UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
----------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 000-22817
HARBOR FLORIDA BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0737675
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 S. SECOND STREET
FORT PIERCE, FL 34950
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (561) 461-2414
--------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (par value $0.01)
(TITLE OF CLASS)
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the average bid and asked price of
the common stock as of December 8, 1997 ($66.75) was $117,271,206.
The number of shares of common stock outstanding on December 8, 1997
was 4,978,756.
Documents incorporated by reference:
1. Annual Report to Stockholders for the fiscal year ended September 30, 1997
(Parts II and III).
2. Proxy Statement of Harbor Florida Bancorp, Inc. to be filed as Exhibit 99.3
to the Registration Statement on Form S-1 of Harbor Florida Bancshares,
Inc.(Part III). (To be filed pursuant to General Instruction G.(3)).
<PAGE>
TABLE OF CONTENTS
Item Page
No. No.
PART I
1 Business 2
2 Properties 20
3 Legal Proceedings 22
4 Submission of Matters to a Vote of
Security-Holders 22
PART II
5 Market for Registrant's Common Equity
and Related Stockholder Matters 22
6 Selected Financial Data 23
7 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 23
8 Financial Statements and Supplementary Data 23
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 23
PART III
10 Directors and Executive Officers of the
Registrant 23
11 Executive Compensation 23
12 Security Ownership of Certain Beneficial Owners
and Management 24
13 Certain Relations and Related Transactions 24
14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 24
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Harbor Florida Bancorp, Inc. (the "Company") is the middle tier stock
holding company for Harbor Federal Savings Bank (the "Bank"). The Company owns
100% of the Bank's common stock. Currently, it engages in no other significant
activities beyond its ownership of the Bank's common stock. The Bank is engaged
in the business of attracting deposits primarily from the communities it serves
and using these and other funds to originate primarily one-to-four family first
mortgage loans for retention in its portfolio. It's principal sources of funds
are deposits and principal and interest payments on loans. Its principal source
of income is interest received from loans and investment and mortgage-backed
securities, and its principal expenses are interest paid on deposit accounts and
employee compensation and benefits.
On June 1, 1996, the Company acquired all of the outstanding common
stock of Treasure Coast Bank, F.S.B. ("Treasure Coast"), a Florida based federal
savings association, for approximately $6.8 million in cash. The acquisition was
accounted for using the purchase method. Treasure Coast had assets of
approximately $75 million. The Treasure Coast acquisition added 1 branch to the
Company's branch network. The results of operations of Treasure Coast from June
1, 1996 to September 30, 1996 are included in the consolidated financial
statements of the Company.
MARKET AREA
The Company serves communities in six growing and diverse Florida
counties. Its headquarters are in Fort Pierce, Florida, located on the eastern
coast of Florida between Stuart and Daytona Beach. In addition to its
headquarters, it has fourteen branch offices in St. Lucie, Indian River and
Martin counties, located on Florida's "Treasure Coast." This area is
characterized by both a large retirement and vacation home population and a
significant agricultural economy, primarily citrus crops. The Company has four
branch offices located in Brevard County, which encompasses the "Space Coast" of
the state. Brevard County has a greater industrial base fueled primarily by
companies related to NASA and the John F. Kennedy Space Center. Prominent
electronics concerns such as Harris Corporation are also major employers in this
area. The Company also has one branch office in Okeechobee County, a rural,
agricultural area, and three branch offices in Volusia County, where tourism and
a large retirement population predominate.
LENDING ACTIVITIES
GENERAL. The Company's principal lending activity has historically
been, and will continue to be for the foreseeable future, the origination of
one-to-four family residential mortgage loans. Although the Company sells some
conforming loans, primarily to the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), and has, on
rare occasions, purchased whole loans and loan participations, it focuses
primarily on the origination of loans and retains them in its portfolio for
investment. See " -- Lending Activities -- One to Four Family Permanent
Residential Mortgage Loans" below. The Company also originates a substantial
amount of one-to-four family residential construction and consumer loans, and,
on a limited basis, consumer installment, commercial real estate and commercial
business loans. Substantially all of the Company's mortgage loans are secured by
property in its market area and most of its nonmortgage loans are made to
borrowers in its market area.
The Company offers both fixed-rate and adjustable rate mortgage ("ARM")
loans. The Company has sought to increase its origination of ARM loans to reduce
its interest rate risk. However, the Company's ability to originate ARM loans
has been limited by borrower preference for fixed-rate loans in many instances,
particularly in low interest rate environments.
LOAN AND MORTGAGE - BACKED SECURITIES PORTFOLIO COMPOSITION. The
following table sets forth a summary of the composition of the Company's loan
and mortgage-backed securities portfolio by type of loan.
2
<PAGE>
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
------ ------ -----
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
(Dollars in thousands)
MORTGAGE LOANS
<S> <C> <C> <C> <C> <C> <C>
Construction 1 - 4 Family. $47,800 5.42% $43,994 5.46% $40,634 6.07%
Permanent 1 - 4 Family.... 629,906 71.46 584,297 72.49 487,480 72.84
Multifamily............... 15,326 1.74 17,804 2.21 14,916 2.23
Nonresidential............ 54,983 6.24 41,970 5.21 31,980 4.78
Land...................... 33,182 3.76 29,034 3.60 20,460 3.06
-------- -------- -------- -------- -------- -------
Total Mortgage Loans.. 781,197 88.62 717,099 88.97 595,470 88.98
------- ------- ------- ------- ------- ------
OTHER LOANS
Commercial Nonmortgage.... 11,287 1.28 8,199 1.02 8,468 1.27
Consumer:
Home Improvement...... 20,614 2.34 20,679 2.56 19,198 2.87
Manufactured Housing.. 16,399 1.86 15,784 1.96 15,045 2.25
Other Consumer (1).... 51,988 5.90 44,265 5.49 31,049 4.63
-------- -------- -------- -------- ------- -------
Total Other Loans..... 100,288 11.38 88,927 11.03 73,760 11.02
-------- ------- -------- ------- ------- ------
Total Loans Receivable.... 881,485 100.00% 806,026 100.00% 669,230 100.00%
------- ====== ------- ====== ------- ======
LESS:
Loans in process.......... 32,078 26,788 24,321
Deferred loan fees and
discounts............. 3,446 3,203 3,519
Allowance for loan losses. 11,691 11,016 10,083
-------- -------- --------
Subtotal.............. 47,215 41,007 37,923
-------- -------- --------
TOTAL LOANS RECEIVABLE,
NET.................. 834,270 765,019 631,307
------- ------- -------
LOANS HELD FOR SALE....... 141 4,870 1,009
-------- -------- --------
MORTGAGE-BACKED
SECURITIES............ 176,854 153,293 164,759
------- ------- -------
TOTAL..................... $1,011,265 $923,182 $797,075
========== ======== ========
</TABLE>
- ------------
(1) Includes home equity and other second mortgage loans.
3
<PAGE>
The following table shows the maturity or period to repricing of the
Company's loan and mortgage-backed securities portfolios at September 30, 1997.
Loans that have adjustable rates are shown as being due in the period in which
the interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on loans totaled $163.0, $143.5, and $99.4 million for
fiscal years 1997, 1996 and 1995, respectively. Loans having no stated maturity
and no schedule of repayments (including delinquent loans), and demand loans are
reported as due within one year.
<TABLE>
<CAPTION>
One Three Ten
through through Five through Beyond
Within three five through twenty twenty
one year years years ten years years years Total
-------- ------- ------- ------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Permanent 1 - 4 family.... $213,414 $25,164 $56,921 $55,450 $139,195 $159,380 $649,524
Other..................... 43,501 11,404 14,034 12,074 15,631 677 97,321
Other loans:
Consumer ................. 24,464 12,576 22,609 24,811 4,358 41 88,859
Commercial ............... 6,146 511 1,290 1,194 27 2,096 11,264
Nonperforming loans (1)..... 2,580 --- --- --- --- --- 2,580
Mortgage-backed
securities.............. 58,708 25,030 20,704 54,497 17,202 713 176,854
-------- ------- ------- ------- -------- -------- ---------
Sub-total............... $348,813 $74,685 $115,558 $148,026 $176,413 $162,907 $1,026,402
======== ======= ======== ======== ======== ========
Deferred loan fees and
discounts............... (3,446)
Allowance for loan
losses.................. (11,691)
--------
Total (2)(3)................ $1,011,265
==========
</TABLE>
(1) All nonperforming loans are reported as due within one year regardless of
the actual maturity term. (2) Amounts reported do not include principal
repayment or prepayment assumptions. (3) Amounts include loans held for sale of
$141,000 at September 30, 1997.
--------------
The following table sets forth the amount of fixed-rate and
adjustable-rate loans at September 30, 1997 due after September 30, 1998.
Adjustable
Fixed Rate Rate Total
-------- -------- --------
(In thousands)
Mortgage loans:
Permanent 1 - 4 family.... $325,483 $110,627 $436,110
Other..................... 37,348 16,472 53,820
Other loans:
Consumer ................. 64,395 --- 64,395
Commercial ............... 5,118 --- 5,118
-------- -------- --------
Total loans................. 432,344 127,099 559,443
Mortgage-backed securities.. 118,146 --- 118,146
-------- -------- --------
Total....................... $550,490 $127,099 $677,589
======== ======== ========
4
<PAGE>
ONE-TO-FOUR FAMILY PERMANENT RESIDENTIAL MORTGAGE LOANS. The Company's
primary lending activities focus on the origination of one-to-four family
residential mortgage loans. The Company generally does not originate one-to-four
family residential loans on properties outside of its market area. At September
30, 1997, $629.9 million or 71.46% of the Company's total loan portfolio and
55.69% of total assets consisted of one-to-four family loans and over 95% of
such loans were collateralized by properties located in the Company's market
area.
The Company's fixed rate loans generally are originated and underwritten
according to standards that permit sales in the secondary market. However, the
decision to sell depends on a number of factors including the yield and the term
of the loan, market conditions, and the Company's current portfolio position.
The Company sells a portion of newly originated 30 year fixed rate mortgage
loans, currently $100,000 to $200,000 per month. In addition, the Company sells
loans under the single family Mortgage Revenue Bond Programs through local
County Housing Finance Authorities. The servicing on these loans is also
released.
The Company currently offers one-to-four family residential mortgage loans
with fixed, adjustable or a combination of fixed/adjustable interest rates.
Originations of fixed rate mortgage loans versus ARM loans are monitored on an
ongoing basis and are affected significantly by the level of market interest
rates, customer preference, the Company's interest rate gap position, and loan
products offered by the Company's competitors. In a low interest rate
environment, borrowers typically prefer fixed rate loans to ARM loans, and even
if management's strategy is to emphasize ARM loans, market conditions may be
such that there is greater demand for fixed rate mortgage loans.
The Company generates residential mortgage loan activity through local
advertising, its existing customers and referrals from local real estate brokers
and home builders. All loans are originated by Company loan officers, none of
whom have underwriting authority. Independent loan brokers are not used.
Residential loans are authorized and approved under central authority by
experienced underwriters. Underwriters have individual authority to approve
loans up to the maximum amount of $250,000. Residential mortgage loans in excess
of this amount are approved by Management individually up to $500,000 or by
committee if above $500,000. The Company also has direct endorsement authority
from the Federal Housing Authority ("FHA") to allow for internal approval of FHA
insured loans. FHA loans are approved under central authority by an underwriter
with a "Direct Endorsement" designation from the FHA. The Company's underwriting
standards are intended to ensure that borrowers are sufficiently credit worthy,
and all of the Company's lending is subject to written underwriting policies and
guidelines approved by the Company's Board of Directors. Detailed loan
applications are designed to determine the borrower's ability to repay the loan
and certain information solicited in these applications is verified through the
use of credit reports, financial statements and other confirmations. The Company
obtains an appraisal of substantially all of the proposed security property in
connection with residential mortgage loans. Additionally, title insurance is
required for all mortgage loans except home equity loans of $50,000 or less.
The types, amounts, terms of and security for conventional loans (those not
insured or guaranteed by the U.S. government or agencies thereof, or state
housing agency) originated by the Company are significantly prescribed by
federal regulation. OTS regulations limit the amount which the Company can lend
up to specified percentages of the value of the real property securing the loan,
as determined by an appraisal at the time the loan is originated (referred to as
"loan-to-value ratios"). The Company makes one-to-four family home loans and
other residential real estate loans with loan-to-value ratios generally of up to
80% of the appraised value of the security property. In certain circumstances
loan-to-value ratios exceed 80%, in which case private mortgage insurance is
generally required. A substantial part of the Company's loan originations are
made to borrowers to finance second homes for vacation use or for use as a
rental property. Such loans may be considered to have a higher credit risk than
loans to finance a primary residence.
ONE-TO-FOUR FAMILY RESIDENTIAL CONSTRUCTION LOANS. A part of the Company's
loan originations are to finance the construction of one-to-four family homes in
the Company's market area. At September 30, 1997 the Company had $47.8 million
in such loans, representing 5.42% of total loans. It is the Company's policy to
disburse loan proceeds as construction progresses and as inspections warrant.
A portion of these loans are made directly to the individual who will
ultimately own and occupy the home. Of these, the vast majority are structured
at origination to guarantee the permanent financing to the Company as well. As a
result, although in recent years the origination of these construction loans to
individuals is second in volume only to the origination of traditional loans to
finance the purchase or refinance of an existing home, the significance of this
type of lending to the Company is not evident from the amount of these loans in
its portfolio at any given time because these construction loans to individuals
usually "roll" into permanent financing.
5
<PAGE>
Approximately one-half of the Company's one-to-four family construction
loans are to builders. In most instances these loans are also structured to
guarantee permanent financing by the Company.
CONSUMER LOANS. The Company originates consumer loans as an essential
element in its retail-oriented strategy. Secured consumer loans include
automobile, manufactured housing, boat and truck loans, home equity and home
improvement loans as well as loans secured by the borrower's deposit accounts
with the Company. The loans for manufactured housing are generally originated
within quality, retirement lifestyle communities spread throughout the six
county market area that feature amenities such as full service clubhouse
facilities, swimming pools, and, in a number of cases, golf courses. These loans
are subject to the normal underwriting standards of the Company. Loans are made
on either a fixed-rate or adjustable-rate basis, with terms generally up to 20
years. A limited amount of unsecured consumer loans are also originated. At
September 30, 1997, consumer-oriented loans accounted for $89.0 million or
10.10% of the Company's total loan portfolio.
NON-RESIDENTIAL AND LAND MORTGAGE LOANS. In the late 1980's the Company
curtailed its lending in non-residential mortgages with the exception of loans
to finance the sale of the Company's real estate acquired through foreclosure.
In recent years, the Company re-entered this market and made a total of $18.3
million, $12.9 million and $10.7 million of non-residential mortgage loans in
1997, 1996 and 1995, respectively. At September 30, 1997, nonresidential loans
constituted 6.24%of the Company's total loan portfolio. Origination of these
loans plays a subordinate role to the origination of residential mortgage and
consumer-related loans. Non-residential mortgage loans are offered on properties
within the Company's primary market area using both fixed or adjustable rate
programs.
Loans secured by non-residential real estate generally carry larger
balances and involve a greater degree of risk than one-to-four family
residential mortgage loans. This increased risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income-producing
properties, and the increased difficulty of evaluating and monitoring these
loans. Furthermore, the repayment of loans secured by non-residential property
is typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. See "Business -- Delinquent, Nonperforming and
Classified Assets".
The Company also originates developed building lot loans ("lot loans")
secured by individual improved lots for future residential construction. Lot
loans are offered with either a fixed or adjustable interest rate and with a
maximum term of up to 15 years. At September 30, 1997 these loans accounted for
$14.6 million or 1.66% of the Company's total loan portfolio.
OTHER LOANS. The balance of the Company's lending consists of multi-family
mortgage and commercial non-mortgage loans. At September 30, 1997 these loans
represented $15.3 million or 1.74% and $11.3 million or 1.28%, respectively, of
the Company's total loan portfolio. The multi-family mortgage loans are secured
primarily by apartment complexes. These loans are subject to the same lending
limits as apply to the Company's commercial real estate lending. The commercial
non-mortgage loans represent primarily equipment and other business loans to
professionals such as physicians and attorneys. These loans are an integral part
of the Company's strategy of seeking synergy between its various deposit and
loan products and as a service to existing customers.
ORIGINATION AND SALE OF LOANS
From time to time the Company has sold mortgage loans, primarily to the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. Historically, the Company has not purchased significant amounts of
loans, particularly in light of its past policy to control asset growth.
The Company sells a portion of newly originated 30 year fixed rate mortgage
loans, currently $100,000 to $200,000 per month. In addition, the Company sells
loans under the single family Mortgage Revenue Bond Programs through local
County Housing Finance Authorities. The servicing on these loans is also
released. The purpose of selling a portion of fixed rate loans from current
production is to reduce interest rate risk by limiting the growth of longer term
fixed rate loans in the portfolio and to generate service fee income over time.
6
<PAGE>
The following table shows total loan origination activity including
mortgage-backed securities, during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
==================================
1997 1996 1995
-------- -------- --------
(In thousands)
MORTGAGE LOANS (GROSS):
<S> <C> <C> <C>
At beginning of year (1)............. $722,435 $596,478 $553,135
Mortgage loans originated:
Construction 1-4 Family............ 63,237 59,000 51,998
Permanent 1-4 Family............... 84,853 85,853 51,334
Multi-family....................... 2,526 2,935 158
Nonresidential..................... 18,302 12,941 10,700
Land............................... 12,264 13,384 11,812
------- ------- -------
Total mortgage loans originated (2).. 181,182 174,113 126,002
Mortgage loans acquired (3).......... --- 60,482 ---
Mortgage loans sold (4).............. (8,583) (4,653) (9,037)
Principal repayments................. (111,255) (101,359) (72,310)
Mortgage loans transferred to real
estate owned....................... (2,438) (2,626) (1,312)
--------- --------- ---------
At end of year....................... $781,341 $722,435 $596,478
======== ======== ========
OTHER LOANS (GROSS):
At beginning of year................. $ 88,927 $ 73,760 $ 59,436
Other loans originated............... 63,406 52,702 40,838
Loans acquired (3)................... --- 4,468 ---
Principal repayments................. (52,045) (42,003) (26,514)
-------- -------- --------
At end of year....................... $100,288 $ 88,927 $ 73,760
======== ======== ========
MORTGAGE-BACKED SECURITIES (GROSS):
At beginning of year................. $153,293 $164,759 $120,099
Mortgage-backed securities purchased. 61,769 29,265 65,609
Principal repayments................. (38,208) (40,731) (20,949)
-------- -------- --------
At end of year....................... $176,854 $153,293 $164,759
======== ======== ========
</TABLE>
(1) Includes loans held for sale.
(2) Loans originated represent loans closed, however all loans
may not be fully disbursed at time of closing.
(3) Represents loans acquired in connection with the
acquisition of Treasure Coast Bank, F.S.B. in 1996.
(4) Includes $3 million commercial land participation loan sold in 1995.
MORTGAGE-BACKED SECURITIES
A substantial part of the Company's business involves investments in
mortgage-backed securities issued or guaranteed by an agency of the United
States government. Historically, the Company's mortgage-backed securities
portfolio has consisted primarily of pass-through mortgage participation
certificates issued by FHLMC and FNMA. These pass-through certificates represent
a participation interest in a pool of single-family mortgages, the principal and
interest payments on which are passed from the loans' originators, through the
FHLMC and FNMA that pools and packages the participation interests into the form
of securities, to investors such as the Company. The FHLMC and FNMA guarantees
the payment of principal and interest. The underlying pool of mortgages can
consist of either fixed-rate or adjustable-rate loans. At September 30, 1997,
the Company's portfolio of mortgage-backed securities consisted entirely of
FHLMC and FNMA participation certificates. Of the $176.9 million in
mortgage-backed securities at that date, approximately $49.0 million or 28%
represented adjustable-rate securities and $127.9 million or 72% represented
fixed-rate securities with anticipated maturity dates from 3 months to 29 years.
7
<PAGE>
Adjustable-rate mortgage-backed securities ("ARM Securities") have periodic
adjustments in the coupons based on the underlying mortgages. These periodic
coupon adjustments are subject to annual and lifetime caps. The caps serve as a
limit to the amount that the coupon will change during any coupon reset period.
As interest rates on the mortgages underlying the ARM Securities are reset
periodically (one to 12 months), the yields on these securities will gradually
adjust to reflect changes in market rates. Management believes that the
adjustable-rate feature of ARM Securities will help to reduce sharp fluctuations
in security value that result from normal changes in interest rates.
During periods of declining interest rates, the coupon on ARM Securities may
adjust downward, resulting in lower yields and reduced income from these
securities. Thus, ARM Securities may have less potential for capital
appreciation as compared to fixed-rate debt securities. During periods of rising
interest rates, the coupon on ARM Securities may not fully adjust upward in
conjunction with changes in market rates due to annual or lifetime coupon
adjustment caps. This could result in ARM Securities that depreciate in value
similar to long-term, fixed-rate mortgage securities in a rising interest rate
environment.
The Company's fixed-rate mortgage-backed securities consist of both
long-term and balloon securities. The long-term securities have original
maturity terms of ten, fifteen and thirty years. The balloon securities have
principal and interest amortization based on a thirty-year maturity schedule
with final principal balloon payments due in five years or seven years from the
date of the security. Balloon mortgage-backed securities are held in the
portfolio as a means of reducing the average life of the fixed-rate portfolio. A
shorter average portfolio life will help reduce the interest rate risk
associated with these investments. As of June 30, 1997, long-term, fixed-rate
mortgage-backed securities amounted to $28.9 million and five-year and
seven-year balloon mortgage-backed securities amounted to $58.6 million and
$26.1 million, respectively.
During periods of declining interest rates, fixed-rate mortgage-backed
securities may have accelerated principal reductions due to increased
refinancing activity on the underlying mortgage loans. The reinvestment of the
accelerated principal reductions at lower prevailing rates could result in lower
overall portfolio yields and income. During periods of rising interest rates,
fixed-rate mortgage-backed securities will tend to depreciate in value. Thus,
total returns on fixed-rate mortgage-backed securities are expected to decline
as market interest rates rise.
If the Company purchases mortgage-backed securities at a premium,
accelerated principal repayments may result in some loss of principal investment
to the extent of the premium paid. Conversely, if mortgage-backed securities are
purchased at a discount, accelerated principal reductions will increase current
and total returns.
DELINQUENT, NONPERFORMING AND CLASSIFIED ASSETS
DELINQUENT LOANS. All delinquent loan results are reviewed monthly by the
Company's Board of Directors. The Company believes it has an effective process
and policy in dealing with delinquent loans.
Residential delinquencies are handled by the Loan Collections Department.
This department begins collections efforts on residential loans when a loan
appears on the 15-day delinquent list. Borrowers are sent a notice to accelerate
the debt when the debt is 45 days delinquent. If the delinquent account has not
been corrected, foreclosure proceedings are begun generally at the 75th day of
delinquency. At September 30, 1997, residential loans delinquent 90 days and
longer represented 0.24% of the total residential loan portfolio.
Commercial delinquent accounts are processed by the Problem Asset and
Lending Departments. For commercial accounts classified as Substandard, as
defined below, or worse, the Problem Asset Department has jurisdiction over the
collection efforts. As with residential delinquent loans, any commercial loans
90 days past due or where the collection of the interest or full principal is
considered doubtful are placed on a non-accrual basis.
If a collection action is instituted on a consumer or commercial loan, the
Company, in compliance with the loan documents and the law, may repossess and
sell the collateral security for the loan through private sales or through
judicially ordered sales when necessary. Should the sale result in a deficiency
owing to the Company, the borrowers generally are pursued where such action is
deemed appropriate, including recourse based on personal loan guarantees by the
borrower's principals.
8
<PAGE>
The following table shows the Company's loans delinquent 90 days or more
at the dates indicated.
September 30,
1997 1996 1995
------ ------ -----
(Dollars in thousands)
Number Amount Number Amount Number Amount
Mortgage loans:
Construction and land. 2 $ 162 2 $ 98 2 $ 89
Permanent 1 - 4
family.............. 28 1,565 23 1,196 36 2,205
Other mortgage........ 3 689 2 423 --- ---
-- ------- --- ------- --- --------
Total mortgage loans.. 33 2,416 27 1,717 38 2,294
Other loans............. 10 164 9 132 7 70
-- ------- --- ------- --- -------
Total loans............. 43 $2,580 36 $1,849 45 $2,364
== == == ======
Delinquent loans to
total loans......... .31% .24% .37%
=== ==== ====
As of September 30, 1997, 1996 and 1995, $0, $323,000, and $1.2 million,
respectively, of loans were on nonaccrual status which were not 90 days past
due.
NONPERFORMING ASSETS. The Company also places emphasis on improving asset
quality. The Company's nonperforming assets as a percentage of total assets have
decreased from .85% at September 30, 1994 to .43% at September 30, 1997.
Loans 90 days past due are generally placed on non-accrual status. The
Company ceases to accrue interest on a loan once it is placed on non-accrual
status, and interest accrued but unpaid at that time is charged against interest
income. Additionally, any loan where it appears evident that the collection of
interest is in doubt is also placed on a non-accrual status. Non-accrual loans
of $500,000 or more are reviewed monthly by the Board of Directors. The
investment in impaired loans (primarily consisting of classified loans), other
than those evaluated collectively for impairment, at September 30, 1997 and 1996
was $12,157,000 and $11,053,000, respectively. The average recorded investment
in impaired loans during the years ended September 30, 1997 and 1996 were
approximately $12,122,000 and $13,651,000, respectively. The total specific
allowance for loan losses related to these loans was approximately $117,000 and
$174,000, respectively, on September 30, 1997 and 1996. Interest income on
impaired loans of approximately $1,147,000 and $1,346,000 was recognized in the
year ended September 30, 1997 and 1996, respectively.
If a foreclosure action is instituted on a real estate-secured loan and
the loan is not reinstated, paid in full, refinanced, or deeded back to the
Company, the property is sold at a foreclosure sale at which the Company may be
the buyer. Thereafter, such acquired property is listed in the Company's real
estate owned ("REO") account or that of a subsidiary, until the property is
sold. The Company carries REO at the lower of cost or fair value less cost to
dispose. The Company also finances the sales of REO properties. Should the
foreclosure sale not produce sufficient proceeds to pay the loan balance and
court costs, the Company's attorneys, where appropriate, may pursue the
collection of a deficiency judgment against the responsible borrower.
It is the Company's policy to try to liquidate its holdings in REO or
subsidiaries on a timely basis while considering both market conditions and the
cost of carrying REO properties. Upon acquisition the Company records all REO at
the lower of its fair value (less estimated costs to dispose), or cost. The fair
value is based upon the most recent appraisal and management's evaluation. If
the fair value of the asset is less than the loan balance outstanding, the
difference is charged against the Company's loan loss allowance prior to
transferring the asset to REO. Administration of REO property is handled by the
Problem Asset Department which is responsible for the sale of all residential
and commercial properties. In those instances where the property may be located
outside the Company's market area or where the property, due to its nature,
requires certain expertise (I.E., hotels, apartment complexes), outside
management firms may be utilized.
9
<PAGE>
At the dates indicated, nonperforming assets in the Company's portfolio
were as follows:
September 30,
--------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Non-accrual mortgage loans:
Delinquent less than 90 days........... $ --- $ 323 $1,153
Delinquent 90 days or more............. 2,416 1,717 2,294
----- ----- -----
Total............................... 2,416 2,040 3,447
----- ----- -----
Non-accrual other loans:
Delinquent less than 90 days........... --- --- ---
Delinquent 90 days or more............. 164 132 70
------ ------ ------
Total............................... 164 132 70
------ ------ ------
Total non-accrual loans.................. 2,580 2,172 3,517
Accruing loans 90 days or more delinquent --- --- ---
-------- -------- -------
Total nonperforming loans.............. 2,580 2,172 3,517
----- ----- -----
Other nonperforming assets:
Real estate owned...................... 2,892 4,830 4,643
Less allowance for losses............ (578) (1,712) (1,857)
------- ------- -------
Total.............................. 2,314 3,118 2,786
------ ------ ------
Total nonperforming assets, net.......... $4,894 $5,290 $6,303
====== ====== ======
Nonperforming loans to total net loans... 0.31% 0.28% 0.56%
Total nonperforming assets to
total assets.......................... 0.43% 0.50% 0.71%
For the year ended September 30, 1997, interest income of $131,000 would
have been recorded on loans accounted for on a non-accrual basis if the loans
had been current throughout the period. No interest income was actually included
in net income regarding non-accrual loans during the same period.
The Company's policy requires that a general allowance be maintained on
all REO. The Company's periodic provisions to its allowance for losses on REO
are included in income (losses) from real estate operations on its
consolidated
statements of earnings.
Management evaluates each REO property on no less than a quarterly basis to
assure that the net carrying value of the property on the Company's books is no
greater than the fair market value less estimated costs to dispose. When
necessary, the property is written down or specific allowances are established
to reduce the carrying value.
REO Allowances
Years Ended September 30,
1997 1996 1995
---- ---- ----
(In thousands)
Beginning balance.................. $1,712 $1,857 $2,008
Provision for (recovery of) losses. (150) 117 35
Allowance for losses on REO
acquired........................ --- 21 ---
Charge-offs........................ (984) (283) (186)
------ ------ ------
Ending balance..................... $ 578 $1,712 $1,857
====== ====== ======
Not included in the preceding table are net gains, (losses) or recoveries
on the sale of real estate owned of $124,000, $(39,000) and $180,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
10
<PAGE>
CLASSIFIED ASSETS. Under OTS regulations, problem assets of insured
institutions are classified as either "substandard," "doubtful" or "loss." An
asset is considered "substandard" if the current net worth and paying capacity
of the obligor and/or the value of the collateral pledged are no longer adequate
to support the loan. "Substandard" assets are characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. In
addition to the classification of assets as "substandard", "doubtful" or "loss",
the OTS regulations also require that assets that do not currently expose the
Company to a sufficient degree of risk to warrant one of the three foregoing
classifications but which do possess credit deficiencies or potential weaknesses
deserving management's close attention must be designated "special mention".
When an insured institution classifies problem assets as either substandard
or doubtful, it is required to establish specific allowances for loan losses in
an amount considered appropriate by management. See "--Allowance for Loan
Losses" below. Additionally, the institution establishes general allowances to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies problem assets as "loss," it is
required either to establish a specific allowance for losses equal to 100% of
the amount of the asset so classified or to charge-off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which can
order the establishment of additional general or specific loss allowances.
The following table presents the Company's classified assets at the dates
indicated.
September 30,
--------------
1997 1996 1995
---- ---- ----
(In thousands)
Substandard:
Real Estate Owned... $ 2,892 $ 3,897 $ 3,483
Loans (1)........... 9,832 8,150 16,119
------- ------- -------
Total Substandard. 12,724 12,047 19,602
Doubtful.............. --- 192 930
Loss.................. 117 174 698
--------- --------- ---------
$12,841 $12,413 $21,230
======= ======= =======
(1) Includes $6 million letter of credit classified in 1995.
---------------
At September 30, 1997, in addition to the Company's classified loans noted
above, the Company had five commercial real estate and commercial business
loans, aggregating approximately $3.9 million, which were currently performing,
where management had obtained information about possible credit problems of the
borrowers or had been seriously delinquent in the past and had other
characteristics which caused management to question the ability of such
borrowers to comply with present loan repayment terms. Subsequent to September
30, 1997, one of these loans which had a net book value prior to allowance of
$2.6 million was paid off in full.
ALLOWANCE FOR LOAN LOSSES
Provisions for loan losses are charged to operations to establish an
allowance for loan losses; recognized loan losses (recoveries) are then charged
(credited) to the allowance. The Company evaluates the outstanding loan
portfolio with respect to the adequacy of the allowance for loan losses at least
quarterly.
11
<PAGE>
Management's policy is to provide for estimated losses on the Company's
loan portfolio based on management's evaluation of the probable losses (existing
and inherent). Such evaluations are made for all major loans on which full
collectibility of interest and/or principal may not be reasonably assured. The
factors which the Company considers are the estimated value of the underlying
collateral, the management of the borrower, and current operating results,
trends and cash flow. In addition to analyzing individual loans, management also
analyzes on a regular basis its asset classification and recent loss experience
on other loans to help insure that prudent general allowances are maintained on
one-to-four family loans, automobile loans and home equity loans. Management
periodically evaluates the allowance percentages utilized for general allowance
purposes based upon delinquencies, charge-off, underwriting, and other trends.
The Company segregates the loan portfolio for loan loss purposes into the
following broad segments: commercial real estate; residential real estate;
commercial business; and consumer loans.
The Company provides for a general allowance for losses inherent in the
portfolio by the above categories, which consists of two components. General
loss percentages are calculated based upon historical analyses. A supplemental
portion of the allowance is calculated for inherent losses which probably exist
as of the evaluation date even though they might not have been identified by the
more objective processes used for the portion of the allowance described above.
This is due to the risk of error and/or inherent imprecision in the process.
This portion of the allowance is particularly subjective and requires judgments
based on qualitative factors which do not lend themselves to exact mathematical
calculations such as: trends in delinquencies and nonaccruals; migration trends
in the portfolio; trends in volume, terms, and portfolio mix; new credit
products and/or changes in the geographic distribution of those products;
changes in lending policies and procedures; loan review reports on the efficacy
of the risk identification process; changes in the outlook for local, regional
and national economic conditions; concentrations of credit; and peer group
comparisons.
Specific allowances are provided in the event that the specific collateral
analysis on each classified loan indicates that the probable loss upon
liquidation of collateral would be in excess of the general percentage
allocation. The provision for loan loss is debited or credited in order to state
the allowance for loan losses to the required level as determined above.
12
<PAGE>
The following tables set forth an analysis of the Company's allowance for
loan losses at the dates indicated.
Years Ended September 30,
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Balance at beginning of year... $11,016 $10,083 $9,434
Provision for (recovery of)
losses..................... 782 (76) 460
Allowance for loan losses
acquired (1)............... --- 885 ---
Charge-offs:
Residential................ (134) (137) (109)
Commercial real estate..... --- --- (145)
Consumer................... (125) (48) (130)
Other...................... (3) (180) ---
------- --------- ---------
Total charge-offs....... (262) (365) (384)
Recoveries:
Residential................ 44 149 117
Commercial real estate..... 19 86 270
Consumer................... 62 79 133
Other...................... 30 175 53
------- -------- ---------
Total recoveries........ 155 489 573
Balance at end of year......... $11,691 $11,016 $10,083
======= ======= =======
Allowance for loan losses to
total loans................ 1.40% 1.44% 1.60%
Allowance for loan losses to
total non-performing loans. 453.11% 507.25% 286.70%
Allowance for loan losses and
allowance for REO to total
non- performing assets..... 224.21% 181.78% 146.32%
Net charge-offs (recoveries) to
average loans outstanding
during the period.......... 0.01% (0.02)% (0.03)%
Classified loans to total net 1.19% 1.11 % 2.78%
loans
(1) Represents allowance acquired in conjunction with
acquisition of Treasure Coast Bank, F.S.B. in 1996.
13
<PAGE>
The following table presents an allocation of the entire allowance for
loan losses among various loan classifications and sets forth the percentage of
loans in each category to total loans. The allowance shown in the table should
not be interpreted as an indication that charge-offs in future periods will
occur in these amounts or proportions or that the analysis indicates future
charge-off trends.
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
------ ------ -----
Amount %(1) Amount %(1) Amount %(1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Allowance at end of period
applicable to:
Residential............ $ 2,141 76.88% $ 2,077 77.95% $1,625 78.91%
Commercial real estate. 6,487 11.74 6,088 11.02 6,158 10.07
Consumer .............. 2,068 10.10 1,802 10.01 1,280 9.75
Commercial business.... 995 1.28 1,049 1.02 1,020 1.27
------ ------ ------ ------ ------- ------
Total.............. $11,691 100.00% $11,016 100.00% $10,083 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
- ------------------
(1) Percent of loans in each category to total loans at the dates indicated.
INVESTMENT ACTIVITIES
The Company invests primarily in overnight funds, U.S. Government and
agency obligations, and Federal Home Loan Bank of Atlanta capital stock. The
Company does not invest in derivatives, collateralized mortgage obligations or
other hedging instruments.
The table below summarizes the carrying value and estimated market value of
the Company's portfolio of investment securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
------ ------ -----
(In thousands)
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
Available for sale:
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury notes..... $17,985 $17,985 $23,347 $23,347 $ --- $ ---
FHLB notes.............. 29,486 29,486 10,031 10,031 --- ---
Other securities........ 82 82 115 115 --- ---
------- ------- ------- ------- ------ ------
Total $47,553 $47,553 $33,493 $33,493 $ --- $ ----
====== ====== ====== ====== ====== =======
Held to maturity:
U.S. Treasury notes..... $ --- $ --- $ --- $ --- $15,028 $14,970
FHLB notes.............. 5,000 4,993 20,000 20,016 10,000 10,159
Other securities........ --- --- --- --- 158 158
------ ------- ------- ------- ------- -------
Total............... $ 5,000 $ 4,993 $20,000 $20,016 $25,186 $25,287
====== ====== ====== ====== ======= =======
FHLB stock................ $ 7,595 $ 7,595 $ 7,158 $ 7,158 $ 6,064 $ 6,064
</TABLE>
14
<PAGE>
On November 15, 1995, the FASB issued Special Report No. 155-B, A GUIDE TO
IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES, (the "Special Report"). Pursuant to the Special Report,
the Company was permitted to conduct a one-time reassessment of the
classifications of all securities held at that time. Any reclassifications from
the held-to-maturity category made in conjunction with that reassessment would
not call into question an enterprise's intent to hold other debt securities to
maturity in the future. The Company undertook such a reassessment and, effective
December 31, 1995, all investment securities were reclassified as available for
sale. On the effective date of the reclassification, the securities transferred
had a carrying value of $25.8 million and an estimated fair value of $26.0
million, resulting in a net increase to stockholders' equity for the net
unrealized appreciation of $126,000, after deducting applicable income taxes of
$76,000.
The table below presents the contractual maturities and weighted average
yields of investment securities at September 30, 1997, excluding FHLB stock:
<TABLE>
<CAPTION>
One year One to More than
or Less Five Years Five Years Total Investment Securities
---------------- ----------------- ----------------- ----------------------------
(Dollars in thousands)
Average
Weighted Weighted Weighted Remaining Weighted
Carrying Average Carrying Average Carrying Average Years to Carrying Market Average
Value Yield Value Yield Value Yield Maturity Value Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Treasury notes.. $17,985 5.41% $ --- 0.00% $ --- 0.00% .3 $17,985 $17,985 5.41%
FHLB notes...... 4,497 5.94 29,989 6.00 --- 0.00 1.3 34,486 34,479 5.99
Other securities --- 0.00 82 10.00 --- 0.00 1.6 82 82 10.00
</TABLE>
SOURCES OF FUNDS
DEPOSITS. The Company offers a number of different deposit accounts,
including regular savings, interest-bearing checking or NOW accounts,
non-interest checking, money market deposit, term certificate accounts and
individual retirement accounts.
The Company has twenty-two branch offices in addition to its home office in
Fort Pierce. The Company's strategy has been to have conveniently located
offices in growth markets as one of its main methods of attracting funds. The
Company's deposits primarily are obtained from areas surrounding its offices.
Certificate accounts in excess of $100,000 are not actively solicited nor are
brokers used to obtain deposits.
The Company had a decline in deposit balances for several years prior to
1993. This was a strategy that the Company used to improve its capital ratios.
Much of the decline was accomplished by the closing of less profitable branches.
With the Company's improved capital position in the beginning of 1993, it made
an effort to stabilize deposits and increase account balances. As part of this
strategy, the Company has upgraded a number of branch facilities and moved from
leased storefronts to full service free-standing offices.
Management believes that demand and passbook accounts are less sensitive to
changes in interest rates than other types of accounts, such as certificates of
deposit. As of September 30, 1997, the Company had 23.34% of its deposits in
passbook and demand accounts, 75.67% in certificates of deposit and .99% in
official checks. Due to the recent low interest rate environment, the Company
has also been pricing its certificates of deposit to encourage lengthening of
maturities. When management determines the levels of its deposit rates,
consideration is given to local competition, U.S. Treasury securities offerings,
and anticipated funding requirements.
15
<PAGE>
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated and the weighted average interest rates on each
category of deposits presented. Management does not believe that the use of
year-end balances instead of average monthly balances produces any material
difference in the information presented:
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
------------------------- ------------------------- ----------------------- -----
Weighted Weighted Weighted
Average Average Average
Nominal Nominal Nominal
Amount Percent Rate Amount Percent Rate Amount Percent Rate
------ ------- ----- ------ ------- ---- ------ ------- ----
(Dollars in thousands)
Demand accounts:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest
bearing demand. $ 40,749 4.47% N/A $ 33,613 3.95% N/A $ 21,001 2.91% N/A
NOW accounts..... 52,045 5.71 1.32% 54,806 6.43 1.51% 44,814 6.22 1.57%
Money market
accounts....... 43,401 4.76 2.51 42,561 5.00 2.58 36,863 5.11 2.37
------- ----- ---- ------- --- - ---- ------- ----- ---
Subtotal....... 136,195 14.94 1.30 130,980 15.38 1.46 102,678 14.24 1.53
Savings accounts:
Passbook......... 76,540 8.40 1.69 77,305 9.07 1.78 80,720 11.20 1.97
Certificates of
deposit........ 689,760 75.67 5.47 636,907 74.77 5.37 531,601 73.73 5.60
Official checks.... 9,081 .99 N/A 6,661 .78 N/A 5,982 .83 N/A
-------- ------- ---- ------- ------- ---- -------- ------- ----
Total deposits..... $911,576 100.00% 4.47% $851,853 100.00% 4.41% $720,981 100.00% 4.57%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
The following table presents, by various categories, information concerning
the amounts and maturities of the Company's time deposits.
<TABLE>
<CAPTION>
September 30,
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
0.00 - 3.00%............ $ 545 $ 307 $ 199
3.01 - 4.00%............ -- 1 4,360
4.01 - 5.00%............ 88,472 155,121 100,834
5.01 - 6.00%............ 553,986 378,999 234,126
6.01 - 7.00%............ 46,333 101,780 182,299
7.01 - 8.00%............ 424 603 9,174
8.01 - 9.00%............ --- 3 61
Over 9.01%.............. --- --- 548
Premiums on deposits
acquired -- 93 ---
-------- -------- --------
Total Certificate Accounts $689,760 $636,907 $531,601
======== ======== ========
</TABLE>
16
<PAGE>
At September 30, 1997, the Company had certificates of deposit in amounts of
$100,000 or more maturing as follows:
Amount
Maturity Period (In thousands)
- ---------------
3 Months or Less....... $16,131
Over 3 to 6 Months..... 11,687
Over 6 to 12 Months.... 14,744
Over 12 Months......... 19,444
-------
Total.................. $62,006
=======
The following table contains information regarding deposit account activity
for the periods shown.
Years Ended September 30,
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Net increase (decrease)
before interest credited. $ 25,563 $ 30,644 $ 21,118
Interest credited........... 34,160 30,035 26,033
Deposits acquired........... --- 70,193 ---
-------- -------- --------
Deposit account increase
(decrease)............... $ 59,723 $130,872 $ 47,151
======== ======== ========
Weighted average cost
of deposits during the
year..................... 4.42% 4.44% 4.24%
==== ==== ====
Weighted average cost of
deposits at end of year.. 4.47% 4.41% 4.57%
==== ==== ====
BORROWINGS. The Company is a member of the Federal Home Loan Bank of
Atlanta ("FHLB of Atlanta"). The FHLB of Atlanta offers various fixed rate and
variable rate advances to its members. Requests for advances with an original
term to maturity of five years or less may be approved for any sound business
purpose in which the member is authorized to engage. Requests for advances with
original maturity in excess of five years may be approved only for the purpose
of enabling that member to provide funds for residential housing finance. The
FHLB of Atlanta underwrites each advance request based on factors such as
adequacy and stability of capital position, quality and composition of assets,
liquidity management, level of borrowings from all sources and other such
factors. Pursuant to a collateral agreement with the FHLB, advances are secured
by all stock in the FHLB and a blanket floating lien that requires the Company
to maintain qualifying first mortgage loans as pledged collateral in an amount
equal to, when discounted at 75% of the unpaid principal balances, the advances.
As of September 30, 1997, the Company had $100 million of outstanding FHLB
advances. Of this amount $70 million have remaining maturity dates of
thirty-three months or longer. The remaining $30 million of FHLB advances are
short-term, with maturity dates of six months or less. The Company has used the
short-term FHLB advances as funding for investment securities that are
classified as "available for sale." Management expects that the Company's
short-term advances will be renewed at similar rates and terms. However, in the
event that interest rates rise in the near term, management would have the
option of renewing the advances at higher rates or selling the investments and
using the proceeds to pay off the short term FHLB advances. This could result in
higher borrowing costs or possibly losses on the sale of investment securities.
17
<PAGE>
As of September 30, 1997, the Company had a total credit limit of $157
million and an availability limit of $57 million with the FHLB of Atlanta.
In addition to FHLB advances, the Company had $174.4 million of unpledged
mortgage-backed securities at September 30, 1997. These unpledged
mortgage-backed securities could be used as collateral under reverse repurchase
transactions with various security dealers. Such borrowing transactions could
provide additional cash and liquidity to the Company in the event of sudden or
unforeseen deposit withdrawals.
The Company recognizes the maturity characteristics of its time deposit
portfolio. Management believes that unused FHLB advances and other borrowing
sources would provide sufficient funding for potential deposit withdrawals.
In addition to advances from the FHLB of Atlanta, the Company has also
borrowed funds from Northwest Company to fund its Employee Stock Ownership Plan.
At September 30, 1997, the Company had $375,000 in that obligation outstanding,
which matures in December, 1998. At September 30, 1997, the Company had a
$100,000 Note Payable relating to the purchase of land, which matures in
January, 1998. From time to time the Company has also entered into sales of
securities under agreements to repurchase. At September 30, 1997 no such
agreements were outstanding.
The following table sets forth information regarding the Company's
borrowing at and for the periods indicated:
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
1997 1996 1995
---- ---- ----
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Average Balance $99,342 $75,096 $58,178
Maximum balance at any month-end 110,000 95,000 85,000
Balance at year end 100,000 95,000 65,000
Weighted average interest rate during the
year 6.00% 6.12% 6.10%
Weighted average interest rate at year end 6.00% 6.02% 6.10%
Other Borrowings:
Average Balance $561 $857 $1,160
Maximum balance at any month-end 674 974 1,273
Balance at year end 475 674 974
Weighted average interest rate during the
year 9.48% 9.47% 9.27%
Weighted average interest rate at year end 7.12% 8.50% 9.00%
Total Borrowings:
Average Balance $99,903 $75,953 $59,338
Maximum balance at any month-end 110,674 95,974 86,273
Balance at year end 100,475 95,674 65,974
Weighted average interest rate during the
year 6.02% 6.15% 6.16%
Weighted average interest rate at year end 6.01% 6.04% 6.14%
</TABLE>
SUBSIDIARIES
Federal associations generally may invest up to 2% of their assets in
service corporations plus an additional 1% of assets for community purposes. In
addition, federal associations such as the Company may invest up to 50% of their
regulatory capital in conforming loans to service corporations. In addition to
investments in service corporations, federal associations are permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal association may engage in directly.
18
<PAGE>
The Company has two active subsidiary corporations. Appraisal Analysts,
Inc. provides real estate appraisal services to the Company as well as third
parties. H. F. Development Company, Inc. serve as repositories of the Company's
REO properties held for disposition. See "Business -- Delinquent, Nonperforming
and Classified Assets".
The Company also has inactive subsidiaries, one of which is discussed
below:
CFD, INC. One of the Company's wholly-owned subsidiaries is CFD, Inc. CFD,
Inc. is a Florida corporation which, in September 1991, filed a Chapter 7
bankruptcy in the Southern District of Florida. Until filing in the
bankruptcy court CFD, Inc. had been engaged in land development and sales
of land using land installment sale contracts. CFD, Inc. became a
subsidiary of the Company in 1985 as a result of the restructuring of
certain nonperforming loans made by the Company to CFD, Inc. and the
transfer of CFD, Inc. stock and other assets to the Company as a result of
the restructuring of the debt.
CFD, Inc. began land development operations in Sebring, Florida and Lake
Placid, Florida in the early 1960's through a predecessor corporation,
Highlands County Title and Guaranty Land Company ("Highlands Guaranty"). At
that time it had no business relationship or affiliation with the Company.
Between 1983 and 1985, the Company extended loans to CFD, Inc. which
aggregated approximately $20 million. The various loans to CFD, Inc. were
subsequently consolidated into a single loan and the Company obtained a
first mortgage on all the land under development.
The Company assumed ownership of CFD, Inc. In 1985 as part of a
restructuring. CFD, Inc. Filed for bankruptcy in September, 1991. The
bankruptcy process is still underway although it is nearing conclusion. All
of the assets of CFD, Inc. Have been transferred to the bankruptcy trustee
for liquidation. In connection with the bankruptcy proceeding, the Company
is both a secured and unsecured creditor of CFD, Inc. During the fiscal
year 1996, the Company received a $150,000 distribution from the bankruptcy
trustee. The Company believes that it is unlikely that it will recover any
significant amounts at the conclusion of the bankruptcy.
The State of Florida has administratively dissolved CFD, Inc.
COMPETITION
The Company encounters strong competition both in attracting deposits and
in originating real estate and consumer loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations and credit unions in its market area. The Company expects
continued strong competition from such financial institutions in the foreseeable
future. The Company's market area includes branches of a number of commercial
banks that are substantially larger than the Company in terms of statewide
deposits. The Company competes for savings by offering depositors a high level
of personal service, convenient locations and a competitive interest rate.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings associations.
Lending competition has increased substantially in recent years, as a result of
the large number of institutions seeking to benefit from the growth in the
Company's market area.
The Company competes for loans primarily through the interest rates and
loan fees it charges, the types of loans it offers, and the efficiency and
quality of services it provides borrowers, real estate brokers and builders.
Factors that affect competition include general and local economic conditions,
current interest rate levels and volatility of the mortgage markets. Based on
total assets, as of September 30, 1997, the Company was the largest savings
institution headquartered in the six county area served by the Company.
EMPLOYEES
At September 30, 1997, the Company had a total of 296 full-time employees
and 65 part-time employees, none of whom were represented by a collective
bargaining unit. The Company considers its relations with its employees to be
good.
19
<PAGE>
ITEM 2. PROPERTIES
- -------------------
The Company conducts its business from its headquarters in Fort Pierce and
through 22 branch offices. These offices are located in Brevard, Indian River,
Martin, Okeechobee, St. Lucie, and Volusia counties, Florida. The net book value
at September 30, 1997 of the Company's offices was $11.2 million. The following
table sets forth information regarding the Company's offices.
Year Lease
Location Opened Owned/Leased Expiration Date
-------- ------ ------------ ---------------
ST. LUCIE COUNTY
- ----------------
MAIN OFFICE 1934 OWNED
100 SOUTH SECOND STREET
FORT PIERCE, FL 34950
VIRGINIA AVENUE 1968 OWNED
500 VIRGINIA AVENUE
FORT PIERCE, FL 34950
PSL MAIN 1975 OWNED
7181 SOUTH U.S. #1
PORT ST. LUCIE, FL 34952
H.F. CENTER 1981 OWNED
2400 S.E. MIDPORT RD.,
SUITE 300
PORT ST. LUCIE, FL 34952
LAKEWOOD PARK 1981 OWNED
5100 TURNPIKE FEEDER RD.
FORT PIERCE, FL 34951
DARWIN SQUARE 1991 LEASED 11/30/97
3251 S.W. PSL BLVD.
PORT ST. LUCIE, FL 34953
ORANGE BLOSSOM 1984 OWNED
4156 OKEECHOBEE ROAD
FORT PIERCE, FL 34947
ST. LUCIE WEST 1993 OWNED
1376 S.W. ST. LUCIE WEST BLVD.
PORT ST. LUCIE, FL 34986
INDIAN RIVER
- ------------
VERO MAIN 1978 OWNED
655 21st STREET
VERO BEACH, FL 32960
CAUSEWAY 1981 OWNED
1700 S.A1A
VERO BEACH, FL 32963
INDIAN RIVER MALL 1997 OWNED
6080 20TH ST.
VERO BEACH, FL 32966
20
<PAGE>
Year Lease
Location Opened Owned/Leased Expiration Date
-------- ------ ------------ ---------------
SEBASTIAN 1979 OWNED
13397 U.S. HIGHWAY #1
SEBASTIAN, FL 32958
MARTIN COUNTY
- -------------
PALM CITY 1978 LEASED 07/26/05
1251 S.W. 27TH STREET
PALM CITY, FL 34990
EAST OCEAN 1981 OWNED
1500 E. OCEAN BLVD.
STUART, FL 34996
STUART MAIN 1996 LEASED 08/15/99
789 S. FEDERAL HWY.
STUART, FL 34994
BREVARD COUNTY
- --------------
PALM BAY 1981 OWNED
5245 BABCOCK ST., N.E.
PALM BAY, FL 32905
INDIALANTIC 1981 OWNED
305 5th AVENUE
INDIALANTIC, FL 32903
WEST MELBOURNE 1982 OWNED
2950 W. NEW HAVEN AVENUE
MELBOURNE, FL 32904
VIERA 1995 OWNED
100 CAPRON TRAIL
MELBOURNE, FL 32940
OKEECHOBEE COUNTY
- -----------------
OKEECHOBEE 1980 OWNED
2801 HIGHWAY #441 SOUTH
OKEECHOBEE, FL 34974
VOLUSIA COUNTY
- --------------
NEW SMYRNA BEACH 1988 LEASED 09/30/99
REGIONAL SHOPPING CENTER
1940 STATE ROAD #44
NEW SMYRNA BEACH, FL 32168
PORT ORANGE 1983 OWNED
4035 NOVA ROAD
PORT ORANGE, FL 32127
ORMOND BEACH 1984 OWNED
75 N. NOVA ROAD
ORMOND BEACH, FL 32174
All leases are anticipated to renew upon their expiration.
21
<PAGE>
The Company uses a data processing service located in Orlando, Florida for
record keeping activities. The data processor specializes in servicing savings
associations. The Company has used this company since 1969 with a current
contract that expires in 2000. All data processing equipment that is used
internally by the Company is owned by the Company. The net book value of such
data processing equipment and related software as of September 30, 1997 was
$922,000.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There are various claims and lawsuits in which the Company is periodically
involved incident to the Company's business. In the opinion of management, no
material loss is anticipated from any such pending claims or lawsuits. The most
significant of these lawsuits is described below.
ROLO V. GENERAL DEVELOPMENT CORPORATION, ET AL., CASE NO. 90-4420. The
Company and certain other entities are defendants in a class action lawsuit
which was filed in May, 1991. The plaintiffs in the litigation are purchasers of
parcels of developed and undeveloped land from General Development Corporation
("GDC") who allege that GDC, through fraudulent means, induced them to buy land
at inflated values. The Company is a defendant in this matter along with a
number of other financial institutions, purchasers of loans in the secondary
market, broker dealers, an insurance company and numerous other individuals and
companies. The involvement of the Company arises from its purchase from GDC of
land sales contracts originated by GDC. The Company, along with the other
defendants, filed a motion to dismiss the case which was granted. The plaintiffs
filed an appeal with the Third Circuit Court of Appeals which remanded the case
to the District Court for reconsideration. The District Court entered its order
dismissing the case again.
The plaintiffs filed a motion requesting the District Court to amend the
dismissal order to permit the plaintiffs to file another amended complaint. The
District Court denied the plaintiff's motion. The plaintiffs appealed that order
to the Third Circuit and both sides were directed to submit supplementary
briefs. Management believes that the position of the plaintiffs is without
merit. Management also believes that a negative outcome to the case, although
unlikely, would not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
- -------------------------------------------------------------
On February 10, 1997, the Bank submitted two proposals to its
stockholders. Both were necessary to approve the Reorganization by which the
Company became a middle tier stock holding company for the Bank. Specifically,
the Bank submitted an Agreement and Plan of Reorganization to the stockholders
as well as a proposal to amend its federal stock charter to permit the Company
to hold 100% of the outstanding shares of the Bank. Both of the proposals were
approved by the Bank's stockholders. The Agreement and Plan of Reorganization
received 3,845,357 votes in favor, 6,125 votes against and 8,130 abstentions.
The amendment of the federal stock charter received 3,845,357 votes in favor,
7.775 votes against and 9,756 abstentions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -------------------------------------------------------------------------------
The Company's common stock trades on the NASDAQ National Market under the
symbol HARB. The approximate number of shareholders of record and beneficial
shareholders of the common stock at December 8, 1997 was 2,445, some of which
are street name holders.
The Company paid $1.35 in cash dividends per share for the twelve months
ended in fiscal 1997. Payments were $0.30 in the first quarter and $0.35 in the
second through fourth quarters. The Company currently expects that comparable
cash dividends will continue to be paid in the future.
On December 8, 1997 the closing sales price of the Company's common stock
was $66.75 per share. The following table sets forth the price range of the high
and low closing sales price per share of common stock as reported by the NASDAQ
stock market for the four quarters of fiscal year 1997.
22
<PAGE>
FISCAL 1997
Low $ High $
----- ------
First Quarter....................... 29.50 36.25
Second Quarter ..................... 33.50 39.00
Third Quarter....................... 35.00 46.00
Fourth Quarter...................... 54.00 59.375
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
The information contained in the table captioned "Selected Consolidated
Financial Data" in the Annual Report on pages 2-4 is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
- --------------------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 5 through 15 in the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Company's consolidated financial statements listed in Item 14 herein,
together with the report thereon by KPMG Peat Marwick LLP, are found in the
Annual Report on pages 16 through 47 and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- --------------------------------------------------------------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
The information contained under the sections captioned "Beneficial
Ownership of Common Stock" and "Management of the Bank" in the Proxy Statement
of Harbor Florida Bancorp, Inc. (the "Proxy Statement") to be filed as Exhibit
99.3 to the Registration Statement on Form S-1 of Harbor Florida Bancshares,
Inc. pursuant to General Instruction G.(3) is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
The information contained under the section captioned "Management of the
Bank" in the Proxy Statement to be filed pursuant to General Instruction G.(3)
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information required by this item is incorporated herein by reference to the
sections captioned "Voting Securities" and "Beneficial Ownership" in the
Proxy Statement to be filed pursuant to General Instruction G.(3).
23
<PAGE>
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by reference to the
section captioned "Beneficial Ownership" in the Proxy Statement to be filed
pursuant to General Instruction G.(3).
(c) CHANGES IN CONTROL
Management of the Company knows of no arrangements, including any pledge by
any persons of securities of the Company, the operation of which may, at a
subsequent date, result in a change in control of the Registrant.
ITEM 13. CERTAIN RELATIONS AND RELATED TRANSACTIONS
- ----------------------------------------------------
The information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities", "Beneficial Ownership of Common
Stock" and "Management of the Bank -- Certain Transactions" in the Proxy
Statement to be filed pursuant to General Instruction G.(3).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
(a) Documents filed as a part of this Report:
(1) The Consolidated Financial Statements of the Registrant are attached and
are listed below:
Pages in Annual
Report
Independent Auditors' Report 16
Consolidated Statements of Financial Condition 17
Consolidated Statements of Earnings 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20 - 21
Notes to Consolidated Financial Statements 22 - 47
(2) The Consolidated Financial Statement Schedules of the Registrant as
required to be filed in this Report are either not applicable or are included
elsewhere in this Report.
(3) Exhibit Index
The exhibits listed below are included with this Report or are
incorporated herein by reference to the identified document previously filed
with the Securities and Exchange Commission as set forth parenthetically.
3(i) Certificate of Incorporation of Registrant (Exhibit 3(a) to
Registration Statement on Form S-4 filed December 20, 1996)
3(ii) Bylaws of Registrant. (Exhibit 3(b) to Registration Statement
on Form S-4 filed December 20, 1996)
10(i) Employment contract with Michael J. Brown, Sr. (Exhibit 10(a)
to the Registration Statement on Form S-4 filed December 20,
1996)
10(ii) Recognition and Retention Plan and Trust Agreement (Exhibit
10(d) to the Registration Statement on Form S-4 filed
December 20, 1996)
24
<PAGE>
10(iii) Outside Directors' Recognition and Retention Plan and Trust
Agreement (Exhibit 10(e) to the Registration Statement on
Form S-4 filed December 20, 1996)
10(iv) 1994 Incentive Stock Option Plan (Exhibit 10(b) to the
Registration Statement on Form S-4 filed December 20, 1996)
10(v) 1994 Stock Option Plan for Outside Directors (Exhibit 10(c)
to the Registration Statement on Form S-4 filed December 20,
1996)
10(vi) Harbor Federal Savings Bank Non-Employee Directors'
Retirement Plan (Exhibit 10(vi) to Form 10-Q for the quarter
ended June 30, 1997 filed August 11, 1997)
10(vii) Unfunded Deferred Compensation Plan for Directors (Exhibit
10(vii) to Form 10-Q for the quarter ended June 30, 1997,
filed August 11, 1997)
10(viii) Management Incentive Compensation Plan for fiscal year ending
September 30, 1997 (Exhibit 10(xiii) to Form 10-Q for the
quarter ended June 30, 1997 filed August 11, 1997)
21 Subsidiaries of the Registrant
99 Consolidated Financial Statements of the Registrant (Annual
Report to Stockholders for fiscal year September 30, 1996)
(b) Reports on Form 8-K
None
25
<PAGE>
SIGNATURES
Pursuant to 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, thereunto duly authorized.
HARBOR FLORIDA BANCORP, INC.
(Registrant)
Dated: December 19, 1997 By:___________/s/________________
Michael J. Brown, Sr.
President and Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
________/s/_______________ December 19, 1997
Michael J. Brown, Sr.
President, Chief Executive
Officer and Director
________/s/_______________ December 19, 1997
Don W. Bebber
Senior Vice President, Finance
________/s/_______________ December 19, 1997
Bruce R. Abernethy, Sr., Director
________/s/_______________ December 19, 1997
Richard K. Davis, Director
________/s/_______________ December 19, 1997
Edward G. Enns, Director
________/s/_______________ December 19, 1997
Frank H. Fee, III, Director
________/s/_______________ December 19, 1997
Richard B. Hellstrom, Director
________/s/_______________ December 19, 1997
Richard N. Bird, Director
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Registrant has one wholly-owned subsidiary corporation, the Bank, and the
Bank has six wholly-owned subsidiary corporations. Each is a Florida
corporation.
1. Appraisal Analysts, Inc.
2. H. F. Development Company, Inc.
3. Indigo Tree, Inc. (inactive)
4. The Palm Bay Inn Corporation (inactive)
5. Highland Communities, Inc. (inactive)
6. CFD, Inc. (inactive)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001029407
<NAME> Harbor Florida Bancorp, Inc.
<MULTIPLIER> 1000
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 16899
<INT-BEARING-DEPOSITS> 15736
<FED-FUNDS-SOLD> 250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47553
<INVESTMENTS-CARRYING> 181854
<INVESTMENTS-MARKET> 183947
<LOANS> 834411
<ALLOWANCE> 11691
<TOTAL-ASSETS> 1131024
<DEPOSITS> 911576
<SHORT-TERM> 30100
<LIABILITIES-OTHER> 118923
<LONG-TERM> 70375
0
0
<COMMON> 50
<OTHER-SE> 96752
<TOTAL-LIABILITIES-AND-EQUITY> 1131024
<INTEREST-LOAN> 68847
<INTEREST-INVEST> 13954
<INTEREST-OTHER> 2013
<INTEREST-TOTAL> 84814
<INTEREST-DEPOSIT> 39144
<INTEREST-EXPENSE> 45159
<INTEREST-INCOME-NET> 39655
<LOAN-LOSSES> 782
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21148
<INCOME-PRETAX> 21938
<INCOME-PRE-EXTRAORDINARY> 21938
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13327
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.66
<YIELD-ACTUAL> 3.72
<LOANS-NON> 2580
<LOANS-PAST> 0
<LOANS-TROUBLED> 3774
<LOANS-PROBLEM> 7758
<ALLOWANCE-OPEN> 11016
<CHARGE-OFFS> 262
<RECOVERIES> 155
<ALLOWANCE-CLOSE> 11691
<ALLOWANCE-DOMESTIC> 11691
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Index to Annual Report
Page
Selected Consolidated Financial Data 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
Independent Auditor's Report 16
Consolidated Statement of Financial Condition - September 30,
1997 and 1996 17
Consolidated Statements of Earnings - Years ended September
30, 1997, 1996, and 1995 18
Consolidated Statements of Stockholders' Equity - Years ended
September 30, 1997, 1996, and 1995 19
Consolidated Statement of Cash Flows -Years ended September
30, 1997, 1996, and 1995 20
Notes to the Consolidated Financial Statements 22
All schedules are omitted as they are not required or are not applicable or the
required information is shown in the applicable consolidated financial
statements or notes thereto.
Harbor Financial, M.H.C has limited assets and liabilities, other than the stock
of Harbor Florida Bancorp, Inc. Accordingly, the financial statements of Harbor
Financial, M.H.C. are omitted due to immateriality.
1
<PAGE>
Selected Consolidated Financial Condition Data
September 30,
1997 1996 1995 1994 1993
(In thousands)
Total assets............ $1,131,024 $1,057,443 $886,570 $808,110 $759,389
Loans (net)(1).......... 834,270 765,019 631,307 576,406 546,699
Federal funds sold...... 250 16,075 12,825 7,400 17,500
Investment securities(2) 53,553 53,493 25,186 40,286 45,522
Mortgage-backed
securities......... 176,854 153,293 164,759 120,099 89,535
Real estate owned (net). 2,314 3,118 2,786 2,522 6,198
Deposits................ 911,576 851,853 720,981 673,830 651,093
FHLB advances........... 100,000 95,000 65,000 45,000 45,000
Other borrowings........ 475 674 974 1,273 990
Stockholders' equity.... 96,802 84,832 77,500 68,251 40,230
- ---------------
(1) Excludes loans held for sale of $141,000, $4.9 million, $1 million,
$25,000, and $679,000, as of September 30, 1997, 1996, 1995, 1994 and
1993, respectively.
(2) Includes investments available for sale of $47,553 and $33,493 in 1997
and 1996, respectively.
2
<PAGE>
Selected Consolidated Operating Data
Years Ended September 30,
1997 1996 1995 1994 1993
-----------------------------------------
(In thousands)
Interest income..................$84,814 $74,357 $64,884 $56,084 $55,674
Interest expense................. 45,159 39,114 33,280 26,276 27,251
------ ------ ------ ------ ------
Net interest income.......... 39,655 35,243 31,604 29,808 28,423
Provision for (recovery of)
loan losses................ 782 (76) 460 1,553 1,890
--- --- --- ----- -----
Net interest income
after provision for
loan losses 38,873 35,319 31,144 28,255 26,533
------ ------ ------ ------ ------
Other income:
Income (loss) from real
estate operations.......... 145 (301) (40) 1,250 (2,792)
Gain (loss) on sale of
mortgage loans............. 188 (40) 91 118 281
Other........................ 3,880 3,226 2,856 2,701 2,668
----- ----- ----- ----- -----
Total other income...... 4,213 2,885 2,907 4,069 157
----- ----- ----- ----- ---
Other expenses:
Compensation and benefits.... 11,931 10,690 10,048 9,433 9,078
Professional fees............ 599 527 699 1,137 711
SAIF deposit insurance
premium................. 785 6,300 1,556 1,672 1,627
Other........................ 7,833 6,615 5,895 5,624 5,555
----- ----- ----- ----- -----
Total other expenses.... 21,148 24,132 18,198 17,866 16,971
------ ------ ------ ------ ------
Income before income taxes...... 21,938 14,072 15,853 14,458 9,719
Income tax expense .............. 8,611 5,432 5,958 5,254 4,016
----- ----- ----- ----- -----
Income before extraordinary
item and cumulative effect
of change in accounting
principle................... 13,327 8,640 9,895 9,204 5,703
Extraordinary item (1)........... --- --- --- (1,342) ---
Cumulative effect on prior
years of changing to a
different method of
accounting for income
taxes....................... --- --- --- 1,935 ---
------ ------ ------ ------ ------
Net income....................... 13,327 $ 8,640 $ 9,895 $ 9,797 $ 5,703
====== ======= ======= ======= =======
(1) Extinguishment of FHLB advances for year 1994.
3
<PAGE>
Selected Financial Ratios
<TABLE>
<CAPTION>
At or for the Years Ended September 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Performance Ratios:
<S> <C> <C> <C> <C> <C>
Return on average assets ................. 1.22% .91% 1.16% 1.25% .77%
Return on average stockholders' equity ... 14.72 10.51 13.61 16.85 15.14
Net interest rate spread ................. 3.36 3.40 3.42 3.68 3.92
Net yield on average interest-earning
assets .............................. 3.72 3.79 3.80 3.92 4.04
Noninterest expense to average assets .... 1.93 2.53 2.14 2.27 2.29
Net interest income to noninterest
expense ............................. 1.88 1.46 1.74 1.67 1.67
Average interest-earnings assets to
average interest-bearing liabilities 108.33 109.24 109.58 106.94 103.13
Asset Quality Ratios:
Nonperforming assets to total assets ..... .43 .50 .71 .85 2.19
Allowance for loan losses to total loans . 1.40 1.44 1.60 1.64 1.34
Allowance for loan losses to
nonperforming loans ................. 453.11 507.25 286.70 329.74 209.67
Allowance for losses on real estate
owned to total real estate owned ... 19.99 35.45 40.00 33.37 26.09
Capital Ratios:
Average stockholders' equity to average
assets .............................. 8.26 8.62 8.54 7.40 5.09
Stockholders' equity to assets at period . 8.56 8.02 8.74 8.45 5.30
end
</TABLE>
4
<PAGE>
Management's Discussion
and analysis of Financial Condition and Results of Operations
General
Harbor Florida Bancorp, Inc. ("the Company") results of operations are primarily
dependent on its net interest income. Net interest income is a function of the
balances of loans and investments outstanding in any one period, the yields
earned on such loans and investments and the interest paid on deposits and
borrowed funds that were outstanding in that same period. The Company's
noninterest income consists primarily of fees and service charges, gains on sale
of mortgage loans and, depending on the period, real estate operations which
have either provided income or loss. The results of operations are also
significantly impacted by the amount of provisions for loan losses which, in
turn, is dependent upon, among other things, the size and makeup of the loan
portfolio, loan quality, and trends. The noninterest expenses consist primarily
of employee compensation and benefits, occupancy expense, professional fees and
federal deposit insurance premiums. Its results of operations are affected by
general economic and competitive conditions, including changes in prevailing
interest rates and the policies of regulatory agencies.
Market Risk and Asset and Liability Management
The Company attempts to manage its assets and liabilities in a manner that
stabilizes net interest income and net economic value under a broad range of
interest rate environments. This is accomplished by matching maturity and
repricing periods on loans and investments to maturity and repricing periods on
deposits and borrowings.
The matching of assets and liabilities may be analyzed by determining the extent
to which such assets and liabilities are interest rate sensitive. An asset or
liability is considered to be interest rate sensitive within a specific time
period if it matures or reprices within that time period. Interest rate
sensitivity analysis, also known as "gap" analysis, attempts to measure the
difference between the amount of interest-earning assets expected to mature or
reprice within a specific time period compared to the amount of interest-bearing
liabilities expected to mature or reprice within that time period. An interest
rate sensitive "gap" is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities
maturing or repricing within a specified time period. A "gap" is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets that mature or reprice within a
specified time period. Interest rate sensitivity analysis is based on numerous
assumptions, such as estimates for paying loans off prior to maturity. Estimates
are revised annually to reflect the anticipated interest rate environment.
Generally, an institution with a positive interest rate sensitivity "gap" can
expect net interest income to increase during periods of rising interest rates
and decline during periods of falling interest rates. Likewise, an institution
with a negative "gap" can expect an increase in net interest income during
periods of falling interest rates and a decrease in net interest income during
periods of rising interest rates. At September 30, 1997, the Company's
cumulative one year interest rate sensitivity "gap" was negative 12.45%.
In addition to interest rate sensitivity analysis, the Company monitors interest
rate risk exposure with the use of computerized simulation models. The
computerized models simulate the effect of rising and falling interest rate
levels on the Company's net interest income and net economic value. The
Company's Board of Directors reviews the simulation results on a quarterly basis
to ensure that simulated fluctuations of net interest income and net economic
value remain within limits established in the Company's interest rate risk
management policy.
The Board of Directors has established an asset/liability committee which
consists of the Company's president and senior Company officers. The committee
meets on a monthly basis to review loan and deposit pricing and production
volumes, interest rate risk analysis, liquidity and borrowing needs, and a
variety of other asset and liability management topics.
The Company currently utilizes the following strategies to reduce interest rate
risk: (a) the Company seeks to originate and hold in portfolio adjustable rate
loans which have annual interest rate adjustments; (b) the Company sells a
portion of newly originated 20 and 30 year fixed rate mortgage loans, currently
$100,000 to $200,000 per month; (c) the Company seeks to lengthen the maturities
of deposits when deemed cost effective through the pricing and promotion of
certificates of deposits; (d) the Company seeks to attract low cost checking and
transaction accounts which tend to be less interest rate sensitive when interest
rates rise; and (e) the Company has utilized long term Federal Home Loan Bank
("FHLB") advances to fund the origination of fixed rate loans. The Company also
maintains a high level of liquid assets consisting of shorter-term investments
which are expected to increase in yield as interest rates rise.
5
<PAGE>
Interest Rate Sensitivity
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates as of September 30, 1997. For
borrowings, the table presents principal cash flows by expected maturity dates.
<TABLE>
<CAPTION>
Four to More than More than
Within twelve one year to three years to Over five
three months months three years five years years Total
------------ ------ ----------- ---------- ----- -----
(Dollars in thousands)
Interest-earning assets (1):
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans (2)
Fixed rate ............. $ 15,032 $ 45,093 $ 96,315 $ 71,876 $ 194,052 $ 422,368
Adjustable rate ........ 55,956 171,506 28,266 61,534 6,003 323,265
Other loans (2):
Fixed rate ............. 5,010 15,031 25,502 13,607 13,964 73,114
Adjustable rate ........ 18,224 8,342 787 -- -- 27,353
Mortgage-backed
securities:
Fixed rate (3) ......... 7,275 21,826 43,850 21,717 33,270 127,938
Adjustable rate ........ 4,751 44,165 -- -- -- 48,916
Investment securities
and other assets ....... 31,580 14,483 30,071 -- -- 76,134
---------- ---------- ---------- ---------- ---------- ----------
Total ................ $ 137,828 $ 320,446 $ 224,791 $ 168,734 $ 247,289 $1,099,088
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities:
Deposits(4):
NOW accounts ........... $ 5,205 $ 15,614 $ 19,985 $ 7,195 $ 4,046 $ 52,045
Passbook accounts ...... 11,481 34,443 25,717 4,115 784 76,540
Money market
accounts ............. 8,680 26,041 8,333 333 14 43,401
Certificates of
deposits ............. 164,116 303,088 180,702 41,006 848 689,760
Borrowings ................ 20,375 10,100 10,000 15,000 45,000 100,475
---------- ---------- ---------- ---------- ---------- ----------
Total ................ $ 209,857 $ 389,286 $ 244,737 $ 67,649 $ 50,692 $ 962,221
---------- ---------- ---------- ---------- ---------- ----------
Excess (deficiency) of
interest earning assets
over interest- bearing
liabilities ............... $ (72,029) $ (68,840) $ (19,946) $ 101,085 $ 196,597 $ 136,867
========== ========== ========== ========== ========== ==========
Cumulative excess
(deficiency) of interest-
earning assets over
interest-bearing
liabilities ............... $ (72,029) $ (140,869) $ (160,815) $ (59,730) $ 136,867
========== ========== ========== ========== ==========
Cumulative excess
(deficiency) of interest-
earning assets over
interest-bearing
liabilities as a percent of
total assets .............. (6.37)% (12.45)% (14.22)% (5.28)% 12.10%
===== ====== ====== ===== =====
</TABLE>
- --------------------------
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments. Estimated
prepayment statistics were obtained from the research department of a
primary securities dealer. For fixed rate mortgages and mortgage-backed
securities, annual prepayment rates from 7% to 25%, based on the coupon
rate, were used.
6
<PAGE>
(2) Balances have been reduced for loans in process and deferred loan fees and
discounts which aggregated to $35.5 million at September 30, 1997.
Nonperforming loans aggregating $2.6 million were included in the within
three month repricing period.
(3) Fixed rate mortgage-backed securities include amortizing securities that
balloon 5 years and 7 years from original issue date. Balloon securities
amounted to $99.5 million at September 30, 1997.
(4) The Company's negotiable order of withdrawal ("NOW") accounts, passbook
savings accounts and money market deposit accounts are generally subject to
immediate withdrawal. However, management considers a certain portion of
these accounts to be core deposits having significantly longer effective
maturities based on the Company's retention of such deposit accounts in
changing interest rate environments. NOW accounts, passbook savings
accounts and money market deposit accounts are assumed to be withdrawn at
annual rates of 40%, 60% and 80%, respectively, of the declining balance of
such accounts during the period shown. Management believes the rates are
indicative of expected withdrawal rates in a rising interest rate
environment. If all of the Company's NOW accounts, passbook savings
accounts and money market deposit accounts had been assumed to be subject
to repricing within one year, the cumulative one-year deficiency of
interest-earning assets to interest-bearing liabilities would have been
$211.4 million or 18.69% of total assets.
(5) The Company does not purchase, sell or enter into derivative financial
instruments or derivative commodity instruments as defined by Statement of
Financial Accounting Standards No. 119, "Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments."
---------------
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
Analysis of Net Interest Income
The Company's earnings have historically depended primarily upon the Company's
net interest income, which is the difference between interest income earned on
its loans and investments ("interest-earning assets") and interest paid on its
deposits and any borrowed funds ("interest-bearing liabilities"). Net interest
income is affected by (i) the difference between rates of interest earned on the
Company's interest-earning assets and rates paid on its interest-bearing
liabilities ("interest rate spread") and (ii) the relative amounts of its
interest- earning assets and interest-bearing liabilities.
The following tables present an analysis of certain aspects of the Company's
operations during the periods indicated. The first table presents the average
balances of, and the interest and dividends earned or paid on, each major class
of interest-earning assets and interest-bearing liabilities. No tax equivalent
adjustments were made. Average balances represent daily average balances. The
yields and costs include fees which are considered adjustments to yields.
7
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996 1995
---- ---- ----
Average Interest & Yield/ Average Interest & Yield/ Average Interest & Yield/
Balance Dividends Rate Balance Dividends Rate Balance Dividends Rate
------- --------- ---- ------- --------- ---- ----------------- ----
(Dollars in thousands)
Assets:
Interest-earning assets(1):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold ....... $ 7,404 $ 399 5.39% $ 12,679 $ 669 5.28% $ 8,224 $ 457 5.56%
Interest-bearing deposits 29,674 1,614 5.44 24,062 1,320 5.49 24,899 1,412 5.67
Investment securities .... 63,743 3,866 6.07 39,825 2,462 6.18 43,375 2,352 5.42
Mortgage-backed
securities ............. 153,347 10,088 6.58 152,895 10,155 6.64 147,482 9,613 6.52
Mortgage loans ........... 718,319 60,000 8.35 620,166 52,237 8.42 542,127 44,883 8.28
Other loans .............. 94,634 8,847 9.35 79,875 7,514 9.41 65,308 6,167 9.44
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-earning
assets ................. 1,067,121 84,814 7.94 929,502 74,357 8.00 831,415 64,884 7.81
Total noninterest earning
assets.................... 29,575 24,481 20,174
------ ------ ------
Total assets................ 1,096,696 953,983 851,589
========= ======= =======
Liabilities and
Stockholders' Equity:
Interest-bearing liabilities
Deposits:
Transaction accounts.... $ 138,721 $ 1,896 1.37 $118,398 $ 1,724 1.46% $108,558 $1,782 1.64%
Passbook savings........ 77,707 1,356 1.75 79,617 1,506 1.89 85,615 1,718 2.01
Official checks......... 5,612 --- .00 6,400 --- .00 4,250 --- .00
Certificate savings..... 663,143 35,892 5.41 570,518 31,210 5.47 500,941 26,127 5.22
------- ------ ---- ------- ------ ---- ------- ------ ----
Total deposits.......... 885,183 39,144 4.42 774,933 34,440 4.44 699,364 29,627 4.24
FHLB advances............. 99,342 5,962 6.00 75,096 4,593 6.12 58,178 3,546 6.10
Other borrowings.......... 561 53 9.48 857 81 9.47 1,160 107 9.27
--- -- ---- --- -- ---- ----- --- ----
Total interest-bearing
liabilities............... 985,086 45,159 4.58 850,886 39,114 4.60 758,702 33,280 4.39
------- ------ ---- ------- ------ ---- ------- ------ ----
Noninterest-bearing
liabilities............... 21,045 20,863 20,167
------ ------ ------
Total liabilities........... 1,006,131 871,749 778,869
Stockholders' equity........ 90,565 82,234 72,720
------ ------ ------
Total liabilities and
stockholders' equity...... 1,096,696 953,983 851,589
========= ======= =======
Net interest income/
interest rate spread (2).. $ 39,655 3.36% $ 35,243 3.40% $31,604 3.42%
== ======== ======== =======
Net interest-earning
assets/net interest
margin (3)................. $ 82,035 3.72% $78,616 3.79% $72,713 3.80%
== ======== ======= =======
Interest-earning assets to
interest-bearing liabilities 108.33% 109.24% 109.58%
</TABLE>
(1) Average balances and rates include nonaccruing loans.
(2) Interest rate spread represents the difference between weighted average
interest rates earned on interest-earning assets and the weighted average
interest rates paid on interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
----------------
Rate/Volume Analysis. The relationship between the volume and rates of the
Company's interest-earning assets and interest-bearing liabilities influences
the Company's net interest income. The following table reflects the sensitivity
of the Company's interest income and interest expense to changes in volume and
in prevailing interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on effects attributable
to: (1) changes in volume (changes in volume multiplied by old rate); (2)
changes in rate (changes in rate multiplied by old volume); and (3) net change.
Changes attributable to the combined impact of volume and rates have been
allocated proportionately to changes due to volume and changes due to rate.
8
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
Increase (Decrease)
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
------------- ------------- -------------
(In thousands)
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- --- ------ ---- ---
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits.............. $ 21 $ 3 $ 24 $194 $(74) $120 $(684) $ 910 $ 226
Investment securities... 1,424 (20) 1,404 (202) 312 110 (166) 412 246
Mortgage-backed
securities............ 29 (96) (67) 360 182 542 2,893 473 3,366
Mortgage loans.......... 8,259 (496) 7,763 6,681 673 7,354 2,524 1,170 3,694
Nonmortgage loans:
Commercial loans...... 85 (72) 13 46 (110) (64) 14 177 191
Consumer loans........ 1,289 31 1,320 1,305 106 1,411 1,021 56 1,077
----- -- ----- ----- --- ----- ----- -- -----
Total interest income..... 11,107 (650) 10,457 8,384 1,089 9,473 5,602 3,198 8,800
------ ---- ------ ----- ----- ----- ----- ----- -----
Interest expense:
Deposits:
Transaction accounts.. $ 278 $ (106) $ 172 $144 $(202) $(58) $(165) $ 24 $(141)
Passbook savings...... (33) (117) (150) (114) (98) (212) (225) 8 (217)
Certificate savings... 5,013 (331) 4,682 3,806 1,277 5,083 2,903 3,657 6,560
----- ---- ----- ----- ----- ----- ----- ----- -----
Total deposits........ 5,258 (554) 4,704 3,836 977 4,813 2,513 3,689 6,202
FHLB advances........... 1,455 (86) 1,369 1,035 12 1,047 803 (31) 772
Other borrowings........ (26) (2) (28) ( 26) --- (26) 11 19 30
--- -- --- - -- --- -- -- --
Total interest expense.... 6,687 (642) 6,045 4,845 989 5,834 3,327 3,677 7,004
----- ---- ----- ----- --- ----- ----- ----- -----
Net interest income....... $ 4,420 $ (8) $ 4,412 $ 3,539 $ 100 $ 3,639 $ 2,275 $ (479) $ 1,796
======= ======== ======= ======= ===== ======= ======= ======= =======
</TABLE>
9
<PAGE>
Results of Operations
- ---------------------
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
- -----------------------------------------------------------------------
General
- -------
Net income for the year ended September 30, 1997 increased 16.1% to $13.3
million or $2.66 per share, compared to $11.5 million or $2.32 per share for the
same period last year, excluding the one-time SAIF special assessment. Including
the one-time SAIF special assessment, net income for the year ended September
30, 1996 was $8.6 million, or $1.75 per share. Net interest income increased
12.5% to $39.6 million for the year ended September 30, 1997 compared to $35.2
million for the year ended September 30, 1996. This increase was due to an
increase in interest income of $10.5 million offset by an increase in interest
expense of $6.0 million. Other income increased to $4.2 million for the year
ended September 30, 1997 from $2.9 million for the year ended September 30,
1996. Other expenses decreased to $21.1 million for the year ended September 30,
1997 from $24.1 million for the year ended September 30, 1996, due primarily to
the one-time SAIF special assessment of $4.5 million.
Interest Income
- ---------------
Total interest income increased to $84.8 million for the year ended September
30, 1997 from $74.3 million for the year ended September 30, 1996, as a result
of an increase in average interest-earning assets that was partially offset by a
decrease in the average interest rate. Average interest-earning assets increased
to $1.067 billion for the year ended September 30, 1997 from $929.5 million for
the year ended September 30, 1996. The average rate earned on interest-earning
assets decreased to 7.94% for the year ended September 30, 1997 from 8.00% for
the year ended September 30, 1996, a decrease of 6 basis points. Interest income
on loans increased $9.0 million to $68.8 million for the year ended September
30, 1997 from $59.8 million for the year ended September 30, 1996. This increase
was a result of a $112.9 million increase in the average balance to $812.9
million in 1997 from $700.0 million in 1996 that was partially offset by a
decrease of 7 basis points in the average yield to 8.47% in 1997 from 8.54% in
1996. The increase in the average balance of total loans was mainly due to
significant growth in the residential loan portfolio resulting from high levels
of loan originations and the acquisition of $62 million of loans from Treasure
Coast Bank, FSB in June, 1996. Interest income on investment securities
increased $1.4 million to $3.9 million for the year ended September 30, 1997
from $2.5 million for the year ended September 30, 1996. This increase was
primarily the result of a $23.9 million increase in the average balance to $63.7
million in 1997 from $39.8 million in 1996. The increase in the average balance
of investment securities was primarily due to the purchase of FHLB Notes with
the proceeds from new FHLB advances.
Interest Expense
- ----------------
Total interest expense increased to $45.1 million for the year ended September
30, 1997 from $39.1 million for the year ended September 30, 1996, as a result
of an increase in average interest-bearing liabilities. Average interest-bearing
liabilities increased to $985.1 million for the year ended September 30, 1997
from $850.9 million for the year ended September 30, 1996. The average interest
rate paid on interest-bearing liabilities was 4.58% for the year ended September
30, 1997 compared to 4.60% for the year ended September 30, 1996, a decrease of
2 basis points. Interest expense on deposits increased $4.7 million to $39.1
million for the year ended September 30, 1997 from $34.4 million for the year
ended September 30, 1996. This increase was a result of an increase of $110.3
million in the average balance to $885.2 million in 1997 from $774.9 million in
1996 partially offset by a decrease of 2 basis points in the average rate to
4.42% in 1997 from 4.44% in 1996. The increase in the average balance of
deposits reflects the acquisition of $70 million of deposits from Treasure Coast
Bank, FSB in June, 1996. Interest expense on FHLB advances and other borrowings
increased $1.3 million to $6.0 million for the year ended September 30, 1997
from $4.7 million for the year ended September 30, 1996. This increase was the
result of an increase of $24.0 million in the average balance to $99.9 million
in 1997 from $75.9 million in 1996 primarily due to proceeds from short-term
advances taken in order to fund the purchase of FHLB Notes.
10
<PAGE>
Provision for Loan Losses
- -------------------------
The provision for loan losses is charged to operations to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, volume and type of lending conducted by the Company,
industry standards, the level and status of past due and nonperforming loans,
the general economic conditions of the Company's lending area and other factors
affecting collectibility of the Company's loan portfolio. The provision for loan
losses was $782,000 for the year ended September 30, 1997 compared to a credit
of $76,000 for the year ended September 30, 1996. The provision for loan losses
for the year ended September 30, 1997 was principally comprised of a charge of
approximately $600,000 related to an increase in the level of classified
commercial real estate loans, a charge of approximately $100,000 due to an
increase in classified consumer loans, and a charge of approximately 80,000 for
unidentified but probable losses due to growth in the consumer loan portfolio.
The credit to the provision for loan losses for the year ended September 30,
1996 was principally comprised of a credit to the provision of $1.7 million
related to a decrease in the level of classified assets compared to the prior
year and $100,000 of additional net recoveries on loans during the year. This
was partially offset by a charge to the provision of approximately $1.6 million
due to growth primarily in the commercial real estate and consumer portfolios
(which excludes loan growth associated with the acquisition of Treasure Coast)
and due to the Company's perception and the inherent risk of loans originated
for these portfolios during the period, as well as the additional inherent risk
of loans acquired as a result of the acquisition of Treasure Coast; and $200,000
related to downgrades of certain commercial real estate loans within pass
grades. The allowance for loan losses was at $11.7 million and $11.0 million for
September 30, 1997 and 1996, respectively. The allowance was 1.4% of total loans
at both September 30, 1997 and 1996, respectively, and was 117.5% and 129.4% of
classified loans at September 30, 1997 and 1996, respectively. The Company had
net charge offs of $107,000 for the year ended September 30, 1997 compared to
net recoveries of $124,000 for the year ended September 30, 1996. While the
Company's management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions.
Other Income
- ------------
Other income increased by $1.3 million to $4.2 million for the year ended
September 30, 1997 from $2.9 million for the year ended September 30, 1996, due
primarily to an increase of $511,000 in other fees and service charges, an
increase of $446,000 in income from real estate operations, an increase of
$228,000 in gain on sale of mortgage loans and a $239,000 gain on sale of an
undeveloped parcel of land. Other fees and service charges, primarily from fees
and service charges on deposit products, was $3.3 million and $2.8 million for
the years ended September 30, 1997 and 1996, respectively. This increase was
primarily due to the growth in deposits. Income from real estate operations was
$145,000 for the year ended September 30, 1997, compared to a loss of $301,000
in the comparable period in 1996. Gain on sale of mortgage loans was $188,000
for the year ended September 30, 1997, compared to a loss of $40,000 in the
comparable period in 1996.
Other Expense
- -------------
Other expense decreased by $3.0 million to $21.1 million for the year ended
September 30, 1997 from $24.1 million for the year ended September 30, 1996. The
decrease was primarily due to a decrease of $5.5 million in SAIF deposit
insurance premiums due to the special assessment of $4.5 million for the year
ended September 30, 1996 and a decrease of $1.0 million in premiums for the year
ended September 30, 1997 due to lower assessment rates resulting from
recapitalization of the SAIF. Other changes included an increase of $1.2 million
in compensation and benefits, an increase of $414,000 in occupancy expense and
an increase of $804,000 in other expense. The increase in compensation and
benefits is due primarily to additional staff required to support the growth in
loans and deposits and an increase in amortization of stock benefit plans. The
increase in other expense is primarily due to an increase of $164,000 in
amortization of goodwill, an increase of $207,000 in advertising and promotion,
an increase of $96,000 in data processing services and $52,000 in filing fees
primarily relating to the organization of the mid-tier holding company.
11
<PAGE>
Income Tax Expense
- ------------------
Income tax expense increased by $3.2 million to $8.6 million for the year ended
September 30, 1997 from $5.4 million for the year ended September 30, 1996, due
primarily to an increase in pretax accounting income, net of the $1.7 million
tax effect of the one-time SAIF special assessment included in 1996. The
effective tax rates were 39% for the both the years ended September 30, 1997 and
1996.
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
- -----------------------------------------------------------------------
General
- -------
Net income for the year ended September 30, 1996, excluding the one-time SAIF
special assessment of $2.8 million after tax, increased 16.0% to $11.5 million
or $2.32 per share, compared to $9.9 million or $2.03 per share for the year
ended September 30, 1995. Including the one-time SAIF special assessment, net
income for the year ended September 30, 1996 was $8.6 million, or $1.75 per
share. Net interest income increased 11.5% to $35.2 million for the year ended
September 30, 1996 compared to $31.6 million for the year ended September 30,
1995. This increase was due to an increase in interest income of $9.4 million
and an increase in interest expense of $5.8 million. Other income remained
constant at $2.9 million for both of the years ended September 30, 1996 and
1995. Other expenses increased to $24.1 million for the year ended September 30,
1996 from $18.2 million for the year ended September 30, 1995, due primarily to
the one-time SAIF special assessment of $4.5 million.
Interest Income
- ---------------
Total interest income increased to $74.3 million for the year ended September
30, 1996 from $64.9 million for the year ended September 30, 1995, as a result
of an increase in average interest-earning assets and an increase in the average
interest rate. Average interest-earning assets increased to $929.5 million for
the year ended September 30, 1996 from $831.4 million for the year ended
September 30, 1995. The average rate earned on interest-earning assets increased
to 8.00% for the year ended September 30, 1996 from 7.81% for the year ended
September 30, 1995, an increase of 19 basis points. Interest income on loans
increased $8.7 million to $59.8 million for the year ended September 30, 1996
from $51.1 million for the year ended September 30, 1995. This increase was a
result of a $92.6 million increase in the average balance to $700.0 million in
1996 from $607.4 million in 1995 and an increase of 14 basis points in the
average yield to 8.54% in 1996 from 8.40% in 1995. The increase in the average
balance of total loans was mainly due to significant growth in the residential
loan portfolio resulting from high levels of loan originations and the
acquisition of $62 million of loans from Treasure Coast Bank, FSB in June, 1996.
Interest income on mortgage-backed securities increased $541,000 to $10.2
million for the year ended September 30, 1996 from $9.6 million for the year
ended September 30, 1995. This increase was primarily the result of a $5.4
million increase in the average balance to $152.9 million in 1996 from $147.5
million in 1995. The increase in the average balance of mortgage-backed
securities was primarily due to the purchase of adjustable and seven-year
balloon securities with the proceeds from maturing investment securities and
proceeds from new FHLB advances.
Interest Expense
- ----------------
Total interest expense increased to $39.1 million for the year ended September
30, 1996 from $33.3 million for the year ended September 30, 1995, as a result
of an increase in average interest-bearing liabilities and an increase in the
average rate paid. Average interest-bearing liabilities increased to $850.9
million for the year ended September 30, 1996 from $758.7 million for the year
ended September 30, 1995. The average interest rate paid on interest-bearing
liabilities was 4.60% for the year ended September 30, 1996 compared to 4.39%
for the year ended September 30, 1995, an increase of 21 basis points. Interest
expense on deposits increased $4.8 million to $34.4 million for the year ended
September 30, 1996 from $29.6 million for the year ended September 30, 1995.
This increase was a result of an increase of $75.6 million in the average
balance to $775.0 million in 1996 from $699.4 million in 1995 and an increase of
20 basis points in the average rate to 4.44% in 1996 from 4.24% in 1995. The
increase in the average balance of deposits reflects the acquisition of $70
million of deposits from Treasure Coast Bank, FSB in June, 1996. Interest
expense on FHLB advances and other borrowings increased $1.0 million to $4.7
million for the year ended September 30, 1996 from $3.7 million for the year
ended September 30, 1995. This increase was the result of an increase of $16.6
million in the average balance to $75.9 million in 1996 from $59.3 million in
1995.
12
<PAGE>
Provision for Loan Losses
- -------------------------
The provision for loan losses is charged to operations to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, volume and type of lending conducted by the Company,
industry standards, the level and status of past due and nonperforming loans,
the general economic conditions of the Company's lending area and other factors
affecting collectibility of the Company's loan portfolio. The provision for loan
losses was a credit of $76,000 for the year ended September 30, 1996 compared to
an expense of $460,000 for the year ended September 30, 1995. The credit to the
provision for the year ended September 30, 1996 was principally comprised of a
credit to the provision of $1.7 million related to a decrease in the level of
classified assets compared to the prior year and $100,000 of additional net
recoveries on loans during the year. This was partially offset by a charge to
the provision of approximately $1.6 million due to growth primarily in the
commercial real estate and consumer portfolios (which excludes loan growth
associated with the acquisition of Treasure Coast) and due to the Company's
perception and the inherent risk of loans originated for these portfolios during
the period, as well as the additional inherent risk of loans acquired as a
result of the acquisition of Treasure Coast; and $200,000 related to downgrades
of certain commercial real estate loans within pass grades. In 1995, the
provision of $460,000 resulted primarily from a $1.1 million charge to the
provision due to growth in the commercial real estate portfolio and increased
allowance levels provided on more recent originations, and a charge to the
provision of $30,000 due to an increase in the level of classified assets. Such
charges were reduced by a reduction of approximately $500,000 related to
upgrades of loans within pass grades and $190,000 in net loan recoveries during
the period. The allowance for loan losses was at $11.0 million and $ 10.1
million for September 30, 1996 and 1995, respectively. An allowance of $885,000
was acquired as part of the Treasure Coast Acquisition in 1996. The allowance
was 1.4% and 1.6% of total loans at September 30, 1996 and 1995, respectively,
and was 129.4% and 57.6% of classified loans at September 30, 1996 and 1995,
respectively. The Company had net recoveries of $124,000 and $188,000 for the
years ended September 30, 1996 and 1995, respectively. While the Company's
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions.
Other Income
- ------------
Other income remained constant at $2.9 million for both the years ended
September 30, 1996 and 1995. Losses from real estate operations were $301,000
for the year ended September 30, 1996 compared to $40,000 for the year ended
September 30, 1995. Other income, primarily from fees and service charges on
deposit products was $2.8 million and $2.6 million for the years ended September
30, 1996 and 1995, respectively.
Other Expense
- -------------
Other expense increased by $5.9 million to $24.1 million for the year ended
September 30, 1996 from $18.2 million for the year ended September 30, 1995. The
increase was primarily due to the one-time SAIF special assessment of $4.5
million. Other changes included an increase of $642,000 in compensation and
benefits, due primarily to wage increases, and a $341,000 increase in occupancy
expense.
Income Tax Expense
- ------------------
Income tax expense decreased by $526,000 to $5.4 million for the year ended
September 30, 1996 from $5.9 million for the year ended September 30, 1995, due
primarily to the $1.7 million tax effect of the one-time SAIF special
assessment. The effective tax rates were 39% and 38% for the years ended
September 30, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On January 6, 1994 the Company closed its initial public offering of common
stock with the sale to persons (other than its mutual holding company) of
2,239,831 shares at $10.00 per share. The net proceeds of approximately $21.3
million were used for general corporate purposes, including investment in home
mortgages and other investments in the ordinary course of business.
The Company is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time, is
currently 5% of deposits and short-term borrowings. It is the Company's policy
to maintain average monthly levels of liquid assets at least 50 basis points
higher than the minimum requirement, primarily as a part of its asset and
liability management strategy of increasing its levels of rate-sensitive
inter-est-earning assets. At September 30, 1997, the Company had federal funds,
cash and investments which exceeded the minimum regulatory requirement. In
addition, the Company had certain investments in mortgage-backed securities
aggregating $55.0 million which also qualify as liquid assets under OTS
regulations. The Company intends to hold such investments in mortgage-backed
securities until maturity. However, such investments may be used as collateral
for borrowing as such need arises. The Company's total liquidity position as of
September 30, 1997 was $141 million, which was $94 million in excess of the
minimum requirement of $47.0 million. The Company's short term liquidity
position at that date amounted to $56 million which was $47 million in excess of
the minimum requirement of $9 million.
13
<PAGE>
The Company's primary sources of funds are deposits, amortization and prepayment
of loans and mortgage-backed securities, maturities of investment securities and
other short-term investments, and earnings and funds provided from operations.
The Company will consider increasing its borrowings from the Federal Home Loan
Bank of Atlanta from time to time to hedge against future increases in
prevailing deposit account interest rates. In addition, the Company holds
unpledged fixed and adjustable rate mortgage-backed securities totaling $119.3
million at September 30, 1997 that could be used as collateral under repurchase
transactions with securities dealers. Repurchase transactions serve as secured
borrowings and provide a source of short-term liquidity for the Company.
Net cash provided by the Company's operating activities (i.e. cash items
affecting net income) was $15.7 million, $10.2 million, and $11.1 million for
the years ended September 30, 1997, 1996 and 1995, respectively.
Net cash used by the Company's investing activities (i.e. cash receipts,
primarily from its investment securities, mortgage-backed securities, and loan
portfolios) was $93.8 million, $86.2 miilion, and $85.9 million for the years
ended September 30, 1997, 1996 and 1995, respectively.
Net cash provided by the Company's financing activities (i.e. cash receipts
primarily from net increases in deposits and net FHLB advances) was $62.4
million, $86.0 million and $66.1 million for the years ended September 30, 1997,
1996, and 1995, respectively. The increase in 1996 was principally due to a
$13.5 million increase in deposits and a $10.0 million increase in FHLB
advances.
The Company's liquid assets consist primarily of investment securities, federal
funds and cash. At September 30, 1997, the Company had liquid assets of $141
million, with loan commitments of $29.1 million (consisting of unused lines of
credit to homebuilders and residential loan commitments), letters of credit of
$501,000 and unfunded loans in process of $32.1 million (the latter consisting
primarily of residential loans in process).
Impact of New Accounting Standards
- ----------------------------------
Earnings Per Share
- ------------------
In February, 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 is effective for
financial statements issued for periods ending after December 15, 1997.
Statement 128 establishes standards for computing and presenting earnings per
share ("EPS"), simplifies the standards previously found in APB No. 15,
"Earnings Per Share", and makes them comparable to international EPS standards.
The Company will begin disclosing EPS in accordance with Statement 128 beginning
with the quarter ended December 31, 1997.
Reporting Comprehensive Income
- ------------------------------
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("Statement 130"). Statement 130 is
effective for fiscal years beginning after December 15, 1997. Statement 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Statement 130
requires all items recognized under accounting standards as components of
comprehensive income to be reported in a financial statement with equal
prominence as other financial statements. Such statement will be presented by
the Company beginning with the quarter ended December 31, 1998.
Disclosures about Segments of an Enterprise and Related Information
- -------------------------------------------------------------------
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 is effective for periods beginning after
December 15, 1997. Statement 131 establishes standards for the way that public
business enterprises report information about operating segments, based on how
the enterprise defines such segments. The Company is required to report
operating segment information, to the extent such segments are defined,
beginning with the year ended September 30, 1999.
14
<PAGE>
Regulatory Matters
- ------------------
On September 30, 1996, President Clinton signed The Deposit Insurance Funds Act
of 1996, which is intended to recapitalize the Savings Association Insurance
Fund ("SAIF") and substantially bridge the assessment rate disparity existing
between SAIF and Bank Insurance Fund insured institutions. The new law subjected
institutions with SAIF-assessable deposits, including the Bank, to a one-time
assessment of 65.7 basis points of assessable deposits as of March 31, 1995, and
provides for, among other things, a sharing of FICO bond obligation fundings by
banks and thrifts and the eventual merger of the Bank Insurance Fund with the
SAIF. The Bank's one-time assessment resulted in a pre- tax charge of
approximately $4,552,000, which was paid on November 27, 1996 and, under
provisions of the new law, was treated for tax purposes as a fully deductible
"ordinary and necessary business expense" when paid. Results of operations for
the year ended September 30, 1996 include a charge for this one-time assessment.
Additionally, the Bank recorded a pre-tax charge of approximately $450,000
related to the application of this assessment to deposits held by Treasure Coast
at March 31, 1995. Such charge was reflected as a cost of the acquisition of
Treasure Coast.
Year 2000 Considerations
- ------------------------
The Company's Year 2000 Action Plan (the "Action Plan") was presented to the
Board of Directors on June 25, 1997. The Action Plan was developed using the
guidelines outlined in the Federal Financial Institutions Examination Council's
"The Effect of Year 2000 on Computer Systems" and is scheduled for completion by
December 31, 1998, with only final testing remaining. The Systems Corporate
Steering Committee is responsible for the Year 2000 Action Plan with the Board
of Directors receiving Year 2000 Executive Progress Reports on a quarterly
basis.
An OTS off-site examination was conducted on September 30, 1997 and, based upon
the examination results, the Company was progressing satisfactorily towards
completing the Action Plan requirements.
Based upon current findings, the Company budgeted $712,000 for capital equipment
in Fiscal 1998 relating to Year 2000 software and hardware issues.
15
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Independent Auditors' Report
Board of Directors
Harbor Florida Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Harbor Florida Bancorp, Inc., (formerly Harbor Federal Savings Bank) and
subsidiaries as of September 30, 1997 and 1996, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended September 30, 1997. These consolidated
financial statements are the responsibility of Harbor Florida Bancorp, Inc.'s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harbor Florida
Bancorp, Inc. and subsidiaries at September 30, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
West Palm Beach, Florida
November 14, 1997
16
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands except share data)
September 30, 1997 and 1996
1997 1996
---- ----
Assets (Dollars in thousands)
Cash and amounts due from
depository institutions ..................... $ 16,899 $ 16,137
Interest-bearing deposits in
other banks ................................. 15,736 16,350
Federal funds sold ............................... 250 16,075
Investment securities held to
maturity (estimated market value of
$4,993 in 1997 and $20,016 in 1996) ......... 5,000 20,000
Investment securities available for sale
(estimated market value of $47,553 in
1997 and $33,493 in 1996) ................... 47,553 33,493
Mortgage-backed securities held to
maturity (estimated market value
of $178,954 in 1997 and $153,288 in 1996) ... 176,854 153,293
Loans held for sale (estimated market
value of $144 in 1997 and $4,870 in 1996) ... 141 4,870
Loans, net ....................................... 834,270 765,019
Accrued interest receivable ...................... 7,033 6,621
Real estate owned ................................ 2,314 3,118
Premises and equipment ........................... 13,313 10,543
Federal Home Loan Bank stock ..................... 7,595 7,158
Goodwill ......................................... 3,045 3,587
Other assets ..................................... 1,021 1,179
----- -----
Total assets ....................... $ 1,131,024 $ 1,057,443
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ...................................... $ 911,576 $ 851,853
Short-term borrowings ......................... 30,100 25,000
Long-term debt ................................ 70,375 70,674
Advance payments by borrowers
for taxes and insurance ..................... 15,924 15,212
Income taxes payable .......................... 628 962
Other liabilities ............................. 5,619 8,910
----- -----
Total liabilities .................. 1,034,222 972,611
--------- -------
Commitments and contingencies .................... -- --
Stockholders' Equity:
Preferred stock; $.01 par value; authorized
1,000,000 shares; none issued and outstanding -- --
Common stock; $.01 par value; authorized
13,000,000 shares; issued and outstanding
4,973,428 shares at September 30, 1997 and
4,934,454 shares at September 30, 1996 ...... 50 49
Paid-in capital ............................... 26,876 25,339
Retained earnings, substantially restricted ... 71,203 60,893
Common stock purchased by:
Employee stock ownership plan (ESOP) ...... (374) (674)
Recognition and retention plans (RRP) ..... -- (53)
Deferred compensation plan ................ (946) (673)
Net unrealized loss on investment securities
available for sale, net of income taxes ..... (7) (49)
-- ---
Total stockholders' equity ........... 96,802 84,832
------ ------
Total liabilities and stockholders'
equity $1,131,024 $1,057,443
========== ==========
See accompanying notes to consolidated financial statements.
17
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Dollars in thousands except per share data)
Years ended September 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Interest income:
Loans .................................... $ 68,847 $ 59,751 $ 51,050
Investment securities .................... 3,866 2,462 2,352
Mortgage-backed securities ............... 10,088 10,155 9,613
Other .................................... 2,013 1,989 1,869
----- ----- -----
Total interest income ................ 84,814 74,357 64,884
------ ------ ------
Interest expense:
Deposits ................................. 39,144 34,440 29,627
Other .................................... 6,015 4,674 3,653
----- ----- -----
Total interest expense ............... 45,159 39,114 33,280
------ ------ ------
Net interest income .................. 39,655 35,243 31,604
Provision for (recovery of) loan losses ..... 782 (76) 460
--- --- ---
Net interest income after provision for
(recovery of) loan losses ....... 38,873 35,319 31,144
------ ------ ------
Other income:
Other fees and service charges ........... 3,308 2,797 2,566
Income (losses) from real estate operations 145 (301) (40)
Gain (loss) on sale of mortgage loans .... 188 (40) 91
Other .................................... 572 429 290
--- --- ---
Total other income ................... 4,213 2,885 2,907
----- ----- -----
Other expenses:
Compensation and employee benefits ....... 11,931 10,690 10,048
Occupancy ................................ 3,046 2,632 2,291
Professional fees ........................ 599 527 699
SAIF deposit insurance premium ........... 785 6,300 1,556
Other .................................... 4,787 3,983 3,604
----- ----- -----
Total other expense .................. 21,148 24,132 18,198
------ ------ ------
Income before income taxes ........... 21,938 14,072 15,853
Income tax expense .......................... 8,611 5,432 5,958
----- ----- -----
Net income ........................... $ 13,327 $ 8,640 $ 9,895
======== ======== ========
Net income per share ................. $ 2.66 $ 1.75 $ 2.03
======== ======== ========
See accompanying notes to consolidated financial statements.
18
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Common
Common stock Unreal.
stock Common purch by gain (loss)
purch stock deferred on securities
Common Paid-in Retained by purch comp available
stock capital earnings ESOP by RRP's plan for sale, net Total
----- ------- -------- ---- -------- ---- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 $49 $23,975 $46,416 $(1,273) $(481) $(435) $ - $68,251
Net income - - 9,895 - - - - 9,895
Stock options exercised - 168 - - - - - 168
Amortization of award of ESOP
and RRP's - 264 - 299 214 - - 777
Tax benefit of RRP's - 48 - - - - - 48
Dividends paid - - (1,639) - - - - (1,639)
Balance at September 30, 1995 $49 $24,455 $54,672 $(974) $(267) $(435) $ - $77,500
Net income - - 8,640 - - - - 8,640
Stock options exercised - 234 - - - - - 234
Amortization of award of ESOP
and RRP's - 482 - 300 214 - - 996
Tax benefit of RRP's - 137 - - - - - 137
Dividends paid - - (2,419) - - - - (2,419)
Unrealized gain on securities
available for sale, net - - - - - - 126 126
Change in unrealized gain
(loss) on securities available
for sale, net - - - - - - (175) (175)
Tax benefit of non- qualified
stock options - 31 - - - - - 31
Stock purchased by deferred
compensation plan - - - - - (238) - (238)
Balance at September 30, 1996 $49 $25,339 $60,893 $(674) $( 53) $(673) $(49) $84,832
Net income - - 13,327 - - - - 13,327
Stock options exercised 1 389 - - - - - 390
Amortization of award of ESOP
and RRP's - 856 - 300 53 - - 1,209
Tax benefit of RRP's - 193 - - - - - 193
Dividends paid - - (3,017) - - - - (3,017)
Change in unrealized gain
(loss) on securities availabl -
for sale, net e - - - - - 42 42
Tax benefit of non- qualified
stock options - 99 - - - - - 99
Stock purchased by deferred
compensation plan - - - - - (273) - (273)
Balance at September 30, 1997 $50 $26,876 $71,203 $(374) $ - $(946) $(7) $96,802
See accompanying notes to consolidated financial statements.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended September 30, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash provided by operating activities:
<S> <C> <C> <C>
Net income 13,327 8,640 $9,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of stock benefit plans 1,209 996 777
Tax benefit of stock plans credited to capital 292 168 48
Originations of loans held for sale (5,360) (8,554) (9,929)
Proceeds from sale of loans held for sale 8,395 4,693 8,945
Depreciation and amortization 1,103 1,104 1,017
Deferred income tax provision (benefit) 1,781 (1,365) 1,559
Increase in deferred loan fees and costs 1,133 1,047 881
Amortization of deferred loan fees and costs (926) (973) (1,090)
Amortization of goodwill 236 71 ---
Net accretion of other purchase accounting
adjustments (12) (20) ---
Gain on sale of premises and equipment (239) --- ---
(Gain) loss on sale of real estate owned (127) 39 (180)
Accretion of discount on purchased loans (17) (24) (258)
Increase in accrued interest receivable (411) (184) (1,277)
Provision for (recovery of) loan losses 782 (76) 460
Provision for (recovery of) losses on real estate
owned (150) 117 35
(Increase) decrease in other assets 157 (143) 70
Increase (decrease) in income taxes payable (334) 469 267
Increase (decrease) in other liabilities (5,098) 4,178 (165)
Net cash provided by operating activities 15,741 10,183 11,055
Cash used by investing activities:
Net increase in loans (69,732) (72,973) (55,545)
Purchase of mortgage-backed securities (61,769) (29,265) (65,609)
Proceeds from principal repayments of mortgage-
backed securities 38,031 40,068 20,780
Proceeds from maturities of investment securities
held to maturity 35,000 --- 25,042
Purchase of investment securities held to maturity (20,000) (20,000) (10,000)
Proceeds from maturities of investment securities
available for sale 15,533 10,595 ---
Proceeds from sale of investment securities
available for sale --- 6,745 ---
Purchase of investment securities available for sale (29,500) (17,939) ---
Proceeds from sale of real estate owned 2,202 1,434 2,022
Purchase of premises and equipment (4,068) (1,423) (2,020)
Proceeds from sale of premises and equipment 587 1,590 180
FHLB stock purchase (437) (619) (706)
Purchase of Treasure Coast Bank, net of cash
acquired --- (4,451) ---
Other 306 --- ---
Net cash used by investing activities (93,847) (86,238) (85,856)
20
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended September 30, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash provided by financing activities:
Net increase in deposits 59,816 60,679 47,152
Net proceeds from short-term borrowings 5,100 15,000 ---
Repayments of long-term borrowings (299) (300) (300)
Net proceeds from long-term borrowings --- 15,000 20,000
Increase (decrease) in advance payments by
borrowers for taxes and insurance 712 (1,995) 697
Stock dividend paid (3,017) (2,419) (1,639)
Common stock options exercised 390 235 168
Purchase of common stock by deferred
compensation plan (273) (238) ---
Net cash provided by financing activities 62,429 85,962 66,078
Net increase (decrease) in cash and cash
equivalents (15,677) 9,907 (8,723)
Cash and cash equivalents - beginning of period 48,562 38,655 47,378
Cash and cash equivalents - end of period $32,885 48,562 $ 38,655
Supplemental disclosures:
$45,159 39,324 $33,228
Cash paid for:
Interest
Taxes 6,918 6,161 4,114
Noncash investing and financing activities:
Additions to real estate acquired in settlement
of loans through foreclosure 2,459 2,879 1,312
Sale of real estate owned financed by the
Company 1,337 1,044 658
Transfer of investment securities from held to
maturity to available for sale --- 26,011 ---
Change in unrealized gain (loss) on securities
available for sale 68 (79) ---
Change in deferred taxes related to securities
available for sale (26) 29 ---
Transfer of loans held for sale to held for 1,693 --- ---
maturity
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies
- -------------------------------------------------
(a) Reorganization
On June 25, 1997, Harbor Federal Savings Bank (the "Bank") completed its
reorganization into the two-tier form of mutual holding company ownership.
Pursuant to the reorganization, the Bank is now the wholly owned subsidiary of
Harbor Florida Bancorp, Inc. (the "Company"), a Delaware corporation. The
Company is the majority owned subsidiary of Harbor Financial, M.H.C. (The
"Holding Company"). Pursuant to the reorganization, each share of the Bank's
outstanding common stock was automatically converted into one share of the
Company's common stock. The reorganization was accounted for in a manner similar
to a pooling of interests and did not result in any significant accounting
adjustments. The consolidated financial statements for prior periods have been
restated to reflect the change in the par value of the Company's common stock
from $1.00 to $.01 per share. Certain conditions were imposed upon the Company
by the OTS as part of the reorganization, including requirements to obtain a
federal charter, provisions related to minority stock issuances, and other
regulatory requirements.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the Bank.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Harbor Florida Bancorp, Inc. and its wholly-owned subsidiaries. In
consolidation, all significant intercompany accounts and transactions have been
eliminated.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and real estate owned, management obtains independent appraisals
for significant properties.
As of September 30, 1997, substantially all of the Company's loans and
investment in real estate owned are secured by real estate in the counties in
which the Company has branch facilities: St. Lucie, Indian River, Brevard,
Martin and Volusia Counties, Florida. Accordingly, the ultimate collectibility
of a substantial portion of the Company's loan portfolio and the recovery of a
substantial portion of the carrying amount of real estate owned are susceptible
to changes in market conditions in the above counties. Management believes that
the allowances for losses on loans and real estate owned are adequate. While
management uses available information to recognize losses on loans and real
estate owned, future additions to the allowances may be necessary based on
changes in economic conditions, particularly in the above counties. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for losses on loans and real estate
owned. Such agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
(c) Loan Origination and Commitment Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred, and the net
fee is recognized in income using the interest method over the contractual life
of the loans. Commitment fees and costs relating to commitments whose likelihood
of exercise is remote are recognized over the commitment period on a
straight-line basis. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the life of the loan as an adjustment of yield.
(d) Loan Interest Income
The Company reverses accrued interest related to loans which are 90 days or more
delinquent or placed on non-accrual status. Such interest is recorded as income
when collected. Amortization of net deferred loans fees and accretion of
discounts are discontinued for loans that are 90 days or more delinquent.
Interest income on impaired loans is recognized on an accrual basis unless
designated nonaccrual as noted above.
22
<PAGE>
(e) Investment and Mortgage Backed Securities
Bonds, notes, and other debt securities for which the Company has the positive
intent and ability to hold to maturity are reported at cost, adjusted for
premiums and discounts that are recognized in interest income using the interest
method over the period to maturity.
Available-for-sale securities consist of bonds, notes, other debt securities and
certain equity securities not classified as trading securities nor as
held-to-maturity securities. Available-for- sale securities include securities
that are being held for an unspecified period of time, such as those the Company
would consider selling to meet liquidity needs or as part of the Company's risk
management program. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate
component of stockholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
On November 15, 1995, the Financial Accounting Standards Board (FASB) issued
Special Report No. 155-B, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities", (the "Special
Report"). Pursuant to the Special Report, the Company was permitted to conduct a
one-time reassessment of the classification of all securities held at that time.
Any reclassification from the held-to-maturity category made in conjunction with
that reassessment would not call into question an enterprise's intent to hold
other debt securities to maturity in the future. The Company undertook such a
reassessment and, effective December 31, 1995, all investment securities were
reclassified as available for sale. On the effective date of the
reclassification, the securities transferred had a carrying value of $25.8
million and an estimated fair value of $26.0 million, resulting in a net
increase to stockholders' equity for the net unrealized appreciation of
$126,000, after deducting applicable income taxes of $76,000.
Prior to October 1, 1994, investment and mortgage-backed securities were carried
at cost, adjusted for premiums and discounts that were recognized in interest
income using the interest method over the period to maturity.
The Company does not purchase, sell or utilize off-balance sheet derivative
financial instruments or derivative commodity instruments.
At September 30, 1997 and 1996, the Company had no commitments to sell
investment or mortgage-backed securities.
(f) Loans Receivable
Loans receivable are stated at unpaid principal balances, less loans in process,
the allowances for loan losses and net deferred loan origination fees and
discounts.
Discounts on mortgage loans are amortized to income using the interest method
over the remaining period to contractual maturity.
The Company follows a consistent procedural discipline and accounts for loan
loss contingencies in accordance with Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies" (Statement 5). The following is
a description of how each portion of the allowance for loan losses is
determined.
The Company segregates the loan portfolio for loan loss purposes into the
following broad segments such as: commercial real estate; residential real
estate; commercial business; and consumer loan. The Company provides for a
general allowance for losses inherent in the portfolio by the above categories,
which consists of two components. General loss percentages are calculated based
upon historical analyses. A supplemental portion of the allowance is calculated
for inherent losses which probably exist as of the evaluation date even though
they might not have been identified by the more objective processes used for the
portion of the allowance described above. This is due to the risk of error
and/or inherent imprecision in the process. This portion of the allowance is
particularly subjective and requires judgments based on qualitative factors
which do not lend themselves to exact mathematical calculations such as: trends
in delinquencies and nonaccruals; migration trends in the portfolio; trends in
volume, terms, and portfolio mix; new credit products and/or changes in the
geographic distribution of those products; changes in lending policies and
procedures; loan review reports on the efficacy of the risk identification
process; changes in the outlook for local, regional and national economic
conditions; concentrations of credit; and peer group comparisons.
23
<PAGE>
Specific allowances are provided in the event that the specific collateral
analysis on each classified loan indicates that the probable loss upon
liquidation of collateral would be in excess of the general percentage
allocation. The provision for loan loss is debited or credited in order to state
the allowance for loan losses to the required level as determined above.
The Company considers a loan to be impaired when it is probable that the company
will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. When a loan is
impaired, the Company may measure impairment based on (a) the present value of
the expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate, (b) the observable market price of the
impaired loans, or (c) the fair value of the collateral of a
collateral-dependent loan. The Company selects the measurement method on a
loan-by-loan basis, except for collateral-dependent loans for which foreclosure
is probable must be measured at the fair value of the collateral. In a troubled
debt restructuring involving a restructured loan, the Company measures
impairment by discounting the total expected future cash flows at the loan's
original effective rate of interest.
(g) Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market,
comprised of 1-4 family residential loans, are carried at the lower of cost or
estimated market value, in the aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("Statement 122") which
eliminated the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. Statement 122 requires an entity to
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. Statement 122 requires the periodic
evaluation of capitalized mortgage servicing rights for impairment based on fair
value. On October 1, 1996, this statement was implemented prospectively. The
impact of Statement 122 upon implementation was not significant to the Company's
financial condition or results of operations upon adoption. Effective January 1,
1997, Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("Statement 125") superseded Statement 122. The impact of the implementation of
Statement 125 was not significant to the Company's financial position and
results of operations upon adoption.
(h) Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in income (losses) from real
estate operations.
(i) Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation of premises and equipment is provided on the straight-line method
over the estimated useful lives of the related assets. Estimated lives are three
to fifty years for buildings and improvements and three to ten years for
furniture and equipment. Leasehold improvements are amortized on the
straight-line method over the shorter of the remaining term of the related
leases or their estimated useful lives.
Maintenance and repairs are charged to expense as incurred and improvements are
capitalized. The cost and accumulated depreciation relating to premises and
equipment retired or otherwise disposed of are eliminated from the accounts and
any resulting gains or losses are credited or charged to income.
24
<PAGE>
(j) Goodwill
Goodwill is being amortized on a straight-line basis over its estimated useful
life of 15 years. Goodwill is evaluated by management for impairment whenever
events or changes in circumstances indicate that the carrying amount of goodwill
may not be recoverable based on facts and circumstances related to the value of
net assets acquired that gave rise to the goodwill.
(k) Income Taxes
The Company uses the asset and liability method to account for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
The effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
The tax bad debt reserve method currently available to thrift institutions was
repealed for the Company for the year beginning October 1, 1996. As a result,
the Company must change from the reserve method to the specific charge-off
method to compute its bad debt deduction.
The Company is required generally to recapture into income for tax purposes the
portion of its bad debt reserves (other than the supplemental reserve) that
exceeds its base year reserves (i.e., its tax reserves for the last tax year
beginning before 1988). For financial statement purposes, the Company has
previously provided deferred taxes on the amount of the bad debt reserve in
excess of the base year. Such reserves subject to recapture and base year
reserves were approximately $7.1 million and $14.5 million at September 30,
1997, respectively.
The recapture amount resulting from the change in the method of accounting for
its bad debt reserves generally will be taken into taxable income ratably (on a
straight-line basis) over a six-year period. If the Company meets a "residential
loan requirement", as defined for a tax year beginning in 1996 or 1997, the
recapture of the reserves will be suspended for such tax year. The Company met
such requirement for the tax year beginning October 1, 1996.
Certain events, as defined, will still trigger a recapture of the base year
reserve. However, the base year will not be recaptured if a thrift converts to a
bank charter or is merged into a bank. The base year reserves also remain
subject to income tax penalty provisions which, in general, require recapture
upon certain stock redemptions of, and excess distributions to, shareholders.
(l) Pension Plan
The Company's policy is to fund pension costs as they accrue based on normal
cost.
(m) Stock-Based Compensation
In October, 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" (Statement 123). This
standard allows the use of either the fair value based method described in
Statement 123 or the intrinsic value based method prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees." ("APB 25")
The Company has elected to continue accounting for stock based compensation
under the APB 25 method and disclose the pro-forma impact of Statement 123.
(n) Statement of Cash Flows
Cash equivalents include amounts due from banks, interest-bearing deposits in
other banks and Federal funds sold. For purposes of cash flows, the Company
considers all highly liquid debt instruments with original maturities when
purchased of three months or less to be cash equivalents.
(o) Net Income Per Share
Net income per share totaled $2.66, $1.75 and $2.03 based upon 5,006,312,
4,947,108 and 4,880,054 weighted average number of common and common equivalent
shares outstanding during the years ended September 30, 1997, 1996, and 1995,
respectively.
(p) Reclassification
Certain amounts included in the 1996 and 1995 consolidated financial statements
have been reclassified in order to conform to the 1997 presentation.
25
<PAGE>
(q) Derivative Instruments
The Company does not purchase, sell or enter into derivative financial
instruments or derivative commodity instruments as defined by Statement of
Financial Accounting Standards No. 119, "Disclosures about Derivative Financial
Instruments and Fair Value of Financial Instruments."
(r) New Accounting Pronouncements
In June, 1996, the FASB issued Statement of Financial Accounting Standards No.
125 ("Statement 125"), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." Statement 125, which superseded
Statement 122 as of January 1, 1997, provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishment of
liabilities based on a financial-components approach that focuses on control.
Statement 125 was effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring on or after January 1, 1997 and is
prospectively applied. Implementation of Statement 125 did not have a material
impact on the financial position or the results of operations of the Company.
In February, 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 is effective for
financial statements issued for periods ending after December 15, 1997.
Statement 128 establishes standards for computing and presenting earnings per
share ("EPS"), simplifies the standards previously found in APB No. 15,
"Earnings Per Share", and makes them comparable to international EPS standards.
The Company will begin disclosing EPS in accordance with Statement 128 beginning
with the quarter ended December 31, 1997.
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("Statement 130"). Statement 130 is
effective for fiscal years beginning after December 15, 1997. Statement 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Statement 130
requires all items recognized under accounting standards as components of
comprehensive income be reported in a financial statement with equal prominence
as other financial statements. Such statement will be presented by the Company
beginning with the quarter ended December 31, 1998.
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 is effective for periods beginning after
December 15, 1997. Statement 131 establishes standards for the way that public
business enterprises report information about operating segments, based on how
the enterprise defines such segments. The Company is required to report
operating segment information, to the extent such segments are defined,
beginning with the year ended September 30, 1999.
26
<PAGE>
2). Investment and Mortgage-backed Securities
- ------------------------------------------------
The amortized cost and estimated market value of investment and mortgage-backed
securities as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(In thousands)
Available for sale:
<S> <C> <C> <C> <C>
Treasury notes $ 17,982 $ 3 $ --- $ 17,985
FHLB notes 29,500 --- 14 29,486
Other securities 82 --- --- 82
-- --
47,564 3 14 47,553
------ ---- ---- --------
Held to maturity:
FHLB notes 5,000 --- 7 4,993
------ ---- ---- --------- - -----
FHLMC mortgage-backed securities 118,951 1,250 --- 120,201
FNMA mortgage-backed securities 57,903 850 --- 58,753
------ ---- ---- --------- --- ------
176,854 2,100 --- 178,954
------ ---- ---- --------- ----- -------
$229,418 $2,103 $ 21 $231,500
======== ====== ==== ========
</TABLE>
The amortized cost and estimated market value of investment and mortgage-backed
securities as of September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(In thousands)
Available for sale:
<S> <C> <C> <C> <C>
Treasury notes $ 23,457 $ --- $ 110 $ 23,347
FHLB notes 10,000 31 --- 10,031
Other securities 115 --- --- 115
-------- ----- ----- --------
33,572 31 110 33,493
-------- ----- ----- --------
Held to maturity:
FHLB notes 20,000 16 --- 20,016
-------- ----- ----- --------
FHLMC mortgage-backed securities 114,072 --- 333 113,739
FNMA mortgage-backed securities 39,221 328 --- 39,549
-------- ----- ----- --------
153,293 328 333 153,288
-------- ----- ----- --------
$206,865 $ 375 $ 443 $206,797
======== ===== ===== ========
</TABLE>
The amortized cost and estimated market value of debt securities at September
30, 1997 and September 30, 1996 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
27
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
(In thousands)
Available for sale:
<S> <C> <C> <C> <C>
Due in one year or less $ 22,482 $ 22,482 $ 15,505 $ 15,539
Due in one to five years 25,000 24,989 17,952 17,839
Other securities 82 82 115 115
-- -- --- ---
47,564 47,553 33,572 33,493
------ ------ ------ ------
Held to maturity:
Due in one year or less --- --- --- ---
Due in one to five years 5,000 4,993 20,000 20,016
Other securities --- --- --- ---
------ ------ ------ ------
5,000 4,993 20,000 20,016
----- ----- ------ ------
FHLMC mortgage-backed securities 118,951 120,201 114,072 113,739
FNMA mortgage-backed securities 57,903 58,753 39,221 39,549
------ ------ ------ ------
176,854 178,954 153,293 153,288
------- ------- ------- -------
$229,418 $231,500 $206,865 $206,797
======== ======== ======== ========
</TABLE>
There were no realized gains or losses on available for sale securities during
1997. During 1996, gross realized gains and gross realized losses on available
for sale securities were $19,000 and $0, respectively. As of September 30, 1997,
the Company had pledged mortgage-backed securities with a market value of
$493,000 and a carrying value of $481,000 to collateralize the public funds on
deposit. The Company had also pledged mortgage-backed securities with a market
value of $2,040,000 and a carrying value of $1,991,000 to collateralize
Treasury, tax and loan accounts as of September 30, 1997.
28
<PAGE>
3). Loans
- ------------
Loans are summarized below:
1997 1996
---- ----
Mortgage loans: (Dollars in thousands)
Construction 1-4 family $ 47,800 $ 43,994
Permanent 1-4 family 629,906 584,297
Multi-family 15,326 17,804
Nonresidential 54,983 41,970
Land 33,182 29,034
------ ------
Total mortgage loans 781,197 717,099
------- -------
Other loans:
Commercial nonmortgage 11,287 8,199
Home improvement 20,614 20,679
Manufactured housing 16,399 15,784
Other consumer 51,988 44,265
------ ------
Total other loans 100,288 88,927
------- ------
Total loans receivable 881,485 806,026
------- -------
Less:
Loans in process 32,078 26,788
Deferred loan fees and discounts 3,446 3,203
Allowance for loan losses 11,691 11,016
------ ------
47,215 41,007
------ ------
Total loans receivable, net $834,270 $765,019
======== ========
Weighted average yield 8.47% 8.54%
An analysis of the allowance for loan losses follows:
1997 1996 1995
---- ---- ----
(In thousands)
Beginning balance $ 11,016 $ 10,083 $ 9,434
Provision for (recovery of) loan
losses 782 (76) 460
Allowance for loan losses
acquired --- 885 ---
Charge-offs (262) (366) (384)
Recoveries 155 490 573
--- --- ---
Ending balance $ 11,691 $ 11,016 $ 10,083
======== ======== ========
At September 30, 1997 and 1996, loans with unpaid principal balances of
approximately $2,580,000 and $2,172,000, respectively, were 90 days or more
contractually delinquent or on nonaccrual status. Interest income relating to
nonaccrual loans not recognized for the years ended September 30, 1997, 1996,
and 1995 totaled approximately $131,000, $140,000 and $231,000, respectively.
As of September 30, 1997 and 1996, approximately $2,377,000 and $2,081,000,
respectively, of loans 90 days or more contractually delinquent were in the
process of foreclosure.
The investment in impaired loans (primarily consisting of classified loans),
other than those evaluated collectively for impairment, at September 30, 1997
and 1996 was $12,157,000 and $11,053,000, respectively. The average recorded
investment in impaired loans during the years ended September 30, 1997 and 1996
were approximately $12,122,000 and $13,651,000, respectively. The total specific
allowance for loan losses related to these loans was approximately $117,000 and
$174,000, respectively, on September 30, 1997 and 1996. Interest income on
impaired loans of approximately $1,147,000 and $1,346,000 was recognized in the
year ended September 30, 1997 and 1996, respectively.
29
<PAGE>
As of September 30, 1997 and September 30, 1996, mortgage loans which had been
sold on a recourse basis had outstanding principal balances of $3,185,000 and
$4,424,000, respectively.
Accrued interest receivable is summarized below:
1997 1996
---- ----
(In thousands)
Loans $4,874 $4,625
Investment securities 759 676
Mortgage-backed securities 1,261 1,190
FHLB stock dividends 139 130
--- ---
$7,033 $6,621
====== ======
The Company is a party to financial instruments in the normal course of business
to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the statements of condition. The
contract or notional amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial instruments. The
Company uses the same credit policies in making commitments as it does for
on-balance sheet instruments. The Company controls the credit risk of these
transactions through credit approvals, limits, and monitoring procedures. Such
commitments are agreements to lend to a customer as long as there is no
violation of conditions established in the contract. Commitments generally have
fixed expiration dates or other termination clauses. Standby letters of credit
are conditional commitments issued by the Company to guarantee the performance
of a customer to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Company holds collateral supporting those commitments for which
collateral is deemed necessary. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Outstanding mortgage loan commitments (excluding loans in process), which
generally expire in 60 days, amounted to approximately $12,254,000 ($4,226,000
fixed rate, interest rates from 6.5% to 9.5%) as of September 30, 1997. In
addition, as of September 30, 1997, the Company had determined that $16,879,000
may be lent to certain home builders on a variable rate and home-by-home basis,
subject to underwriting and product approval by the Company.
4) Loan Servicing
- ------------------
Mortgage loans, including those underlying pass through securities, serviced for
others are not included in the accompanying consolidated financial statements.
The unpaid principal balances of these loans are summarized as follows:
1997 1996 1995
---- ---- ----
(In thousands)
FHLMC $ 22,888 $ 30,169 $ 39,252
FNMA 34,217 33,521 33,961
Other Investors 2,767 3,547 3,873
----- ----- -----
$ 59,872 $ 67,237 $ 77,086
======== ======== ========
At September 30, 1997 and 1996, collection of principal and interest to be
remitted to FHLMC and FNMA and advance payment for taxes and insurance relating
to FNMA serviced loans are reflected in the consolidated statements of financial
condition as advance deposits by borrowers for taxes and insurance.
30
<PAGE>
5). Real Estate Owned
- --- -----------------
Real estate owned includes the following:
1997 1996
---- ----
(In thousands)
Real estate acquired in satisfaction of loans $ 2,892 $ 4,830
Allowance for losses (578) (1,712)
---- ------
$ 2,314 $ 3,118
======= =======
Activity in the allowance for losses on real estate owned is as follows:
1997 1996 1995
---- ---- ----
(In thousands)
Beginning balance $ 1,712 $ 1,857 $ 2,008
Provision for (reversal of) losses (150) 117 35
Allowance for losses acquired 0 21 ---
Charge-offs (984) (283) (186)
---- ---- ----
Ending balance $ 578 $ 1,712 $ 1,857
======== ======= ========
Provision for losses on real estate owned is included in income (losses) from
real estate operations in the consolidated statements of earnings.
Legal and consulting fees relating to real estate operations and real estate
owned are included in professional fees on the consolidated statements of
earnings.
(6) Premises and Equipment
- --- ----------------------
Premises and equipment are summarized as follows:
1997 1996
---- ----
(In thousands)
Land $ 5,239 $ 3,818
Buildings and leasehold improvements 9,170 7,656
Furniture, fixtures and equipment 8,080 7,518
----- -----
22,489 18,992
Less accumulated depreciation and amortization (9,176) (8,449)
------ ------
$ 13,313 10,543
======== ======
Depreciation expense for the years ended September 30, 1997, 1996 and 1995
totaled $952,000, $902,000, and $729,000, respectively.
31
<PAGE>
(7) Deposits
- ---------------
Deposits are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Period-end Period-end
Amount stated rate Amount stated rate
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial checking $ 22,032 $ 19,653
Noninterest-bearing personal
checking accounts 18,717 13,961
NOW 52,045 1.32% 54,806 1.51%
Passbook 76,540 1.69% 77,304 1.78%
Money market checking 1,492 1.26% 1,625 1.32%
Money market investment 41,909 2.55% 40,936 2.63%
Official checks 9,081 6,661
----- -----
221,816 214,946
------- -------
Certificate accounts:
2.01 - 3.00% 545 307
3.01 - 4.00% --- 1
4.01 - 5.00% 88,472 155,121
5.01 - 6.00% 553,986 378,999
6.01 - 7.00% 46,333 101,780
7.01 - 8.00% 424 603
8.01 - 9.00% --- 3
Premiums on deposits
purchased --- 93
------ --
689,760 636,907
------- -------
$ 911,576 $ 851,853
========= =========
Weighted average interest rate 4.47% 4.41%
==== ====
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows:
1997 1996
---- ----
(In thousands)
Less than one year $467,204 $ 438,168
One to three years 180,702 159,085
Over three years 41,854 39,654
------ ------
$ 689,760 $ 636,907
========= =========
The aggregate amount of certificates of deposit in amounts of $100,000 or more
was approximately $62,006,000 and $56,259,000 at September 30, 1997 and 1996,
respectively. Balances of individual certificates in excess of $100,000 are not
federally insured.
32
<PAGE>
Interest expense on deposits is summarized as follows:
1997 1996 1995
---- ---- ----
(In thousands)
Passbook accounts $ 1,356 $ 1,506 $ 1,718
Now, money market checking, and
money marketinvestment accounts 1,896 1,724 1,782
Certificate accounts 35,892 31,210 26,127
------ ------ ------
$ 39,144 $ 34,440 $ 29,627
======== ======== ========
Early withdrawal penalties for the years ended September 30, 1997, 1996 and 1995
aggregated $205,702, $173,560 and $229,633, respectively, and are netted against
interest expense on certificate accounts.
Accrued interest payable of $145,989 and $145,831 at September 30, 1997 and
1996, respectively, is included in other liabilities.
(8) Short-Term Borrowings
- ----------------------------
At September 30, 1997, short-term borrowings were comprised of $30 million in
advances from the Federal Home Loan Bank (FHLB) due at various dates through
March, 1998, with fixed terms and fixed interest rates of 5.63% to 5.81% and a
$100,000 note payable, maturing January, 1998, relating to the purchase of land.
At September 30, 1996, short-term borrowings were comprised of $25 million in
advances from the Federal Home Loan Bank (FHLB) due at various dates through
February, 1997, with fixed terms and fixed interest rates of 5.58% to 5.94%.
Information concerning short-term borrowings is summarized as follows:
1997 1996
---- ----
(Dollars in thousands)
Average balance during the year $ 29,301 $ 5,997
Average interest rate during the year 5.62% 5.87%
Maximum month-end balance during the year $ 40,000 $ 25,000
(9) Long-Term Debt
- ---------------------
Long-term debt is summarized as follows:
1997 1996
---- ----
(In thousands)
Advances from the Federal Home Loan Bank
(FHLB), due at various dates through
December, 2005, with fixed terms and
fixed interest rates of 5.86% to 6.5% $70,000 $70,000
ESOP Loan, maturing December, 1998 with a
variable interest rate of prime plus .25%,
8.75% at September 30, 1997 375 674
--- ---
$70,375 $ 70,674
======= ========
Pursuant to a collateral agreement with the FHLB, advances are secured by all
stock in the FHLB and a blanket floating lien that requires the Company to
maintain qualifying first mortgage loans as pledged collateral in an amount
equal to, when discounted at 75% of the unpaid principal balances, the advances.
33
<PAGE>
At September 30, 1997 and 1996, the FHLB advances and the ESOP loan have fiscal
year maturity dates as follows:
1997 1996
---- ----
Weighted Weighted
Year ending September 30, Amount average rate Amount average rate
- ------------------------- ------ ------------ ------ ------------
(Dollars in thousands)
1997 $ --- --- $ 299 8.50%
1998 300 8.75% 300 8.50%
1999 75 8.75% 75 8.50%
2000 10,000 6.17% 10,000 6.17%
2001 5,000 6.13% 5,000 6.13%
2002 and after 55,000 6.10% 55,000 6.10%
---- ------ ---- ------ ----
$ 70,375 6.13% $ 70,674 6.14%
======== ==== ======== ====
Other interest expense is summarized as follows:
1997 1996 1995
---- ---- ----
(In thousands)
Advances from the FHLB $ 5,962 $ 4,593 $ 3,546
ESOP loan 49 76 105
Other 4 5 2
- - -
$ 6,015 $ 4,674 $ 3,653
======= ======= =======
(10) Income Taxes
Income tax expense (benefit) on income from continuing operations is summarized
as follows:
1997 1996 1995
---- ---- ----
In thousands
Current:
Federal $ 5,868 $ 5,832 $ 3,766
State 962 965 633
--- --- ---
6,830 6,797 4,399
----- ----- -----
Deferred:
Federal 1,527 (1,170) 1,334
State 254 (195) 225
--- ---- ---
1,781 (1,365) 1,559
----- ------ -----
$ 8,611 $ 5,432 $ 5,958
======= ======= =======
34
<PAGE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at September 30, 1997 and 1996 are as
follows:
1997 1996
---- ----
(In thousands)
Deferred tax assets:
Allowance for bad debts $ 1,713 $ 1,440
Valuation of real estate owned 626 704
Deferred compensation 692 681
SAIF special assessment --- 1,929
Other 71 71
-- --
3,102 4,825
Less valuation allowance (250) (250)
---- ----
Total deferred tax assets 2,852 4,575
----- -----
Deferred tax liability:
Net deferred loan fees and costs 3,332 3,333
FHLB stock dividend 840 840
Premises and equipment depreciation
difference 447 355
Purchase accounting adjustments 360 350
Cash to accrual adjustment 88 132
Installment sales 128 128
Other 17 16
-- --
Total deferred tax liability 5,212 5,154
----- -----
2,360 579
Unrealized loss on available for sale
securities (3) (29)
-- ---
Net deferred tax liability 2,357 550
Less liability at beginning of year (550) (2,055)
Deferred tax asset acquired from Treasure Coast
Bank --- 111
Change in unrealized loss on available for sale
securities (26) 29
--- --
Provision (benefit) for deferred income taxes $ 1,781 $ (1,365)
======= ========
Income tax expense on income from continuing operations is different than the
amount computed by applying the United States Federal income tax rate of 34% to
income from continuing operations before income taxes because of the following:
1997 1996 1995
---- ---- ----
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State income tax (net of Federal income tax 3.6 3.6 3.6
benefit)
Other 1.7 1.0 ---
--- --- ---
Effective tax expense rate 39.3% 38.6% 37.6%
==== ==== ====
Deferred income taxes payable of approximately $2,357,000 and $550,000 at
September 30, 1997 and 1996, respectively, are included in other liabilities.
Included in deferred income taxes payable at September 30, 1996 is a net
deferred tax asset of approximately $110,000 acquired from Treasure Coast Bank,
FSB (see note 17).
35
<PAGE>
Retained earnings at September 30, 1997 includes approximately $14,500,000 base
year tax bad debt reserve for which no deferred Federal and state income tax
liability has been recognized. These amounts represent an allocation of income
to bad debt deductions for tax purposes only. Reduction of amounts so allocated
for purposes other than tax bad debt losses or adjustments arising from
carryback of net operating losses would create income for tax purposes only,
which would be subject to the then current corporate income tax rate. The
unrecorded deferred income tax liability on the above amounts was approximately
$5,600,000 at September 30, 1997.
(11) Regulatory Matters
- ---- ------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
adjusted tangible assets (as defined). Management believes, as of September 30,
1997, that the Bank meets all capital adequacy requirements to which it is
subject.
As of September 30, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
36
<PAGE>
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
Dollars in thousands
To be well capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purpose Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997
Total Capital (to risk-
weighted assets) $89,721 15.15% $47,371 > 8.0% $59,213 >10.0%
Tier I Capital (to risk-
weighted assets) 82,269 13.89% 23,685 > 4.0% 35,528 > 6.0%
Tier I Capital (to
adjusted tangible
assets) 82,269 7.29% 33,842 > 3.0% 56,404 > 5.0%
Tangible Capital (to
adjusted tangible
assets) 82,269 7.29% 16,921 > 1.5% n/a n/a
As of September 30, 1996
Total Capital (to risk-
weighted assets) 87,890 16.13% 43,593 > 8.0% 54,492 >10.0%
Tier I Capital (to risk-
weighted assets) 81,030 14.87% 21,797 > 4.0% 32,695 > 6.0%
Tier I Capital (to
adjusted tangible
assets) 81,030 7.69% 31,609 > 3.0% 52,682 > 5.0%
Tangible Capital (to
adjusted tangible 81,030 7.69% 15,805 > 1.5% n/a n/a
assets)
</TABLE>
The following is a reconciliation of the Bank's capital under generally accepted
accounting principles (GAAP) to regulatory capital (in thousands):
37
<PAGE>
<TABLE>
<CAPTION>
Equity Tangible Risk-based
capital capital capital
------- ------- -------
September 30, 1997
<S> <C> <C> <C>
GAAP capital/equity capital $ 85,307 $ 85,307 $ 85,307
Unrealized loss on investment ========
securities available for sale, net 7 7
Goodwill (3,045) (3,045)
General valuation allowance --- 7,452
-------- -----
Regulatory capital measure $ 82,269 $ 89,721
======== ========
September 30, 1996
GAAP capital/equity capital $ 84,832 $ 84,832 $ 84,832
Unrealized loss on investment ========
securities available for sale, net 49 49
Investment in and advance to
nonincludable subsidiary required
to be deducted (264) (264)
Goodwill (3,587) (3,587)
General valuation allowance --- 6,860
-------- -----
Regulatory capital measure $ 81,030 $ 87,890
======== ========
September 30, 1995
GAAP capital/equity capital $ 77,500 $ 77,500 $ 77,500
General valuation allowance ======== --- 5,773
-------- -----
Regulatory capital measure $ 77,500 $ 83,273
======== ========
</TABLE>
At September 30, 1997, $8,361,000 of retained earnings is restricted relating to
the dividends on the Company's shares owned by the Holding Company which have
been waived. The dividend waiver was approved by the OTS and is available only
to the Holding Company. The dividend will be accrued only when the payment of
such amount is probable.
In the unlikely event of a complete liquidation of the Mutual Holding Company in
its present mutual form, each depositor of the Bank would receive his pro rata
share of any assets of the Mutual Holding Company remaining after payment of
claims of all creditors. Each depositor's pro rata share of such remaining
assets would be in the same proportion as the value of his deposit account was
to the total value of all deposit accounts in the Bank at the time of
liquidation.
The Certificate of Incorporation of the Company provides that in no event shall
any record owner of any outstanding Common Stock which is beneficially owned,
directly or indirectly, by a person who beneficially owns in excess of 10% of
the then outstanding shares of Common Stock (the "Limit") be entitled or
permitted to any vote in respect of the shares held in excess of the Limit.
The Company has authorized but not issued preferred stock, subject to regulatory
restrictions and determination of rights and preferences to be determined by the
Board of Directors.
38
<PAGE>
On September 30, 1996, President Clinton signed The Deposit Insurance Funds Act
of 1996, which was intended to recapitalize the Savings Association Insurance
Fund ("SAIF") and substantially bridge the assessment rate disparity existing
between SAIF and Bank Insurance Fund insured institutions. The new law subjected
institutions with SAIF-assessable deposits, including the Bank, to a one-time
assessment of 65.7 basis points of assessable deposits as of March 31, 1995, and
provides for, among other things, a sharing of FICO bond obligation fundings by
banks and thrifts and the eventual merger of the Bank Insurance Fund with the
SAIF. The Bank's one-time assessment resulted in a pre-tax charge of
approximately $4,552,000, which was paid on November 27, 1996 and, under
provisions of the new law, was treated for tax purposes as a fully deductible
"ordinary and necessary business expense" when paid. Results of operations for
the year ended September 30, 1996 include a charge for this one-time assessment.
Additionally, the Bank recorded a pre-tax charge of approximately $450,000
related to the application of this assessment to deposits held by Treasure Coast
(see note 17) at March 31, 1995. Such charge was reflected as a cost of the
acquisition of Treasure Coast.
(12) Commitments and Contingencies
- ---- -----------------------------
As of September 30, 1997, the Company had irrevocable letters of credit
aggregating approximately $501,000.
The Company and certain other entities are defendants in a class action lawsuit
which was filed in May 1991. The plaintiffs in the litigation are purchasers of
parcels of developed and undeveloped land from General Development Corporation
("GDC") who allege that GDC, through fraudulent means, induced them to buy land
at inflated values. The Company is a defendant in this matter along with a
number of other financial institutions, purchasers of loans in the secondary
market, broker dealers, an insurance company and numerous other individuals and
companies. The involvement of the Company arises from its purchase from GDC of
land sales contracts originated by GDC. The Company, along with the other
defendants, filed a motion to dismiss the case which was granted. The plaintiffs
filed an appeal with the Third Circuit Court of Appeals which remanded the case
to the District Court for reconsideration. The District Court entered its order
dismissing the case again.
The plaintiffs filed a motion requesting the District Court to amend the
dismissal order to permit the plaintiffs to file another amended complaint. The
District Court denied the plaintiff's motion. The plaintiffs appealed that order
to the Third Circuit and both sides were directed to submit supplementary
briefs. Management believes that the position of the plaintiffs is without
merit.
The Company and subsidiaries are defendants in certain other claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial statements of the Company and subsidiaries.
(13) Related Party Transactions
- ---------------------------------
Directors, executive officers and principal stockholders of the Company had
certain transactions with the Company in the ordinary course of business, as
described below.
Loan transactions were made on substantially the same terms as those prevailing
at the time for comparable loans to other persons, did not involve more than
normal risk of collectibility, and are performing as agreed.
The summary of changes in the related party loans follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Outstanding loans - beginning of year $ 1,786 $ 1,478 $ 1,386
New loans 3,015 842 176
Repayments (2,517) (534) (84)
------ ---- ---
Outstanding balance - end of year $ 2,284 $ 1,786 $ 1,478
======= ======= =======
</TABLE>
The Company paid approximately $150,000, $125,000 and, $159,000 of legal fees in
the years ended September 30, 1997, 1996 and 1995, respectively, to a law firm
in which a director of the Company is a partner.
39
<PAGE>
Richard K. Davis, a director of the Company, is also chairman of Richard K.
Davis Construction Corp ("Davis Construction"). In the years ended September 30,
1997 and 1996, the Company paid Davis Construction a total of $27,057 and
$76,887, respectively, for a roof on a new branch facility and re-roofing of
existing branch facilities. Additionally, Davis Construction is currently
constructing a new office and drive-in facility for the Company. This contract,
worth $905,499, was awarded June 25, 1997. The contract was put out for
competitive bid and was awarded to Davis Construction because it submitted the
lowest bid for the contract. During 1997, total payments related to this
contract were $216,795.
Prior to Richard N. Bird's nomination, and subsequent election, to the Board of
Director's of the Company, Bird Realty Group, Inc. entered into a listing
agreement with the Company on property listed at $3,895,000. The commission
related to the sale could be up to 6% of the selling price if Bird Realty also
becomes the selling broker. The listing expires on December 16, 1997. A
commission of $25,000 was also paid to Bird Realty during 1997 with regard to
the sale of property.
(14) Other Expense
- --------------------
Other expense consists of the following:
Dollars in thousands
1997 1996 1995
---- ---- ----
Data processing $ 1,188 $ 1,092 $ 994
Advertising 942 735 622
Postage 364 294 252
Insurance 162 214 216
Telephone 280 265 252
OTS assessment 212 190 171
Other 1,639 1,193 1,097
----- ----- -----
$ 4,787 $ 3,983 $ 3,604
======= ======= =======
(15) Disclosures About Fair Value of Financial Instruments
- ------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Amounts Due From Depository Institutions, Interest-Bearing Assets in
Other Banks and Federal Funds Sold - The carrying amount of these assets is a
reasonable estimate of their fair value.
Investment Securities and Mortgage-Backed Securities Held to Maturity - Fair
value equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Investment Securities Available for Sale - Fair value equals carrying value.
Loans - The fair value of loans is estimated by discounting future cash flows
using the current rate at which similar loans would be made to borrowers with
similar credit ratings for the same remaining maturities.
Deposits - The fair value of demand deposits, interest-bearing checking
accounts, savings and money market deposits is the amount payable on demand at
the reporting date. The fair value of certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining maturities.
Short and Long Term Advances from the FHLB - Rates currently available to the
Company for FHLB advances with similar terms and remaining maturities are used
to estimate the fair value of FHLB advances.
ESOP Loan - The carrying amount of the ESOP loan is a reasonable estimate of
fair market value.
Commitments to Extend Credit and Standby Letters of Credit - The fair value of
commitments is insignificant.
The estimated fair values of the Company's financial instruments at September
30, 1997 and 1996 are as follows:
40
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets: (In thousands)
Cash and amounts due from depository
institutions $ 16,899 $ 16,899 $ 16,137 $ 16,137
Interest-bearing deposits in other banks 15,736 15,736 16,350 16,350
Federal funds sold 250 250 16,075 16,075
Investment securities held to maturity 5,000 4,993 20,000 20,016
Investment securities available for sale 47,553 47,553 33,493 33,493
Mortgage-backed securities held to
maturity 176,854 178,954 153,293 153,288
Loans held for sale 141 144 4,870 4,870
Loans 845,961 858,944 776,035 776,346
Less allowance for loan losses (11,691) --- (11,016) ---
------- ------- -------
Loans, net 834,270 858,944 765,019 776,346
------- ------- ------- -------
Liabilities
Commercial checking, non-interest-
bearing personal, NOW, passbook,
money market accounts and official
checks 221,816 221,816 214,946 214,946
Certificate accounts 689,760 691,406 636,907 638,592
FHLB advances 100,000 98,887 95,000 91,882
ESOP loan 375 375 674 674
</TABLE>
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(16) Benefit Plans
- --------------------
The Company has a noncontributory-defined benefit pension plan covering all
employees who have attained one year of service and 21 years of age. Pension
expense was $8,500, $7,400, and $8,500, respectively, for the years ended
September 30, 1997, 1996 and 1995. The plan is a multi-employer plan. Separate
actuarial valuations are not made for each employer nor are plan assets so
segregated. The assumed average rate of return used in determining the actuarial
present value of accumulated plan benefits was 7.5%. The date of the most recent
actuarial evaluation is June 30, 1996.
41
<PAGE>
The Company has a deferred compensation plan for Directors (the "Directors'
Deferred Compensation Plan") who may elect to defer all or part of their annual
director fees to fund the Directors' Deferred Compensation Plan. The plan
provides that deferred fees are to earn interest at an annual rate equal to the
30-month certificate of deposit rate, adjusted and compounded quarterly. At
September 30, 1997 and 1996, deferred directors fees included in other
liabilities aggregated $195,069 and $309,790, respectively. Directors may elect
to have their deferred compensation balance invested in shares of the Company's
common stock. When the Company purchases common stock in the open market to fund
such investment, these purchases are reflected as a reduction in stockholders'
equity. Such purchases were approximately $273,000 and $238,000 in 1997 and
1996, respectively. No shares were purchased in 1995.
The Company also has a retirement plan for nonemployee directors (the "Plan").
The annual basic benefit under the Plan is based on a percentage of the average
three years director's fees preceding the termination of service multiplied by
the number of years of service, not to exceed 50% of the average annual
director's fees. During the years ended September 30, 1997, 1996 and 1995, the
charge to earnings relating to the Plan was insignificant.
As part of the reorganization to the stock form of ownership, the Company's
Employee Stock Ownership Plan ("ESOP") purchased 149,800 shares of the Company's
common stock at $10 per share, or $1,498,000, which was funded by a loan from an
unaffiliated lender. The ESOP covers all eligible employees of the Company age
21 and over. The Company makes scheduled cash contributions to the ESOP
sufficient to service the amount borrowed. Dividends paid on unallocated shares
reduce the Company's cash contribution to the ESOP. For the years ended
September 30, 1997 and 1996, total contributions to the ESOP, which were used to
fund principal and interest payments on the ESOP debt, totaled approximately
$259,000 and $375,000, respectively. At September 30, 1997, there were 95,356
allocated shares, 22,485 shares committed to be released, and 37,435
suspense(unallocated and not yet committed to be released) shares held by the
ESOP. Allocated shares and shares committed to be released are included in the
weighted average common shares outstanding used to compute earnings per share.
Total compensation expense charged to earnings in the years ended September 30,
1997 and 1996, totaled $1,165,500 and $766,500, respectively. At September 30,
1997, the fair value of the unallocated shares was $3,355,520.
Additionally, the Company's Recognition and Retention Plans ("RRP") purchased
64,200 shares at $10 per share totaling $642,000. The funds used to acquire the
RRP shares were contributed by the Company. The purchase price of $642,000 will
be amortized as compensation expense ratably over the participants' vesting
period of three years.
The Company's 401(k) Profit Sharing Plan and Trust (the "401(k) Plan") covers
all eligible employees of the Company age 21 and over. An eligible employee may
elect to contribute to the 401(k) Plan in the form of deferrals of between 1%
and 15% of the total compensation that would otherwise be payable to the
employee. Employee contributions are fully vested and nonforfeitable at all
times. The 401(k) Plan permits contributions by the Company. The Company intends
initially to make matching contributions of 25% of the first 6% of each
participant's contributions. For the years ended September 30, 1997 and 1996,
the Company's matching contribution totaled approximately $83,000 and $75,000,
respectively.
At September 30, 1997, the Company had a stock option plan for the benefit of
directors, officers, and other key employees of the Company. The Company applies
APB Opinion 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock option
plan since stock option exercise prices are equal to market price at date of
grant. The number of shares of common stock reserved for issuance under the
stock option plan is equal to 214,000 shares, or 9.6% of the total number of
common shares issued in the minority offering pursuant to the Company's
reorganization to the stock form of ownership. The stock options vest in equal
installments over varying periods not to exceed 10 years, depending upon the
individual's position in the Company.
42
<PAGE>
A summary of the Company's stock option plan is presented below:
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
average average average
exercise exercise exercise
Number price Number price Number price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
beginning of year 170,106 $10.73 191,569 $10.25 208,660 $10.00
Options granted 4,500 $34.47 4,500 $27.00 7,400 $16.50
Options exercised (38,974) $10.00 (23,463) $10.00 (16,791) $10.00
Options forfeited (1,334) $18.95 (2,500) $10.00 (7,700) $10.00
------ ------ ------ ------ ------ ------
Options outstanding end of year 134,298 $11.66 170,106 $10.73 191,569 $10.25
======= ====== ======= ====== ======= ======
Options exercisable at year-end 50,264 34,913 20,792
====== ====== ======
Weighted average fair value of
options granted during the year $ 7.38 $ 6.60
====== ======
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Weighted
Number average Weighted Number Weighted
Range of outstanding @ remaining average exercise exercisable @ average exercise
exercise prices 9/30/97 contractual life price 9/30/97 price
--------------- ------- ---------------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
$10.00 118,398 6.1 $10.00 50,264 $10.00
$16.50 7,400 7.2 $16.50 --- ---
$27.00 4,500 8.1 $27.00 --- ---
$33.88 to 34.00 3,500 9.1 $33.98 --- ---
$38.25 to 40.75 500 9.6 $38.50 --- ---
</TABLE>
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with Statement 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below:
1997 1996
---- ----
Net income As reported $ 13,327 $ 8,640
Pro forma 13,294 8,611
Net income
per share As reported 2.66 1.75
Pro forma 2.66 1.74
Only options granted after October 1, 1995 are included in pro-forma amounts.
43
<PAGE>
The option method used to calculate the Statement 123 compensation adjustment
was the Binomial model with the following grant date fair values and
assumptions:
<TABLE>
<CAPTION>
Number of
Date of options Grant date Exercise Risk free Expected Expected Expected
grant granted fair value price interest rate life (years) volatility dividend
----- ------- ---------- ----- ------------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
01/06/96 4,500 $ 6.60 $ 27.00 5.421% 5 38.71 $ 1.60
11/27/96 1,000 7.27 33.88 5.912 5 29.89 1.80
01/06/97 3,000 7.13 34.00 6.291 5 28.33 1.80
06/16/97 450 9.01 38.25 6.276 5 30.71 1.90
06/20/97 50 10.05 40.75 6.271 5 31.11 1.90
</TABLE>
(17) Acquisition of Treasure Coast
- ------------------------------------
On June 1, 1996, the Company acquired all of the outstanding common stock of
Treasure Coast Bank, FSB ("Treasure Coast"), a Florida based bank, for
approximately $6.8 million in cash. The acquisition was accounted for using the
purchase method. Treasure Coast had assets of approximately $75 million. The
acquisition added one branch to the Company's branch network. The results of
operations of Treasure Coast from June 1, 1996 to September 30, 1996 are
included in the consolidated financial statements of the Company.
The fair value of assets acquired and liabilities assumed in conjunction with
the acquisition of Treasure Coast was as follows:
(In thousands)
Cash $ 2,315
Investments 7,039
Mortgage-backed securities 287
Loans receivable, net 62,575
Accrued interest receivable 437
Real estate owned 86
Property and equipment 1,778
Goodwill 3,365
Other assets 542
Fair value of assets acquired 78,424
Deposits 70,239
Other liabilities 1,712
Fair value of liabilities assumed 71,951
Acquisition costs 293
Purchase of Treasure Coast 6,766
Cash acquired 2,315
Purchase of Treasure Coast,
net of cash acquired $ 4,451
44
<PAGE>
The following table indicates the estimated net decrease in earnings resulting
from the net amortization/accretion of the adjustments, including goodwill,
resulting from the use of the purchase method of accounting during each of the
years 1997 through 2001. The amounts (in thousands) assume no sales or
dispositions of the related assets or liabilities.
Net
decrease of
Years ending September 30, net earnings
- -------------------------- ------------
1997 (232)
1998 (325)
1999 (325)
2000 (298)
2001 (245)
Thereafter (2,364)
Adjustments to fair value are being amortized on a straight-line basis, which
approximates the level yield method, over the estimated average term of four
years for loans, and one year for deposits. Goodwill does not qualify for
amortization for tax purposes. Goodwill is being amortized on a straight-line
basis over its estimated useful life of 15 years. Goodwill as of September 30,
1997 is $3.0 million.
The following is pro forma information for the years ended September 30, 1996
and 1995 as if the Treasure Coast purchase was consummated on October 1, 1995
and 1994, respectively (in thousands, except for per share data), after giving
effect to certain adjustments, including amortization of goodwill and other
purchase accounting adjustments, and interest income assumed foregone on the
funding of the acquisition:
<TABLE>
<CAPTION>
For the year ended For the year ended
September 30, 1996 September 30, 1995
------------------ ------------------
Historical Pro forma Historical Pro forma
---------- --------- ---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income $ 74,357 $ 77,840 $ 64,885 $ 69,855
Interest expense 39,114 41,214 33,281 36,411
Provision for (recovery of) loan losses (76) 510 460 536
Net interest income after provision for loan
losses 35,319 36,116 31,144 32,908
Net income 8,640 7,971 9,895 9,748
Net income per share $ 1.75 $ 1.61 $ 2.03 $ 2.00
</TABLE>
These pro forma results may not be representative of the actual results that
would have occurred or may occur in the future.
45
<PAGE>
(18) Quarterly Results of Operations (Unaudited)
- --------------------------------------------------
The quarterly results of operations for the years ended September 30, 1997 and
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended Fiscal 1997
September 30 June 30 March 31 December 31
------------ ------- -------- -----------
<S> <C> <C> <C> <C>
Interest income $ 22,009 $ 21,554 $ 20,723 $ 20,528
Interest expense 11,777 11,447 11,002 10,932
Net interest income 10,232 10,107 9,721 9,596
Provision for loan losses 326 205 126 125
Net interest income after
provision for loan losses 9,906 9,902 9,595 9,471
Total other income 1,318 1,041 860 994
Total other expenses 5,442 5,318 5,106 5,282
Income before income taxes $ 5,782 $ 5,625 $ 5,349 $ 5,183
Net income $ 3,510 $ 3,416 $ 3,301 $ 3,101
Net income per share (1) $ 0.70 $ 0.68 $ 0.66 $ 0.62
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended Fiscal 1996
September 30 June 30 March 31 December 31
<S> <C> <C> <C> <C>
Interest income $ 19,885 $ 18,618 $ 18,221 $ 17,632
Interest expense 10,461 9,754 9,471 9,428
Net interest income 9,424 8,864 8,750 8,204
Provision for loan losses 72 (19) 28 (158)
Net interest income after
provision for loan losses 9,352 8,883 8,722 8,362
Total other income 744 562 827 752
Total other expenses (2) 9,481 4,857 5,057 4,737
Income before income taxes $ 615 $ 4,588 $ 4,492 $ 4,377
Net income $ 390 $ 2,807 $ 2,736 $ 2,707
Net income per share (1) $ 0.08 $ 0.57 $ 0.55 $ 0.55
</TABLE>
(1) Net income per share was computed by dividing net income by the weighted
average number of shares of common stock outstanding during the quarters.
Adjustments have been made, where material, to give effect to the shares
that would be outstanding, assuming the exercise of dilutive stock options,
all of which are considered common stock equivalents.
(2) The quarter ended September 30, 1996 amounts include a one time SAIF
assessment of $4,552,000.
(19) Subsequent Event
- ---------------------
On August 27, 1997, the Company announced that the Board of Directors of their
Mutual Holding Company, Harbor Financial, M.H.C., has determined to convert the
Mutual Holding Company to a capital stock corporation. Upon completion of the
Conversion, the Mutual Holding Company will cease to exist. Pursuant to the Plan
of Conversion, shares of Harbor Florida Bancorp, Inc. previously held by the
Mutual Holding Company will be sold. The remaining shares will be sold in
subscription and community offerings. The Conversion is expected to be completed
in the first calendar quarter of 1998.
46
<PAGE>
Direct costs of the sale of stock, if completed, will be recorded as a reduction
in proceeds from the sale of stock and applied to paid in capital. If the sale
of stock is not completed, such costs will be charged to expense. At September
30, 1997, $30,000 of such costs had been incurred and were included in other
assets on the balance sheet.
The Plan of Conversion provides for the establishment, upon the completion of
the Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the amount of any dividends waived by the Mutual Holding Company plus the
greater of (1) 100% of the Bank's retained earnings of $34.5 million at
September 30, 1992, the date of the latest balance sheet contained in the final
offering circular utilized in the Bank's initial public offering in the Mutual
Holding Company Reorganization, or (2) 53.41% of the Bank's total stockholders'
equity as reflected in its latest balance sheet contained in the final
Prospectus utilized in the Offerings plus the amounts distributed to the
mid-tier holding company by the Bank at the formation of the Mid-tier Holding
Company. Each eligible Account Holder and Supplemental Eligible Account Holder,
if such person were to continue to maintain such person's deposit account at the
Bank, would be entitled, upon a complete liquidation of the Bank after the
conversion, to an interest in the liquidation account prior to any payment to
the Company as the sole stockholder of the Bank.
For a period of one year after the date of the Conversion, total dividends paid
to stockholders must not exceed the net income of the Company during the one
year period.
Pursuant to OTS regulations, certain restrictions will be imposed upon
directors, executive officers and their associates, and the Company with respect
to stock purchases for the period following completion of the Conversion.
47
