. Noninterest expense increased $11.8 million or 94.4% to $24.3 million for the nine months ended September 30, 2003 compared to $12.5 million for the nine months ended September 30, 2002. The increase in noninterest expense resulted primarily from increases in salaries and benefits and other expenses. Salaries and benefits expenses increased $9.1 million to $16.6 million for the first nine months of 2003 compared to $7.5 million for the first nine months of 2002. This increase is primarily the result of additional staff associated with the overall growth of the Company's business and with the addition of the staff of the wholesale mortgage division who were hired beginning in the third quarter of 2002. Other expenses increased $2.1 million, or 84.7% to $4.5 million for the first nine months of 2003 compared to $2.4 million for the first nine months of 2002. This increase is primarily attributed to the expenses associated with supporting operations related to the overall growth of the Company. Specific operational expenses which increased include communications, recruitment expenses and postage/courier expenses. A provision for income taxes of $1.8 million was recognized for the first nine months of 2003 compared to $557 thousand for the same period in 2002. These provisions for income taxes represent an estimated effective annual tax rate of approximately 34% and 38% respectively. The decrease in the effective tax rate results from a tax credit obtained from a charitable contribution the Company made in the second quarter of 2003. FINANCIAL CONDITION Total assets at September 30, 2003 were $965.1 million, an increase of $209.0 million or 27.6%, from $756.1 million at December 31, 2002. The increase in total assets primarily resulted from the growth in loans outstanding, mortgage loans held for sale, and cash and due from banks which were funded by new deposit growth and other borrowed funds. Total investment securities decreased $8.0 million or 14.9% to $45.7 million at September 30, 2003 as compared to -17- $53.7 million at December 31, 2002. Federal funds sold and repurchase agreements decreased $15.0 million or 24.0% to $47.5 million at September 30, 2003 from $62.5 million at December 31, 2002. Loans held for investment increased $116.6 million, or 32.7%, to $664.6 million at September 30, 2003, from $551.0 million at December 31, 2002. Mortgage loans held for sale increased $16.5 million or 30.2% to $71.2 million at September 30, 2003 from $54.7 million at December 31, 2002. These increases in loans were funded by increases in depository accounts, repurchase agreements sold and other borrowings. The allowance for loan losses increased $1.3 million or 18.2% during the first nine months of 2003. The increase resulted from net charge-offs of loans of $1.1 million plus additional provisions of $2.5 million during that period. The allowance for loan losses as a percent of total loans held for investment was 1.29% at September 30, 2003 and 1.32% at December 31, 2002. Management believes that such allowance for loan losses is sufficient to cover estimated losses in the Bank's loan portfolio. For further information, see "Allowance for Loan Losses" below. ------------------------- Deposits increased $146.7 million, or 22.1%, to $811.6 million at September 30, 2003 from $664.9 million at December 31, 2002. The increase in total deposits primarily resulted from an increase of $108.1 million or 34.3% in time deposits $100,000 and over, combined with an increase of $21.7 million or 31.2% in other time deposits. Time deposits often fluctuate in response to interest rate changes and can vary rather significantly on a quarterly basis. The increase in time deposits $100,000 and over resulted primarily from an increase in brokered deposits. Noninterest-bearing deposits decreased $40.8 million or 28.9%. This decrease was a result of the transfer of funds into demand deposit accounts which were previously invested in repurchase agreements sold. This transfer was related to the customer's intangible tax strategy. These funds flowed back into repurchase agreements after year-end, as can be seen by comparing the relative balances of demand deposits and repurchase agreements sold at September 30, 2003 and December 31, 2002. Interest-bearing demand deposits increased $31.0 million or 58.7%. Savings deposits increased $16.8 million or 25.1%. Money market accounts increased $9.9 million or 51.7%. Growth in deposit accounts, other than brokered time deposits, are primarily attributable to continued expansion of the Company's customer base as a result of ongoing marketing activities. Repurchase agreements sold increased $38.9 million, or 835.0%, to $43.5 million at September 30, 2003 from $4.7 million at December 31, 2002, for reasons discussed in the previous paragraph, together with continued expansion of the Company's customer base. Other borrowed funds increased $10.0 million or 100.8% to $19.9 million at September 30, 2003 from $9.9 million at December 31, 2002. Accrued interest payable increased $480 thousand, or 20.2%, to $2.9 million at September 30, 2003 from $2.4 million at December 31, 2002. This increase was due primarily to an increase in interest-bearing deposits and other interest-bearing liabilities highlighted herein. Accounts payable and accrued expenses increased $4.9 million or 103.2% to $9.7 million at September 30, 2003 from $4.8 million at December 31, 2002. This increase was primarily attributable to accrued commissions and incentives related to the mortgage banking division. Mandatory mortgage forward delivery contracts were $1.1 million at September 30, 2003, compared to zero at December 31, 2002. This liability results from forward commitments imbedded in the mortgage loans held for sale. Trust preferred securities were $20.0 million at September 30, 2003, resulting from the reclassification of company obligated manditorily redeemable preferred securities of subsidiary trust from mezzanine financing to a liability, together with a new trust preferred issue in the second quarter of 2003. See Notes 5 and 6 to the "Notes to Consolidated Condensed Financial Statements: contained in Part 1 Item 1. Shareholders' equity increased by $3.4 million to $56.4 million at September 30, 2003, from $53.0 million at December 31, 2002. This increase is the result of net income for the first nine months of 2003 of $3.3 million, combined with the issue of stock under the Company's Employee Stock Purchase Plan of $223 thousand, and the issue of stock related to exercise of warrants and options and the issue of stock grants of $375 thousand. These increases were partially offset by a decrease in other comprehensive income related to an unrealized loss -18- in the Company's bond portfolio of $362 thousand, the payment of dividends on the Series C Preferred Stock of $123 thousand, and the recording of offering expenses of the Series C Preferred Stock issue to additional paid-in capital of $11 thousand. Non-accrual loans were $617 thousand at September 30, 2003, a decrease of $918 thousand or 59.8%, compared to the balance of $1.5 million at December 31, 2002. These loans were reclassified under the Bank's policy of transferring loans to non-accrual status when they become more than 90 days past due on either principal or interest. The Company believes the specific reserves placed against these loans are adequate, and payment is being sought from secondary sources, such as the sale of collateral. Allowance for Loan Losses ------------------------- Management determines the allowance for loan losses by establishing a general allowance by loan pool determined for groups of smaller, homogenous loans possessing similar characteristics and non-homogeneous loans that are not classified. All classified loans are reviewed on an individual basis. General Allowance It is difficult for a lending institution the size of the Bank to use migration analysis or other more sophisticated approaches due to the small size of the loan portfolio, and the significant changes in the lending strategy and mix of the loan portfolio from the date of the Merger. For this reason, a reasonable indicator of the Bank's potential future losses in the non-criticized and non-specialized pools of loans is the historical performance of the Bank's peer group on a rolling four-quarter basis. This information is gathered quarterly from the Uniform Bank Performance Report provided by the Federal Financial ---------------------------------- Institutions Examination Council. As the bank matures, and growth stabilizes, it is management's intention to replace this peer group methodology with the actual loss experience of the Bank. Added to the peer group historical performance are those current conditions that are probable to impact future loan losses. To account for these current conditions, management has reviewed various factors to determine the impact on the current loan portfolio. This methodology involves determining a range for each current condition adjustment, "lower range to upper range". The "lower range" represents management's opinion of a higher near term probability. The "upper range" represents management's opinion of a lower near term probability that allows management to "shock" the loan portfolio and look at the level of reserves required should an "upper range" scenario start to unfold. The following current condition factors were considered in this analysis: o Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices. o Changes in national and local economic and business conditions, including the condition of various market segments. o Changes in the nature and volume of the portfolio. o Changes in the experience, ability, and depth of lending management and staff. o Changes in the volume and severity of past due and classified loans; and the volume of non-accruals, trouble debt restructurings and other loan modifications. o The existence and effect of any concentrations of credit, and changes in the level of such conditions. -19- o The effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank's portfolio. Specific Allowance Management believes that given the small number of classified loans, type of historical loan losses, and the nature of the underlying collateral, creating specific allowances for classified assets results in the most accurate and objective allowance. Should the number of these types of assets grow substantially, other methods may have to be considered. The method used in setting the specific allowance uses current appraisals as a starting point, based on the Bank's possible liquidation of the collateral. On assets other than real estate, which tend to depreciate rapidly, another current valuation is used. For instance, in the case of commercial loans collateralized by automobiles, the current NADA wholesale value is used. On collateral such as over-the-road equipment, trucks or heavy equipment, valuations are sought from firms or persons knowledgeable in the area, and adjusted for the probable condition of the collateral. Other collateral such as furniture, fixtures and equipment, accounts receivable, and inventory, are considered separately with more emphasis given to the borrower's financial condition and trends rather than the collateral support. The value of the collateral is then discounted for estimated selling cost. Summary "Loans" in the following two paragraphs refers to loans held for investment. ------------------------- The various methodologies included in this analysis take into consideration the historic loan losses and specific allowances. In addition, the allowance incorporates the results of measuring impaired loans as provided by Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. Specific allowances totaled $1.9 million at September 30, 2003. The range for the allowance for loan losses at September 30, 2003, including specific allowances, was determined to be between $7.4 million or 1.11% of loans (low range) and $11.7 million or 1.76% of loans (high range). At September 30, 2003, the Bank's total allowance for loan losses was $8.6 million or 1.29% of loans as compared to $7.3 million or 1.32% of loans at December 31, 2002. Criticized/Classified assets have decreased when measured against loans outstanding. This is primarily attributable to the charge-off during the first quarter of certain credits for which specific reserves were established at the end of 2002. At September 30, 2003, this benchmark (Criticized/Classified) was 3.67% of loans outstanding compared to 4.5% at December 31, 2002. Past due loans have increased to .66% of loans outstanding at September 30, 2003 compared to .14% at December 31, 2002. Non-Performing assets have declined as a percentage of total loans including other real estate owned to .19% at September 30, 2003 versus .78% at December 31, 2002. Net loan losses for the first nine months of 2003 were $1.1 million or .19% of average loans outstanding for the period, compared to $415 thousand, or .09% of average loans for the same period in 2002. -20- LIQUIDITY The Company, through its subsidiary, the Bank, has traditionally maintained levels of liquidity above levels required by regulatory authorities. The Bank's operational needs, demand for loan disbursements, and savings withdrawals can be met by loan principal and interest payments received, new deposits, and excess liquid assets. Significant loan demand, deposit withdrawal, increased delinquencies and increased real estate acquired in settlement of loans could alter this condition. Management does not foresee any liquidity problems for the remainder of 2003. Liquidity and Sources of Capital -------------------------------- Liquidity is the Company's ability to meet all deposit withdrawals immediately, while also providing for the credit needs of customers. The September 30, 2003 balance sheet evidences a satisfactory liquidity position as total cash and cash equivalents amounted to $165.9 million, representing 17.2% of total assets. Investment securities available for sale amounted to $42.4 million, representing 4.4% of total assets. These securities provide a secondary source of liquidity since they can be converted into cash in a timely manner. The Company's ability to maintain and expand its deposit base and borrowing capabilities are also a source of liquidity. For the nine-month period ended September 30, 2003, total deposits increased from $664.9 million at December 31, 2002 to $811.6 million, or 22.1%. During this period, repurchase agreements sold increased from $4.7 million to $43.5 million, or 835.0%, and other borrowed funds increased from $9.9 million to $19.9 million, or 100.8%. There can be no assurance that the Company will be able to maintain this level of growth. The Company's management closely monitors and maintains appropriate levels of interest earning assets and interest bearing liabilities so that maturities of assets are such that adequate funds are provided to meet customer withdrawals and loan demand. Management believes there are no trends, demands, commitments, events or uncertainties that will result in, or are reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way. The Company's Board of Directors and executive officers are committed to maintaining capital at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements. In December 2001, April 2002, June 2002, December 2002, and June 2003, the Company participated in pooled trust preferred offerings. By issuing trust preferred securities through its subsidiary trusts, the Company was able to increase its Tier 1 capital for regulatory purposes without diluting the ownership interests of its common shareholders. For the specific transactions, terms and rates of the Company's trust preferred securities issues, please refer to footnote 6 of Item 1 above, together with footnote 13 of the Company's consolidated financial statements for the years ended December 31, 2002, 2001 and 2000 filed in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2002. At September 30, 2003, the net proceeds from pooled trust preferred trust offerings included in the calculation of the Company's consolidated Tier 1 capital for regulatory purposes is $19.1 million. The table below illustrates the Bank's regulatory capital ratios at September 30, 2003: Minimum September 30, Regulatory Bank 2003 Requirement -------------------- -------------------- Tier 1 Capital 10.08% 4.00% Total risk-based capital ratio 11.20% 8.00% Leverage ratio 8.32% 4.00% -21- Neither the Company nor its subsidiaries have historically incurred off-balance sheet obligations through the use of or investment in off-balance sheet derivative financial instruments or structured finance or special purpose entities organized as corporations, partnerships or limited liability companies or trusts. Recently Issued Accounting Pronouncements ----------------------------------------- Refer to Note 5 of the Consolidated Condensed Financial Statements for further discussion of new accounting standards and their impact on earning beginning in 2003. CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS The Company and its representatives may from time to time make written or oral statements that are "forward-looking" and provide other than historical information, including statements contained in this Quarterly Report on Form 10-Q, the Company's other filings with the Securities and Exchange Commission or in communications to its shareholders. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. These factors include, among other things, the risk factors listed below. In some case, the Company has identified forward-looking statements by such words or phrases as "will likely result," "is confident that," "expects," "should," "could," "may," "will continue to," "believes," "anticipates," "predicts," "forecasts," "estimates," "projects," "potential," "intends" or similar expressions identifying "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including the negative of those words and phrases. These forward-looking statements are based on management's current views and assumptions regarding future events, future business conditions and the outlook for the Company based on currently available information. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, these statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Among the factors that could have an impact on the Company's ability to achieve operating results and growth plan goals are: o Management's ability to reduce and effectively manage interest rate risk and the impact of interest rates in general on the volatility of the Company's net interest income; o Fluctuations in the value of the Company's investment securities; o The ability to attract and retain senior management experienced in banking and financial services; o The sufficiency of allowances for possible loan losses to absorb the amount of actual future losses inherent in the existing portfolio of loans; o The Company's ability to adapt successfully to technological changes to compete effectively in the marketplace; o Credit risks and risks from concentrations (by geographic area and by industry) within the Bank's loan portfolio; o The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in the Company's market or elsewhere or providing similar services; -22- o The failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities; o Volatility of rate sensitive deposits; o Operational risks, including data processing system failures or fraud; o Asset/liability matching risks and liquidity risks; o The limited operating history of our wholesale residential mortgage banking division; o Risks associated with the operation of our wholesale residential mortgage banking division; o Changes in the economic environment, competition or other factors that may influence the anticipated growth rate of loans and deposits, the quality of the loan portfolio and loan and deposit pricing and Company's ability to successfully pursue acquisition and expansion strategies; o The impact from liabilities arising from legal or administrative proceedings the financial condition of the Company; o Governmental monetary and fiscal policies, as well as legislative and regulatory changes, that may result in the imposition of costs and constraints on the Company through higher FDIC insurance premiums, significant fluctuations in market interest rates and operational limitations; o Changes in general economic or industry conditions, nationally or in the communities in which the Bank conducts business; o Changes in accounting principles, policies or guidelines affecting the businesses conducted by the Company or its affiliates; o Acts of war or terrorism; and o Other economic, competitive, governmental, regulatory and technical factors affecting the Bank's operations, products, services, and prices. The Company wishes to caution that the foregoing list of important factors may not be all-inclusive and specifically declines to undertake any obligation to publicly update or revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Item 3. Qualitative and Quantitative Disclosures About Market Risk The Company's financial performance is subject to risk from interest rate fluctuations. This interest rate risk arises due to differences between the amount of interest-earning assets and the amount of interest-earning liabilities subject to repricing over a specified period and the amount of change in individual interest rates. In the current interest rate environment, the liquidity and maturity structure of the Company's assets and liabilities are important to the maintenance of acceptable performance levels. A decreasing rate environment negatively impacts earnings as the Company's rate-sensitive assets generally reprice faster than its rate-sensitive liabilities. Conversely, in an increasing rate environment, earnings are positively impacted. This asset/liability mismatch in pricing is referred to as gap ratio and is measured as rate sensitive assets divided by rate sensitive liabilities for a defined time period. A gap ratio of 1.00 means that assets and liabilities are perfectly matched as to repricing. Management has targeted gap ratio guidelines for a one-year time horizon of between .80 and 1.20 for the Bank. At September 30, 2003, the Bank had a cumulative gap ratio of approximately 0.95 for the one-year period ending September 30, 2004, and a cumulative gap ratio of 1.80 for the three-month time period. Given these gap ratios, over the next three-month period, rate-sensitive assets will reprice faster than rate-sensitive liabilities, and for the following nine-month period, rate sensitive liabilities will reprice faster than rate-sensitive assets. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities, which are not reflected in the interest sensitivity analysis. Prepayments may have significant effects on the Company's -23- net interest margin. Because of these factors, in a static test, interest sensitivity gap reports may not provide a complete assessment of the Company's exposure to changes in interest rates. Accordingly, management also utilizes computerized interest rate simulation analysis to determine the Company's interest rate sensitivity. The Company is in an asset sensitive gap position for the first year, then moves into a matched position through the five year period. Overall, due to the factors cited, current simulation results indicate a relatively low sensitivity to parallel shifts in interest rates. A liability sensitive company will generally benefit from a falling interest rate environment as the cost of interest-bearing liabilities falls faster than the yields on interest-bearing assets, thus creating a widening of the net interest margin. Conversely, an asset sensitive company will benefit from a rising interest rate environment as the yields on earning assets rise faster than the costs of interest-bearing liabilities. Management also evaluates economic conditions, the pattern of market interest rates and competition to determine the appropriate mix and repricing characteristics of assets and liabilities required to produce a targeted net interest margin. In addition to the gap analysis, management uses rate shock simulation to measure the rate sensitivity of its balance sheet. Rate shock simulation is a modeling technique used to estimate the impact of changes in rates on the Company's net interest margin. The Company measures its interest rate risk by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of plus or minus 200 basis points over a period of twelve months. The Company's most recent rate shock simulation analysis, performed as of September 30, 2003, indicates that a 200 basis point increase in rates would cause an increase in net interest income of $3.9 million over the next twelve-month period. Conversely, a 200 basis point decrease in rates would cause a decrease in net interest income of $1.8 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. At September 30, 2003, the Company was not engaged in trading activities. The Company enters into interest rate swap agreements to manage its exposure to changes in interest rates and to convert the fixed rate on certain brokered certificates of deposit to a floating rate in order to more closely match interest rate sensitivity between selected assets and liabilities. The Company does not use derivative financial instruments for speculative purposes. As is customary for these types of instruments, the Company does not require collateral or other security from other parties to these instruments. By their nature all such instruments involve risk, including the credit risk of nonperformance by counterparties. However, at September 30, 2003, in management's opinion there was no significant risk of loss in the event of nonperformance of the counterparties to these financial instruments. Item 4. Controls and Procedures In order to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, the Company has formalized its disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of September 30, 2003. Based on such evaluation, such officers -24- have concluded that, as of September 30, 2003, the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company's (and the Company's consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There has been no change in the Company's internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. While management believes the Company's disclosure controls and procedures and the Company's internal control over financial reporting are adequate, no system of controls can prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the controls system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effect control system, misstatements due to error or fraud may occur and not be detected. Part II. Other Information Item 1. Legal Proceedings No disclosure required. Item 2. Changes in Securities No disclosure required. Item 3. Defaults Upon Senior Securities No disclosure required. Item 4. Submission of Matters to a Vote of Security Holders No disclosure required. Item 5. Other Information No disclosure required. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. -25- 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. On July 16, 2003, the Company filed a report on Form 8-K (furnishing information under Items 7 and 12) to release financial results for the quarter ended June 30, 2003 and announce conference call information. -26- 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 13, 2003 By: /s/ Charles E. Hughes, Jr. ------------------------- Charles E. Hughes, Jr. President and Chief Executive Officer Date: November 13, 2003 By: /s/ T. Edwin Stinson, Jr. ------------------------- T. Edwin Stinson, Jr. Chief Financial Officer -27- Exhibits. 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-15(e) and 15d-15(e), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -28-

FLORIDA BANKS INC 10-Q