UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
----------
FORM 10-K
(MARKONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 000-22817
HARBOR FLORIDA BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0813766
(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 $0.10)
------------------------------
(TITLE OF CLASS)
------------------------------
(TITLE OF CLASS)
<PAGE>
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 7, 1998 ($11.00) was $340,100,662.
The number of shares of common stock outstanding on December 7, 1998
was 30,918,242.
Documents incorporated by reference:
1. Annual Report to Stockholders for the fiscal year ended September 30,
1998 (Parts II and III).
2. Proxy Statement for the 1999 Annual Meeting of Stockholder's (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...............23
PART II
5 Market for Registrant's Common Equity and
Related Stockholder Matters................................. 23
6 Selected Financial Data...........................................23
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................24
7A Quantitative and Qualitative Disclosures about Market Risk........24
8 Financial Statements and Supplementary Data.......................24
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................25
PART III
10 Directors and Executive Officers of the Registrant................25
11 Executive Compensation............................................25
12 Security Ownership of Certain Beneficial Owners and Management....25
13 Certain Relations and Related Transactions........................25
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..26
HARBOR FLORIDA BANCSHARES, INC.
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Harbor Florida Bancshares, Inc. (the "Company" or "Bancshares") is the
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. Consequently, its
net income is derived from the Bank. The Bank provides a wide range of banking
services and 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.
Prior to March 18, 1998, the Company's predecessor entity, Harbor
Florida Bancorp, Inc. ("Bancorp"), was owned approximately 53.37% by Harbor
Financial M.H.C. ("Mutual Holding Company") and 46.63% by public shareholders.
On March 18, 1998, pursuant to a plan of conversion and reorganization, and
after a series of transactions: (1) a new entity, Bancshares, became the
surviving corporate entity, (2) Bancshares sold the ownership interest in
Bancorp previously held by the Mutual Holding Company to the public in a
subscription offering (the "Offering") (16,586,752 common shares at $10.00
resulting in net cash proceeds after costs and funding the ESOP (note 17) of
approximately $150 million), (3) previous public shareholders of Bancorp had
their shares exchanged into 14,112,400 common shares of Bancshares (exchange
ratio of 6.0094 to 1) (the "Exchange"), and (4) the Mutual Holding Company
ceased to exist. The total number of shares of common stock outstanding
following the Offering and Exchange was 30,699,152. The reorganization was
accounted for in a manner similar to a pooling of interests and did not result
in any significant accounting adjustments. As a result of the reorganization,
the consolidated financial statements for prior periods have been restated to
reflect the changes in the par value of common stock from $.01 to $.10 per share
and in the number of authorized shares of common stock from 13,000,000 to
70,000,000.
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 resulted in the
addition of 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.
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 sixteen 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 five
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 four 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
HARBOR FLORIDA BANCSHARES, INC.
2
<PAGE>
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 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.
<TABLE>
<CAPTION>
September 30,
-------------
1998 1997 1996
------ ------ -----
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..... $ 66,671 6.62% $ 47,800 5.42% $ 43,994 5.46%
Permanent 1 - 4 Family........ 707,078 70.26 629,906 71.46 584,297 72.49
Multifamily................... 11,074 1.10 15,326 1.74 17,804 2.21
Nonresidential................ 84,254 8.37 54,983 6.24 41,970 5.21
Land.......................... 27,562 2.75 33,182 3.76 29,034 3.60
-------- -------- -------- -------- -------- --------
Total Mortgage Loans...... 896,639 89.10 781,197 88.62 717,099 88.97
------- ------- ------- ------- ------- -------
OTHER LOANS
Commercial Nonmortgage........ 15,074 1.50 11,287 1.28 8,199 1.02
Consumer:
Home Improvement.......... 19,016 1.89 20,614 2.34 20,679 2.56
Manufactured Housing...... 16,418 1.63 16,399 1.86 15,784 1.96
Other Consumer (1)........ 59,223 5.88 51,988 5.90 44,265 5.49
-------- -------- -------- -------- -------- --------
Total Other Loans......... 109,731 10.90 100,288 11.38 88,927 11.03
-------- ------ -------- ------- -------- -------
Total Loans Receivable........ 1,006,370 100.00% 881,485 100.00% 806,026 100.00%
--------- ====== ------- ====== ------- ======
LESS:
Loans in process.............. 46,152 32,078 26,788
Deferred loan fees and
discounts................. 3,700 3,446 3,203
Allowance for loan losses..... 11,818 11,691 11,016
-------- -------- --------
Subtotal.................. 61,670 47,215 41,007
-------- -------- --------
TOTAL LOANS RECEIVABLE,
NET...................... 944,700 834,270 765,019
------- ------- -------
LOANS HELD FOR SALE........... 714 141 4,870
-------- -------- --------
MORTGAGE-BACKED
SECURITIES................ 201,049 176,854 153,293
------- ------- -------
TOTAL......................... $1,146,463 $1,011,265 $923,182
========== ========== ========
</TABLE>
- ------------
(1) Includes home equity and other second mortgage loans.
---------------
HARBOR FLORIDA BANCSHARES, INC.
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, 1998.
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 $246.4, $163.0, and $143.5 million for
fiscal years 1998, 1997 and 1996, 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 Five
Within through through through Ten through Beyond
one year three years five years ten years twenty years twenty years Total
-------- ----------- ---------- --------- ------------------------- -----
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
Permanent 1 - 4 family.... $153,039 $40,388 $70,525 $47,807 $202,113 $221,954 $735,826
Other..................... 39,944 9,137 29,039 15,043 19,603 729 113,495
Other loans:
Consumer ................. 27,120 12,347 24,706 24,977 5,369 --- 94,519
Commercial ............... 8,392 342 2,848 1,197 26 1,976 14,781
Nonperforming loans (1)..... 2,311 --- --- --- --- --- 2,311
Mortgage-backed
securities.............. 32,986 8,881 13,933 89,599 55,211 439 201,049
-------- ------ ------- ------- ------- -------- --------
Sub-total............... $263,792 $71,095 $141,051 $178,623 $282,322 $225,098 $1,161,981
======== ======= ======== ======== ======== ========
Deferred loan fees and
discounts............... (3,700)
Allowance for loan
losses.................. (11,818)
---------
Total (2)(3)................ $1,146,463
==========
</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
$714,000 at September 30, 1998.
--------------
The following table sets forth the amount of fixed-rate and
adjustable-rate loans at September 30, 1998 due after September 30, 1999.
Adjustable
Fixed Rate Rate Total
(In thousands)
Mortgage loans:
Permanent 1 - 4 family..... $464,484 $118,303 $582,787
Other...................... 39,772 33,779 73,551
Other loans:
Consumer .................. 67,399 --- 67,399
Commercial ................ 6,389 --- 6,389
--------- --------- ---------
Total loans.................. 578,044 152,082 730,126
Mortgage-backed securities... 168,063 --- 168,063
-------- --------- --------
Total........................ $746,107 $152,082 $898,189
======== ======== ========
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
HARBOR FLORIDA BANCSHARES, INC.
4
<PAGE>
family residential loans on properties outside of its market area. At September
30, 1998, $707.1 million or 70.26% of the Company's total loan portfolio and
52.35% 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 small portion of newly originated 30 year fixed rate
mortgage loans. 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 $750,000 or by
committee if above $750,000. 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 agencies) 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, 1998 the Company had
$66.7 million in such loans, representing 6.62% 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. 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. However, 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.
HARBOR FLORIDA BANCSHARES, INC.
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, 1998, consumer-oriented loans accounted for $94.7 million or 9.4%
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 $38.3
million, $18.3 million, and $12.9 million of non-residential mortgage loans in
1998, 1997 and 1996, respectively. At September 30, 1998, nonresidential loans
constituted 8.37%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, 1998 these loans accounted for
$14.9 million or 1.48% 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, 1998
these loans represented $11.0 million or 1.10% and $15.1 million or 1.50%,
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 small portion of newly originated 30 year fixed rate
mortgage loans. 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.
HARBOR FLORIDA BANCSHARES, INC.
6
<PAGE>
The following table shows total loan origination activity including
mortgage-backed securities, during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
=====================================
1998 1997 1996
---- ---- ----
(In thousands)
MORTGAGE LOANS (GROSS):
<S> <C> <C> <C>
At beginning of year (1)............. $781,341 $722,435 $596,478
Mortgage loans originated:
Construction 1-4 Family............ 83,429 63,237 59,000
Permanent 1-4 Family............... 173,758 84,853 85,853
Multi-family....................... 605 2,526 2,935
Nonresidential..................... 38,260 18,302 12,941
Land............................... 11,313 12,264 13,384
------- ------- -------
Total mortgage loans originated (2).. 307,365 181,182 174,113
Mortgage loans acquired (3).......... --- --- 60,482
Mortgage loans sold.................. (9,125) (8,583) (4,653)
Principal repayments................. (179,354) (111,255) (101,359)
Mortgage loans transferred to real
estate owned....................... (2,864) (2,438) (2,626)
--------- --------- ---------
At end of year....................... $897,363 $781,341 $722,435
======== ======== ========
OTHER LOANS (GROSS):
At beginning of year................. $ 100,288 $ 88,927 $ 73,760
Other loans originated............... 77,044 63,406 52,702
Loans acquired (3)................... --- --- 4,468
Principal repayments................. (67,601) (52,045) (42,003)
------- -------- --------
At end of year....................... $109,731 $100,288 $ 88,927
======== ======== ========
MORTGAGE-BACKED SECURITIES (GROSS):
At beginning of year................. $176,854 $153,293 $164,759
Mortgage-backed securities purchased. 100,222 61,769 29,265
Principal repayments................. (76,027) (38,208) (40,731)
-------- -------- --------
At end of year....................... $201,049 $176,854 $153,293
======== ======== ========
</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.
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, 1998,
the Company's portfolio of mortgage-backed securities consisted entirely of
FHLMC and FNMA participation certificates. Of the $201.0 million in
mortgage-backed securities at that date, approximately $23.0 million or 11%
represented adjustable-rate securities and $178.0 million or 89% represented
fixed-rate securities with anticipated maturity dates from 3 months to 28 years.
HARBOR FLORIDA BANCSHARES, INC.
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 September 30, 1998, long-term,
fixed-rate mortgage-backed securities amounted to $70.1 million and five-year
and seven-year balloon mortgage-backed securities amounted to $32.6 million and
$75.3 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 for dealing with delinquent loans.
Residential delinquencies are handled by the Loan Collections Department.
This department begins collection 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, 1998, residential loans delinquent 90 days and
longer represented 0.10% 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.
HARBOR FLORIDA BANCSHARES, INC.
8
<PAGE>
The following table shows the Company's loans delinquent 90 days or more
at the dates indicated.
September 30,
1998 1997 1996
------ ------ ------
(Dollars in thousands)
Number Amount Number Amount Number Amount
Mortgage loans:
Construction and land.... --- $ --- 2 $ 162 2 $ 98
Permanent 1 - 4
family................. 19 778 28 1,565 23 1,196
Other mortgage........... 4 1,102 3 689 2 423
-- ------ -- ------- --- -------
Total mortgage loans..... 23 1,880 33 2,416 27 1,717
Other loans................ 13 542 10 164 9 132
-- ------- -- ------- --- -------
Total loans................ 36 $2,422 43 $2,580 36 $1,849
== ====== == ======= == ======
Delinquent loans to
total loans............ .26% .31% .24%
==== ==== ====
As of September 30, 1998, 1997 and 1996, $25,000, $0, and $323,000,
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 .50% at September 30, 1996 to .37% at September 30, 1998.
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. The investment in
impaired loans (primarily consisting of classified loans), other than those
evaluated collectively for impairment, at September 30, 1998 and 1997 was
$6,109,000 and $12,157,000, respectively. The average recorded investment in
impaired loans during the years ended September 30, 1998 and 1997 were
approximately $7,695,000 and $12,122,000, respectively. The total specific
allowance for loan losses related to these loans was approximately $29,000 and
$117,000, respectively, on September 30, 1998 and 1997. Interest income on
impaired loans of approximately $790,000 and $1,147,000 was recognized in the
year ended September 30, 1998 and 1997, 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 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.
HARBOR FLORIDA BANCSHARES, INC.
9
<PAGE>
At the dates indicated, nonperforming assets in the Company's portfolio
were as follows:
September 30,
-------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Non-accrual mortgage loans:
Delinquent less than 90 days............ $ --- $ --- $ 323
Delinquent 90 days or more.............. 1,880 2,416 1,717
----- ----- -----
Total................................ 1,880 2,416 2,040
----- ----- -----
Non-accrual other loans:
Delinquent less than 90 days............ 25 --- ---
Delinquent 90 days or more.............. 542 164 132
------ ------ ------
Total................................ 567 164 132
------ ------ ------
Total non-accrual loans................... 2,447 2,580 2,172
Accruing loans 90 days or more delinquent --- --- ---
-------- -------- --------
Total nonperforming loans............... 2,447 2,580 2,172
----- ----- -----
Other nonperforming assets:
Real estate owned....................... 3,168 2,892 4,830
Less allowance for losses............. (634) (578) (1,712)
------- ------- -------
Total............................... 2,534 2,314 3,118
------ ------ ------
Total nonperforming assets, net........... $4,981 $4,894 $5,290
====== ====== ======
Nonperforming loans to total net loans.... 0.26% 0.31% 0.28%
Total nonperforming assets to
total assets............................ 0.37% 0.43% 0.50%
For the year ended September 30, 1998, interest income of $135,000 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,
-------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Beginning balance................... $578 $1,712 $1,857
Provision for (recovery of) losses.. 136 (150) 117
Allowance for losses on REO
acquired......................... --- --- 21
Charge-offs......................... (80) (984) (283)
----- ------ ------
Ending balance...................... $ 634 $ 578 $1,712
===== ====== ======
Not included in the preceding table are net gains, (losses) or recoveries
on the sale of real estate owned of $176,000, $127,000 and ($39,000) for the
years ended September 30, 1998, 1997 and 1996, respectively.
HARBOR FLORIDA BANCSHARES, INC.
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,
-------------
1998 1997 1996
---- ---- ----
(In thousands)
Substandard:
Real Estate Owned.......... $ 3,168 $ 2,892 $ 3,897
Loans...................... 5,375 9,832 8,150
------- ------- -------
Total Substandard........ 8,543 12,724 12,047
Doubtful..................... --- --- 192
Loss......................... 202 117 174
--------- --------- ---------
$8,745 $12,841 $12,413
====== ======= =======
---------------
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. During 1998, one of these
loans which had a net book value prior to allowance of $2.6 million was paid 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.
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
HARBOR FLORIDA BANCSHARES, INC.
11
<PAGE>
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.
HARBOR FLORIDA BANCSHARES, INC.
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,
-------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Balance at beginning of year...... $11,691 $11,016 $10,083
Provision for (recovery of)
losses........................ 297 782 (76)
Allowance for loan losses
acquired (1).................. --- --- 885
Charge-offs:
Residential................... (259) (43) (137)
Commercial real estate........ --- (91) ---
Consumer...................... (213) (125) (48)
Other......................... (102) (3) (180)
--------- ------- ---------
Total charge-offs.......... (574) (262) (365)
Recoveries:
Residential................... 86 44 28
Commercial real estate........ 2 19 207
Consumer...................... 16 62 79
Other......................... 300 30 175
-------- ------- --------
Total recoveries........... 404 155 489
Balance at end of year............ $11,818 $11,691 $11,016
======= ======= =======
Allowance for loan losses to
total loans................... 1.25% 1.40% 1.44%
Allowance for loan losses to
total non-performing loans... 483.13% 453.11% 507.25%
Allowance for loan losses and
allowance for REO to total
non- performing assets........ 221.80% 224.21% 181.78%
Net charge-offs (recoveries) to
average loans outstanding
during the period............ 0.02% 0.01% (0.02)%
Classified loans to total net 0.59% 1.19% 1.11%
loans
(1) Represents allowance acquired in conjunction with acquisition of Treasure
Coast.
HARBOR FLORIDA BANCSHARES, INC.
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,
-------------
1998 1997 1996
---- ---- ----
Amount Percent(1) Amount Percent(1) Amount Percent(1)
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Allowance at end of period
applicable to:
Residential................... $ 2,251 76.88% $ 2,141 76.88% $ 2,077 77.95%
Commercial real estate........ 5,986 12.22 6,487 11.74 6,088 11.02
Consumer ..................... 2,310 9.40 2,068 10.10 1,802 10.01
Commercial business........... 1,271 1.50 995 1.28 1,049 1.02
-------- ------- -------- ------- -------- -------
Total..................... $11,818 100.00% $11,691 100.00% $11,016 100.00%
======= ====== ======= ====== ======= ======
</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,
1998 1997 1996
------ ------ -----
(In thousands)
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Treasury Notes.......... $ --- $ --- $17,985 $17,985 $23,347 $23,347
FHLB notes.............. 50,721 50,721 29,486 29,486 10,031 10,031
FNMA Notes 20,343 20,343 --- --- --- ---
Other securities........ 452 452 82 82 115 115
------- -------- ------- ------- ------- -------
Total $71,516 $71,516 $47,553 $47,553 $33,493 $33,493
====== ====== ====== ====== ====== ======
Held to maturity:
FHLB notes.............. 19,989 20,268 5,000 4,993 20,000 20,016
FNMA notes.............. 10,000 10,005 --- --- --- ---
------- ------ ---------- ------- ------ -------
Total............... $29,989 $30,273 $ 5,000 $ 4,993 $20,000 $20,016
====== ====== ====== ====== ====== ======
FHLB stock................ $ 8,212 $ 8,212 $ 7,595 $ 7,595 $ 7,158 $ 7,158
</TABLE>
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
HARBOR FLORIDA BANCSHARES, INC.
14
<PAGE>
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, 1998, excluding FHLB stock and
equity securities.
<TABLE>
<CAPTION>
One Year or Less One to Five Years More Than 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>
FHLB Notes $ --- 0.00% $70,710 5.97% $ --- 0.00% 1.8 $70,710 $70,989 5.97%
FNMA Notes --- 0.00 30,343 5.72 --- 0.00 2.1 30,343 30,348 5.72
</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-four full-service banking offices and one in-store
branch location 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, 1998, the Company had 27.10% of its deposits in
passbook and demand accounts, 71.76% in certificates of deposit and 1.14% 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.
HARBOR FLORIDA BANCSHARES, INC.
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,
-------------
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Nominal Nominal Nominal
Amount Percent Rate Amount Percent Rate Amount Percent Rate
------ ------ ---- ------ ------- ---- ------ ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Demand accounts:
Non-interest
bearing demand.... $ 54,954 5.99% N/A $ 40,749 4.47% N/A $ 33,613 3.95% N/A
NOW accounts........ 60,129 6.55 1.13% 52,045 5.71 1.32% 54,806 6.43 1.51%
Money market
accounts.......... 41,074 4.46 2.54 43,401 4.76 2.51 42,561 5.00 2.58
------- ---- ---- ------- ----- ---- ------- ---- ----
Subtotal.......... 156,157 17.00 1.10 136,195 14.94 1.30 130,980 15.38 1.46
Savings accounts:
Passbook............ 92,698 10.10 2.06 76,540 8.40 1.69 77,305 9.07 1.78
Certificates of
deposit........... 658,842 71.76 5.43 689,760 75.67 5.47 636,907 74.77 5.37
Official checks....... 10,429 1.14 N/A 9,081 .99 N/A 6,661 .78 N/A
-------- ------- ---- -------- ------ ---- -------- ------- ----
Total deposits........ $918,126 100.00% 4.29% $911,576 100.00% 4.47% $851,853 100.00% 4.41%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
The following table presents, by various categories, information concerning
the amounts and maturities of the Company's time deposits.
September 30,
-------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
0.00 - 3.00%................ $ 328 $ 545 $ 307
3.01 - 4.00%................ -- -- 1
4.01 - 5.00%................ 84,192 88,472 155,121
5.01 - 6.00%................ 540,209 553,986 378,999
6.01 - 7.00%................ 33,674 46,333 101,780
7.01 - 8.00%................ 434 424 603
8.01 - 9.00%................ 5 --- 3
Premiums on deposits
acquired -- -- 93
---------- ---------- ----------
Total Certificate Accounts.... $658,842 $689,760 $636,907
======== ======== ========
HARBOR FLORIDA BANCSHARES, INC.
16
<PAGE>
At September 30, 1998, 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......................................... $13,276
Over 3 to 6 Months....................................... 13,355
Over 6 to 12 Months...................................... 14,370
Over 12 Months........................................... 21,726
-------
Total.................................................... $62,727
=======
The following table contains information regarding deposit account activity
for the periods shown.
Years Ended September 30,
-------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Net increase (decrease)
before interest credited.. $ (28,838) $ 25,563 $ 30,644
Interest credited............ 35,388 34,160 30,035
Deposits acquired............ --- --- 70,193
------- -------- --------
Deposit account increase..... $ 6,550 $ 59,723 $130,872
======= ======== ========
Weighted average cost
of deposits during the
year...................... 4.35% 4.42% 4.44%
Weighted average cost of 4.29% 4.47% 4.41%
deposits at end of year...
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, 1998, the Company had $145 million of outstanding FHLB
advances. Of this amount, all have remaining maturity dates of thirty-six months
or longer.
As of September 30, 1998, the Company had a total credit limit of $250
million and an availability limit of $105 million with the FHLB of Atlanta.
In addition to FHLB advances, the Company had $199.2 million of unpledged
mortgage-backed securities at September 30, 1998. 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.
HARBOR FLORIDA BANCSHARES, INC.
17
<PAGE>
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.
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,
1998 1997 1996
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Average Balance................................$104,877 $ 99,342 $75,096
Maximum balance at any month-end............... 145,000 110,000 95,000
Balance at year end............................ 145,000 100,000 95,000
Weighted average interest rate during the
year................................... 6.12% 6.00% 6.12%
Weighted average interest rate at year end..... 5.76% 6.00% 6.02%
Other Borrowings:
Average Balance................................ $ 167 $ 561 $ 857
Maximum balance at any month-end............... 475 674 974
Balance at year end............................ --- 475 674
Weighted average interest rate during the
year................................... 11.98% 9.48% 9.47%
Weighted average interest rate at year end..... --- 7.12% 8.50%
Total Borrowings:
Average Balance................................$105,044 $99,903 $75,953
Maximum balance at any month-end............... 145,000 110,674 95,974
Balance at year end............................ 145,000 100,475 95,674
Weighted average interest rate during the
year................................... 6.13% 6.02% 6.15%
Weighted average interest rate at year end..... 5.76% 6.01% 6.04%
</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 Bank 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.
The Bank has two active subsidiary corporations. Appraisal Analysts, Inc.
provides real estate appraisal services to the Bank as well as third parties. H.
F. Development Company, Inc. serves as a repository for some of the Company's
commercial REO properties held for disposition. See "Business -- Delinquent,
Nonperforming and Classified Assets".
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 deposits by offering depositors a high level
of personal service, convenient locations and a competitive interest rate.
HARBOR FLORIDA BANCSHARES, INC.
18
<PAGE>
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, 1998, the Company was the largest savings
institution headquartered in the six county area served by the Company.
EMPLOYEES
At September 30, 1998, the Company had a total of 329 full-time employees
and 96 part-time employees, none of whom were represented by a collective
bargaining unit. The Company considers its relations with its employees to be
good.
ITEM 2. PROPERTIES
The Company conducts its business from its headquarters in Fort Pierce and
through 24 full-service banking offices, one loan production office and one
in-store branch location. These offices are located in Brevard, Indian River,
Martin, Okeechobee, St. Lucie, and Volusia counties, Florida. The net book value
at September 30, 1998 of the Company's offices was $13.3 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 OWNED
3201 S.W. PSL BLVD.
PORT ST. LUCIE, FL 34953
ORANGE BLOSSOM 1984 OWNED
4156 OKEECHOBEE ROAD
FORT PIERCE, FL 34947
HARBOR FLORIDA BANCSHARES, INC.
19
<PAGE>
Year Lease
Location Opened Owned/Leased Expiration Date
-------- ------ ------------ ---------------
ST. LUCIE WEST 1993 OWNED
1320 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
SEBASTIAN 1979 OWNED
13397 U.S. HIGHWAY #1
SEBASTIAN, FL 32958
WEST SEBASTIAN 1998 OWNED
993 FELLSMERE ROAD
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
HARBOR FLORIDA BANCSHARES, INC.
20
<PAGE>
Year Lease
Location Opened Owned/Leased Expiration Date
-------- ------ ------------ ---------------
WAL-MART 1998 LEASED 08/31/03
1000 N WICKHAM ROAD
MELBOURNE, FL 32935
LOAN PRODUCTION OFFICE 1998 LEASED 10/10/99
2460 N COURTENAY PARKWAY
SUITE 107
MERRITT ISLAND, FL 32953
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
DELTONA 1998 OWNED
2901 HOWLAND BOULEVARD
DELTONA, FL 32725
All leases are anticipated to renew upon their expiration.
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's current contract expires in 2002. 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, 1998 was $1,985,000.
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.
HARBOR FLORIDA BANCSHARES, INC.
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
A Special Meeting of Stockholders of Harbor Florida Bancshares, Inc. was held
September 18, 1998 for the purpose of considering and voting upon the following
matters:
1. To approve the Harbor Florida Bancshares, Inc. 1998 Stock Incentive Plan
for directors, officers and employees (the "Plan").
2. The approval of the adjournment of the Special Meeting, if necessary, to
permit solicitation of proxies in the event there are not sufficient
votes at the time of the Special Meeting to approve the Plan.
The following table sets forth the results as to each matter voted upon:
% BROKER
PROPOSAL FOR AGAINST ABSTAIN APPROVED NON-VOTES
- -------- --- ------- ------- -------- ---------
No. 1 18,356,951 3,218,808 --- 59% -
No. 2 18,361,951 422,083 --- 59% -
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 7, 1998 was 10,886, some of which
are street name holders.
The Company paid $0.246 in cash dividends per share for the twelve months
ended in fiscal 1998. Payments were $0.058 in the first and second quarters and
$0.065 in the third and fourth quarters. The Company currently expects that
comparable cash dividends will continue to be paid in the future.
On December 7, 1998 the closing sales price of the Company's common stock
was $11.00 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 1998 and 1997.
On March 8, 1998, the conversion and reorganization of Harbor Financial,
M.H.C. was consummated. Pursuant to this transaction, the Company became the
stock holding company for the Bank and Harbor Financial, M.H.C., the Bank's
mutual holding company, ceased to exist. Each existing share of Harbor Florida
Bancorp, Inc., except for those shares held by Harbor Financial, M.H.C. were
exchanged for 6.0094 shares of the Company. The prices in the following table
have been adjusted to reflect this transaction.
Low $ High $
----- ------
FISCAL 1998
First Quarter.................... 9.29 11.61
Second Quarter .................. 10.65 12.56
Third Quarter.................... 11.63 12.81
Fourth Quarter................... 9.31 13.56
HARBOR FLORIDA BANCSHARES, INC.
22
<PAGE>
Low $ High $
----- ------
FISCAL 1997
First Quarter.................... 4.91 6.03
Second Quarter .................. 5.57 6.49
Third Quarter.................... 5.82 7.65
Fourth Quarter................... 8.99 9.88
ITEM 6. SELECTED FINANCIAL DATA.
The information contained in the table captioned "Selected Consolidated
Financial Data" in the Annual Report on pages 2-3 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 4 through 16 in the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the sections captioned "Market Risk and Asset
and Liability Management" and "Interest Rate Sensitivity" on pages 9 through 12
in the Annual Report is incorporated herein by reference.
Interest Rate Risk
The monetary nature of the Company's assets and liabilities exposes the
Company to significant interest rate risk. Interest rate risk generally results
from a mismatch between the extent and timing of asset cash flows compared to
liability cash flows.
The Company uses a computer model to quantify its interest rate risk. The
computer model measures the sensitivity of asset and liability fair values to
hypothetical changes in interest rates. Interest rate sensitive instruments used
in the computer model include: loans, mortgage-backed securities, investment
securities, federal funds sold, interest-bearing deposits in other banks, FHLB
stock, deposits, advances from the FHLB, and off- balance sheet loan servicing
rights and commitments. The model calculates net portfolio value of fair values
for assets, liabilities and off-balance sheet contracts using a discounted cash
flow methodology. Management estimates discount rates by using current market
yields on similar financial instruments. Discount rates are adjusted upward and
downward by 100 basis points and 200 basis points to reflect a hypothetical
parallel shift in interest rates. In addition, management estimates loan
prepayments rates, deposit decay rates, and values of certain assets that could
correspond with such hypothetical parallel shifts in interest rates. Management
also assumes that loan delinquency rates will not change as a result of changes
in interest rates, although there can be no assurance that this will be the
case.
HARBOR FLORIDA BANCSHARES, INC.
23
<PAGE>
Presented below is an analysis of the Company's interest rate risk at
September 30, 1998 as calculated utilizing the Company's computer model. The
table presents net portfolio value, dollar and percent changes in net portfolio
value, for instantaneous and parallel shifts in the yield curve in 100 basis
point increments up and down.
Change in Net Portfolio
Rates Value Amount Dollar Change Percent
----- ------------ ------------- -------
(Dollars in thousands)
+200 B.P. $ 269,410 $ (42,933) (13.7)%
+100 B.P. $ 293,342 $ (19,001) (6.1)%
0 B.P. $ 312,343 $ 0 0%
- -100 B.P. $ 313,737 $ 1,394 0.4%
- -200 B.P. $ 313,506 $ 1,163 0.4%
The preceding analysis is based on numerous assumptions that management
believes to be reasonable. These assumptions relate to interest rates, loan
prepayment rates, deposit decay rates, and market values of certain assets under
various interest rate scenarios. It was also assumed that delinquency rates will
not change as a result of changes in interest rates although there can be no
assurance that this will be the case. Even if interest rates change in the
designated increments, there can be no assurance that the Company's assets and
liabilities would perform as indicated in the table above. Since there is no
quoted market for most of the Company's financial instruments, management has no
basis to determine that values presented would be indicative of the amounts
realized in an actual negotiated sale. Furthermore, management has not
considered the tax effect or transaction costs that may be associated with
disposal of the Company's assets and liabilities. A change in U.S. Treasury
rates in the indicated amounts, accompanied by a change in the slope or shape of
the yield curve, could result in significantly different net portfolio values
than shown above.
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.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the sections captioned "Beneficial
Ownership of Common Stock," "Management of the Company," and "Management of the
Bank" in the Proxy Statement of Harbor Florida Bancshares, Inc. (the "Proxy
Statement") to be filed pursuant to General Instruction G.(3) is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the sections captioned "Management of the
Bank" and "Management of the Company" in the Proxy Statement to be filed
pursuant to General Instruction G.(3) is incorporated herein by reference.
HARBOR FLORIDA BANCSHARES, INC.
24
<PAGE>
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 of Common
Stock" in the Proxy Statement to be filed pursuant to General Instruction
G.(3).
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by reference to the
section captioned "Beneficial Ownership of Common Stock" 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 18
Consolidated Statements of Financial Condition 19
Consolidated Statements of Earnings 20
Consolidated Statements of Stockholders' Equity 21
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24 - 48
(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.
HARBOR FLORIDA BANCSHARES, INC.
25
<PAGE>
(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 3.3 to
Pre-effective Amendment No. 1 to the Registration Statement on
Form S-1, No. 333-37275 filed November 10, 1997).
3(ii) Bylaws of Registrant. (Exhibit 3.4 to Pre-Effective Amendment No.
1 to the Registration Statement on Form S-1, No. 333-37275, filed
November 10, 1997).
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)
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
10(viii) Management Incentive Compensation Plan for fiscal year ending
September 30, 1998 (Exhibit 10(xiii) to Form 10-Q for the quarter
ended December 31, 1997 filed February 11, 1998)
10(ix) 1998 Stock Incentive Plan for Directors, Officers and Employees
(Exhibit 4.3 to the Registration Statement on Form S-8 filed
October 26, 1998.)
10(x) Change of Control Agreements
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Consolidated Financial Statements of the Registrant (Annual Report
to Stockholders for fiscal year September 30, 1998)
(b) Reports on Form 8-K
None.
HARBOR FLORIDA BANCSHARES, INC.
26
<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 BANCSHARES, INC.
(Registrant)
Dated: December 22, 1998 By:
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 22, 1998
Michael J. Brown, Sr.
President, Chief Executive
Officer and Director
- ----/s/------ December 22, 1998
Don W. Bebber
Senior Vice President, Finance
(Principal Financial and Accounting Officer)
- ----/s/-------------------------- December 22, 1998
Bruce R. Abernethy, Sr., Director
- ----/s/-------------- December 22, 1998
Richard K. Davis, Director
- ----/s/----------------- December 22, 1998
Edward G. Enns, Director
- ----/s/-------------------- December 22, 1998
Frank H. Fee, III, Director
- ----/s/----------------------- December 22, 1998
Richard B. Hellstrom, Director
- ----/s/------------------- December 22, 1998
Richard N. Bird, Director
27
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)
Exhibit 10(vii)
UNFUNDED DEFERRED COMPENSATION PLAN
FOR THE DIRECTORS OF
HARBOR FEDERAL SAVINGS AND LOAN ASSOCIATION
OF FORT PIERCE
The provisions of the plan are as follows:
1. Each director may elect on or before December 31st of any year to defer
all or a specified portion of his annual fees for succeeding calendar
years.
2. Any person elected to fill a vacancy on the board, and who was not a
director on the preceding December 31st, may elect, before his term
begins, to defer all or a specified part of his annual fees for the
balance of the calendar year following such election and for succeeding
years.
3. Interest on the deferred fees is to be computed at the 2 1/2 year CD
rate.
4. Amounts deferred under the plan, together with accumulated interest,
will be distributed in annual installments over a ten-year period
beginning with the first day of the calendar year immediately following
the year in which the director (1) ceases to be a director, or (2)
having attained the age of 65 years and having been a participant in
the plan for a minimum of five years terminates the request by written
request and in writing, requests distribution as before stated.
5. An election to defer fees shall continue from year to year unless
terminated by the director by written request. In the event a director
elects to terminate deferring fees, the amount already deferred cannot
be paid to him except as provided in the preceding paragraph.
6. In the event the director ceases to be a voting member of the Board of
Directors of the Company, or if he becomes a proprietor, officer,
partner, employee or otherwise becomes affiliated with any business
that is in competition with the corporation, the entire balance of his
deferred fees, including interest, may, if directed by the Board of
Directors, in its sole discretion, be paid immediately to him in a lump
sum.
7. Upon the death of a director or former director prior to the expiration
of the period during which the deferred amounts are payable, the
balance of the deferred fees and interest in his account shall be
payable to his estate or designated beneficiary 50% on the first day of
the calendar year following the death of the director and the remaining
50% on the first day of the next succeeding calendar year.
ADOPTED December 22, 1971.
<PAGE>
Exhibit 10(vii)
FIRST AMENDMENT TO THE
UNFUNDED DEFERRED COMPENSATION
PLAN FOR THE DIRECTORS OF
HARBOR FEDERAL SAVINGS AND LOAN ASSOCIATION
OF FORT PIERCE
The Unfunded Deferred Compensation Plan for the Directors of Harbor Federal
Savings Bank (the "Plan") is hereby amended as follows:
1. The name of the Plan is amended to read "The Unfunded Deferred
Compensation Plan for the Directors of Harbor Federal Savings Bank."
2. A new paragraph is added to the Plan to read as follows:
"8. On or before December 17, 1993, a director participating
in the Plan may elect in writing to have all or a portion of
the amounts previously deferred by the director under the Plan
plus interest credited on such amounts used to purchase shares
of common stock of Harbor Federal Savings Bank ("harbor
Federal") at the time of the reorganization of Harbor Federal
Savings and Loan Association into a mutual holding company.
The amount so chosen must equal the value of a whole number of
such shares at the offering price. With respect to the funds,
the director will no longer receive the interest credit
described in paragraph 3. Dividends paid on shares of stock
held by the Plan for the account of a participant will be
credited to the Plan account of the participant as will
interest on these dividends in the manner described in
paragraph 3."
<PAGE>
Exhibit 10(vii)
SECOND AMENDMENT TO THE
UNFUNDED DEFERRED COMPENSATION
PLAN FOR THE DIRECTORS OF
HARBOR FEDERAL SAVINGS BANK
The Unfunded Deferred Compensation Plan for the Directors of Harbor Federal
Savings Bank (the "Plan") is hereby amended as follows:
1. Amended paragraph to the Plan to read as follows:
"8. On or before December 17, 1993 a director participating in
the Plan may elect in writing to have all or a portion of the
amounts previously deferred by the Director under the Plan
plus interest credited on such amounts used to purchase shares
of common stock of Harbor Federal Savings Bank ("harbor
Federal") at the time of the reorganization of Harbor Federal
Savings and Loan Association into a mutual holding company or
thereafter provided that the common stock is purchased at its
fair market value and the director so electing notifies Harbor
Federal on or before July 31 of each year of the amount chosen
for the purchase of stock. The amount so chosen must equal the
value of a whole number of shares at the offering price/fair
market value. With respect to the funds, the director will no
longer receive the interest credit described in paragraph 3.
Dividends paid on shares of stock held by the Plan for the
account of a participant will be credited to the Plan account
of the participant as will interest on these dividends in the
manner described in paragraph 3."
Harbor Federal Savings Bank
By: /s/
--------------
Edward G. Enns
Date: July 11, 1996
<PAGE>
Exhibit 10(vii)
THIRD AMENDMENT TO THE
UNFUNDED DEFERRED COMPENSATION
PLAN FOR THE DIRECTORS OF
HARBOR FEDERAL SAVINGS BANK
The Unfunded Deferred Compensation Plan for the Directors of Harbor Federal
Savings Bank (the "Plan") is hereby amended as follows:
1. Amended Paragraph to the plan to read as follows:
"8. On or before December 17, 1993 a director participating in
the Plan may elect in writing to have all or a portion of the
amounts previously deferred by the Director under the Plan
plus interest credited on such amounts used to purchase shares
of common stock of Harbor Federal Savings Bank ("Harbor
Federal") at the time of the reorganization of Harbor Federal
Savings and Loan Association into a mutual holding company or
thereafter provided that the common stock is purchased at its
fair market value and the director so electing notifies Harbor
Federal on or before January 31, April 30, July 31 or October
31 of each year of the amount chosen for the purchase of
stock. The amount so chosen must equal the value of a whole
number of shares at the offering price/fair market value. With
respect to the funds, the director will no longer receive the
interest credit described in paragraph 3. Dividends paid on
shares of stock held by the Plan for the account of a
participant will be credited to the Plan account of the
participant as will interest on these dividends in the manner
described in paragraph 3."
Harbor Federal Savings Bank
By: /s/
--------------
Edward G. Enns
Date: April 23, 1997
<PAGE>
Exhibit 10(vii)
FOURTH AMENDMENT TO THE
UNFUNDED DEFERRED COMPENSATION
PLAN FOR THE DIRECTORS OF
HARBOR FEDERAL SAVINGS BANK
The unfunded deferred Compensation Plan for the Directors of Harbor
Federal Savings Bank (the "Plan") is hereby amended as follows:
1. Amended Paragraph to the Plan to read as follows:
4. Amounts deferred under the plan, together with
accumulated interest, will be distributed in annual
installments over a ten-year period beginning with
the first day of the calendar year immediately
following the year in which the director ceases to be
a director."
HARBOR FEDERAL SAVINGS BANK
By: Eddie Enns /s/
Date: June 10, 1998
Exhibit 10(x)
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT is made effective as of March 18, 1998 by and among
Harbor Federal Savings Bank (the "Bank"), Harbor Florida Bancshares, Inc.
("Bancshares" or the "Holding Company") and Don W. Bebber (the "Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect Executive's position therewith for the
period provided in this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to serve in the
position of Senior Vice President for the Bank, a position of substantial
responsibility.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. GENERAL.
Employee is, except as described in Section 4, an employee at will and
serves at the pleasure of the Chief Executive Officer and the Board of Directors
of the Bank (the "Board").
2. TERM OF AGREEMENT.
The term of this Agreement shall commence as of the date first above
written and shall continue for a period of three (3) years thereafter.
Commencing on the first anniversary date of this Agreement and continuing at
each anniversary date thereafter, the Board may extend this Agreement for an
additional year. The Board will review the Agreement and the Executive's
performance annually for purposes of determining whether to extend the
Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
3. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as herein defined) of
the Bank, or Bancshares, followed at any time within one (1) year of a Change in
Control, and during the term of this Agreement, by the voluntary or involuntary
termination of Executive's employment, other than for Cause as defined in
Section 3(c) hereof, the provisions of Section 4 shall apply. Upon the
occurrence of a Change in Control, Executive shall have the right to elect to
voluntarily terminate his
<PAGE>
Exhibit 10(x)
employment at any time during the term of this Agreement following any demotion,
loss of title, office or significant authority, reduction in his annual
compensation, or relocation of his principal place of employment by more than 50
miles from its location immediately prior to the Change in Control.
(b) For purposes of this Agreement, a "Change in Control" of the Bank
or the Holding Company shall mean (a) merger or consolidation where the Bank or
the Holding Company is not the consolidated or surviving association, (b)
transfer of all or substantially all of the assets of the Bank or the Holding
Company, (c) voluntary or involuntary dissolution of the Bank or the Holding
Company or (d) change in control as defined under the Change in Bank Control Act
of 1978. The surviving or resulting association, the transferee of Bank's or the
Holding Company's assets or the control person shall be bound by and have the
benefit of the provisions of this Agreement, and the Bank or the Holding Company
shall take all actions necessary to insure that such association, transferee or
control person is bound by the provisions of this Agreement.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 4 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
material provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the Board of Directors of the
Bank at a meeting of the Board called and held for that purpose (after
reasonable notice to the Executive and an opportunity for him, together with
counsel, to be heard before the Board at such meeting and which such meeting
shall be held not more than 30 days from the date of notice during which period
Executive may be suspended with pay), finding that in the good faith opinion of
the Board, the Executive was guilty of conduct justifying Termination for Cause.
4. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the voluntary or involuntary termination of
the Executive's employment, other than for Termination for Cause, the Bank and
the Company shall pay the Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to his then current
annual salary. At the election of the Executive such payment may be made in a
lump sum or paid in equal monthly installments during the
<PAGE>
Exhibit 10(x)
twelve (12) months following the Executive's termination. In the event that no
election is made, payment to the Executive will be in equal monthly
installments.
(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by the
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Bank shall cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for the Executive prior to his severance, except to the
extent such coverage may be changed in its application to all Bank employees.
Such coverage and payments shall cease upon the earlier of the expiration of
twelve (12) months or the Executive obtaining other coverage.
(c) At the effective date of this Agreement, and annually on each
anniversary, Executive shall make the election referred to in Section 4(a)
hereof with respect to whether the amounts payable under said Section 4(a) shall
be paid in a lump sum or on a monthly basis. Such election shall be irrevocable
for the year for which such election is made and shall continue in effect until
the executive has made his next annual election.
(d) Notwithstanding the preceding paragraphs of this Section 4, in no
event shall the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Code or any successor
thereto, and in order to avoid such a result Termination Benefits will be
reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal to three (3) times
Executive's "base amount", as determined in accordance with said Section 280G.
The allocation of the reduction required hereby among the Termination Benefits
provided by the preceding paragraphs of this Section 4 shall be determined by
the Executive.
5. NOTICE OF TERMINATION.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other parties thereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination which, in the instance of Termination for Cause, shall be
immediate.
<PAGE>
Exhibit 10(x)
6. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank. The
Holding Company, however, guarantees payment and provision of all amounts and
benefits due hereunder to the Executive, and if such amounts and benefits due
from the Bank are not timely paid or provided by the Bank, such amounts and
benefits shall be paid or provided by the Holding Company.
7. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition for the future or as to any act other than
that specifically waived.
8. REQUIRED REGULATORY PROVISIONS.
(a) The Board of Directors may terminate the Executive's employment at
any time, but any termination by the Board of Directors, other than Termination
for Cause, shall not prejudice the Executive's right to compensation or other
benefits under this Agreement. The Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause as
defined in Section 3 hereinabove.
(b) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) (12 U.S.C. ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss.
1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's
obligations under this contract shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Executive all or part of
the compensation withheld while their contract obligations were suspended and
(ii) reinstate (in whole or in part) any of the obligations which were
suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 U.S.C. ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions
<PAGE>
Exhibit 10(x)
Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under
this contract shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in section 3(x) (12 U.S.C. ss.
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to
the extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the Office of
Thrift Supervision (or his or her designee) at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the
Director of the Office of Thrift Supervision (or his or her designee) at the
time the Director (or his or her designee) approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
9. REINSTATEMENT OF BENEFITS UNDER SECTION 8(b).
In the event the Executive is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice described in
Section 8(b) hereof (the "Notice") during the terms of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and the Executive will be entitled to receive all of the
termination benefits provided for under Section 4 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
10. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
<PAGE>
Exhibit 10(x)
11. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
12. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by Florida law.
13. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that the Executive shall be entitled to seek specific performance of
his right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
14. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank (which payments are guaranteed by the
Company pursuant to Section 6 hereof) if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
<PAGE>
Exhibit 10(x)
15. SIGNATURES.
IN WITNESS WHEREOF, Harbor Federal Savings Bank and Harbor Florida
Bancshares, Inc. each has caused this Agreement to be executed by its duly
authorized officers, and Executive has signed this Agreement, as of the 18th day
of March, 1998.
ATTEST: HARBOR FEDERAL SAVINGS BANK
/s/ H. Michael Callahan BY: /s/ Michael J. Brown
ATTEST: HARBOR FLORIDA BANCSHARES, INC.
/s/ H. Michael Callahan BY: /s/ Michael J. Brown
WITNESS:
/s/ Tammy L. Ross /s/ Don W. Bebber
Executive
<PAGE>
Exhibit 10(x)
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT is made effective as of March 18, 1998 by and among
Harbor Federal Savings Bank (the "Bank"), Harbor Florida Bancshares, Inc.
("Bancshares" or the "Holding Company") and Robert W. Bluestone (the
"Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect Executive's position therewith for the
period provided in this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to serve in the
position of Senior Vice President for the Bank, a position of substantial
responsibility.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. GENERAL.
Employee is, except as described in Section 4, an employee at will and
serves at the pleasure of the Chief Executive Officer and the Board of Directors
of the Bank (the "Board").
2. TERM OF AGREEMENT.
The term of this Agreement shall commence as of the date first above
written and shall continue for a period of three (3) years thereafter.
Commencing on the first anniversary date of this Agreement and continuing at
each anniversary date thereafter, the Board may extend this Agreement for an
additional year. The Board will review the Agreement and the Executive's
performance annually for purposes of determining whether to extend the
Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
3. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as herein defined) of
the Bank, or Bancshares, followed at any time within one (1) year of a Change in
Control, and during the term of this Agreement, by the voluntary or involuntary
termination of Executive's employment, other than for Cause as defined in
Section 3(c) hereof, the provisions of Section 4 shall apply. Upon the
occurrence of a Change in Control, Executive shall have the right to elect to
voluntarily terminate his
<PAGE>
Exhibit 10(x)
employment at any time during the term of this Agreement following any demotion,
loss of title, office or significant authority, reduction in his annual
compensation, or relocation of his principal place of employment by more than 50
miles from its location immediately prior to the Change in Control.
(b) For purposes of this Agreement, a "Change in Control" of the Bank
or the Holding Company shall mean (a) merger or consolidation where the Bank or
the Holding Company is not the consolidated or surviving association, (b)
transfer of all or substantially all of the assets of the Bank or the Holding
Company, (c) voluntary or involuntary dissolution of the Bank or the Holding
Company or (d) change in control as defined under the Change in Bank Control Act
of 1978. The surviving or resulting association, the transferee of Bank's or the
Holding Company's assets or the control person shall be bound by and have the
benefit of the provisions of this Agreement, and the Bank or the Holding Company
shall take all actions necessary to insure that such association, transferee or
control person is bound by the provisions of this Agreement.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 4 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
material provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the Board of Directors of the
Bank at a meeting of the Board called and held for that purpose (after
reasonable notice to the Executive and an opportunity for him, together with
counsel, to be heard before the Board at such meeting and which such meeting
shall be held not more than 30 days from the date of notice during which period
Executive may be suspended with pay), finding that in the good faith opinion of
the Board, the Executive was guilty of conduct justifying Termination for Cause.
4. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the voluntary or involuntary termination of
the Executive's employment, other than for Termination for Cause, the Bank and
the Company shall pay the Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to his then current
annual salary. At the election of the Executive such payment may be made in a
lump sum or paid in equal monthly installments during the
<PAGE>
Exhibit 10(x)
twelve (12) months following the Executive's termination. In the event that no
election is made, payment to the Executive will be in equal monthly
installments.
(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by the
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Bank shall cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for the Executive prior to his severance, except to the
extent such coverage may be changed in its application to all Bank employees.
Such coverage and payments shall cease upon the earlier of the expiration of
twelve (12) months or the Executive obtaining other coverage.
(c) At the effective date of this Agreement, and annually on each
anniversary, Executive shall make the election referred to in Section 4(a)
hereof with respect to whether the amounts payable under said Section 4(a) shall
be paid in a lump sum or on a monthly basis. Such election shall be irrevocable
for the year for which such election is made and shall continue in effect until
the executive has made his next annual election.
(d) Notwithstanding the preceding paragraphs of this Section 4, in no
event shall the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Code or any successor
thereto, and in order to avoid such a result Termination Benefits will be
reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal to three (3) times
Executive's "base amount", as determined in accordance with said Section 280G.
The allocation of the reduction required hereby among the Termination Benefits
provided by the preceding paragraphs of this Section 4 shall be determined by
the Executive.
5. NOTICE OF TERMINATION.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other parties thereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination which, in the instance of Termination for Cause, shall be
immediate.
<PAGE>
Exhibit 10(x)
6. SOURCE OF PAYMENTS.
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank. The
Holding Company, however, guarantees payment and provision of all amounts and
benefits due hereunder to the Executive, and if such amounts and benefits due
from the Bank are not timely paid or provided by the Bank, such amounts and
benefits shall be paid or provided by the Holding Company.
7. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition for the future or as to any act other than
that specifically waived.
8. REQUIRED REGULATORY PROVISIONS.
(a) The Board of Directors may terminate the Executive's employment at
any time, but any termination by the Board of Directors, other than Termination
for Cause, shall not prejudice the Executive's right to compensation or other
benefits under this Agreement. The Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause as
defined in Section 3 hereinabove.
(b) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) (12 U.S.C. ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss.
1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's
obligations under this contract shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Executive all or part of
the compensation withheld while their contract obligations were suspended and
(ii) reinstate (in whole or in part) any of the obligations which were
suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 U.S.C. ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions
<PAGE>
Exhibit 10(x)
Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under
this contract shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in section 3(x) (12 U.S.C. ss.
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to
the extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the Office of
Thrift Supervision (or his or her designee) at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the
Director of the Office of Thrift Supervision (or his or her designee) at the
time the Director (or his or her designee) approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
9. REINSTATEMENT OF BENEFITS UNDER SECTION 8(b).
In the event the Executive is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice described in
Section 8(b) hereof (the "Notice") during the terms of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and the Executive will be entitled to receive all of the
termination benefits provided for under Section 4 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
10. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
<PAGE>
Exhibit 10(x)
11. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
12. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by Florida law.
13. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that the Executive shall be entitled to seek specific performance of
his right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
14. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank (which payments are guaranteed by the
Company pursuant to Section 6 hereof) if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
<PAGE>
Exhibit 10(x)
15. SIGNATURES.
IN WITNESS WHEREOF, Harbor Federal Savings Bank and Harbor Florida
Bancshares, Inc. each has caused this Agreement to be executed by its duly
authorized officers, and Executive has signed this Agreement, on the 18th day of
March, 1998.
ATTEST: HARBOR FEDERAL SAVINGS BANK
/s/ H. Michael Callahan BY: /s/ Micahel J. Brown
ATTEST: HARBOR FLORIDA BANCSHARES, INC.
/s/ H. Michael Callahan BY: /s/ Michael J. Brown
WITNESS:
/s/ Tammy L. Ross /s/ Robert w. Bluestone
Executive
<PAGE>
Exhibit 10(x)
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT is made effective as of March 18, 1998 by and among
Harbor Federal Savings Bank (the "Bank"), Harbor Florida Bancshares, Inc.
("Bancshares" or the "Holding Company") and Albert L. Fort (the "Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect Executive's position therewith for the
period provided in this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to serve in the
position of Senior Vice President for the Bank, a position of substantial
responsibility.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. GENERAL.
Employee is, except as described in Section 4, an employee at will and
serves at the pleasure of the Chief Executive Officer and the Board of Directors
of the Bank (the "Board").
2. TERM OF AGREEMENT.
The term of this Agreement shall commence as of the date first above
written and shall continue for a period of three (3) years thereafter.
Commencing on the first anniversary date of this Agreement and continuing at
each anniversary date thereafter, the Board may extend this Agreement for an
additional year. The Board will review the Agreement and the Executive's
performance annually for purposes of determining whether to extend the
Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
3. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as herein defined) of
the Bank, or Bancshares, followed at any time within one (1) year of a Change in
Control, and during the term of this Agreement, by the voluntary or involuntary
termination of Executive's employment, other than for Cause as defined in
Section 3(c) hereof, the provisions of Section 4 shall apply. Upon the
occurrence of a Change in Control, Executive shall have the right to elect to
voluntarily terminate his
<PAGE>
Exhibit 10(x)
employment at any time during the term of this Agreement following any demotion,
loss of title, office or significant authority, reduction in his annual
compensation, or relocation of his principal place of employment by more than 50
miles from its location immediately prior to the Change in Control.
(b) For purposes of this Agreement, a "Change in Control" of the Bank
or the Holding Company shall mean (a) merger or consolidation where the Bank or
the Holding Company is not the consolidated or surviving association, (b)
transfer of all or substantially all of the assets of the Bank or the Holding
Company, (c) voluntary or involuntary dissolution of the Bank or the Holding
Company or (d) change in control as defined under the Change in Bank Control Act
of 1978. The surviving or resulting association, the transferee of Bank's or the
Holding Company's assets or the control person shall be bound by and have the
benefit of the provisions of this Agreement, and the Bank or the Holding Company
shall take all actions necessary to insure that such association, transferee or
control person is bound by the provisions of this Agreement.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 4 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
material provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the Board of Directors of the
Bank at a meeting of the Board called and held for that purpose (after
reasonable notice to the Executive and an opportunity for him, together with
counsel, to be heard before the Board at such meeting and which such meeting
shall be held not more than 30 days from the date of notice during which period
Executive may be suspended with pay), finding that in the good faith opinion of
the Board, the Executive was guilty of conduct justifying Termination for Cause.
4. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the voluntary or involuntary termination of
the Executive's employment, other than for Termination for Cause, the Bank and
the Company shall pay the Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to his then current
annual salary. At the election of the Executive such payment may be made in a
lump sum or paid in equal monthly installments during the
<PAGE>
Exhibit 10(x)
twelve (12) months following the Executive's termination. In the event that no
election is made, payment to the Executive will be in equal monthly
installments.
(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by the
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Bank shall cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for the Executive prior to his severance, except to the
extent such coverage may be changed in its application to all Bank employees.
Such coverage and payments shall cease upon the earlier of the expiration of
twelve (12) months or the Executive obtaining other coverage.
(c) At the effective date of this Agreement, and annually on each
anniversary, Executive shall make the election referred to in Section 4(a)
hereof with respect to whether the amounts payable under said Section 4(a) shall
be paid in a lump sum or on a monthly basis. Such election shall be irrevocable
for the year for which such election is made and shall continue in effect until
the executive has made his next annual election.
(d) Notwithstanding the preceding paragraphs of this Section 4, in no
event shall the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Code or any successor
thereto, and in order to avoid such a result Termination Benefits will be
reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal to three (3) times
Executive's "base amount", as determined in accordance with said Section 280G.
The allocation of the reduction required hereby among the Termination Benefits
provided by the preceding paragraphs of this Section 4 shall be determined by
the Executive.
5. NOTICE OF TERMINATION.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other parties thereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination which, in the instance of Termination for Cause, shall be
immediate.
6. SOURCE OF PAYMENTS.
<PAGE>
Exhibit 10(x)
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank. The
Holding Company, however, guarantees payment and provision of all amounts and
benefits due hereunder to the Executive, and if such amounts and benefits due
from the Bank are not timely paid or provided by the Bank, such amounts and
benefits shall be paid or provided by the Holding Company.
7. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition for the future or as to any act other than
that specifically waived.
8. REQUIRED REGULATORY PROVISIONS.
(a) The Board of Directors may terminate the Executive's employment at
any time, but any termination by the Board of Directors, other than Termination
for Cause, shall not prejudice the Executive's right to compensation or other
benefits under this Agreement. The Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause as
defined in Section 3 hereinabove.
(b) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) (12 U.S.C. ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss.
1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's
obligations under this contract shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Executive all or part of
the compensation withheld while their contract obligations were suspended and
(ii) reinstate (in whole or in part) any of the obligations which were
suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 U.S.C. ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, all obligations of the Bank under this
contract shall
<PAGE>
Exhibit 10(x)
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in section 3(x) (12 U.S.C. ss.
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to
the extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the Office of
Thrift Supervision (or his or her designee) at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the
Director of the Office of Thrift Supervision (or his or her designee) at the
time the Director (or his or her designee) approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
9. REINSTATEMENT OF BENEFITS UNDER SECTION 8(b).
In the event the Executive is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice described in
Section 8(b) hereof (the "Notice") during the terms of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and the Executive will be entitled to receive all of the
termination benefits provided for under Section 4 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
10. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
<PAGE>
Exhibit 10(x)
11. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
12. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by Florida law.
13. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that the Executive shall be entitled to seek specific performance of
his right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
14. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank (which payments are guaranteed by the
Company pursuant to Section 6 hereof) if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
<PAGE>
Exhibit 10(x)
15. SIGNATURES.
IN WITNESS WHEREOF, Harbor Federal Savings Bank and Harbor Florida
Bancshares, Inc. each has caused this Agreement to be executed by its duly
authorized officers, and Executive has signed this Agreement, as of the 18th day
of March, 1998.
ATTEST: HARBOR FEDERAL SAVINGS BANK
/s/ H. Michael Callahan BY: /s/ Michael J. Brown
ATTEST: HARBOR FLORIDA BANCSHARES, INC.
/s/ H. Michael Callahan BY: /s/ Michael J. Brown
WITNESS:
/s/ Tammy L. Ross /s/ Albert L. Fort
Executive
<PAGE>
Exhibit 10(x)
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT is made effective as of March 18, 1998 by and among
Harbor Federal Savings Bank (the "Bank"), Harbor Florida Bancshares, Inc.
("Bancshares" or the "Holding Company") and David C. Hankle (the "Executive").
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect Executive's position therewith for the
period provided in this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to serve in the
position of Senior Vice President for the Bank, a position of substantial
responsibility.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. GENERAL.
Employee is, except as described in Section 4, an employee at will and
serves at the pleasure of the Chief Executive Officer and the Board of Directors
of the Bank (the "Board").
2. TERM OF AGREEMENT.
The term of this Agreement shall commence as of the date first above
written and shall continue for a period of three (3) years thereafter.
Commencing on the first anniversary date of this Agreement and continuing at
each anniversary date thereafter, the Board may extend this Agreement for an
additional year. The Board will review the Agreement and the Executive's
performance annually for purposes of determining whether to extend the
Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
3. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as herein defined) of
the Bank, or Bancshares, followed at any time within one (1) year of a Change in
Control, and during the term of this Agreement, by the voluntary or involuntary
termination of Executive's employment, other than for Cause as defined in
Section 3(c) hereof, the provisions of Section 4 shall apply. Upon the
occurrence of a Change in Control, Executive shall have the right to elect to
voluntarily terminate his
<PAGE>
Exhibit 10(x)
employment at any time during the term of this Agreement following any demotion,
loss of title, office or significant authority, reduction in his annual
compensation, or relocation of his principal place of employment by more than 50
miles from its location immediately prior to the Change in Control.
(b) For purposes of this Agreement, a "Change in Control" of the Bank
or the Holding Company shall mean (a) merger or consolidation where the Bank or
the Holding Company is not the consolidated or surviving association, (b)
transfer of all or substantially all of the assets of the Bank or the Holding
Company, (c) voluntary or involuntary dissolution of the Bank or the Holding
Company or (d) change in control as defined under the Change in Bank Control Act
of 1978. The surviving or resulting association, the transferee of Bank's or the
Holding Company's assets or the control person shall be bound by and have the
benefit of the provisions of this Agreement, and the Bank or the Holding Company
shall take all actions necessary to insure that such association, transferee or
control person is bound by the provisions of this Agreement.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 4 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
material provision of this Agreement. In determining incompetence, the acts or
omissions shall be measured against standards generally prevailing in the
savings institutions industry. Notwithstanding the foregoing, Executive shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the Board of Directors of the
Bank at a meeting of the Board called and held for that purpose (after
reasonable notice to the Executive and an opportunity for him, together with
counsel, to be heard before the Board at such meeting and which such meeting
shall be held not more than 30 days from the date of notice during which period
Executive may be suspended with pay), finding that in the good faith opinion of
the Board, the Executive was guilty of conduct justifying Termination for Cause.
4. TERMINATION BENEFITS.
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by the voluntary or involuntary termination of
the Executive's employment, other than for Termination for Cause, the Bank and
the Company shall pay the Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to his then current
annual salary. At the election of the Executive such payment may be made in a
lump sum or paid in equal monthly installments during the
<PAGE>
Exhibit 10(x)
twelve (12) months following the Executive's termination. In the event that no
election is made, payment to the Executive will be in equal monthly
installments.
(b) Upon the occurrence of a Change in Control of the Bank or the
Holding Company followed at any time during the term of this Agreement by the
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Bank shall cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for the Executive prior to his severance, except to the
extent such coverage may be changed in its application to all Bank employees.
Such coverage and payments shall cease upon the earlier of the expiration of
twelve (12) months or the Executive obtaining other coverage.
(c) At the effective date of this Agreement, and annually on each
anniversary, Executive shall make the election referred to in Section 4(a)
hereof with respect to whether the amounts payable under said Section 4(a) shall
be paid in a lump sum or on a monthly basis. Such election shall be irrevocable
for the year for which such election is made and shall continue in effect until
the executive has made his next annual election.
(d) Notwithstanding the preceding paragraphs of this Section 4, in no
event shall the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Code or any successor
thereto, and in order to avoid such a result Termination Benefits will be
reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal to three (3) times
Executive's "base amount", as determined in accordance with said Section 280G.
The allocation of the reduction required hereby among the Termination Benefits
provided by the preceding paragraphs of this Section 4 shall be determined by
the Executive.
5. NOTICE OF TERMINATION.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other parties thereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination which, in the instance of Termination for Cause, shall be
immediate.
6. SOURCE OF PAYMENTS.
<PAGE>
Exhibit 10(x)
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank. The
Holding Company, however, guarantees payment and provision of all amounts and
benefits due hereunder to the Executive, and if such amounts and benefits due
from the Bank are not timely paid or provided by the Bank, such amounts and
benefits shall be paid or provided by the Holding Company.
7. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition for the future or as to any act other than
that specifically waived.
8. REQUIRED REGULATORY PROVISIONS.
(a) The Board of Directors may terminate the Executive's employment at
any time, but any termination by the Board of Directors, other than Termination
for Cause, shall not prejudice the Executive's right to compensation or other
benefits under this Agreement. The Executive shall not have the right to receive
compensation or other benefits for any period after Termination for Cause as
defined in Section 3 hereinabove.
(b) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs by a notice
served under Section 8(e)(3) (12 U.S.C. ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss.
1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's
obligations under this contract shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Executive all or part of
the compensation withheld while their contract obligations were suspended and
(ii) reinstate (in whole or in part) any of the obligations which were
suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 U.S.C. ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, all obligations of the Bank under this
contract shall
<PAGE>
Exhibit 10(x)
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in section 3(x) (12 U.S.C. ss.
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations under this contract shall be terminated, except to
the extent determined that continuation of the contract is necessary for the
continued operation of the institution: (i) by the Director of the Office of
Thrift Supervision (or his or her designee) at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the
Director of the Office of Thrift Supervision (or his or her designee) at the
time the Director (or his or her designee) approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is determined
by the Director to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
9. REINSTATEMENT OF BENEFITS UNDER SECTION 8(b).
In the event the Executive is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice described in
Section 8(b) hereof (the "Notice") during the terms of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and the Executive will be entitled to receive all of the
termination benefits provided for under Section 4 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
10. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
<PAGE>
Exhibit 10(x)
11. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
12. GOVERNING LAW.
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by Florida law.
13. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that the Executive shall be entitled to seek specific performance of
his right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
14. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank (which payments are guaranteed by the
Company pursuant to Section 6 hereof) if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
<PAGE>
Exhibit 10(x)
15. SIGNATURES.
IN WITNESS WHEREOF, Harbor Federal Savings Bank and Harbor Florida
Bancshares, Inc. each has caused this Agreement to be executed by its duly
authorized officers, and Executive has signed this Agreement, as of the 18th day
of March, 1998.
ATTEST: HARBOR FEDERAL SAVINGS BANK
/s/ H. Michael Callahan BY: /s/ Michael J. Brown
ATTEST: HARBOR FLORIDA BANCSHARES, INC.
/s/ H. Michael Callahan BY: /s/ Michael J. Brown
WITNESS:
/s/ Tammy L. Ross /s/ David C. Hankle
Executive
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001029407
<NAME> Harbor Florida Bancsh
<MULTIPLIER> 1000
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.00
<CASH> 23861
<INT-BEARING-DEPOSITS> 19902
<FED-FUNDS-SOLD> 20000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71516
<INVESTMENTS-CARRYING> 231038
<INVESTMENTS-MARKET> 235115
<LOANS> 945414
<ALLOWANCE> 11818
<TOTAL-ASSETS> 1350583
<DEPOSITS> 918126
<SHORT-TERM> 0
<LIABILITIES-OTHER> 23738
<LONG-TERM> 145000
0
0
<COMMON> 3091
<OTHER-SE> 260628
<TOTAL-LIABILITIES-AND-EQUITY> 1350583
<INTEREST-LOAN> 76231
<INTEREST-INVEST> 16246
<INTEREST-OTHER> 2681
<INTEREST-TOTAL> 95158
<INTEREST-DEPOSIT> 40219
<INTEREST-EXPENSE> 46658
<INTEREST-INCOME-NET> 48500
<LOAN-LOSSES> 297
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 24444
<INCOME-PRETAX> 29609
<INCOME-PRE-EXTRAORDINARY> 17366
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17366
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 4.04
<LOANS-NON> 2447
<LOANS-PAST> 0
<LOANS-TROUBLED> 1788
<LOANS-PROBLEM> 2107
<ALLOWANCE-OPEN> 11691
<CHARGE-OFFS> 574
<RECOVERIES> 404
<ALLOWANCE-CLOSE> 11818
<ALLOWANCE-DOMESTIC> 11818
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99
HARBOR FLORIDA BANCSHARES, 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 18
Consolidated Statement of Financial Condition - September 30,
1998 and 1997 19
Consolidated Statements of Earnings - Years ended September
30, 1998, 1997, and 1996 20
Consolidated Statements of Stockholders' Equity - Years ended
September 30, 1998, 1997, and 1996 21
Consolidated Statement of Cash Flows -Years ended September
30, 1998, 1997, and 1996 23
Notes to the Consolidated Financial Statements 24
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.
1
<PAGE>
Exhibit 99
SELECTED CONSOLIDATED
FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets............... $1,350,583 $1,131,024 $1,057,443 $886,570 $808,110
Loans (net) (1)............ 944,700 834,270 765,019 631,307 576,406
Federal funds sold......... 20,000 250 16,075 12,825 7,400
Investment securities (2).. 101,505 52,553 53,493 25,186 40,286
Mortgage-backed securities. 201,049 176,854 153,293 164,759 120,099
Real estate owned.......... 2,534 2,314 3,118 2,786 2,522
Deposits................... 918,126 911,576 851,853 720,981 673,830
FHLB advances.............. 145,000 100,000 95,000 65,000 45,000
Other borrowings........... --- 475 674 974 1,273
Stockholders' equity....... 263,719 96,802 84,832 77,500 68,251
</TABLE>
(1) Excludes loans held for sale of $714,000, $141,000, $4.9 million,
$1 million, and $25,000, as of September 30, 1998, 1997, 1996, 1995,
and 1994, respectively.
(2) Includes investments available for sale of $71.5 million, $47.6 million
and $33.5 million in 1998, 1997 and 1996, respectively.
2
<PAGE>
Exhibit 99
SELECTED CONSOLIDATED OPERATING DATA
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1998 1997 1996 1995 1994
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income .............................. $ 95,158 $ 84,814 $ 74,357 $ 64,884 $ 56,084
Interest expense ............................. 46,658 45,159 39,114 33,280 26,276
-------- -------- -------- -------- --------
Net interest income ...................... 48,500 39,655 35,243 31,604 29,808
Provision for (recovery of) loan losses ..... 297 782 (76) 460 1,553
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses ................................... 48,203 38,873 35,319 31,144 28,255
-------- -------- -------- -------- --------
Other income:
Income (loss) from real estate operations (41) 145 (301) (40) 1,250
Gain (loss) on sale of mortgage loans .... 142 188 (40) 91 118
Other .................................... 5,749 3,880 3,226 2,856 2,701
-------- -------- -------- -------- --------
Total other income .................. 5,850 4,213 2,885 2,907 4,069
-------- -------- -------- -------- --------
Other expenses:
Compensation and benefits ................ 14,282 11,931 10,690 10,048 9,433
Professional fees ........................ 589 599 527 699 1,137
SAIF deposit insurance premium ........... 572 785 6,300 1,556 1,672
Other .................................... 9,001 7,833 6,615 5,895 5,624
-------- -------- -------- -------- --------
Total other expenses ................ 24,444 21,148 24,132 18,198 17,866
-------- -------- -------- -------- --------
Income before income taxes .................. 29,609 21,938 14,072 15,853 14,458
Income tax expense ........................... 12,243 8,611 5,432 5,958 5,254
-------- -------- -------- -------- --------
Income before extraordinary item and
cumulative effect of change in accounting
principle ................................ 17,366 13,327 8,640 9,895 9,204
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 ................................... $ 17,366 $ 13,327 $ 8,640 $ 9,895 $ 9,797
======== ======== ======== ======== ========
</TABLE>
(1) Extinguishment of FHLB advances for year 1994.
3
<PAGE>
Exhibit 99
SELECTED FINANCIAL RATIOS
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (1) ............. 1.40% 1.22% .91% 1.16% 1.25%
Return on average stockholders' equity (1) 9.34 14.72 10.51 13.61 16.85
Net interest rate spread ................. 3.40 3.36 3.40 3.42 3.68
Net yield on average interest-earning
assets .............................. 4.04 3.72 3.79 3.80 3.92
Noninterest expense to average assets (1) 1.97 1.93 2.53 2.14 2.27
Net interest income to noninterest
expense (1) ......................... 1.98 1.88 1.46 1.74 1.67
Average interest-earnings assets to
average interest-bearing liabilities 116.54 108.33 109.24 109.58 106.94
Efficiency Ratio (1) ..................... 46.87 48.83 62.83 52.76 54.81
ASSET QUALITY RATIOS:
Nonperforming assets to total assets ..... .37 .43 .50 .71 .85
Allowance for loan losses to total loans . 1.25 1.40 1.44 1.60 1.64
Allowance for loan losses to
nonperforming loans ................ 483.13 453.11 507.25 286.70 329.74
Allowance for losses on real estate
owned to total real estate owned .... 20.01 19.99 35.45 40.00 33.37
CAPITAL RATIOS:
Average stockholders' equity to average
assets .............................. 15.01 8.26 8.62 8.54 7.40
Stockholders' equity to assets at period
end ................................. 19.53 8.56 8.02 8.74 8.45
</TABLE>
(1) Year ended September 30, 1996 includes one-time SAIF special assessment
expense of $4.6 million, $2.8 million net of tax. Without the one-time
SAIF special assessment, return on average assets would have been
1.20%, return on average equity would have been 13.92%, noninterest
expense to average assets would have been 2.05%, net interest income to
noninterest expense would have been 1.80% and the efficiency ratio
would have been 50.97%.
4
<PAGE>
Exhibit 99
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements." Harbor Florida
Bancshares, Inc (the "Company") desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protections of the safe harbor with respect to all such forward-looking
statements. These forward-looking statements, which are included in Management's
Discussion and Analysis, describe future plans or strategies and include the
Company's expectations of future financial results. The words "believe,"
"expect," "anticipate," "estimate," "project," and similar expressions identify
forward-looking statements. The Company's ability to predict results or the
effect of future plans or strategies or qualitative or quantitative changes
based on market risk exposure is inherently uncertain. Factors which could
affect actual results include but are not limited to i) change in general market
interest rates, ii) general economic conditions, iii) legislative/regulatory
changes, iv) monetary and fiscal policies of the U.S. Treasury and the Federal
Reserve, v) changes in the quality or composition of the Company's loan and
investment portfolios, vi) demand for loan products, vii) deposit flows, viii)
competition, and ix) demand for financial services in the Company's markets.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.
GENERAL
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 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 exceed 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, 1998, the Company's
cumulative one year interest rate sensitivity "gap" was negative 2.62%.
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.
5
<PAGE>
Exhibit 99
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 seeks to
lengthen the maturities of deposits when deemed cost effective through the
pricing and promotion of certificates of deposits; (c) the Company seeks to
attract low cost checking and transaction accounts which tend to be less
interest rate sensitive when interest rates rise; and (d) 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.
6
<PAGE>
Exhibit 99
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, 1998. For
borrowings, the table presents principal cash flows by expected maturity dates.
<TABLE>
<CAPTION>
More than
Four to More than three years
Within twelve one year to to five Over five
three months months three years years years Total
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans (2)
Fixed rate............ $ 28,178 $ 84,532 $158,511 $ 98,654 $ 159,654 $ 529,529
Adjustable rate....... 44,885 143,221 28,905 93,279 7,583 317,873
Other loans (2):
Fixed rate............ 7,296 21,888 29,844 11,698 7,451 78,177
Adjustable rate....... 23,264 8,389 --- -- -- 31,653
Mortgage-backed
securities:
Fixed rate (3)........ 16,296 48,885 59,633 25,688 27,493 177,995
Adjustable rate....... 2,426 20,628 -- -- -- 23,054
Investment securities
and other assets...... 58,114 30,092 60,960 -- -- 149,166
--------- -------- --------- --------- --------- ----------
Total............... $ 180,459 $ 357,635 $ 337,853 $ 229,319 $ 202,181 $1,307,447
--------- --------- --------- --------- --------- ----------
Interest-bearing liabilities:
Deposits (4):
NOW accounts.......... $ 6,013 $ 18,039 $ 23,090 $ 8,312 $ 4,675 $ 60,129
Passbook accounts..... 13,905 41,714 31,147 4,983 949 92,698
Money market
accounts............ 8,215 24,644 7,886 315 14 41,074
Certificates of
deposits............ 146,353 314,625 158,980 38,018 866 658,842
Borrowings............... --- --- 5,000 32,000 108,000 145,000
--------- --------- --------- ---------- --------- ----------
Total............... $ 174,486 $ 399,022 $ 226,103 $ 83,628 $ 114,504 $ 997,743
--------- --------- --------- ---------- --------- ----------
Excess (deficiency) of
interest earning assets
over interest-bearing
liabilities.............. $ 5,973 $ (41,387) $ 111,750 $ 145,691 $ 87,677 $ 309,704
======= =========== ========= ========= ======== =========
Cumulative excess
(deficiency) of interest-
earning assets over
interest-bearing
liabilities.............. $ 5,973 $ (35,414) $ 76,336 $ 222,027 $ 309,704
======= ========== ======== ========= =========
Cumulative excess
(deficiency) of interest-
earning assets over
interest-bearing
liabilities as a percent of
total assets............. .44% (2.62)% 5.65% 16.44% 22.93%
==== ======= ===== ====== ======
</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
7
<PAGE>
Exhibit 99
the research department of a primary securities dealer. For fixed rate
mortgages and mortgage-backed securities, annual prepayment rates from 11%
to 57%, based on the coupon rate, were used.
(2) Balances have been reduced for loans in process and deferred loan fees and
discounts which aggregated to $49.9 million at September 30, 1998.
Nonperforming loans aggregating $2.4 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 $107.9 million at September 30, 1998.
(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
$116.8 million or 8.65% of total assets.
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.
8
<PAGE>
Exhibit 99
<TABLE>
<CAPTION> Years Ended September 30,
1998 1997 1996
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 ..... $ 7,959 $ 448 5.63% $ 7,404 $ 399 5.39% $ 12,679 $ 669 5.28%
Interest-bearing
deposits ............. 40,531 2,233 5.51 29,674 1,614 5.44 24,062 1,320 5.49
Investment securities .. 82,076 4,945 6.02 63,743 3,866 6.07 39,825 2,462 6.18
Mortgage-backed
securities ........... 173,177 11,301 6.53 153,347 10,088 6.58 152,895 10,155 6.64
Mortgage loans ......... 791,491 66,329 8.38 718,319 60,000 8.35 620,166 52,237 8.42
Other loans ............ 105,287 9,902 9.40 94,634 8,847 9.35 79,875 7,514 9.41
---------- ---------- ------- ---------- ---------- ------- ---------- ---------- -------
Total interest-earning
assets ............ 1,200,521 95,158 7.93 1,067,121 84,814 7.94 929,502 74,357 8.00
------ ---- ------ ---- ------ ----
Noninterest earning
assets ................. 38,155 29,575 24,481
------ ------ ------
Total assets ............. 1,238,676 1,096,696 953,983
========= ========= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities
Deposits:
Transaction accounts . $ 158,723 $ 1,894 1.19% $ 138,721 $ 1,896 1.37% $ 118,398 $ 1,724 1.46%
Passbook savings ..... 87,760 1,674 1.91 77,707 1,356 1.75 79,617 1,506 1.89
Official checks ...... 8,004 -- .00 5,612 -- .00 6,400 -- .00
Certificate savings .. 670,628 36,651 5.47 663,143 35,892 5.41 570,518 31,210 5.47
---------- ---------- ------- ---------- ---------- ------- ---------- ---------- -------
Total deposits ....... 925,115 40,219 4.35 885,183 39,144 4.42 774,933 34,440 4.44
FHLB advances .......... 104,877 6,419 6.12 99,342 5,962 6.00 75,096 4,593 6.12
Other borrowings ....... 167 20 11.87 561 53 9.48 857 81 9.47
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities ............ 1,030,159 46,658 4.53 985,086 45,159 4.58 850,886 39,114 4.60
------ ---- ------ ---- ------- -----
Noninterest-bearing
liabilities ............ 22,648 21,045 20,863
------ ------ ------
Total liabilities ........ 1,052,807 1,006,131 871,749
Stockholders' equity ..... 185,869 90,565 82,234
------- ------ ------
Total liabilities and
stockholders' equity ... 1,238,676 1,096,696 953,983
========= ========= =======
Net interest income/
interest rate
spread (2) ............. $ 48,500 3.40% $39,655 3.36% $ 35,243 3.40%
== ========== ----- ======= ----- ========== -----
Net interest-earning
assets/net interest
margin (3) .............. $ 170,362 4.04% $82,035 3.72% $78,616 3.79%
== ========== ----- ======= ----- ======= -----
Interest-earning assets
to interest-bearing
liabilities ............ 116.54% 108.33% 109.24%
------- ------- -------
</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. Net interest margin increase in 1998 is
due primarily to interest earned on cash proceeds from the conversion of
Harbor Financial, M.H.C. and concurrent stock offering.
9
<PAGE>
Exhibit 99
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.
<TABLE>
<CAPTION>
Years Ended September 30,
Increase (Decrease)
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
------------- ------------- -------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- --- ------ ---- ---
(IN THOUSANDS)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits ........... $ 638 $ 30 $ 668 $ 21 $ 3 $ 24 $ 194 $ (74) $ 120
Investment securities 1,086 (7) 1,079 1,424 (20) 1,404 (202) 312 110
Mortgage-backed
securities ......... 1,294 (81) 1,213 29 (96) (67) 360 182 542
Mortgage loans ....... 6,207 122 6,329 8,259 (496) 7,763 6,681 673 7,354
Nonmortgage loans:
Commercial loans ... 417 (22) 395 85 (72) 13 46 (110) (64)
Consumer loans ..... 601 59 660 1,289 31 1,320 1,305 106 1,411
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest income .. 10,243 101 10,344 11,107 (650) 10,457 8,384 1,089 9,473
-------- -------- -------- -------- -------- -------- -------- -------- --------
Interest expense:
Deposits:
Transaction accounts $ 224 $ (226) $ (2) $ 278 $ (106) $ 172 $ 144 $ (202) $ (58)
Passbook savings ... 192 126 318 (33) (117) (150) (114) (98) (212)
Certificate savings 409 350 759 5,013 (331) 4,682 3,806 1,277 5,083
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total deposits ..... 825 250 1,075 5,258 (554) 4,704 3,836 977 4,813
FHLB advances ........ 331 126 457 1,455 (86) 1,369 1,035 12 1,047
Other borrowings ..... (36) 3 (33) (26) (2) (28) (26) -- (26)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest expense . 1,120 379 1,499 6,687 (642) 6,045 4,845 989 5,834
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest income .... $ 9,123 $ (278) $ 8,845 $ 4,420 $ (8) $ 4,412 $ 3,539 $ 100 $ 3,639
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
10
<PAGE>
Exhibit 99
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
GENERAL
Net income for the year ended September 30, 1998 increased 30.3% to $17.4
million or 57 cents per diluted share, compared to $13.3 million or 43 cents per
diluted share for the same period last year. Net interest income increased 22.3%
to $48.5 million for the year ended September 30, 1998, compared to $39.6
million for the year ended September 30, 1997. This increase was due to an
increase in interest income of $10.4 million offset by an increase in interest
expense of $1.5 million. Other income increased to $5.8 million for the year
ended September 30, 1998 from $4.2 million for the year ended September 30,
1997. Other expenses increased to $24.4 million for the year ended September 30,
1998 from $21.1 million for the year ended September 30, 1997.
INTEREST INCOME
Total interest income increased to $95.1 million for the year ended September
30, 1998 from $84.8 million for the year ended September 30, 1997. This increase
was due primarily to an increase in average interest-earning assets to $1.201
billion for the year ending September 30, 1998, compared to $1.067 billion for
the year ending September 30, 1997 and $874,000 of interest income recognized on
the payoff of a problem commercial real estate loan. The increase in average
interest-earning assets was due primarily to the cash proceeds from the
conversion of Harbor Financial, M.H.C. and concurrent stock offering (the "Stock
Offering"). Additionally, in the quarter ending December 31, 1997, the Company
received final payment on a commercial real estate loan. This loan was
performing, but had been seriously delinquent in the past and had other
characteristics which caused management to be uncertain about the ability of the
borrower to comply with the loan repayment terms. Additional interest income was
recognized in the amount of $874,000 due to deferred cash interest payments and
unearned purchase discount remaining at time of payoff of the loan. Interest
income on loans increased $7.4 million to $76.2 million for the year ended
September 30, 1998 from $68.8 million for the year ended September 30, 1997.
This increase was a result of a $83.8 million increase in the average balance to
$896.8 million in 1998 from $812.9 million in 1997 and the $874,000 of interest
income recognized on the payoff of the problem commercial real estate loan. The
increase in the average balance of total loans was mainly due to significant
growth in the residential and commercial loan portfolios resulting from high
levels of loan originations. Interest income on investment securities increased
$1.1 million to $5.0 million for the year ended September 30, 1998 from $3.9
million for the year ended September 30, 1997. This increase was primarily the
result of a $18.3 million increase in the average balance to $82.0 million in
1998 from $63.7 million in 1997. The increase in the average balance of
investment securities was primarily due to the purchase of FHLB and FNMA Notes
with the proceeds from the Stock Offering. Interest income on mortgage-backed
securities increased $1.2 million to $11.3 million for the year ended September
30, 1998 from $10.1 million for the year ended September 30, 1997. This increase
was primarily the result of a $19.8 million increase in the average balance to
$173.2 million in 1998 from $153.4 million in 1997. The increase in the average
balance of mortgage-backed securities was primarily due to the purchase of
seven-year balloon securities and fifteen-year fixed rate securities with the
proceeds from new FHLB advances.
INTEREST EXPENSE
Total interest expense increased to $46.6 million for the year ended September
30, 1998 from $45.1 million for the year ended September 30, 1997. This increase
was due primarily to an increase in average interest-bearing liabilities to
$1.030 billion for the year ended September 30, 1998 from $985.1 million for the
year ended September 30, 1997. The average interest rate paid on
interest-bearing liabilities was 4.53% for the year ended September 30, 1998
compared to 4.58% for the year ended September 30, 1997, a decrease of 5 basis
points. Interest expense on deposits increased $1.1 million to $40.2 million for
the year ended September 30, 1998 from $39.1 million for the year ended
September 30, 1997. This increase was due primarily to an increase of $39.9
million in the average balance to $925.1 million in 1998 from $885.2 million in
1997. The average interest rate paid on deposits decreased by 7 basis points to
4.35% for the year ended September 30, 1998 from 4.42% for the year ended
September 30, 1997. This decrease was primarily due to the change in deposit mix
to lower rate core deposits from higher rate certificates. The average deposit
mix changed to 27.5% and 72.5% of core deposits and certificates, respectively,
for the year ended September 30, 1998 from 25.1% and 74.9% for the same period
in 1997. Interest expense on FHLB advances and other borrowings increased
$424,000 to $6.4 million for the year ended September 30, 1998 from $6.0 million
for the year ended September 30, 1997. This increase was the result of an
increase of $5.5 million in the average balance to $104.9 million in 1998 from
$99.9 million in 1997 primarily due to proceeds from new long-term fixed rate
advances taken in order to fund the purchase of mortgage-backed securities,
partially offset by maturities in 1998 of short-term advances taken in 1997 to
fund purchases of FHLB Notes.
<PAGE>
Exhibit 99
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 $297,000 for the year ended September 30, 1998 compared to $782,000
for the year ended September 30, 1997. The provision for loan losses for the
year ended September 30, 1998 was principally comprised of a credit of
approximately $909,000 related to a decrease in the level of classified loans, a
charge of approximately $1.1 million due to overall loan portfolio growth and a
charge of approximately $103,000 for net charge offs. 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 allowance for loan losses was at $11.8 million and $11.7 million
for September 30, 1998 and 1997, respectively. The allowance was 1.25% and 1.40%
of total loans at September 30, 1998 and 1997, respectively, and was 211.9% and
117.5% of classified loans at September 30, 1998 and 1997, respectively. The
Company had net charge offs of $170,000 and $107,000 for the years ended
September 30, 1998 and 1997, 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 increased by $1.6 million to $5.8 million for the year ended
September 30, 1998 from $4.2 million for the year ended September 30, 1997, due
primarily to a $719,000 gain on the sale of the Company's ownership interest in
its data processing servicer, a $596,000 gain on the sale of land and buildings
and an increase of $678,000 in other fees and service charges. Other fees and
service charges, primarily from fees and service charges on deposit products,
was $4.0 million and $3.3 million for the years ended September 30, 1998 and
1997, respectively. This increase was primarily due to the growth in deposits.
OTHER EXPENSE
Other expense increased by $3.3 million to $24.4 million for the year ended
September 30, 1998 from $21.1 million for the year ended September 30, 1997. The
increase was primarily due to an increase of $2.4 million in compensation and
benefits, an increase of $319,000 in occupancy expense, an increase of $839,000
in other expense partially offset by a decrease of $213,000 in SAIF deposit
insurance premiums. The increase in compensation and benefits is due primarily
to additional staff required to support the growth in loans and deposits and an
increase of $910,000 in noncash expense of stock benefit plans. The increase in
occupancy expense is due primarily to an increase in data processing equipment
expense. The increase in other expense is due primarily to an increase of
$116,000 in Delaware franchise tax, $108,000 in deposit account losses and other
increases resulting from the growth in loans and deposits. The decrease in SAIF
deposit insurance premiums is due to lower assessment rates resulting from The
Deposit Insurance Act of 1996.
INCOME TAXES
Income tax expense increased by $3.6 million to $12.2 million for the year ended
September 30, 1998 from $8.6 million for the year ended September 30, 1997, due
primarily to an increase in pretax accounting income. The effective tax rates
were 41% and 39% for the years ended September 30, 1998 and 1997, respectively.
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 43 cents per diluted share, compared to $11.5 million or 39 cents per
diluted 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 29 cents per diluted 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.
12
<PAGE>
Exhibit 99
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.
PROVISION FOR LOAN LOSSES
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
performing commercial real estate loans. 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.
13
<PAGE>
Exhibit 99
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.
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 years ended September 30, 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
On March 18, 1998, the Company completed its reorganization and stock offering
in connection with the conversion of Harbor Financial, M.H.C. The Company sold
16,586,752 shares of common stock for $10.00 per share in the Stock Offering.
Cash proceeds after costs and funding of the Company's ESOP was approximately
$150 million. The company also issued 14,112,400 exchange shares (exchange ratio
of 6.0094 to 1) to existing Harbor Florida Bancorp, Inc. public stockholders.
The net proceeds 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 4% of deposits and short-term borrowings. It is the Company's policy
to maintain average monthly levels of liquid assets of 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
interest-earning assets. At September 30, 1998, 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 $199.2 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, 1998 was $399.4 million, which was $362.4 million in excess of the
minimum requirement of $37 million.
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 $199.2
million at September 30, 1998 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 $20.7 million, $15.7 million, and $9.9 million for the
years ended September 30, 1998, 1997 and 1996, respectively.
Net cash used by the Company's investing activities (i.e., cash disbursements,
primarily for its investment securities, mortgage-backed securities, and loan
portfolios) was $188.2 million, $93.8 million, and $86.2 million for the years
ended September 30, 1998, 1997 and 1996, respectively. The increase in 1998 was
principally due to a $43.6 million net increase in loans and a $50.9 million
increase in the purchase of investment securities.
14
<PAGE>
Exhibit 99
Net cash provided by the Company's financing activities (i.e., cash receipts
primarily from net increases in deposits and net FHLB advances) was $198.4
million, $62.7 million, and $86.2 million for the years ended September 30,
1998, 1997, and 1996, respectively. The increase in 1998 was principally due to
$150.2 million net proceeds from the Stock Offering.
The Company's liquid assets consist primarily of investment securities, federal
funds and cash. At September 30, 1998, the Company had liquid assets of $165.3
million, with loan commitments of $36.6 million (consisting of unused lines of
credit to homebuilders and residential and commercial loan commitments), letters
of credit of $1.4 million and unfunded loans in process of $46.2 million (the
latter consisting primarily of residential loans in process).
IMPACT OF NEW ACCOUNTING STANDARDS
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("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 ending
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 ending September 30, 1999.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"). Statement 133 is effective for fiscal years beginning after June 15,
1999, with earlier adoption permitted. Statement 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. It
is currently anticipated that the Company will adopt Statement 133 on October 1,
1999, and that the statement will not have a significant financial statement
impact upon adoption.
REGULATORY MATTERS
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 Harbor Federal Savings
Bank (the "Bank"), to a one-time assessment of 65.7 basis points of assessable
deposits as of March 31, 1995, and provided 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 includes 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 Year 2000 problem represents one of the biggest challenges to face the
information technology age. The problem results from efforts to store data
efficiently in the early years of computer development, when computer memory was
at a premium. In those years, computer programmers made the decision, almost
universally followed, to store the year as a two-digit number (e.g., 75) instead
of a four-digit number (e.g., 1975). Therefore, when the next century arrives,
the date "00" may be interpreted as "1900" instead of "2000". This can cause
15
<PAGE>
Exhibit 99
systems to lock up, crash or provide erroneous information. The Year 2000
problem affects computer systems in all industries, both domestically and
internationally. It is a complex and difficult problem because of the number of
systems potentially impacted and the interdependence of systems.
The Company has been addressing Year 2000 issues, by developing plans and
implementing solutions utilizing the guidelines and five management phases
recommended by the Federal Financial Institutions Examination Council (FFIEC).
The five phases are: 1) AWARENESS Define the Year 2000 issues, gain executive
level support, establish a project team, develop a strategy to address all
internal and external systems and discuss Year 2000 plans with vendors, 2)
ASSESSMENT - Assess the size and complexity of the issues and detail the
magnitude of the effort necessary to address them, 3) RENOVATION - Convert,
replace or eliminate software, hardware and date sensitive items as necessary
and monitor vendors' renovation activities, 4) VALIDATION - Test and verify
software, systems components, other applicable date sensitive items and
contingency plans, and 5) IMPLEMENTATION - Put tested date sensitive items into
production, monitor implementation with vendors, and execute contingency plans
as necessary.
The Year 2000 issue is the Company's top technology priority. Even so, the
Company is treating this problem as a "business" issue, and not one just
affecting technology. To successfully prepare for the Year 2000, enterprise
coordination has been established and resources have been mobilized across the
company to support this effort. The Company has also developed a Year 2000 plan
(the "Millennium Plan") which was first presented to the Board of Directors
during June 1997. Management provides monthly progress reports to the Company's
Systems Corporate Steering Committee which oversees all Systems activities,
including the Year 2000 plan. In addition, the Board of Directors is updated
monthly on the Company's Year 2000 process.
The Company has identified and assessed its system level software including
operating systems and networking software; applications software; data
processing hardware platforms such as personal computers and automated teller
machines; customer, service bureau, and third party interfaces; and
environmental systems including, but not limited to, climate control systems,
sprinklers, elevators, and security systems. The Company is primarily reliant on
external third party vendors for its computer output and processing, as well as
other significant functions and services. Management is currently working with
these third party vendors to assess their Year 2000 readiness. Based upon the
current assessment, management believes that with planned modifications to
existing software and hardware and planned conversions to new software and
hardware, the Company's third party vendors are taking the appropriate steps to
ensure critical systems will function properly for the Year 2000.
To assess the Company's date sensitive items, each item was identified as
mission critical, mission necessary, mission important and non mission
necessary. Mission critical items are the primary focus for the Company. The
largest component of mission critical items is the Company's service bureau,
which has informed the Company that it expects to complete testing of its
updated systems by the end of 1998. The Company was significantly involved in
the initial phase of testing the service bureau's updated systems. This testing
was completed in October 1998 and substantially all systems evidenced Year 2000
compliance. Management currently expects the majority of modifications,
conversions and related testing of all vendors to be completed by December 31,
1998 with any remaining ones being completed by March 31, 1999. Ninety percent
(90 %) of the Company's remaining mission critical and mission necessary vendors
have provided written assurance that their products and services will be Year
2000 compliant.
While the Company has received such assurances from these vendors, risk exists
in that the assurances are not guarantees and may not be enforceable. Thus, in
the event such vendors' products and/or services are not Year 2000 compliant,
the Company's recourse in the event of such failure may be limited. If the
required modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 issue could have a material impact on the operations
of the Company. Other risk factors associated with the Year 2000 event include
the risk that the Company's business could be disrupted due to the service
bureau and customer system failures, or even the possible loss of electrical
power or phone service. The Company could also be subjected to litigation due to
Year 2000 non compliance from customers, borrowers and vendors as a result of
both internal and third party system failures.
It is the intention of the Company to maintain normal business operations during
the Year 2000 transition and beyond. The Company has developed its own
company-wide Year 2000 Contingency Plan as an addition to the Company's
Corporate Recovery Plan. Together these plans provide the means to help insure
the continuity of daily operations in the event of a loss of essential resources
due to Year 2000 induced failures. They describe individual contingency plans
concerning distinctive software and hardware issues, operational plans for
continuing operations, and specific policies and procedures to follow up on the
occurrence of a power outage, computer interruptions, telecommunication
interruptions, hurricanes, etc. Such plans identify participants, processes and
equipment that will be necessary to permit the Company to continue operations.
Testing of the Contingency Plan actions started August 1, 1998 and will continue
through September 30, 1999. Third party testing processes will depend on the
nature of the third party and will be independently agreed upon for each party.
Recommendations and adjustments to the contingency plan will be made based on
the results of the testing and necessary circumstances.
16
<PAGE>
Exhibit 99
Management has also completed a review of risk related to the Company's
customers. The Company sent brochures to customers and questionnaires to
borrowers and vendors. Upon review of customer risk, it was determined that only
commercial loan customers posed any significant potential risk related to the
Year 2000. As of June 30, 1998, the Company had contacted all of its commercial
loan customers (514 borrowers with loans outstanding aggregating $108,090,700
million) regarding the customers' awareness of the Year 2000 problem. While no
assurance can be given that its customers will be Year 2000 compliant,
management believes, based on representations of such customers and reviews of
their operations, that the customers are either addressing the appropriate
issues to insure compliance or that they are not faced with material Year 2000
issues. Management also regularly reviews the need to establish a specific
reserve for potential losses associated with the Year 2000 issue. As of
September 30, 1998, such a reserve was not necessary. Furthermore, in
substantially all cases the credit extended to such borrowers is collateralized
by real estate which inherently minimizes the Company's exposure in the event
that such borrowers do experience problems or delays becoming Year 2000
compliant. Additionally, management has developed a liquidity contingency plan
should any unlikely problems occur with Fund Providers or Capital Market/Asset
Management Counter parties.
A Year 2000 budget has been established. Although the costs of modifications to
the existing software is being primarily absorbed by the third party vendors,
the Company recognized the need to purchase new hardware and software. Based
upon current estimates, the Company has identified approximately $731,000 in
total costs, including hardware, software, and other issues, for completing the
Year 2000 project. Of that amount, approximately $490,000 was incurred during
the year ended September 30, 1998, with the remaining $241,000 budgeted for the
year ending September 30, 1999.
Due to the general uncertainty inherent in the Year 2000 issues, there can be no
assurance that potential systems interruptions or unanticipated additional
expense incurred to obtain Year 2000 compliance would not have a material
adverse effect on the Company's business, financial condition, results of
operations and business prospects. Nevertheless, the Company believes that, with
the implementation and completion of the Year 2000 process, the possibility of
significant interruptions of normal operations and additional expenses should be
reduced. Further, all disclosure concerning Year 2000 issues should be
considered "Year 2000 Readiness Disclosure" pursuant to the Year 2000
Information and Readiness Disclosure Act. The Year 2000 information provided
herein should be read in connection with the Year 2000 Information and Readiness
Disclosure Act which, among other things, mandates that certain Year 2000
readiness disclosures may not be used in litigation.
17
<PAGE>
Exhibit 99
INDEPENDENT AUDITORS' REPORT
Board of Directors
Harbor Florida Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Harbor Florida Bancshares, Inc., (formerly Harbor Florida Bancorp, Inc.) and
subsidiaries as of September 30, 1998 and 1997, 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, 1998. These consolidated
financial statements are the responsibility of Harbor Florida Bancshares, 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
Bancshares, Inc. and subsidiaries at September 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1998 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
West Palm Beach, Florida
October 9, 1998
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
18
<PAGE>
Exhibit 99
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 AND 1997 1998 1997
- --------------------------- ---- ----
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<S> <C> <C>
Cash and amounts due from depository institutions $ 23,861 $ 16,899
Interest-bearing deposits in other banks 19,902 15,736
Federal funds sold 20,000 250
Investment securities held to maturity (estimated market value of $30,273 in 1998
and $4,993 in 1997) 29,989 5,000
Investment securities available for sale at estimated market value 71,516 47,553
Mortgage-backed securities held to maturity (estimated market value of $204,842
in 1998 and $178,954 in 1997) 201,049 176,854
Loans held for sale (estimated market value of $736 in 1998 and $144 in 1997) 714 141
Loans, net 944,700 834,270
Accrued interest receivable 7,872 7,033
Real estate owned 2,534 2,314
Premises and equipment, net 16,927 13,313
Federal Home Loan Bank stock 8,212 7,595
Goodwill, net 2,563 3,045
Other assets 744 1,021
---------- ----------
Total assets $1,350,583 $1,131,024
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 918,126 $ 911,576
Short-term borrowings --- 30,100
Long-term debt 145,000 70,375
Advance payments by borrowers for taxes and insurance 17,608 15,924
Income taxes payable 761 628
Other liabilities 5,369 5,619
--------- ---------
Total liabilities 1,086,864 1,034,222
--------- ---------
Commitments and contingencies --- ---
Stockholders' Equity:
Preferred stock; $.10 par value; authorized 10,000,000 shares; none issued and
outstanding --- ---
Common stock; $.10 par value; authorized 70,000,000 shares; issued and
outstanding 30,909,830 shares at September 30, 1998 and 30,522,862 at
September 30, 1997 3,091 3,052
Paid-in capital 189,958 23,874
Retained earnings 83,355 71,203
Common stock purchased by:
Employee stock ownership plan (ESOP) (13,344) (374)
Deferred compensation plan --- (946)
Net unrealized gain (loss) on investment securities available for sale, net of
income taxes 659 (7)
------------- ----------------
Total stockholders' equity 263,719 96,802
----------- ------------
Total liabilities and stockholders' equity $1,350,583 $1,131,024
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
19
<PAGE>
Exhibit 99
CONSOLIDATED STATEMENTS
OF EARNINGS
YEARS ENDED SEPTEMBER 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income:
<S> <C> <C> <C>
Loans $ 76,231 $ 68,847 $ 59,751
Investment securities 4,945 3,866 2,462
Mortgage-backed securities 11,301 10,088 10,155
Other 2,681 2,013 1,989
-------- -------- --------
Total interest income 95,158 84,814 74,357
------- ------- -------
Interest expense:
Deposits 40,219 39,144 34,440
Other 6,439 6,015 4,674
-------- -------- --------
Total interest expense 46,658 45,159 39,114
------- ------- -------
Net interest income 48,500 39,655 35,243
Provision for (recovery of) loan losses 297 782 (76)
-------- -------- ---------
Net interest income after provision for
(recovery of) loan losses 48,203 38,873 35,319
------- ------- -------
Other income:
Other fees and service charges 3,986 3,308 2,797
Income (losses) from real estate operations (41) 145 (301)
Gain (loss) on sale of mortgage loans 142 188 (40)
Other 1,763 572 429
------- ------- --------
Total other income 5,850 4,213 2,885
------- ------ -------
Other expenses:
Compensation and employee benefits 14,282 11,931 10,690
Occupancy 3,365 3,046 2,632
SAIF deposit insurance premium 572 785 6,300
Other 6,225 5,386 4,510
-------- ------ --------
Total other expense 24,444 21,148 24,132
------- ------- -------
Income before income taxes 29,609 21,938 14,072
Income tax expense 12,243 8,611 5,432
-------- --------- --------
Net income $ 17,366 $ 13,327 $ 8,640
======== ======== ========
Net income per share
Basic $ .58 $ .44 $ .29
===== ===== =====
Diluted $ .57 $ .43 $ .29
===== ===== =====
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
20
<PAGE>
Exhibit 99
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Common stock Unrealized
Common Common purchased by gain (loss) on
stock stock deferred securities
Common Paid-in Retained purchased purchased compensation available
stock capital earnings by ESOP by RRP's plan for sale, net Total
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1995 .............................. $ 3,015 $ 21,489 $ 54,672 $ (974) $ (267) $ (435) $ -- $ 77,500
Net income ........................... -- -- 8,640 -- -- -- -- 8,640
Stock options exercised .............. 14 220 -- -- -- -- -- 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 .............................. $ 3,029 $ 22,359 $ 60,893 $ (674) $ (53) $ (673) $ (49) $ 84,832
-------- -------- -------- -------- -------- -------- -------- --------
Net income ........................... -- -- 13,327 -- -- -- -- 13,327
Stock options exercised .............. 23 367 -- -- -- -- -- 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
available for sale, net ........... -- -- -- -- -- -- 42 42
Tax benefit of non-
qualified stock options ........... -- 99 -- -- -- -- -- 99
Stock purchased by
deferred compensation
plan .............................. -- -- -- -- -- (273) -- (273)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30,
1997 .............................. $ 3,052 $ 23,874 $ 71,203 $ (374) $ -- $ (946) $ (7) $ 96,802
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
21
<PAGE>
Exhibit 99
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Common stock Unrealized
Common Common purchased by gain (loss)
stock stock deferred on securities
Common Paid-in Retained purchased purchased compensation available
stock capital earnings by ESOP by RRP's plan for sale, net Total
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1997 ......................... $ 3,052 $ 23,874 $ 71,203 $ (374) $ -- $ (946) $ (7) $ 96,802
--------- --------- --------- --------- ------- --------- --------- ---------
Net income ...................... -- -- 17,366 -- -- -- -- 17,366
Reorganization of MHC ........... -- -- 200 -- -- -- -- 200
Proceeds of stock offering,
net .......................... -- 163,493 -- -- -- -- -- 163,493
Issuance of ESOP shares ......... -- -- -- (13,269) -- -- -- (13,269)
Stock options exercised ......... 39 618 -- -- -- -- -- 657
Amortization of award of
ESOP shares .................. -- 1,798 -- 299 -- -- -- 2,097
Dividends paid .................. -- -- (5,414) -- -- -- -- (5,414)
Change in unrealized
gain(loss) on securities
available for sale, net ...... -- -- -- -- -- -- 666 666
Tax benefit of stock plans ...... -- 175 -- -- -- -- -- 175
Stock purchased by
deferred compensation
plan ......................... -- -- -- -- -- (100) -- (100)
Satisfaction of deferred
compensation liability ....... -- -- -- -- -- 1,046 -- 1,046
--------- --------- --------- ------- --------- --------- --------- ---------
Balance at September 30,
1998 ......................... $ 3,091 $ 189,958 $ 83,355 $ (13,344) $ -- $ -- $ 659 $ 263,719
========= ========= ========= ========= ======= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
22
<PAGE>
Exhibit 99
CONSOLIDATED STATEMENTS
OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
Cash provided by operating activities:
<S> <C> <C> <C>
Net income ................................................... $ 17,366 $ 13,327 $ 8,640
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of stock benefit plans ...................... 2,097 1,209 996
Tax benefit of stock plans credited to capital ........... 175 292 168
Originations of loans held for sale ...................... (9,556) (5,360) (8,554)
Proceeds from sale of loans held for sale ................ 8,983 8,395 4,693
Depreciation and amortization ............................ 1,282 1,103 1,104
Deferred income tax provision (benefit) .................. (208) 1,781 (1,365)
Increase in deferred loan fees and costs ................. 1,816 1,133 1,047
Amortization of deferred loan fees and costs ............. (1,195) (926) (973)
Amortization of goodwill ................................. 221 236 71
Net amortization (accretion) of other purchase
accounting adjustments .............................. 80 (12) (20)
Gain on sale of premises and equipment ................... (594) (239) --
(Gain) loss on sale of real estate owned ................. (176) (127) 39
Accretion of discount on purchased loans ................. (352) (17) (24)
Increase in accrued interest receivable .................. (839) (411) (184)
Provision for (recovery of) loan losses .................. 297 782 (76)
Provision for (recovery of) losses on real estate owned .. 136 (150) 117
(Increase) decrease in other assets ...................... 277 157 (143)
Increase (decrease) in income taxes payable ............. 133 (334) 469
Increase (decrease) in other liabilities ................. 746 (5,371) 3,940
--------- --------- ---------
Net cash provided by operating activities ................ 20,689 15,468 9,945
--------- --------- ---------
Cash used by investing activities:
Net increase in loans ........................................ (113,365) (69,732) (72,973)
Purchase of mortgage-backed securities ....................... (100,222) (61,769) (29,265)
Proceeds from principal repayments of mortgage-backed
securities ............................................... 75,827 38,031 40,068
Proceeds from maturities and calls of investment securities
held to maturity ......................................... 5,000 35,000 --
Purchase of investment securities held to maturity ........... (29,983) (20,000) (20,000)
Proceeds from maturities and calls of investment securities
available for sale ....................................... 47,582 15,533 10,595
Proceeds from sale of investment securities available for sale -- -- 6,745
Purchase of investment securities available for
sale ................................................... (70,427) (29,500) (17,939)
Proceeds from sale of real estate owned ...................... 2,111 2,202 1,434
Purchase of premises and equipment ........................... (5,602) (4,068) (1,423)
Proceeds from sale of premises and equipment ................. 1,460 587 1,590
FHLB stock purchase .......................................... (617) (437) (619)
Purchase of Treasure Coast Bank, net of cash acquired ........ -- -- (4,451)
Other ........................................................ -- 306 --
--------- --------- ---------
(188,236) (93,847) (86,238)
--------- --------- ---------
Net cash used by investing activities
</TABLE>
<PAGE>
Exhibit 99
CONSOLIDATED STATEMENTS
OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
Cash provided by financing activities:
<S> <C> <C> <C>
Net increase in deposits ................................... 6,751 59,816 60,679
---------
Net (repayments of) proceeds from short-term borrowings .... (30,400) 5,100 15,000
Repayments of long-term borrowings ......................... (75) (299) (300)
Net proceeds from long-term borrowings ..................... 75,000 -- 15,000
Increase (decrease) in advance payments by borrowers for
taxes and insurance .................................... 1,682 712 (1,994)
Dividends paid ............................................. (5,414) (3,017) (2,419)
Common stock options exercised ............................. 657 390 234
Net proceeds from issuance of common stock ................. 150,224 -- --
--------- --------- ---------
Net cash provided by financing activities .............. 198,425 62,702 86,200
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ... 30,878 (15,677) 9,907
Cash and cash equivalents - beginning of period ............... 32,885 48,562 38,655
--------- --------- ---------
Cash and cash equivalents - end of period ..................... $ 63,763 $ 32,885 $ 48,562
========= ========= =========
Supplemental disclosures:
Cash paid for:
Interest................................................ $ 46,509 $ 45,159 $ 39,324
Taxes .................................................. 12,142 6,918 6,161
Noncash investing and financing activities:
Additions to real estate acquired in settlement of loans
through foreclosure ............................... 2,815 2,459 2,879
Sale of real estate owned financed by the Company ...... 524 1,337 1,044
Transfer of investment securities from held to maturity
to available for sale ............................. -- -- 26,011
Change in unrealized gain (loss) on securities available
for sale .......................................... 1,084 68 (80)
Change in deferred taxes related to securities available
for sale .......................................... (418) (26) 31
Transfer of loans held for sale to held for maturity ... -- 1,693 --
Issue ESOP common stock ................................ 13,269 -- --
Addition to retained earnings due to merger of Harbor
Financial, M.H.C .................................. 201 -- --
Satisfaction of deferred compensation plan ............. 1,046 -- --
Transfer to short-term borrowings from long-term debt .. 300 -- --
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
23
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997, AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF BUSINESS, REORGANIZATION AND OFFERING OF COMMON STOCK
Harbor Florida Bancshares, Inc. (the "Company" or "Bancshares") is the 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. Consequently, its
net income is derived from the Bank. The Bank provides a wide range of banking
services and 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.
Prior to March 18, 1998, the Company's predecessor entity, Harbor Florida
Bancorp, Inc. ("Bancorp"), was owned approximately 53.37% by Harbor Financial
M.H.C. ("Mutual Holding Company") and 46.63% by public shareholders. On March
18, 1998, pursuant to a plan of conversion and reorganization, and after a
series of transactions: (1) a new entity, Bancshares, became the surviving
corporate entity, (2) Bancshares sold the ownership interest in Bancorp
previously held by the Mutual Holding Company to the public in a subscription
offering (the "Offering") (16,586,752 common shares at $10.00 resulting in net
cash proceeds after costs and funding the ESOP (note 17) of approximately $150
million), (3) previous public shareholders of Bancorp had their shares exchanged
into 14,112,400 common shares of Bancshares (exchange ratio of 6.0094 to 1) (the
"Exchange"), and (4) the Mutual Holding Company ceased to exist. The total
number of shares of common stock outstanding following the Offering and Exchange
was 30,699,152. The reorganization was accounted for in a manner similar to a
pooling of interests and did not result in any significant accounting
adjustments. As a result of the reorganization, the consolidated financial
statements for prior periods have been restated to reflect the changes in the
par value of common stock from $.01 to $.10 per share and in the number of
authorized shares of common stock from 13,000,000 to 70,000,000.
(B) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Harbor Florida Bancshares, Inc., the Bank and the Bank's 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 and the disclosure of
contingent 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, 1998, 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.
- ----------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
24
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(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.
(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 are reported at
estimated market value and 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 results in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
The Company does not purchase, sell or utilize off-balance sheet derivative
financial instruments or derivative commodity instruments.
At September 30, 1998 and 1997, the Company had no commitments to sell
investment or mortgage-backed securities.
(F) LOANS
Loans 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: commercial real estate; residential real estate;
commercial business; and consumer. 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. 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.
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
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
25
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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.
(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.
(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 bases 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 previously available to thrift institutions was
repealed for the Company for the year beginning October 1, 1996. As a result,
the Company changed 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 $6.8 million and $14.8 million at September 30,
1998, 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 years beginning October 1, 1996 and 1997.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
26
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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
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 replaced primary and fully diluted earnings per share ("EPS") with
basic and diluted EPS. Basic earnings per share excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if options, convertible securities or warrants to
issue common shares were exercised. The Company began disclosing EPS in
accordance with Statement 128 for the current period with previous periods
restated.
(P) RECLASSIFICATION
Certain amounts included in the 1997 and 1996 consolidated financial statements
have been reclassified in order to conform to the 1998 presentation.
(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, 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 years 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 ending September 30, 1999.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
27
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
In June, 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"). Statement 133 is effective for fiscal years beginning after June 15,
1999, with earlier adoption permitted. Statement 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. It
is currently anticipated that the Company will adopt Statement 133 on October 1,
1999, and that the statement will not have a significant financial statement
impact upon adoption.
(2) INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of investment and mortgage-backed
securities at September 30, 1998 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>
FHLB notes ..................... $ 50,000 $ 721 $ -- $ 50,721
FNMA notes ..................... 19,929 414 -- 20,343
Other securities ............... 514 -- 62 452
-------- -------- -------- --------
70,443 1,135 62 71,516
-------- -------- -------- --------
Held to maturity:
FHLB notes ..................... 19,989 279 -- 20,268
FNMA notes ..................... 10,000 5 -- 10,005
-------- -------- -------- --------
29,989 284 -- 30,273
-------- -------- -------- --------
FHLMC mortgage-backed securities 65,610 1,338 -- 66,948
FNMA mortgage-backed securities 135,439 2,455 -- 137,894
-------- -------- -------- --------
201,049 3,793 -- 204,842
-------- -------- -------- --------
$301,481 $ 5,212 $ 62 $306,631
======== ======== ======== ========
</TABLE>
The amortized cost and estimated market value of investment and mortgage-backed
securities at September 30, 1997 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(IN THOUSANDS)
Available for sale:
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 87,840 999 -- 88,839
FNMA mortgage-backed securities . 89,014 1,101 -- 90,115
-------- -------- -------- --------
176,854 2,100 -- 178,954
-------- -------- -------- --------
$229,418 $ 2,103 $ 21 $231,500
======== ======== ======== ========
<PAGE>
The amortized cost and estimated market value of debt securities at September
30, 1998 and September 30, 1997 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.
<TABLE>
<CAPTION>
1998 1997
---- ----
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
Due in one to five years ........ 69,929 71,064 25,000 24,989
Other securities ................ 514 452 82 82
-------- -------- -------- --------
70,443 71,516 47,564 47,553
-------- -------- -------- --------
Held to maturity:
Due in one year or less ......... -- -- -- --
Due in one to five years ........ 29,989 30,273 5,000 4,993
-------- -------- -------- --------
29,989 30,273 5,000 4,993
-------- -------- -------- --------
FHLMC mortgage-backed securities 65,610 66,948 87,840 88,839
FNMA mortgage-backed securities . 135,439 137,894 89,014 90,115
-------- -------- -------- --------
201,049 204,842 176,854 178,954
-------- -------- -------- --------
$301,481 $306,631 $229,418 $231,500
======== ======== ======== ========
</TABLE>
There were no sales of available for sale securities during 1998 or 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, 1998, the
Company had pledged mortgage-backed securities with a market value of $368,000
and a carrying value of $355,000 to collateralize the public funds on deposit.
The Company had also pledged mortgage-backed securities with a market value of
$1,522,000 and a carrying value of $1,476,000 to collateralize Treasury, tax and
loan accounts as of September 30, 1998.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
28
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(3) LOANS
Loans at September 30, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Mortgage loans:
<S> <C> <C>
Construction 1-4 family ............ $ 66,671 $ 47,800
Permanent 1-4 family ............... 707,078 629,906
Multi-family ....................... 11,074 15,326
Nonresidential ..................... 84,254 54,983
Land ............................... 27,562 33,182
---------- ----------
Total mortgage loans ........... 896,639 781,197
---------- ----------
Other loans:
Commercial nonmortgage ............. 15,074 11,287
Home improvement ................... 19,016 20,614
Manufactured housing ............... 16,418 16,399
Other consumer ..................... 59,223 51,988
---------- ----------
Total other loans .............. 109,731 100,288
---------- ----------
Total loans .................... 1,006,370 881,485
---------- ----------
Less:
Loans in process ................... 46,152 32,078
Net deferred loan fees and discounts 3,700 3,446
Allowance for loan losses .......... 11,818 11,691
---------- ----------
61,670 47,215
---------- ----------
Total loans, net ............... $ 944,700 $ 834,270
========== ==========
Weighted average yield ................ 8.50% 8.47%
</TABLE>
An analysis of the allowance for loan losses as of September 30, 1998,
1997 and 1996 follows:
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
Beginning balance .................... $ 11,691 $ 11,016 $ 10,083
Provision for (recovery of) loan
losses ............................ 297 782 (76)
Allowance for loan losses
acquired .......................... -- -- 885
Charge-offs .......................... (574) (262) (366)
Recoveries ........................... 404 155 490
-------- -------- --------
Ending balance ....................... $ 11,818 $ 11,691 $ 11,016
======== ======== ========
At September 30, 1998 and 1997, loans with unpaid principal balances of
approximately $2,447,000 and $2,580,000, 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, 1998, 1997 and
1996 totaled approximately $135,000, $131,000 and $140,000, respectively.
As of September 30, 1998 and 1997, approximately $1,909,000 and $2,377,000,
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, 1998
and 1997 was $6,109,000 and $12,157,000, respectively. The average recorded
investment in impaired loans during the years ended September 30, 1998, 1997 and
1996 were approximately $7,695,000, $12,122,000 and $13,651,000, respectively.
The
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
29
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
total specific allowance for loan losses related to these loans was
approximately $29,000 and $117,000, respectively, on September 30, 1998 and
1997. Interest income on impaired loans of approximately $790,000, $1,147,000
and $1,346,000 was recognized in the years ended September 30, 1998, 1997 and
1996, respectively.
As of September 30, 1998 and September 30, 1997, mortgage loans which had been
sold on a recourse basis had outstanding principal balances of $2,213,000 and
$3,185,000, respectively.
Accrued interest receivable at September 30, 1998 and 1997 is summarized below:
1998 1997
---- ----
(IN THOUSANDS)
Loans .................... $4,983 $4,874
Investment securities .... 1,460 759
Mortgage-backed securities 1,274 1,261
FHLB stock dividends ..... 155 139
------ ------
$7,872 $7,033
====== ======
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 $14,368,000 ($8,349,000
fixed rate, interest rates from 5.85% to 8.0%) as of September 30, 1998. In
addition, as of September 30, 1998, the Company had determined that $17,626,000
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 at September 30, 1998 and 1997 are
summarized as follows:
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
FHLMC ......... $16,214 $22,888 $30,169
FNMA .......... 34,706 34,217 33,521
Other Investors 579 2,767 3,547
------- ------- -------
$51,499 $59,872 $67,237
======= ======= =======
At September 30, 1998 and 1997, collection of principal and interest to be
remitted to FHLMC and FNMA and advance payment for taxes and insurance relating
to FHLMC and FNMA serviced loans are reflected in the consolidated statements of
financial condition as advance deposits by borrowers for taxes and insurance.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
30
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(5) REAL ESTATE OWNED
Real estate owned at September 30, 1998 and 1997 includes the following:
1998 1997
---- ----
(IN THOUSANDS)
Real estate acquired in satisfaction of loans $ 3,168 $ 2,892
Allowance for losses ........................ (634) (578)
------- -------
$ 2,534 $ 2,314
======= =======
Activity in the allowance for losses on real estate owned as of September 30,
1998 and 1997 is as follows:
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Beginning balance ................ $ 578 $ 1,712 $ 1,857
Provision for (reversal of) losses 136 (150) 117
Allowance for losses acquired ... -- -- 21
Charge-offs ...................... (80) (984) (283)
------- ------- -------
Ending balance ................... $ 634 $ 578 $ 1,712
======= ======= =======
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 other expenses in the consolidated statements of earnings.
(6) PREMISES AND EQUIPMENT
Premises and equipment at September 30, 1998 and 1997 are summarized as follows:
1998 1997
---- ----
(IN THOUSANDS)
Land ......................................... $ 5,327 $ 5,239
Buildings and leasehold improvements ......... 11,639 9,170
Furniture, fixtures and equipment ............ 10,091 8,080
-------- --------
27,057 22,489
Less accumulated depreciation and amortization (10,130) (9,176)
-------- --------
$ 16,927 $ 13,313
======== ========
Depreciation expense for the years ended September 30, 1998, 1997 and 1996
totaled $1,116,000, $952,000, and $902,000, respectively.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
31
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(7) DEPOSITS
Deposits at September 30, 1998 and 1997 are summarized as follows:
1998 1997
---- ----
Period-end Period-end
Amount stated rate Amount stated rate
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Commercial checking $ 28,508 $ 22,032
Noninterest-bearing personal
checking accounts 26,446 18,717
NOW 60,129 1.13% 52,045 1.32%
Passbook 92,698 2.06% 76,540 1.69%
Money market checking 1,721 1.27% 1,492 1.26%
Money market investment 39,353 2.59% 41,909 2.55%
Official checks 10,429 9,081
------- --------
259,284 221,816
------- -------
Certificate accounts:
2.01 - 3.00% 328 545
3.01 - 4.00% --- ---
4.01 - 5.00% 84,192 88,472
5.01 - 6.00% 540,210 553,986
6.01 - 7.00% 33,673 46,333
7.01 - 8.00% 434 424
8.01 - 9.00% 5 ---
----------- ----------
658,842 689,760
---------- ---------
$ 918,126 $ 911,576
========= =========
Weighted average interest rate 4.29% 4.47%
===== =====
Maturities of outstanding certificates of deposit are summarized as follows:
1998 1997
---- ----
(IN THOUSANDS)
Less than one year $460,798 $467,204
One to three years 159,160 180,702
Over three years . 38,884 41,854
-------- --------
$658,842 $689,760
======== ========
The aggregate amount of certificates of deposit in amounts of $100,000 or more
was approximately $62,727,000 and $62,006,000 at September 30, 1998 and 1997,
respectively. Balances of individual certificates in excess of $100,000 are not
federally insured.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
32
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Interest expense on deposits is summarized as follows:
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Passbook accounts ............................. $ 1,674 $ 1,356 $ 1,506
NOW, money market checking, and money market
investment accounts ........................... 1,894 1,896 1,724
Certificate accounts .......................... 36,651 35,892 31,210
------- ------- -------
$40,219 $39,144 $34,440
======= ======= =======
Early withdrawal penalties for the years ended September 30, 1998, 1997 and 1996
aggregated $191,391, $205,702, and $173,560, respectively, and are netted
against interest expense on certificate accounts.
Accrued interest payable of $135,942 and $145,989 at September 30, 1998 and
1997, respectively, is included in other liabilities.
(8) SHORT-TERM BORROWINGS
There were no short-term borrowings at September 30, 1998. 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.
Information concerning short-term borrowings is summarized as follows:
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Average balance during the year ......... $12,292 $29,301
Average interest rate during the year ... 5.83% 5.62%
Maximum month-end balance during the year $40,300 $40,000
(9) LONG-TERM DEBT
Long-term debt at September 30, 1998 and 1997 is summarized as follows:
1998 1997
---- ----
(IN THOUSANDS)
Advances from the Federal Home Loan Bank (FHLB),
due at various dates through
September, 2008, with fixed terms and
fixed interest rates of 5.46% to 6.5% ......... $145,000 $ 70,000
ESOP Loan, paid off March, 1998 with a variable
interest rate of prime plus .25%,
8.75% at September 30, 1997 -- 375
-------- --------
$145,000 $ 70,375
======== ========
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.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
33
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
At September 30, 1998 and 1997, the FHLB advances and the ESOP loan have fiscal
year maturity dates as follows:
1998 1997
---- ----
Weighted Weighted
Year ending September 30, Amount average rate Amount average rate
- ------------------------- ------ ------------ ------ ------------
(DOLLARS IN THOUSANDS)
1998 $ --- --- $ 300 8.75%
1999 --- --- 75 8.75%
2000 --- --- 10,000 6.17%
2001 5,000 6.13% 5,000 6.13%
2002 10,000 6.10% 10,000 6.10%
2003 and after 130,000 5.72% 45,000 6.10%
------- ----- ------ -----
$ 145,000 5.76% $ 70,375 6.13%
========= ===== ======== =====
Other interest expense is summarized as follows:
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Advances from the FHLB $6,419 $5,962 $4,593
ESOP loan ............ 15 49 76
Other ................ 5 4 5
------ ------ ------
$6,439 $6,015 $4,674
====== ====== ======
(10) INCOME TAXES
Income tax expense (benefit) on income from continuing operations for the years
ended September 30, 1998, 1997 and 1996 is summarized as follows:
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Current:
Federal $ 10,751 $ 5,868 $ 5,832
State . 1,700 962 965
-------- -------- --------
12,451 6,830 6,797
-------- -------- --------
Deferred:
Federal (195) 1,527 (1,170)
State . (13) 254 (195)
-------- -------- --------
(208) 1,781 (1,365)
-------- -------- --------
$ 12,243 $ 8,611 $ 5,432
======== ======== ========
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
34
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at September 30, 1998 and 1997 are as
follows:
1998 1997
---- ----
(IN THOUSANDS)
Deferred tax assets:
Allowance for bad debts ...................... $ 1,850 $ 1,713
Valuation of real estate owned ............... 648 626
Deferred compensation ........................ 690 692
Other ........................................ -- 71
------- -------
3,188 3,102
Less valuation allowance ..................... (130) (250)
------- -------
Total deferred tax assets ................ 3,058 2,852
------- -------
Deferred tax liability:
Net deferred loan fees and costs ............. 3,220 3,332
FHLB stock dividend .......................... 840 840
Premises and equipment depreciation difference 653 447
Purchase accounting adjustments .............. 52 360
Cash to accrual adjustment ................... 44 88
Installment sales ............................ 140 128
Other ........................................ -- 17
------- -------
Total deferred tax liabilities ........... 4,949 5,212
------- -------
1,891 2,360
Unrealized gain (loss) on available for sale
securities ...................................... 415 (3)
------- -------
Net deferred tax liability ............... 2,306 2,357
------- -------
Less liability at beginning of year ............. (2,357) (550)
Change in unrealized gain on available for sale
securities ................................... (418) (26)
Other ........................................... 261 --
------- -------
Provision (benefit) for deferred income taxes ... $ (208) $ 1,781
======= =======
Income tax expense on income from continuing operations is different than the
amount computed by applying the United States Federal income tax rate of 35% for
1998 and 34% for 1997 and 1996 to income from continuing operations before
income taxes because of the following:
1998 1997 1996
---- ---- ----
Statutory Federal income tax rate ......... 35.0% 34.0% 34.0%
State income tax (net of Federal income tax 3.6 3.6 3.6
benefit)
Other ..................................... 2.7 1.7 1.0
--- --- ---
Effective tax expense rate ................ 41.3% 39.3% 38.6%
==== ==== ====
Deferred income taxes payable of approximately $2,306,000 and $2,357,000 at
September 30, 1998 and 1997, respectively, are included in other liabilities.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
35
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Retained earnings at September 30, 1998 includes approximately $14,800,000 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
$5,700,000 at September 30, 1998.
(11) NET INCOME PER SHARE
Net income per share was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the twelve months ended
September 30, 1998 and 1997. 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.
Beginning with the quarter ended December 31, 1997, net income per share has
been calculated in accordance with the provisions of Statement of Financial
Accounting Standards No. 128 "Earnings Per Share", with previous periods
restated.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income ........................................ $ 17,366,095 $ 13,326,761 $ 8,640,216
============ ============ ============
Weighted average common shares outstanding:
Shares outstanding ............................ 30,713,432 30,426,407 30,212,212
Less weighted average uncommitted ESOP
shares ...................................... (857,136) (322,047) (502,114)
------------ ------------ ------------
Total ...................................... 29,856,296 30,104,360 29,710,098
============ ============ ============
Basic earnings per share .......................... $ 0.58 $ 0.44 $ 0.29
============ ============ ============
Weighted average common shares outstanding ........ 29,856,296 30,104,360 29,710,098
Additional dilutive shares related to stock
options ........................................ 490,374 586,817 597,455
------------ ------------ ------------
Total weighted average common shares and
equivalents outstanding for diluted earnings per
share computation .............................. 30,346,670 30,691,177 30,307,553
============ ============ ============
Diluted earnings per share $ 0.57 $ 0.43 $ 0.29
============ ============ ============
</TABLE>
Additional dilutive shares are calculated under the treasury stock method
utilizing the average market value of the Company's stock for the period.
(12) REGULATORY AND CAPITAL 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.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
36
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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 average
assets (as defined). Management believes, as of September 30, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1998, 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.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
Actual adequacy purpose action provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
AS OF SEPTEMBER 30, 1998
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk-
weighted assets) $193,276 27.76% $55,700 >8.0% $69,625 >10.0%
Tier I Capital (to risk-
weighted assets) 185,730 26.68% 27,850 >4.0% 41,775 > 6.0%
Tier I Capital (to adjusted
tangible assets) 185,730 13.79% 53,883 >4.0% 67,354 > 5.0%
Tangible Capital (to adjusted
tangible assets) 185,730 13.79% 20,206 >1.5% n/a n/a
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
</TABLE>
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.
The Plan of Conversion (Note 1a) provided for the establishment 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 Bancorp by the Bank at the formation of Bancorp
in 1997. 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
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
37
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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.
Applicable rules and regulations of the OTS impose limitations on dividends paid
by the Bank. Within those limitations, certain "safe harbor" dividends are
permitted, subject to providing the OTS at least 30 days' advance notice. The
safe harbor amount is based upon an institution's regulatory capital level.
Thrift institutions which have capital in excess of all capital requirements
before and after the proposed dividend, are permitted to make capital
distributions during any calendar year up to the greater of (i) 100% of net
income to date during the calendar year, plus one-half of the surplus over such
institution's capital requirements at the beginning of the calendar year, or
(ii) 75% of net income over the most recent four-quarter period. Additional
restrictions would apply to an institution which does not meet its capital
requirement before or after a proposed dividend.
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.
13) COMMITMENTS AND CONTINGENCIES
At September 30, 1998, the Company had irrevocable letters of credit aggregating
approximately $1,395,000.
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.
(14) 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:
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Outstanding loans - beginning of year $ 2,284 $ 1,786 $ 1,478
New loans ........................... 4,714 3,015 842
Repayments .......................... (5,116) (2,517) (534)
------- ------- -------
Outstanding balance - end of year ... $ 1,882 $ 2,284 $ 1,786
======= ======= =======
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
38
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Frank H. Fee, III, a director of the Company, is also President of the law firm
of Fee & Koblegard, P.A. which does business under the registered name of Fee,
Koblegard & DeRoss, a general practice law firm. The Company paid approximately
$122,000, $150,000, and $125,000 of legal fees in the years ended September 30,
1998, 1997 and 1996, respectively, to this law firm.
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, 1998 and 1997, the Company paid Davis Construction a total of $106,668 and
$27,057, respectively, for a roof on a new branch facility and re-roofing of
existing branch facilities. Additionally, Davis Construction constructed a new
office and drive-in facility for the Company. This contract for $926,984 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. In the years ended September 30, 1998 and 1997, total payments
relating to this contract were $853,990 and $72,994, respectively. Additional
payments made during 1998 for tenant improvements in the new office totaled
$102,938.
Richard B. Hellstrom, a director of the Company, is also President of Lindahl,
Browning, Ferrari & Hellstrom, (LBF&H), an engineering firm. During 1998, LBF&H
was selected to complete the modifications of an existing branch. This contract,
worth $8,600, was awarded to LBF&H in April, 1998. Total payments made in 1998
related to the contract were $8,209. Additionally, payments to LBF&H during 1998
relating to the relocation of a branch totaled $16,441.
Prior to Richard N. Bird's nomination and subsequent election to the Board of
Directors of the Company, Bird Realty Group, Inc. entered into a listing
agreement with the Company on property listed at $3,895,000. Commissions of
$30,833 and $25,000 were paid to Bird Realty in the years ended September 30,
1998 and 1997, respectively, with regard to the sale of the property.
(15) OTHER EXPENSE
Other expense for the years ended September 30, 1998, 1997 and 1996 consists of
the following:
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Data processing . $1,243 $1,188 $1,092
Advertising ..... 984 942 735
Professional fees 589 599 527
Postage ......... 397 364 294
Insurance ....... 174 162 214
Telephone ....... 360 280 265
OTS assessment .. 227 212 190
Other ........... 2,251 1,639 1,193
------ ------ ------
$6,225 $5,386 $4,510
====== ====== ======
(16) 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.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
39
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
ASSETS: (IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and amounts due from depository
institutions ....................... $ 23,861 $ 23,861 $ 16,899 $ 16,899
Interest-bearing deposits in other banks 19,902 19,902 15,736 15,736
Federal funds sold ..................... 20,000 20,000 250 250
Investment securities held to maturity . 29,989 30,273 5,000 4,993
Investment securities available for sale 71,516 71,516 47,553 47,553
Mortgage-backed securities held to
maturity ........................... 201,049 204,842 176,854 178,954
Loans held for sale .................... 714 736 141 144
Loans .................................. 956,518 989,418 845,961 858,944
Less allowance for loan losses ......... (11,818) -- (11,691) --
--------- --------- --------- ---------
Loans, net ......................... 944,700 989,418 834,270 858,944
--------- --------- --------- ---------
LIABILITIES:
Commercial checking, non-interest-
bearing personal, NOW, passbook,
money market accounts and official
checks ............................. 259,284 259,284 221,816 221,816
Certificate accounts ................... 658,842 665,877 689,760 691,406
FHLB advances .......................... 145,000 148,046 100,000 98,887
ESOP loan .............................. -- -- 375 375
</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.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
40
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(17) BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
In January, 1994, as part of the reorganization to the stock form of ownership,
the Company's Employee Stock Ownership Plan ("ESOP") purchased 900,208 shares of
the Company's common stock at $1.664 per share, or $1,498,000, which was funded
by a loan from an unaffiliated lender. In March, 1998, as part of the
reorganization and conversion of Harbor Financial, M.H.C., the Company's ESOP
purchased 1,326,940 shares of the Company's common stock at $10 per share, which
was funded by a loan from the Company. The ESOP covers all eligible employees of
the Company age 21 and over. Dividends paid on unallocated shares reduce the
Company's cash contribution to the ESOP. GAAP requires that any third party
borrowing by the ESOP be reflected as a liability on the Company's statement of
financial condition. The ESOP's borrowing from the Company is eliminated in
consolidation. For the years ended September 30, 1998 and 1997, total
contributions to the ESOP, which were used to fund principal and interest
payments on the ESOP debt, totaled approximately $162,000 and $259,000,
respectively. At September 30, 1998, there were 726,051 allocated shares,
135,029 shares committed to be released, and 1,371,952 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, 1998, 1997 and
1996, totaled $2,064,654, $1,155,066 and $766,500, respectively. At September
30, 1998, the fair value of the unallocated shares was $15,541,496.
RECOGNITION AND RETENTION PLANS AND STOCK OPTION PLANS
The Company's 1998 Stock Incentive Plan, adopted on September 18, 1998,
authorizes the award of Recognition and Retention Plan Stock (RRP Stock) and the
granting of options to purchase common stock. On September 18, 1998, the Company
awarded 630,296 RRP shares at $10.69 per share totaling $6,736,000. The total
award will be amortized as compensation expense ratably over the participants'
vesting periods of from 5 to 10 years. Management's current intention is to
purchase Common Stock from market sources in order to fund the grants of RRP
Stock. However, management's intention is based on current market conditions and
is subject to change. In January, 1994, the Company's Recognition and Retention
Plans ("RRP") purchased 385,803 shares at $1.664 per share totaling $642,000.
The funds used to acquire the RRP shares were contributed by the Company. The
purchase price of $642,000 was amortized as compensation expense ratably over
the participants' vesting period of three years. Total compensation expense
charged to earnings in the years ended September 30, 1998, 1997 and 1996,
totaled $33,013, $53,511 and $213,996, respectively.
At September 30, 1998, the Company had stock option plans 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
plans since stock option exercise prices are equal to market price at dates of
grant. The number of shares of common stock reserved for issuance under the 1994
stock option plan is equal to 1,286,012 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 number of shares of common
stock reserved for issuance under the 1998 Stock Incentive Plan is equal to
1,658,675 (1,498,615 shares granted at September 30, 1998) or 5.40% of the
outstanding shares of common stock as of the effective date of the plan. The
stock options vest in equal installments over varying periods not to exceed 10
years, depending upon the individual's position in the Company. At September 30,
1998, 161,377 shares were available for future awards.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
41
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
A summary of the Company's stock option plans is presented below:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1998 1997 1996
---- ---- ----
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 .......... 807,038 $ 1.94 1,022,234 $1.79 1,151,215 $1.71
Options granted ............... 1,513,615 $10.70 27,042 $5.57 27,042 $4.49
Options exercised ............. (387,496) $ 1.70 (234,206) $1.66 (140,999) $1.66
Options forfeited ............. (13,484) $ 1.66 (8,032) $3.15 (15,024) $1.66
---------- ------ ---------- ----- ---------- -----
Options outstanding end of year 1,919,673 $ 8.90 807,038 $1.94 1,022,234 $1.79
========== ====== ========== ===== ========== =====
Options exercisable at year-end 146,733 302,056 209,806
======= ======= =======
Weighted average fair value of
options granted during the year $ 3.97 $ 1.23 $ 1.10
====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF EXERCISE OUTSTANDING @ REMAINING AVERAGE EXERCISABLE @ AVERAGE
PRICES 9/30/98 CONTRACTUAL LIFE EXERCISE PRICE 9/30/98 EXERCISE PRICE
------ ------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.664 321,622 5.3 $ 1.66 143,028 $ 1.664
$ 2.746 to 4.493 60,400 6.7 $ 3.53 3,705 2.746
$ 5.638 to 5.658 21,032 8.3 $ 5.66 --- ---
$ 6.365 to 6.781 3,004 8.7 $ 6.41 --- ---
$ 10.69 to 12.00 1,513,615 10.0 $10.70 --- ---
</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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
Net income .................................. As reported $ 17,366 $ 13,327
Pro forma 17,326 13,320
Net income per share - basic ................ As reported .58 .44
Pro forma .58 .44
Net income per share - diluted .............. As reported .57 .43
Pro forma .57 .43
</TABLE>
Only options granted after October 1, 1995 are included in pro forma amounts.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
42
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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 27,038 $ 1.10 $ 4.49 5.421% 5 38.71 $ .27
11/27/96 6,009 1.21 5.64 5.912 5 29.89 .30
01/06/97 18,028 1.19 5.66 6.291 5 28.33 .30
06/16/97 2,704 1.50 6.37 6.276 5 30.71 .32
06/20/97 300 1.67 6.78 6.271 5 31.11 .32
07/08/98 15,000 4.68 12.00 5.433 5 32.66 .38
09/18/98 1,498,615 3.96 10.69 4.517 5 35.13 .38
</TABLE>
OTHER 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 $8,700, $8,500, and $7,400, respectively, for the years ended
September 30, 1998, 1997 and 1996. 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, 1997.
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
currently makes matching contributions of 25% of the first 6% of each
participant's contributions. For the years ended September 30, 1998, 1997 and
1996, the Company's matching contribution totaled approximately $89,000, $83,000
and $75,000, respectively.
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, 1998 and 1997, deferred directors' fees included in other
liabilities aggregated $216,737 and $195,069, respectively. Directors may elect
to have their deferred compensation balance invested in shares of the Company's
common stock. Such purchases were approximately $101,000, $273,000 and $238,000
in 1998, 1997 and 1996, respectively. After purchase of shares of the Company's
common stock, the Company's liability has been satisfied except for distribution
of the shares to the director when he ceases to be a director. At September 30,
1998 and 1997, the Directors' Deferred Compensation Plan held 323,799 and
363,268 shares of the Company's common stock, respectively.
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, 1998, 1997 and 1996, the
charge to earnings relating to the Plan was insignificant.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
43
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(18) 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
=======
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 1998 through 2002. The amounts (in thousands) assume no sales or
dispositions of the related assets or liabilities.
Net
decrease of
Years ending September 30, net earnings
- -------------------------- ------------
1998 (301)
1999 (283)
2000 (256)
2001 (202)
2002 (202)
Thereafter (2,016)
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,
1998 is $2.6 million.
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
44
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the years ended September 30, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FISCAL 1998
SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31
------------ ------- -------- ----------
<S> <C> <C> <C> <C>
Interest income .......................... $ 25,015 $ 24,315 $ 22,773 $ 23,054
Interest expense ......................... 12,057 11,375 11,459 11,766
------- ------- ------- -------
Net interest income ............... 12,958 12,940 11,314 11,288
Provision for (recovery of) loan losses .. 66 (231) 651 (188)
------- ------- ------- -------
Net interest income after provision
for (recovery of) loan losses 12,892 13,171 10,663 11,476
Total other income ....................... 1,298 1,887 1,085 1,580
Total other expenses ..................... 6,412 5,987 5,927 6,117
------- ------- ------- -------
Income before income taxes ........ 7,778 9,071 5,821 6,939
Income tax ............................... 3,231 3,736 2,432 2,844
------- ------- ------- -------
Net income ............................... $ 4,547 $ 5,335 $ 3,389 $ 4,095
======= ======= ======= =======
Net income per share
Basic ................................. $ 0.15 $ 0.18 $ 0.11 $ 0.14
======= ======= ======= =======
Diluted .............................. $ 0.15 $ 0.18 $ 0.11 $ 0.13
======= ======= ======= =======
</TABLE>
<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
Income tax ............................... 2,272 2,209 2,048 2,082
------- ------- ------- -------
Net income ............................... $ 3,510 $ 3,416 $ 3,301 $ 3,101
======= ======= ======= =======
Net income per share
Basic ................................. $ 0.12 $ 0.11 $ 0.11 $ 0.10
======= ======= ======= =======
Diluted ............................... $ 0.11 $ 0.11 $ 0.11 $ 0.10
======= ======= ======= =======
</TABLE>
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
45
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(20) PARENT COMPANY FINANCIAL INFORMATION
Condensed Statements of Financial Condition at September 30, 1998 and 1997 and
Condensed Statements of Operations and Cash Flows for the year ended September
30, 1998 and for the period June 25, 1997 through September 30, 1997 are shown
below (in thousands) for Bancshares and it's predecessor, Bancorp (Note 1a),
which was formed on June 25, 1997 in a reorganization accounted for in a manner
similar to a pooling of interests:
CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 AND 1997 1998 1997
---- ----
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C> <C>
Cash deposited at Harbor Federal .......................................... $ 12,215 $ 11,241
Investment securities available for sale at market value .................. 453 --
Investment in Harbor Federal .............................................. 249,956 85,306
Income tax receivable from Harbor Federal ................................. 34 10
Due from Harbor Federal ................................................... 1,277 369
--------- ---------
Total assets .......................................................... $ 263,935 $ 96,926
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due to Harbor Federal ................................................. $ 152 $ 97
Other liabilities ..................................................... 64 27
--------- ---------
Total liabilities ................................................. 216 124
--------- ---------
Stockholders' Equity:
Preferred stock; $.10 par value; authorized 10,000,000 shares; none
issued and outstanding ............................................ -- --
Common stock; $.10 par value; authorized 70,000,000 shares;
issued and outstanding 30,090,830 shares at September 30, 1998
and 30,522,862 at September 30, 1997 .............................. 3,091 3,052
Paid in capital ....................................................... 189,958 23,874
Retained earnings ..................................................... 83,355 71,203
Common stock purchased by:
Employee stock ownership plan (ESOP) .............................. (13,344) (374)
Deferred compensation plan ........................................ -- (946)
Net unrealized gain on investment securities available for sale, net of
income taxes ...................................................... 659 (7)
--------- ---------
Total stockholders' equity ........................................ 263,719 96,802
--------- ---------
Total liabilities and stockholders' equity ........................ $ 263,935 $ 96,926
========= =========
</TABLE>
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
46
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the period
June 25, 1997
Year ended through
eptember 30, September 30,
1998 1997
------ -----
IN THOUSANDS
<S> <C> <C>
Management fee to Harbor Federal ................................ $ (161) $ (38)
Other expenses .................................................. (197) (27)
-------- --------
Loss before income tax benefit and earnings of Harbor Federal (358) (65)
Income tax benefit .............................................. 76 10
-------- --------
(Loss) before earnings of Harbor Federal .................... (282) (55)
Equity in net earnings of Harbor Federal ........................ 17,648 3,565
-------- --------
Net income .................................................. $ 17,366 $ 3,510
======== ========
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the period
June 25, 1997
Year ended through
September 30, September 30,
1998 1997
------ -----
Cash used by operating activities: IN THOUSANDS
<S> <C> <C>
Net income ......................................... $ 17,366 $ 3,510
Adjustments to net income:
Equity in earnings of Harbor Federal ........... (17,648) (3,565)
Increase in income tax receivable .............. (53) (10)
Increase in payable to Harbor Federal .......... 160 37
Increase in other liabilities .................. 86 27
--------- ---------
Net cash used by operating activities .......... (89) (1)
--------- ---------
Cash used by investing activities:
Purchase of investment securities available for sale (514) --
--------- ---------
Net cash used by investing activities .......... (514) --
--------- ---------
Cash provided by financing activities:
Net proceeds from issuance of common stock ......... 150,223 --
(Investment in)/amounts received from Harbor Federal (143,889) 12,000
Dividends paid ..................................... (5,414) (790)
Common stock options exercised ..................... 657 32
--------- ---------
Net cash provided by financing activities ...... 1,577 11,242
--------- ---------
Net increase in cash and cash equivalents ...... 974 11,241
Cash and cash equivalents - beginning of period ........ 11,241 0
--------- ---------
Cash and cash equivalents - end of period .............. $ 12,215 $ 11,241
========= =========
</TABLE>
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
47
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the period
June 25, 1997
Year ended through
September 30, September 30,
1998 1997
------ -----
Supplemental disclosures: IN THOUSANDS
<S> <C> <C>
Changes in unrealized gain on securities available for sale net of tax $ 666 $ 36
Amortization of stock benefit plans .................................. 2,097 369
Issuance of ESOP common stock ........................................ 13,269 --
Satisfaction of deferred compensation plan .......................... 1,046 --
Tax benefit of employee benefit plans ................................ 175 --
</TABLE>
- -------------------------------------------
HARBOR FLORIDA BANCSHARES, INC. & SUBSIDIARIES 1998 ANNUAL REPORT
48
