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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from _____ to _____
 Commission File Number 0-24683 FLORIDA BANKS, INC.  FLORIDA
    
    58-2364573(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer 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 o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x Indicate the number of shares outstanding of each of the registrants classes
of common stock, as of the latest practicable date. COMMON STOCK, $.01 PAR
VALUE PER SHARE: 6,955,376 OUTSTANDING AT MAY 5, 2004




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Table of Contents ItemNumber
    
    
    
    PagePart I  FINANCIAL INFORMATION1.
    
    Financial Statements.
    
    
    32.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations.
    
    
    113.
    
    Quantitative and Qualitative Disclosures About Market Risk.
    
    
    214.
    
    Controls and Procedures.
    
    
    23Part II  OTHER INFORMATION1.
    
    Legal Proceedings.
    
    
    242.
    
    Changes in Securities and Use of Proceeds.
    
    
    243.
    
    Defaults Upon Senior Securities.
    
    
    244.
    
    Submission of Matters to a Vote of Security Holders.
    
    
    245.
    
    Other Information.
    
    
    246.
    
    Exhibits and Reports on Form 8-K.
    
    
    24SIGNATURES
    
    
    26CERTIFICATION OF CEO PURSUANT TO SECTION 302CERTIFICATION OF CFO PURSUANT TO SECTION 302CERTIFICATION OF CEO PURSUANT TO SECTION 906CERTIFICATION OF CFO PURSUANT TO SECTION 906
 -2-




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PART I  FINANCIAL INFORMATION 
 ITEM 1  FINANCIAL STATEMENTS FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)  March 31, 2004
    
    December 31, 2003ASSETSCASH AND DUE FROM BANKS
    
    $
    31,032,156
    
    
    $
    81,513,673FEDERAL FUNDS SOLD AND REPURCHASE AGREEMENTS
    
    
    79,120,000
    
    
    
    30,616,000Total cash and cash equivalents
    
    
    110,152,156
    
    
    
    112,129,673INVESTMENT
SECURITIES:Available for sale, at fair value (cost $47,827,511 and $53,085,489
at March 31, 2004 and December 31, 2003)
    
    
    48,172,520
    
    
    
    53,282,085Other investments
    
    
    3,979,750
    
    
    
    3,604,050Total investment securities
    
    
    52,152,270
    
    
    
    56,886,135MORTGAGE LOANS HELD FOR SALE
    
    
    71,390,593
    
    
    
    66,495,468LOANS:Commercial real estate
    
    
    466,546,073
    
    
    
    424,498,020Commercial
    
    
    173,155,746
    
    
    
    176,094,389Residential mortgage
    
    
    35,365,980
    
    
    
    34,119,945Consumer
    
    
    59,442,533
    
    
    
    54,648,116Credit card and other loans
    
    
    1,807,588
    
    
    
    1,956,431Total loans
    
    
    736,317,920
    
    
    
    691,316,901Allowance for loan losses
    
    
    (9,252,124
    )
    
    
    (9,056,665
    )Net deferred loan fees
    
    
    (920,614
    )
    
    
    (726,755
    )Net loans
    
    
    726,145,182
    
    
    
    681,533,481PREMISES AND EQUIPMENT, NET
    
    
    5,392,194
    
    
    
    5,008,664ACCRUED INTEREST RECEIVABLE
    
    
    2,691,257
    
    
    
    2,684,599DEFERRED INCOME TAXES, NET
    
    
    4,640,719
    
    
    
    4,597,922DERIVATIVE INSTRUMENTS
    
    
    2,695,936
    
    
    
    OTHER REAL ESTATE OWNED
    
    
    1,585,800
    
    
    
    1,768,569OTHER ASSETS
    
    
    12,925,550
    
    
    
    13,356,388TOTAL ASSETS
    
    $
    989,771,657
    
    
    $
    944,460,899LIABILITIES AND SHAREHOLDERS EQUITYDEPOSITS:Noninterest-bearing demand
    
    $
    121,404,016
    
    
    $
    134,647,508Interest-bearing demand
    
    
    57,259,000
    
    
    
    59,056,481Regular savings
    
    
    100,390,398
    
    
    
    97,679,405Money market accounts
    
    
    31,706,778
    
    
    
    31,676,249Time $100,000 and over
    
    
    431,475,728
    
    
    
    382,091,082Other time
    
    
    81,008,805
    
    
    
    91,462,134Total deposits
    
    
    823,244,725
    
    
    
    796,612,859REPURCHASE AGREEMENTS SOLD
    
    
    58,081,006
    
    
    
    33,508,157OTHER BORROWED FUNDS
    
    
    20,924,572
    
    
    
    24,046,860TRUST PREFERRED SECURITIES
    
    
    20,620,000
    
    
    
    20,000,000ACCRUED INTEREST PAYABLE
    
    
    2,507,687
    
    
    
    2,364,087ACCOUNTS PAYABLE AND ACCRUED EXPENSES
    
    
    6,449,234
    
    
    
    9,869,871DERIVATIVE INSTRUMENTS
    
    
    
    
    
    
    265,144Total liabilities
    
    
    931,827,224
    
    
    
    886,666,978SHAREHOLDERS EQUITY:Series C Preferred Stock, $100.00 par value, 50,000 shares authorized, 50,000 shares issued and outstanding
    
    
    5,000,000
    
    
    
    5,000,000Common stock, $.01 par value; 30,000,000 shares authorized;
6,939,177 and 6,838,271 shares issued, respectively
    
    
    69,392
    
    
    
    68,383Additional paid-in capital
    
    
    54,009,588
    
    
    
    53,008,095Accumulated deficit (deficit of $8,134,037 eliminated upon
quasi-reorganization on December 31, 1995)
    
    
    (1,349,729
    )
    
    
    (405,174
    )Accumulated other comprehensive income, net of tax
    
    
    215,182
    
    
    
    122,617Total shareholders equity
    
    
    57,944,433
    
    
    
    57,793,921TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    989,771,657
    
    
    $
    944,460,899
 See notes to consolidated condensed financial statements. -3-




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FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)  Three-Month Period EndedMarch 31,2004
    
    2003INTEREST INCOME:Loans, including fees
    
    $
    10,870,582
    
    
    $
    9,285,628Investment securities
    
    
    422,681
    
    
    
    408,679Federal funds sold and repurchase agreements
    
    
    113,783
    
    
    
    104,362Total interest income
    
    
    11,407,046
    
    
    
    9,798,669INTEREST EXPENSE:Deposits
    
    
    3,676,953
    
    
    
    3,734,228Repurchase agreements
    
    
    83,947
    
    
    
    100,892Trust Preferred
    
    
    274,428
    
    
    
    Borrowed funds
    
    
    216,800
    
    
    
    104,663Total interest expense
    
    
    4,252,128
    
    
    
    3,939,783NET INTEREST INCOME
    
    
    7,154,918
    
    
    
    5,858,886PROVISION FOR LOAN LOSSES
    
    
    2,115,292
    
    
    
    889,039NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    5,039,626
    
    
    
    4,969,847NONINTEREST INCOME:Service fees
    
    
    575,472
    
    
    
    518,445Gain on sale of mortgage loans
    
    
    1,498,412
    
    
    
    2,271,626Mortgage loan processing fees
    
    
    429,136
    
    
    
    477,553Mortgage loan origination fees
    
    
    217,789
    
    
    
    181,937Other noninterest income
    
    
    307,601
    
    
    
    234,2483,028,410
    
    
    
    3,683,809NONINTEREST EXPENSES:Salaries and benefits
    
    
    4,928,188
    
    
    
    5,113,894Occupancy and equipment
    
    
    775,958
    
    
    
    628,804Data processing
    
    
    326,567
    
    
    
    258,986Dividends on preferred security of subsidiary trust
    
    
    
    
    
    
    252,652Other
    
    
    3,084,934
    
    
    
    1,180,7489,115,647
    
    
    
    7,435,084(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME
TAXES
    
    
    (1,047,611
    )
    
    
    1,218,572(BENEFIT) PROVISION FOR INCOME TAXES
    
    
    (166,070
    )
    
    
    425,782NET (LOSS) INCOME
    
    $
    (881,541
    )
    
    $
    792,790PREFERRED STOCK DIVIDENDS
    
    
    (46,747
    )
    
    
    (61,644
    )NET (LOSS) INCOME APPLICABLE TO COMMON SHARES
    
    $
    (928,288
    )
    
    $
    731,146(LOSS) INCOME PER COMMON SHARE:Basic
    
    $
    (0.14
    )
    
    $
    0.11Diluted
    
    $
    (0.14
    )
    
    $
    0.11
 See notes to consolidated condensed financial statements. -4-




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FLORIDA BANKS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)  Three-Month Period EndedMarch 31,2004
    
    2003OPERATING ACTIVITIES:Net (loss) income
    
    $
    (881,541
    )
    
    $
    792,790Adjustments to reconcile net (loss) income to net cash used
in operating activities:Depreciation and amortization
    
    
    225,036
    
    
    
    223,657Reinvested dividends on investment securities
    
    
    
    
    
    
    (30,226
    )Deferred income tax (benefit) provision
    
    
    (98,645
    )
    
    
    422,357Amortization (accretion) of discounts on investments, net
    
    
    248,863
    
    
    
    (286,903
    )Amortization of premium on loans
    
    
    8,248
    
    
    
    21,229Provision for loan losses
    
    
    2,115,292
    
    
    
    889,039Gain on bank owned life insurance
    
    
    (129,570
    )
    
    
    Write-down of REO
    
    
    216,069
    
    
    
    Restricted stock grants
    
    
    141,168
    
    
    
    Gain on foreign currency translation
    
    
    
    
    
    
    (11,515
    )(Gain) loss on derivative instruments
    
    
    (320,413
    )
    
    
    4,148Write-off of issuance costs
    
    
    579,934
    
    
    
    Loss on disposition of furniture and fixtures
    
    
    2,133
    
    
    
    Net increase in mortgage loans held for sale
    
    
    (4,846,026
    )
    
    
    (35,285,620
    )(Increase) decrease in accrued interest receivable
    
    
    (6,658
    )
    
    
    79,226Increase in accrued interest payable
    
    
    143,600
    
    
    
    247,027Decrease (increase) in other assets
    
    
    832,639
    
    
    
    (626,322
    )Decrease in other liabilities
    
    
    (3,420,637
    )
    
    
    (63,741
    )Net cash used in operating activities
    
    
    (5,190,508
    )
    
    
    (33,624,854
    )INVESTING ACTIVITIES:Proceeds from sales, paydowns and maturities of investment securities:Available for sale
    
    
    5,009,115
    
    
    
    17,662,829Held to maturity
    
    
    
    
    
    
    227,925Purchases of investment securities:Available for sale
    
    
    
    
    
    
    (14,352,772
    )Other investments
    
    
    (375,700
    )
    
    
    (805,700
    )Net increase in loans held for investment
    
    
    (46,954,255
    )
    
    
    (39,337,080
    )Purchase of bank owned life insurance
    
    
    
    
    
    
    (10,000,000
    )Purchases of premises and equipment
    
    
    (610,699
    )
    
    
    (257,355
    )Net cash used in investing activities
    
    
    (42,931,539
    )
    
    
    (46,862,153
    )FINANCING ACTIVITIES:Net decrease in demand deposits, money market accounts and savings accounts
    
    
    (14,633,755
    )
    
    
    (32,653,157
    )Net increase in time deposits
    
    
    38,931,317
    
    
    
    63,928,008Increase in repurchase agreements
    
    
    24,572,849
    
    
    
    46,662,829(Decrease) increase in other borrowed funds
    
    
    (3,115,621
    )
    
    
    4,539,487Repayment of FHLB advances
    
    
    (6,667
    )
    
    
    Proceeds from exercise of stock options and stock warrants
    
    
    691,586
    
    
    
    74,656Preferred dividends paid
    
    
    (63,014
    )
    
    
    Payment of issuance costs
    
    
    (232,165
    )
    
    
    Issuance cost of trust preferred securities
    
    
    
    
    
    
    30,576Issuance cost of Series C preferred stock
    
    
    
    
    
    
    (10,677
    )Net cash provided by financing activities
    
    
    46,144,530
    
    
    
    82,571,722NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (1,977,517
    )
    
    
    2,084,715CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    112,129,673
    
    
    
    89,479,504End of period
    
    $
    110,152,156
    
    
    $
    91,564,219SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    3,533,353
    
    
    $
    3,692,756NONCASH FINANCING ACTIVITIES:Proceeds from demand deposits used to purchase shares of
common stock under Employee Stock Purchase Plan
    
    $
    169,748
    
    
    $
    101,964
 See notes to consolidated condensed financial statements -5-




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FLORIDA BANKS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2004 AND 2003 (UNAUDITED)  1. BACKGROUND AND BASIS OF PRESENTATION Background Florida Banks, Inc. (the Company) was formed in 1997 to create a statewide
community banking system that would focus on the largest and fastest growing
Florida banking markets. The Company began to operate in 1998 after it
completed the acquisition of First National Bank of Tampa, which became the
Companys wholly owned banking subsidiary and was subsequently named Florida
Bank, N.A. (the Bank). The Company offers a broad range of traditional
banking products and services, focusing primarily on small to medium-sized
businesses with annual revenues between $5 million and $40 million. The
Company currently operates community-banking offices in the Tampa,
Jacksonville, Gainesville, Ft. Lauderdale, St. Petersburg/Clearwater, Ocala and
West Palm Beach markets. As opportunities arise, it may also expand into other
Florida market areas with demographic characteristics similar to the markets it
currently serves. Basis of Presentation The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission (the SEC) related to interim financial statements.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been omitted pursuant to SEC rules
and regulations. The consolidated financial statements reflect, in the opinion
of management, all adjustments of a normal recurring nature necessary to
present fairly the financial position and results of operations for the periods
indicated. The consolidated balance sheet as of December 31, 2003 has been derived from
the Companys audited consolidated financial statements for the fiscal year
ended December 31, 2003. The financial statements and related notes included
in this report should be read in conjunction with the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2003 as they do not include
all disclosures provided in the annual consolidated financial statements. The results of operations for the three-month period ended March 31, 2004 are
not necessarily indicative of the results to be expected for the full fiscal
year. The consolidated condensed financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Stock Options Pursuant to the disclosure requirements of Statement of Financial Accounting
Standards (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 (APB) 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. -6-




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Three-Months EndedMarch 31,2004
    
    2003Net (loss) income applicable to common sharesAs reported
    
    $
    (928,288
    )
    
    $
    731,146Total stock-based employee compensation
cost included in the determination of net
(loss) income, net of related tax effects
    
    
    88,046
    
    
    
    40,235Total stock-based employee compensation
cost determined under fair value method for all awards, net of related tax effects
    
    
    (114,787
    )
    
    
    (39,481
    )Pro forma net (loss) income applicable
to common shares
    
    $
    (955,029
    )
    
    $
    731,900(Loss) earnings per share  BasicAs reported
    
    $
    (0.14
    )
    
    $
    0.11Pro forma
    
    $
    (0.14
    )
    
    $
    0.11(Loss) earnings per share  DilutedAs reported
    
    $
    (0.14
    )
    
    $
    0.11Pro forma
    
    $
    (0.14
    )
    
    $
    0.11
 Reclassifications Certain amounts for prior periods have been reclassified to conform to the
current period presentation. Recent Accounting Pronouncements In December 2003, the FASB issued FIN 46 (revised December 2003) Consolidation
of Variable Interest Entities(FIN 46(R)).This interpretation defines
trust-preferred vehicles as variable interest entities and requires traditional
trust preferred vehicles to be deconsolidated effective the first reporting
period ending after March 15, 2004. Accordingly, investments in
trust-preferred vehicles totaling $620,000 at March 31, 2004 have not been
eliminated in consolidation. In March of 2004, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 105, Application of Accounting Principles to
Loan Commitments, Topic 5: DD. This Bulletin summarizes the views of the SEC
regarding the application of generally accepted accounting principles to loan
commitments accounted for as derivative instruments and must be applied to all
loan commitments accounted for as derivatives entered into after March 31,
2004. As a result of adopting this bulletin, the Company anticipates a
reduction in earnings in the second quarter of $1.2 million over the prior
quarter resulting from a timing difference in the recognition of income on
closed loans held for sale that have yet to be delivered to the investor. Recent Developments On March 17, 2004, the Company announced that it entered into a definitive
agreement to be acquired by The South Financial Group, Inc. (South Financial)
in an all-stock transaction. Under terms of the agreement, the Companys
shareholders will receive 0.77 shares of South Financial common stock for each
share of the Companys common stock subject to certain minimum price levels for South
Financial common stock. In addition, outstanding options to purchase the
Companys common stock will be converted into options to acquire South Financials
common stock at the 0.77 exchange ratio. The transaction is expected to close
in July -7-




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2004 and is subject to regulatory and Company shareholder approval. The
Companys subsidiary, Florida Bank, N.A., will merge into South Financials
Florida banking subsidiary, Mercantile Bank. 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. As the Company experienced a loss
in the first quarter of 2004, stock options outstanding are anti-dilutive and
are not included in the Earnings per Share Calculation for the three-month
period ended March 31, 2004. Three-Month Period EndedMarch 31,2004
    
    2003Weighted average number of common shares
outstanding  Basic
    
    
    6,783,603
    
    
    
    6,782,579Incremental shares from the assumed conversion
of stock options
    
    
    
    
    
    
    111,871Total  Diluted
    
    
    6,783,603
    
    
    
    6,894,450
 The incremental shares from the assumed conversion of stock options for the
three-months ended March 31, 2004 and 2003 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. 3. DERIVATIVE INSTRUMENTS The following instruments are derivatives as defined by SFAS No. 133: March 31, 2004Contract/Notional
    
    FairAmount
    
    ValueInterest rate swap agreements
    
    $
    173,521,000
    
    
    $
    2,655,575Commitments to fund mortgage loans
    
    $
    77,861,000
    
    
    $
    1,568,670Mandatory mortgage forwards
    
    $
    69,485,000
    
    
    $
    40,361
 Interest rate swap agreements at March 31, 2004 consist of twenty-seven
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 which expired January 31, 2004. This swap agreement
did not qualify for hedge accounting under SFAS No. 133. Accordingly, all
changes in the fair value of the foreign currency swap agreement were reflected
in the earnings of the Company. -8-




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The Company enters into commitments to make loans whereby the interest rate on
the loan is set prior to funding (rate lock commitment). Rate lock commitments
on mortgage loans that are intended to be sold are considered to be
derivatives. Therefore, they are recorded, at fair value, in mortgage loans
held for sale on the accompanying consolidated balance sheets with changes in
fair value recorded in gain on sale of mortgage loans on the accompanying
consolidated statement of operations. In measuring the fair value of rate lock
commitments, the amount of the expected gain on sale of the loans is included
in the valuation. This value is calculated adjusting for an anticipated
fallout factor for loan commitments that will never be funded. This policy of
recognizing the value of the derivative has the effect of recognizing the gain
from mortgage loans before the loans are sold. Rate lock commitments expose
the Company to interest rate risk. The Company manages that risk by entering
into forward sales contracts, which are recorded at fair value with changes in
fair value reported in gain on sale of mortgage loans. 4. GUARANTEES The Company issues standby letters of credit to provide credit support for some
creditors in case of default. As of March 31, 2004, the carrying amount of the
liability was $58,000 and the maximum potential payment was approximately $10.8
million. The Company also sells loans without recourse that may have to be subsequently
repurchased due to defects that occurred during the loans origination process.
The defects are categorized as documentation errors, underwriting errors and
fraud. When a loan sold to an investor without recourse fails to perform
according to its contractual terms, the investor will typically review the loan
file to determine whether defects in the origination process occurred. If a
defect is identified, the Company may be required to either repurchase the loan
or indemnify the investor for losses sustained. If there are no defects, the
Company has no commitment to repurchase the loan. The maximum exposure to cover
the estimated loss related to the loan origination process defects that are
inherent within this portfolio as of March 31, 2004 represents the principal
balance of the loan portfolio (approximately $1.3 billion). The fair value of
the liability recorded in the Consolidated Condensed Balance Sheet as of March
31, 2004 is approximately $100,000. 5. SEGMENT REPORTING Prior to October 1, 2002, the Company had one reporting segment. However, in
October 2002, the Company started a mortgage banking division, which is managed
as a segment. Accordingly, the Company has two reporting segments: the
commercial bank and the mortgage bank. 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 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 its network of mortgage brokers and
sells these loans (on a wholesale basis) into the secondary market. Information about reportable segments, and reconciliation of such information
to the consolidated financial statements as of and for the three months ended
March 31 follows: -9-




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##### Table of Contents



Commercial
    
    Mortgage
    
    
    
    
    
    Intersegment
    
    Consolidated2004
    
    Bank
    
    Bank
    
    Other
    
    Eliminations
    
    TotalNet interest income
    
    $
    6,748,397
    
    
    $
    754,343
    
    
    $
    (347,822
    )
    
    
    
    
    
    $
    7,154,918Noninterest income
    
    
    1,080,596
    
    
    
    1,927,548
    
    
    
    20,266
    
    
    
    
    
    
    
    3,028,410Noninterest expense
    
    
    4,882,346
    
    
    
    1,868,002
    
    
    
    2,365,299
    
    
    
    
    
    
    
    9,115,647Net income (loss) before taxes
    
    
    831,355
    
    
    
    813,889
    
    
    
    (2,692,855
    )
    
    
    
    
    
    
    (1,047,611
    )Assets
    
    
    908,737,559
    
    
    
    74,100,577
    
    
    
    89,951,302
    
    
    
    (83,017,781
    )
    
    $
    989,771,657Expenditures for additions
to premises and equipment
    
    
    612,676
    
    
    
    (6,606
    )
    
    
    4,629
    
    
    
    
    
    
    
    610,699
 Commercial
    
    Mortgage
    
    
    
    
    
    Intersegment
    
    Consolidated2003
    
    Bank
    
    Bank
    
    Other
    
    Eliminations
    
    TotalNet interest income
    
    $
    5,426,970
    
    
    $
    596,153
    
    
    $
    (164,237
    )
    
    
    
    
    
    $
    5,858,886Noninterest income
    
    
    924,975
    
    
    
    2,749,180
    
    
    
    9,654
    
    
    
    
    
    
    
    3,683,809Noninterest expense
    
    
    4,018,892
    
    
    
    2,368,852
    
    
    
    1,047,340
    
    
    
    
    
    
    
    7,435,084Net income (loss) before taxes
    
    
    1,444,014
    
    
    
    976,481
    
    
    
    (1,201,923
    )
    
    
    
    
    
    
    1,218,572Assets
    
    
    747,045,603
    
    
    
    91,167,106
    
    
    
    71,039,877
    
    
    
    (69,195,891
    )
    
    $
    840,056,695Expenditures for additions
to premises and equipment
    
    
    229,002
    
    
    
    28,231
    
    
    
    122
    
    
    
    
    
    
    
    257,355
 The accounting policies of the segments are the same as those described in the
summary of significant accounting policies found in footnote 1 of the Companys
consolidated financial statements for the years ended December 31, 2003, 2002
and 2001 filed in conjunction with the Companys annual report on Form 10-K for
the year ended December 31, 2003. The Company evaluates performance based on
profit or loss from operations before income taxes. The Company derives a majority of its revenues from interest income and gain on
sale of mortgage loans. 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 other category reflects Parent Company financial information and represents
an overhead function rather than an operating segment. The Company does not have a single external customer from whom it derives 10
percent or more of its revenues and operates in one geographical area. -10-




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##### Table of Contents



Item 2.
    Managements Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS The Company and its representatives may from time to time make written or
oral statements that are forward-looking and provide other than historical
information, including statements contained in 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:  
    
    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;  
    
    Fluctuations in the value of the Companys investment securities;  
    
    The ability to attract and retain senior management experienced in banking and financial services;  
    
    The sufficiency of allowances for possible loan losses to absorb the amount of actual future losses inherent in the
existing portfolio of loans;  
    
    The Companys ability to adapt successfully to technological changes to compete effectively in the marketplace;  
    
    Credit risks and risks from concentrations (by geographic area and by industry) within the Banks loan portfolio;  
    
    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;  
    
    The failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral
and various financial assets and liabilities;  
    
    Volatility of rate sensitive deposits;  
    
    Operational risks, including data processing system failures or fraud;  
    
    Asset/liability matching risks and liquidity risks;  
    
    The limited operating history of our wholesale residential mortgage banking division; -11-




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##### Table of Contents




    
    Risks associated with the operation of our wholesale residential mortgage banking division;  
    
    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;  
    
    The impact from liabilities arising from legal or administrative proceedings the financial condition of the Company;  
    
    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;  
    
    Changes in general economic or industry conditions, nationally or in the communities in which the Bank conducts business;  
    
    Changes in accounting principles, policies or guidelines affecting the businesses conducted by the Company or its
affiliates;  
    
    Acts of war or terrorism; and  
    
    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. -12-




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##### Table of Contents



RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Throughout this section, the Company uses the following terms and meanings
to discuss its results of operations: Net interest income is the principal component of a commercial banks
income stream and represents the difference or spread between interest and
certain fee income generated from earning assets and the interest expense paid
on deposits and other borrowed funds. Fluctuations in interest rates, as well
as volume and mix changes in earning assets and interest-bearing liabilities,
can materially impact net interest income. The Company had no investments in
tax-exempt securities during the first quarter of fiscal year 2004 and 2003.
Accordingly, no adjustment is necessary to facilitate comparisons on a taxable
equivalent basis. Provision for loan losses is the expense of providing an allowance or
reserve for probable future losses on loans. The amount of the provision for
each period is dependent upon many factors, including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
managements assessment of loan portfolio quality, the value of loan collateral
and general business and economic conditions. Noninterest income consists of revenues generated from a broad range of
financial services, products and activities, including fee-based services,
service fees on deposit accounts and other activities. In addition, gains
realized from the sale of the guaranteed portion of Small Business
Administration (SBA) loans, other real estate owned, and available for sale
investments are included in noninterest income. Noninterest expense consists of items such as salaries and benefits,
occupancy and equipment, and other general and administrative expenses. Net income applicable to common shares means net income after taxes less
any dividends on preferred stock for that period. Preferred stock for the
periods presented consists of Series C preferred, which was issued December 31,
2002, and was still outstanding as of March 31, 2004. For the Three Months Ended March 31, 2004 compared to the Three Months Ended March 31, 2003 Net interest incomeincreased by $1.3 million, or 22.1% to $7.2 million
for the three months ended March 31, 2004 from $5.9 million for the three
months ended March 31, 2003. This is primarily attributable to an increase of
$1.6 million in interest on loans for the three months ended March 31, 2004
compared to the same period in 2003, resulting from the growth in the Companys
loan portfolio, partially offset by an increase in interest expense of
$312,000. The increase in interest expense resulted primarily from an increase
in other borrowed funds and the reclassification of dividends related to Trust
Preferred Securities as interest expense in accordance with SFAS No. 150 for
the current quarter. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 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. Upon the
adoption of SFAS No. 150, the Companys obligated mandatorily redeemable
preferred securities of subsidiary trusts were reclassified from mezzanine
equity to debt. The dividends related to these securities are reflected as
interest expense beginning July 1, 2003, on a prospective basis. At March 31,
2004, the Company had $20.6 million outstanding as company obligated
mandatorily redeemable preferred securities of subsidiary trusts. For the
three month period ended March 31, -13-




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##### Table of Contents



2004, the Company recorded interest expense of approximately $274,000
related to those instruments, which including amortization of debt issuance
costs of approximately $35,000. Provision for loan lossescharged to operations increased by $1.2 million
or 137.9% to $2.1 million for the three months ended March 31, 2004 from
$889,000 million for the three months ended March 31, 2003. This increase is
primarily a result of additional reserves related to loans charged off during
the first quarter of 2004 that had previously been classified as non-performing
and the Companys overall loan portfolio growth from the prior year. For a
more detailed discussion of the provision for loan losses, see  Analysis of
Financial Condition  Allowance for Loan Losses and Net Charge-offs. Noninterest income:The following table presents an analysis of the
noninterest income for the three months ended March 31, 2004 and 2003 with
respect to each major category of noninterest income: For the Three MonthsEnded March 31,2004
    
    2003
    
    $ Change
    
    % ChangeGain on sale of mortgage loans
    
    $
    1,498,412
    
    
    $
    2,271,626
    
    
    $
    (773,214
    )
    
    
    (34.0
    )%Service fees
    
    
    575,472
    
    
    
    518,445
    
    
    
    57,027
    
    
    
    11.0Mortgage loan processing fees
    
    
    429,136
    
    
    
    477,553
    
    
    
    (48,417
    )
    
    
    (10.1
    )Mortgage loan origination fees
    
    
    217,789
    
    
    
    181,937
    
    
    
    35,852
    
    
    
    19.7Other noninterest income
    
    
    307,601
    
    
    
    234,248
    
    
    
    73,353
    
    
    
    31.3Total
    
    $
    3,028,410
    
    
    $
    3,683,809
    
    
    $
    (655,399
    )
    
    
    (17.8
    )%
 Noninterest income decreased by $655,399, or 17.8% to $3.0 million for the
three months ended March 31, 2004 from $3.7 million for the three months ended
March 31, 2003. This decrease primarily resulted from gains on sale of
mortgage loans of $1.5 million for the three months ended March 31, 2004,
compared to $2.3 million for the three months ended March 31, 2003. The
decrease in the sale of mortgage loans results from a decrease in loan volume
as a result of the increase in interest rates. Service fees which include
service charges on deposits increased by $57,000, or 11.0%, to $575,000 for the
three months ended March 31, 2004 from $518,000 for the three months ended
March 31, 2003. This increase is primarily attributable to an increase in
deposit accounts. Other noninterest income increased by $73,000, or 31.3% to
$308,000 for the three months ended March 31, 2004 from $234,000 for the three
months ended March 31, 2003. Noninterest expense:The following table presents an analysis of the
noninterest expense for the three months ended March 31, 2004 and 2003 with
respect to each major category of noninterest expense: For the Three MonthsEnded March 31,2004
    
    2003
    
    $ Change
    
    % ChangeSalaries and benefits
    
    $
    4,928,188
    
    
    $
    5,113,894
    
    
    
    (185,706
    )
    
    
    (3.6
    )%Occupancy and equipment
    
    
    775,958
    
    
    
    628,804
    
    
    
    147,154
    
    
    
    23.4Data processing
    
    
    326,567
    
    
    
    258,986
    
    
    
    67,581
    
    
    
    26.1Dividends on preferred
securities of
subsidiary trusts (1)
    
    
    
    
    
    
    252,652
    
    
    
    (252,652
    )
    
    
    (100.0
    )Other
    
    
    3,084,934
    
    
    
    1,180,748
    
    
    
    1,904,186
    
    
    
    161.3Total
    
    $
    9,115,647
    
    
    $
    7,435,084
    
    
    
    1,680,563
    
    
    
    22.6
    %
  (1)
    
    Effective July 1, 2003, dividends on trust preferred
securities are reported as interest expense on a prospective basis.
Previously such dividends were reported as noninterest expense. -14-




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Noninterest expense increased by $1.6 million, or 22.6%, to $9.1 million
for the three months ended March 31, 2004 compared to $7.4 million for the
three months ended March 31, 2003. The increase resulted primarily from
increases in other expenses. The increase in other expenses is primarily
attributed to the expenses associated with the proposed merger with the South
Financial Group and accumulated offering expenses. The Company expenses of
$750,000 for fairness opinions related to the proposed merger. In addition, the
Company wrote-off expenses of $580,000 related to the filing of the universal
shelf registration with the SEC, which at the present time is not expected to
be utilized. Other operational expenses such as occupancy, data processing,
communications postage/courier, stationary /supplies and legal and accounting
fees increased in relation to the overall growth of its business. During the
three months ended March 31, 2004, salary and benefits expense decreased by
3.6% to $4.9 million from $5.1 million for the same period in 2003. The
decrease in benefits expense is primarily related to lower staff levels in the
wholesale mortgage division resulting form lower loan volumes, partially offset
by higher expenses in the core banking operation resulting from growth in core
banking activities. Dividends on preferred securities of subsidiary trusts decreased during
the three months ended March 31, 2004 compared to the three months ended March
31, 2003 due to the change in classification of such dividends effective July
1, 2003, from noninterest expense to interest expense upon adoption of SFAS No.
150. A benefit for income taxesof $166,070 was recognized for the three months
ended March 31, 2004 compared to a provision for income taxes of $425,782 for
the three months ended March 31, 2003. The benefit was based on the
tax-deductible portion of the net operating loss before taxes of $1.0 million.
The provision for income taxes represents an estimated effective annual tax
rate of approximately 35.0% during the three months ended March 31, 2003. Net loss applicable to common shareswas $928,288 for the three months
ended March 31, 2004 compared to net income of $792,790 for the three months
ended March 31, 2003. Basic and diluted loss per common share for the three
months ended March 31, 2004 was $0.14, respectively compared to earnings per
basic and diluted per common share of $0.11, respectively, for the three months
ended March 31, 2003. Analysis of Financial Condition as of March 31, 2004 and December 31, 2003 Total assetsincreased by $45.3 million at March 31, 2004, or 4.8%, to
$989.8 million from $944.5 million at December 31, 2003. The increase in total
assets primarily resulted from the growth in loans outstanding and mortgage
loans held for sale that were funded by new deposit growth and other borrowed
funds. Total investment securities decreased by $4.7 million, or 8.3%, to $52.2
million at March 31, 2004 as compared to $56.9 million at December 31, 2003.
The decrease in investment securities primarily resulted from principal
payments on mortgage-backed securities, the proceeds of which were invested in
loans. Federal funds sold and repurchase agreements increased by $48.5 million
or 158.4% to $79.1 million at March 31, 2004 from $30.6 million at December 31,
2003. At December 31, 2003, approximately $50 million in Fed Funds sold were
transferred into the Banks account at the Federal Reserve Bank as a strategy
to improve the Banks capital ratios. At March 31, 2004, the these funds
remained as Fed Funds sold. Other assets decreased by $431,000 to $12.9 million
at March 31, 2004 from $13.6 million at December 31, 2003. This decrease in
other assets results principally from the write-off of accrued expenses related
to the universal shelf registration. Loansincreased by $45.0 million, or 6.5%, to $736.3 million at March 31,
2004, from $691.3 million at December 31, 2003. Mortgage loans held for sale
increased by $4.9 million, or 7.4%, to $71.4 million at March 31, 2004 from
$66.5 million at December 31, 2003. The increase in loans was funded by
increases in depository accounts and repurchase agreements. -15-




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The Company has a policy of transferring certain non-performing loans to
nonaccrual status when they become more than 90 days past due on either
principal or interest. At March 31, 2004, nonaccrual loans amount to $5.1
million, compared with $2.6 million at December 31, 2003. The increase of $2.5
million is due to the addition of approximately $3.8 million in new loans
placed on non-accrual which was offset by the loans charged-off or upgraded to
performing status. Management believes the specific reserves placed against
these loans are adequate. In addition, payment on these loans is being sought
from secondary sources, such as the sale of collateral. The allowance for loan lossesincreased to $9.3 million, or 2.2%, at March
31, 2004 from $9.1 million at December 31, 2003. The increase primarily
resulted from additional provision of $2.1 million during this period, offset
by charge-offs of $1.9 million. The allowance for loan losses as a percentage
of total loans held for investment was 1.26% at March 31, 2004 and 1.31% at
December 31, 2003. Management believes that such allowance for loan losses is
sufficient to cover estimated losses in the Companys bank loan portfolio. The allowance for loan losses represents managements estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio.
In its evaluation of the allowance and its adequacy, management considers loan
growth, changes in the composition of the loan portfolio, the loan charge-off
experience, the amount of past due and non-performing loans, current and
anticipated economic conditions, underlying collateral values securing loans
and other factors. While it is the Companys policy to provide for a full
reserve or charge-off for loans in the period in which a loss is considered
probable, there are additional risks of future losses that cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these
risks include the state of the economy, managements judgment as to the
adequacy of the allowance is necessarily approximate and imprecise. 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. There is no unallocated portion of the Companys allowance for
loan losses. All classified loans are reviewed on an individual basis,
resulting in a specific allowance. General Allowance. It is difficult in a bank of this size to use
migration analysis or other more sophisticated approaches due to the small size
of the loan portfolio, the short history of Florida Bank, N.A., and the loan
problems, which surfaced in the early years of the Banks preceding operation,
First National Bank of Tampa. For this reason, a reasonable indicator of the
Banks potential future losses in the non-classified and homogeneous 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 Florida Bank, N.A. 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. These adjustments reflect
managements best estimate of the level of loan losses resulting from these
conditions by determining a range for each current condition adjustment, lower
range to upper range. This allows the Bank to shock the loan portfolio and
look at the level of allowances required should an upper range scenario start
to unfold. The following current condition factors were considered in this
analysis:  
    
    Changes in lending policies and procedures, including
underwriting standards and collection, charge-off, and recovery
practices. -16-




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
    
    Changes in national and local economic and business
conditions, including the condition of various market segments.  
    
    Changes in the nature and volume of the portfolio.  
    
    Changes in the experience, ability, and depth of lending management and staff.  
    
    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.  
    
    The existence and effect of any concentrations of credit, and
changes in the level of such conditions.  
    
    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 feels 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. 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 $2.3
million at March 31, 2004. The range for the allowance for loan losses at
March 31, 2004, including specific allowances, were determined to be between
$8.0 million or 1.09% of loans (low range) and $12.9 million or1.76% of loans
(high range). During the first quarter of 2004, the company increased its
specific reserves by $1.3 million related to a non-performing commercial loan
in bankruptcy. At the conclusion of the bankruptcy proceedings, the loan was
charged- off. The allowance for loan losses totaled $9.3 million or 1.3% of
loans at March 31, 2004. In assessing the adequacy of the allowance, management relies
predominantly on its ongoing review of the loan portfolio, which is undertaken
to ascertain whether there are probable losses that must be charged-off and to
assess the risk characteristics of the portfolio in the aggregate. This review
encompasses the judgment of management, utilizing internal loan rating
standards, guidelines provided by the banking regulatory authorities governing
the Company, and their loan portfolio reviews as part of the Companys
examination process. -17-




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##### Table of Contents



Depositsincreased by $26.6 million, or 3.3%, to $823.2 million at March
31, 2004 from $796.6 million at December 31, 2003. The increase in total
deposits primarily resulted from increases in the following types of
interest-bearing deposits: ($ in thousands)
    
    March 31, 2004
    
    December 31, 2003
    
    $ Change
    
    % ChangeNoninterest-bearing demand
    
    $
    121,404
    
    
    $
    134,648
    
    
    
    ($13,244
    )
    
    
    (9.8
    %)Interest-bearing demand
    
    
    57,259
    
    
    
    59,057
    
    
    
    (1,798
    )
    
    
    (3.0
    )Regular savings
    
    
    100,390
    
    
    
    97,679
    
    
    
    2,711
    
    
    
    2.8Money market accounts
    
    
    31,707
    
    
    
    31,676
    
    
    
    31
    
    
    
    0.1Time $100,000 and over
    
    
    431,476
    
    
    
    382,091
    
    
    
    49,385
    
    
    
    12.9Other time
    
    
    81,009
    
    
    
    91,462
    
    
    
    (10,453
    )
    
    
    (11.4
    )Total
    
    $
    823,245
    
    
    $
    796,613
    
    
    $
    26,632
    
    
    
    3.3
    %
 Time deposits often fluctuate in response to interest rate changes and can
vary rather significantly as a result. The increase in time deposits of
$100,000 and over resulted primarily from an increase in brokered deposits.
Noninterest-bearing deposits decreased as a result of fewer transfers of funds
into demand deposit accounts that were previously invested in repurchase
agreements sold. This transfer is related to certain of the Companys
customers 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 March 31, 2004 and December
31, 2003. Similar fluctuations can be observed relative to prior year-ends, and
management believes fluctuations will continue in similar fashion in the
future. The growth in savings and money market accounts is primarily
attributable to continued expansion of the Companys customer base as a result
of ongoing marketing and savings activities. Repurchase agreements and other borrowed fundssold increased by $24.6
million, or 73.3%, to $58.1 million at March 31, 2004 from $33.5 million at
December 31, 2003, for reasons discussed in the previous section on Deposits,
and due to continued expansion of the Companys customer base. Other borrowed
funds decreased by $3.1 million, or 13.0%, to $20.9 million at March 31, 2004
from $24.0 million at December 31, 2003. This decrease is primarily
attributable to a reduction in the Treasury Tax and Loan account which
represents tax deposits held in an interest bearing account for the benefit of
the U.S. Treasury. Accounts payable and accrued expensesdecreased by $3.4 million, or 34.7%,
to $6.4 million at March 31, 2004 from $9.9 million at December 31, 2003. This
decrease is primarily attributable to a reduction in accrued incentives and
commissions and incentives related to the mortgage banking division which were
paid in the first quarter of 2004. Shareholders equityincreased by $151,000, or 0.3%, to $57.9 million at
March 31, 2004, from $57.8 million at December 31, 2003. This small increase is
the result of approximately $1.0 million in new capital resulting from the
exercise of warrants and options which was offset by $882,000 in net losses,
dividends paid of $63,000 and a gain of $93,000 in other comprehensive income. LIQUIDITY AND CAPITAL RESOURCES Liquidity, as defined by the SEC, is the ability of a company to generate
adequate amounts of cash to meet the Companys needs for day-to-day operating
expenses and material commitments on both a long- and short-term basis.
Liquidity management involves maintaining the Companys ability to meet the
day-to-day cash flow requirements of its customers, whether they are depositors
wishing to withdraw funds or borrowers requiring funds to meet their credit
needs. The Company does not know of any trends, demands, commitments, -18-




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events or uncertainties that will result in or that are reasonably likely
to result in the Companys liquidity increasing or decreasing in any material
way. The primary function of asset-liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but also to maintain an appropriate balance between interest-sensitive
assets and interest-sensitive liabilities so that the Company can profitably
deploy its assets. Both assets and liabilities are considered sources of
liquidity funding and both are, therefore, monitored on a daily basis. The
greatest risk addressed by asset-liability management is disintermediation 
when the margin between an institutions cost of liabilities and its yield on
earning assets narrows to an unacceptable level. As discussed under
Interest Rate Risk Management below, the Company frequently evaluates its
assets and liabilities in relation to different interest rate movement
scenarios. Based on these projections, management believes the Companys
assets and liabilities are balanced in such a way that the risk of
disintermediation is held to a minimum. Given current historically low interest rate levels, the Company has given
significant attention to the risks posed by rising interest rates, which would
increase its cost of funds. The Companys balance sheet is structured in such
a way that these increased costs are projected to be exceeded by increased
income from variable-rate loans. As pointed out in the previous paragraph,
even if interest rates doubled from their current levels, they would still be
lower than two and a half years ago, when they were considered moderate. All
financial institutions compete for time deposits, primarily on interest rates.
It is the Companys experience that an institution must pay the market rate to
obtain deposits in any rate environment. Since inception, the Company has not
had significant difficulty attracting deposits and raising other sources of
funds at reasonable rates. The Company knows of no factors, which would reduce
its ability to do so in the future in any material way. OFF-BALANCE SHEET ARRANGEMENTS The Company originates financial instruments with off-balance sheet risk
in the normal course of business, usually for a fee, primarily to meet the
financing needs of its customers. The financial instruments include
commitments to fund loans, letters of credit and unused lines of credit. These
commitments involve varying degrees of credit risk, however, management does
not anticipate losses upon the fulfillment of these commitments. At March 31, 2004, financial instruments having credit risk in excess of
that reported in the balance sheet totaled approximately $238.6 million. The Company has no off-balance sheet activities with unconsolidated or
limited purpose entities. Recent Accounting Pronouncements In March of 2004, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 105, Application of Accounting Principles
to Loan Commitments, Topic 5: DD. This Bulletin summarizes the views of the
SEC regarding the application of generally accepted accounting principles to
loan commitments accounted for as derivative instruments and must be applied to
all loan commitments accounted for as derivatives entered into after March 31,
2004. The Company will adopt the Bulletin on March 31, 2004 and is currently
assessing the impact of adoption on the Companys consolidated financial
position, results of operations or cash flows. -19-




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EFFECTS OF INFLATION AND CHANGING PRICES Inflation generally increases the cost of funds and operating overhead,
and to the extent loans and other assets bear variable rates, the yields on
such assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions increased cost of goods and services purchased, the
cost of salaries and benefits, occupancy expense, and similar items. Inflation
and related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings, and
shareholders equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and can reduce the Companys earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market. Monetary Policies The Companys results of operations will be affected by credit policies of
monetary authorities, particularly the Federal Reserve Board. The instruments
of monetary policy employed by the Federal Reserve Board include open market
operations in U.S. Government securities, changes in the discount rate on
member company borrowings, changes in reserve requirements against member
company deposits and limitations on interest rates which member company may pay
on time and savings deposits. In view of changing conditions in the national
economy and in the money markets, as well as the effect of action by monetary
and fiscal authorities, including the Federal Reserve Board, no prediction can
be made as to possible future changes in interest rates or the Companys
deposit levels, loan demand, business and earnings. Critical Accounting Policies The preparation of the financial statements, on which this managements
discussion and analysis is based, requires the Company to make estimates, which
impact these financial statements. The most critical of these estimates and
accounting policies relate to the allowance for loan losses, other real estate
owned, and derivative financial instruments. Allowance for Loan Losses Management carefully monitors the credit quality of the Companys loan
portfolios and makes estimates about the amount of credit losses that have been
incurred at each financial statement reporting date. This process significantly
impacts the financial statements and involves complex, subjective judgments.
The allowance is largely determined based upon the market value of the
underlying collateral. Market values of collateral are generally based upon
appraisals obtained from independent appraisers. If market conditions decline,
the allowance for loan losses would be negatively impacted resulting in a
negative impact on the Companys earnings. The allowance for loan losses is a
significant estimate that can and does change based on managements assumptions
about specific borrowers and applicable economic and environmental conditions,
among other factors. Other Real Estate Owned At March 31, 2004, the Company had two real estate properties that were
obtained through a foreclosure. The properties are recorded based upon the
market value determined by an independent appraisal less estimated selling
cost. If market conditions decline in the area in which the properties are
located, then the -20-




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value of other real estate owned will be negatively impacted, resulting in
a negative impact to the Companys earnings. Derivative Instruments The Company has entered into several interest swaps plus a foreign
currency swap, which expired January 31, 2004. The fair market value of these
instruments is determined by quotes obtained from the related counter parties
in combination with a valuation model utilizing discounted cash flows. The
valuation of these derivative instruments is a significant estimate that is
largely affected by changes in interest rates. If interest rates significantly
increase or decrease, the value of these instruments will significantly change,
resulting in an impact on the Companys earnings. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk 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. The Company has specified gap ratio guidelines for a one year time horizon
of between 0.60 and 1.20. At March 31, 2004, the Company had cumulative gap
ratios of approximately 1.15. Thus, over the next twelve months, rate-sensitive
assets will reprice slightly faster than rate-sensitive liabilities. At
December 31, 2003, the Company had cumulative gap ratios of approximately 1.19.
However, relative repricing frequency of rate-sensitive assets versus
rate-sensitive liabilities is not the sole indicator of changes in net interest
income in a fluctuating interest rate environment, as further discussed below. Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities that are not reflected in the
interest sensitivity analysis report. Prepayments may have significant effects
on the Companys net interest margin. Because of these factors and in a static
test, interest sensitivity gap reports may not provide a complete assessment of
the Companys exposure to changes in interest rates. Management utilizes
computerized interest rate simulation analysis to determine the Companys
interest rate sensitivity. The Company is in an asset sensitive position for
the first year, and then moves to a matched position for the five-year period.
Overall, due to the factors cited, current simulations results indicate a
relatively low sensitivity to parallel shifts in interest rates. A liability
sensitive company will generally benefit from a falling interest rate
environment as the cost of interest-bearing liabilities falls faster than the
yields on interest-bearing assets, thus creating a widening of the net interest
margin. Conversely, an asset sensitive company will benefit from a rising
interest rate environment as the yields on earning assets rise faster than the
costs of interest-bearing liabilities. Management also evaluates economic
conditions, the pattern of market interest rates and competition to determine
the appropriate mix and repricing characteristics of assets and liabilities
required to produce a targeted net interest margin. In addition to the gap analysis, management uses rate shock simulation to
measure the rate sensitivity of the Companys 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 -21-




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rate shock simulation analysis, which was performed as of March 31, 2004,
indicates that a 200 basis point decrease in rates would cause a decrease in
net interest income of $2.6 million over the next twelve-month period.
Conversely, a 200 basis point increase in rates would cause an increase in net
interest income of $6.0 million. 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 the Company cannot assure you that this will be the
case. While this simulation is a useful measure of the Companys sensitivity to
changing rates, it is not a forecast of the future results and is based on many
assumptions that, if changed, could cause a different outcome. In addition, a
change in U.S. Treasury rates in the designated amounts accompanied by a change
in the shape of the Treasury yield curve would cause significantly different
changes to net interest income than indicated above. Generally, the Companys commercial and commercial real estate loans are
indexed to the prime rate. A portion of the Companys investments in
mortgage-backed securities is indexed to U.S. Treasury rates. Accordingly, any
changes in these indices will have a direct impact on the Companys interest
income. Certificates of deposit are generally priced based upon current market
conditions, which include changes in the overall interest rate environment and
pricing of such deposits by competitors. Other interest-bearing deposits are
not priced against any particular index; but rather, reflect changes in the
overall interest rate environment. Repurchase agreements are indexed to the
nationally quoted repurchase agreement rate and other borrowed funds are
indexed to U.S. Treasury rates. The Company adjusts the rates and terms of its
loans and interest-bearing liabilities in response to changes in the interest
rate environment. The Company does not currently engage in trading activities. Derivative Financial Instruments The Company is exposed to market risks, including fluctuations in
interest rates, variability in spread relationships (Prime to LIBOR spreads),
mismatches of repricing intervals between finance receivables and related
funding obligations, and variability in currency exchange rates. The Company
has established policies, procedures and internal processes governing its
management of market risks and the use of financial instruments to manage its
exposure to such risks. Sensitivity of earnings to these risks are managed by
entering into securitization transactions, issuing debt obligations with
appropriate price and term characteristics, and utilizing derivative financial
instruments. These derivative financial instruments consist primarily of
interest rate swaps and foreign currency swaps. The Company does not use
derivative financial instruments for trading purposes. At March 31, 2004, the following instruments qualify as derivatives as
defined by SFAS 133: Contract/Notional
    
    
    
    
    
    Weighted Average
    
    Weighted AverageAmount
    
    Fair Value
    
    Paying Rates
    
    Receiving RatesInterest rate swap
agreements
    
    $
    173,521,000
    
    
    $
    2,655,575
    
    
    
    1.22
    %
    
    
    4.36
    %Mortgage loan
interest rate locks.
    
    
    77,861,000
    
    
    
    1,568,670
    
    
    
    N/A
    
    
    
    N/AMandatory mortgage
delivery forwards
    
    
    56,233,000
    
    
    
    40,361
    
    
    
    N/A
    
    
    
    N/A
 -22-




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Interest rate swap agreements at March 31, 2004 consist of twenty-seven
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 133. Additionally, the Company entered into a
foreign currency swap agreement during the first quarter of 2001 which expired
as of January 31, 2004. This swap agreement does not qualify for hedge
accounting under SFAS No. 133. Accordingly, all changes in the fair value of
the foreign currency swap agreement are reflected in earnings. The Company
recognized losses of $12,000 during the three months ended March 31, 2004 as a
result of changes in the fair value of the foreign currency agreement and the
related translation adjustment. The five counter parties to these derivatives are large, credit-worthy
financial services companies experienced in derivative operations. If a
counter party were to default on one of the interest rate swap agreements, the
practical impact of that default would be to revert the Companys cost on the
underlying certificate of deposit to its fixed coupon rate. As per the
preceding table, this would raise the Companys effective cost on the
underlying deposit by an average rate of 3.14% as of March 31, 2004. However,
most of these underlying certificates contain a provision allowing the Company
to cancel the certificate of deposit in the event the related swap agreement is
unwound, and the Company would probably do so to avoid the increase in cost of
these funds. The default risk, therefore, on these interest rate swaps is
limited. If the Company was to cancel the underlying certificate of deposit,
the Company might need to replace it in the brokered deposit market, depending
on its funding needs at the time. There can be no assurance the Company could
replace such a deposit on terms as favorable as the cancelled deposit and the
related interest rate swap had provided. If the counter party for the foreign
currency swap were to default, the Company would have to use another process to
convert the foreign currency payments into dollars, which might entail some
additional costs, but in managements judgment, these would not be significant.
The Company currently has no agreements with its counter parties to hold
collateral to secure the positive value of these instruments, and management
does not believe such agreements would present any real financial advantage.
At March 31, 2004, in managements opinion there was no significant risk of
loss in the event of nonperformance of the counter parties 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 principal executive officer
and principal 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 March 31, 2004 (the Evaluation Date).
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Companys disclosure controls and procedures were
effective in timely alerting them to material information relating to the
Company (and its consolidated subsidiaries) required to be included in the
Companys periodic SEC filings. There has been no change in our internal
control over financial reporting during the quarter ended March 31, 2004,
identified in connection with the evaluation referred to above, that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. -23-




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PART II 
 Item 1. Legal Proceedings Not Applicable. 
 Item 2. Changes in Securities and Use of Proceeds Not Applicable. 
 Item 3. Defaults Upon Senior Securities Not Applicable. 
 Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 
 Item 5. Other Information Not Applicable. 
 Item 6. Exhibits and Reports on Form 8-K (a) 1. Financial Statements. The following financial statements have
been filed as Item 8 in Part II of this Report: Consolidated Condensed Balance Sheets  March 31, 2004 and December 31,
2003 Consolidated Condensed Statements of Operations  Three-month periods
ended March 31, 2004 and 2003 Consolidated Condensed Statements of Cash Flows  Three-month periods
ended March 31, 2004 and 2003 Notes to Consolidated Condensed Financial Statements 2. Exhibits. 2.1
    
    
    Agreement and Plan of Merger dated March 27, 1004 between The
South Financial Group and the Company.(1)31.1
    
    
    Certification by Charles E. Hughes, Jr., Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification by T. Edwin Stinson, Jr., Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification by Charles E. Hughes Jr., Chief Executive
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification by T. Edwin Stinson,
Jr., Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   (1) Incorporated by reference to the Form 8-K dated March 17,
2004, previously filed by the Company. -24-




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(b) Reports on Form 8-K During the three months ended March 31, 2004, we filed the following
current reports on Form 8-K: On January 21, 2004, we furnished information under Item 12 regarding our
preliminary unaudited financial results for the year ended December 31,
2003. On March 18, 2004, we furnished information under Item 5 regarding the
merger agreement executed between the Company and The South Financial
Group, dated March 17, 2004. -25-




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SIGNATURES In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, in the City of Jacksonville, State
of Florida on May 14, 2004. FLORIDA BANKS, INC.By:
    /s/ T. Edwin Stinson, Jr.T. Edwin Stinson, Jr.Chief Financial Officer -26-




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EXHIBIT INDEX ExhibitNumber
    
    Description of Exhibit31.1
    
    Certification by Charles E. Hughes, Jr., Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by T. Edwin Stinson, Jr., Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Charles E. Hughes, Jr., Chief Executive
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification by T. Edwin Stinson, Jr., Chief Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 -27-




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EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Name
    
    Place of IncorporationFlorida Bank, N.A., a national banking association
    
    Federally CharteredFB Financial Services, Inc.
    
    FloridaFlorida Banks Statutory Trust I
    
    ConnecticutFlorida Banks Statutory Trust II
    
    ConnecticutFlorida Banks Statutory Trust III
    
    ConnecticutFlorida Banks Capital Trust I
    
    DelawareFlorida Banks Capital Trust II
    
    Delaware