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| BOFL > SEC Filings for BOFL > Form 10-Q on 5-Nov-2008 | All Recent SEC Filings |
5-Nov-2008
Quarterly Report
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this quarterly Report on Form 10-Q may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally can be identified by the use of forward-looking terminology, such as "may," "will," "expect," "estimate," "anticipate," "believe," "target," "plan," "project," or "continue" or the negatives thereof or other variations thereon or similar terminology, and are made on the basis of management's plans and current analyses of Bank of Florida Corporation, its business and the industry as a whole. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, economic conditions, competition, interest rate sensitivity and exposure to regulatory and legislative changes. The above factors, in some cases, have affected, and in the future could affect Bank of Florida Corporation's financial performance and could cause actual results for fiscal 2008 and beyond to differ materially from those expressed or implied in such forward-looking statements. Bank of Florida Corporation does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
OVERVIEW
Bank of Florida Corporation, incorporated in Florida in September 1998, is a $1.5 billion financial services company and a registered bank holding company. Our subsidiary Banks are separately chartered independent community banks with local boards that provide full-service commercial banking in a private banking environment. Our Trust Company offers investment management, trust administration, estate planning, and financial planning services largely to the Banks' commercial borrowers and other high net worth individuals. The Company's overall focus is to develop a total financial services relationship with its client base, which is primarily businesses, professionals, and entrepreneurs with commercial real estate borrowing needs. The Banks also provide technology-based cash management and other depository services. The holding company structure provides flexibility for expansion of the Company's banking business, including possible acquisitions of other financial institutions, and support of banking-related services to its subsidiary banks.
Our corporate vision is to achieve $2.0 billion in assets over the next couple of years, excluding acquisitions, and be recognized as a premier financial services company in our markets, while maintaining a well-controlled environment. Our primary strategy to achieve this vision is to focus on core deposit growth with current products and services, focus lending on commercial real estate properties in the $1 million to $10 million size range, and leverage our operating efficiencies.
The primary market areas of the Company are among the fastest growing markets in Florida. Those markets include Collier and Lee Counties on the southwest coast of Florida (served by Bank of Florida-Southwest), Broward, Miami-Dade, and Palm Beach Counties on the southeast coast (served by Bank of Florida-Southeast), and Hillsborough and Pinellas Counties in the Tampa Bay area (served by Bank of Florida - Tampa Bay). The high population growth and income demographics of the counties in which the Company operates support its plans to grow loans, deposits, and wealth management revenues with limited, highly selective, full-service locations. These counties together constitute more than 50% of the deposit market share in the state of Florida.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The financial information contained within these statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Critical accounting policies are those that involve the most complex and subjective decisions and assessments, and have the greatest potential impact on the Company's stated results of operations. The notes to the consolidated financial statements include a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management believes that, of our significant accounting policies, the following involve a higher degree of judgment and complexity. Our management has discussed these critical accounting assumptions and estimates with the Board of Directors' Audit Committee.
Allowance for Loan Losses:
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes the collectibility of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is comprised of: (1) a component for individual loan impairment measured according to SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", and (2) a measure of collective loan impairment according to SFAS No. 5, "Accounting for Contingencies". The allowance for loan losses is established and maintained at levels deemed adequate to cover losses inherent in the portfolio as of the balance sheet date. This estimate is based upon management's evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. Estimates for loan losses are derived by analyzing historical loss experience, current trends in delinquencies and charge-offs, historical peer bank experience, changes in the size and composition of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Larger impaired credits that are measured according to SFAS No. 114 have been defined to include loans which are classified as doubtful, substandard or special mention risk grades where the borrower relationship is greater than $150,000. For such loans that are considered impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.
Loans made outside the scope of SFAS No. 114 are measured according to SFAS No. 5 and include commercial real estate loans that are performing or have not been specifically identified under SFAS No. 114, and large groups of smaller balance homogeneous loans evaluated based on historical loss experience adjusted for qualitative factors.
EXECUTIVE SUMMARY
Total assets grew to $1.5 billion at September 30, 2008, up $234.6 million or 18% from December 31, 2007, as a result of loan growth, fed funds sold, and securities purchases. Loans climbed $103.6 million or 9% during the first nine months of this year, while total deposits increased $262.6 million to $1.2 billion. Core deposits, which exclude all CDs, decreased $39.2 million while certificates of deposit increased $301.8 million. Book value per share declined to $15.39, down $0.18 over the last nine months.
The Company realized third quarter net loss of $3.4 million, a decrease of $5.1 million or 314% over the same period last year. Loss per share was ($0.27), a $.40 or 308% decrease compared to the same period in 2007. Net interest margin decreased 63 basis points from third quarter 2007 to 3.33%, reflective of intense competition, interest reversals on nonperforming loans and a decrease in the prime rate of 275 basis points.
ANALYSIS OF FINANCIAL CONDITION
Investment securities and overnight investments
Total investment securities and overnight investments were $158.9 million at September 30, 2008, an increase of $124.2 million or 358.1% over that held at December 31, 2007.
Federal Funds sold totaled $70.7 million at September 30, 2008, an increase of $70.7 million from December 31, 2007. This category of earning assets is normally used as a temporary investment vehicle to support the Company's daily funding requirements and, as a result, fluctuates with loan demand. The average yield on federal funds for the first nine months of 2008 was 2.10%, down 157 basis points compared to the first nine months of 2007.
Securities available for sale totaled $88.3 million, an increase of $53.6 million from the level held at December 31, 2007. The Company had $3.3 million classified as held to maturity at September 30, 2008 and December 31, 2007. The Company does not currently engage in trading activities and, therefore, did not hold any securities classified as trading at September 30, 2008 or December 31, 2007.
Loans
Total gross loans, including loans held for sale, were $1.2 billion at September 30, 2008, up $103.0 million or 9.0% for the first nine months of 2008. Construction loans, largely secured by commercial real estate, totaled $325.2 million (26.1% of total loans) at September 30, 2008, down $72.1 million since the end of last year. Commercial real estate loans, including multi-family dwellings, but excluding those in construction, increased by $154.9 million and also total 48.3% of total loans outstanding, while commercial and industrial loans climbed $21.1 million to approximately 9.2% of total loans outstanding. One-to-four family residential loans, including loans held for sale, were $147.1 million (11.8% of total loans), up $6.8 million from year-end. Consumer lines of credit and installment and other loans decreased by $7.7 million (4.6% of total loans).
Asset quality
The Company's nonperforming loans (nonaccrual and 90+ days past due) totaled $29.1 million at September 30, 2008 or 2.33% of total loans outstanding. Thirty-to-ninety day delinquent loans were $37.3 million or 2.99% of loans outstanding at September 30, 2008, an increase of $34.6 million in total loan delinquencies from December 31, 2007. There were $8.4 million in net charge-offs for the first nine months of 2008, resulting in net charge-offs to average loans of 0.96%, an increase of 0.91% from the first nine months of 2007.
Deposits
Total deposits rose $262.6 million or 28.0% during the first nine months of 2008 to $1.2 billion. Core deposits, which exclude all CDs, declined $576 thousand or 0.1% in the past 90 days, with the growth in certificates of deposit accounts (up $187.9 million or 36.4%) more than offsetting the decline in money market, NOW and non-interest bearing deposit accounts.
The annualized average rate paid on total interest bearing deposits during the first nine months of 2008 was 3.63%, a decrease of 83 basis points compared to the first nine months last year. This decrease resulted primarily from the lower interest rate environment under which we currently operate.
Borrowings
While client deposits remain our primary source of funding for asset growth, management uses other borrowings as a funding source for loan growth, regulatory capital needs, and as a tool to manage the Company's interest rate risk. At September 30, 2008 borrowings totaled $144.3 million, a decrease of $26.8 million compared to December 31, 2007. Total borrowings at September 30, 2008, consisted of $20.0 million of other borrowings, $16.0 million in subordinated debt and $108.3 million in FHLB Advances compared to $16.0 million in subordinated debt and $155.1 million in FHLB advances, respectively, at the end of 2007. The other borrowings include two repurchase agreements, priced on a variable rate basis, due March 18, 2013 and callable on March 18, 2011. The maturities of the Company's borrowings range from March 2010 through July 2017.
Stockholders' equity
Total stockholders' equity was $196.7 million at September 30, 2008, a $2.2 million decrease since December 31, 2007. Book value per share was $15.39 at September 30 while the tangible book value per share was $10.31. The Company's Tier 1 leverage ratio decreased 105 basis points to 9.19% at September 30, 2008 from 10.24% at December 31, 2007, primarily as a result of loan growth and the purchase of investment securities, but is still well above the minimum for bank holding companies of 4.0%.
ANALYSIS OF RESULTS OF OPERATIONS
Third Quarter 2008 Compared to Third Quarter 2007
Consolidated net loss for the third quarter of 2008 totaled $3.4 million, a decrease of $5.1 million or 314.4% compared to third quarter 2007. Top-line revenue (a non-GAAP measure which the Company defines as net interest income plus noninterest income, excluding net securities gains/losses) declined $1.2 million, driven by $1.0 million less net interest income and $129 thousand less non interest income.
The $1.2 million decrease in top-line revenue against a $1.2 million or 11.4% increase in noninterest expense resulted in an efficiency ratio for the quarter of 94.5%. The increase in noninterest expense relates to salaries and benefits, occupancy and equipment costs, professional fees and repossession expenses. The provision for loan losses increased $5.9 million compared to the same period last year due to additional provisions for loan downgrades.
Net interest income
Net interest income in the third quarter totaled $10.9 million, down $1.0 million or 8.6% less than the third quarter of 2007. This decline is due to a $34.6 million decrease in net average interest earning assets which resulted in a $93,000 decrease in net interest income and a 63 basis point decline in the net interest margin to 3.33% resulted in a $940,000 decrease in net interest income. The spread between the yield on earning assets and cost of interest-bearing liabilities also narrowed when comparing third quarter 2008 versus third quarter 2007. The yield on earning assets decreased 147 basis points over the same period last year to 6.39%, with continued pressures from a declining rate environment as interest bearing liabilities re-priced during the quarter resulted in a 116 basis point decrease in the cost of funds to 3.49%.
Noninterest income
Noninterest income was $1.1 million in the third quarter, a $129,000 or 10.2% decrease over the third quarter 2007. Third quarter 2008 trust fees were $679,000 compared to $790,000 for the third quarter of the prior year. Over the past twelve months, assets under advice have declined $62.4 million or 12.4% to $439.9 million at September 30th.
Noninterest expense
Noninterest expense totaled $11.4 million for the third quarter of 2008 compared to $10.2 million for the comparable quarter last year. Approximately $486,000 of the increase relates to repossession expenses associated with the other real estate owned properties. Approximately $428,000 of the increase is explained by higher occupancy and equipment related expense. Building lease costs rose due to additional space required for business expansion, and equipment rental, maintenance, and depreciation expense increased accordingly. Other increases, which are also attributable to the growth of the Company, occurred in the areas of professional fees ($137,000), and salaries and benefits ($132,000).
Provision and Allowance for Loan Losses
The real estate markets in the U.S. have deteriorated at an accelerated pace over recent quarters, resulting in increased credit losses for many financial institutions. Many banks, including Bank of Florida, have taken steps to increase reserve levels in response to these changing market conditions. Negative trends in general economic conditions, as measured by items such as unemployment rate, home sales and inventory, consumer price index and bankruptcy filings in the national and local economies, also caused increases in reserve factors used to determine the losses inherent within the loan portfolio. The third quarter provision for loan losses was $6.2 million, an increase of $5.9 million from third quarter 2007. At September 30, 2008, the loan loss allowance was 1.14% of total loans or 49.1% of the nonperforming loans. There were $5.2 million in net chargeoffs in the third quarter of 2008, resulting in net chargeoffs to average loans of 1.72%. Two large loans constitute approximately $3.2 million of the charge-offs, both of which are in the Southwest market and had been previously disclosed beginning in the fourth quarter of 2007. The primary factor impacting the amount of these charge-offs is the continued decline in property values across the Southwest Florida markets. The remaining charge-offs were a combination of smaller loans across various loan categories.
Nine-months Ended September 30, 2008 Compared to Nine-months Ended September 30, 2007
Consolidated net loss for the first nine months of 2008 totaled $3.2 million, $6.9 million or 186.4% less than the same time last year. Top-line revenue increased $438 thousand or 1.2%, primarily driven by $782 thousand greater net interest income, a result of $215.9 million or 18.0% growth in earning assets and a 59 basis point decrease in the net interest margin to 3.50%.
The $438 thousand increase in top-line revenue against a $4.8 million or 16.9% increase in noninterest expense resulted in an efficiency ratio of 90.8% for the first nine months of the year. The majority of the expense increase relates to personnel, occupancy and equipment costs, repossession expenses, regulatory assessments, and professional fees. The provision for loan losses increased $6.9 million compared to the same period last year.
Net interest income
Net interest income for the first nine months of 2008 totaled $33.0 million, up $782 thousand or 2.4% greater than the first nine months of 2007. This improvement is due to $205.3 million increase in average interest earning assets partially offset by a 59 basis point decline in the net interest margin, to 3.50%. The spread between the yield on interest earning assets narrowed when comparing the nine months ended September 30, 2008 to nine months ended September 30, 2007. Yield on interest earning assets decreased 115 basis points to 6.67% while cost of funds decreased 92 basis points due to continued competitive pricing on deposits.
Noninterest income
Noninterest income was $3.5 million in the first nine months of 2008, a $316,000 or 8.3% decrease over the comparable period of 2007. This decline was primarily the result of a $168,000 or 131.2% decrease in secondary market income and fixed asset dispositions and a $130,000 decline in trust fee income.
Noninterest expense
Noninterest expense totaled $33.1 million for the first nine months of 2008, an increase of 16.9% or $4.8 million compared to the same period of 2007. Approximately $2.0 million of the increase is explained by higher occupancy and equipment-related expense due to additional space required for business expansion. A total of $929,000 of the increase in noninterest expense between the two periods occurred in personnel expense. Other increases, which are also attributable to the growth of the Company, occurred in the areas of repossession expenses ($706,000), regulatory assessments ($420,000) and professional fees ($361,000).
Provision and Allowance for Loan Losses
The provision for loan losses for the first nine months of 2008 was $8.5 million, up $6.9 million (451.0%) from the same period last year. This increase was necessitated primarily by an increased level of net charge-offs due to the continued weakness in real estate values, primarily within the Company's Southwest Florida markets. There were $8.4 million in net charge-offs during the first nine months of 2008, resulting in a ratio of net charge-offs to average loans of 0.96% compared to 0.05% net charge-offs for the first nine months of 2007. Five large loans constitute approximately $6.6 million of the charge-offs, the majority of which are in the Southwest Florida market. The primary factor impacting the amount of these charge-offs is the continued decline in property values across the Southwest Florida markets. The remaining charge-offs were a combination of smaller loans across various loan categories.
There were $29.1 million in nonperforming loans at September 30, 2008 compared to $5.7 million at September 30, 2007. The increase was primarily caused by the downturn in the residential real estate market which negatively impacted the liquidity of a number of borrowers. The increase was primarily related to twelve commercial relationships totaling $22.3 million. Loans thirty to eighty-nine days delinquent increased to $37.3 million at September 30, 2008 from $7.4 million at September 30, 2007.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Management
Liquidity management involves monitoring sources and uses of funds in order to meet day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Asset liquidity is provided by cash and assets which are readily marketable, which can be pledged, or which will mature in the near future.
In addition to deposits within its geographic market place, the sources of funds available to the Banks for lending and other business purposes include loan repayments, sales of loans and securities, borrowings from the Federal Home Loan Bank (FHLB), national market funding sources, and contributions from the Holding Company. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by competition, general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in other sources, such as deposits at less than projected levels and may be used to fund the origination of mortgage loans designated to be sold in the secondary market.
At September 30, 2008, the Company had $108.3 million in outstanding borrowings from the FHLB of its present $256.6 million line, and there was $205.6 million in other available lines from correspondents.
Management regularly reviews the Banks' liquidity position and has implemented internal policies that establish guidelines for sources of asset-based liquidity and limit the total amount of purchased funds used to support the balance sheet and funding from non-core sources.
Asset Liability and Interest Rate Risk Management
The objective of the Company's Asset Liability and Interest Rate Risk strategies is to identify and manage the sensitivity of net interest income to changing interest rates and to minimize the interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities. This is to be done in conjunction with the need to maintain adequate liquidity and the overall goal of maximizing net interest income.
The Company manages its exposure to fluctuations in interest rates through policies established by the Asset/Liability Committee ("ALCO") of the Bank. The ALCO meets quarterly and has the responsibility for approving asset/liability management policies, formulating and implementing strategies to improve balance sheet positioning and/or earnings and reviewing the interest rate sensitivity of the Company. ALCO tries to minimize interest rate risk between interest-earning assets and interest-bearing liabilities by attempting to minimize wide fluctuations in net interest income due to interest rate movements. The ability to control these fluctuations has a direct impact on the profitability of the Company. Management monitors this activity on a regular basis through analysis of its portfolios to determine the difference between rate sensitive assets and rate sensitive liabilities.
The Company's rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. The Company's balance sheet is asset-sensitive, meaning that in a given period there will be more assets than liabilities subject to immediate re-pricing as interest rates change in the market. Because most of the Company's loans are tied to the prime rate, they re-price more rapidly than rate sensitive interest-bearing deposits. During periods of rising rates, this results in increased net interest income. The opposite occurs during periods of declining rates.
The Company entered into interest rate swaps which provided for the Company to receive payments at a fixed rate in exchange for paying a floating rate on cash flows from certain loans. Management believes the entering into the interest rate swaps exposed the Company to variability in their fair value due to changes in the level of interest rates. Management believes that it is prudent to limit the variability in the fair value of a portion of its floating rate loan portfolio. It is the Company's objective to hedge the change in fair value of floating rate loans at coverage levels that are appropriate, given anticipated or existing interest rate levels and other market considerations, as well as the relationship of change in this asset to other assets of the Company. To meet this objective, the Company utilizes interest rate swaps as an asset/liability management strategy to hedge the change in value of the cash flows due to changes in expected interest rate assumptions. These interest rate swap agreements are contracts to make a series of floating rate payments in exchange for receiving a series of fixed rate payments.
Capital
The Federal Reserve Board and other bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital consists of common stockholders' equity, excluding the unrealized gain (loss) on available for sale securities, minus certain intangible assets. Tier 2 capital consists of the general allowance for credit losses subject to certain limitations. An institution's qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. Bank holding companies and banks are also required to maintain capital at a minimum level based on total average assets as defined by a leverage ratio.
The regulators define five classifications for measuring capital levels, including well capitalized, adequately capitalized, undercapitalized, . . .
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