As filed with the Securities and Exchange Commission on January 12, 1998
Registration No. 333-37275
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM S-1
PRE-EFFECTIVE AMENDMENT NO. 2 TO
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----------------------------------
HARBOR FLORIDA BANCSHARES, INC.
(Name of registrant issuer in its charter)
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Delaware 6035 Applied For
-------- ---- -----------
<S> <C> <C>
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification number)
</TABLE>
100 S. Second Street, Fort Pierce, Florida 34950
(561) 461-2414
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(Address and telephone number of principal executive offices
and principal place of business)
Harbor Florida Banshares, Inc.
100 S. Second Street
Fort Pierce, Florida 34950
(561) 461-2414
- --------------------------------------------------------------------------------
(Name, address, and telephone number of agent for service)
Please send copies of all communications to:
Raymond J. Gustini, Esquire
Jeremy J. Sher, Esquire
Peabody & Brown
1255 23rd Street, N.W., Suite 800
Washington, D.C. 20037
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
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<CAPTION>
CALCULATION OF REGISTRATION FEE (1)
==================================================================================================================
Title of each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Offering Price Per Aggregate Offering Registration Fee
Security Price(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 0.10 28,478,006 $10.00 $284,780,060 $98,200(2)
per share
- ------------------------------------------------------------------------------------------------------------------
Common Stock, par value 2,221,146 $10.00 $ 22,211,460 $ 7,659
$0.10 per share
==================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
<TABLE>
<CAPTION>
Cross Reference Sheet showing the location
in the Prospectus of the Items of Form S-1
<S> <C> <C>
1. Forepart of the Registration Statement and Forepart of the Registration Statement; Outside
Outside Front Cover of Prospectus Front Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page; Outside Back Cover Page
Prospectus
3. Summary Information; Risk Factors and Ratio of Summary; Risk Factors
Earnings to Fixed Charges
4. Use of Proceeds Capitalization, Use of Proceeds
5. Determining of Offering Price Market for Common Stock; The Conversion - Stock
Pricing and Number of Shares to be Issued, and - The
Distribution Exchange
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution The Conversion and Reorganization
9. Description of Securities to be Registered Description of Capital Stock of Harbor Florida
Bancshares
10. Interests of Named Experts and Counsel Legal and Tax matters; Experts
11. Information with Respect to the Registrant
(a) Description of Business Business of Harbor Federal
(b) Description of Property Business of Harbor Federal - Properties
(c) Legal Proceedings Business of Harbor Federal - Legal Proceedings
(d) Market Price of and Dividends on the Outside Front Cover Page; Market for Common Stock;
Registrant's Common Equity and Related Dividend Policy
Stockholder Matters
(e) Financial Statements Consolidated Financial Statements; Pro Forma Data
</TABLE>
<PAGE>
PROSPECTUS
HARBOR FLORIDA BANCSHARES, INC.
From 19,731,024 (minimum) to 26,694,915 Shares of Common Stock
(anticipated maximum)
$10.00 Per Share Purchase Price
Harbor Florida Bancshares, Inc. ("Bancshares" or the "Company"), a
Delaware corporation, is offering up to 26,694,915 shares (which may be
increased to 30,699,152 shares under certain circumstances described below) of
its common stock, par value $.10 per share (the "Common Stock"), in connection
with (i) the Exchange described herein to be effected in connection with the
Conversion of Harbor Financial, M.H.C. (the "Mutual Holding Company") and the
Reorganization in which Harbor Florida Bancorp, Inc. ("Bancorp") and the Mutual
Holding Company will be merged into Harbor Federal Savings Bank (the "Bank")
with the result that Bancshares will become the holding company of the Bank and
(ii) the Offerings described herein.
The Offerings. In addition to the Exchange, nontransferable
subscription rights to subscribe for up to 14,490,000 shares (which may be
increased to 16,663,500 shares under certain circumstances described below) of
Common Stock (the "Conversion Stock") have been granted to certain members of
the Bank as of specified record dates, and to the ESOP (the "Subscription
Offering"), subject to the limitations described herein. Commencing concurrently
with the Subscription Offering, and subject to the prior rights of holders of
subscription rights, the right of the Bank, the Mutual Holding Company, Bancorp
and Bancshares (the "Primary Parties") to reject such orders in whole or in
part, and the other limitations described herein, Bancshares is offering the
shares of Conversion Stock not subscribed for in the Subscription Offering, if
any, for sale to stockholders of Bancorp as of December 31, 1997, other than
the Mutual Holding Company (the "Eligible Public Stockholders") in the "Public
Stockholder Offering". After satisfying those with subscription rights and the
Eligible Public Stockholders, Bancshares is offering shares of conversion stock
in a community offering (the "Community Offering") to certain members of the
general Public to whom a copy of this Prospectus is delivered by or on behalf of
Bancshares, with preference given to natural persons residing in the Bank's
Local Community. The Primary Parties have determined the Bank's Local Community
to be the six Florida counties of Volusia, Brevard, Indian River, Martin,
Okeechobee and St. Lucie. (The Subscription Offering, Eligible Public
Stockholder Offering and the Community Offering are referred to collectively as
the "Offerings"). The Primary Parties have engaged Friedman, Billings, Ramsey &
<PAGE>
Co., Inc. ("FBR" or the "Agent") to consult with and advise them in the
Conversion, and Reorganization and FBR has agreed to use its best efforts to
solicit subscriptions and purchase orders for shares of Conversion Stock in the
Subscription and Community Offerings. See "THE CONVERSION AND REORGANIZATION --
Marketing Arrangements."
The Subscription Offering will terminate at Noon, Florida Time, on
February ______, 1998 (the "Expiration Date"), unless extended by the Primary
Parties, with approval of the OTS, if necessary. The Community Offering is
expected to terminate at the same time as the Subscription Offering. The
Community Offering must be completed within 45 days after the close of the
Subscription Offering, or April ______, 1998, unless extended by the Primary
Parties with the approval of the OTS, if necessary. The latest possible
extension date under the rules of the OTS is 24 months from the date of the
approval of the Plan of Conversion and Reorganization or February _____, 2000.
Orders submitted are irrevocable until the completion of the Conversion
and Reorganization; provided that, if the Conversion and Reorganization are not
completed within the 45 day period referred to above, unless such period has
been extended with the consent of the OTS, if necessary, all subscribers will
have their funds returned promptly with interest, and all withdrawal
authorizations will be cancelled. See "THE CONVERSION AND REORGANIZATION -- The
Offerings" and " -- Subscription Offering."
The Exchange. Pursuant to a Plan of Conversion and Reorganization and
Plan of Merger (the "Plan" or "Plan of Conversion and Reorganization") adopted
by the Primary Parties, the Mutual Holding Company will be converted to an
interim federal stock association and eventually merged into the Bank upon
consummation of a series of transactions described herein (collectively, with
the Offerings, the "Conversion and Reorganization"). As a result of the
Conversion and Reorganization, each of the 2,654,369 shares of common stock of
Bancorp ("Bancorp Common Stock") held by the Mutual Holding Company immediately
prior to the Conversion and Reorganization -- will be cancelled and each of the
2,319,059 shares of Common Stock held by stockholders other than the Mutual
Holding Company (the "Public Bancorp Shares" held by the "Public Stockholders"),
will receive Common Stock in an Exchange (the "Exchange Shares") pursuant to a
ratio (the "Exchange Ratio") that will result in the Public Stockholders owning
in the aggregate approximately the same percentage of the outstanding Common
Stock immediately following the Conversion and Reorganization, subject to
certain adjustments described in "THE CONVERSION AND REORGANIZATION -- The
Exchange Ratio."
ii
<PAGE>
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY EACH PROSPECTIVE INVESTOR,
SEE "RISK FACTORS" BEGINNING ON PAGE ____ HEREOF.
----------
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF CONVERSION
STOCK, PLEASE CALL THE STOCK INFORMATION CENTER
AT 1-888-613-2262
(Toll-Free)
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THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, OFFICE OR OTHER
AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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=========================================================================================
Estimated Fees,
Underwriting
Commissions and
Reorganization Estimated
Purchase Price(l) Expenses(2) Net Proceeds(3)
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<S> <C> <C> <C>
Minimum Per Share ............... $ 10.00 $ 0.14 $ 9.86
Midpoint Per Share .............. $ 10.00 $ 0.13 $ 9.87
Maximum Per Share ............... $ 10.00 $ 0.12 $ 9.88
Maximum Per Share, as adjusted(4) $ 10.00 $ 0.11 $ 9.89
Total Minimum ................... $107,100,000 $1,488,990 $105,611,010
Total Midpoint .................. $126,000,000 $1,619,400 $124,380,600
Total Maximum ................... $144,900,000 $1,749,810 $143,150,190
Total Maximum, as adjusted(4) ... $166,635,000 $1,899,782 $164,735,218
=========================================================================================
</TABLE>
(1) Based upon the minimum, midpoint, maximum and 15% above the maximum of the
Offering Price Range, respectively. Does not include shares of Common
Stock to be issued to Eligible Public Stockholders in the Exchange.
(2) Consists of the estimated costs to the Primary Parties to be incurred in
connection with the Conversion and Reorganization, including estimated
fixed expenses of $750,000 and marketing fees and reimbursable expenses to
be paid to Friedman, Billings, Ramsey & Co., Inc. in connection with the
Offerings See "THE CONVERSION AND REORGANIZATION -- Marketing
Arrangements." The actual fees and expenses may vary substantially from the
estimates. See "PRO FORMA DATA." The fees paid to the Friedman, Billings,
Ramsey & Co. may be deemed to be underwriting fees.
(3) Actual net proceeds may vary substantially from estimated amounts depending
on the number of shares sold in the Offerings and other factors. See
"CAPITALIZATION" and "PRO FORMA DATA."
(4) Gives effect to an increase in the number of shares which could occur
without a resolicitation of subscribers or any right of cancellation due to
an increase in the Offering Price Range of up to 15% above the maximum of
the Offering Price Range to reflect changes in market and financial
conditions following commencement of the Offerings. See "THE CONVERSION
AND REORGANIZATION -- Stock Pricing and Number of Shares To Be Issued."
iii
<PAGE>
Restrictions on Transfer of Subscription Rights and Shares. No person
may transfer or enter into any agreement or understanding to transfer the legal
or beneficial ownership of the subscription rights issued under the Plan of
Conversion and Reorganization or the shares of Common Stock to be issued upon
their exercise. Each person exercising subscription rights will be required to
certify that a purchase of Common Stock is solely for the purchaser's own
account and that there is no agreement or understanding regarding the sale or
transfer of such shares. See "THE CONVERSION AND REORGANIZATION -- Restrictions
on Transfer of Subscription Rights and Shares." The Primary Parties will pursue
any and all legal and equitable remedies in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve the transfer of such rights.
Purchase Limitations. The Plan sets forth various purchase limitations
which are applicable in the Offerings. The minimum purchase is 25 shares. With
the exception of the ESOP, the maximum number of shares of Conversion Stock
which may be purchased by any person (or persons through a single account) shall
not exceed, when combined with Exchange Shares, $500,000 (or 50,000 shares). The
Plan also provides that the maximum number of shares of Conversion and
Reorganization Stock which may be subscribed for or purchased in all categories
in the Conversion by any person together with any associate or group of persons
acting in concert shall not exceed such number of shares of Conversion Stock as
shall equal, when combined with Exchange Shares, $4,750,000 (or 475,000 shares)
divided except for the Tax Qualified Employee Benefit Plans which in the
aggregate may subscribe for 10% of the Conversion Stock. Directors and officers
may not purchase in the aggregate more than 25% of the total number of shares of
Conversion Stock sold in the Offerings, including any shares which may be issued
in the event of an increase in the maximum of the Offering Price Range to
reflect changes in market, financial, or economic conditions after the
commencement of the Subscription Offering and prior to the completion of the
Offerings. Notwithstanding anything to the contrary unless otherwise required by
the OTS, Public Stockholders will not have to sell Bancorp Common Stock or
common stock or be limited in receiving Exchange Shares even if their ownership
of Company shares when converted into Exchange Shares would exceed an applicable
limitation.
iv
<PAGE>
Required Approvals. The consummation of the Conversion and
Reorganization is subject to the receipt of various regulatory approvals and the
approval of the members of the Mutual Holding Company and the stockholders of
Bancorp in the manner set forth herein. See "THE CONVERSION AND REORGANIZATION
- -- Required Approvals."
Market for Common Stock. The Public Bancorp Shares are currently quoted
on the NASDAQ National Market under the symbol "HARB." After the Conversion and
Reorganization, shares of Bancshares will trade on the Nasdaq National Market
under the same symbol. See "MARKET FOR COMMON STOCK."
This Prospectus contains forward-looking statements which reflect the
Primary Parties' views regarding future events and financial performance. Actual
results could differ materially from those projected in the forward-looking
v
<PAGE>
statements as a results of risks and uncertainties including, but not limited
to, those found in the Risk Factors section. The words "believe," "expect," and
"anticipate" and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements which speak only as of their dates. The Primary Parties undertake no
obligation to publicly update or revise any forward looking statements, whether
as a result of new information, future events or otherwise unless such update is
deemed material to the Public Stockholders. The Risk Factors discussion begins
on page ____ of this Prospectus.
vi
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed
information regarding Bancshares, Bancorp and the Mutual Holding Company, and
the Consolidated Financial Statements of Bancorp and the Notes thereto,
appearing elsewhere in this Prospectus.
Harbor Florida Bancshares, Inc.
Harbor Florida Bancshares, Inc. is a newly created Delaware
corporation, organized in November 1997. It was organized at the direction of
the Board of Directors of the Bank to acquire and hold all of the Bank Common
Stock and to facilitate the Conversion and Reorganization. Bancshares has not
engaged in any significant business to date. Bancshares has applied to the OTS
for authority to acquire 100% of the Bank Common Stock and become a savings and
loan holding company. That application has not yet been approved by the OTS and
the ability to consummate the Conversion and Reorganization is contingent on
such approval. After the Conversion and Reorganization, Bancshares will be 100%
publicly owned and serve as a holding company of the Bank. Its Common Stock will
be registered with the Securities and Exchange Commission (the "SEC") under
Section 12(g) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act.").
Harbor Florida Bancorp, Inc.
Harbor Florida Bancorp, Inc. is a Delaware corporation organized in
December of 1996. It is currently the mid-tier holding company (the "Mid-Tier
Holding Company") for Harbor Federal Savings Bank. At present, 53.37% of the
Bancorp Common Stock is held by the Mutual Holding Company. The other 46.63% of
the Bancorp Common Stock is held by the Public Stockholders. Bancorp has no
other business or activities other than acting as the holding company of Harbor
Federal Savings Bank. Pursuant to the Conversion and Reorganization, Bancorp
will, after a series of transactions, merge with the Bank, with the Bank as the
survivor, and Bancorp will cease to exist and its successor, Bancshares, will be
100% publicly owned. Bancshares will own 100% of Harbor Federal Savings Bank.
Harbor Federal Savings Bank
Harbor Federal Savings & Loan Association was established in 1934 as a
federally chartered savings association. Harbor Federal Savings Bank is a
federally chartered stock savings bank that was organized on January 6, 1994, as
a subsidiary of the Mutual Holding Company. In connection with the organization
of the Mutual Holding Company (the "MHC Reorganization"), Harbor Federal Savings
& Loan Association transferred substantially all of its assets and liabilities
to the Bank in exchange for 2,654,369 shares of common stock (the "Bank Common
Stock") and converted its
1
<PAGE>
charter to that of a federal mutual holding company known as Harbor Financial,
M.H.C. As part of the MHC Reorganization, the Bank sold an additional 2,239,831
shares of Bank Common Stock to certain members of the general public.
On June 25, 1997, pursuant to a reorganization, all Bank Common Stock
was exchanged on a one-for-one basis for Bancorp Common Stock. This resulted in
the Bank becoming the 100% owned subsidiary of Bancorp.
As of September 30, 1997, the Bank had $1.1 billion of total assets, $1
billion of total liabilities (including $922.8 million of deposits) and $85.3
million of stockholders equity.
Harbor Financial, M.H.C.
Harbor Financial, M.H.C. is a federally chartered mutual holding
company chartered on January 6, 1994, in connection with the MHC Reorganization.
The Mutual Holding Company's primary asset is 2,654,369 shares of Bancorp Common
Stock, which represents 53.37% of the shares of Bancorp Common Stock outstanding
as of September 30, 1997. As part of the Conversion and Reorganization, the
Mutual Holding Company will convert from mutual form to a federal interim stock
savings institution and, after a series of transactions, merge into the Bank
with the Bank being the surviving entity. A special liquidation account for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders of
the Bank will also be established by the Bank. The Bank will then be acquired by
Bancshares and become a wholly owned subsidiary of Bancshares. See "THE
CONVERSION AND REORGANIZATION -- Liquidation Rights" and " -- Effect on
Liquidation Rights."
Purposes of the Conversion and Reorganization
In their decision to pursue the Conversion and Reorganization, the
Primary Parties considered various regulatory uncertainties associated with the
mutual holding company structure including the ability to waive dividends in the
future as well as the general uncertainty regarding a possible elimination of
the federal savings association charter. See "RISK FACTORS -- Proposed Federal
Legislation." In addition, the Primary Parties considered the various advantages
of a fully converted stock holding company form of organization including: (1)
the larger capital base of a fully converted stock holding company; (2) the
enhancement of Bancshares' future access to the capital markets; (3) the
increase in the number of outstanding shares of publicly traded stock (which may
increase the liquidity of the Common Stock); (4) a stock holding company's
ability to repurchase shares of its common stock without increasing the Mutual
Holding Company's percentage interest in Bancorp; and (5) recent consolidations
in the Florida market and the
2
<PAGE>
greater ability to acquire other financial institutions or branches of other
financial institutions. For additional information see "THE CONVERSION AND
REORGANIZATION -- Purposes of the Conversion and Reorganization."
Description of the Conversion and Reorganization
On September 24, 1997, the Board of Directors of Bancorp and the Mutual
Holding Company adopted the Plan which has subsequently been amended and adopted
by the Bank and Bancshares. Pursuant to the Plan, (i) Bancorp will convert first
into a federal stock holding company and then into an interim federal stock
savings bank. Following its conversion into an interim federal stock savings
bank, it will merge into the Bank with the Bank as the survivor; (ii) the Mutual
Holding Company will convert to an interim federal stock savings institution and
merge with and into the Bank, pursuant to which the Mutual Holding Company will
cease to exist and the 2,654,369 shares or 53.37% of the outstanding Bancorp
Common Stock held by the Mutual Holding Company will be cancelled. The Bank will
then be acquired by a newly created Delaware chartered holding company,
Bancshares, and become a wholly owned subsidiary of Bancshares. The outstanding
Public Bancorp Shares, which amounted to 2,319,059 shares or 46.63% of the
outstanding Bancorp Common Stock at September 30, 1997, will be converted into
the Exchange Shares pursuant to the Exchange Ratio, which will result in the
holders of such shares owning in the aggregate approximately 45.72% of the
Common Stock to be outstanding upon the completion of the Conversion and
Reorganization. See "THE CONVERSION AND REORGANIZATION -- The Exchange Ratio."
The following diagram outlines the current organizational structure of
the Primary Parties' and their ownership interests:
3
<PAGE>
CURRENT ORGANIZATIONAL STRUCTURE
Harbor Financial, Holders of Public
M.H.C. Bancorp Shares
53.37% 46.63%
Harbor Florida
Bancorp, Inc.
100%
Harbor Federal
Savings Bank
The following diagrams reflect the steps in Conversion and Reorganization
as follows: (i) The Mutual Holding Company will convert into an interim federal
stock savings bank to be known as Interim Bank #1. Bancorp will then adopt a
federal charter and immediately thereafter an interim federal stock charter to
be known as Interim Bank #2; (ii) Interim Bank #2 will then merge into the Bank
("Merger #1"), with the Bank as the surviving entity; (iii) immediately
following Merger #1, Interim Bank #1, formerly the Mutual Holding
4
<PAGE>
Company, will merge with and into the Bank with the Bank as the surviving entity
("Merger #2"). The shares of Bancorp Common Stock previously held by the Mutual
Holding Company (now Interim Bank #1) will be cancelled. Eligible members of the
Mutual Holding Company as of certain specified dates will be granted interests
in a liquidation account to be established by the Bank. The amount in the
liquidation account is the amount of dividends waived by the Mutual Holding
Company plus 100% of retained earnings as of June 30, 1993, or 53.4% of
Bancorp's total shareholders' equity as reflected in its latest statement of
financial condition; (iv) Banchares will form an interim corporation ("Interim
FSB"), a new, wholly owned first-tier subsidiary with an interim federal stock
charter; (vi) immediately following Merger #2, Interim FSB will merge with and
into the Bank, with the Bank as the surviving entity ("Merger #3"). As a result
of Merger #3, Bank stock deemed held by Public Stockholders will be converted
into Bancshares stock based upon the Exchange Ratio which is designed to ensure
that the same Public Stockholders will own, subject to certain adjustments
described in "THE CONVERSION AND REORGANIZATION -- The Exchange Ratio,"
approximately the same percentage of Banchares stock as the percentage of
Bancorp stock owned by them immediately prior to the Conversion and
Reorganization before giving effect to (a) cash paid in lieu of fractional
shares and (b) any shares of Bancshares stock purchased by Public Stockholders
in the Offering and subject to an adjustment as a result in a change in OTS
policy; (vii) simultaneously with the consummation of Merger #3, Bancshares will
sell additional shares of Common Stock, with priority subscription rights
granted to certain members of the Mutual Holding Company; depositors of the Bank
and to tax qualified employee benefit plans pursuant to the Plan of Conversion
and Reorganization adopted by the Primary Parties.
5
<PAGE>
REORGANIZATION - STAGE 1
MHC/Interim Bank Public
#1 Shareholders
53.37% 46.63%
Harbor Florida
Bancorp/Interim Bank #2
Harbor Federal
Savings Bank
100%
Harbor Florida
Bancshares
(Interim 1)
100%
Interim
FSB
(Interim 2)
6
<PAGE>
REORGANIZATION - STAGE 2
Purchasers of Public Shareholders
Conversion Stock
54.28% 45.72%
Harbor Florida
Bancshares
100%
Harbor Federal
Savings Bank
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization is conditioned upon the approval of the Plan by the OTS, as well
as (1) the approval of the holders of at least a majority of the total number of
votes eligible to be cast by the members of the Mutual Holding Company (which
consist of depositors and certain borrowers of the Bank) ("Members") as of the
close of business on December 31, 1997 (the "Voting Record Date"), at a special
meeting of Members called for the purpose of submitting the Plan for approval
(the "Members' Meeting"), and (2) the approval of the holders of at least
two-thirds of the shares of the outstanding Bancorp Common Stock held by the
Mutual Holding Company and the Public Stockholders (collectively, the
"Stockholders"), as of the Voting Record Date, at a special meeting of
Stockholders called for the purpose of considering the Plan (the "Stockholders'
Meeting"). In addition, the Primary Parties have conditioned the consummation of
the Conversion and Reorganization on the approval of the Plan by at least a
majority of the votes cast, in person or by proxy, by the Public Stockholders at
the Stockholders' Meeting. The Conversion and Reorganization is also contingent
on obtaining various approvals from the OTS, including approval to form
Bancshares as a holding company for the Bank. The Mutual Holding Company intends
to vote its shares of Bancorp Common Stock, which amount to 53.37% of the
outstanding shares, in favor of the Plan at the Stockholders' Meeting. In
addition, as of October 31, 1997, directors and executive officers of the Bank
as a group (11 persons) beneficially owned 311,064 shares or 6.26% of the
outstanding Bancorp Common Stock, which shares can also be expected to be voted
in favor of the Plan at the Stockholders' Meeting.
7
<PAGE>
The Offerings
Pursuant to the Plan and in connection with the Conversion and
Reorganization, the Company is offering up to 14,490,000 shares (subject to
adjustment of up to 16,663,500 shares) of Conversion Stock in the Offerings.
Conversion Stock is first being offered in the Subscription Offering, with
nontransferable subscription rights being granted, in the following order of
priority: (i) First Priority, to depositors of the Bank with account balances of
$50.00 or more as of the close of business on July 31, 1996, ("Eligible Account
Holders"); (ii) Second Priority, to the ESOP; (iii) Third Priority, to
depositors of the Bank with account balances of $50.00 or more as of the close
of business on December 31, 1997 ("Supplemental Eligible Account Holders"); and
(iv) Fourth Priority, Depositors of the Bank as of the Voting Record Date (other
than Eligible Account Holders and Supplemental Eligible Account Holders) and
certain borrowers ("Other Members"). Subscription rights will expire if not
exercised by Noon, Florida Time, on February _________, 1998, unless extended.
Subject to the prior rights of holders of subscription rights,
Conversion Stock not subscribed for in the Subscription Offering is being
offered first to Eligible Public Stockholders and then in a Community Offering
to certain members of the general public to whom a copy of this Prospectus and
order form is delivered, with preference given to natural persons residing in
the Bank's Local Community. The Primary Parties reserve the absolute right to
reject or accept any orders in the Community Offering, in whole or in part,
either at the time of receipt of an order or as soon as practicable following
the Expiration Date. The closing of all shares sold in the Offerings will occur
simultaneously, and all shares of Conversion Stock will be sold at a uniform
price of $10.00 per share.
Procedure for Purchasing Shares in the Offerings.
To help ensure that each purchaser receives a Prospectus at least 48
hours before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery of the Prospectus in accordance with
Rule 15c2-8. Order forms will only be distributed with a Prospectus.
To purchase shares in the Offerings, an executed original order form
with a certification form and the required payment for each share subscribed
for, or with appropriate authorization for withdrawal from a deposit account at
the Bank (which may be given by completing the appropriate blanks on the order
form), must be received by the Bank at any of its offices by 12 noon, Florida
Time, on the Expiration Date. Order forms which are not received by such time or
are executed defectively or are received without full payment (or appropriate
withdrawal instructions) are not required to be accepted. The Bank is not
required to accept orders submitted on facsimilied order forms. The Primary
Parties have the right to waive or permit the correction of incomplete or
improperly executed forms, but do not represent that they will do so. The waiver
8
<PAGE>
of an irregularity on an order form, the allowance by the Primary Parties of a
correction of an incomplete or improperly executed order form, or the acceptance
of an order after 12 noon on the Expiration date in no way obligates the Primary
Parties to waive an irregularity, allow a correction, or accept an order with
respect to any other order form. The interpretation by the Primary Parties of
the acceptability of an order form will be final. Once received, an executed
order form may not be modified, amended or rescinded without the consent of the
Primary Parties, unless the Offerings have not been completed within 45 days
after the end of the Subscription, Eligible Public Stockholders, and Community
Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date ( July 31, 1996) or the Supplemental Eligibility Record Date and
Voting Record Date (both of which are December 31, 1997) must list on the order
form all accounts in which they have an ownership interest at the applicable
eligibility date, giving all names in each account and the account numbers.
Members qualifying for a stock purchase priority who add individuals with a
lower, or no, stock purchase priority as subscribers on an order form will have
their stock purchase priority reduced or eliminated based on the lower priority.
Payment for subscriptions and orders may be made (i) in cash if
delivered in person at any office of the Bank, (ii) by check or money order, or
(iii) by authorization of withdrawal from certificate of deposit accounts or
IRAs maintained with the Bank. The Primary Parties may in their sole discretion
elect not to accept payment for shares of Conversion Stock by wired funds and
there shall be no liability for failure to accept such payment. Funds will be
deposited in a segregated account at the Bank and interest will be paid on funds
made by cash, check or money order at the Bank's passbook rate of interest from
the date payment is received until completion or termination of the Conversion
and Reorganization. If payment is made by authorization of withdrawal from
certificate accounts, the funds authorized to be withdrawn from a Bank deposit
account may continue to accrue interest at the contractual rates until
completion or termination of the Conversion and Reorganization, but a hold will
be placed on such funds, thereby making them unavailable to the depositor until
completion or termination of the Conversion and Reorganization.
If a subscriber authorizes the Bank to withdraw the aggregate amount of
the purchase price from a deposit account, the Bank will do so as of the
effective date of the Conversion and Reorganization. The Bank may waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate.
9
<PAGE>
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of Conversion Stock
subscribed for upon consummation of the Offerings, provided that there is in
force from the time of its subscription until such time, a loan commitment from
an unrelated financial institution or the Company to lend to the ESOP, at such
time, the aggregate purchase price of the shares for which it subscribed.
A depositor interested in using his or her IRA funds to purchase
Conversion Stock must do so through a self-directed IRA. Since the Bank does not
offer such accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program with
the agreement that such funds will be used to purchase the Conversion Stock in
the Offerings. There will be no early withdrawal or IRS penalties for such
transfers. The new trustee would hold the Conversion Stock in a self-directed
account in the same manner as the Bank now holds the depositor's IRA funds. An
annual administrative fee may be payable to the new trustee. Depositors
interested in using funds in a Bank IRA to purchase Conversion Stock should
contact the Stock Information Center as soon as possible so that the necessary
forms may be forwarded for execution prior to the Expiration Date.
The Primary Parties have retained FBR as consultant and advisor in
connection with the Offerings and to assist in soliciting subscriptions in the
Offerings on a best efforts basis. See "THE CONVERSION AND REORGANIZATION -- The
Offerings" " -- Subscription Offering," "-- Community Offering," and " --
Marketing Arrangements."
Purchase Limitations
The Plan sets forth various purchase limitations which are applicable
in the Offerings. The minimum purchase is 25 shares. With the exception of the
ESOP, the maximum number of shares of Conversion Stock which may be purchased by
any person (or persons through a single accountant) shall not exceed, when
combined with Exchange Shares, $500,000 (or 50,000 shares). Further, the Plan
provides that, except for the Tax Qualified Employee Stock Benefit Plans, the
maximum number of shares of Conversion Stock which may be purchased in all
categories in the Conversion and Reorganization by any person (or persons
through a single account), together with any associate
10
<PAGE>
or group of persons acting in concert, when combined with Exchange Shares equals
$4,750,000 (or 475,000 shares). Directors and officers may not purchase in the
aggregate, when combined with Exchange Shares, more than 25% of the total number
of shares of Conversion Stock sold in the Offerings, including any shares which
may be issued in the event of an increase in the maximum of the Offering Price
Range to reflect changes in market, financial, or economic conditions after the
Commencement of the Subscription Offering and prior to the completion of the
Offerings. Notwithstanding anything to the contrary, except as otherwise
required by the OTS, Public Stockholders will not have to sell Company stock or
be limited in receiving Exchange Shares even if their ownership of Company
shares, when converted into Exchange Shares, would exceed an applicable
limitation.
Stock Pricing and Number of Shares to be Issued in the Conversion and
Reorganization
The Plan of Conversion and Reorganization requires that the aggregate
purchase price of the Conversion Stock be based on the appraisal of the pro
forma market value of Bancorp and the Bank on a consolidated basis, as
determined on the basis of an independent valuation. The Primary Parties have
retain RP Financial ("RP"), Arlington, Virginia, to prepare such independent
valuation (the "Independent Valuation"). The Independent Valuation was prepared
based on the assumption that the aggregate amount of Conversion Stock sold in
the Offerings would be equal to the estimated pro forma market value of Bancorp
and the Bank, on a consolidated basis, multiplied by the percentage of the
outstanding shares of Bancorp Common Stock held by the Mutual Holding Company as
of the date of the appraisal, subject to certain adjustments described in "THE
CONVERSION AND REORGANIZATION -- The Exchange Ratio." The Independent Valuation
states that as of December ______, 1997, the estimated pro forma market value of
the Company ranged from a minimum of $197,310,000 to a maximum of $266,949,000
with a midpoint of $232,130,000. Based on the percentage of the outstanding
shares of Bancorp Common Stock held by the Mutual Holding Company as of the date
of the appraisal, and the adjustments described herein, the estimated pro forma
market value of the Mutual Holding Company was multiplied by 54.28% to determine
the dollar amount of Conversion Stock to be offered in the Offerings, which
ranges from a minimum of $107,100,000 (i.e., 10,710,000 share of Conversion
Stock) to a maximum of $144,900,000 (i.e., 14,490,000 shares of Conversion
Stock), with a midpoint of $126,000,000 (i.e., 12,600,000 shares of Conversion
Stock). The range of the aggregate dollar amount and number of shares of
Conversion Stock offered in the Offerings is referred to herein as the "Offering
Price Range."
11
<PAGE>
The full text of the Appraisal describes the procedures followed, the
assumptions made, limitations on the review undertaken and matters considered,
which included the trading market for Bancorp Common Stock (see "MARKET FOR
COMMON STOCK"), but was not dependent thereon. The Appraisal has been filed as
an exhibit to the Registration Statement and Application for Conversion of which
this Prospectus is a part, and is available in the manner set forth under
"ADDITIONAL INFORMATION." The Appraisal is not intended and should not be
construed as a recommendation of any kind as to the advisability of purchasing
such stock.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares of
Conversion Stock to be sold in the Offerings may be increased by up to 15%, to
16,663,500 shares, without a resolicitation of subscribers. In the event market
or financial conditions change so as to cause the aggregate purchase price of
the shares to be below the minimum of the Offering Price Range (i.e.
$107,100,000) or more than 15% above the maximum of such range (i.e.
$166,635,000), purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to modify or rescind their
subscriptions). Based upon current market and financial conditions and recent
practices and policies of the OTS, in the event Bancshares receives orders for
Conversion Stock in excess of $144,900,000 (the maximum of the Offering Price
Range) and up to $166,635,000 (the maximum of the Offering Price Range, as
adjusted by 15%) the Company may be required by the OTS to accept all such
orders. No assurances, however, can be made that the Company will receive orders
for Conversion Stock in excess of the maximum of the Offering Price Range or
that, if such orders are received that all such orders will be accepted.
12
<PAGE>
The Exchange Ratio
OTS regulations and policy provide that in a conversion of a mutual
holding company to stock form, stockholders other than the mutual holding
company will be entitled to exchange their shares of subsidiary savings bank (or
mid-tier holding company) common stock for common stock of the converted holding
company, provided that the bank and the mutual holding company demonstrate to
the satisfaction of the OTS that the basis for the exchange is fair and
reasonable. The Boards of Directors of the Primary Parties have determined that
each Public Bancorp Share will on the effective date be automatically converted
into and become the right to receive a number of Exchange Shares determined
pursuant an exchange ratio (the "Exchange Ratio") which was established as the
ratio that ensures that after the Conversion and Reorganization, subject to
certain adjustments described in "THE CONVERSION AND REORGANIZATION -- The
Exchange Ratio," the percentage of the to-be outstanding shares of Common Stock
issued to Public Stockholders in exchange for their Public Bancorp shares will
be equal to the percentage of the outstanding shares of Bancorp Common Stock
held by Public Stockholders immediately prior to the Conversion and
Reorganization. The total number of shares held by Public Stockholders after the
Conversion and Reorganization would also be affected by any purchases by such
persons in the Offering.
13
<PAGE>
Based on the Independent Valuation, the percentage of the outstanding
shares of Bancorp Common Stock held by Mutual Holding Company as of the date of
the Independent Valuation, and adjustments described herein, the following table
sets forth, based upon the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Valuation Range, the following: (i) the total number of shares
of Conversion Stock and Exchange Shares to be issued in the Conversion and
Reorganization, (ii) the percentage of the total Common Stock represented by the
Conversion Stock and the Exchange Shares, and (iii) the Exchange Ratio. The
table assumes there is no cash paid in lieu of issuing fractional Exchange
Shares.
<TABLE>
<CAPTION>
Conversion Stock Total Shares
to be Issued Exchange Shares of Common
--------------------- ---------------------- Stock to be Exchange
Amount Percent Amount Percent Outstanding Ratio
------ ------- ------ ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Minimum 10,710,000 54.28% 9,021,024 45.72% 19,731,024 3.8899
Midpoint 12,600,000 54.28 10,612,969 45.72 23,212,969 4.5764
Maximum 14,490,000 54.28 12,204,915 45.72 26,694,915 5.2629
15% Above Maximum 16,663,500 54.28 14,035,652 45.72 30,699,152 6.0523
-----------------
</TABLE>
Options to purchase Public Bancorp Shares will also be converted into
and become options to purchase Common Stock. As of the date of this Prospectus
there were outstanding options to purchase 134,298 shares of Bancorp Common
Stock at an average exercise price of $11.66 per share. The number of shares of
Common Stock to be received upon exercise of such options will be determined
pursuant to the Exchange Ratio. The aggregate exercise price, duration, and
vesting schedule of such options will not be affected. If such options are
exercised prior to the effective date of the Conversion and Reorganization, then
there will be an increase in the number of shares of Common Stock issued to
Public Stockholders in the Share Exchange, and a decrease in the Exchange Ratio.
Bancorp has no plans to grant additional stock options prior to the Effective
Date.
14
<PAGE>
Delivery and Exchange of Certificates
Upon consummation of the Conversion and Reorganization, holders of
Public Bancorp Shares in certificate form (other than the Mutual Holding
Company) will receive a transmittal letter with instruction on delivery of
certificates for exchange. See "THE CONVERSION AND REORGANIZATION -- Delivery
and Exchange of Certificates." Upon surrender of such certificates to an agent
appointed by Bancshares (the "Exchange Agent") the Public Stockholder will be
entitled to receive in exchange therefore a certificate or certificates
representing the number of full shares of Common Stock to which he or she is
entitled based on the Exchange Ratio. The Exchange Agent will provide each
stockholder of record a letter of transmittal with instructions for the exchange
of shares. Holders of Bancorp Common Stock should not forward shares to the Bank
or Exchange Agent until they have received instructions from the Exchange Agent.
Comparison Of Shareholder Rights.
Pursuant to the Plan, Bancshares will become the stock holding company
for the Bank. Bancorp will cease to exist. Therefore, the Certificate of
Incorporation and Bylaws of Bancshares and Delaware corporate law will govern
stockholder rights after the Conversion and Reorganization. Both Bancshares and
Bancorp are Delaware corporations. The Certificate of Incorporation of
Bancshares is substantially similar to that of Bancorp. Differences in the
Certificate of Incorporation are related primarily to issues related to the
Reorganization. See "COMPARISON OF STOCKHOLDERS' RIGHTS."
Benefits of Conversion and Reorganization to Directors and Officers
Bancshares does not intend to enter into any new employment agreements.
Mr. Brown has an Employment Agreement with the Bank. See "MANAGEMENT OF THE BANK
- -- Employment Agreements." However, Bancshares will also enter into certain
change in control agreements with the other members of the senior management of
the Bank, Messrs. Bluestone, Bebber, Hankle, and Fort. Under the terms of the
Change in Control Agreements (the "Agreements"), each would receive payment
equal to one year of salary plus continuation of benefit programs if terminated
(other than for cause) following a change in control as defined in the
Agreements. For a termination occurring in 1998, the total payments required to
be paid to Messrs. Bebber, Bluestone, Fort and Hankle would be $467,500. See
"MANAGEMENT OF THE BANK -- Change in Control Agreements." Bancshares currently
15
<PAGE>
intends to adopt certain stock benefit plans for the benefit of directors and
employees of Bancshares and the Bank. The proposed benefit plans are as follows:
(i) a Stock Option Plan, pursuant to which a number of authorized but unissued
shares of Common Stock equal to 10% of the Conversion Stock to be sold in the
Offerings (1,449,000 shares at the maximum of the Offering Price Range) may be
reserved for issuance pursuant to stock options and stock appreciation rights to
directors, officers and employees; and (ii) a Management Recognition and
Retention Plan (the "Recognition Plan"), which may purchase a number of shares
of Common Stock, with funds contributed by Bancshares, either from Bancshares or
in the open market, equal to an amount which will equal 4.0% of the total
Conversion stock issued in the Conversion and Reorganization (579,600 shares at
the maximum of the Offering Price Range) for distribution to directors, officers
and employees. These shares will be issued at no cost to the recipients.
Recipients will, however, be required to pay both federal and applicable state
taxes on the value of Common Stock received pursuant to the Recognition Plan.
Bancshares has not determined when it will implement the Stock Option Plan and
the Recognition Plan. If, however, it is implemented prior to one year following
the consummation of the Conversion and Reorganization, Bancshares will submit
such plans to stockholders for approval at an annual or special meeting at least
six months following the consummation of the Conversion and Reorganization. In
such event, OTS regulations permit individual members of management to receive
up to 25% of the shares reserved pursuant to any stock option or non-tax
qualified stock benefit plan, and directors who are not employees to receive up
to 5% of such stock (or stock options) reserved individually and up to 30% in
the aggregate under any such plan. See "MANAGEMENT OF THE BANK -- Benefit
Plans."
In the event that the Recognition Plan purchases shares of Common Stock
in the open market with funds contributed by Bancshares, the cost of such shares
initially will be deducted from the stockholders' equity of the Company, but the
number of outstanding shares of Common Stock will not increase and stockholders
accordingly will not experience dilution of their ownership interest. In the
event that the Recognition Plan purchases shares of Common Stock from Bancshares
with funds contributed by Bancshares, total stockholders' equity would neither
increase or decrease, but under such circumstances stockholders would experience
dilution of their ownership interests (by approximately 2.1% at the maximum of
the Offering Price Range) and per share stockholders' equity and per share net
earnings would decrease as a result of an increase in the number of outstanding
shares of Common Stock. In either case, Bancshares will incur operating expense
and increases in stockholders' equity as the shares held by the Recognition Plan
are granted and issued in accordance with the terms thereof. For a presentation
of the effects of anticipated purchases of Common Stock by the Recognition Plan,
see "PRO FORMA DATA."
In addition, the ESOP intends to purchase up to 8.0% of the Conversion
Stock issued in the Conversion and Reorganization (1,159,200 shares or
$11,592,000 of Conversion Stock at the maximum of the Offering Price Range) with
a loan funded by Bancshares. See "USE OF PROCEEDS." In the event that there are
insufficient
16
<PAGE>
shares available to fill the ESOP's order due to an oversubscription by Eligible
Account Holders, the offering range will be increased above the maximum and the
ESOP shall have a priority right to purchase any shares exceeding the maximum of
the Offering Valuation Range, up to an aggregate of 8% of the Conversion Stock.
See "MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan" and "RISK FACTORS
- -- Possible Dilutive Effective of Issuance of Additional Shares."
The foregoing plans are in addition to a stock option plan and a
directors' stock option plan; which were adopted by the Bank in 1993. After the
creation of Bancorp as the Mid-Tier Holding Company of the Bank, these plans
remained as benefit plans of the Bank. The stock options and restricted stock
awards made pursuant to these plans are currently for Bancorp Common Stock.
These plans will continue in existence after the Conversion and Reorganization
as plans of Bancshares. See "MANAGEMENT OF THE BANK -- Benefit Plans" and "THE
CONVERSION AND REORGANIZATION -- Effects of the Conversion and
Reorganization," " -- Effect on Existing Option Plans."
Use of Proceeds
Net proceeds from the sale of the Conversion Stock are estimated to be
between $105.6 million and $143.2 million, depending on the number of shares
sold and the expenses of the Conversion and Reorganization. See "PRO FORMA
DATA." Bancshares plans to contribute to the Bank 50% of the net proceeds from
the Offerings and retain the remainder of the net proceeds. Bancshares intends
to use a portion of the net proceeds retained by it to make a loan directly to
the ESOP to enable the ESOP to purchase 8.0% of the Conversion Stock to be
issued in the Conversion and Reorganization. The amount of the loan is expected
to be between $8.6 million and $11.6 million at the minimum and maximum of the
Offering Price Range, respectively. It is anticipated that the loan to the ESOP
will have a term of not less than 15 years and a fixed rate of interest at the
prime rate as of the date of the loan. See "MANAGEMENT OF THE BANK -- Benefit
Plans" and " -- Employee Stock Ownership Plan." The remaining net proceeds will
initially be lent by Bancshares to the Bank and be used by the Bank to invest
primarily in short-term interest-bearing deposits and short and intermediate
term marketable securities. The funds retained by Bancshares may be used to
support the future expansion of operations or diversification into other
banking-related businesses and for other business or investment purposes,
including the acquisition of other financial institutions and/or branch offices,
although there are no current plans, arrangements, understandings or agreements
regarding such expansion, diversification or acquisitions. In addition, subject
to applicable limitations, such funds also may be used in the future to
repurchase shares of Common Stock, although Bancshares currently has no
intention of effecting any such transactions following consummation of the
Conversion and Reorganization. See "THE CONVERSION AND REORGANIZATION -- Certain
Restrictions on Purchases or Transfers of Shares after the Conversion and
Reorganization." Funds contributed to the Bank from the Company will be used for
general business purposes. The proceeds will be used to support the Bank's
lending and investment activities and thereby enhance the Bank's capabilities to
serve the borrowing and other financial needs of the communities it serves. The
Bank plans to initially use the proceeds to invest primarily in short-term
interest-bearing deposits and short and intermediate term marketable securities.
See "USE OF PROCEEDS."
17
<PAGE>
Dividend Policy
Since the completion of the first full quarter after the MHC
Reorganization, i.e. March 31, 1994, until the adoption of the Plan, Bancorp or
the Bank has paid a regular quarterly cash dividend. For the fiscal year ending
September 30, 1996, that dividend was 30(cent) per quarter, and $1.20 per year.
The dividend was increased by the Board of Directors to 35(cent) per quarter for
the quarter ended March 31, 1997. Following the consummation of the Conversion
and Reorganization, the Board of Directors of Bancshares intends to declare cash
dividends on the Common Stock commencing with the first quarter following the
consummation of the Conversion and Reorganization. The first quarterly dividend
is expected to be an amount of no less than 35(cent) ($1.40 annualized) per
share on the total Public Bancorp Shares outstanding immediately before the
consummation of the Conversion and Reorganization. For example, based on the
Exchange Ratio of 4.5764 at the midpoint of the Offering Price Range, the cash
dividend after the Conversion and Reorganization would be approximately $0.07648
per share per quarter. However, no assurance can be given as to the amount of a
dividend or that a dividend will be paid or if paid that the dividend will not
be reduced or eliminated in future periods. Pending the completion of the
Conversion and Reorganization, Bancorp intends to continue paying its regular
quarterly cash dividend. For a period of one year following the completion of
the Conversion and Reorganization, Bancshares will not pay any dividends that
would be treated for tax purposes as a return of capital nor take any actions or
propose such dividends. See "DIVIDEND POLICY."
Dissenters' Rights and Rights of Appraisal
Pursuant to Section 262 of the General Corporation Law of Delaware,
Public Stockholders will have no dissenters' rights or rights of appraisal in
connection with the Conversion and Reorganization.
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order forms will be distributed only with a prospectus. The Primary Parties will
accept for processing orders submitted on original order forms with an executed
certification. In their discretion, the Primary Parties may accept photocopies
or facsimile copies of order forms or the form of certification. Payment by
cash, check, money order, bank draft or debit authorization to an existing
account at the bank must accompany the order form. In their discretion, the
Primary Parties may accept wire transfers. See "THE CONVERSION AND
REORGANIZATION."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data as of and for the
periods ended September 30, 1997, 1996, 1995, 1994 and 1993 have been derived
from the audited consolidated financial statements of Bancorp. The financial
data presented below is qualified in its entirety by the more detailed financial
data appearing elsewhere herein, including the audited consolidated financial
statements and notes thereto beginning on page F-1.
Selected Consolidated Financial Condition Data
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ----- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets $1,131,024 $1,057,443 $886,570 $808,110 $759,389
Loans (net)(1) 834,270 765,019 631,307 576,406 546,699
Federal funds sold 250 16,075 12,825 7,400 17,500
Investment securities(2) 52,553 53,493 25,186 40,286 45,522
Mortgage-backed securities 176,854 153,293 164,759 120,099 89,535
Real estate owned (net) 2,314 3,118 2,786 2,522 6,198
Deposits 911,576 851,853 720,981 673,830 651,093
FHLB advances 100,000 95,000 65,000 45,000 45,000
Other borrowings 475 674 974 1,273 990
Stockholders' equity 96,802 84,832 77,500 68,251 40,230
</TABLE>
- ---------------
(1) Excludes loans held for sale of $141,000, $4.9 million, $1.0 million,
$25,000, and $679,000, as of September 30, 1997, 1996, 1995, 1994 and 1993
respectively.
(2) Includes investments available for sale of $47.6 million and $33.5 million
as of September 30, 1997 and 1996, respectively.
19
<PAGE>
Selected Consolidated Operating Data
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income .................................. $ 84,814 $ 74,357 $ 64,884 $ 56,084 $ 55,674
Interest expense ................................. 45,159 39,114 33,280 26,276 27,251
-------- -------- -------- -------- --------
Net interest income .............................. 39,655 35,243 31,604 29,808 28,423
Provision for (recovery of) loan
losses ......................................... 782 (76) 460 1,553 1,890
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses ...................... 38,873 35,319 31,144 28,255 26,533
-------- -------- -------- -------- --------
Other income:
Income (loss) from real estate
operations ................................... 145 (301) (40) 1,250 (2,792
Gain on sale of mortgage loans ................. 188 (40) 92 118 281
Other .......................................... 3,880 3,226 2,855 2,701 2,668
-------- -------- -------- -------- --------
Total other income ........................... 4,213 2,885 2,907 4,069 157
-------- -------- -------- -------- --------
Other expenses:
Compensation and benefits ...................... 11,931 10,690 10,048 9,433 9,078
Professional fees .............................. 599 527 699 1,137 711
SAIF deposit insurance premium ................. 785 6,300 1,556 1,672 1,627
Other .......................................... 7,833 6,615 5,895 5,624 5,555
-------- -------- -------- -------- --------
Total other expenses ......................... 21,148 24,132 18,198 17,866 16,971
-------- -------- -------- -------- --------
Income tax expense ............................... 8,611 5,432 5,958 5,254 4,016
-------- -------- -------- -------- --------
Income before extraordinary
item and cumulative effect
of change in accounting principle .............. 13,327 8,640 9,895 9,204 5,703
Extraordinary item(1) ............................ -- -- -- (1,342) --
Cumulative effect on prior years
of changing to a different
method of accounting for
income taxes ................................... -- -- -- 1,935 --
-------- -------- -------- -------- --------
Net income ....................................... $ 13,327 $ 8,640 $ 9,895 $ 9,797 $ 5,703
======== ======== ======== ======== ========
Cash Dividends Per Share(2) ...................... $ 1.40 $ 1.20 $ .90 $ .3375 --
</TABLE>
- --------------
(1) Extinguishment of FHLB advances for year 1994.
(2) Cash Dividends declared on Public Bancorp Shares only. The Mutual Holding
Company has waived receipt of all dividends since the MHC Reorganization.
20
<PAGE>
Selected Financial Ratios
<TABLE>
<CAPTION>
At or for the Years Ended September 30,
--------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Performance Ratios:
<S> <C> <C> <C> <C> <C>
Return on average assets ....................... 1.22% 0.91%(1) 1.16% 1.25% 0.77%
Return on average stockholders' equity ......... 14.72 10.51 (1) 13.61 16.85 15.14
Net interest rate spread ....................... 3.36 3.40 3.42 3.68 3.92
Net yield on average interest-
earning assets ............................... 3.72 3.79 3.80 3.92 4.04
Noninterest expense to average assets .......... 1.93 2.53 (1) 2.14 2.27 2.29
Net interest income to
noninterest expense ......................... 1.88 1.46 (1) 1.74 1.67 1.67
Average interest-earning assets
to average interest-
bearing liabilities ......................... 108.33 109.24 109.58 106.94 103.13
Efficiency Ratio ............................... 48.83 62.83 (1) 52.76 54.81 54.59
Asset Quality Ratios:
Nonperforming assets to total assets ........... 0.43 0.50 0.71 0.85 2.19
Allowance for loan losses to total loans ....... 1.40 1.44 1.60 1.64 1.34
Allowance for loan losses to
nonperforming loans .......................... 453.11 507.25 286.70 329.74 209.67
Allowance for losses on real
estate owned to total real estate owned ...... 19.99 35.45 40.00 33.37 26.09
Capital Ratios:
Average stockholders' equity to
average assets ............................... 8.26 8.62 8.54 7.40 5.09
Stockholders' equity to assets
at period end ................................ 8.56 8.02 8.74 8.45 5.30
</TABLE>
- ----------
(1) Includes one-time SAIF special assessment expense of $4,552,000, $2,839,000
net of tax. Without the one-time SAIF special assessment, return on average
assets for year ended September 30, 1996, would have been 1.20% and return
on average equity would have been 13.92%, noninterest expense to average
assets would have been 2.05%, noninterest income to noninterest expense
would have been 1.80% and the efficiency ratio would have been 50.97%.
------------------
21
<PAGE>
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered hereby.
Vulnerability to Changes in Interest Rates
The Bank's profitability, like that of many financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits. When interest-bearing liabilities mature or reprice more quickly
than interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Asset and Liability Management."
Intent to Remain Independent; Unsuitability as a Short-term Investment
The Bank and its predecessors have operated as independent
community-oriented savings associations since 1934. Following the Conversion and
Reorganization, it is Bancshares' intent to continue to operate as an
independent financial institution. Accordingly, the Common Stock may not be a
suitable investment for individuals anticipating a rapid sale of Bancshares to a
third party. See "BUSINESS OF HARBOR FLORIDA BANCSHARES"
22
<PAGE>
Also due to Bancshares' intention to remain independent, certain
provisions in Bancshares' Certificate of Incorporation and Bylaws may assist
Bancshares in maintaining its status as an independent publicly owned
corporation. These provisions, as well as the Delaware General Corporation law
and certain federal regulations, may have certain anti-takeover effects. These
provisions include: restriction on the acquisition of Bancshares' equity
securities and limitations on voting rights, the classification of the terms of
the members of the Board of Directors, certain provisions relating to the
meeting of stockholders, denial of cumulative voting by stockholders in the
election of directors, the issuance of preferred stock and additional shares of
Common Stock without shareholder approval, and supermajority provisions for the
approval of certain business combinations. See "RESTRICTIONS ON ACQUISITION OF
THE COMPANY." As a result, stockholders who might wish to participate in a
change of control transaction may not have the opportunity to do so.
Price of Common Stock Following the Conversion and Reorganization
Since the MHC Reorganization and public stock issuance on January 6,
1994, Bancorp's Common Stock and its predecessor the Bank's common stock has
increased in value. The Bank Shares (which were exchanged for Bancorp shares)
were initially sold to the public at $10 per share. On January ___, 1998, the
date of this prospectus, the closing price of the Public Bancorp Shares was
__________. There can be no assurance that the Conversion Stock will appreciate
in value as has the Public Bancorp Shares. Additionally, there can be no
assurance that the Common Stock will appreciate after the Conversion and
Reorganization. The Boards of Directors of the Primary Parties have set an
offering price for the Conversion Stock of $10 a share. However, the pricing of
this stock should in no way be seen as an indication or assurance that the
Conversion Stock or the Common Stock will appreciate after the Conversion and
Reorganization in the same manner as the Public Bancorp Shares which were also
initially sold at $10 per share as shares of the Bank.
Competition
The Bank is headquartered in the City of Fort Pierce, and has 22 branch
offices located within six counties on Florida's central east coast. The Bank
operates in a highly competitive market and experiences strong competition in
its local market area in both originating loans and attracting deposits. As of
March 31, 1997, the Bank's market share of deposits within the six counties
totaled 6.12%, while the largest competitor held 20.8%. The Bank's market will
likely undergo significant consolidation when this competitor merges with one of
the nation's largest financial institutions.
23
<PAGE>
Most of the Bank's mortgages are secured by properties located within
its six county market, with the predominance of its lending in one to four
family residential mortgages. The State of Florida has a substantial number of
financial institutions, many of which have a state-wide or regional presence,
and in some cases, a national presence. All of these institutions are
competitors of the Bank, to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings bank, savings and loan
associations, credit unions, mortgage banking companies and insurance companies.
Its most direct competition for deposits has historically come from commercial
banks, savings banks, savings and loan associations and credit unions, many of
which are significantly larger than the Bank and, therefore, have greater
financial and marketing resources than the Bank. The Bank also faces additional
competition for deposits from short-term money market funds, other corporate and
government securities funds and from other financial institutions such as
brokerage firms and insurance companies. In order to deal with the various
competitive factors, the Bank recognizes its need to monitor competition and
modify its products and services as necessary and possible, taking into
consideration the financial impact of such actions.
As a result of the level of competition in its market, the Company's
growth and profitability in the future may be adversely affected. See "BUSINESS
- -- Market Area" and " -- Competition."
Geographical Concentration of Loans
At September 30, 1997, substantially all of the Bank's real estate
mortgage loans were secured by properties located in the Bank's primary market
area. While the Bank currently believes that its loans are adequately secured or
reserved for, in the event that real estate prices in the Bank's market area
substantially weaken or economic conditions in its market area deteriorate,
reducing the value of properties securing the Bank's loans, some borrowers may
default and the value of the real estate collateral may be insufficient to fully
secure the loans. In either event, the Bank may experience increased levels of
delinquencies and related losses having an adverse impact on net income.
Additionally, some of the real estate securing loans held by the Bank are
vacation homes or second homes used as rental properties. As such, such loans
may have a higher level of risk than loans secured by primary residences.
Certain Anti-Takeover Provisions
Certain provisions of Bancshares' certificate of incorporation and
bylaws, including a provision limiting voting rights of beneficial owners of
more than 10% of the Common Stock, and the Bank's stock charter and bylaws, as
well as certain Delaware laws and regulations, will assist Bancshares in
maintaining its status as an independent publicly owned corporation and may have
certain anti-takeover effects.
24
<PAGE>
Certificate of Incorporation and Bylaws of Bancshares. Bancshares
articles of incorporation and bylaws provide for, among other things, a limit on
voting more than 10% of the Common Stock described above, staggered terms for
members of its Board of Directors, noncumulative voting for directors, limits on
the calling of special meetings of stockholders and director nominations, a
prohibition on action by consent, a fair price or super majority stockholder
approval requirement for certain business combinations and certain shareholder
proposal notice requirements. These provisions are the same as those currently
in the Certificate of Incorporation and Bylaws of Bancorp.
Federal Stock Charter of the Bank. Provisions in the Bank's federal
stock charter that have an anti-takeover effect could also be applicable to
changes in control of Bancshares as the sole shareholder of the Bank. The Bank's
federal stock charter includes a provision applicable for five years which
prohibits the acquisition or offer to acquire directly or indirectly the
beneficial ownership of more than 10% of the Bank's securities by any person or
entity other than Bancshares. Any person violating this restriction may not vote
the Bank's securities in excess of 10%.
These provisions in Bancshares' and the Bank's governing instruments
may discourage potential proxy contests and other takeover attempts by making
Bancshares less attractive to a potential acquiror, particularly those takeover
attempts which have not been negotiated with the Board of Directors of
Bancshares and/or the Bank, as the case may be. These provisions may also have
the effect of discouraging a future takeover attempt which would not be approved
by Bancshares' Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. In addition, certain of these provisions that
limit the ability of persons (including management or others) owning more than
10% of the shares to vote their shares will be enforced by the Board of
Directors of Bancshares or the Bank, as the case may be, to limit the voting
rights of 10% or greater stockholders and thus could have the effect in a proxy
contest or other solicitation to defeat a proposal that is desired by the
holders of a majority of the shares of Common Stock.
Federal Law and Regulations. Federal law also requires OTS approval
prior to the acquisition of "control" (as defined in OTS regulations) of an
insured institution, including a holding company thereof. In the event any
person or group of persons acquires shares in violation of these limitations,
such person or group may be restricted from voting his or their shares in excess
of 10% of the outstanding Common Stock. Such laws and regulations may also limit
a person's ability without regulatory approval to solicit proxies enabling him
to elect one third or more of Bancshares' Board of Directors or exert a
controlling influence on the operations of the Bank or the Company.
25
<PAGE>
In addition, certain of these provisions may limit the ability of
persons (including management or others) owning more than 10% of the shares to
vote their shares (by proxy or otherwise) for proposals that they believe to be
in the best interests of shareholders. See "MANAGEMENT OF THE BANK -- Benefit
Plans," and " -- Description of Capital Stock."
Voting Power of Directors and Executive Officers
Directors and executive officers of Bancshares expect to beneficially
own approximately 1,713,840 shares or 7.38% of the shares of Common Stock
outstanding (excluding unexercisable stock options) upon consummation of the
Conversion and Reorganization based upon the midpoint of the Offering Price
Range. See "BENEFICIAL OWNERSHIP OF COMMON STOCK."
In addition, Bancshares may acquire Common Stock on behalf of the
Recognition Plan in an amount which will equal 4.0% of the Conversion Stock
issued in the Offering (579,600 shares based on the maximum of the Offering
Price Range). Under the terms of the Recognition Plan, individuals to whom
shares of Common Stock are awarded will be able to vote the Common Stock
immediately after it is awarded. Bancshares also may reserve for future issuance
pursuant to the Stock Option Plan (which will be subject to stockholder approval
if implemented prior to one year following the Conversion and Reorganization), a
number of authorized shares of Common Stock equal to an aggregate of 10.0% of
the Conversion Stock issued in the Offerings (1,449,000 shares, based on the
maximum of the Offering Price Range). These options are in addition to the
options for 43,304 shares of Bancorp Common Stock which were previously granted
to directors and executive officers and remain unexercised under the option
plans adopted by the Bank in connection with the MHC Reorganization. In
addition, the ESOP intends to purchase up to 8% of the shares of Common Stock to
be issued by Bancshares in the Conversion and Reorganization. See "MANAGEMENT OF
THE BANK -- Option Grants in Last Fiscal Year," " -- Other Stock Benefit Plans,"
and " -- Stock Option Plan."
Management's potential voting power could, together with additional
stockholder support, preclude or make more difficult takeover attempts which do
not have the support of the Company's Board of Directors and may tend to
perpetuate existing management.
Return on Equity
As a result of the Bank's high capital levels and the additional
capital that will be raised by Bancshares in the Conversion and Reorganization,
Bancshares' ability to leverage the net proceeds from the Conversion and
Reorganization may be limited in the near future. Accordingly, return on
capitalized equity is initially expected to be lower than it has been in recent
years.
26
<PAGE>
ESOP Compensation Expense
An employer must record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan. Assuming shares of Common Stock appreciate in value over
time, compensation expenses relating to the ESOP to be established in connection
with the Conversion and Reorganization will increase. It is impossible to
determine at this time the extent of such impact on future net income. See "PRO
FORMA DATA."
Potential Elimination Of Thrift Charter
The Bank is subject to extensive regulation, supervision and
examination by the Office of Thrift Supervision ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC"). A bill, H.R. 10, has been reported by the U.S.
House of Representatives, Committee on Banking and Financial Services, that
would consolidate the OTS with the Office of the Comptroller of the Currency
("OCC") and eliminate the federal thrift charter under which the Bank currently
operates. If this legislation becomes law, the Bank will be forced to become a
state chartered bank or a national commercial bank. If the Bank becomes a
commercial bank, its investment authority and the ability of Bancshares to
engage in diversified activities would be more limited and could affect the
Bank's profitability. See "REGULATION."
Possible Dilutive Effect of Issuance of Additional Shares
Various possible and planned issuances of Common Stock could dilute the
interests of prospective stockholders of Bancshares or existing stockholders of
Bancorp following consummation of the Conversion and Reorganization, as noted
below.
The number of shares to be sold in the Conversion and Reorganization
may be increased as a result of an increase in the Offering Price Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Offerings. In the event that the Offering Price Range is so
increased, it is expected that Bancshares will issue up to 16,663,500 shares of
Conversion Stock at the Purchase Price for an aggregate price of up to
$166,635,000. An increase in the number of shares will decrease net earnings per
share and stockholders' equity per share on a pro forma basis and will increase
Bancshares' consolidated stockholders' equity and net earnings. See
"CAPITALIZATION" and "PRO FORMA DATA."
27
<PAGE>
The ESOP intends to purchase an amount of Common Stock equal to up to
8.0% of the Conversion Stock issued in the Conversion and Reorganization. In the
event that there are insufficient shares available to fill the ESOP's order due
to an oversubscription by Eligible Account Holders and the total number of
shares of Conversion Stock issued in the Conversion and Reorganization is
increased by up to 15%, the additional shares will first be allocated to fill
the ESOP's subscription and thereafter in accordance with the terms of the Plan
of Conversion. See "MANAGEMENT OF THE BANK -- Benefit Plans," " -- Employee
Stock Ownership Plan," and "THE CONVERSION AND REORGANIZATION -- The Offerings"
" -- Subscription Offering," and " -- Priority 2: ESOP."
If the Recognition Plan is implemented, the Recognition Plan may
acquire an amount of Common Stock which will equal 4.0% of the shares of
Conversion Stock issued in the Conversion and Reorganization (579,600 shares,
based on the maximum of the Offering Price Range). Such shares of Common Stock
may be acquired in the open market with funds provided by Bancshares, if
permissible, or from authorized but unissued shares of Common Stock. In the
event that additional shares of Common Stock are issued to the Recognition Plan,
stockholders would experience dilution of their ownership interests and per
share stockholders' equity and per share net earnings would decrease as a result
of an increase in the number of outstanding shares of Common Stock. See "PRO
FORMA DATA" and "MANAGEMENT OF THE BANK -- -- Recognition Plan."
If Bancshares' Stock Option Plan is implemented, Bancshares may reserve
for future issuance pursuant to such plan a number of authorized shares of
Common Stock equal to an aggregate of 10% of the Conversion Stock issued in the
Offerings (1,449,000 shares, based on the maximum of the Offering Price Range).
See "PRO FORMA DATA" and "MANAGEMENT OF THE BANK -- Benefit Plans," and " --
Stock Option Plan."
In 1993 the Bank adopted, and continues to maintain, the Harbor Federal
Savings Bank Incentive Stock Option Plan (the "Option Plan"), and the Harbor
Federal Savings Bank Stock Option Plan for Nonemployee Directors (the "Directors
Option Plan"). Upon consummation of the Conversion and Reorganization, these
plans will remain plans of the Bank. See "MANAGEMENT OF THE BANK -- Other Stock
Benefit Plans."
The OTS has required that the purchase limitations contained in the
Plan of Conversion and Reorganization include Exchange Shares to be issued to
Public Stockholders for their Public Bancorp Shares. As a result, certain
holders of Public Bancorp Shares may be limited in their ability to purchase
Conversion Stock in the Offerings. For example, a Public Stockholder which
acquires Exchange Shares in an amount equal to $500,000 or a Public Shareholder
and his Associates or a group acting in concert which acquires Exchange Shares
in an amount equal to $4.75 million of Conversion Stock, will not be able to
purchase any shares of Conversion Stock in the Offerings, although such a
stockholder will be able to purchase shares of Common Stock in the market during
the Offerings and thereafter. No stockholder, except as otherwise required by
the OTS, will be required to sell shares if, as a result of receiving Exchange
Shares, his ownership percentage would exceed a purchase limitation. See "THE
CONVERSION AND REORGANIZATION -- Limitations on Conversion Stock Purchases and
Ownership."
28
<PAGE>
Risk of Delay
The Subscription and Community Offering will expire at Noon, Florida
Time, on February _________, 1998, unless extended by the Primary Parties.
However, unless waived by the Primary Parties, all orders will be irrevocable
unless the Conversion and Reorganization is not completed by April _________
1998. In the event the Conversion and Reorganization is not completed by April
_________, 1998, subscribers will have the right to modify or rescind their
subscriptions and to have their subscription funds returned with interest.
Additionally, Bancshares must receive the approval of the OTS to acquire the
stock of the Bank. Although the application to acquire this stock has been
filed, it has not yet been approved by the OTS.
Possible Adverse Income Tax Consequences
The Bank has received an opinion of Peabody & Brown, subject to certain
assumptions stated therein, that the mergers constituting the Conversion and
Reorganization will qualify under the Internal Revenue Code of 1986 as
reorganizations where no gain or loss will be recognized to the Primary Parties.
In addition, the Primary Parties have received a letter from RP that states that
it is RP's belief that subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders, Other Members, and Eligible Public
Stockholders have no value. However, these opinions and letters are not binding
on the Internal Revenue Service ("IRS"). Accordingly, if the IRS were to
successfully assert that the mergers constituting the Conversion and
Reorganization either were part of a step transaction without independent
economic significance and business purpose or that the transactions circumvented
the repeal of the "General Utilities" doctrine, the mergers would not qualify as
tax-free reorganizations resulting in taxable gain to the parties to the
transaction. If the subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders, Other Members, and Eligible Public
Stockholders are deemed to have an ascertainable value, receipt of such rights
likely would be taxable only to those Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members, directors, officers and employees and
Eligible Public Stockholders in an amount equal to such value. Whether
subscription rights are considered to have ascertainable value is an inherently
factual determination. See "THE CONVERSION AND REORGANIZATION -- Effects of the
Conversion and Reorganization" and " -- Tax Aspects."
HARBOR FLORIDA BANCSHARES, INC.
Harbor Florida Bancshares, Inc. ("Bancshares") was organized in
November of 1997 at the direction of the Board of Directors of the Bank for the
purpose of holding all of the capital stock of the Bank in order to facilitate
the Conversion and Reorganization. The Mutual Holding Company and Bancorp are
presently subject to regulation by the OTS. After the Conversion and
Reorganization, Bancshares will be subject to OTS regulations. Bancshares has
applied to the OTS for
29
<PAGE>
authority to acquire 100% of the Bank Common Stock and become the savings and
loan holding company of the Bank. The Conversion and Reorganization is
contingent upon various approvals from the OTS, including the approval for
Bancshares to become the holding company for the Bank. See "REGULATION --
Company Regulation." Upon consummation of the Conversion and Reorganization,
Bancshares will have no significant assets other than all of the outstanding
shares of Bank Common Stock, an outstanding loan to the ESOP, and a portion of
the net proceeds of the Offering retained by the Company. Bancshares will have
no significant liabilities. See "USE OF PROCEEDS." Initially, the management of
Bancshares and the Bank will be substantially similar. Bancshares will neither
own nor lease any property but will instead use the premises, equipment and
furniture of the Bank. At present time Bancshares does not intend to employ any
persons other than executive officers who are also executive officers of the
Bank. Bancshares will utilize the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent that Bancshares
expands or changes its future business activities.
Management believes that the holding company structure will provide
Bancshares with additional flexibility to diversify its business activities
through existing or newly formed subsidiaries or through acquisitions of or
mergers with other financial institutions and financial services related
companies. Although there are no current arrangements, understandings or
agreements regarding such opportunities or transactions, Bancshares will be in a
position after the Conversion and Reorganization subject to regulatory
limitations and Bancshares' financial position to take advantage of any such
acquisition and expansion opportunities that may arise. The initial activities
of Bancshares are anticipated to be funded by the proceeds to be retained by
Bancshares from the Conversion and Reorganization and earnings thereon as well
as dividends from the Bank. See "USE OF PROCEEDS" and "DIVIDEND POLICY."
After the completion of the Conversion and Reorganization, Bancshares
is expected to conduct business initially as a unitary thrift holding company.
See "BUSINESS OF HARBOR FLORIDA BANCSHARES, INC." Bancshares' executive office
is located at the home office of the Bank at 100 S. Second Street, Fort Pierce,
Florida 34954 and its telephone number is (561) 461-2414.
HARBOR FLORIDA BANCORP, INC.
Harbor Florida Bancorp, Inc. ("Bancorp") was organized in December 1996
at the direction of the Board of Directors of the Bank for the purpose of
holding all of the capital stock of the Bank. Bancorp acquired all of the
outstanding stock of the Bank in a one-for-one stock exchange consummated on
June 25, 1997. Bancorp has received the approval of the OTS to become, and is
currently, a thrift holding company, and as such is subject to regulation by the
OTS. After the Conversion and Reorganization Bancorp will cease to exist and
Bancshares will, with the approval of the OTS, become the holding company for
the Bank.
Bancorp's executive office is located at the home office of the Bank at
100 S. Second Street, Fort Pierce, Florida 34954, and its telephone number is
(561) 461-2414.
30
<PAGE>
HARBOR FEDERAL SAVINGS BANK
General
The Bank was established in 1934 as a federally chartered savings
association. In January, 1994, it was reorganized into the mutual holding
company form of organization whereby it (i) formed a new stock savings
association; (ii) transferred substantially all of its assets and liabilities to
the newly formed stock savings bank in exchange for all of the common stock of
such institution; and (iii) reorganized from a federally chartered, mutual
association to a federally chartered, mutual holding company known as "Harbor
Financial, M.H.C." As part of the MHC Reorganization, the newly formed stock
savings bank subsidiary issued 2,239,831 shares of capital stock to certain
members of the general public and 2,654,369 shares of stock to the Mutual
Holding Company. On June 25, 1997, the Bank completed its reorganization into
the Mid-Tier Holding Company structure. Pursuant to that reorganization, the
Bank exchanged all of its shares in a one-for-one exchange for the shares of
Bancorp, a newly created Delaware corporation, which became the Mid-Tier Holding
Company of the Bank. The primary purpose of that reorganization was to
facilitate repurchases of shares without adverse tax consequences. The Bank
became the 100% owned subsidiary of Bancorp. The Bank currently conducts its
business from 23 offices in six counties in southeastern Florida. At September
30, 1997, the Bank had $1.1 billion of total assets, $1.0 billion of total
liabilities, including $922.8 million of deposits, and $85.3 million of
stockholders' equity.
The Bank is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans secured by one to four-family residences. One- to four-family
residential loans amounted to $629.9 million, or 71.46%, of the Bank's total
loan portfolio at September 30, 1997. To a lesser extent, the Bank originates
loans secured by existing multi-family residential and nonresidential real
estate, which amounted to $15.3 million or 1.74%, and $55.0 million or 6.24%,
respectively, of the total loan portfolio at September 30, 1997, as well as
construction loans and consumer loans, which amounted to $47.8 million, or 5.42%
of the total loan portfolio and $89.0 million, or 10.10%, of the total loan
portfolio at such date, respectively. The Bank also invests in U.S. Government
and federal agency obligations and mortgage-backed securities which are insured
by federal agencies. The Bank has two active subsidiary corporations. Appraisal
Analysis, Inc. provides real estate appraisal services to the Bank as well as
third parties. H.F. Development Company, Inc. serves as a repository of selected
REO properties held for disposition.
The Bank is a community-oriented savings association which emphasizes
customer service and convenience. As part of this strategy, the Bank has sought
to develop a variety of products and services which meet the needs of its retail
customers. The Bank generally has sought to achieve long-term financial strength
and stability by (i) increasing the amount and stability of its net interest
income, (ii) maintaining a high level of asset quality, (iii) maintaining a high
level of regulatory capital, and (iv) controlling general, administrative and
other expenses. In pursuit of these goals, the Bank has adopted a number of
complementary business strategies which emphasize retail lending and deposit
products and services traditionally offered by savings institutions.
Highlights of the Bank's business strategy include the following:
31
<PAGE>
Emphasis on Traditional Lending and Investment Activities. Management
believes that Bancshares is more likely to achieve its goals of long-term
financial strength and profitability by emphasizing retail products and
services, as opposed to wholesale or commercial activities. The Bank's primary
lending emphasis is the origination of loans secured by first liens on
single-family (one- to four-unit) residences. In addition, the Bank originates
consumer loans, such as home equity loans, and multi-family and nonresidential
real estate loans. Such loans generally provide for higher interest rates and
shorter terms than single-family residential real estate loans. At September 30,
1997, the Bank's net loans amounted to $834.3 million or 73.76% of the Bank's
total assets.
Maintain Asset Quality. Management believes that continuously seeking
to maintain asset quality is key to long-term financial success and, as a
result, the investments which are emphasized by the Bank and its related
policies and practices are intended to maintain a high level of asset quality
and reduce credit risk. At September 30, 1997, the Bank's non-performing assets,
which consist of non-accrual loans, accruing loans that are contractually past
due 90 days or more, and real estate owned, amounted to $4.9 million or 0.43% of
the Bank's total assets. At September 30, 1997, the Bank's allowance for loan
losses amounted to $11.7 million or 1.40% of the Bank's total loans outstanding.
Controlling Expenses. The Bank's noninterest expenses have amounted to
1.93% and 2.53% (2.05 excluding the one-time SAIF special assessment), of
average assets for the years ended September 30, 1997 and 1996, respectively.
However, these expenses may increase in the future should Bancshares implement
certain benefit plans or should experience significant growth. See "RISK FACTORS
- -- ESOP Compensation Expense" and "MANAGEMENT OF THE BANK -- Benefit Plans."
Regulation
The Bank is subject to examination and comprehensive regulation by the
OTS, which is the Bank's chartering authority and primary regulator, and by the
Federal Deposit Insurance Corporation ("FDIC"), which, as administrator of the
SAIF, insures the Bank's deposits up to applicable limits. The Bank also is
subject to certain reserve requirements established by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board") and is a member of the
Federal Home Loan Bank ("FHLB") of Atlanta, which is one of the 12 regional
banks comprising the FHLB System. See "REGULATION."
32
<PAGE>
Office
The Bank's principal executive office is located at 100 S. Second
Street, Fort Pierce, Florida 34964 and its telephone number is (561) 461-2414.
HARBOR FINANCIAL, M.H.C.
The Mutual Holding Company is a federally chartered mutual holding
company which was chartered on January 6, 1994 in connection with the MHC
Reorganization. The Mutual Holding Company's primary asset is 2,654,369 shares
of Bancorp Common Stock, which represent 53.37% of the shares of Bancorp Common
Stock outstanding as of September 30, 1997. Prior to the Conversion and
Reorganization, each depositor in the Bank has both a deposit account in the
institution and a pro rata ownership interest in the net worth of the Mutual
Holding Company based upon the value in his account, which interest may only be
realized in the event of a liquidation of the Mutual Holding Company. As part of
the Conversion and Reorganization, the Mutual Holding Company will convert from
mutual form to a federal interim stock savings institution and simultaneously
merge with and into the Bank, with the Bank being the surviving entity.
USE OF PROCEEDS
Net proceeds from the sale of the Conversion Stock are estimated to be
between $105.6 million and $143.2 million ($164.7 million assuming an increase
in the Offering Price Range by 15%). See "Pro Forma Data" as to the assumptions
used to arrive at such amounts.
Bancshares plans to contribute to the Bank 50% of the net proceeds from
the Offerings and retain the remainder of the net proceeds. The Company
anticipates that after the loan to the ESOP and after contributing 50% of the
funds raised in the Conversion and Reorganization to the Bank, it will have
approximately $60.0 million (based upon the sale of 14,490,000 shares of Common
Stock) which it intends to loan to the Bank. The Bank will invest these funds,
initially in short interest-bearing deposits and short and intermediate term
securities. The Company intends to use a portion of the net proceeds to make a
loan directly to the ESOP to enable the ESOP to purchase 8.0% of the Conversion
Stock. Based upon the issuance of 10,710,000 shares and 14,490,000 shares of
Conversion Stock at the minimum and maximum of the Offering Price Range,
respectively, the loan to the ESOP would be $8.6 million and $11.6 million,
respectively. It is anticipated that the loan to the ESOP will have a term of
33
<PAGE>
not less than 20 years and a fixed rate of interest at the prime rate as of the
date of the loan. See "MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan."
The net proceeds retained by Bancshares also may be used to support the future
expansion of operations or diversification into other banking-related businesses
and for other business or investment purposes, including the acquisition of
other financial institutions and/or branch offices, although there are no
current plans, arrangements, understandings or agreements regarding such
expansion, diversification or acquisitions. The Bank does, however, continually
evaluate additional branching opportunities that will complement existing
operations or support expansion into new markets. The Bank owns certain vacant
land in its market area which may be used for branch expansion in 1998. No
assurance can be given, however, that such expansion will occur during 1998. In
addition, subject to applicable regulatory limitations, the net proceeds also
may be used to repurchase shares of Common Stock, although Bancshares currently
has made no decision concerning the repurchase of shares following consummation
of the Conversion and Reorganization. See "THE CONVERSION AND REORGANIZATION --
Certain Restrictions on Purchase or Transfer of Shares after the Conversion and
Reorganization." The portion of the net proceeds contributed to the Bank will be
used for general corporate purposes, primarily investment in residential real
estate loans and will be initially used to invest primarily in short-term
interest-bearing deposits and marketable securities.
In addition, a portion of the proceeds may be used to fund open market
purchases of Common Stock for the Recognition Plan if such plan is approved by
shareholders. The estimated cost of such plans is dependent upon the price paid
for the shares in the open market. If Common Stock equal to 4% at the maximum of
the Offering Range, or 579,600 shares, was purchased for the Recognition Plan at
$10 per share, the cost would be $5.8 million. See "MANAGEMENT OF HARBOR FEDERAL
SAVINGS BANK -- Recognition Plan."
DIVIDEND POLICY
Upon completion of the Conversion and Reorganization, the Board of
Directors of Bancshares will continue to have the authority to declare dividends
on the Common Stock, subject to statutory and regulatory requirements. Following
consummation of the Conversion and Reorganization, the Board of Directors of
Bancshares intends to pay cash dividends on the Common Stock at an initial
quarterly rate equal to no less than 35(cent) per share based on the total
Public Bancorp Shares outstanding before consummation of the Conversion and
Reorganization. Based upon the Offering Price Range, the Exchange Ratio is
expected to be 3.8899, 4.5764, 5.2629 and 6.0523 at the minimum, midpoint,
maximum and 15% above the maximum of the Offering Price Range, respectively,
resulting in an initial quarterly dividend rate of $0.07648, $0.06650 and
$0.05783 per share, respectively, commencing with the first full quarter
following consummation of the Conversion and Reorganization. Declarations of
dividends by the Board of Directors will depend upon a number of factors,
including the amount of the net proceeds from the Offerings retained by
Bancshares, investment opportunities available to Bancshares or the Bank,
capital requirements, regulatory limitations, Bancshares' and the Bank's
financial condition and results of operations, tax considerations and general
economic conditions. Consequently, there can be no assurance that dividends will
in fact be paid on the Common Stock or that, if paid, such dividends will not be
reduced or eliminated in future periods. Bancshares intends to continue to pay
regular quarterly dividends through either the date of consummation of the
Conversion and Reorganization (on a pro rata basis) or the end of the fiscal
quarter during which the consummation of the Conversion and Reorganization
occurs.
34
<PAGE>
Dividends from Bancshares after the Conversion and Reorganization will
depend, in part, upon receipt of dividends from the Bank, because Bancshares
initially will have no source of income other than dividends from the Bank,
earnings from the investment of proceeds from the sale of Conversion Stock
retained by Bancshares, and interest on the ESOP loan. A regulation of the OTS
imposes limitations on "capital distributions" by savings institutions,
including cash dividends, payments by a savings institution to repurchase or
otherwise acquire its stock, payments to stockholders of another savings
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system, with the greatest
flexibility being afforded to well-capitalized or Tier 1 savings institutions
and the least flexibility being afforded to under-capitalized or Tier 3 savings
institutions. As of September 30, 1997, the Bank was a Tier 1 savings
institution and is expected to continue to so qualify immediately following the
consummation of the Conversion and Reorganization. However, for a period of one
year following the completion of the Conversion and Reorganization, the Bank
will not pay any dividends that would be treated for tax purposes as a return of
capital nor take any actions to pursue or propose such dividends.
Any payment of dividends by the Bank to Bancshares which would be
deemed to be a distribution from the Bank's pre-1988 bad debt reserves for
federal income tax purposes would require a payment of taxes at the then-current
tax rate by the Bank on the amount of earnings deemed to be removed from the
reserves for such distribution. The Bank has no current intention of making any
distribution that would create such a federal tax liability either before or
after the Conversion and Reorganization. See "REGULATION --Federal and State
Taxation."
Unlike the Bank, Bancshares is not subject to the aforementioned
regulatory restrictions on the payment of dividends to its stockholders,
although the source of such dividends will be, in part, dependent upon dividends
from the Bank in addition to the net proceeds retained by Bancshares and
earnings thereon. Bancshares is subject, however, to the requirements of
Delaware law.
MARKET FOR COMMON STOCK
There is an established market for the Bancorp Common Stock, which is
currently listed on the Nasdaq National Market under the symbol "HARB." Bancorp
Common Stock had five (5) market makers as of October 31, 1997. It is expected
that the Bancshares Common Stock, which will be received after the Conversion
and Reorganization in the form of Exchange Shares, will be more liquid after the
Conversion and Reorganization than the Bancorp Common Stock because there will
be significantly more outstanding shares owned by the public. However, there can
be no assurance that an active and liquid trading market for the Common Stock
will be maintained. FBR will assist Bancshares in obtaining additional market
makers, if necessary, but there can be no assurance that additional market
makers will be identified. Making a market involves maintaining bid and ask
quotations and
35
<PAGE>
being able, as principal, to effect transactions in reasonable quantities at
those quoted prices, subject to various securities laws and other regulatory
requirements.
At September 30, 1997, there were 4,973,428 shares of Bancorp Common
Stock outstanding, including 2,319,059 Public Bancorp Shares, which were held of
record by approximately 2,295 stockholders. The following table shows the high
and low per share sales prices of the Bancorp Common Stock as reported by Nasdaq
National Market since the MHC Reorganization and the dividends declared per
share during the periods indicated. Such quotations reflect inter-dealer prices,
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
Quarter Ended High Low Dividends Declared Per Share
------------- ---- --- ----------------------------
March 31, 1994 $14.50 $11.00 $.1125
June 30, 1994 15.25 11.75 .1125
September 30, 1994 20.25 14.25 .1125
December 31, 1994 19.25 15.00 .2250
March 31, 1995 18.50 15.50 .2250
June 30, 1995 19.75 17.75 .2250
September 30, 1995 23.50 19.75 .2250
December 31, 1995 27.75 21.75 .30
March 31, 1996 28.25 24.75 .30
June 30, 1996 29.375 25.25 .30
September 30, 1996 30.25 23.75 .30
December 31, 1996 36.25 29.50 .35
March 31, 1997 39.00 33.50 .35
June 30, 1997 46.00 35.00 .35
September 30, 1997 59.375 54.00 .35
December 31, 1997 70.00 55.875 .35
The closing price of Bancorp Common Stock on September 30, 1997 was $56.00. On
January __, 1998, the date of this Prospectus, the closing price of Bancorp's
Common Stock was $____________.
36
<PAGE>
CAPITALIZATION
The following table presents Bancorp's and its consolidated
subsidiaries', including the Bank's, historical capitalization including
deposits at September 30, 1997 and the pro forma consolidated capitalization of
Bancshares after giving effect to the Conversion and Reorganization based upon
the sale of the indicated number of shares at $10 per share and upon the other
assumptions set forth under "PRO FORMA DATA."
37
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization
at September 30, 1997 Based Upon The Sale Of:
---------------------------------------------
Maximum as
Minimum Midpoint Maximum adjusted(1)
Historical 10,710,000 shares 12,600,000 shares 14,490,000 shares 16,663,500 shares
Capitalization Price of $10.00 Price of $10.00 Price of $10.00 Price of $10.00
June 30, 1997 Per Share Per Share Per Share Per Share
------------- --------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2) ............................. $ 911,576 $ 911,576 $ 911,576 $ 911,576 $ 911,576
Borrowings(6) ............................ 100,475 100,475 100,475 100,475 100,475
----------- ----------- ----------- ----------- -----------
Total deposits and borrowings ............ $ 1,012,051 $ 1,012,051 $ 1,012,051 $ 1,012,051 $ 1,012,051
=========== =========== =========== =========== ===========
Stockholders' equity:
Preferred stock, par value $.10
per share, 10,000,000 shares
authorized; none issued ............... 0 0 0 0 0
Common stock, par value $.10 per
share, 70,000,000 shares
authorized; shares reflect
par value of shares to be
issued(3)(4)(7) ....................... 5 1,973 2,321 2,669 3,070
Additional paid-in capital(3) ........... 26,921 130,564 148,986 167,407 188,592
Retained earnings(5) .................... 71,203 71,203 71,203 71,203 71,203
Unrealized gain (loss) on
securities available for
sale, net ............................. (7) (7) (7) (7) (7)
Less: Existing plans
Common stock acquired by ESOP ........... (374) (374) (374) (374) (374)
Common stock acquired by
Deferred Compensation Plans ........... (946) (946) (946) (946) (946)
Common stock acquired by ESOP(3) ........ 0 (8,568) (10,080) (11,592) (13,331)
Common stock acquired by
Recognition Plan(3) ................... 0 (4,284) (5,040) (5,796) (6,665)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ............... $ 96,802 $ 189,561 $ 206,063 $ 222,654 $ 241,542
=========== =========== =========== =========== ===========
Total stockholders' equity to
total assets ........................... 8.56% 15.49% 16.61% 17.71% 18.93%
</TABLE>
38
<PAGE>
- ---------------
(1) As adjusted to give effect to an increase in the number of shares that
could occur to an increase in the Offering Price Range of up to 15% to
reflect changes in market and financial conditions prior to the completion
of the Conversion and Reorganization or to fill the order of the ESOP.
(2) No effect is given to possible withdrawals from deposit accounts to
purchase the Common Stock. Any such withdrawals will reduce pro forma
deposits by the amounts thereof.
(3) Assumes that 8% and 4% of the shares sold in the Offering will be purchased
by the ESOP and the Recognition Plan, respectively. No shares will be
purchased by the Recognition Plan in the Conversion and Reorganization. It
is assumed on a pro forma basis that the Recognition Plan will be adopted
by the Board of Directors, approved by the stockholders at a special or
annual meeting no earlier than six months after completion of the
Conversion and Reorganization and reviewed by the OTS. It is assumed that
the Recognition Plan will purchase Common Stock in the open market in order
to give an indication of its effects on capitalization. The pro forma
presentation does not show the impact of: (i) results of operations after
the Conversion and Reorganization; (ii) changes in market prices of shares
of the Common Stock after the Conversion and Reorganization; or (iii) a
smaller than 4% purchase by the Recognition Plan. Assumes that the funds
used to acquire the ESOP shares will be borrowed from the Company for a 15
year term. For an estimate of impact of the ESOP on earnings, see "PRO
FORMA DATA." The Bank intends to make contributions to the ESOP sufficient
to service and ultimately retire its debt. The amount to be acquired by the
ESOP and the Recognition Plan is reflected as a reduction in stockholder
equity. The issuance of authorized but unissued shares for the Recognition
Plan in an amount equal to 4% of the amount of Conversion Stock in the
Offering will have the effect of diluting existing stockholders' interests
by 2.1%. There can be no assurance that approval of the Recognition Plan
will be obtained. See "MANAGEMENT OF THE BANK -- Other Stock Benefit Plans"
and " -- Stock Option Plans."
(4) Assumes that (i) the 2,319,059 Public Bancorp Shares outstanding at
September 30, 1997 are exchanged for 9,021,024, 10,612,969, 12,204,915 and
14,035,652 at the minimum midpoint maximum and 15% above the maximum of the
Offering Price Range, respectively; and (ii) that no cash in lieu of
fractional Exchange Shares will be issued by the Company. No effect has
been given to the issuance of additional shares of Common Stock pursuant to
existing and proposed stock option plans as opposed to purchases in the
open market. See "PRO FORMA DATA."
(5) The retained earnings of the Bank will be substantially restricted after
the Conversion and Reorganization by virtue of the liquidation account to
be established by the Bank in connection with the Conversion and
Reorganization. See "THE CONVERSION AND REORGANIZATION -- Liquidation
Rights." In addition, certain distributions of the Bank's retained earnings
may be treated as being from its pre-1988 accumulated bad debt reserve for
tax purposes which would cause the Bank to have additional taxable income
and financial statement expense. See "REGULATION -- Federal and State
Taxation." The pro forma amounts do not include $246,000 of assets held by
the Mutual Holding Company.
(6) Consists of $100 million in advances from the FHLB of Atlanta and $375,000
from a third party lender to fund the existing ESOP, and $100,000 note
payable relating to the purchase of land.
(7) The par value of Bancorp Common Stock is $.01 per share. The par value of
Bancshares Common Stock is $.10 per share.
-------------
39
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At September 30, 1997 the Bank exceeded each of the three OTS capital
requirements. Set forth below is a summary of the Bank's compliance with the OTS
capital standards as of September 30, 1997, on a historical and pro forma basis
assuming that the indicated number of shares of Common Stock were sold at $10
per share as of such date. See "PRO FORMA DATA" for the assumptions used to
determine the net proceeds of the Conversion and Reorganization.
40
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at September 30, 1997 Based Upon Sale at $10.00 Per Share
-----------------------------------------------------------------------------------
(Dollars in thousands)
10,710,000 Shares 12,600,000 Shares
Historical (Minimum of (Midpoint of
at September 30, 1997(1) Offering Range) Offering Range)
------------------------ ----------------------- ------------------------
Percent Percent Percent
of of of
Amount Assets(1) Amount(2) Assets(1) Amount(2) Assets(1)
------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital(3) .............. $85,307 7.54% $125,261 10.62% $132,378 11.14%
Tangible capital ............. $82,269 7.29% $122,223 10.39% $129,340 10.91%
Tangible requirement ......... 16,921 1.50 17,649 1.50 17,778 1.50
------ ---- ------ ---- ------ ----
Excess ....................... $65,348 5.79% $104,574 8.89% $111,562 9.41%
====== ==== ======= ==== ======= ====
Core Capital ................. $82,269 7.29% $122,223 10.39% $129,340 10.91%
Core requirement ............. 33,842 3.00 35,298 3.00 35,557 3.00
------ ---- ------ ---- ------ ----
Excess ....................... $48,427 4.29% $86,925 7.39% $93,783 7.91%
====== ==== ====== ==== ====== ====
Total risk-based capital(4) .. $89,721 15.15% $129,675 21.55% $136,792 22.66%
Risk-based requirement ....... 47,371 8.00 48,147 8.00 48,285 8.00
------ ---- ------ ---- ------ ----
Excess ....................... $42,350 7.15% $81,528 13.55% $88,507 14.66%
====== ==== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Pro Forma at September 30, 1997 Based
Upon Sale at $10.00 Per Share
--------------------------------------------------------
(Dollars in thousands)
14,490,000 Shares 16,663,500 Shares
(Maximum of (15% above Maximum
Offering Range) Offering Range)
------------------------ ------------------------
Percent Percent
of of
Amount(2) Assets(1) Amount(2) Assets(1)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
GAAP capital(3) ....... ...... $139,494 11.66% $147,677 12.24%
Tangible capital ...... ...... $136,456 11.43% $144,639 12.02%
Tangible requirement .. ...... 17,908 1.50 18,057 1.50
------ ---- ------ ----
Excess ................ ...... $118,548 9.93% $126,582 10.52%
======= ==== ======= =====
Core Capital .......... ...... $136,456 11.43% $144,639 12.02%
Core requirement ...... ...... 35,815 3.00 36,113 3.00
------ ---- ------ ----
Excess ................ ...... $100,641 8.43% $108,526 9.02%
======= ==== ======= ====
Total risk-based capital(4) .. $143,908 23.77% $152,091 25.04%
Risk-based requirement ....... 48,423 8.00 48,582 8.00
------ ---- ------ ----
Excess ....................... $95,485 15.77% $103,509 17.04%
====== ===== ======= =====
</TABLE>
- -------------
(1) GAAP, adjusted or risk weighted assets as appropriate.
(2) Pro forma capital levels include the impact of the ESOP, Recognition Plan
and assume receipt by the Bank of 50% of the net proceeds of the
Conversion and Reorganization.
(3) Subject to certain restrictions.
(4) Assumes net proceeds are invested in assets that carry 20% risk weight.
41
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Conversion Stock cannot be
determined until the Conversion and Reorganization is completed. However, net
proceeds are currently estimated to be between $105.6 million and $143.2 million
(or $164.7 million in the event the Offering Price Range is increased by 15%)
based upon the following assumptions: (i) no fees will be paid to FBR on shares
purchased by (x) the ESOP or by (y) officers, directors and associates thereof;
(ii) FBR will receive a fee equal to .75% of the aggregate Purchase Price for
sales in the Subscription and Community Offering (excluding the sale of shares
by the ESOP and to officers, directors or employees or members of their
immediate families); and (iii) total expenses, excluding the marketing fees to
be paid to FBR, will be approximately $750,000 at the Midpoint of the Offering
Range. Actual expenses may vary from those estimated.
Pro forma net earnings have been calculated for the year ended
September 30, 1997 as if the Conversion Stock to be issued in the Offerings had
been sold (and the Exchange Shares issued) at the beginning of the respective
periods and the net proceeds had been invested at the one year Treasury Bill
Rate which was 5.49% as of September 30, 1997. The effect of withdrawals from
deposit accounts for the purchase of Conversion Stock has not been reflected. An
effective combined federal and state tax rate of 40.7% has been assumed for the
periods, resulting in an after-tax yield of 3.23% for the year ended September
30, 1997. Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
Common Stock, as adjusted to give effect to the shares purchased by the ESOP and
Recognition Plan. See Notes 1 and 2 to the tables below. No effect has been
given in the pro forma stockholders' equity calculations for the assumed
earnings on the net proceeds. As discussed under "Use of Proceeds," Bancshares
intends to retain 50% of the net proceeds from the Offerings. Bancshares intends
to make a loan to fund the purchase by the ESOP an amount of Conversion Stock
equal to up to 8% of the Common Stock outstanding upon consummation of the
Conversion and Reorganization.
At the consummation of the Conversion and Reorganization, 9,021,024,
10,612,969, 12,204,915 and 14,035,652 shares of Common Stock, at the minimum,
midpoint, maximum and 15% above the maximum, respectively, will be issued to
Public Stockholders pursuant to the Exchange. See "THE CONVERSION AND
REORGANIZATION -- The Exchange Ratio."
No effect has been given in the tables to the issuance of additional
shares of Common Stock pursuant to existing and proposed stock option plans as
opposed to purchases in the open market. See "MANAGEMENT OF THE BANK -- Benefit
Plans." The tables below give effect to the Recognition Plan, which is expected
42
<PAGE>
to be adopted by Bancshares following the Conversion and Reorganization and
presented (together with the Stock Option Plan) to stockholders for approval at
an annual or special meeting of stockholders to be held at least six months
following the consummation of the Conversion and Reorganization. If the
Recognition Plan is approved by stockholders, the Recognition Plan intends to
acquire an amount of Common Stock equal to 4.0% of the shares of Conversion
Stock issued in the Offerings, either through open market purchases or from
authorized but unissued shares of Common Stock. No effect has been given to (i)
Bancshares' results of operations after the Conversion and Reorganization, or
(ii) the market price of the Common Stock after the Conversion and
Reorganization.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma stockholders' equity represents the difference
between the stated amount of pro forma assets and liabilities of the Company
computed in accordance with generally accepted accounting principles ("GAAP").
The pro forma stockholders' equity is not intended to represent the fair market
value of the Common Stock and may be different than amounts that would be
available for distribution to stockholders in the event of liquidation.
43
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended September 30, 1997
----------------------------------------------------------------------
Maximum As
Minimum Midpoint Maximum Adjusted
10,710,000 12,600,000 14,490,000 16,663,500
Shares Shares Shares Shares
$10.00 per $10.00 per $10.00 per $10.00 per
share share share share
----- ----- ----- -----
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Gross proceeds ............................... $107,100 $126,000 $144,900 $166,635
Less: estimated offering expenses .......... 1,489 1,619 1,750 1,900
----- ----- ----- --------
Estimated net proceeds ....................... $105,611 $124,381 $143,150 $164,735
Less: Common Stock acquired by ESOP ....... (8,568) (10,080) (11,592) (13,331)
Common Stock acquired by
Recognition Plan .................... (4,284) (5,040) (5,796) (6,665)
----- ------- ------- -------
Estimated net proceeds as adjusted ......... $92,759 $109,261 $125,762 $144,739
====== ======= ======= =======
Consolidated net income:
Historical net income ...................... $13,327 $13,327 $13,327 $13,327
Pro forma income on net proceeds ........... 2,992 3,525 4,057 4,669
Pro forma ESOP adjustments(1) .............. (254) (299) (344) (395)
Pro forma Recognition Plan adjustments(2) .. (508) (598) (687) (791)
----- ----- --- -------
Pro forma net income ......................... $15,557 $15,955 $16,353 $16,810
====== ====== ====== ======
Per share income:
Historical net income, as adjusted(8) ..... $0.69 $0.59 $0.51 $0.44
Pro forma income on net proceeds .......... 0.16 0.16 0.16 0.16
Pro forma ESOP adjustments(1) ............. (0.01) (0.01) (0.01) (0.01)
Pro forma Recognition Plan adjustment(2) .. (0.03) (0.03) (0.03) (0.03)
---- ------ ------ ------
Pro forma net income per share ............... $0.81 $0.71 $0.63 $0.56
==== ==== ==== ====
Offering price to pro forma net income
per share ................................. 12.35x 14.29x 16.03x 17.86x
====== ====== ====== ======
Number of shares used in per share
income calculations(7): .................... 19,263,932 22,663,452 26,112,972 29,992,412
Stockholders' equity(6):
Historical, as adjusted(8) ................. $96,802 $96,802 $96,802 $96,802
Estimated net proceeds(3) .................. 105,611 124,381 143,150 164,735
Less: Common stock acquired by ESOP(1) .... (8,568) (10,080) (11,592) (13,331)
Common stock acquired by
Recognition Plan(2) ................. (4,284) (5,040) (5,796) (6,665)
------ ------- ------- ----------
Pro forma stockholders' equity(5) ........ $189,561 $206,063 $222,564 $241,541
======= ======= ======= =======
Stockholders' equity per share(6):
Historical ................................. $4.91 $4.17 $3.63 $3.15
Estimated net proceeds(3) .................. 5.35 5.36 5.36 5.37
Less: Common Stock acquired by ESOP(1) .... (0.43) (0.43) (0.43) (0.43)
Common Stock acquired by
Recognition Plan(2) ................. (0.22) (0.22) (0.22) (0.22)
---- ------ ------ ------
Pro forma stockholders' equity
per share(4)(5)(7) ......................... $9.61 $8.88 $8.34 $7.87
==== ==== ==== ====
Offering price as a percent of pro forma
shareholders' equity per share(4) .......... 104.06% 112.61% 119.90% 127.06%
Number of shares used in per share equity
calculation ................................ 19,731,024 23,212,969 26,649,915 30,699,152
</TABLE>
44
<PAGE>
(1) It is assumed that up to 8% of the shares of Common Stock offered in the
Conversion and Reorganization will be purchased by the ESOP. The funds used
to acquire such shares are expected to be borrowed by the ESOP from the net
proceeds from the Conversion and Reorganization retained by Bancshares. The
Bank intends to make contributions to the ESOP in amounts at least equal to
the principal and interest requirement of the debt. The Bank's payment of
the ESOP debt is based upon equal installments of principal and interest
over a 20-year period. However, assuming Bancshares makes the ESOP loan,
interest income earned by Bancshares on the ESOP debt will offset the
interest paid by the Bank. The amount of ESOP debt, which is equivalent to
the cost of unallocated common stock held by the ESOP, is reflected as a
reduction of stockholders' equity. In the event that the ESOP were to
receive a loan from an independent third party, both ESOP expense and
earnings on the proceeds retained by Bancshares would be expected to
increase.
For purposes of this table, the purchase price of $10.00 per share was
utilized to calculate ESOP expense. Bancshares intends to record
compensation expense related to the ESOP in accordance with American
Institute of Certified Public Accountants, Statement of Position 93-6 ("SOP
93-6"). As a result, to the extent the value of the Common Stock
appreciates over time, compensation expense related to the ESOP will
increase. SOP 93-6 also requires that, for the earnings per share
computations for leveraged ESOPs, outstanding shares include only such
shares as have been committed to be released to participants. See
"MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan."
(2) Assuming the receipt of shareholder approval at an annual or special
meeting of shareholders to be held at least six months following the
consummation of the Conversion and Reorganization, the Bank and Bancshares
intend to implement the Recognition Plan. Assuming such approval, the
Recognition Plan will eventually purchase an amount of shares equal to 4%
of the shares of Conversion Stock issued in the Offerings for issuance to
directors, officers and employees of Bancshares and the Bank. Such shares
may be purchased from authorized and unissued shares or on the open market.
Bancshares currently intends that the shares be purchased on the open
market at the assumed purchase price of $10.00, and that the estimated net
conversion proceeds have been reduced for the purchase of the shares in
determining estimated proceeds available for investment. The Common Stock
to be purchased by the Recognition Plan represents unearned compensation
and is, accordingly, reflected as a reduction to pro forma stockholders'
equity. As shares of the Common Stock granted pursuant to the Recognition
Plan vest over five years, an expense will be recognized as well as a
corresponding reversal in the reduction in capital. In the event that
authorized but unissued shares are issued in connection with the
Recognition Plan as opposed to acquired in the open market, the interests
of existing shareholders will be diluted. Assuming that 12,600,000 shares
of Common Stock are issued in the Conversion and Reorganization and that
all awards under the Recognition Plan are from authorized but unissued
shares, Bancshares estimates that the per share book value for the Common
Stock would be increased $0.02 per share, or 0.2% and earnings per share
would be diluted $0.01 per share, or 1.4% on a pro forma basis as of
September 30, 1997.
(3) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion and Reorganization.
For purposes of calculating pro forma net income, proceeds attributable to
purchases by the ESOP, which purchases are to be funded by Bancshares, have
been deducted from net proceeds.
(4) Historical pro forma equity per share amounts have been computed as if the
shares of Common Stock indicated had been outstanding at the beginning of
the periods or on the dates shown, but without any adjustment of historical
net income or historical equity to reflect the investment of the estimated
net proceeds of the sale of shares in the Conversion and Reorganization as
described above. All ESOP and Recognition Plan shares have been considered
outstanding for purposes of computing book value per share. Pro forma share
amounts have been computed by dividing the pro forma net income or
stockholders' equity (book value) by the number of shares indicated.
45
<PAGE>
(5) "Book value" represents the difference between the stated amounts of the
Company's assets (based on historical cost) and liabilities computed in
accordance with generally accepted accounting principles. The amounts shown
do not reflect the effect of the Liquidation Account which will be
established by the Bank for the benefit of Eligible and Supplemental
Eligible Account Holders in the Conversion and Reorganization, or the
federal income tax consequences of the restoration to income of the Bank's
bad debt reserves for income tax purposes which would be required in the
unlikely event of liquidation. See "THE CONVERSION AND REORGANIZATION --
Effects of Conversion and Reorganization" and "REGULATION -- Federal and
State Taxation." The amounts shown for book value do not represent fair
market values or amounts, if any, distributable to stockholders in the
unlikely event of liquidation.
(6) The retained earnings of the Bank will be substantially restricted after
the Conversion and Reorganization. See "REGULATION -- Capital
Requirements." Dividends will also be restricted in that the Bank may not
declare a dividend that would be a return of capital for one year after the
Conversion and Reorganization. See "DIVIDEND POLICY." Direct costs beyond
estimated offering expenses related to the sale of Common Stock, if the
Offerings are completed, will be recorded as a reduction in proceeds and
applied to paid in capital. If the Conversion and Reorganization is not
consummated, such costs will be charged to expenses. At September 30, 1997
$30,000 of such costs had been incurred. The Common Stock of Bancshares is
being offered in the Conversion and Reorganization. At the Conversion and
Reorganization, the Bank will establish a liquidation account, which will
also act as a restriction on earnings. See "THE CONVERSION AND
REORGANIZATION -- Liquidation Account."
(7) The number of shares used in the per share income calculations reflect
historical shares as adjusted for the Exchange, shares issued in the
Offerings, and incremental shares related to existing stock options as
adjusted for the Exchange considered for EPS purposes under the Treasury
stock method. No effect has been given in the stockholders' equity tables
to the issuance of additional shares of Common Stock pursuant to existing
and proposed stock option plans.
(8) Historical per share amounts have been adjusted for the appropriate
Exchange Ratio at the Minimum, Midpoint, Maximum and Maximum as Adjusted.
46
<PAGE>
HARBOR FLORIDA BANCORP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
The consolidated condensed statements of earnings of Harbor Florida
Bancorp, Inc., its wholly owned subsidiary, Harbor Federal Savings Bank, and the
Bank's subsidiaries for the years ended September 30, 1997, 1996 and 1995 have
been derived from the consolidated financial statements audited by KPMG Peat
Marwick LLP, independent certified public accountants, whose report thereon
appears elsewhere herein. The condensed statements of earnings should be read in
conjunction with the audited consolidated financial statements and notes thereto
contained herein beginning on page F-1.
<TABLE>
<CAPTION>
Years Ended September 30
-------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Interest income .............. $ 84,814 $ 74,357 $ 64,884
-------- -------- --------
Interest expense ............. 45,159 39,114 33,280
-------- -------- --------
Net interest income ......... 39,655 35,243 31,604
Provision for (recovery
of) loan losses ............. 782 (76) 460
-------- -------- --------
Net interest income
after provision for
(recovery of) loan
losses ...................... 38,873 35,319 31,144
-------- -------- --------
Other income ................. 4,213 2,885 2,907
-------- -------- --------
Other expenses ............... 21,148 24,132 18,198
-------- -------- --------
Income from continuing
operations before
income taxes, extraordinary
item and cumulative effect of
change in accounting
principles .................. 21,938 14,072 15,853
Income tax expense ........... 8,611 5,432 5,958
-------- -------- --------
Income before
extraordinary
item and cumulative
effect of change in
accounting principles ....... 13,327 8,640 9,895
-------- -------- --------
Net income ................... $ 13,327 $ 8,640 $ 9,895
======== ======== ========
</TABLE>
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of the Bank's financial condition
and results of operations is intended to provide assistance and understanding of
the Bank's financial condition and results of operations. The information in
this section should be read with the financial statements and the notes to
financial statements beginning at page F-1. The Bank's 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
Bank'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 generated income or losses. The results of operations are also
significantly impacted by the amount of provisions for loan losses which, in
turn, are dependent upon, among other things, the size and makeup of the loan
portfolio, loan quality and loan trends. The noninterest expenses consist
primarily of employee compensation and benefits, occupancy expenses,
professional fees and federal deposit insurance premiums. Its results of
operations are affected by general economic and competitive conditions,
including changes in prevailing interest rates and the policies of regulatory
agencies.
Business Strategy
The Bank's current business strategy has been to operate as a
well-capitalized/well-reserved independent community savings bank dedicated to
providing quality service at competitive prices. Generally, the Bank has sought
to implement this strategy by maintaining a substantial part of its assets in
loans secured by one-to-four family residential real estate located in the
Bank's market area, consumer loans, home equity loans, mortgage-backed
securities and U.S. Government and agency obligations.
While management intends to continue emphasizing these objectives, the
additional capital will allow the Bank to modify the existing operating strategy
in order to achieve greater growth and profitability. Specifically, the Bank
intends to: (i) increase its percentage of commercial and consumer loans and
commercial deposits accounts, among other products; and (ii) expand the Bank's
market area through its branch network and through its lending and deposit
services. By seeking to broaden the range of its products and services offered,
the Bank believes it will offset the declining margins in the competitive market
for one-to-four-family loans.
48
<PAGE>
Management believes that the increased diversification of the Bank's
loan portfolio may expose it to a higher degree of credit risk than is involved
in the Bank's one-to-four-family residential mortgage lending activity. As a
consequence of management's lending strategy, the Bank may, in future periods,
depending upon conditions at that time, increase the level of its provision for
loan losses as well as its provision for losses on real estate owned ("REO").
Highlights of the Bank's business strategy are as follows:
Community-Oriented Institution. The Bank is the largest savings
institution headquartered in Fort Pierce, Florida. The Bank is committed to
meeting the financial needs of the community in which it operates. Management
believes that the Bank is large enough to provide a full range of personal and
business financial services, and yet is small enough to be able to provide such
services in a personalized and efficient manner. Management believes that the
Bank can be more effective in servicing its customers than many of its non-local
competitors because of the Bank's ability to quickly and effectively provide
senior management responses to customer needs and inquiries. The Bank intends to
maintain its community orientation by continuing to emphasize traditional
deposit and loan products, primarily single-family residential mortgages.
Emphasis on Residential Mortgage Lending. Since its inception, the Bank
has been a portfolio lender. The Bank has emphasized and will continue to
emphasize the origination of mortgage loans secured by one-to-four-family
residential properties located in its six-county market area. Such mortgage
loans generally have less credit risk than loans collateralized by multifamily
or commercial real estate. At September 30, 1997, one-to-four-family residential
mortgage loans totaled $629.9 million, or 71.5% of the Bank's loan portfolio.
Generally, the yield on mortgage loans originated by the Bank is greater than
that of mortgage securities purchased by the Bank. In the future, the Bank is
considering expanding its lending programs to include commercial loans in an
effort to satisfy a perceived need within its market area and increase its loan
portfolio. To accomplish this, the Bank may hire additional personnel
experienced in commercial lending and may focus marketing efforts on smaller
businesses operating in the Bank's market areas.
Asset and Liability Management
The Bank 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.
In addition, the Bank 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 Bank's net interest income and
net economic value. The Bank'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 Bank's
interest rate risk management policy.
49
<PAGE>
The Board of Directors has established an asset/liability committee
which consists of the Bank's president and senior bank 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 Bank currently utilizes the following strategies to reduce interest
rate risk: (a) the Bank seeks to originate and hold in portfolio adjustable rate
loans which have annual interest rate adjustments; (b) the Bank sells a portion
of newly originated 30 year fixed rate mortgage loans, currently $100,000 to
$200,000 per month; (c) the Bank seeks to lengthen the maturities of deposits
when deemed cost effective through the pricing and promotion of certificates of
deposits; (d) the Bank seeks to attract low cost checking and transaction
accounts which tend to be less interest rate sensitive when interest rates rise;
and (e) the Bank has utilized long term Federal Home Loan Bank ("FHLB") advances
to fund the origination of fixed rate loans. Harbor Federal refinanced a portion
of its outstanding FHLB advances in the first quarter of the fiscal year ended
September 30, 1994, thereby incurring a prepayment penalty of $1.3 million (net
of income tax benefit of $810,000), in order to lengthen the maturity of its
liabilities at favorable rates. The Bank also maintains a high level of liquid
assets consisting of shorter-term investments which are expected to increase in
yield as interest rates rise.
Market Rate Analysis
The Bank measures its interest rate sensitivity by using the computer
modeling techniques described above. However, in order to encourage savings
associations such as the Bank to reduce interest rate risk, in 1993 the OTS
adopted a rule which would incorporate an interest rate risk ("IRR") component
into its risk-based capital rules. The IRR component is a dollar amount that
would be deducted from regulatory capital for the purpose of calculating an
institution's risk-based capital requirement. The IRR component of regulatory
capital is measured in terms of sensitivity of net portfolio value ("NPV") to a
hypothetical change in interest rates. NPV is the difference between estimated
future incoming and outgoing cash flows, discounted to present value, for
assets, liabilities and off-balance sheet contracts. An institution's IRR would
be measured as the change to its NPV as a result of a hypothetical 200 basis
point instantaneous change in market interest rates. Under the OTS rule, a
calculated change in NPV of more than 2% of the estimated market of an
institution's assets would require the institution to deduct from its risk-based
capital 50% of that excess change. In March 1995, the OTS announced that
application of the revised rule was being suspended until further notice.
50
<PAGE>
The following table presents the Bank's NPV as of September 30, 1997,
as calculated by the OTS, based on information provided by the Bank.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE AT SEPTEMBER 30, 1997 NPV AS % OF PV OF ASSETS
------------------------------------------------ ---------------------------
Change in Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $56,611 $(69,317) (55)% 5.30% (549)%
+300 bp 76,227 (49,701) (39) 6.96 (383)
+200 bp 95,375 (30,553) (24) 8.50 (229)
+100 bp 112,754 (13,174) (10) 9.84 (96)
Static 125,928 -- -- 10.79 --
-100 bp 132,181 6,254 5 11.19 40
-200 bp 133,156 7,229 6 11.19 40
-300 bp 134,692 8,764 7 11.23 44
-400 bp 140,006 14,078 11 11.55 76
</TABLE>
Based on the information above, the Bank believes that it would have
been in compliance with the risk-based capital requirements of the regulations,
as of September 30, 1997, if the regulation had been effective on that date. As
such, a 200 basis point increase in interest rates would result in a 24% or
$30.05 million decline in NPV, and the Bank would have been required to deduct
$3.61 million from total capital for purposes of calculating the Bank's
risk-based capital. After such deduction, the Bank would continue to be well
capitalized. As of September 30, 1997, without considering the effect of the IRR
component, the Bank had $89.7 million of risk-based capital, which exceeded the
OTS minimum requirements by $42.4 million.
Future interest rates or their effects on NPV or net interest income
are not predictable. Nevertheless, the Bank's management does not expect current
interest rates to have a material adverse effect on the Bank's NPV or net
interest income in the near future. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in such computations. Although certain assets and liabilities may
have similar maturity or periods of repricing, they may react at different times
and in different degrees to changes in the market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while rates on other types of assets and
liabilities may lag behind changes in market interest rates. Certain assets,
such as adjustable rate mortgages, generally have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
In the event of a change in interest rates, prepayments and early withdrawal
levels could deviate significantly from those assumed in making calculations set
forth above. Additionally, an increased credit risk may result as the ability of
many borrowers to service their debt may decrease in the event of an interest
rate increase.
51
<PAGE>
Analysis of Net Interest Income
The Bank's earnings have historically depended primarily upon the
Bank'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 Bank'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
Bank's operations during the recent 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.
52
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------------------------
At September 30, 1997 1997 1996
--------------------- ------------------------------ ----------------------------
Interest Interest
Yield/ Average and Yield/ Average and Yield/
Balance Rate Balance Dividends Rate Balance Dividends Rate
------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
Assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning
assets(1):
Federal funds sold .. $ 250 5.51% $ 7,404 $ 399 5.39% $ 12,679 $ 669 5.28%
Interest-bearing
deposits ........... 15,736 5.59 26,674 1,614 5.44 24,062 1,320 5.49
Investment securities 60,148 5.97 63,743 3,866 6.07 39,825 2,462 6.18
Mortgage-backed
securities ......... 176,854 6.57 153,347 10,088 6.58 152,895 10,155 6.64
Mortgage loans ...... 745,635 8.38 718,319 60,000 8.35 620,166 52,237 8.42
Other loans ......... 100,467 9.50 94,634 8,847 9.35 79,875 7,514 9.41
-------- ----- -------- ------- ---- -------- -------- ----
Total interest-earning
assets ................ 1,099,090 7.98 1,067,121 84,814 7.94 929,502 74,357 8.00
----- ------- ---- -------- ----
Total noninterest-
earning assets ........ 31,934 29,575 24,481
-------- ------- --------
Total assets ........... $1,131,024 $1,096,696 $953,983
======== ======== ========
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities
Deposits:
Transaction accounts $136,195 1.26% $138,721 $1,896 1.37% $118,398 $ 1,724 1.46%
Passbook savings .... 76,540 1.69 77,707 1,356 1.75 79,617 1,506 1.89
Official checks ..... 9,081 -- 5,612 --- .00 6,400 -- .00
Certificate savings . 689,760 5.48 663,143 35,892 5.41 570,518 31,210 5.47
------- ---- -------- ------- ---- -------- -------- ----
Total deposits ...... 911,576 4.49 885,183 39,144 4.42 774,933 34,440 4.44
FHLB advances ......... 100,000 6.02 99,342 5,962 6.00 75,096 4,593 6.12
Other borrowings ...... 475 8.80 561 53 9.48 857 81 9.47
------- ---- -------- ------ ---- -------- -------- -----
Total interest-
bearing liabilities ... 1,012,051 4.65 985,086 45,159 4.58 850,886 39,114 4.60
------ --------
Noninterest-bearing
liabilities ........... 22,171 21,045 20,863
-------- ------- --------
Total liabilities ...... 1,034,222 1,006,131 871,749
Stockholders'equity .... 96,802 90,565 82,234
-------- -------- --------
Total liabilities and
stockholders' equity .. $1,131,024 $1,096,696 $953,983
========== ======== ========
Net interest income/
interest rate spread(2) 3.33 $39,655 3.36 $ 35,243 3.40
---- ======= ---- ======== ----
Net interest-earning
assets/net interest
margin (3) ............ $ 87,039 3.73 $ 82,035 3.72 $ 78,616 3.79
======== ---- ======== ---- ======== ----
Interest-earning assets
to interest-bearing
liabilities ........... 108.60 108.33 109.24
------ ------ ------
</TABLE>
<PAGE>
Years Ended September 30,
-------------------------------
1995
-------------------------------
Interest
Average and Yield/
Balance Dividends Rate
------- --------- ----
(Dollars in thousands)
Assets:
Interest-earning
assets(1):
Federal funds sold .. $ 8,224 $ 457 5.56%
Interest-bearing
deposits ........... 24,899 1,412 5.67
Investment securities 43,375 2,352 5.42
Mortgage-backed
securities ......... 147,482 9,613 6.52
Mortgage loans ...... 542,127 44,883 8.28
Other loans ......... 65,308 6,167 9.44
-------- -------- ----
Total interest-earning
assets ................ 831,415 64,884 7.80
-------- ----
Total noninterest-
earning assets ........ 20,174
--------
Total assets ........... $851,589
========
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities
Deposits:
Transaction accounts $108,558 $ 1,782 1.64%
Passbook savings .... 85,615 1,718 2.01
Official checks ..... 4,250 -- .00
Certificate savings . 500,941 26,127 5.22
-------- ------- ----
Total deposits ...... 699,364 29,627 4.24
FHLB advances ......... 58,178 3,546 6.10
Other borrowings ...... 1,160 107 9.27
-------- -------- ----
Total interest-
bearing liabilities ... 758,702 33,280 4.39
--------
Noninterest-bearing
liabilities ........... 20,167
--------
Total liabilities ...... 778,869
Stockholders'equity .... 72,720
--------
Total liabilities and
stockholders' equity .. $851,589
========
Net interest income/
interest rate spread(2) $ 31,604 3.42
======== ----
Net interest-earning
assets/net interest
margin (3) ............ $ 72,713 3.80
======== ----
Interest-earning assets
to interest-bearing
liabilities ........... 109.58
------
- ---------
(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 yield on average interest-earning assets represents net interest income
as a percentage of average interest-earning assets.
53
<PAGE>
Rate/Volume Analysis
The relationship between the volume and rates of the Bank's
interest-earning assets and interest-bearing liabilities influences the Bank's
net interest income. The following table reflects the sensitivity of the Bank'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)
-----------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
----------------------------- ----------------------------- -----------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest-bearing
deposits ......... $21 $3 $24 $ 194 $ (74) $ 120 $ (684) $ 910 $ 226
Investment ......... 1,424 (20) 1,404 (202) 312 110 (166) 412 246
securities
Mortgage-backed
securities ....... 29 (96) (67) 360 182 542 2,893 473 3,366
Mortgage loans ..... 8,259 (496) 7,763 6,681 673 7,354 2,524 1,170 3,694
Nonmortgage loans:
Commercial loans ... 85 (72) 13 46 (110) (64) 14 177 191
Consumer loans ..... 1,289 31 1,320 1,305 106 1,411 1,021 56 1,077
----- -- ----- ------- ------- ------- ------- ------- -------
Total interest income $11,107 $(650) $10,457 8,384 1,089 9,473 5,602 3,198 8,800
======= ====== ======= ======= ======= ======= ======= ======= =======
Interest expense
Deposits:
Transaction accounts $278 $(106) $172 $ 144 $ (202) $ (58) $ (165) $ 24 $ (141)
Passbook savings ... (33) (117) (150) (114) (98) (212) (225) 8 (217)
Certificate savings 5,013 (331) 4,682 3,806 1,277 5,083 2,903 3,657 6,560
----- ----- ----- ------- ------- ------- ------- ------- -------
Total deposits ..... 5,258 (554) 4,704 3,836 977 4,813 2,513 3,689 6,202
FHLB advances ...... 1,455 (86) 1,369 1,035 12 1,047 803 (31) 772
Other borrowings ... (26) (2) (28) (26) -- (26) 11 19 30
---- --- ---- ------- ------- ------- ------- ------- -------
Total interest expense 6,687 (642) 6,045 4,845 989 5,834 3,327 3,677 7,004
----- ----- ------- ------- ------- ------- ------- ------- -------
Net interest income .. $ 4,420 $ (8) $ 4,412 $ 3,539 $ 100 $ 3,639 $ 2,275 $ (479) $ 1,796
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
54
<PAGE>
Comparison of Operating Results For Year Ended September 30, 1997 to Year Ended
September 30, 1996
General. Net income for the year ended September 30, 1997 increased
16.1% to $13.3 million or $2.66 per share, compared to $11.5 million or $2.32
per share for the same period last year, excluding the one-time SAIF special
assessment. Including the one-time SAIF special assessment, net income for the
year ended September 30, 1996 was $8.6 million, or $1.75 per share. Net interest
income increased 12.5% to $39.6 million for the year ended September 30, 1997
compared to $35.2 million for the year ended September 30, 1996. This increase
was due to an increase in interest income of $10.5 million offset by an increase
in interest expense of $6.0 million. Other income increased to $4.2 million for
the year ended September 30, 1997 from $2.9 million for the year ended September
30, 1996. Other expenses decreased to $21.1 million for the year ended September
30, 1997 from $24.1 million for the year ended September 30, 1996, due primarily
to the one-time SAIF special assessment of $4.5 million.
Interest Income. Total interest income increased to $84.8 million for
the year ended September 30, 1997 from $74.3 million for the year ended
September 30, 1996, as a result of an increase in average interest-earning
assets that was partially offset by a decrease in the average interest rate.
Average interest-earning assets increased to $1.067 billion for the year ended
September 30, 1997 from $929.5 million for the year ended September 30, 1996.
The average rate earned on interest-earning assets decreased to 7.94% for the
year ended September 30, 1997 from 8.00% for the year ended September 30, 1996,
a decrease of 6 basis points. Interest income on loans increased $9.0 million to
$68.8 million for the year ended September 30, 1997 from $59.8 million for the
year ended September 30, 1996. This increase was a result of a $112.9 million
increase in the average balance to $812.9 million in 1997 from $700.0 million in
1996 that was partially offset by a decrease of 7 basis points in the average
yield of 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.
55
<PAGE>
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 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 Bank, industry standards, the level and status of past
due and nonperforming loans, the general economic conditions in the Bank's
lending area and other factors affecting collectibility of the Bank's loan
portfolio. The provision for loan losses was $782,000 for the year ended
September 30, 1997 compared to a credit of $76,000 for the year ended September
30, 1996. The provision for loan losses for the year ended September 30, 1997
was principally comprised of a charge of approximately $600,000 related to an
increase in the level of classified commercial real estate loans, a charge of
approximately $100,000 due to an increase in classified consumer loans, and a
charge of approximately $80,000 for unidentified but probable losses due to
growth in the consumer loan portfolio. The credit to the provision for loan
losses for the year ended September 30, 1996 was principally comprised of a
credit to the provision of $1.7 million related to a decrease in the level of
classified assets compared to the prior year and $100,000 of additional net
recoveries on loans during the year. This was partially offset by a charge to
the provision of approximately $1.6 million due to loan 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 Bank'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 Bank 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 Bank'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, were $3.3 million and $2.8
million for the years ended September 30, 1997 and 1996, respectively. This
increase was primarily due to the growth in deposits. Income from real estate
operations was $145,000 for the year ended September 30, 1997, compared to a
loss of $301,000 in the comparable period in 1996. Gain on sale of mortgage
loans was $188,000 for the year ended September 30, 1997, compared to a loss of
$40,000 in the comparable period in 1996.
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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 pre-tax income,
net of the $1.7 million tax effect of the one-time SAIF special assessment
included in 1996. The effective tax rates were 39% for the both the years ended
September 30, 1997 and 1996.
Subsequent Event. In the first quarter of fiscal 1998, the Bank
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
will be recognized in the amount of $874,000 in the quarter ended December 31,
1997 due to deferred cash interest payments and unearned purchase discount
remaining at time of payoff.
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
General. Net income for the year ended September 30, 1996, excluding
the one-time SAIF special assessment of $2.8 million after tax, increased 16.0%
to $11.5 million or $2.32 per share, compared to $9.9 million or $2.03 per share
for the year ended September 30, 1995. Including the one-time SAIF special
assessment, net income for the year ended September 30, 1996 was $8.6 million,
or $1.75 per share. Net interest income increased 11.5% to $35.2 million for the
year ended September 30, 1996 compared to $31.6 million for the year ended
September 30, 1995. This increase was due to an increase in interest income of
$9.4 million and an increase in interest expense of $5.8 million. Other income
remained constant at $2.9 million for both of the years ended September 30, 1996
and 1995. Other expenses increased to $24.1 million for the year ended September
30, 1996 from $18.2 million for the year ended September 30, 1995, due primarily
to the one-time SAIF special assessment of $4.5 million.
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Interest Income. Total interest income increased to $74.3 million for
the year ended September 30, 1996 from $64.9 million for the year ended
September 30, 1995, as a result of an increase in average interest-earning
assets and an increase in the average interest rate. Average interest-earning
assets increased to $929.5 million for the year ended September 30, 1996 from
$831.4 million for the year ended September 30, 1995. The average rate earned on
interest-earning assets increased to 8.00% for the year ended September 30, 1996
from 7.81% for the year ended September 30, 1995, an increase of 19 basis
points. Interest income on loans increased $8.7 million to $59.8 million for the
year ended September 30, 1996 from $51.1 million for the year ended September
30, 1995. This increase was a result of a $92.6 million increase in the average
balance to $700.0 million in 1996 from $607.4 million in 1995 and an increase of
14 basis points in the average yield to 8.54% in 1996 from 8.40% in 1995. The
increase in the average balance of total loans was mainly due to significant
growth in the residential loan portfolio resulting from high levels of loan
originations and the acquisition of $62 million of loans from Treasure Coast
Bank, F.S.B. Interest income on mortgage-backed securities increased $541,000 to
$10.2 million for the year ended September 30, 1996 from $9.6 million for the
year ended September 30, 1995. This increase was primarily the result of a $5.4
million increase in the average balance to $152.9 million in 1996 from $147.5
million in 1995. The increase in the average balance of mortgage-backed
securities was primarily due to the purchase of adjustable and seven-year
balloon securities with the proceeds from maturing investment securities and
proceeds from new FHLB advances.
Interest Expense. Total interest expense increased to $39.1 million for
the year ended September 30, 1996 from $33.3 million for the year ended
September 30, 1995, as a result of an increase in average interest-bearing
liabilities and an increase in the average rate paid. Average interest-bearing
liabilities increased to $850.9 million for the year ended September 30, 1996
from $758.7 million for the year ended September 30, 1995. The average interest
rate paid on interest-bearing liabilities was 4.60% for the year ended September
30, 1996 compared to 4.39% for the year ended September 30, 1995, an increase of
21 basis points. Interest expense on deposits increased $4.8 million to $34.4
million for the year ended September 30, 1996 from $29.6 million for the year
ended September 30, 1995. This increase was a result of an increase of $75.6
million in the average balance to $775.0 million in 1996 from $699.4 million in
1995 and an increase of 20 basis points in the average rate to 4.44% in 1996
from 4.24% in 1995. The increase in the average balance of deposits reflects the
acquisition of $70 million of deposits from Treasure Coast Bank, F.S.B. Interest
expense on FHLB advances and other borrowings increased $1.0 million to $4.7
million for the year ended September 30, 1996 from $3.7 million for the year
ended September 30, 1995. This increase was the result of an increase of $16.6
million in the average balance to $75.9 million in 1996 from $59.3 million in
1995.
Provision for Loan Losses. The provision for loan losses was a credit
of $76,000 for the year ended September 30, 1996 compared to an expense of
$460,000 for the year ended September 30, 1995, a difference of $536,000. The
credit to the provision for loan losses for the year ended September 30, 1996
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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 Bank's perception and the inherent risk of loans originated for
these portfolios during the period, as well as the additional inherent risk of
loans acquired as a result of the acquisition of Treasure Coast, and $200,000
related to downgrades of certain commercial real estate loans within pass
grades. In 1995 the provision of $460,000 resulted primarily from a $1.1 million
charge to the provision due to growth in the commercial real estate portfolio
and increase allowance levels provided on more recent originations, and a charge
to the provision of $30,000 due to an increase in the level of classified
assets. Such charges were reduced by a reduction of approximately $500,000
related to upgrades of loans within pass grades and $190,000 in net loan
recoveries during the period. The allowance for loan losses was at $11.0 million
and $ 10.1 million for September 30, 1996 and 1995, respectively. An allowance
of $885,000 was acquired as part of the Treasure Coast acquisition in 1996. The
allowance was 1.4% and 1.6% of total loans at September 30, 1996 and 1995,
respectively, and was 129.4% and 57.6% of classified loans at September 30, 1996
and 1995, respectively.
Other Income. Other income remained constant at $2.9 million for both
the years ended September 30, 1996 and 1995. Losses from real estate operations
were $301,000 for the year ended September 30, 1996 compared to $40,000 for the
year ended September 30, 1995. Other income, primarily from fees and service
charges on deposit products was $2.8 million and $2.6 million for the years
ended September 30, 1996 and 1995, respectively.
Other Expense. Other expense increased by $5.9 million to $24.1 million
for the year ended September 30, 1996 from $18.2 million for the year ended
September 30, 1995. The increase was primarily due to an expense for the
one-time SAIF special assessment of $4.5 million. Payment of the SAIF assessment
on deposits formerly held by Treasure Coast was charged to goodwill. Other
changes included an increase of $642,000 in compensation and benefits, due
primarily to wage increases, and a $341,000 increase in occupancy expense.
Income Tax Expense. Income tax expense decreased by $526,000 to $5.4
million for the year ended September 30, 1996 from $5.9 million for the year
ended September 30, 1995, due primarily to the $1.7 million tax effect of the
one-time SAIF special assessment. The effective tax rates were 39% and 38% for
the years ended September 30, 1996 and 1995, respectively.
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Liquidity and Capital Resources
The Bank 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. The Bank's liquidity ratio
was 14.92%, 18.79%, and 16.06% at September 30, 1997, 1996 and 1995,
respectively. It is the Bank's policy to maintain average monthly levels of
liquid assets at least 50 basis points higher than the minimum requirement,
primarily as a part of its asset and liability management strategy of increasing
its levels of rate-sensitive interest-earning assets. At September 30, 1997, the
Bank had federal funds, cash and investments which exceeded the minimum
regulatory requirement. In addition, the Bank had certain investments in
mortgage-backed securities aggregating $55.0 million which also qualify as
liquid assets under OTS regulations. The Bank 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 Bank's total liquidity
position as of September 30, 1997 was $141.2 million, which was $93.9 million in
excess of the minimum requirement of $47.3 million. The Bank's short term
liquidity position at that date amounted to $56.2 million which was $46.8
million in excess of the minimum requirement of $49.4 million.
The Bank'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 Bank will consider increasing its borrowings from the FHLB
of Atlanta from time to time to hedge against future increases in prevailing
deposit account interest rates. In addition, the Bank held unpledged fixed and
adjustable rate mortgage-backed securities totaling $174.4 million at September
30, 1997 that could be used as collateral under repurchase transactions with
securities dealers. Repurchase transactions serve as secured borrowings and
provide a source of short-term liquidity for the Bank.
Net cash provided by the Bank's operating activities (i.e., cash items
affecting net income) was $15.7 million, $10.2 million and $11.1 million for the
years ended September 30, 1997, 1996 and 1995, respectively.
Net cash used by the Bank's investing activities (i.e., cash receipts,
primarily from its investment securities, mortgage-backed securities, and loan
portfolios) was $93.8 million, $86.2 million and $85.9 million for the years
ended September 30, 1997, 1996 and 1995, respectively.
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Net cash provided by the Bank's financing activities (i.e., cash
receipts primarily from net increases in deposits and net FHLB advances) was
62.4 million, $86.0 million and $66.1 million for the years ended September 30,
1997, 1996 and 1995, respectively. The increase in 1996 was principally due to a
$13.5 million increase in deposits and a $10.0 million increase in FHLB
advances.
The Bank's liquid assets consist primarily of investment securities,
federal funds and cash. At September 30, 1997 the Bank had liquid assets of
$141.2 million, with loan commitments of $29.1 million (consisting of unused
lines of credit to homebuilders and residential and commercial loan
commitments), letters of credit of $501,000 and unfunded loans in process of
$32.1 million (the latter consisting primarily of residential loans in process).
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying notes presented
elsewhere in this Prospectus have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") which generally requires the measurement
of financial position and operating results in terms of historical dollars
without considering the change in the relative purchasing power of money over
time and due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. As a result, interest rates have a greater impact
on the Bank's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or, to the same
extent, as prices of goods and services.
Impact of New Accounting Standards
Earnings Per Share. In February, 1997, the FASB issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128").
Statement 128 is effective for financial statements issued for periods ending
after December 15, 1997. Statement 128 establishes standards for computing and
presenting earnings per share ("EPS"), simplifies the standards previously found
in APB No. 15, "Earnings Per Share", and makes them comparable to international
EPS standards. The Bank will begin disclosing EPS in accordance with Statement
128 beginning with the quarter ended December 31, 1997.
Reporting Comprehensive Income. In June, 1997, the FASB issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("Statement 130"). Statement 130 is effective for fiscal years beginning
after December 15, 1997. Statement 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Statement 130 requires that all items recognized
under accounting standards as components of comprehensive income be reported in
a financial statement in equal prominence with other financial statements. Such
statement will be presented by the Bank beginning with the quarter ended
December 31, 1998.
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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 Bank is required to report operating
segment information, to the extent such segments are defined, beginning with the
year ended September 30, 1999.
Year 2000 Considerations
The Bank's Year 2000 Action Plan (the "Action Plan") was presented to
the Board of Directors on June 25, 1997. The Action Plan was developed using the
guidelines outlined in the Federal Financial Institutions Examination Council's
"The Effect of Year 2000 on Computer Systems" and is scheduled for completion by
December 31, 1998, with only final testing remaining. The Systems Corporate
Steering Committee is responsible for the Year 2000 Action Plan with the Board
of Directors receiving Year 2000 Executive Progress Reports on a quarterly
basis.
An OTS off-site examination was conducted on September 30, 1997, and
based upon the examination results, the Bank was progressing satisfactorily
towards completing the Action Plan requirements.
Based upon current findings, the Bank budgeted $712,600 for Capital
Equipment in Fiscal 1998 relating to Year 2000 software and hardware issues.
BUSINESS OF HARBOR FLORIDA BANCSHARES, INC.
Harbor Florida Bancshares, Inc. ("Bancshares") was organized in
November of 1997 at the direction of the Board of Directors of the Bank for the
purpose of holding all of the capital stock of the Bank and in order to
facilitate the Conversion and Reorganization. It will apply to the OTS for
authority to acquire 100% of the Bank Common Stock and become the savings and
loan holding company for the Bank. That application has not yet been approved by
the OTS and the ability to consummate the Conversion and Reorganization is
contingent on such approval. Upon consummation of the Conversion and
Reorganization, Bancshares will own only one savings association, the Bank, and
will initially be a unitary savings and loan holding company. It will have no
significant assets other than all of the outstanding common shares of Bank
Common Stock, a loan to the ESOP and the portion of net proceeds from the
Offerings retained by the Company. It will have no significant liabilities. See
"USE OF PROCEEDS." Initially, the management of Bancshares and the Bank will be
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substantially similar and Bancshares will neither own nor lease any property but
will instead use the premises, equipment and furniture of the Bank. At the
present time, Bancshares does not intend to employ any persons other than
executive officers who are executive officers of the Bank. Bancshares will
utilize the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent Bancshares expands or changes its
business in the future.
Management believes that the stock holding company structure will
provide Bancshares with additional flexibility to diversify its business
activities through existing and newly formed subsidiaries or through
acquisitions of or mergers with other financial institutions and financial
services related companies. Although there are no current arrangements,
understandings, or agreements regarding any opportunities or transactions, the
Company will be in a position after the Conversion and Reorganization, subject
to regulatory limitations and Bancshares' financial position, to take advantage
of any such acquisition or expansion opportunities that arise. The initial
activities of Bancshares are anticipated to be funded by the proceeds to be
retained by it and the earnings thereon as well as dividends from the Bank.
Bancshares' executive office is located at home office of the Bank at
100 S. Second Street, Fort Pierce, FL 34950 and its telephone number is (561)
461-2414.
BUSINESS OF HARBOR FLORIDA BANCORP, INC.
Harbor Florida Bancorp, Inc. was formed in December, 1996 to serve as
the Mid-Tier Holding Company for the Bank. The primary purpose for creation of
Bancorp was to facilitate capital management through stock repurchases.
Bancorp's stock is currently owned by the Mutual Holding Company and the Public
Stockholders. It has not engaged in any business other than holding 100% of the
Bank's common stock and has not, to date, repurchased any stock. Pursuant to the
Conversion and Reorganization, Bancorp will adopt a Federal stock charter and be
merged into the Bank, with the Bank as the surviving entity.
When the Bank announced the creation of Bancorp, on October 23, 1996,
management intended to use the mid-tier holding company structure to facilitate
stock repurchases from time to time as part of its capital management strategy.
On June 25, 1997, when the Mid-Tier Reorganization was consummated, Bancorp
announced its intention to purchase Public Bancorp Shares in the open market.
Subsequent to June 25, 1997, management considered repurchasing Public Bancorp
Shares, and in this regard considered, among other things, market conditions,
capital needs, securities regulation restrictions on the timing of repurchases,
and alternative capital expenditures, and ultimately decided not to repurchase
Public Bancorp Shares.
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Reorganization Into Harbor Florida Bancshares
Bancorp is a Delaware corporation which began its activities on June
25, 1997. Bancorp was created under a new regulation promulgated by the OTS
which allowed mutual holding companies such as the Mutual Holding Company to
create mid-tier holding companies. The primary purpose for creation of mid-tier
holding companies was as a capital management tool to enable the repurchases
stock without any adverse tax consequences, while maintaining the mutual holding
company structure. The mid-tier Reorganization was structured as a tax free
reorganization as follows: (i) Bancorp, a Delaware corporation, chartered a
wholly owned interim federal stock savings bank known as interim; (ii) interim
was then merged with and into the Bank with the Bank as the surviving entity. As
a result of the merger, the Bank became a wholly owned subsidiary of Bancorp and
the shareholders of the Bank became shareholders of Bancorp with the same
aggregate percentage ownership interest as their aggregate ownership of the Bank
prior to the reorganization.
OTS Conditions of Approval. The OTS approval of the mid-tier
Reorganization that created Bancorp, and resulted in the Bank becoming the
wholly owned subsidiary of Bancorp, was accompanied by certain conditions
imposed on Bancorp while it continued to operate in a structure with majority
ownership of its shares held by the Mutual Holding Company. The material
conditions of the OTS approval were as follows:
(i) No later than one year from the date of consummation of the
acquisition, or June 25, 1998, Bancorp was required to obtain a
federal charter from the OTS and to submit bylaws acceptable to
the Director, Corporate Activities, of the OTS.
(ii) Bancorp was made subject to the provisions of the Mutual Holding
Company Regulations pertaining to minority stock issuances as if
it were a former mutual savings association that reorganized into
a mutual holding company structure;
(iii) Bancorp was made subject to the same restrictions (including,
but not limited to, the activities limitations) that the Mutual
Holding Company is subject to under Section 10(o)(5) of the HOLA
and 12 C.F.R. ss. ss. 575.11 and 575.12, as well as any other
pertinent statutory and regulatory provisions, e.g. that its
permissible activities would be those authorized for mutual
holding companies;
(iv) Bancorp is required to hold all of the issued and outstanding
common stock of the Bank, and the Bank was not permitted to issue
any other class of equity security;
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(v) Bancorp and the Bank must obtain approval from the OTS prior to
issuing any securities;
(vi) Bancorp was subject to the provisions of 12 C.F.R. Part 552,
pertaining to amendments of charters and bylaws as if Bancorp
were a federal stock savings association;
(vii) Bancorp was required to cease any activity, reverse any action,
or amend any provisions of its charter or bylaws, to which the
OTS objects as being contrary to the MHC Regulations; and
(viii) If the Mutual Holding Company undertakes a mutual-to-stock
conversion, OTS policies regarding purchases of stock in
conversions would apply to any Public Stockholders.
The OTS conditions are based upon the continued operation of Bancorp as
part of a structure in which a mutual holding company is present. Upon the
completion of the Conversion and Reorganization, Harbor Financial MHC will
convert to an interim federal stock savings association and merge into the Bank
with the Bank being the surviving entity. Further, Bancorp will also cease to
exist and Bancshares will become the holding company for the Bank. Accordingly,
the restrictions on the activities which Bancorp may engage, (i.e., the
requirement to eliminate Bancorp's Delaware charter and adopt a federal charter,
and the prohibition against issuance of any other class of security), would not
be applicable.
The office of Bancorp is located at the main office of the Bank at 100
S. Second Street, Fort Pierce, FL 34950 and its telephone number is (561)
461-2414.
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BUSINESS OF HARBOR FEDERAL SAVINGS BANK
General
Harbor Federal Savings Bank ("Bank") is engaged in the business of
attracting deposits primarily from the communities it serves and using these and
other funds to originate primarily one-to-four family first mortgage loans for
retention in its portfolio. The Bank's principal sources of funds are deposits
and principal and interest payments on loans. Its principal source of income is
interest received from loans and investment and mortgage-backed securities, and
its principal expenses are interest paid on deposit accounts and employee
compensation and benefits.
On June 1, 1996, the Bank acquired all of the outstanding common stock
of Treasure Coast Bank, F.S.B. ("Treasure Coast"), a Florida based federal
savings association, for approximately $6.8 million in cash. The acquisition was
accounted for using the purchase method. Treasure Coast had assets of
approximately $75 million. The Treasure Coast acquisition added 1 branch to the
Bank'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 Bank.
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Market Area
The Bank serves communities in six growing and diverse Florida
counties. Its headquarters is in Fort Pierce, Florida, located on the eastern
coast of Florida between Stuart and Daytona Beach. In addition to its
headquarters, it has fourteen branch offices in St. Lucie, Indian River and
Martin counties, located on Florida's "Treasure Coast." This area is
characterized by both a large retirement and vacation home population and a
significant agricultural economy, primarily citrus crops. The Bank has four
branch offices located in Brevard County, which encompasses the "Space Coast" of
the state. Brevard County has a greater industrial base fueled primarily by
companies related to NASA and the John F. Kennedy Space Center. Prominent
electronics concerns such as Harris Corporation are also major employers in this
area. The Bank also has one branch office in Okeechobee County, an agricultural
area, and three branch offices in Volusia County, where tourism and a large
retirement population predominate.
Lending Activities
General. The Bank'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 Bank 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 " -- One to Four Family Permanent Residential Mortgage Loans."
The Bank also originates a substantial amount of one-to-four family residential
construction and consumer loans, and, on a limited basis, consumer installment,
commercial real estate and commercial business loans. Substantially all of the
Bank'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 Bank offers both fixed-rate and adjustable rate mortgage ("ARM")
loans. The Bank has sought to increase its origination of ARM loans to reduce
its interest rate risk. However, the Bank'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 Bank's loan and
mortgage-backed securities portfolio by type of loan.
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<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------- --------------------- ------------------- ----------------------
(Dollars in Thousands)
Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total
------ ---- ------ ----- ------ ----- ------ -----
Mortgage Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Construction 1 - 4 Family $ 47,800 5.42% $ 43,994 5.46% $ 40,634 6.07% $ 38,473 6.28%
Permanent 1 - 4 Family .. 629,906 71.46 584,297 72.49 487,480 72.84 456,880 74.60
Multifamily ............. 15,326 1.74 17,804 2.21 14,916 2.23 15,384 2.51
Nonresidential .......... 54,983 6.24 41,970 5.21 31,980 4.78 25,378 4.14
Land .................... 33,182 3.76 29,034 3.60 20,460 3.06 16,995 2.77
------ ---- ------ ---- ------ ---- ------ ----
Total Mortgage Loans .... 781,197 88.62 717,099 88.97 595,470 88.98 553,110 90.30
Other Loans
Commercial Nonmortgage .. 11,287 1.28 8,199 1.02 8,468 1.27 8,135 1.33
Home Improvement ........ 20,614 2.34 20,679 2.56 19,198 2.87 14,823 2.42
Manufactured Housing .... 16,399 1.86 15,784 1.96 15,045 2.25 13,461 2.19
Other Consumer (1) ...... 51,988 5.90 44,265 5.49 31,049 4.63 23,017 3.76
------ ---- ------ ---- ------ ---- ------ ----
Total Other Loans ....... 100,288 11.38 88,927 11.03 73,760 11.02 59,436 9.70
------ ----- ------ ----- ------ ----- ------ ----
Total Loans Receivable .. 881,485 100.00% 806,026 100.00% 669,230 100.00% 612,546 100.00%
====== ====== ====== ======
Less:
Loans in process ........ 32,078 26,788 24,321 22,652
Deferred loan fees and
discounts .............. 3,446 3,203 3,519 4,054
Allowance for loan
losses ................. 11,691 11,016 10,083 9,434
------ ------ ------ -----
Subtotal .............. 47,215 41,007 37,923 36,140
------ ------ ------ ------
Total Loans Receivable,
Net .................... 834,270 765,019 631,307 576,406
------- ------- ------- -------
Loans Held for Sale ..... 141 4,870 1,009 25
----- ----- ----- --
Mortgage-Backed
Securities ............. 176,854 153,293 164,759 120,099
------- ------- ------- -------
Total ................... $1,011,265 $923,182 $797,075 $696,530
========== ======== ======== ========
</TABLE>
<PAGE>
September 30,
------------------
1993
------------------
(Dollars in Thousands)
Percent of
Amount Total
------ -----
Mortgage Loans
Construction 1 - 4 Family $ 44,250 7.57%
Permanent 1 - 4 Family .. 428,524 73.36
Multifamily ............. 16,386 2.80
Nonresidential .......... 23,615 4.04
Land .................... 19,077 3.27
------ ----
Total Mortgage Loans .... 531,852 91.04
Other Loans
Commercial Nonmortgage .. 10,356 1.77
Home Improvement ........ 11,574 1.98
Manufactured Housing .... 13,064 2.24
Other Consumer (1) ...... 17,322 2.97
-- ------ ----
Total Other Loans ....... 52,316 8.96
------ ----
Total Loans Receivable .. 584,168 100.00%
======
Less:
Loans in process ........ 25,548
Deferred loan fees and
discounts .............. 4,616
Allowance for loan
losses ................. 7,305
-----
Subtotal .............. 37,469
------
Total Loans Receivable,
Net .................... 546,699
-------
Loans Held for Sale ..... 679
---
Mortgage-Backed
Securities ............. 89,535
------
Total ................... $636,913
========
- ---------
(1) Includes home equity and other second mortgage loans.
68
<PAGE>
---------------
The following table shows the maturity or period to repricing of the
Bank's loan and mortgage-backed securities portfolios at September 30, 1997.
Loans that have adjustable rates are shown as being due in the period in which
the interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on loans totaled $163.0 million, $143.5 million and $99.4
million for the fiscal years 1997, 1996 and 1995, respectively. Loans having no
stated maturity and no schedule of repayments (including delinquent loans), and
demand loans are reported as due within one year.
<TABLE>
<CAPTION>
LOAN PORTFOLIO MATURITY
--------------------------------------------------------------------------------------
Ten
One Three Five through
Within through through through twenty Beyond
one year three years five years ten years years twenty years Total
-------- ----------- ---------- --------- ----- ------------ -----
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C>
Permanent 1 - 4 family ....... $213,414 $25,164 $56,921 $55,450 $139,195 $159,380 $649,524
Other ........................ 43,501 11,404 14,034 12,074 15,631 677 97,321
Other Loans:
Consumer ..................... 24,464 12,576 22,609 24,811 4,358 41 88,859
Commercial ................... 6,146 511 1,290 1,194 27 2,096 11,264
Nonperforming Loans (1) ........ 2,580 0 0 0 0 0 2,580
Mortgage-Backed Securities ..... 58,708 25,030 20,704 54,497 17,202 713 176,854
------ ------ ------ ------ ------ --- --------
Sub-Total ...................... $348,813 $74,685 $115,558 $148,026 $176,413 $162,907 $1,026,402
======= ====== ======= ======= ======= =======
Deferred Loan Origination
Costs and Commitment Fees..... (3,446)
Allowance for Loan Losses ...... (11,691)
--------
Total(2)(3) .................... $1,011,265
========
</TABLE>
- ---------
(1) All nonperforming loans are reported as due within one year regardless of
the actual maturity term.
(2) Amounts reported do not include principal repayment or prepayment
assumptions.
(3) Amounts include loans held for sale of $141,000 as of September 30, 1997.
69
<PAGE>
The following table sets forth the amount of fixed-rate and
adjustable-rate loans at September 30, 1997 due after September 30, 1998.
Adjustable
Fixed Rate Rate Total
---------- ---- -----
(In thousands)
Mortgage loans:
Permanent 1 - 4 family ............. $325,483 $110,627 $436,110
Other .............................. 37,348 16,472 53,820
Other loans:
Consumer ........................... 64,395 0 64,395
Commercial ......................... 5,118 0 5,118
-------- --------- --------
Total loans .......................... $432,344 $127,099 $559,443
Mortgage-backed securities ........... 118,146 0 118,146
------- --------- -------
Total ................................ $550,490 $127,099 $677,589
======= ======= =======
-------------
One-to-Four Family Permanent Residential Mortgage Loans. The Bank's
primary lending activities focus on the origination of one-to-four family
residential mortgage loans. The Bank generally does not originate one-to-four
family residential loans on properties outside of its market area. At September
30, 1997, 71.46% of the Bank's total loan portfolio, or $629.9 million consisted
of one-to-four family loans and over 95% of such loans were collateralized by
properties located in the Bank's market area.
The Bank'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 Bank's current portfolio position. The
Bank sells a portion of newly originated 30 year fixed rate mortgage loans,
currently $100,000 to $200,000 per month. In addition, the Bank 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 Bank 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 Bank's interest rate gap position, and loan
products offered by the Bank'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 Bank 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 Bank loan officers, none of whom
have underwriting authority. Independent loan brokers are not used.
70
<PAGE>
Residential loans are authorized and approved under central authority
by experienced underwriters. Underwriters have individual authority to approve
loans up to the maximum amount of $250,000. Residential mortgage loans in excess
of this amount are approved by Management individually up to $500,000 or by
committee if above $500,000. The Bank 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 Bank's underwriting
standards are intended to ensure that borrowers are sufficiently credit worthy,
and all of the Bank's lending is subject to written underwriting policies and
guidelines approved by the Bank'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 Bank obtains
an appraisal of substantially all of the proposed security property in
connection with residential mortgage loans. Additionally, title insurance is
required for all mortgage loans, except home equity loans of $50,000 or less.
The types, amounts, terms of and security for conventional loans (those
not insured or guaranteed by the U.S. government or agencies thereof, or state
housing agency) originated by the Bank are significantly prescribed by federal
regulation. OTS regulations limit the amount which the Bank 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 Bank 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 Bank'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 Bank's
loan originations are to finance the construction of one-to-four family homes in
the Bank's market area. At September 30, 1997 the Bank had $47.8 million in such
loans, representing 5.42% of total loans. It is the Bank'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 Bank as well. As a
result, although in recent years the origination of these construction loans to
individuals is second in volume only to the origination of traditional loans to
finance the purchase or refinance of an existing home, the significance of this
type of lending to the Bank 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.
71
<PAGE>
Approximately one-half of the Bank's one-to-four family construction
loans are to builders. In most instances these loans are also structured to
guarantee permanent financing by the Bank.
Consumer Loans. The Bank 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 Bank. 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 Bank. Loans are made on
either a fixed-rate or adjustable-rate basis, with terms generally up to 20
years. A limited amount of unsecured consumer loans are also originated. At
September 30, 1997 consumer-oriented loans accounted for $89.0, or 10.10% of the
Bank's total loan portfolio.
Non-Residential and Land Mortgage Loans. In the late 1980's the Bank
curtailed its lending in non-residential mortgages with the exception of loans
to finance the sale of the Bank's real estate acquired through foreclosure. In
recent years, the Bank re-entered this market and made a total of $18.3 million,
$12.9 million and $10.7 million of non-residential mortgage loans in the fiscal
years ended September 30, 1997, 1996 and 1995, respectively. At September 30,
1997, nonresidential loans constituted 6.24% of the Bank'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 Bank'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 " -- Delinquent, Nonperforming and
Classified Assets."
The Bank also originates developed building lot loans ("lot loans")
secured by individual improved lots for future residential construction. Lot
loans are offered with either a fixed or adjustable interest rate and with a
maximum term of up to 15 years. At September 30, 1997 these loans accounted for
$14.6 million, or 1.66% of the Bank's total loan portfolio.
72
<PAGE>
Other Loans. The balance of the Bank's lending consists of multi-family
mortgage and commercial non-mortgage loans. At September 30, 1997 these loans
represented $15.3 million, or 1.74% and $11.3 million, or 1.28%, respectively,
of the Bank'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 Bank'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 Bank'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 Bank has sold mortgage loans, primarily to the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. Historically, the Bank has not purchased significant amounts of
loans, particularly in light of its past policy to control asset growth.
The Bank sells a portion of newly originated 30 year fixed rate
mortgage loans, in an amount currently between $100,000 to $200,000 per month.
In addition, the Bank 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.
73
<PAGE>
The following table shows total loan origination activity including
mortgage-backed securities, during the periods indicated.
Years Ended September 30,
------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Mortgage loans (gross):
At beginning of period(1) ........ $722,435 $ 596,478 $ 553,135
Mortgage loans originated:
Construction 1-4 Family ........ 63,237 59,000 51,998
Permanent 1-4 Family ........... 84,853 85,853 51,334
Multi-family ................... 2,526 2,935 158
Nonresidential ................. 18,302 12,941 10,700
Land ........................... 12,264 13,384 11,812
--------- --------- ---------
Total mortgage loans originated(2) 181,182 174,113 126,002
Mortgage loans acquired (3) ...... 0 60,482 --
Mortgage loans sold (4) .......... (8,583) (4,653) (9,037)
Principal repayments ............. (111,255) (101,359) (72,310)
Mortgage loans transferred to
real estate owned ............... (2,438) (2,626) (1,312)
--------- --------- ---------
At end of period ................. $781,341 $ 722,435 $ 596,478
========= ========= =========
Other loans (gross):
At beginning of period ........... $88,927 $ 73,760 $ 59,436
Other loans originated ........... 63,406 52,702 40,838
Loans acquired ................... 0 4,468 --
Principal repayments ............. (52,045) (42,003) (26,514)
-------- --------- ---------
At end of period ................. $ 100,288 $ 88,927 $ 73,760
========= ========= =========
Mortgage-backed securities (gross):
At beginning of period ........... $ 153,293 $ 164,759 $ 120,099
Mortgage-backed securities
purchased ....................... 61,769 29,265 65,609
Principal repayments ............. (38,208) (40,731) (20,949)
--------- --------- ---------
At end of period ................. $ 176,854 $ 153,293 $ 164,759
========= ========= =========
- ---------
(1) Includes loans held for sale.
(2) Loans originated represent loans closed, however all loans may not be fully
disbursed at time of closing.
(3) Represents loans acquired in connection with the acquisition of Treasure
Coast Bank, F.S.B. in 1996.
(4) Includes $3 million commercial land participation loan sold in 1995.
74
<PAGE>
---------------------
Mortgage-backed Securities
A substantial part of the Bank's business involves investments in
mortgage-backed securities issued or guaranteed by an agency of the United
States government. Historically, the Bank'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 Bank. The FHLMC and FNMA guarantees the
payment of principal and interest. The underlying pool of mortgages can consist
of either fixed-rate or adjustable-rate loans. At September 30, 1997, the Bank's
portfolio of mortgage-backed securities consisted entirely of FHLMC and FNMA
participation certificates. Of the $176.9 million in mortgage-backed securities
at that date, $49.0 million or 28% represented adjustable-rate securities and
$127.9 million or 72% represented fixed-rate securities with anticipated
maturity dates from 3 months to 29 years.
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 Bank'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, 1997, long-term,
fixed-rate mortgage-backed securities amounted to $28.4 million and five-year
and seven-year balloon mortgage-backed securities amounted to $55.0 million and
$44.5 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 Bank 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.
75
<PAGE>
Delinquent, Nonperforming and Classified Assets
Delinquent Loans. All delinquent loan results are reviewed monthly by
the Bank's Board of Directors. The Bank believes it has an effective process and
policy in dealing with delinquent loans.
Residential delinquencies are handled by the Loan Collections
Department. This department begins collections efforts on residential loans when
a loan appears on the 15-day delinquent list. Borrowers are sent a notice to
accelerate the debt when the debt is 45 days delinquent. If the delinquent
account has not been corrected, foreclosure proceedings are begun generally at
the 75th day of delinquency. At September 30, 1997, residential loans delinquent
90 days and longer represented .24% of the total residential loan portfolio.
Commercial delinquent accounts are processed by the Problem Asset and
Lending Departments. For commercial accounts classified as Substandard, as
defined below, or worse, the Problem Asset Department has jurisdiction over the
collection efforts. As with residential delinquent loans, any commercial loans
90 days past due or where the collection of the interest or full principal is
considered doubtful are placed on a non-accrual basis.
If a collection action is instituted on a consumer or commercial loan,
the Bank, 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 Bank, the borrowers generally are pursued where such action is
deemed appropriate, including recourse based on personal loan guarantees by the
borrower's principals.
76
<PAGE>
The following table shows the Bank's loans delinquent 90 days or more
at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
(Dollars in thousands)
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
Construction and land ................ 2 $ 162 2 $ 98 2 $ 89
Permanent 1 - 4 family ............... 28 1,565 23 1,196 36 2,205
Other mortgage ....................... 3 689 2 423 0 --
------ ------ ------ ------ ------ ------
Total mortgage loans ................. 33 2,416 27 1,717 38 2,294
Other loans ............................ 10 164 9 132 7 70
------ ------ ------ ------ ------ ------
Total loans ............................ 43 $2,580 36 $1,849 45 $2,364
====== ====== ====== ====== ====== ======
Delinquent loans to
total loans ........................... .31% .24% .37%
</TABLE>
As of September 30, 1997, 1996 and 1995, $0, $323,000 and $1.2 million,
respectively, of loans were on nonaccrual status which were not 90 days past
due.
Nonperforming Assets. The Bank also places emphasis on improving asset
quality. The Bank's nonperforming assets as a percentage of total assets have
decreased from .71% at September 30, 1995 to .43% at September 30, 1997.
Loans 90 days past due are generally placed on non-accrual status. The
Bank ceases to accrue interest on a loan once it is placed on non-accrual
status, and interest accrued but unpaid at that time is charged against interest
income. Additionally, any loan where it appears evident that the collection of
interest is in doubt is also placed on a non-accrual status. Non-accrual loans
of $500,000 or more are reviewed monthly by the Board of Directors. The
investment in impaired loans, other than those evaluated collectively for
impairment, at September 30, 1997 was approximately $12.2 million. The average
recorded investment in impaired loans during the year ended September 30, 1997
was approximately $12.1 million. The total specific allowance for loan losses
related to these loans was approximately $117,000 on September 30, 1997.
Interest income on impaired loans of approximately $1.1 million was recognized
in the year ended September 30, 1997.
77
<PAGE>
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
Bank, the property is sold at a foreclosure sale at which the Bank may be the
buyer. Thereafter, such acquired property is listed in the Bank's real estate
owned ("REO") account or that of a subsidiary, until the property is sold. The
Bank carries REO at the lower of cost or fair value less cost to dispose. The
Bank also finances the sales of REO properties. Should the foreclosure sale not
produce sufficient proceeds to pay the loan balance and court costs, the Bank's
attorneys, where appropriate, may pursue the collection of a deficiency judgment
against the responsible borrower.
It is the Bank's policy to try to liquidate its holdings in REO or
subsidiaries on a timely basis while considering both market conditions and the
cost of carrying REO properties. Upon acquisition the Bank 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 Bank'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 Bank'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.
78
<PAGE>
At the dates indicated, nonperforming assets in the Bank's portfolio
were as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accrual mortgage loans:
<S> <C> <C> <C> <C> <C>
Delinquent less than 90 days $ 0 $ 323 $ 1,153 $ 1,175 $ 292
Delinquent 90 days or more . 2,416 1,717 2,294 1,577 1,095
-------- -------- -------- -------- --------
Total ................... 2,416 2,040 3,447 2,752 1,387
-------- -------- -------- -------- --------
Non-accrual other loans:
Delinquent less than 90 days 0 -- -- -- 181
Delinquent 90 days or more . 164 132 70 109 1,916
-------- -------- -------- -------- --------
Total ................... 164 132 70 109 2,097
-------- -------- -------- -------- --------
Total non-accrual loans ...... 2,580 2,172 3,517 2,861 3,484
Accruing loans 90 days or more
delinquent ................. 0 -- -- -- 0
-------- -------- -------- -------- --------
Total nonperforming loans .. 2,580 2,172 3,517 2,861 3,484
-------- -------- -------- -------- --------
Other nonperforming assets:
Real estate owned .......... 2,892 4,830 4,643 4,530 10,990
In-substance foreclosures .. -- -- -- 1,488 6,957
-------- -------- -------- -------- --------
Total ...................... 2,892 4,830 4,643 6,018 17,947
Less allowance for losses (578) (1,712) (1,857) (2,008) (4,792)
-------- -------- -------- -------- --------
Total .................. 2,314 3,118 2,786 4,010 13,155
-------- -------- -------- -------- --------
Total nonperforming assets ... $ 4,894 $ 5,290 $ 6,303 $ 6,871 $ 16,639
======== ======== ======== ======== ========
Nonperforming loans to total
net loans ................. 0.31% 0.28% 0.56% 0.50% 0.64%
Total nonperforming assets to
total assets .............. 0.43% 0.50% 0.71% 0.85% 2.19%
</TABLE>
For the year ended September 30, 1997 interest income of $131,000 would
have been recorded on loans accounted for on a non-accrual basis if the loans
had been current throughout the period. No interest income was actually included
in net income regarding non-accrual loans during the same period.
The Bank's policy requires that a general allowance be maintained on
all REO. The Bank'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.
79
<PAGE>
Management evaluates each REO property on no less than a quarterly
basis to assure that the net carrying value of the property on the Bank's books
is no greater than the fair market value less estimated costs to dispose. When
necessary, the property is written down or specific allowances are established
to reduce the carrying value.
REO Allowances
Years Ended September 30,
------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Beginning balance .................... $ 1,712 $ 1,857 $ 2,008
Provision for (recovery of)
losses ............................. (150) 117 35
Allowances for losses on REO
acquired ........................... -- 21 --
Charge-offs .......................... (984) (283) (186)
------- ------- -------
Ending balance ....................... $ 578 $ 1,712 $ 1,857
======= ======= =======
Not included in the preceding table are gains, (losses) or recoveries
on the sale of real estate owned of $124,000, ($39,000) and $180,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
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 Bank 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 allowances for loan losses
in an amount considered appropriate by management. See "-- Allowance for Loan
Losses." 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.
80
<PAGE>
The following table presents the Bank's classified assets at the dates
indicated.
September 30,
------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Substandard:
Real Estate Owned ................ $ 2,892 $ 3,897 $ 3,483
Loans ............................ 9,832 8,150 16,119
------- ------- -------
Total Substandard ............... 12,724 12,047 19,602
Doubtful .......................... 0 192 930
Loss .............................. 117 174 698
------- ------- -------
$12,841 $12,413 $21,230
======= ======= =======
At September 30, 1997, in addition to the Bank's classified loans noted
above, the Bank had five commercial real estate and commercial business loans,
aggregating approximately $3.9 million, which were currently performing.
However, in the case of these loans, either management had obtained information
about possible credit problems of the borrowers or the borrowers had been
seriously delinquent in the past and had other characteristics which caused
management to question the ability of such borrowers to comply with present loan
repayment terms. Subsequent to September 30, 1997, one of these loans which had
a net book value prior to allowance of $2.6 million was paid off in full. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Year Ended September 30, 1997 Compared With Year Ended September
30, 1996 -- Subsequent Event."
Allowance for Loan Losses
Provisions for loan losses are charged to operations as an allowance
for loan losses; recognized loan losses (recoveries) are then charged (credited)
to the allowance. The Bank 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 Bank's
loan portfolio based on management's evaluation of the probable losses (existing
and inherent). Such evaluations are made for all major loans on which full
collectibility of interest and/or principal may not be reasonably assured. The
factors which the Bank 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 Bank segregates the loan portfolio for loan loss purposes into the
following broad segments: (i) Commercial Real Estate; (ii) Residential Real
Estate; (iii) Commercial Business; and (iv) Consumer.
81
<PAGE>
Further, the Bank provides for a general allowance for losses inherent
in the portfolio by the above categories, which consists of two components: (i)
general loss percentages based on historical analyses; and (ii) a supplemental
portion of the allowance 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 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.
82
<PAGE>
The following tables set forth an analysis of the Bank's allowance for
loan losses at the dates indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .......... $ 11,016 $ 10,083 $ 9,434 $ 7,305 $ 6,029
Provision for (recovery of) loan losses . 782 (76) 460 1,552 1,889
Allowance for loan losses acquired(1) ... -- 885 -- -- --
Charge-offs:
Residential ........................... (134) (137) (109) (88) (165)
Commercial real estate ................ -- -- (145) -- (987)
Consumer .............................. (125) (48) (130) (47) (29)
Other ................................. (3) (180) -- -- (29)
-------- -------- -------- -------- --------
Total charge-offs .................... (262) (365) (384) (135) (1,210)
-------- -------- -------- -------- --------
Recoveries:
Residential ........................... 44 149 117 87 103
Commercial real estate ................ 19 86 270 499 134
Consumer .............................. 62 79 133 38 139
Other ................................. 30 175 53 88 221
-------- -------- -------- -------- --------
Total recoveries .................... 155 489 573 712 597
-------- -------- -------- -------- --------
Balance at end of period ................ $ 11,691 $ 11,016 $ 10,083 $ 9,434 $ 7,305
Allowance for loan losses
to total loans ......................... 1.40% 1.44% 1.60% 1.64% 1.34%
Allowance for loan losses
to total non-performing loans .......... 453.11% 507.25% 286.70% 329.74% 209.67%
Allowance for loan losses
and allowance for REO to
total non-performing assets ............ 224.21% 181.78% 146.32% 128.86% 56.45%
Net charge-offs to average
loans outstanding during
the period ............................. 0.01% (0.02)% (0.03)% (0.10)% 0.11%
Classified loans to total
net loans .............................. 1.19% 1.11% 2.78% 2.85% 2.92%
</TABLE>
- ------------
(1) Represents allowance acquired in conjunction with acquisition of Treasure
Coast Bank, F.S.B. in 1996.
83
<PAGE>
The following table presents an allocation of the entire allowance for
loan losses among various loan classifications and sets forth the percentage of
loans in each category to total loans. The allowance shown in the table should
not be interpreted as an indication that charge-offs in future periods will
occur in these amounts or proportions or that the analysis indicates future
charge-off trends.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- ---------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Allowance at end of
period applicable to:
Residential ....................... $ 2,141 76.88% $ 2,077 77.95% $ 1,625 78.91%
Commercial Real Estate ............ 6,487 11.74 6,088 11.02 6,158 10.07
Consumer .......................... 2,068 10.10 1,802 10.01 1,280 9.75
Commercial Business ............... 995 1.28 1,049 1.02 1,020 1.27
------- ------ ------- ------ ------- ------
Total ......................... $11,691 100.00% $11,016 100.00% $10,083 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- --------
(1) Percent of loans in each category of total loans at the dates indicated.
84
<PAGE>
Investment Activities
The Bank invests primarily in overnight funds, U.S. Government and
agency obligations, and FHLB of Atlanta capital stock. The Bank 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 Bank's portfolio of investment securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- ------------------
Carrying Market Carrying Market Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value Value Value Value Value
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury notes .......... $17,985 $17,985 $23,347 $23,347 $ -- $ -- $ -- $ -- $ -- $ --
FHLB notes ................... 29,486 29,486 10,031 10,031 -- -- -- -- -- --
Other securities ............. 82 82 115 115 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total ...................... $47,553 $47,553 $33,493 $33,493 $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Held to maturity:
U.S. Treasury notes .......... $ 0 $ 0 $ -- $ -- $15,028 $14,970 $35,065 $34,578 $40,036 $40,251
FHLB notes ................... 5,000 4,993 20,000 20,016 10,000 10,159 5,021 4,936 5,044 5,056
Other securities ............. 0 0 -- -- 158 158 200 200 442 442
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total ...................... $ 5,000 $ 4,993 $20,000 $20,016 $25,186 $25,287 $40,286 $39,714 $45,522 $45,749
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
FHLB stock ..................... $ 7,595 $ 7,595 $ 7,158 $ 7,158 $ 6,064 $ 6,064 $ 5,358 $ 5,358 $ 5,225 $ 5,225
</TABLE>
85
<PAGE>
On November 15, 1995, the FASB issued the Special Report pursuant to
which the Bank 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 Bank undertook such a reassessment and, effective
December 31, 1995, all investment securities were reclassified as available for
sale. On the effective date of the reclassification, the securities transferred
had a carrying value of $25.8 million and an estimated fair value of $26.0
million, resulting in a net increase to stockholders' equity for the net
unrealized appreciation of $126,000, after deducting applicable income taxes of
$76,000.
The table below presents the contractual maturities and weighted
average yields of investment securities at September 30, 1997, excluding FHLB
stock:
<TABLE>
<CAPTION>
One Year 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>
U.S. Treasury
notes .............. $17,985 5.41% $ 0 0.00% $0 0.00% .3 $17,985 $17,985 5.41%
FHLB notes ........... 4,497 5.94 29,989 6.00 0 0.00 1.3 34,486 34,479 5.99
Other securities ..... 0 0.00 82 10.00 0 0.00 1.6 82 82 10.00
</TABLE>
86
<PAGE>
Sources of Funds
Deposits. The Bank 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 Bank has twenty-two branch offices in addition to its home office
in Fort Pierce. The Bank's strategy has been to have conveniently located
offices in growth markets as one of its main methods of attracting funds. The
Bank'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 Bank had a decline in deposit balances for several years prior to
1993. This was a strategy that the Bank used to improve its capital ratios. Much
of the decline was accomplished by the closing of less profitable branches. With
the Bank'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 Bank has upgraded a number of branch facilities and moved from leased
storefronts to full service free-standing offices.
Management believes that demand and passbook accounts are less
sensitive to changes in interest rates than other types of accounts, such as
certificates of deposit. As of September 30, 1997, the Bank had 23.34% of its
deposits in passbook and demand accounts and 75.67% in certificates of deposit
and 0.99% in official checks. Due to the recent low interest rate environment,
the Bank 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.
87
<PAGE>
The following table sets forth the distribution of the Bank'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
period-end balances instead of average monthly balances produces any material
difference in the information presented:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ------------------------------ -----------------------------
Weighted Weighted Weighted
Average Average Average
Nominal Nominal Nominal
Amount Percent Rate Amount Percent Rate Amount Percent Rate
------ ------- ---- ------ ------- ---- ------ ------- ------
(Dollars in thousands)
Demand accounts:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand $ 40,749 4.47% N/A $ 33,613 3.95% N/A $ 21,001 2.91% N/A
NOW accounts .............. 52,045 5.71 1.32% 54,806 6.43 1.51% 44,814 6.22 1.57%
Money market accounts ..... 43,401 4.76 2.51 42,561 5.00 2.58 36,863 5.11 2.37
------ ---- ---- ------ ---- ---- ------ ---- ----
Subtotal ................... $136,195 14.94 1.30 $130,980 15.38% 1.46% $102,678 14.24% 1.53%
Savings accounts:
Passbook .................. $ 76,540 8.40% 1.69% $ 77,305 9.07% 1.78% $ 80,720 11.20% 1.97%
Certificates of deposit .... 689,760 75.67 5.47 636,907 74.77 5.37 531,601 73.73 5.60
Official checks ............ 9,081 .99 N/A 6,661 .78 N/A 5,982 .83 N/A
----- --- ---- ----- --- ---- ----- --- ----
Total deposits ............. $911,576 100.00% 4.47% $851,853 100.00% 4.41% $720,981 100.00% 4.57%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
88
<PAGE>
The following table presents, by various categories, information
concerning the amounts and maturities of the Bank's time deposits on the dates
indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1997 1996 1995
----- ---- ----
(In thousands)
<S> <C> <C> <C>
0.00 - 3.00%................... $ 545 $ 307 $ 199
3.01 - 4.00%................... -- 1 4,360
4.01 - 5.00%................... 88,472 155,121 100,834
5.01 - 6.00%................... 553,986 378,999 234,126
6.01 - 7.00%................... 46,333 101,780 182,299
7.01 - 8.00%................... 424 603 9,174
8.01 - 9.00%................... -- 3 61
Over 9.01%..................... -- -- 548
Premiums on deposits
acquired...................... -- 93 --
------- -------- --------
Total Certificate Accounts..... $689,760 $636,907 $531,601
======= ======== ========
</TABLE>
At September 30, 1997, the Bank had certificates of deposit in amounts
of $100,000 or more maturing as follows:
Amount
Maturity Period (In thousands)
3 Months or Less $16,131
Over 3 to 6 Months 11,687
Over 6 to 12 Months 14,744
Over 12 Months 19,444
------
Total $62,006
89
<PAGE>
The following table contains information regarding deposit account
activity for the periods shown.
Years Ended September 30,
----------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
Net increase
(decrease) before
interest credited ............... $ 25,563 $ 30,644 $ 21,118
Interest credited ................. 34,160 30,035 26,033
Deposits acquired ................. -- 70,193 --
-------- -------- --------
Deposit account
increase (decrease) ............. $ 59,723 $130,872 $ 47,151
======== ======== ========
Weighted average cost
of deposits during
the period ...................... 4.42% 4.44% 4.24%
Weighted average cost
of deposits at end
of period ....................... 4.47% 4.41% 4.57%
Borrowings. The Bank 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 Bank to
maintain qualifying first mortgage loans as pledged collateral in an amount
equal to, when discounted at 75% of the unpaid principal balances, the advances.
As of September 30, 1997, the Bank had $100 million of outstanding FHLB
advances. Of this amount, $70 million have remaining maturity dates of
thirty-three months or longer. The remaining $30 million of FHLB advances are
short-term, with maturity dates of six months or less. The bank has used the
short-term FHLB advances as funding for investment securities that are
classified as "Available for Sale." Management expects that the Bank's
short-term advances will be renewed at similar rates and terms. However, in the
event that interest rates rise in the near term, management would have the
option of renewing the advances at higher rates or selling the investments and
using the proceeds to pay off the short term FHLB advances. This could result in
higher borrowing costs or possibly losses on the sale of investment securities.
90
<PAGE>
As of September 30, 1997, the Bank had a total credit limit of $157
million and an availability limit of $57 million with the Federal Home Loan Bank
of Atlanta.
In addition to FHLB Advances, the Bank had $174.4 million of unpledged
mortgage-backed securities at September 30, 1997. These unpledged
mortgage-backed securities could be used as collateral under reverse repurchase
transactions with various security dealers. Such borrowing transactions could
provide additional cash and liquidity to the Bank in the event of sudden or
unforeseen deposit withdrawals.
The Bank recognizes the maturity characteristics of its time deposit
portfolio. Management believes that unused FHLB advances and other borrowing
sources would provide sufficient funding for potential deposit withdrawals.
In addition to advances from the FHLB of Atlanta, the Bank has also
borrowed funds from Northwest Bank to fund its Employee Stock Ownership Plan. At
September 30, 1997, the Bank had $375,000 of that obligation outstanding, which
matures in December, 1998. At September 30, 1997, the Bank also had a $100,000
Note Payable relating to the purchase of land, which matures in January, 1998.
From time to time the Bank has also entered into sales of securities under
agreements to repurchase. At September 30, 1997 no such agreements were
outstanding.
91
<PAGE>
The following table sets forth information regarding the
Bank's borrowing at and for the periods indicated:
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
-------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Average Balance ........................................... $ 99,342 $ 75,096 $ 58,178
Maximum balance at any month-end .......................... 110,000 95,000 85,000
Balance at period end ..................................... 100,000 95,000 65,000
Weighted average interest rate during the period .......... 6.00% 6.12% 6.10%
Weighted average interest rate at period end .............. 6.00% 6.02% 6.10%
Other Borrowings:
Average Balance ........................................... $ 561 $ 857 $ 1,160
Maximum balance at any month-end .......................... 674 974 1,273
Balance at period end ..................................... 475 674 974
Weighted average interest rate during the period .......... 9.48% 9.47% 9.27%
Weighted average interest rate at period end .............. 7.12% 8.50% 9.00%
Total Borrowings:
Average Balance ........................................... $ 99,903 $ 75,953 $ 59,338
Maximum balance at any month-end .......................... 110,674 95,974 86,273
Balance at period end ..................................... 100,475 95,674 65,974
Weighted average interest rate during the period .......... 6.02% 6.15% 6.16%
Weighted average interest rate at period end .............. 6.01% 6.04% 6.14%
</TABLE>
92
<PAGE>
---------------
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 in which a federal association may directly engage.
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. serve as repositories of selected REO
properties held for disposition. See " -- Delinquent, Nonperforming and
Classified Assets."
The Bank also has inactive subsidiaries, one of which is discussed
below:
CFD, Inc. One of the Bank's wholly-owned subsidiaries is CFD, Inc. CFD,
Inc. is a Florida corporation which, in September 1991, filed a Chapter 7
bankruptcy in the Southern District of Florida. Until filing in the bankruptcy
court CFD, Inc. had been engaged in land development and sales of land using
land installment sale contracts. CFD, Inc. became a subsidiary of the Bank in
1985 as a result of the restructuring of certain nonperforming loans made by the
Bank to CFD, Inc. and the transfer of CFD, Inc. stock and other assets to the
Bank as a result of the restructuring of the debt.
CFD, Inc. began land development operations in Sebring, Florida and
Lake Placid, Florida in the early 1960's through a predecessor corporation,
Highlands County Title and Guaranty Land Company ("Highlands Guaranty"). At that
time it had no business relationship or affiliation with the Bank. Between 1983
and 1985, the Bank extended loans to CFD, Inc. which aggregated approximately
$20 million. The various loans to CFD, Inc. were subsequently consolidated into
a single loan and the Bank obtained a first mortgage on all land under
development.
The Bank assumed ownership of CFD, Inc. in 1985 as part of a
restructuring. CFD, Inc. filed for bankruptcy in September of 1991. The
bankruptcy process is still underway although it is nearing conclusion. All of
the assets of CFD, Inc. have been transferred to the bankruptcy trustee for
liquidation. In connection with the bankruptcy proceeding, the Bank is both a
secured and unsecured creditor of CFD, Inc. During the fiscal year 1996, the
Bank received a $150,000 distribution from the bankruptcy trustee. The Bank
believes that it is unlikely that it will recover any significant amounts at the
conclusion of the bankruptcy.
The State of Florida has administratively dissolved CFD, Inc..
93
<PAGE>
Competition
The Bank is headquartered in the City of Fort Pierce, Florida and has
22 branch offices located within six counties on Florida's east central coast.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and consumer loans.
The Bank's sources of deposits are primarily derived from St. Lucie,
Martin, Indian River, Brevard, Okeechobee and Volusia Counties. The six county
market area contains a population of approximately 1.3 million residents, and
includes a broad cross-section of demographic and economic characteristics. Like
the rest of the state of Florida, the region has experienced relatively strong
growth in recent years, with population growth well above national averages.
Sections of the market area contain concentrations of developed areas
(residential and industrial), agricultural areas (citrus and cattle), and
vacation/resort areas (along the coastline). The relatively rapid development
and strong population growth has resulted in relatively large increases in new
housing in recent years.
As of March 31, 1997, the Bank's market share of deposits within the
six counties totaled 6.12% while its largest competitor held 20.8%. During the
fiscal years ended September 30, 1995 and September 30, 1996, the Bank recorded
growth in total deposits. The Bank experienced deposit growth in all of its
market area counties except Okeechobee County. This growth amounted to a 12.9%
increase in deposits from September 30, 1994 to September 30, 1996. This
increase in deposits includes the acquisition of Treasure Coast Bank, F.S.B.
during June 1996, which added approximately $64 million to the Bank's overall
funding base. Excluding these acquired deposits, the Bank's deposits increased
at a rate of approximately 8% over this time period. However, the market will
undergo significant consolidation when the Bank's largest competitor merges with
one of the nation's largest financial institutions.
Most of the Bank's mortgages are secured by properties located within
its six county market, with a predominance of its lending in the one to four
family residential mortgages. The State of Florida has a substantial number of
financial institutions, many of which have a state-wide or regional presence,
and in some cases, a national presence, all of which are competitors of the Bank
to varying degrees. The Bank's competition for loans comes principally from
commercial banks, savings banks, savings and loan associations, credit unions,
mortgage banking companies and insurance companies. Its most direct competition
for deposits has historically come from commercial banks, savings bank, savings
and loan associations and credit unions, many of which are significantly larger
than the Bank and, therefore, have greater financial and marketing resources
than those of the Bank. The Bank faces additional competition for deposits from
short-term money market funds, other corporate and government securities funds
and from other financial institutions such as brokerage firms and insurance
companies.
94
<PAGE>
The Bank competes for loans primarily through the interest rates and
loan fees it charges, the types of loans it offers, and the efficiency and
quality of services it provides borrowers, real estate brokers, and builders.
Factors that affect competition include general and local economic conditions,
current interest rate levels and volatility of the mortgage markets. Based on
total assets, as of September 30, 1997, the Bank was the largest savings
institution headquartered in the six county area served by the Bank.
Employees
At September 30, 1997, the Bank had a total of 296 full-time employees
and 65 part-time employees, none of whom were represented by a collective
bargaining unit. The Bank considers its relations with its employees to be good.
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Properties
The Bank conducts its business from its headquarters in Fort Pierce and
through 22 branch offices. These offices are located in Brevard, Indian River,
Martin, Okeechobee, St. Lucie, and Volusia counties, Florida. The net book value
at September 30, 1997 of the Bank's offices was $11.2 million. The following
table sets forth information regarding the Bank'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 34982
PSL MAIN 1975 OWNED
7181 SOUTH U.S. #1
PORT ST. LUCIE, FL 34952
H.F. CENTER 1981 OWNED
2400 S.E. MIDPORT RD.
PORT ST. LUCIE, FL 34952
LAKEWOOD PARK 1981 OWNED
5100 TURNPIKE FEEDER RD.
FORT PIERCE, FL 34950
DARWIN SQUARE 1991 LEASED 11/30/97
3251 S.W. PSL BLVD.
PORT ST. LUCIE, FL 34953
ORANGE BLOSSOM 1984 OWNED
4156 OKEECHOBEE ROAD
FORT PIERCE, FL 34947
ST. LUCIE WEST 1993 OWNED
1376 S.W. ST. LUCIE WEST
BLVD.
PORT ST. LUCIE, FL 34986
INDIAN RIVER
- ------------
VERO MAIN 1978 OWNED
655 21st STREET
VERO BEACH, FL 32960
CAUSEWAY 1981 OWNED
1700 S.A1A
VERO BEACH, FL 32963
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Year Lease
Location Opened Owned/Leased Expiration Date
-------- ------ ------------ ---------------
INDIAN RIVER MALL 1997 OWNED
6080 20th STREET
VERO BEACH, FL 32966
SEBASTIAN 1979 OWNED
13397 U.S. HIGHWAY #1
SEBASTIAN, FL 32958
MARTIN COUNTY
- -------------
PALM CITY 1978 LEASED 07/26/05
1251 S.W. 27TH STREET
PALM CITY, FL 34990
EAST OCEAN 1981 OWNED
1500 E. OCEAN BLVD.
STUART, FL 34996
STUART MAIN 1996 LEASED 08/15/99
789 S. FEDERAL HWY.
STUART, FL 34994
BREVARD COUNTY
- --------------
PALM BAY 1981 OWNED
5245 BABCOCK ST., N.E.
PALM BAY, FL 32905
INDIALANTIC 1981 OWNED
305 5th AVENUE
INDIALANTIC, FL 32903
WEST MELBOURNE 1982 OWNED
2950 W. NEW HAVEN AVENUE
MELBOURNE, FL 32904
VIERA 1995 OWNED
100 CAPRON TRAIL
MELBOURNE, FL 32940
OKEECHOBEE COUNTY
- -----------------
OKEECHOBEE 1980 OWNED
2801 HIGHWAY #441 SOUTH
OKEECHOBEE, FL 34974
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Year Lease
Location Opened Owned/Leased Expiration Date
-------- ------ ------------ ---------------
VOLUSIA COUNTY
- --------------
NEW SMYRNA 1988 LEASED 9/30/99
REGIONAL SHOPPING CENTER
1940 STATE ROAD #44
NEW SMYRNA BEACH, FL 32069
PORT ORANGE 1983 OWNED
4035 NOVA ROAD
PORT ORANGE, FL 32127
ORMOND BEACH 1984 OWNED
75 N. NOVA ROAD
ORMOND BEACH, FL 32174
All leases are anticipated to renew upon their expiration.
The Bank uses a data processing service located in Orlando, Florida for
record keeping activities. The data processor specializes in servicing savings
associations. The Bank has used this company since 1969 with a current contract
that expires in 2000. All data processing equipment that is used internally by
the Bank is owned by the Bank. The net book value of such data processing
equipment and related software as of September 30, 1997 was $922,000.
Legal Proceedings
There are various claims and lawsuits in which the Bank is periodically
involved incident to the Bank's business. In the opinion of management, no
material loss is anticipated from any such pending claims or lawsuits. The most
significant of these lawsuits is described below.
Rolo v. General Development Corporation, et al., Case No. 90-4420. The
Bank and certain other entities are defendants in a class action lawsuit which
was filed in May, 1991. The case was filed in the District Court for the
District of New Jersey. The plaintiffs in the litigation are purchasers of
parcels of developed and undeveloped land from General Development Corporation
("GDC") who allege that GDC, through fraudulent means, induced them to buy land
at inflated values. The Bank is a defendant in this matter along with a number
of other financial institutions, purchasers of loans in the secondary market,
broker dealers, an insurance company and numerous other individuals and
companies. The involvement of the Bank arises from its purchase from GDC of land
sales contracts originated by GDC. The Bank, along with the other defendants,
filed a motion to dismiss the case which was granted. The plaintiffs filed an
appeal with the Third Circuit Court of Appeals which remanded the case to the
District Court for reconsideration. The District Court entered its order
dismissing the case again.
The plaintiffs filed a motion requesting the District Court to amend
the dismissal order to permit the plaintiffs to file another amended complaint.
The District Court denied the plaintiff's motion. The plaintiffs appealed that
order to the Third Circuit and both sides were directed to submit supplementary
briefs. Management believes that the position of the plaintiffs is without
merit. Management also believes that a negative outcome to the case, although
unlikely, would not have a material adverse effect on the Bank.
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REGULATION
General
The Bank is a federally chartered savings association, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Bank is a member
of the FHLB of Atlanta and is subject to certain limited regulation by the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board").
Bancorp, as the mid-tier holding company of the Bank, is also regulated by the
OTS. Specifically, the OTS has ruled that Bancorp has the same powers and
limitations as the Mutual Holding Company. After the Conversion and
Reorganization and, subject to OTS approval, Bancshares will become the savings
and loan holding company for the Bank. As the savings and loan holding company
of the Bank, will be subject to federal regulation and oversight. The purpose of
the regulation of Bancshares and other holding companies is to protect
subsidiary savings associations. The Bank is a member of the SAIF, which
together with the BIF are the two deposit insurance funds administered by the
FDIC, and the deposits of the Bank are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. Being subject to this authority, the Bank is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last OTS examination of the Bank was as of January 21, 1997.
When these examinations are conducted by the OTS and the FDIC, the examiners may
require Bancshares to provide for higher general or specific loan loss reserves.
All savings associations, including the Bank, are subject to a semi-annual
assessment, based upon their total assets, to fund the operations of the OTS.
The Bank's OTS assessment for the fiscal year ended September 30, 1997, was
$212,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank, Bancshares and the
Mutual Holding Company. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease-and-desist or
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removal orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws or regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the OTS.
Except under certain circumstances, public disclosure of final enforcement
actions by the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal law and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real estate property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings associations are also generally
authorized to branch nationwide. The Bank is in compliance with the noted
restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1997, the Bank's lending limit under this restriction was $14.1
million. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC insured institutions. It also
may prohibit any FDIC insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the SAIF or the BIF.
The FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
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capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6%, and a risk-based capital ratio of at least 10%), and considered
healthy, pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier I risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
In order to equalize the deposit insurance premium schedules for BIF
and SAIF insured institutions, the FDIC imposed a one-time special assessment on
all SAIF-assessable deposits pursuant to federal legislation passed on September
30, 1996. The Bank's special assessment, which was $4,552,000, was paid in
November 1996, but accrued as of September 30, 1996. Effective January 1, 1997,
the premium schedule for BIF and SAIF insured institutions ranged from 0 to 27
basis points. However, SAIF insured institutions are required to pay a Financing
Corporation (FICO) assessment, in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s, equal to 6.48 basis points for each $100
in domestic deposits, while BIF-insured institutions pay an assessment equal to
1.52 basis points for each $100 in domestic deposits. The assessment is expected
to be reduced to 2.43 basis points no later than January 1, 2000, when BIF
insured institutions fully participate in the assessment. These assessments,
which may be revised based upon the level of BIF and SAIF deposits will continue
until the bonds mature in the year 2017.
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Regulatory Capital Requirements
Federally insured savings associations, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement, and a risk-based capital requirement applicable
to such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total tangible assets (as defined by regulation). Tangible capital
generally includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks, or engaged in certain other activities solely as agent for
its customers, are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the Bank's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At September 30, 1997, the Bank had tangible capital of $82.3 million,
or 7.29% of total assets, which is approximately $65.3 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. On a pro
forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
Reorganization and investment of 50% of the net proceeds in assets not excluded
for tangible capital purposes, the Bank would have had tangible capital equal to
10.39%, 10.91%, and 11.43%, respectively, of adjusted total assets at September
30, 1997, which is $104.6 million, $111.6 million and $118.5 million,
respectively, above the requirement.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio.
At September 30, 1997, the Bank had core capital equal to $82.3
million, or 7.29% of adjusted total assets, which is $48.4 million above the
minimum leverage ratio requirement of 3% as in effect on that date. On a pro
forma
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basis, after giving effect to the sale of the minimum, midpoint and maximum
number of shares of Common Stock offered in the Conversion and Reorganization,
and investment of 50% of the net proceeds in assets not excluded from core
capital, the Bank would have had core capital equal to 10.39%, 10.91% and 11.43%
respectively, of adjusted total assets at September 30, 1997, which is $86.9
million, $93.8 million and $100.6 million, respectively, above the requirement.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts. The rule provides for a two
quarter lag between calculating interest rate risk and recognizing any deduction
from capital. The rule will not become effective until the OTS evaluates the
process by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed.
On September 30, 1997, the Bank had total capital of $89.7 million.
This amount was $42.4 million above the 8% requirement in effect on that date.
On a pro forma basis, after giving effect to the sale of the minimum, midpoint
and maximum number of shares of Common Stock offered in the Conversion and
Reorganization, the infusion to the Bank of 50% of the net Conversion and
Reorganization proceeds and the investment of those
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proceeds in 20% risk-weighted government securities, the Bank would have had
total capital of 21.55%, 22.66% and 23.77%, respectively, of risk-weighted
assets, which is above the current 8% requirement by $81.5 million, $88.5
million and $95.5 million, respectively.
Prompt Corrective Action. The OTS and the FDIC are authorized and,
under certain circumstances, required, to take certain actions against savings
association that fail to meet their capital requirements. The OTS is generally
required to take action to restrict the activities of an "undercapitalized
association" (generally defined to be one with less than either a 4% core
capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based
capital ratio). Any such association must submit a capital restoration plan and
until such plan is approved by the OTS may not increase its assets, acquire
another institution, establish a branch or engage in any new activities, and
generally may not make capital distributions. The OTS is authorized to impose
the additional restrictions that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of an association. An association that becomes "critically
undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those applicable
to significantly undercapitalized savings associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on its operations and profitability.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings association with
respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
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savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of an association would
be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. See "THE
CONVERSION AND REORGANIZATION -- Effects of the Conversion and Reorganization"
and "-- Certain Restrictions on Purchase or Transfer of Shares After the
Conversion and Reorganization."
The OTS utilizes a three-tiered approach to permit savings
associations, based on their capital level and supervisory condition, to make
capital distributions which include dividends, stock redemptions or repurchases,
cash-out mergers and other transactions charged to the capital account. See
"--Regulatory Capital Requirements."
Generally, Tier 1 savings associations, which are savings associations
that before and after the proposed distribution meet their current capital
requirements, may make capital distributions during any calendar year equal to
the greater of 100% of net income for the year-to-date plus 50% of the amount by
which the lesser of the association's tangible, core, or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, or the amount authorized for a
Tier 2 association. However, a Tier 1 association deemed to be in need of more
than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier I association and has not been notified of a need for more than
normal supervision. Tier 2 savings associations, which are savings associations
that before and after the proposed distribution meet their current minimum
capital requirements, may make capital distributions of up to 75% of net income
over the most recent four quarter period.
Tier 3 savings associations (which are savings associations that do not
meet current minimum capital requirements) that propose to make any capital
distribution and Tier 2 savings associations that propose to make a capital
distribution in excess of the noted safe harbor level must obtain OTS approval
prior to making such distribution. Tier 2 savings associations proposing to make
a capital distribution within the safe harbor provisions and Tier 1 savings
associations proposing to make any capital distribution need only submit written
notice to the OTS 30 days prior to such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns. A
savings association may not make a capital distribution without prior approval
of the OTS and the FDIC if it is undercapitalized before, or as a result of,
such a distribution. See "- Regulatory Capital Requirements."
Liquidity
All savings associations, including the Bank, are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Bank
includes in liquid assets, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
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Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings association. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the Bank's average daily
balance of net withdrawable deposit accounts and current borrowings. Penalties
may be imposed upon savings associations for violations of either liquid asset
ratio requirement. At September 30, 1997, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 14.92% and a short-term
liquid assets ratio of 5.94%.
Accounting
An OTS policy statement applicable to all savings association clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with GAAP. Under the policy
statement, management must support its classification of and accounting for
loans and securities (i.e., whether held for investment, sale, or trading) with
appropriate documentation. The Bank is in compliance with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including the Bank, are required to meet a
QTL test to avoid certain restrictions on their operations. This test requires a
savings association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code of 1986, as amended ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At September 30, 1997, the Bank met the test and has always met the
test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
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permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, such
an association is immediately ineligible to receive any new FHLB borrowings and
is subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See " -- Company Regulation." Recent changes in federal law have
provided savings associations with a broader array of lending activities that
will enable the Bank to continue to meet the QTL test but place more portfolio
assets in credit card loans, educational loans and commercial loans.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank.
An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
After the Conversion and Reorganization and merger, the federal banking
agencies, including the OTS, have recently revised the CRA regulations and the
methodology for determining an institution's compliance with the CRA. Due to the
heightened attention being given to the CRA in the past few years, the Bank may
be required to devote additional finds for investment and lending in its local
community. The Bank was last examined for CRA compliance on June 9, 1997. At
that time it was rated as having an "outstanding record of meeting community
credit needs."
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of the Bank include Bancshares, the Mutual
Holding Company and any company which is under common control with the Bank. In
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addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The OTS has the discretion to treat subsidiaries of savings
association as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Company Regulation
Upon completion of the Conversion and Reorganization and subject of OTS
approval, Bancshares will be a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, Bancshares is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over Bancshares and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If Bancshares acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of Bancshares and any of its
subsidiaries (other than the Bank or any other SAIF insured savings association)
would become subject to such restrictions unless such other savings associations
each qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "
- --Qualified Thrift Lender Test."
Bancshares must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
108
<PAGE>
Federal Securities Law
The stock of Bancshares is registered under the Securities and Exchange
Act of 1934 (the "Exchange Act") as administered by the Securities and Exchange
Commission ("SEC"). The stock of Bancorp is currently registered under the
Exchange Act. After the Conversion and Reorganization, the Common Stock of
Bancshares will be registered with the SEC under the Exchange Act. Bancshares
will continue to be subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange Act.
Common Stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of Bancshares may not be resold without
registration unless resold in accordance with certain resale restrictions.
Further, affiliates may not sell Common Stock (excluding Exchange Shares) for
one year following the Conversion and Reorganization. Thereafter, if Bancshares
meets specified current public information requirements, each affiliate of
Bancshares is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain noninterest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At September 30, 1997, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See " --Liquidity."
Savings association are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Atlanta, which is one of 12
regional FHLBs that provide collateralized borrowings (advances) to support the
home financing credit function of savings associations and other stockholder
members such as commercial banks and credit unions. Each FHLB serves as a
reserve or central bank for its members within its assigned region. Each is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. Each makes loans to members (i.e., advances) in accordance
with policies and procedures, established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
109
<PAGE>
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta. At September 30, 1997, the Bank had $7,595,000 in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five fiscal
years such dividends have averaged 6.48%, and were 7.25% for calendar year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings association and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low and moderate income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the year ended September 30, 1997, dividends paid by the FHLB of
Atlanta to the Bank totaled $536,000.
110
<PAGE>
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that met
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Code, are permitted to establish reserves for bad
debts and to make annual additions thereto which may, within specified formula
limits, be taken as a deduction in computing taxable income for federal income
tax purposes. The amount of the bad debt reserve deduction for "nonqualifying
loans" is computed under the experience method. The amount of the bad debt
reserve deduction for "qualifying real property loans" (generally loans secured
by improved real estate) could be computed under either the experience method or
the percentage of taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
Since 1987, the percentage of specially-computed taxable income that
was used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
savings association to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction). Under changes in federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995. Accordingly, this method will not be
available to the Bank for its tax years ending September 30, 1997, and
thereafter.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for qualifying real property loans to an amount equal to 6% of such
loans outstanding at the end of the taxable year, or the greater of (i) the
amount deductible under the experience method, or (ii) the amount which, when
added to the bad debt deduction for non-qualifying loans, equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits, and reserves at the beginning of the year.
Through September 30, 1996, the 6% and 12% limitations did not restrict the
percentage bad debt deduction available to the Bank.
The federal tax legislation enacted in August 1996 also imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Bank, the base-year reserves are the balances as of September
30, 1988. Recapture of the excess reserves will occur over a six-year period
which could begin for the Bank as early as the tax year ending September 30,
111
<PAGE>
1997 (commencement of the recapture period may be delayed, however, for up to
two years provided the Bank meets certain residential lending requirements).
This delay of the recapture is not available to the Bank if it converts to a
national bank. The Bank previously established, and will continue to maintain, a
deferred tax liability with respect to its federal tax bad debt reserves in
excess of the base-year balances; accordingly, the legislative changes will have
no effect on total income tax expense for financial reporting purposes.
Also, under the August 1996 legislation, the Bank's base-year federal
tax bad debt reserves are "frozen" and subject to current recapture only in very
limited circumstances. Generally, recapture of all or a portion of the base-year
reserves will be required if the Bank pays a dividend in excess of the greater
of its current or accumulated earnings and profits, redeems any of its stock, or
is liquidated. The Bank has not established a deferred federal tax liability
under SFAS No. 109 for its base-year federal tax bad debt reserves, as it does
not anticipate engaging in any of the transactions that would cause such
reserves to be recaptured.
In addition to the regular income tax, corporations, including savings
association such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings association such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
The Bank files federal income tax returns on a fiscal year basis using
the accrual method of accounting.
The Bank was recently notified by the IRS that its September 30, 1995
federal tax return would be examined. In the opinion of management, the
examination of still open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of the Bank.
Florida Taxation. Under the laws of the state of Florida, Bancorp and
its subsidiaries are subject generally to a 5.5% tax on net income. The tax may
be reduced by credit of up to 65% of the tax due as a result of certain
intangible taxes.
112
<PAGE>
MANAGEMENT OF HARBOR FLORIDA BANCSHARES
Directors and Executive Officers
The Board of Directors of Bancshares consists of the same individuals
who are the current members of the Board of Directors of the Bank. Upon the
completion of the Conversion and Reorganization, the directors of Bancorp will
become directors of Bancshares. See "MANAGEMENT OF THE BANK -- Directors." Each
director of Bancorp has served since its incorporation in November of 1997. The
directors of Bancorp serve three year staggered terms so approximately one third
of the directors are elected at each annual meeting of the stockholders. The
terms of the current directors of Bancorp and those of Bancshares, upon
completion of the Conversion and Reorganization, are the same as their terms as
directors of the Bank. Bancshares does not intend to pay its directors a fee for
participation on the Board of Directors of Bancshares.
The executive officers of Bancshares will be elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors of Bancshares. The
executive officers of Bancshares are also the executive officers of the Bank. It
is not anticipated that the executive officers of Bancshares receive any
renumeration in their capacity as Bancshares executive officers, nor do they
currently receive renumeration as officers of Bancorp. For information regarding
compensation of directors and executive officers of the Bank, see "MANAGEMENT OF
THE BANK."
MANAGEMENT OF THE BANK
Directors
The direction and control of the Bank is vested in the Bank's Board of
Directors. The Board of Directors currently consists of seven directors. The
directors are divided into three classes. Approximately one third of the
directors are elected at each annual meeting of stockholders. Because Bancorp
currently owns all of the issued and outstanding shares of the Bank, it, through
its directors, elects directors of the Bank. This will continue after the
Conversion and Reorganization after Bancorp ceases to exist and Bancshares owns
all of the issued and outstanding shares of the Bank.
113
<PAGE>
The following table sets forth certain information, as of September 30,
1997, with respect to each director of the Bank.
Director of the New or Current
Name Age Bank Since Term to Expire(*)
---- --- ---------- -----------------
Bruce R. Abernethy, Sr ......... 62 1983 1999
Richard N. Bird ................ 56 1997 2000
Michael J. Brown, Sr ........... 56 1977 1998
Richard K. Davis ............... 67 1978 2000
Edward G. Enns ................. 64 1977 1999
Frank H. Fee, III .............. 54 1987 2000
Richard B. Hellstrom ........... 61 1988 1998
- --------------------
(*) All terms expire on the date of the Annual Meeting.
The principal occupation for the last five years for each director of
the Bank is set forth below.
Bruce R. Abernethy, Sr. Mr. Abernethy was elected to the Board in 1983.
He served as Executive Vice President of the Fort
Pierce/St. Lucie County Chamber of Commerce from May
1991 to May 1993. Prior to that Mr. Abernethy was
operations manager for the Southern Bell Telephone
Company. He currently resides in St. Lucie County,
Florida, and is retired.
Richard N. Bird Mr. Bird is President and principal broker of Bird
Realty broker of Bird Realty Group, Inc., a real estate
brokerage firm specializing in commercial real estate
in Indian River County. He is recently retired from
elected office after serving sixteen years on the
Indian River County Commission. Mr. Bird assisted
Harbor Federal in forming the Indian River County
Advisory Board and served as a member of that Board in
1996. He conducts his business in Indian River County,
Florida.
Michael J. Brown, Sr. Mr. Brown has served as President and Chief Executive
Officer of Harbor Federal since 1976. He was elected to
the Board in 1977. Prior to joining Harbor Federal, Mr.
Brown was the Chief Financial Officer at University
Federal Savings in Coral Gables, Florida and Prudential
Savings in Clayton, Missouri. Mr. Brown has served as
president of the Chamber of Commerce and the Rotary
Club. He has also been a member of the Federal Home
Loan Mortgage Corporation Advisory Board.
114
<PAGE>
Richard K. Davis Mr. Davis has served on the Board of Directors since
1978. He is Chairman of Richard K. Davis Construction
Corp., located in St. Lucie County, Florida.
Edward G. Enns Mr. Enns has served as a Director since 1977. He is
the owner of the Enns Agency, a property and casualty
insurance agency located in Fort Pierce, Florida. Mr.
Enns is a licensed real estate sales agent. He is a
former County Commission Chairman of St. Lucie County,
Florida, and presently serves as mayor of the city of
Fort Pierce.
Frank H. Fee, III Mr. Fee has served as a Director since 1987. He
is an attorney and 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 located in Fort Pierce, Florida. Mr.
Fee is also President of Treasure Coast Abstract &
Title Insurance Company, an abstracting and title
insuring agent firm, and is in the business of citrus
and cattle production.
Richard B. Hellstrom Mr. Hellstrom has been a Director since 1988. He is
shareholder and President of Lindahl, Browning, Ferrari
& Hellstrom, Inc., a firm specializing in civil,
environmental and agricultural engineering. He conducts
his business in St. Lucie County, Florida.
115
<PAGE>
Executive Officers Who Are Not Directors
The following executive officers do not serve on the Board of
Directors. Apart from the Change in Control Agreements to be entered into upon
consummation of the Conversion and Reorganization, there are no other
arrangements or understandings between the Bank or Bancshares and any persons
pursuant to which such person serves as an executive officer. Except as
otherwise noted, they have been employed by the Bank for the last five years.
Don W. Bebber Mr. Bebber is a Senior Vice President and Chief
Financial Officer. He began working for the Bank in
1982 as Controller and as Treasurer in 1986. He assumed
his present position in 1990.
Robert W. Bluestone Mr. Bluestone has been Senior Vice President for Retail
Banking since 1988. Prior to that he worked for the
Bank as Assistant Vice President beginning in 1976, as
Vice President of Savings and Marketing in 1978, and as
Senior Vice President of Retail Banking in 1981 until
he assumed his present position.
Albert L. Fort Mr. Fort is Senior Vice President of Marketing and
Operations. Since joining the Bank in 1983, Mr. Fort
has also served as Vice President of Savings and Vice
President of Savings/Marketing. Before joining the
Bank, Mr. Fort held positions with two other savings
associations.
David C. Hankle Mr. Hankle is currently Senior Vice President of Credit
Administration and Commercial Lending and has held that
position since 1989. Prior to this he served as Senior
Vice President for Banking from 1985 to 1989.
116
<PAGE>
Board Meetings and Committees
The Board of Directors meets twice a month and may have additional
special meetings. During the year ended September 30, 1997, the Board met 26
times. All Directors who served as directors during the fiscal year ended
September 30, 1997 attended at least 75% of Board meetings. All committee
members attended at least 75% of the meetings of their respective committees.
The standing committees include the following:
Audit Committee. The Audit Committee met three times during the fiscal
year ended September 30, 1997. The Audit Committee reviews the internal audit
department of the Bank as well as selecting the independent auditors for the
Bank. It also has oversight of the Bank's internal control structure and
financial reporting as well as review of the Bank's annual audit plan. This
committee currently consists of Messrs. Bird, Davis, and Fee.
Nominating Committee. The Nominating Committee nominates candidates for
vacancies for the office of director. The Committee met once in fiscal 1997 and
consists of Messrs. Enns, Abernethy, Bird, Hellstrom and Brown.
Compensation Committee. The Compensation Committee met four (4) times
in fiscal 1997. It reviews and discusses employee performance and prepares
recommendations for annual salary adjustments and bonuses. The Committee also
administers Bancorp's and the Bank's stock benefit plans. This committee
consists of Messrs. Abernethy, Enns, and Hellstrom.
Directors' Fees
Directors of the Bank receive a monthly fee of $1,750 for serving on
the Board. Directors Abernethy, Davis and Fee defer their compensation through
the Bank's Directors' Deferred Compensation Plan. In addition, each Director is
covered by a Group Accident and Travel Plan at a cost of $290 per year per
Director. The Chairman of the Board, Edward G. Enns, receives an additional $435
per month and the Vice-Chairman, Bruce R. Abernethy, Sr., receives an additional
$200 per month. The Chairman and Vice-Chairman devote approximately 10% and 8%,
respectively, of their professional time to the affairs of the Bank. President
Brown receives no fees for serving on the Board of Directors.
117
<PAGE>
Director Retirement Plan
The Bank has established a Director Retirement Plan. Under this plan,
non-employee directors who served on the Board of Directors for ten (10) years
and have attained the age of 65 are entitled to receive annually until death a
payment upon retirement equal to 2 1/2% of the average of the annual Board fee
paid such directors for the last three years of service multiplied by his years
of Board services (not to exceed 50% of the three year average fee). In 1996,
the Board discontinued this plan on a prospective basis. Directors who were
elected to the Board after 1996, such as Richard N. Bird, are not eligible to
participate in this plan.
Directors' Unfunded Deferred Compensation Plan
The Unfunded Deferred Compensation Plan for the Directors of the Bank
(the "Directors' Deferred Compensation Plan") provides that a director of the
Bank may elect to defer all or part of his annual director fees to fund the
Directors' Deferred Compensation Plan. The plan also 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. Amounts deferred under the
Directors' Deferred Compensation Plan are 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: (i) ceases to be a
director; or (ii) attains the age of 65, having been a participant in the
Directors' Deferred Compensation Plan for a minimum of five years; or (iii)
terminates his participation in the plan. The Directors' Deferred Compensation
Plan also provides methods of distribution in the event of the death of the
participant as well as retirement or removal from the Board of the Bank. As of
October 31, 1997, the Directors' Deferred Compensation Plan held 21,350, 22,900,
and 16,200 shares of Bancorp Stock for Messrs. Abernethy, Davis and Fee,
respectively. These shares were acquired by the Plan utilizing deferred annual
director fees of Messrs. Abernethy, Davis and Fee.
Executive Compensation
The following table sets forth the compensation paid to Mr. Michael J.
Brown, Sr., President and Chief Executive Officer, Robert W. Bluestone, Senior
Vice President - Retail Banking, David C. Hankle, Senior Vice President - Credit
Administration/Commercial Lending, Don W. Bebber, Senior Vice President and
Chief Financial Officer, and Albert L. Fort, Senior Vice President -
Marketing/Operations. No other executive officer of the Bank served as President
or earned a total salary and bonus in excess of $100,000 during these three
fiscal years.
118
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------- -----------------------------------------
Restricted All Other
Name and Stock Compensaton
Principal Position Year(1) Salary($) Bonus($) Awards($) Options(#) ($)(2)
------------------ ------- --------- -------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Brown, Sr 1997 $250,057 $ 23,804 $ 0 3,000 $127,709
President 1996 235,550 22,260 0 2,000 98,996
1995 220,833 25,440 0 0 55,453
Robert W. Bluestone 1997 $127,083 $ 12,250 $ 0 0 $ 8,375
Senior Vice President- 1996 121,717 11,780 0 500 10,510
Retail Banking 1995 116,950 11,270 0 0 10,347
David C. Hankle 1997 $126,083 $12,150 $ 0 0 $ 11,852
Senior Vice President- 1996 120,717 11,680 0 500 14,194
Credit Administration/ 1995 115,967 11,180 0 0 14,387
Commercial Lending
Don W. Bebber 1997 $110,333 $ 10,450 $ 0 0 $ 9,162
Senior Vice President- 1996 102,917 9,500 0 500 11,033
Chief Financial Officer 1995 92,500 16,000 0 0 11,047
Albert L. Fort 1997 $100,283 $ 9,670 $ 0 0 $ 10,218
Senior Vice President- 1996 96,392 9,485 0 500 12,286
Marketing/Operations 1995 94,242 9,120 0 0 13,514
</TABLE>
- ---------------
(1) The Bank's fiscal year ends September 30.
(2) For fiscal 1997 consists of insurance payments of $6,113, $2,536, $4,155,
$4,173 and $4,082 and contributions to the Bank's Employee Stock Ownership
Plan in the equivalent amount of $6,478, $5,839, $5,792, $4,989 and $4,669
for Messrs. Brown, Bluestone, Hankle, Bebber and Fort, respectively.
Additionally, the Bank contributed $2,018, $1,905 and $1,467 to Messrs.
Brown, Hankle and Fort, respectively, pursuant to the Bank's 401(k) Profit
Sharing Plan and Trust. The Bank also contributed $113,100 to fund Mr.
Brown's Supplemental Executive Retirement Plan. Other personal benefits
provided by the Bank have not been listed. The aggregate amount of such
benefits does not exceed the lesser of $50,000, or 10% of each named
executive officers' cash compensation.
119
<PAGE>
Option Grants in Last Fiscal Year. The following table provides
information on option grants in fiscal 1997 to Mr. Brown. No other executive
officer received option grants during fiacal 1997:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annualized Rates of
Stock Price
Appreciation
Individual Grants for Option Term(1)
-------------------------------------------------------- -----------------------
% of Total
Options
Number of Granted to Exercisable
Date of Options Employees in Price Per Expiration
Name Grant(2) Granted Fiscal Year Share(3) Date 5% 10%
---- ------- ------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Michael J. Brown, Sr. 1/6/97 3,000 66.67% $34.00 1/6/07 $ 64,140 $162,570
</TABLE>
- --------
(1) "Potential Realized Value" is disclosed in response to the Securities and
Exchange commission rules which require such disclosure for illustration
purposes and is based on the difference between the potential market value
of shares issuable upon exercise of such options and the exercise price of
such options. The values disclosed are not intended to be, and should not
be interpreted by stockholders as, representations or projections of future
value of Bancorp's Common Stock or Bancshares' Common Stock or of the stock
price. To lend perspective to the illustrative potential realized value, if
Bancorp's stock price increased 5% per year for ten years from its closing
price on Monday, January 6, 1997, $34.00 per share, (disregarding dividends
and assuming for purposes of the calculation a constant number of shares
outstanding) the stock price at the end of ten years would be $55.38 per
share for an increase of $21.38 per share; and if the stock increased 10%
per year over such period, the ending stock price would be $88.19 per share
for an increase of $54.19 per share. At January __, 1998, the date of this
Prospectus, the closing price of Bancorp's Common Stock was
_____________.
(2) 2,910 of the options granted on January 6, 1997, first become exercisable
on January 6, 2002. The remaining 90 options first become exercisable on
January 6, 2003.
(3) The exercise price is equal to the closing price on Monday, January 6,
1997, or $34.00 per share.
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<PAGE>
-----------------------
Aggregate Option Exercises and Year-End Option Values. The following
table sets forth the number of shares acquired on the exercise of stock options
and the aggregate gains realized on the exercise during fiscal 1997 by Messrs.
Brown, Bebber, Bluestone, Fort and Hankle. The table also sets forth the number
of shares covered by exercisable and unexercisable options held by the named
individuals on September 30, 1997, and the aggregate gains that would have been
realized had these options been exercised on September 30, 1997, even though
these options were not exercised, and the unexercised options could not have
been exercised, on September 30, 1997.
<TABLE>
<CAPTION>
Shares Acquired
On Exercise Number of Shares Value of Unexercised
During Fiscal Value Covered by Unexercised In-The-Money
Name 1997 Realized(1) Options on 9/30/97 Options As Of 9/30/97(2)
---- ---- ----------- ------------------------------- -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Brown, Sr ..... 4,000 $106,000 22,000 22,800 $1,232,000 $1,164,800
Don W. Bebber ............ 0 0 3,176 5,276 177,856 295,456
Robert W. Bluestone ...... 2,388 57,312 0 5,276 0 295,456
Albert L. Fort ........... 2,388 82,983 0 5,276 0 295,456
David C. Hankle .......... 1,000 26,500 4,664 5,276 261,184 295,456
</TABLE>
- ----------
(1) Equals the difference between the aggregate exercise price of the options
exercised and the aggregate fair market value of the common stock received
upon exercise computed using the price of the last sale of the common stock
on the exercise date, as quoted on the Nasdaq National Market. All options
exercised had an exercise price of $10.00 per share. Mr. Brown exercised
4,000 options on April 21, 1997, when the market price of the common stock
was $36.50 per share. Mr. Bluestone exercised 2,388 options on January 6,
1997, when the market price of the common stock was $34.00 per share. Mr.
Fort exercised 2,388 options on July 24, 1997, when the market price of the
common stock was $44.75 per share. Mr. Hankle exercised 1,000 options on
April 15, 1997, when the market price of the common stock was $36.50 per
share.
(2) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the common stock that will be
received upon exercise, assuming such exercise occurred on Tuesday,
September 30, 1997, at which date the last sale of the common stock as
quoted on the Nasdaq National Market was at $56.00 per share.
121
<PAGE>
--------------------
Employee Stock Ownership Plan. In 1994, the Bank established the ESOP
in connection with the MHC Reorganization for employees age 21 or older who have
at least one year of credited service with the Bank. Following the creation of
Bancorp, investments in the Bank's common stock by the ESOP were exchanged for
Bancorp Shares.
In January 1994, the ESOP borrowed $1,498,000 from an unaffiliated
lender to purchase 149,800 shares of Bank common stock issued in the MHC
Reorganization. Upon consummation of the Conversion and Reorganization, the
Bancorp Shares held by the ESOP will be increased pursuant to the Exchange.
The ESOP is administered by an unaffiliated corporate trustee in
conjunction with the Compensation Committee of the Board (the "Committee"). The
ESOP trustee must vote all allocated shares held by the ESOP in accordance with
the instructions of participating employees. Shares for which employees do not
give instructions will be voted by the ESOP trustee.
As part of the Conversion and Reorganization, it is anticipated that
ESOP will borrow funds from Bancshares to purchase up to 8.0% of the Common
Stock issued in the Conversion and Reorganization through the exercise of
subscription rights under the Plan of Conversion and Reorganization. It is
anticipated that such loan will equal 100% of the aggregate purchase price of
Conversion Stock purchased by the ESOP and will be at a fixed interest rate at
the prevailing prime rate at the time the loan is made for a term of fifteen
years. Collateral for the loan will be Conversion Stock purchased by the ESOP.
See "PRO FORMA DATA."
GAAP requires that any third party borrowing by the ESOP be reflected
as a liability on Bancshares' statement of financial condition. Since the ESOP
is borrowing from Bancshares, such obligation is eliminated in consolidation.
However, the cost of unallocated shares are treated as a reduction of
shareholders' equity. However, should the ESOP purchase new shares of Common
Stock from Bancshares, per share shareholders' equity and per share net earnings
would decrease because of the increase in the number of outstanding shares.
Common stock purchased by the ESOP with the proceeds of the loan are
held in a loan suspense account and returned on a prorated basis as debt service
payments are made. Discretionary contributions to the ESOP and shares released
from the suspense account will be allocated among ESOP participants on the basis
of participants' compensation as it relates to total participant compensation.
Employees are fully vested upon completion of five years of service. Credit that
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is given for past service will be reallocated among remaining participating
employees and may reduce the amount contributed to the ESOP. Benefits may be
payable upon retirement, early retirement, disability, death or separation from
service.
The ESOP is subject to the requirements of ERISA and the regulation of
IRS and the Department of Labor.
Other Stock Benefit Plans. Bancshares intends to adopt certain stock
benefit plans following consummation of the Conversion and Reorganization.
Moreover, existing stock benefit plans of the Bank will be continued after the
Conversion and Reorganization with the effect that shares of Common Stock will
be issuable pursuant thereto.
Stock Option Plan. The Board of Directors of Bancshares currently
intends to adopt the Stock Option Plan (the "1998 Plan") and may submit the 1998
Plan to stockholders at an annual or special meeting of stockholders to be held
at least six months following the consummation of the Conversion and
Reorganization.
The 1998 Plan will be designed to attract and retain qualified
personnel in key positions, provide directors, officers and key employees with a
proprietary interest in Bancshares as an incentive to contribute to the success
of Bancshares, and reward key employees for outstanding performance and the
attainment of targeted goals. Options granted under the 1998 Plan may be either
options that qualify under the Code as "incentive stock options" (options that
afford preferable tax treatment to recipients upon compliance with certain
restrictions and that do not normally result in tax deductions to the employer),
or options that do not so qualify. The exercise price of stock options granted
under the 1998 Plan is required to be a least equal to the fair market value per
share of the stock on the date of grant. All grants will be made in
consideration of past and future services rendered to the Bank, and in an amount
deemed appropriate to encourage the continued retention of the officers and
directors who are considered necessary for the continued success of the Bank.
The 1998 Plan may provide for the grant of stock appreciation rights
("SARs") at any time, whether or not the participant then holds stock options,
granting the right to receive the excess of the market value of the shares
represented by the SARs on the date exercised over the exercise price. SARs
generally will be subject to the same terms and conditions and exercisable to
the same extent as stock options. In addition, SARs generally result in greater
expense to a company's income statement than do options, accounted for under the
intrinsic value method, that are issued at the then-current market value.
Limited SARs may be granted at the time of, and must be related to, the
grant of a stock option or SAR. The exercise of one will reduce to that extent
the number of shares represented by the other. Limited SARs will be exercisable
only for the 45 days following the expiration of the tender or exchange offer,
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during which period the related stock option or SAR will be exercisable.
However, no SAR or Limited SAR will be exercisable by a 10% beneficial owner,
director or senior officer within six months of the date of its grant.
Bancshares has no present intention to grant any SARs or Limited SARs.
The 1998 Plan will be administered the Bancshares' Compensation
Committee which will consist of at least two non-employee directors. The
Bancshares' Compensation Committee will select the recipients and terms of
awards made pursuant to the 1998 Plan. Assuming the 1998 Plan is submitted to
stockholders prior to one year following the consummation of the Conversion and
Reorganization, OTS regulations limited the amount of shares that may be awarded
pursuant to such stock-based plans to each individual officer, each non-employee
director, and all non-employee directors as a group to 25%, 5%, and 30%,
respectively, of the total shares reserved for issuance under each such
stock-based plan. In addition, all options would be required to vest in five
equal annual installments, commencing one year from the date of grant, subject
to the continued service of the holder of such option.
The 1998 Plan is intended to be funded either with shares purchased in
the open market or with authorized but unissued shares of Common Stock. The use
of authorized but unissued shares to fund the 1998 Plan could dilute the
holdings of stockholders who purchase Conversion Stock in the Offerings. See
"PRO FORMA DATA."
Recognition Plan. Bancshares intends to establish the Recognition Plan
in order to provide employees and non-employee directors with a proprietary
interest in Bancshares in a manner designed to encourage such persons to remain
with Bancshares and the Bank. The Recognition Plan may be subject to
ratification by stockholders at a meeting to be held not earlier than six months
after the completion of the Conversion and Reorganization. Bancshares will
contribute funds to the Recognition Plan to enable it to acquire in the open
market or from authorized but unissued shares (with the decision between open
market or authorized but unissued shares based on the Bancshares future stock
price, alternative investment opportunities and capital needs), following
stockholder ratification of such plan, an amount of stock equal to 4.0% of the
shares of Conversion Stock issued in the Conversion and Reorganization.
The Compensation Committee of the Board of Directors (the "Compensation
Committee" of Bancshares will administer the proposed Recognition Plan. Under
the anticipated terms of the proposed Recognition Plan, awards ("Awards") can be
granted to key employees and non-employee directors in the form of shares of
Common Stock held by the Recognition Plan. Awards are non-transferable and
non-assignable. In the event the Recognition Plan is submitted to a vote of
stockholders prior to one year following consummation of the Conversion and
Reorganization, OTS regulations limit the amount of shares that may be awarded
pursuant to such stock-based plans to each individual officer, each non-employee
director and all non-employee directors as a group to 25%, 5% and 30%,
respectively, of the total shares reserved for issuance under each such
stock-based plan.
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Pension Plan. The Bank provides a noncontributory, defined benefit
pension plan through the Financial Institutions Retirement Fund of White Plains,
New York (the "Pension Plan") which covers all salaried employees who have one
year of service with Harbor Federal and have attained twenty-one years of age.
An employee is 100% vested in the Pension Plan when he/she completes five years
of employment at the Bank. Employees who reach the age of sixty-five (65) are
also 100% vested in the Pension Plan, regardless of completed years of
employment.
The following table illustrates the annual pension benefits at age 65
under the most advantageous plan provisions available at various levels of
average annual salary and years of service.
<TABLE>
<CAPTION>
Average
Salary 5 10 15 20 25 30 35
-------- ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 20,000 $ 2,000 $ 4,000 $ 6,000 $ 8,000 $ 10,000 $ 12,000 $ 14,000
$ 40,000 $ 4,000 $ 8,000 $12,000 $16,000 $ 20,000 $ 24,000 $ 28,000
$ 60,000 $ 6,000 $12,000 $18,000 $24,000 $ 30,000 $ 36,000 $ 42,000
$ 80,000 $ 8,000 $16,000 $24,000 $32,000 $ 40,000 $ 48,000 $ 56,000
$100,000 $10,000 $20,000 $30,000 $40,000 $ 50,000 $ 60,000 $ 70,000
$125,000 $12,500 $25,000 $37,500 $50,000 $ 62,500 $ 75,000 $ 87,500
$150,000 $15,000 $30,000 $45,000 $60,000 $ 75,000 $ 90,000 $105,000
</TABLE>
Normal retirement benefits under the Pension Plan are based on
retirement at or after age sixty-five (65), with the amount of the benefit
dependent on years of service as well as average annual salary for the five (5)
consecutive years of highest salary during service. However, the maximum annual
compensation which may be taken into account under the Internal Revenue Code of
1986, as amended, for calculating contributions under qualified defined benefit
plans is currently $150,000.
As of September 30, 1997, Messrs. Brown, , Bebber, Bluestone, Fort and
Hankle have 21, 21, 19, 13 and 11 credited years of service, respectively, under
the Pension Plan. All benefits are computed as a straight-life annuity and are
not subject to deduction for Social Security.
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Supplemental Executive Retirement Program. On September 13, 1995, the
Board of Directors approved a Supplemental Executive Retirement Plan ("SERP")
for President Brown. The SERP became effective on that date. The SERP will pay
Mr. Brown an annual retirement benefit at age 65 of 75% of his final five year
average earnings, less the amount payable from the Pension Plan and less the
amount expected to be paid as a Social Security benefit. The SERP benefit will
accrue evenly over Mr. Brown's career so that if Mr. Brown retires or otherwise
terminates his employment before attaining age 65, his benefit will be reduced
on a pro rata basis. In addition, if Mr. Brown receives his benefit before age
65, such benefit will be subject to a reduction of 3% multiplied by the number
of years prior to age 65 that his benefit commences. The SERP is administered by
the Compensation Committee. Payments by Harbor Federal to fund the SERP were
$113,100 in fiscal 1997.
Employment Agreement. The Board of Directors entered into a three-year
employment agreement with President Brown effective January 6, 1994. On November
27, 1996, the Board voted to approve an extension of this agreement effective
January 6, 1997, with a new initial term to continue through January 6, 2000.
During the term of the agreement, Mr. Brown's salary is equal to the initial
salary plus any increases which the Board of Directors may authorize from time
to time. The agreement also provides for reimbursement of reasonable business
expenses, participation in the employee benefit programs of Harbor Federal and
in certain other perquisites.
In the event the Bank terminates President Brown's employment without
cause, he will receive a severance payment equal to his salary, and will
continue to participate in the employee benefit programs of the Bank, for the
balance of the term of the agreement. Mr. Brown's agreement with the Bank also
provides for certain payments in the event of a change of control under the Bank
Change in Control Act of 1978, a merger or consolidation, voluntary dissolution,
or transfer of all of the Bank's of Bancshares' assets and liabilities. The
employment agreement, while not specifically excluding from its coverage the
events encompassed by the Conversion and Reorganization, has been interpreted by
the Board of Directors and Mr. Brown as excluding these events. Accordingly, the
Conversion and Reorganization would not provide Mr. Brown with any of the
benefits which would normally be available to him in the event that Bancshares
or the Bank was acquired by an unaffiliated third party acquiror. Should one of
these events occur, the Bank's agreement with Mr. Brown would be assumed by any
acquiring or merging entity. Further, in the one-year period following one of
these events, the agreement provides Mr. Brown with certain protection against
termination other than for cause and against a material diminution in his duties
or reporting responsibilities under the presumption that such a change would
amount to an involuntary termination of President Brown's employment with the
Bank. Should one of the enumerated events occur, Mr. Brown would be entitled to
a severance
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benefit of three times his base salary plus the amount of bonuses received
during the twelve month period preceding the involuntary termination plus the
cost of all benefits which Mr. Brown was entitled to in the twelve-month period
preceding the involuntary termination, plus, at his election, the excess of the
fair value of shares subject to options held by him over their exercise price,
which would then be cancelled. Total amounts paid to Mr. Brown under this
provision of the agreement with the Bank will not exceed an amount which is $100
less than three times the base amount paid to Mr. Brown as the term "base
amount" is defined in Section 280G(b)(3) of the Internal Revenue Code of 1986.
Any payments under the agreement are also conditioned upon their conformity with
the "golden parachute" provisions of Section 18(k) of the FDI Act. Under the
employment agreement of Mr. Brown, the events set forth in the Plan of
Reorganization are not deemed events which would require payments to Mr. Brown,
and would not be affected by the Plan of Reorganization.
Change In Control Agreements. Upon consummation of the Conversion and
Reorganization, Bancshares will enter into Change in Control Agreements with
each of Messrs. Bluestone, Bebber, Hankle and Fort. These agreements will
provide that, should the officer be terminated by Bancshares or the Bank within
one year following a change in control of Bancshares or the Bank (other than
termination for cause as defined these agreements), he will receive one year's
salary and continue to participate in the employee benefit programs of
Bancshares and the Bank for three months following his termination. The
aggregate payments under these agreements, presuming a termination not for
cause, are dependent upon the employees' salary and level of benefits at the
time of a change in control. If all four (4) senior vice presidents were
terminated not for cause during fiscal 1998, the total payment would be
$467,500. These agreements will have an initial three year term and may be
extended by the Board of Directors.
Certain Transactions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") requires that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with the general public and must not involve
more than the normal risk of repayment or present other unfavorable features. In
addition, loans made to a director or an executive officer that exceeded, in the
aggregate, an amount equal to the greater of $25,000 or 5% of the Bank's capital
and surplus, or in any event $500,000, must be approved in advance by a majority
of the disinterested members of the Board of Directors.
Frank H. Fee, III, a director of Bancorp and the Bank, is also a
director, stockholder and the President of the law firm of Fee & Koblegard, P.A.
which does business under the registered firm name of Fee, Koblegard & DeRoss.
In the year ended September 30, 1997, the Bank paid this firm approximately
$150,000 in monthly retainers and extraordinary fees for general legal services.
Richard K. Davis, a director of the Bank and Bancorp, is also chairman
of Richard K. Davis Construction Corp. In the year ended September 30, 1997, the
Bank paid this firm a total of $27,057 for a roof on a new branch facility and
re-roofing of an existing branch facilities. Additionally, Richard K. Davis
Construction Corporation is currently constructing a new office and drive-in
facility for the Bank. This contract, worth $905,499, was awarded on June 25,
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1997. The contract was put out for competitive bid. The contract was awarded to
Richard K. Davis Construction Corporation because it submitted the lowest bid
for the contract. During 1997, total payments related to this contract were
$216,795.
Prior to Richard N. Bird's nomination, and subsequent election, to the
Board of Directors of the Bank and Bancorp, Bird Realty Group, Inc. entered into
a listing agreement with the Bank on property known as St. Lucie Crossroads. The
listing agreement, which expires December 16, 1997, provides for a 3%
commission. The total listing price is $3,895,000. The commission could be up to
6% of the selling price if Bird Realty also becomes the selling broker. A
commission of $25,000 was paid to Bird Realty in April, 1997 with regard to the
sale of property known as the "Route 60" parcel. The listing agent was Laurel
Agency, Inc.
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee consists of Directors Abernethy, Enns, and Hellstrom,
none of whom have ever been an officer or employee of the Bank or Bancorp. None
of the above are members of a compensation committee of the Board of Directors
of any company other than Bancorp and the Bank.
Section 16(a) Beneficial Ownership Reporting Compliances
To the knowledge of the Board and based upon a review of Forms 3 and 4
and amendments thereto furnished to the Bank pursuant to Rule 16a-3(e) during
the fiscal year ended September 30, 1997, no person who is a director, officer
or beneficial owner of 10% of Bancorp Common Stock failed to file on a timely
basis reports required by Section 16(a) of the Securities Exchange Act.
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BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information as of October 31, l997, with
respect to ownership of Bancorp's Common Stock by: (i) Harbor Financial, M.H.C.;
(ii) the Bank's Employee Stock Ownership Plan; (iii) the executive officers and
directors of the Bank; and (iv) all the directors and executive officers of the
Bank as a group. The Boards of Directors of the Mutual Holding Company, Bancorp
and Bancshares, as well as both the companies' executive officers, are identical
to those of the Bank. Except for those listed below, and based on the absence of
any filings under Regulation 13D-G with the Securities and Exchange Commission,
the Bank has no knowledge of any person (including any "group" as that term is
used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) who
owns beneficially more than 5% of the Common Stock.
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned(1)
----------------------------
Name Title Number(2) Percent
---- ----- --------- -------
<S> <C> <C> <C>
Harbor Financial, M.H.C. N/A 2,654,369 53.31%
Harbor Federal Savings
Bank Employee
Stock Ownership Plan N/A 154,841 3.11
Bruce R. Abernethy, Sr. Vice Chairman of the Board 55,816(3)(12) 1.12
Richard N. Bird Director 17,089(8) *
Michael J. Brown, Sr. Director, President and Chief
Executive Officer 86,916(4) 1.75
Richard K. Davis Director 46,112(3)(5) *
Edward G. Enns Chairman of the Board 16,251(6) *
Frank H. Fee III Director 56,742(3)(13) 1.14
Richard B. Hellstrom Director 22,790(7) *
Don W. Bebber Senior Vice President 15,255(9) *
Robert W. Bluestone Senior Vice President 44,556 *
Albert L. Fort Senior Vice President 17,291(10) *
David C. Hankle Senior Vice President 33,856(11) *
Directors and Executive
Officers as a group (11
persons) N/A 412,674 8.29%
</TABLE>
- -----------
(1) Except as otherwise noted, all beneficial ownership is direct and each
beneficial owner exercises sole voting and investment power over the
shares.
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(2) Reflects information provided by these persons, filings made by these
persons with the Securities and Exchange Commission, and other information
known to Bancorp.
(3) Includes 21,350, 22,900 and 16,200 shares, respectively, held by the
Directors' Deferred Compensation Plan for the benefit of Messrs. Abernethy,
Davis and Fee.
(4) Includes 590 shares held by spouse and currently exercisable options to
purchase 22,000 shares. Mr. Brown disclaims beneficial ownership of 200
shares held in trust for the benefit of his grandson.
(5) Includes 10,922 shares held by Richard K. Davis Construction Corporation
Profit Sharing Fund. Does not include 1,750 shares owned by Nancy D. Davis,
spouse. Richard K. Davis disclaims beneficial ownership of the 1,750 shares
held by Nancy D. Davis.
(6) Includes 4,202 shares held by spouse and currently exercisable options to
purchase 6,134 shares.
(7) Includes 2,000 shares held by spouse.
(8) Includes 3,490 shares held by spouse.
(9) Includes 300 shares held by spouse and currently exercisable options to
purchase 3,176 shares.
(10) Includes 373 shares held by spouse and 50 shares held by son.
(11) Includes 1,400 shares held by spouse and 3,800 shares held as custodian for
minor children
(12) Includes 706 shares held by spouse and currently exercisable options to
purchase 9,850 shares.
(13) Includes 500 shares held by spouse.
* Represents less than 1% of outstanding shares.
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PROPOSED SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, for each of Bancorp's and the Bank's
directors and executive officers, and for all of the directors and executive
officers as a group, (1) the number of Exchange Shares to be held upon
consummation of the Conversion and Reorganization, based upon their beneficial
ownership of Bancorp Common Stock as of October 31, 1997, and (2) the total
amount of Common Stock to be held upon consummation of the Conversion and
Reorganization, in each case assuming that 12,600,000 shares of Conversion Stock
are sold, which is the midpoint of the Offering Price Range. The purchase limit
of $500,000 includes shares received as Exchange Shares. Accordingly, pursuant
to the policies and regulations of the OTS, none of the Directors or senior
management will be permitted to purchase stock in the Conversion and
Reorganization if the maximum number of shares of Conversion Stock are sold. See
"THE CONVERSION AND REORGANIZATION -- Purchase Limitations."
Total Common Stock
to be Held
------------------------
Number of
Exchange Shares Number of Percentage
Name to be Held(1)(2) Shares of Total
---- ---------------- ------ --------
Bruce R. Abernethy .......... 210,359 210,359 *
Richard N. Bird ............. 78,206 78,206 *
Michael J. Brown, Sr ........ 306,225 306,225 1.32%
Richard K. Davis ............ 211,027 211,027 *
Edward G. Enns .............. 46,299 46,299 *
Frank H. Fee III ............ 259,674 259,674 1.12%
Richard B. Hellstrom ........ 104,296 104,296 *
Don W. Bebber ............... 55,278 55,278 *
Robert W. Bluestone ......... 203,906 203,906 *
Albert L. Fort .............. 79,131 79,131 *
David C. Hankle ............. 155,939 155,939 *
All directors and
executive officers
as a group (11 persons) ..... 1,710,340 1,713,840 7.38%
- ---------
(1) Excludes shares which may be received upon the exercise of outstanding
exercisable stock options. Exchange Ratio is 4.5764 at the Midpoint of the
Offering Price Range.
(2) Excludes stock options and awards to be granted under Bancshares' 1998
Stock Option Plan and Recognition Plan if such plans are approved by
stockholders at an annual or special meeting of shareholders at least six
months following the Conversion and Reorganization. See "MANAGEMENT OF THE
BANK -- Proposed Benefit Plans."
* Less than one percent
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THE CONVERSION AND REORGANIZATION
The Boards of Directors of the Primary Parties have approved the Plan
of Conversion and Reorganization, as has the OTS, subject to approval by the
members of the Mutual Holding Company and the stockholders of the Company
entitled to vote on the matter and the satisfaction of certain other conditions.
Such OTS approval, however, does not constitute a recommendation or endorsement
of the Plan by such agency.
General
The Boards of Directors of the Mutual Holding Company, Bancorp and the
Bank adopted the Plan as of September 24, 1997. An amendment to the Plan was
adopted by the Boards of the Mutual Holding Company, Bancorp, the Bank and
Bancshares on November 5, 1997. The Plan has been approved by the OTS, subject
to, among other things, approval of the Plan by the Members of the Mutual
Holding Company and the Public Stockholders of Bancorp. The Members' Meeting and
the Stockholders' Meeting have been called for this purpose on February __,
1998.
The following is a brief summary of pertinent aspects of the Plan and
the Conversion and Reorganization. The summary is qualified in its entirety by
reference to the provisions of the Plan, which is available for inspection at
each branch office of the Bank and at certain offices of the OTS. The Plan also
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part, copies of which may be obtained from the SEC. See "ADDITIONAL
INFORMATION."
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Purposes of the Conversion and Reorganization
The Mutual Holding Company, as a federally chartered mutual holding
company, does not have stockholders and has no authority to issue capital stock.
As a result of the Conversion and Reorganization, Bancshares will be structured
in the form used by holding companies of commercial banks, many business
entities and a growing number of savings institutions. An important distinction
between the mutual holding company form of organization and the fully public
form is that, by federal law, a mutual holding company must always own over 50%
of the common stock of its savings institution subsidiary. Only a minority of
the subsidiary's outstanding stock can be sold to investors. If the Bank had
undertaken a full conversion to public ownership in 1994, a much greater amount
of Bank Common Stock would have been offered, resulting in more stock offering
proceeds than management believes could have been effectively deployed at that
time. High levels of capital might, in the opinion of management, have exceeded
the available opportunities in the Bank's market area in early 1994. Management
determined therefore that the amount of capital raised in the MHC Reorganization
was consistent with its capabilities and loan demand in its market at that time.
Bancorp is a Delaware corporation and is the current holding company
for the Bank owning 100% of the Bank's Common Stock. Bancorp's shares are owned
by the Mutual Holding Company (53.37%) and the Public Stockholders (46.63%).
Following the Conversion and Reorganization, Bancorp will cease to exist and
Bancshares will own 100% of the Bank's Common Stock.
Through the Conversion and Reorganization, Bancshares will become the
stock holding company of the Bank, which will complete the transition to full
public ownership. The stock holding company form of organization will provide
Bancshares with the ability to diversify Bancshares' and the Bank's business
activities through acquisition of or mergers with both stock savings
institutions and commercial banks, as well as other companies. There has been
significant consolidation in Florida where the Bank conducts its operations, and
although there are no current arrangements, understanding or agreements
regarding any such opportunities, Bancshares will be in a position (subject to
regulatory limitations and Bancshares' financial position) to take advantage of
any such opportunities that may arise because of the increase in its capital
after the Conversion and Reorganization.
The Conversion and Reorganization will be important to the future
growth and performance of Bancshares and the Bank by providing a larger capital
base to support the operations of the Bank and Bancshares and by enhancing their
future access to capital markets, ability to diversify into other financial
services related activities, and ability to provide services to the public. The
Conversion and Reorganization will result in increased funds being available for
lending purposes, greater resources for expansion of services, and better
opportunities for attracting and retaining qualified personnel. Although Bancorp
currently has the ability to raise additional capital through the sale of
additional shares of Bancorp Common Stock, that ability is limited by the mutual
holding company structure which, among other things, requires that the Mutual
Holding Company always hold a majority of the outstanding shares of Bancorp
Common Stock.
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The Conversion and Reorganization also will result in an increase in
the number of outstanding shares of Common Stock following the Conversion and
Reorganization, as compared to the number of outstanding shares of Public
Bancorp Shares prior to the Conversion and Reorganization, which will increase
the likelihood of the development of an active and liquid trading market for the
Common Stock. See "MARKET FOR COMMON STOCK."
In light of the foregoing, the Boards of Directors of the Primary
Parties believe that the Conversion and Reorganization is in the best interests
of such companies and their respective stockholders and members.
Description of the Conversion and Reorganization
On September 24, 1997, the Boards of Directors of Bancorp, and the
Mutual Holding Company adopted the Plan. It was subsequently amended and adopted
by the Bank and Bancorp on November 5, 1997. Pursuant to the Plan, Bancorp will
become a federal holding company, then convert to an interim federal stock
savings bank and merge with and into the Bank with the Bank as the survivor.
Next, the Mutual Holding Company will convert to an interim Federal stock
savings bank and merge with and into the Bank, pursuant to which the Mutual
Holding Company will cease to exist and the shares of Bancorp Common Stock held
by the Mutual Holding Company will be canceled. As a result of the merger of the
Mutual Holding Company with and into the Bank, the Public Bancorp Shares be
converted into and become shares of Common Stock. See "--The Exchange Ratio."
Pursuant to OTS regulations, consummation of the Conversion and
Reorganization (including the offering of Conversion Stock in the Offerings, as
described below) is conditioned upon the approval of the Plan by (1) the OTS,
(2) at least a majority of the total number of votes eligible to be cast by
Members of the Mutual Holding Company at the Members' Meeting, and (3) at least
two thirds of the shares of the outstanding Bancorp Common Stock at the
Stockholders' Meeting. In addition, the Primary Parties have conditioned the
consummation of the Conversion and Reorganization on the approval of the Plan by
at least a majority of the votes cast, in person or by proxy, by the Public
Stockholders at the Stockholders' Meeting.
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Effects of the Conversion and Reorganization
General. Prior to the Conversion and Reorganization, each depositor in
the Bank has both a deposit account in the Bank and a pro rata ownership
interest in the net worth of the Mutual Holding Company based upon the balance
in his account, which interest may only be realized in the event of a
liquidation of the Mutual Holding Company. However, this ownership interest is
tied to the depositor's account and has no tangible market value separate from
such deposit account. A depositor who reduces or closes his account receives a
portion or all of the balance in the account but nothing for his ownership
interest in the net worth of the Mutual Holding Company, which is lost to the
extent that the balance in the account is reduced.
Consequently, the depositors of the Bank normally have no way to
realize the value of their ownership interest in the Mutual Holding Company,
which has realizable value only in the unlikely event that the Mutual Holding
Company is liquidated. In such event, the depositors of record at that time, as
owners, would share pro rata in any residual surplus and reserves of the Mutual
Holding Company after other claims are paid.
Upon consummation of the Conversion and Reorganization and the
Offerings, additional permanent nonwithdrawable capital stock will be created
which will represent the ownership of the consolidated net worth of the Company.
The Common Stock of Bancshares is separate and apart from deposit accounts and
cannot be and is not insured by the FDIC or any other governmental agency.
Certificates are issued to evidence ownership of the permanent stock. The stock
certificates are transferable, and therefore, the stock may be sold or traded if
a purchaser is available with no effect on any account the seller may hold in
the Bank.
Continuity. While the Conversion and Reorganization is being
accomplished, the normal business of the Bank of accepting deposits and making
loans will continue without interruption. The Bank will continue to be subject
to regulation by the OTS and the FDIC. After the Conversion and Reorganization,
the Bank will continue to provide services for depositors and borrowers under
current policies by its present management and staff.
The directors and officers of the Bank and the Company at the time of
the Conversion and Reorganization will continue to serve as directors and
officers of the Bank after the Conversion and Reorganization. The directors and
executive officers of the Company consist of individuals currently serving as
directors and executive officers of the Mutual Holding Company and the Bank, and
they generally will retain their positions in the Company after the Conversion
and Reorganization.
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Effect on Deposit Accounts. Under the Plan, each depositor in the Bank
at the time of the Conversion and Reorganization will automatically continue as
a depositor after the Conversion and Reorganization, and each such deposit
account will remain the same with respect to deposit balance, interest rate and
other terms, except to the extent that funds in the account are withdrawn to
purchase Conversion Stock to be issued in the Offerings. Each such account will
continue to be insured by the FDIC to the same extent as before the Conversion
and Reorganization. Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
Effects on Loans. No loan outstanding from the Bank will be affected by
the Conversion and Reorganization, and the amount, interest rate, maturity and
security for each loan will remain as they were contractually fixed prior to the
Conversion and Reorganization.
Effect on Voting Rights of Members. At present, all depositors and
certain borrowers of the Bank are members of, and have voting rights in, the
Mutual Holding Company as to all matters requiring membership action. Upon
completion of the Conversion and Reorganization and merger of Bancorp and the
Mutual Holding Company into the Bank and the acquisition of the Bank by
Bancshares, depositors and borrowers will cease to be members and will no longer
be entitled to vote at meetings of the Mutual Holding Company. The
reorganization which created Bancorp vested all voting rights in Bancorp as the
sole stockholder of the Bank. With the merger of the Mutual Holding Company and
Bancorp into the Bank and the acquisition of Bancshares of all of the Bank's
shares, exclusive voting rights with respect to Bancshares will be vested in the
holders of Common Stock.
Tax Effects. Consummation of the Conversion and Reorganization is
conditioned on prior receipt by the Primary Parties of rulings or opinions with
regard to federal and Florida income taxation which indicate that the adoption
and implementation of the Plan of Conversion and Reorganization set forth herein
will not be taxable for federal or Florida income tax purposes to the Primary
Parties or the Bank's Eligible Account Holders, Supplemental Eligible Account
Holders or Other Members, except as discussed below. See " -- Tax Aspects" below
and "RISK FACTORS."
Effect on Liquidation Rights. If the Mutual Holding Company were to
liquidate, all claims of the Mutual Holding Company's creditors would be paid
first. Thereafter, if there were any assets remaining, members of the Mutual
Holding Company would receive such remaining assets, pro rata, based upon the
deposit balances in their deposit accounts at the Bank immediately prior to
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liquidation. In the unlikely event that the Bank were to liquidate after the
Conversion and Reorganization, all claims of creditors (including those of
depositors, to the extent of the deposit balances) also would be paid first,
followed by distribution of the "liquidation account" to certain depositors (see
" -- Liquidation Rights" below), with any assets remaining thereafter
distributed to the Company as the holder of the Bank's capital stock. Pursuant
to the rules and regulations of the OTS, a merger, consolidation, sale of bulk
assets or similar combination or transaction with another insured savings
institution would not be considered a liquidation for this purpose and, in such
a transaction, the liquidation account would be required to be assumed by the
surviving institution.
Effect on Existing Option Plans. Under the Mid-Tier Reorganization, the
Option Plan and the Directors' Option Plan remained benefit plans of the Bank
with shares of Bancorp Common Stock. After the Conversion and Reorganization,
they would become benefit plans of Bancshares. As of September 30, 1997, 99.8%
of the options available for grant under these plans had been granted but
options for 134,298 shares had not yet been exercised.
The Offerings
Subscription Offering. In accordance with the Plan of Conversion and
Reorganization, rights to subscribe for the purchase of Conversion Stock have
been granted under the Plan of Conversion and Reorganization to the following
persons in the following order of descending priority: (i) First Priority, to
depositors of the Bank with account balances of $50.00 or more as of the close
of business on July 31, 1996, ("Eligible Account Holders"); (ii) Second
Priority, to the ESOP; (iii) Third Priority, to depositors of the Bank with
account balances of $50.00 or more as of the close of business on December 31,
1997 ("Supplemental Eligible Account Holders"); and (iv) Fourth Priority,
Depositors of the Bank as of the Voting Record Date (other than Eligible Account
Holders and Supplemental Eligible Account Holders) and certain borrowers ("Other
Members"). All subscriptions received will be subject to the availability of
Conversion Stock after satisfaction of all subscriptions of all persons having
prior rights in the Subscription Offering and to the maximum and minimum
purchase limitations set forth in the Plan of Conversion and Reorganization and
as described below under "--Limitations on Conversion Stock Purchases and
Ownership." All purchase amounts described below except Priority 2 are purchase
amounts combined with Exchange Shares received by stockholders.
Priority 1: Eligible Account Holders (First Priority). Each Eligible
Account Holder will receive, without payment therefor, first priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the greater of (i) the maximum purchase limitation established
for the Offerings, (ii) one-tenth of 1% of the total offering of shares of
Conversion Stock in the Subscription Offering, or (iii) 15 times the product
(rounded down to the next whole number) obtained by multiplying the total number
of shares of Conversion Stock offered in the Subscription Offering by a
fraction, of which the numerator is the amount of the Qualifying Deposits of the
Eligible Account Holder and the denominator is the total amount of all
Qualifying Deposits of all Eligible Account Holders, subject to the overall
purchase limitations and the overall ownership limitation. See "-- Limitations
on Conversion Stock Purchases and Ownership."
If there are not sufficient shares available to satisfy all
subscriptions of Eligible Account Holders, shares first may be allocated so as
to permit each subscribing Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to the lesser of the number
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of shares subscribed for or 100 shares. Thereafter, unallocated shares may be
allocated to subscribing Eligible Account Holders whose subscriptions remain
unfilled in the proportion that the amounts of their respective eligible
deposits bear to the total amount of eligible deposits of all subscribing
Eligible Account Holders whose subscriptions remain unfilled, provided that no
fractional shares shall be issued. The subscription rights of Eligible Account
Holders who are also directors or officers of the Mutual Holding Company, the
Company or the Bank and their associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the year preceding July 31, 1996.
Priority 2: ESOP (Second Priority). The ESOP will receive, without
payment therefore, second priority, nontransferable subscription rights to
purchase, in the aggregate, up to 10% of the Conversion Stock within the
Offering Price Range, including any increase in the number of shares of
Conversion Stock after the date hereof as a result of an increase of up to 15%
in the maximum of the Offering Price Range. The ESOP currently intends to
purchase 8% of the shares of Conversion Stock, or 1,008,000 shares based on the
midpoint of the Offering Price Range. Subscriptions by the ESOP will not be
aggregated with shares of Conversion Stock purchased directly by or which are
otherwise attributable to any other participants in the Offerings, including
subscriptions of any of the Bank's directors, officers, employees or associates
thereof. See "MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan."
Priority 3: Supplemental Eligible Account Holders (Third Priority).
Each Supplemental Eligible Account Holder will receive, without payment
therefor, third priority, nontransferable subscription rights to subscribe for
in the Subscription Offering up to the greater of (i) the maximum purchase
limitation established for the Offerings, (ii) one-tenth of 1% of the total
offering of shares of Conversion Stock in the Subscription Offering, or (iii) 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Conversion Stock offered in the
Subscription Offering by a fraction, of which the numerator is the amount of the
Qualifying Deposits of the Supplemental Eligible Account Holder and the
denominator is the total amount of all Qualifying Deposits of all Supplemental
Eligible Account Holders, subject to the overall purchase limitation, the
overall ownership limitations, and the availability of shares of Conversion
Stock for purchase after taking into account the shares of Conversion Stock
purchased by Eligible Account Holders and the ESOP. See " -- Limitations on
Conversion Stock Purchases and Ownership."
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If there are not sufficient shares available to satisfy all
subscriptions of Supplemental Eligible Account Holders, shares first will be
allocated so as to permit each subscribing Supplemental Eligible Account Holder
to purchase a number of shares sufficient to make his total allocation equal to
the lesser of the number of shares subscribed for or 100 shares. Thereafter,
unallocated shares will be allocated to subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled in the proportion that the
amounts of their respective eligible deposits bear to the total amount of
eligible deposits of all such subscribing Supplemental Eligible Account Holders
whose subscriptions remain unfilled, provided that no fractional shares shall be
issued.
Priority 4: Other Members (Fourth Priority). To the extent that there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the ESOP and Supplemental Eligible Account Holders, each Other
Member will receive, without payment therefor, fourth priority, nontransferable
subscription rights to subscribe for Conversion Stock in the Subscription
Offering up to the greater of (i) the maximum purchase limitation established
for the Offerings or (ii) one-tenth of 1% of the total offering of shares of
Conversion Stock in the Subscription Offering, in each case subject to the
overall purchase limitation, the overall ownership limitation, and the
availability of shares of Conversion Stock for purchase after taking into
account the shares of Conversion Stock purchased by Eligible Account Holders,
the ESOP, and Supplemental Eligible Account Holders. See " -- Limitations on
Conversion Stock Purchases and Ownership."
If sufficient shares are not available to satisfy all subscriptions of
Other Members, available shares will first be allocated to the remaining
subscribing Other Members so as to permit each subscribing Other Member to
purchase a number of shares sufficient to make his allocation equal to the
lesser of the number of shares subscribed for or 100 shares. Thereafter, any
remaining shares will be allocated among subscribing Other Members on a pro rata
basis in the proportion that each such Other Member's subscription bears to the
total subscriptions of all subscribing Other Members, provided that no
fractional shares shall be issued.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire at 12:00 noon, Florida Time, on February __, 1998, unless
extended for up to 45 days or such additional periods by the Primary Parties
with the approval of the OTS. Such extensions may not be extended by
___________, 1998. Subscription rights that have not been exercised prior to the
Expiration Date will become void.
The Primary Parties will not execute orders until at least the minimum
number of shares of Conversion Stock (10,710,000 shares) have been subscribed
for or otherwise sold. If all shares have not been subscribed for or sold within
45 days after the Expiration Date, unless such period is extended with the
consent
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of the OTS, all funds delivered to the Company and the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with interest
and all withdrawal authorizations will be canceled. If an extension beyond the
45-day period following the Expiration Date is granted, the Primary Parties will
notify subscribers of the extension of time and of any rights of subscribers to
modify or rescind their subscriptions.
Eligible Public Stockholders Offering. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders and Other
Members, each Public Stockholder as of the Stockholder Voting Record Date,
December 31, 1997 ("Eligible Public Stockholders"), may submit orders for
Conversion Stock in the Offerings up to the maximum purchase limitation
established for the Community Offering, subject to the overall purchase and
ownership limitations and the availability of shares of Conversion Stock for
purchase after taking into account the shares of Conversion Stock purchased by
Eligible Account Holders, the ESOP and Supplemental Eligible Account Holders.
See " -- Limitations on Conversion Stock Purchases and Ownership."
In the event the Eligible Public Stockholders as of the Stockholder
Voting Record Date submit orders for a number of shares which, when added to the
shares subscribed for by Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders, Other Members and directors, officers and employees of
the Mutual Holding Company and the Bank, is in excess of the total number of
shares of Conversion Stock offered in the Offerings, available shares will be
allocated among Eligible Public Stockholders as of the Stockholder Voting Record
Date whose orders are accepted on a pro rata basis in the same proportion as
each Eligible Public Stockholder's order bears to the total orders of all
Eligible Public Stockholders, provided that no fractional shares shall be
issued.
The opportunity to submit orders for shares of Conversion Stock in the
Eligible Public Stockholders Offering category is subject to the right of the
Primary Parties, in their sole discretion, to accept or reject any such orders
in whole or in part for any reason either at the time of receipt of an order or
as soon as practicable following the completion of the Eligible Public
Stockholders Offering. It should be noted that Eligible Public Stockholders do
not have subscription rights with respect to the Conversion and Reorganization.
Community Offering. To the extent that shares remain available for
purchase after satisfaction of all subscriptions by Eligible Account Holders,
the ESOP, Supplemental Eligible Account Holders, and Other Members and orders of
Eligible Public Stockholders, the Primary Parties have determined to offer
shares pursuant to the Plan to certain members of the general public, with
preference given to the natural persons residing in the Local Community.
Individually, such persons may purchase, when combined with Exchange Shares,
$500,000 of Conversion Stock, subject to overall purchase and ownership
limitations. See " -- Limitations on Conversion Stock Purchases and Ownership."
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This amount may be increased at the sole discretion of the Primary Parties. The
opportunity to submit orders for shares of Conversion Stock in the Community
Offering category is subject to the right of the Primary Parties, in their sole
discretion, to accept or reject any such orders in whole or in part for any
reason either at the time of receipt of an order or as soon as practicable
following the completion of the Community Offering. All purchases in the
Community Offering will be combined with Exchange Shares for purposes of
complying with the purchase limitations in the Plan of Conversion and
Reorganization.
If there are not sufficient shares available to fill the orders of the
Subscribers in the Community Offering, available shares of stock will be
allocated first to each such Subscriber whose order is accepted by the Primary
Parties, in an amount equal to the lesser of 100 shares or the number of shares
ordered by each such Subscriber, if possible. Thereafter, unallocated shares
will be allocated among the Subscribers whose orders remain unsatisfied in the
same proportion that the unfilled order of each bears to the total unfilled
orders of all such Subscribers whose order remains unsatisfied. If the orders of
such Subscribers are filled, and there are shares remaining, shares will be
allocated to other members of the general public who submit orders in the
Community Offering applying the same allocation described above for such
Subscribers.
Limitations on Conversion Stock Purchases and Ownership
The Plan includes the following limitations on the number of shares of
Conversion Stock that may be purchased:
(1) No less than 25 shares of Conversion Stock may be purchased,
to the extent such shares are available;
(2) The number of shares of Conversion Stock which may be
purchased by any person in the Subscription Offering shall not exceed
such number of shares of Conversion Stock that, when combined with
Exchange Shares, shall equal $500,000 (or 50,000 shares), except for
the ESOP, which in the aggregate may subscribe for up to 10% of the
Conversion Stock.
(3) The number of shares of Conversion Stock which may be
purchased by any person, in the Subscription Offering, Eligible Public
Stockholders' Offering or the Community Offering combined shall not
exceed such number of shares of Conversion Stock that shall, when
combined with Exchange Shares, equal $500,000 (or 50,000 shares).
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(4) Except for Tax-Qualified Employee Stock Benefit Plans, the
maximum amount of Conversion Stock that may be purchased in all
categories in the Conversion and Reorganization by any person together
with any associate or group of persons acting in concert, shall not
exceed such number of shares of Conversion Stock as shall equal when
combined with Exchange Shares, $4.75 million (or 475,000 shares).
(5) No more than 25% of the total number of shares sold in the
Offerings, when combined with Exchange Shares, may be purchased by
directors and officers of the Primary Parties and the Bank and their
associates in the aggregate, excluding purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the Members of
the Mutual Holding Company or the Stockholders of Bancorp or Bancshares, the
purchase limitations in (2), (3) and (4) above may be decreased, or increased,
up to a maximum of 5% of the total shares of Conversion Stock to be issued in
the Conversion and Reorganization, at the sole discretion of the Primary
Parties. If such amounts are increased, subscribers for the maximum amount will
be, and certain other large subscribers in the sole discretion of the Primary
Parties may be, given the opportunity to increase their subscriptions up to the
then applicable limit.
In the event of an increase in the total number of shares of Conversion
Stock offered in the Conversion and Reorganization due to an increase in the
maximum of the Offering Price Range of up to 15% (the "Adjusted Maximum"), the
new total number of shares will be allocated in the following order of priority
in accordance with the Plan: (i) to fill the ESOP's order of up to a total of
8.0% of the Adjusted Maximum number of shares (the Board of Directors has
determined to purchase 8%); (ii) in the event that there is an oversubscription
by Eligible Account holders to fill their unfulfilled subscriptions; (iii) in
the event that there is an oversubscription by Supplemental Eligible Account
Holders to fill their unfulfilled subscriptions; (iv) in the event that there is
an oversubscription by Other Members to fill their unfulfilled subscriptions;
(v) in the event that there is an oversubscription by Eligible Public
Stockholders, to fill their unfulfilled subscriptions; and (vi) to fill
unfulfilled subscriptions in the Community Offerings.
The term "associate," when used to indicate a relationship with any
person, is defined to mean (i) a corporation or organization (other than the
Mutual Holding Company, Bancorp or Bancshares, a majority-owned subsidiary of
Bancorp or Bancshares or the Bank) of which such person is a director, officer
or partner or is, directly or indirectly, the beneficial owner of 10% or more of
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any class of equity securities, (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity, provided, however, that such term
shall not include any tax qualified employee stock benefit plan of Bancshares or
the Bank in which such person has a substantial beneficial interest or serves as
a trustee or in a similar fiduciary capacity, and (iii) any relative or spouse
of such person, or any relative of such spouse, who has the same home as such
person or who is a director or officer of Bancorp, Bancshares or the Bank or any
of the subsidiaries of the foregoing.
The term "resident" as used herein means any person who, on the date
designated for that category of subscriber in the Plan, maintained a bona fide
residence within the Local Community and has manifested or intent to remain
within the Local Community for a period of time. The designated dates for
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members are July 31, 1996, December 31, 1997, and December 31, 1998,
respectively. To the extent the person is a corporation or other business
entity, the principal place of business or headquarters shall be within the
Local Community. To the extent the person is a personal benefit plan, the
circumstances of the beneficiary shall apply with respect to this definition. In
the case of all other benefit plans, the circumstances of the trustee shall be
examined for purposes of this definition. The Primary Parties may utilize
deposit or loan records of the Bank or such other evidence provided to it to
make a determination as to whether a person is a bona fide resident of the Local
Community. Subscribers in the Community Offering who are natural persons also
will have a purchase preference if they are residents of the Local Community. In
all cases, however, such determination shall be in the sole discretion of the
Bank and shall be determined on a case-by-case basis without regard to prior
determinations.
Stock Pricing and Number of Shares to be Issued
The Plan of Conversion and Reorganization requires that the aggregate
purchase price of the Conversion Stock must be based on the appraised pro forma
market value of the Mutual Holding Company, Bancorp, Bancshares and the Bank on
a consolidated basis, as determined on the basis of an independent valuation.
The Primary Parties have retained RP Financial to make such a valuation. For its
services in making such an appraisal and any expenses incurred in connection
therewith, RP Financial will receive a maximum of $35,000 plus out of pocket
expenses. The Primary Parties have agreed to indemnify RP Financial and its
employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where RP Financial's liability results from its
negligence or bad faith.
The Independent Valuation has been prepared by RP Financial in reliance
upon the information contained in this Prospectus, including the financial
statements. RP Financial also considered the following factors, among others:
the present and projected operating results and financial condition of the
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Primary Parties and the economic and demographic conditions in the Bank's
existing market area: certain historical, financial and other information
relating to Bancorp, Bancshares and the Bank; a comparative evaluation of the
operating and financial statistics of Bancorp with those of other similarly
situated publicly traded companies located in Florida and other regions of the
United States; the aggregate size of the offering of the Conversion Stock; the
impact of the Conversion and Reorganization on the Bank's net worth and earnings
potential; the proposed dividend policy of Bancshares and the Bank; and the
trading market for Bancorp's Common Stock and securities of comparable companies
and general conditions in the market for such securities.
The Independent Valuation was prepared based on the assumption that the
aggregate amount of Conversion Stock sold in the Offerings would be equal to the
estimated pro forma market value of Bancorp and the Bank, on a consolidated
basis, multiplied by the percentage of the outstanding shares of Bancorp Common
Stock held by the Mutual Holding Company as of the date of the appraisal,
subject to an adjustment, pursuant to a change in OTS policy, described below in
"-- The Exchange Ratio." The Independent Valuation states that as of December
___, 1997, the estimated pro forma market value ranged from a minimum of
$197,310,000 to a maximum of $266,949,000 with a midpoint of $232,130,000. Based
on the approximately 53.37% of the outstanding shares of Bancorp Common Stock
held by the Mutual Holding Company as of the date of the appraisal and the
adjustment described in "-- The Exchange Ratio," the estimated pro forma market
value of the Company was multiplied by approximately 54.28% to determine the
dollar amount of Conversion Stock to be offered in the Offerings, which ranges
from a minimum of $107,100,000 to a maximum of $144,900,000, with a midpoint of
$126,000,000 (the "Offering Price Range").
The Boards of Directors of the Primary Parties reviewed RP Financial's
appraisal report, including the methodology and the assumptions used by RP
Financial, and determined that the Estimated Valuation Range was reasonable and
adequate. However, the Boards of Directors of the Primary Parties are relying
upon the expertise, experience and independence of RP Financial, and are not
qualified to determine the appropriateness of the assumptions or the
methodology.
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RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing such shares.
RP Financial did not independently verify the financial statements and other
information provided by the Primary Parties, nor did RP Financial value
independently the assets or liabilities of Bancorp or the Bank. The valuation
considers the Primary Parties as going concerns and should not be considered as
indication of the liquidation value of Bancorp, Bancshares, the Bank and the
Mutual Holding Company. Moreover, because such valuation is necessarily based
upon the estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing Conversion Stock or receiving Exchange Shares in the Conversion and
Reorganization will thereafter be able to sell such shares at prices at or above
the purchase price per share in the Offerings.
No sale of shares of Conversion Stock or issuance of Exchange Shares
may be consummated unless, prior to such consummation, RP Financial confirms
that nothing of a material nature has occurred which, taking into account all
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relevant factors, would cause it to conclude that the aggregate Purchase Price
is materially incompatible with the estimate of the pro forma market value the
Company, and the Bank on a consolidated basis. If such is not the case, a new
Estimated Valuation Range may be set, a new Exchange Ratio may be determined
based upon the new Estimated Valuation Range, a new Subscription, Eligible
Public Stockholders, Community Offerings may be held or such other action may be
taken as the Primary Parties shall determine and the OTS may permit or require.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of shares of
Conversion Stock to be sold in the Offerings may be increased by up to 15%, to
16,663,500 shares, without a resolicitation of subscribers. In the event market
or financial conditions change so as to cause the aggregate purchase price of
the shares to be below the minimum of the Offering Price Range (i.e.
$107,000,000) or more than 15% above the maximum of such range (i.e.
$166,635,000), purchasers will be resolicited (i.e., permitted to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to modify or rescind their
subscriptions). Based upon current market and financial conditions and recent
practices and policies of the OTS, in the event Bancshares receives orders for
Conversion Stock in excess of $ 144,900,000 (the maximum of the Offering Price
Range) and up to $166,635,000 (the maximum of the Offering Price Range, as
adjusted by 15%) the Company may be required by the OTS to accept all such
orders. No assurances, however, can be made that the Company will receive orders
for Conversion Stock in excess of the maximum of the Offering Price Range or
that, if such orders are received that all such orders will be accepted.
An increase in the number of shares of Conversion Stock, as a result of
an increase in the Independent Valuation, would decrease a subscriber's
ownership interest and Bancshares' pro forma net income and stockholders' equity
on a per share basis while increasing pro forma net income and stockholders'
equity on an aggregate basis. See "RISK FACTORS -- Possible Dilutive Effect of
Issuance of Additional Shares" and "PRO FORMA DATA."
The Appraisal (including the appraisal report of RP Financial as of
December __________, 1997) has been filed as an exhibit to this Registration
Statement and Application for Conversion of which this Prospectus is a part and
is available for inspection in the manner set forth under "Additional
Information."
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The Exchange Ratio
OTS regulations and policy provide that in a conversion of a mutual
holding company to stock form, stockholders other than the mutual holding
company will be entitled to exchange their shares of subsidiary savings bank (or
mid-tier holding company) common stock for common stock of the converted holding
company, provided that the bank and the mutual holding company demonstrate to
the satisfaction of the OTS that the basis for the exchange is fair and
reasonable. The Boards of Directors of the Primary Parties have determined that
each Public Bancorp Share will on the effective date be automatically converted
into and become the right to receive a number of Exchange Shares determined
pursuant to the Exchange Ratio, which was established in order to ensure that --
after the Conversion and Reorganization, subject to an adjustment required by
the OTS to reflect the Mutual Holding Company's waiver of certain dividends in
the amount of $1.9 million out of the aggregate waived dividends of $9.3 million
since the MHC Reorganization and a slight adjustment to reflect the receipt of
cash in lieu of fractional shares -- the percentage of the to-be outstanding
shares of Common Stock issued to Public Stockholders in exchange for their
Public Bancorp Shares will be equal to the percentage of the outstanding shares
of Bancorp Common Stock held by Public Stockholders immediately prior to the
Conversion and Reorganization. The total number of shares held by Public
Stockholders after the Conversion and Reorganization would also be affected by
any purchases by such persons in the Offering.
Based on the Independent Valuation, the 53.37% of the outstanding
shares of the Bancorp Common Stock held by Mutual Holding Company as of the date
of the Independent Valuation, and the Mutual Holding Company's waiver of certain
dividends as described above which resulted in an adjustment of approximately
.91%, the following table sets forth, based upon the minimum, midpoint, maximum
and 15% above the maximum of the Estimated Valuation Range, the following: (i)
the total number of shares of Conversion Stock and Exchange Shares to be issued
in the Conversion and Reorganization, (ii) the percentage of the total Common
Stock represented by the Conversion Stock and the Exchange Shares, and (iii) the
Exchange Ratio. The table assumes that there is no cash paid in lieu of issuing
fractional Exchange Shares.
<TABLE>
<CAPTION>
Conversion Stock Exchange Total Shares
to be Issued Shares of Common
--------------------------- --------------------------- Stock to be Exchange
Amount Percent Amount Percent Outstanding Ratio
------ ------- ------ ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Minimum 10,710,000 54.28% 9,021,024 45.72% 19,731,024 3.8899
Midpoint 12,600,000 54.28 10,612.969 45.72 23,212,969 4.5764
Maximum 14,490,000 54.28 12,204,915 45.72 26,694,915 5.2629
15% Above Maximum 16,663,500 54.28 14,035,652 45.72 30,699,152 6.0523
</TABLE>
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Options to purchase Public Bancorp Shares will also be converted into
and become options to purchase Common Stock. As of the date of this Prospectus
there were outstanding options to purchase 134,298 shares of Bancorp Common
Stock at an average exercise price of $11.66 per share. The number of shares of
Common Stock to be received upon exercise of such options will be determined
pursuant to the Exchange Ratio. The aggregate exercise price, duration, and
vesting schedule of such options will not be affected. If such options are
exercised prior to the effective date of the Conversion and Reorganization, then
there will be an increase in the number of shares of Common Stock issued to
Public Stockholders in the Share Exchange, and a decrease in the Exchange Ratio.
Bancorp has no plans to grant additional stock options prior to the Effective
Date.
Persons in Nonqualified States or Foreign Countries
The Primary Parties will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons entitled to
subscribe for the Common Stock pursuant to the Plan reside. However, no person
will be offered or allowed to purchase any Common Stock under the Plan if such
person resides in a foreign country or in a state of the United States with
respect to which any of the following apply: (i) a small number of persons
otherwise eligible to subscribe for shares under the Plan reside in such state
or foreign country; (ii) the granting of subscription rights or offering or
selling shares of Common Stock to such persons would require the Bank, Bancorp,
Bancshares or their employees to register, under the securities laws of such
state or foreign country, as a broker or dealer or to register or otherwise
qualify its securities for sale in such state or foreign country; or (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of subscription
rights to any such person.
Marketing Arrangements
The Primary Parties have engaged Friedman, Billings, Ramsey & Co., Inc.
("FBR" or the "Agent") as a financial advisor and marketing agent in connection
with the Offerings, and the Agent has agreed to use its best efforts to solicit
subscriptions and purchase orders for shares of Conversion Stock in the
Offerings. The Agent is a member of National Association of Securities Dealers,
Inc. (the "NASD") and a broker-dealer which is registered with the SEC. The
Agent will provide various services including, but not limited to (1) training
and educating the Bank's employees who will be performing certain ministerial
functions in the Offerings regarding the mechanics and regulatory requirements
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of the stock sales process; (2) coordinating the Company's sales efforts; (3)
soliciting orders for Conversion Stock; and (4) assisting in the solicitation of
proxies of Members and Stockholders for use at the Members' Meeting and the
Stockholders' Meeting, respectively. Based upon negotiations between the Primary
Parties and the Agent, the Agent will receive (i) an advisory and management fee
of $50,000 which will be subtracted from the Agent's total fee in (ii) and (iii)
below; (ii) a marketing fee equal to .75% of the aggregate Purchase Price of
Conversion Stock sold in the Subscription Offering and the Eligible Public
Stockholders Offering, except as set forth below; and (iii) a marketing fee of
.75% of the aggregate Purchase Price of Conversion Stock sold in the Community
Offering. No fees will be paid to the Agent on subscriptions by any director,
officer or employee or members of their immediate families or by the ESOP. The
Agent also will be reimbursed for its reasonable out-of-pocket expenses
(including legal fees and expenses) which are estimated to be approximately
$70,000. The Primary Parties have agreed to indemnify the Agent for reasonable
costs and expenses (including legal fees) incurred in connection with certain
claims or litigation arising out of or based upon untrue statements or omissions
contained in the offering material for the Common Stock, including certain
liabilities under the Securities Act.
Directors and executive officers of the Primary Parties may participate
in the solicitation of offers to purchase Conversion Stock. Other employees of
the Bank may participate in the Offerings in ministerial capacities or providing
clerical work in effecting a sales transaction. Such other employees have been
instructed not to solicit offers to purchase Conversion Stock or provide advice
regarding the purchase of Conversion Stock. Questions of prospective purchasers
will be directed to executive officers or registered representatives. Bancshares
will rely on Rule 3a4-1 under the Exchange Act, and sales of Conversion Stock
will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of Conversion
Stock. No officer, director or employee of the Primary Parties will be
compensated in connection with such person's solicitations or other
participation in the Offerings or the Exchange by the payment of commissions or
other remuneration based either directly or indirectly on transactions in the
Conversion Stock and Exchange Shares, respectively.
Procedure for Purchasing Shares in the Offerings.
To help ensure that each purchaser receives a Prospectus at least 48
hours before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery of the Prospectus in accordance with
Rule 15c2-8. Order forms will only be distributed with a Prospectus.
To purchase shares in the Offerings, an executed order form with the
required payment for each share subscribed for, or with appropriate
authorization for withdrawal from a deposit account at the Bank (which may be
given by completing the appropriate blanks on the order form), must be received
by the Bank at any of its offices by 12 noon, Florida Time, on the Expiration
Date. Order forms which are not received by such time or are executed
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defectively or are received without full payment (or appropriate withdrawal
instructions) are not required to be accepted. The Bank is not required to
accept orders submitted on facsimilied order forms. The Primary Parties have the
right to waive or permit the correction of incomplete or improperly executed
forms, but do not represent that they will do so. The waiver of an irregularity
on an order form, the allowance by the Primary Parties of a correction of an
incomplete or improperly executed order form, or the acceptance of an order
after 12 noon on the Expiration date in no way obligates the Primary Parties to
waive an irregularity, allow a correction, or accept an order with respect to
any other order form. The interpretation by the Primary Parties of the
acceptability of an order form will be final. Once received, an executed order
form may not be modified, amended or rescinded without the consent of the
Primary Parties, unless the Offerings have not been completed within 45 days
after the end of the Subscription, Eligible Public Stockholders, and Community
Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priority, depositors as of the close of business on the Eligibility
Record Date ( July 31, 1996) or the Supplemental Eligibility Record Date
(December 31, 1997) must list on the order form all accounts in which they have
an ownership interest at the applicable eligibility date, giving all names in
each account and the account numbers.
Payment for subscriptions and orders may be made (i) in cash if
delivered in person at any office of the Bank, (ii) by check or money order, or
(iii) by authorization of withdrawal from certificate of deposit accounts or
IRAs maintained with the Bank. The Primary Parties, in their sole discretion,
may elect not to accept payment for shares of Conversion Stock by wired funds
and there shall be no liability for failure to accept such payment. Funds will
be deposited in a segregated account at the Bank and interest will be paid on
funds made by cash, check or money order at the Bank's passbook rate of interest
from the date payment is received until completion or termination of the
Conversion and Reorganization. If payment is made by authorization of withdrawal
from certificate accounts, the funds authorized to be withdrawn from a Bank
deposit account may continue to accrue interest at the contractual rates until
completion or termination of the Conversion and Reorganization, but a hold will
be placed on such funds, thereby making them unavailable to the depositor until
completion or termination of the Conversion and Reorganization.
If a subscriber authorizes the Bank to withdraw the aggregate amount of
the purchase price from a deposit account, the Bank will do so as of the
effective date of the Conversion and Reorganization. The Bank may waive any
applicable penalties for early withdrawal from certificate accounts. If the
remaining balance in a certificate account is reduced below the applicable
minimum balance requirement at the time that the funds actually are transferred
under the authorization, the certificate will be canceled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate.
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The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of Conversion Stock
subscribed for upon consummation of the Offerings, provided that there is in
force from the time of its subscription until such time, a loan commitment from
an unrelated financial institution or the Company to lend to the ESOP, at such
time, the aggregate purchase price of the shares for which it subscribed.
A depositor interested in using his or her IRA funds to purchase
Conversion Stock must do so through a self-directed IRA. Since the Bank does not
offer such accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program with
the agreement that such funds will be used to purchase the Conversion Stock in
the Offerings. There will be no early withdrawal or IRS penalties for such
transfers. The new trustee would hold the Conversion Stock in a self-directed
account in the same manner as the Bank now holds the depositor's IRA funds. An
annual administrative fee may be payable to the new trustee. Depositors
interested in using funds in a Bank IRA to purchase Conversion Stock should
contact the Stock Information Center as soon as possible so that the necessary
forms may be forwarded for execution prior to the Expiration Date.
Restrictions on Transfer of Subscription Rights and Shares
Pursuant to the rules and regulations of the OTS, no person with
subscription rights may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Conversion Stock to be issued upon their
exercise. Such rights may be exercised only by the person to whom they are
granted and only for such person's account. Each person exercising such
subscription rights will be required to certify that such person is purchasing
shares solely for such person's own account and that such person has no
agreement or understanding regarding the sale or transfer of such shares.
Federal regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Conversion Stock prior to the completion of the
Conversion and Reorganization.
The Primary Parties will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders known by them to involve the transfer of such rights.
Liquidation Rights
In the unlikely event of a complete liquidation of the Mutual Holding
Company in its present mutual form, each depositor of the Bank would receive his
pro rata share of any assets of the Mutual Holding Company remaining after
payment of claims of all creditors. Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of his deposit
account was to the total value of all deposit accounts in the Bank at the time
of liquidation. After the Conversion and Reorganization, each depositor, in the
event of a complete
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liquidation of the Bank, would have a claim as a creditor of the same general
priority as the claims of all other general creditors of the Bank. However,
except as described below, this claim would be solely in the amount of the
balance in the deposit account plus accrued interest. A depositor would not have
an interest in the value of assets of the Bank, or Bancshares, above that
amount.
The Plan provides for the establishment by the Bank, upon the
completion of the Conversion and Reorganization, 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 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 MHC Reorganization, or (2) 53.37% of the Bank's total
stockholders' equity as reflected in its latest balance sheet contained in the
final Prospectus utilized in the Offerings. Upon consummation of the Conversion
and Reorganization, the Bank will amend its Federal stock charter to provide a
special liquidation account. As of the date of this Prospectus, the initial
balance of the liquidation account would be $38.7 million. Each Eligible Account
Holder and Supplemental Eligible Account Holder, if such person were to continue
to maintain such person's deposit account at the Bank, would be entitled, upon a
complete liquidation of the Bank after the Conversion and Reorganization, to an
interest in the liquidation account prior to any payment to the Company as the
sole stockholder of the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, including passbook accounts, transaction
accounts such as checking accounts, money market deposit accounts and
certificates of deposit, held in the Bank at the close of business on July 31,
1996 or December 31, 1997, as the case may be. Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the total
liquidation account for each of such person's deposit accounts based on the
proportion that the balance of each such deposit account on the July 31, 1996
eligibility record date (or the December 31, 1997 Supplemental Eligibility
Record Date, as the case may be) bore to the balance of all deposit accounts in
the Bank on such date.
If, however, on any September 30 annual closing date of the Bank,
commencing September 30, 1996 for Eligible Account Holders and on September 30,
1998 for Supplemental Eligible Account Holders, the amount in any deposit
account is less than the amount in such deposit account on July 31, 1996, or
December 31, 1997, as the case may be, or any other annual closing date, then
the interest in the liquidation account relating to such deposit account would
be reduced by the proportion of any such reduction, and such interest will cease
to exist if such deposit account is closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. Any assets remaining after the above liquidation
rights of Eligible Account Holders and Supplemental Eligible Account Holders are
satisfied would be distributed to the Company as the sole stockholder of the
Bank.
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Tax Aspects
Consummation of the Conversion and Reorganization is expressly
conditioned upon prior receipt of either a ruling from the IRS or an opinion of
counsel with respect to federal tax effects of the transaction, and either a
ruling or an opinion with respect to Florida tax laws, to the effect that
consummation of the transactions contemplated hereby will not result in a
taxable reorganization under the provisions of the applicable codes or otherwise
result in any material adverse tax consequences to the Mutual Holding Company,
the Bank, Bancshares or to account holders receiving subscription rights, except
to the extent, if any, that subscription rights are deemed to have fair market
value on the date such rights are issued. This condition may not be waived by
the Primary Parties.
Peabody & Brown, Washington, D.C. ("Counsel"), has issued an opinion to
the Company and the Bank to the effect outlined below. The opinions of counsel
are subject to certain assumptions stated therein. The assumptions include: (i)
that the Plan of Conversion and Reorganization has been duly and validly
adopted; (ii) the Primary Parties will comply with the Plan of Conversion and
Reorganization; (iii) various representations and warranties of management are
accurate, complete, true and correct; and (iv) that there were no adverse facts
not present on the face of instruments and documents examined.
In the opinion of Counsel
1. The transactions qualify as statutory mergers and each merger
required by the Plan qualifies as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code. The Mutual Holding
Company, Bancorp and the Bank will be a party to a
"reorganization" as defined in Section 368(b) of the Code.
2. Interim Bank #1 (the Mutual Holding Company following its
conversion to a federal stock savings bank) and Interim Bank #2
(Bancorp following its conversion to a federal holding company
and then to a federal stock savings bank) will recognize no gain
or loss pursuant to the Conversion and Reorganization.
3. No gain or loss will be recognized by the Bank upon the receipt
of the assets of Interim Bank #1 and Interim Bank #2 pursuant to
the Conversion and Reorganization.
4. The reorganization of Bancshares as the Holding Company of the
Bank qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code by virtue of Section 368(a)(2)(E) of the
Code. Therefore, the Bank, Bancshares, and Interim will each be a
party to a reorganization as defined in Section 368(b) of the
Code.
5. No gain or loss will be recognized by Interim upon the transfer
of its assets to the Bank pursuant to the Conversion and
Reorganization.
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6. No gain or loss will be recognized by the Bank upon the receipt
of the assets of Interim.
7. No gain or loss will be recognized by Bancshares upon the receipt
of Bank Common Stock solely in exchange for Common Stock.
8. No gain or loss will be recognized by the Public Stockholders
upon the receipt of Common Stock.
9. The basis of the Common Stock to be received by the Public
Stockholders will be the same as the basis of the Bancorp Common
Stock surrendered before giving effect to any payment of cash in
lieu of fractional shares.
10. The holding period of the Common Stock to be received by the
Public Stockholders will include the holding period of the Common
Stock, provided that the Common Stock was held as a capital asset
on the date of the exchange.
11. No gain or loss will be recognized by Bancshares upon the sale of
Common Stock to investors.
12. The Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members will recognize gain, if any, upon the
issuance to them of: (i) withdrawable savings accounts in the
Bank following the Conversion and Reorganization, (ii) Bank
Liquidation Accounts, and (iii) nontransferable subscription
rights to purchase Conversion Stock, but only to the extent of
the value, if any, of the subscription rights.
13. The tax basis to the holders of Conversion Stock purchased in the
offerings will be the amount paid therefor, and the holding
period for such shares will begin on the date of consummation of
the offerings if purchased through the exercise of subscription
rights. If purchased in the Community Offering or Public
Stockholder Offering (as such terms are defined in the Plan), the
holding period for such stock will begin on the day after the
date of purchase.
Furthermore, Dean, Mead, Egerton, Bloodworth, Capouano & Bogarth, P.A.,
Orlando, Florida, has issued an opinion to the Company and the Bank to the
effect that the income tax consequences of the Conversion and Reorganization are
substantially the same under Florida law as they are under the Code.
The opinion states that although case law and IRS pronouncements
indicate otherwise, it is possible that the IRS could assert that the overall
plan of the transactions contemplated by the Plan is the maintenance of the
Bank's holding company structure and the merger of MHC into Bank. If so, the IRS
could argue that the "step transaction" doctrine should be applied and the
transitory elimination of the holding company structure in Merger #1 (the merger
of Interim Bank #2 with and into the Bank with the Bank as the surviving entity)
and the re-creation of the holding company structure in Merger #3 (the merger of
Interim FSB, a subsidiary of Bancshares with and into the Bank with the Bank as
the surviving entity) should be ignored for tax purposes. If the IRS were
successful with such an assertion, the transaction would be treated as a direct
merger of MHC into Bank which may not qualify as a tax free reorganization,
resulting in taxable gain to the parties to the transaction.
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However, the case law and the IRS's pronouncements indicate that if two
or more transactions carried out pursuant to an overall plan have economic
significance independent of each other, the transactions generally will not be
stepped together. The IRS's most significant pronouncement regarding independent
economic significance is Rev. Rul. 79-250. In that ruling, the IRS will respect
the transaction if each step demonstrates independent economic significance, is
not subject to attack as a sham, and was undertaken for valid business purposes
and not mere avoidance of taxes.
Counsel notes that the parties to Merger #2 (the merger of Interim Bank
#1 (formerly the Mutual Holding Company) with and into the Bank with the Bank as
the surviving entity) maintain a separate and distinct business purpose for
consummating Merger #2 (e.g., allowing for the conversion of the MHC from mutual
to stock form). Immediately after the consummation of Merger #2, the Bank will
no longer be controlled by the MHC but will instead be controlled by its public
stockholders and that the Bank's capital will be substantially increased. The
facts indicate that the merger of MHC with and into the Bank will result in a
real and substantial change in the form of ownership of the Bank that is
sufficient to conclude that Merger #2 comports with the underlying purposes and
assumptions of a reorganization under Section 368(a)(1)(A) of the Code.
In addition, Counsel believes that, because the various steps
contemplated by the Plan were necessitated by the requirements of the Office of
Thrift Supervision, each of Merger #1, Merger #2 and Merger #3 has a business
purpose and independent significance and, as a result, the step transaction
should not be applied to this transaction.
The IRS is currently also reviewing the question of whether certain
downstream mergers of a parent corporation into its subsidiary, known as
inversion transactions, where a parent and its subsidiary reverse positions,
which otherwise qualify for tax-free treatment nevertheless should be treated as
taxable transactions. Counsel does not believe that the transactions undertaken
pursuant to the Plan should be so treated. Counsel's opinions, however, are not
binding upon the IRS, and there can be no assurance that the IRS will not assert
a contradictory position.
The Bank and the Company have also received a letter from RP Financial
which addresses certain issues surrounding the value of the subscription rights.
The letters states that it is RP's belief, which is not binding on the IRS, that
the subscription rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration, and afford the recipients the right only to purchase the
Conversion Stock at a price equal to its estimated fair market value, which will
be the same price as the Purchase Price for the unsubscribed shares of
Conversion Stock. If the subscription rights granted to eligible subscribers are
deemed to have an ascertainable value, receipt of such rights likely would be
taxable only to those eligible subscribers who exercise the subscription rights
(either as a capital gain or ordinary income) in an amount equal to such value,
and the Primary Parties could recognize gain on such distribution. Eligible
subscribers are encouraged to consult with their own tax advisor as to the tax
consequences in the event that such subscription rights are deemed to have an
ascertainable value.
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Unlike private rulings, an opinion of Counsel or letter from RP
Financial is not binding on the IRS and the IRS could disagree with the
conclusions reached therein. In the event of such disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding. Management does not believe the fact that the IRS has placed this
transaction into a "no rule" area will result in the IRS treating the Conversion
and the Reorganization any differently from similar transactions already
completed for which the IRS has issued private letter rulings. If the IRS
determines that the tax effects of the transaction are to be treated differently
from that presented in the tax opinion, the Primary Parties may be subject to
adverse tax consequences as a result of the Conversion and Reorganization.
Delivery and Exchange of Certificates
Conversion Stock. Certificates representing Conversion Stock issued in
connection with the Offerings will be mailed by the Company's transfer agent for
the Common Stock to the persons entitled thereto at the addresses of such
persons appearing on the stock order form for Conversion Stock as soon as
practicable following consummation of the Conversion and Reorganization. Any
certificates returned as undeliverable will be held by the Company until claimed
by persons legally entitled thereto or otherwise disposed of in accordance with
applicable law. Until certificates for Conversion Stock are available and
delivered to subscribers, subscribers may not be able to sell such shares.
Exchange Shares. After consummation of the Conversion and
Reorganization, each holder of a certificate or certificates evidencing issued
and outstanding shares of Bancorp Common Stock, or Bank Common Stock, which was
held prior to the Mid-Tier Reorganization and currently represents an equivalent
number of shares of Public Bancorp Shares on the transfer book of Bancorp (other
than the Mutual Holding Company), shall be entitled to receive a certificate or
certificates representing the number of full shares of Common Stock which when
multiplied by the Exchange Ratio, will represent the same percentage ownership
of Public Bancorp Shares as held prior to the Conversion and Reorganization. The
Transfer or Exchange Agent shall promptly mail to each such holder of record of
Public Bancorp Shares immediately after the consummation of the Conversion and
Reorganization, a letter of transmittal advising the holder of the procedures by
which Exchange Shares, pursuant to the Exchange Ratio, will be delivered. The
Company's stockholders need not forward any Bancorp Common Stock certificates to
the Bank or the Transfer Agent until they receive a transmittal letter.
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Required Approvals
Various approvals of the OTS are required in order to consummate the
Conversion and Reorganization. The OTS has approved the Plan of Conversion and
Reorganization, subject to approval by the Mutual Holding Company's Members and
Bancorp's Stockholders. In addition, consummation of the Conversion and
Reorganization is subject to OTS approval of the applications with respect to
the merger of the Mutual Holding Company (following its conversion to an interim
Federal stock savings bank) and Bancorp (following its adoption of a Federal
stock charter) into the Bank, with the Bank being the surviving entity.
Applications for these approvals, including an application to form Bancshares as
a holding company for the Bank, have been filed and are currently pending. There
can be no assurances that the requisite OTS approvals will be received in a
timely manner, in which event the consummation of the Conversion and
Reorganization may be delayed beyond the expiration of the Offerings.
Pursuant to OTS regulations, the Plan of Conversion and Reorganization
also must be approved by (1) at least a majority of the total number of votes
eligible to be cast by Members of the Mutual Holding Company at the Members'
Meeting, and (2) holders of at least two-thirds of the outstanding Bancorp
Common Stock at the Stockholders' Meeting. In addition, the Primary Parties have
conditioned the consummation of the Conversion and Reorganization on the
approval of the Plan by at least a majority of the votes cast, in person or by
proxy, by the Public Stockholders at the Stockholders' Meeting.
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the
Primary Parties will be final; however, such interpretations shall have no
binding effect on the OTS. The Plan provides that, if deemed necessary or
desirable by the Board of Directors, the Plan may be substantively amended by
the Board of Directors as a result of comments from the OTS or otherwise, prior
to the solicitation of proxies from the members of the Mutual Holding Company
and at any time thereafter with the concurrence of the OTS, except that in the
event that the regulations under which the Plan was adopted are liberalized
subsequent to the approval of the Plan by the OTS and the members of the Mutual
Holding Company at the special meeting of members, the Board of Directors may
amend the Plan to conform to the regulations without further approval of the OTS
or the members, to the extent permitted by law. An amendment to the Plan that
would result in a material adverse change in the terms of the Conversion and
Reorganization would require a resolicitation. In the event of a resolicitation,
subscriptions for which a confirmation or modification was not received would be
rescinded. Any amendment to the Plan regarding preferences to the Local
Community will not be deemed to be a material change.
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Certain Restrictions on Purchase or Transfer of Shares After the Conversion and
Reorganization
All shares of Conversion Stock purchased in connection with the
Conversion and Reorganization by a director or an executive officer of the
Primary Parties will be subject to a restriction that the shares may not be sold
for a period of one year following the Conversion and Reorganization, except in
the event of the death of such director or executive officer or pursuant to a
merger or similar transaction approved by the OTS. Each certificate for
restricted shares will bear a legend giving notice of this restriction on
transfer, and appropriate stop-transfer instructions will be issued to
Bancshares' transfer agent. Any shares of Conversion Stock issued within this
one-year period as a stock dividend, stock split or otherwise with respect to
such restricted stock will be subject to the same restrictions. The directors
and executive officers of Bancshares will also be subject to the insider trading
rules promulgated pursuant to the Exchange Act.
Purchases of Conversion Stock of Bancshares by directors, executive
officers and their associates during the three-year period following completion
of the Conversion and Reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 10% of Bancshares' outstanding Common Stock or to the purchase of Common
Stock pursuant to any tax-qualified employee stock benefit plan, such as the
ESOP, or by any non-tax-qualified employee stock benefit plan.
Pursuant to OTS regulations, Bancshares will generally be prohibited
from repurchasing any shares of Common Stock within one year following
consummation of the Conversion and Reorganization. During the second and third
years following consummation of the Conversion and Reorganization, Bancshares
may not repurchase any shares of its Common Stock other than pursuant to (i) an
offer to all stockholders on a pro rata basis that is approved by the OTS; (ii)
the repurchase of qualifying shares of a director, if any; (iii) purchases in
the open market by a tax-qualified or non-tax-qualified employee stock benefit
plan in an amount reasonable and appropriate to fund the plan; or (iv) purchases
that are part of an open-market program not involving more than 5% of its
outstanding capital stock during a 12 month period, if the repurchases do not
cause the Bank to become undercapitalized and the Bank provides to the Regional
Director of the OTS no later than 10 days prior to the commencement of a
repurchase program written notice containing a full description of the program
to be undertaken and such program is not disapproved by the Regional Director.
However, the Regional Director has authority to permit repurchases during the
first year following consummation of the Conversion and Reorganization and to
permit repurchases in excess of 5% during the second and third years upon the
establishment of exceptional circumstances.
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COMPARISON OF STOCKHOLDERS' RIGHTS
IN BANCORP AND BANCSHARES
General. The Conversion and Reorganization involve the elimination of
the Mutual Holding Company and Bancorp, and the substitution of another newly
organized company also chartered in Delaware. The resulting structure will be
more conventional in nature in that Bancshares will be the only entity with a
direct ownership interest in the Bank. Further, no mutual holding company will
be present. The Primary Parties were unable to maintain Bancorp as the owner of
the Bank because of certain regulations and policies of the OTS which prohibited
the merger of the Mutual Holding Company into Bancorp in a conversion and
reorganization. Bancshares, a Delaware corporation and holding company for the
Bank, will operate under a charter nearly identical to that of Bancorp. The
material differences are described below.
Authorized Capital Stock and Par Value. Bancorp's authorized capital
stock currently consists of 13,000,000 shares of common stock, par value $.0l
per share and 1,000,000 shares of preferred stock, par value $.0l per share.
Bancshares' Certificate of Incorporation authorizes 70,000,000 shares of Common
Stock, par value $.10 per share and 10,000,000 shares of Preferred Stock, par
value $.10 per share.
Removal of Mutual Holding Company Provisions. Certain sections of
Bancorp's Certificate of Incorporation provide for limitations concerning voting
rights. These limitations are also found in Bancshares' Certificate of
Incorporation. See "RESTRICTIONS ON ACQUISITION OF THE COMPANY -- Limitation of
Voting Rights." However, Bancorp's Certificate of Incorporation allows the
Mutual Holding Company to exceed these limits. This qualification is not
included in Bancshares' Certificate of Incorporation as the Mutual Holding
Company will not exist after the Conversion and Reorganization.
RESTRICTIONS ON ACQUISITION OF THE COMPANY
A number of provisions of Bancshares' Certificate of Incorporation and
bylaws deal with matters of corporate governance and certain rights of
shareholders. These provisions allow the Board of Directors flexibility to
analyze and consider corporate transactions in order to maximize benefits to
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shareholders. However, they may also serve to prevent individual shareholders
from participating in a transaction if the Board does not deem the transaction
to be beneficial to shareholders, even if individual shareholders desire to do
so. The following discussion is a general summary of certain provisions of
Bancshares' Certificate of Incorporation and Bylaws and certain other statutory
and regulatory provisions relating to stock ownership and transfers, the Board
of Directors and business combinations, which might be deemed to have a
potential "anti-takeover" effect. Such provisions may have the effect of
rendering the removal of the current Board of Directors of the Company more
difficult. The following description of certain of the provisions of the
Certificate of Incorporation and bylaws of the Company is necessarily general
and reference should be made in each case to such Certificate of Incorporation
and bylaws, which are incorporated herein by reference. See "ADDITIONAL
INFORMATION" for instructions on how to obtain a copy of these documents. The
provisions discussed below are identical to those of Bancorp unless otherwise
noted.
Limitation on Voting Rights. The Certificate of Incorporation of
Bancshares 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. In addition, for a period of five years from
the completion of the Conversion and Reorganization, no person may directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of equity securities of Bancshares. Beneficial ownership is
determined pursuant to Rule 13d-3 of the General Rules and Regulations
promulgated pursuant to the Exchange Act, and includes shares beneficially owned
by such person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire upon the exercise of conversion rights or options and shares as to which
such person and his affiliates have or share investment or voting power, but
shall not include shares beneficially owned by the benefit plans of the Board or
directors, officers and employees of the Bank or Bancshares as a group or shares
that are subject to a revocable proxy and that are not otherwise beneficially
owned, or deemed by Bancshares to be beneficially owned, by such person and his
affiliates. The Certificate of Incorporation of Bancshares further provides that
this provision limiting voting rights may only be amended upon the vote of 66
2/3% of the outstanding shares of voting stock (after giving effect to the
limitation on voting rights).
Board of Directors. The Board of Directors of Bancshares will be
divided into three classes, each of which shall contain approximately one-third
of the whole number of members of the Board. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. Bancshares' Certificate of Incorporation and bylaws provide
that the size of the Board shall be determined by a majority of the directors.
The Certificate of Incorporation and the bylaws provide that any vacancy
occurring in the Board, including a vacancy resulting from death, resignation,
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retirement, disqualification, removal from office or other cause, shall be
filled for the remainder of the unexpired term exclusively by a majority vote of
the directors then in office. The classified Board is intended to provide for
continuity of the Board of Directors and to make it more difficult and time
consuming for a shareholder group to fully use its voting power to gain control
of the Board of Directors without the consent of the incumbent Board of
Directors of Bancshares. The Certificate of Incorporation of Bancshares provides
that a director may be removed from the Board of Directors prior to the
expiration of his term only for cause, upon the vote of 66 2/3% of the
outstanding shares of voting stock.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of shareholders of the Company may be called
only by the Board of Directors of Bancshares. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
shareholders of the Company may be taken only at an annual or special meeting
and prohibits shareholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation of Bancshares
authorizes the issuance of 70,000,000 shares of Common Stock and 10,000,000
shares of preferred stock. See `DESCRIPTION OF CAPITAL STOCK OF BANCSHARES." The
shares of Common Stock and preferred stock were required to be increased to
enable sufficient common stock to be available to effect the transmittal of
Exchange Shares at the $10 Actual Purchase Price. The additional shares also
provide the Company's Board of Directors with as much flexibility as possible to
effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors consistent with its fiduciary
duty to deter future attempts to gain control of Bancshares. The Board of
Directors also has sole authority to determine the terms of any one or more
series of Preferred Stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post-tender offer merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. Bancshares' Board of Directors currently has
no plans for the issuance of additional shares upon the exercise of stock
options.
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Shareholder Vote Required to Approve Business Combinations with
Principal Shareholders. The Certificate of Incorporation of Bancshares requires
the approval of the holders of at least 66 2/3% of the Company's outstanding
shares of voting stock to approve certain "Business Combinations," as defined
therein, and related transactions. Under Delaware law, absent this provision,
Business Combinations, including mergers, consolidations and sales of all or
substantially all of the assets of a corporation must, subject to certain
exceptions, be approved by the vote of the holders of only a majority of the
outstanding shares of Common Stock of Bancshares and any other affected class of
stock. Under the Certificate of Incorporation, at least 66 2/3% approval of
shareholders is required in connection with any transaction involving an
Interested Shareholder (as defined below) except (i) in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Company's Board of Directors who are unaffiliated with the Interested
Shareholder and were directors prior to the time when the Interested Shareholder
became an Interested Shareholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
shareholders a fair price in consideration for their shares in which case, if a
shareholder vote is required, approval of only a majority of the outstanding
shares of voting stock would be sufficient. The term "Interested Shareholder" is
defined to include any individual, corporation, partnership or other entity
(other than Bancshares or its subsidiary) which owns beneficially or controls,
directly or indirectly, 15% or more of the outstanding shares of voting stock of
Bancshares. This provision of the Certificate of Incorporation applies to any
"Business Combination," which is defined to include (i) any merger or
consolidation of the Company or any of its subsidiaries with or into any
Interested Shareholder or Affiliate (as defined in the Certificate of
Incorporation) of an Interested Shareholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Shareholder or Affiliate of 10% or more of the assets of the Company or combined
assets of the Company and its subsidiary; (iii) the issuance or transfer to any
Interested Shareholder or its Affiliate by Bancshares (or any subsidiary) of any
securities of Bancshares in exchange for any assets, cash or securities the
value of which equals or exceeds 10% of the fair market value of the Common
Stock of Bancshares; (iv) the adoption of any plan for the liquidation or
dissolution of the Company proposed by or on behalf of any Interested
Shareholder or Affiliate thereof; and (v) any reclassification of securities,
recapitalization, merger or consolidation of Bancshares which has the effect of
increasing the proportionate share of Common Stock or any class of equity or
convertible securities of Bancshares owned directly or indirectly by an
Interested Shareholder or Affiliate thereof.
Amendment of Certificate of Incorporation and Bylaws. Amendments to
Bancshares' Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock; provided, however, that an affirmative vote of at least 66 2/3% of
the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
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provisions of the Certificate of Incorporation, including those provisions
limiting voting rights, relating to approval of certain business combinations,
calling special meetings, the number and classification of directors, director
and officer indemnification by the Company and amendment of Bancshares' bylaws
and Certificate of Incorporation. Bancshares' bylaws may be amended by its Board
of Directors, or by the vote of a majority of the shares present in person or by
proxy and entitled to a vote at any annual or special meeting except for those
instances where the Certificate of Incorporation requires a vote of 66 2/3% of
the total votes eligible to be voted at a duly constituted meeting of
shareholders for amendment.
Certain Bylaw Provisions. The Bylaws of Bancshares also require a
shareholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a shareholder meeting to give at least
120 days advance notice to the Secretary of the Company. The notice provision
requires a shareholder who desires to raise new business to provide certain
information to Bancshares concerning the nature of the new business, the
shareholder and the shareholder's interest in the business matter. Similarly, a
shareholder wishing to nominate any person for election as a director must
provide Bancshares with certain information concerning the nominee and the
proposing shareholder.
Benefit Plans. In addition to the provisions of Bancshares' certificate
and bylaws described above, certain benefit plans of ours adopted in connection
with the Conversion and Reorganization contain provisions which also may
discourage hostile takeover attempts which the boards of directors might
conclude are not in the best interests for us or our stockholders. For a
description of the benefit plans and the provisions of such plans relating to
changes in control, see "MANAGEMENT OF HARBOR FEDERAL -- Other Stock Benefit
Plans" and " -- Stock Option Plan
Regulatory Restrictions. A federal regulation prohibits any person
prior to the completion of a conversion from transferring, or entering into any
agreement or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, OTS regulations prohibit any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire more
than 10% of the stock of any converted savings institution if such person is, or
after consummation of such acquisition would be, the beneficial owner of more
than 10% of such stock. In the event that any person, directly or indirectly,
violates this regulation, the securities beneficially owned by such person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matter
submitted to a vote of stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
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through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of a savings
association or the power to control in any manner the election of a majority of
the directors of such institution.
Federal law also provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control of a savings association unless at least 60 days prior written notice
has been given to the OTS and the OTS has not objected to the proposed
acquisition. Control is defined for this purpose as the power, directly or
indirectly, to direct the management or policies of a savings association or to
vote more than 25% of any class of voting securities of a savings association.
Under federal law (as well as the regulations referred to below) the term
"savings association" includes state-chartered and federally chartered
SAIF-insured institutions, federally chartered savings and loans and savings
banks whose accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an
insured institution, a person, other than a company, must give 60 days notice to
the OTS and have received no OTS objection to such acquisition of control, and a
company must apply for and receive OTS approval of the acquisition. In this
circumstance, control involves a 25% voting stock test, control in any manner of
the election of a majority of the institution's directors, or a determination by
the OTS that the acquiror has the power to direct, or directly or indirectly to
exercise a controlling influence over, the management or policies of the
institution. Acquisition of more than 10% of an institution's voting stock, if
the acquiror also is subject to any one of either "control factors," constitutes
a rebuttable determination of control under the regulations. The determination
of control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock after the effective date of the regulations must file with
the OTS a certification that the holder is not in control of such institution,
is not subject to a rebuttable determination of control and will take no action
which would result in a determination or rebuttable determination of control
without prior notice to or approval of the OTS, as applicable.
Delaware Corporate Law
In addition, the state of Delaware has a statute designed to provide
Delaware corporations such as the Company with additional protection against
hostile takeovers. The takeover statute, which is codified in Section 203 of the
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Delaware General Corporation Law ("Section 203"), is intended to discourage
certain takeover practices by impeding the ability of a hostile acquiror to
engage in certain transactions with the target company.
In general Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(an "Interested Shareholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Shareholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Shareholder, the Board of Directors approved either the business
combination or the transaction which resulted in the shareholder becoming an
Interested Shareholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Shareholder, with the number of shares outstanding
calculated without regard to those shares owned by the corporation's directors
who are also officers and by certain employee stock plans; (iii) any business
combination with an Interested Shareholder that is approved by the Board of
Directors and by a two-thirds vote of the outstanding voting stock not owned by
the Interested Shareholder; and (iv) certain business combinations that are
proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the Board of Directors. A corporation may exempt itself from the requirements of
the statute by adopting an amendment to its Certificate of Incorporation or
Bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
DESCRIPTION OF CAPITAL STOCK OF BANCSHARES
Bancshares is authorized to issue 70,000,000 shares of the Common
Stock, $.10 par value per share, and 10,000,000 shares of serial preferred
stock, $.10 par value per share. Bancshares currently expects to issue up to
26,694,915 shares of Common Stock in the Conversion and Reorganization including
shares to be provided to shareholders in the Exchange. Therefore, after the
Conversion and Reorganization, the Company expects to have 26,694,915 shares
outstanding .
Dividends. Bancshares can pay dividends if and when declared by its
Board of Directors. See "DIVIDEND POLICY" and "REGULATION." The holders of
Common Stock of Bancshares will be entitled to receive and share equally in such
dividends as may be declared by the Board of Directors of Bancshares out of
funds legally available therefor. If Bancshares issues preferred stock, the
holders thereof may have a priority over the holders of the Common Stock with
respect to dividends.
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Bancshares does not intend to issue any shares of serial preferred
stock in the Conversion and Reorganization, nor are there any present plans to
issue such preferred stock following the Conversion and Reorganization. The
aggregate par value of the issued shares will constitute the capital account of
the Company. The balance of the purchase price will be recorded for accounting
purposes as additional paid-in capital. See "CAPITALIZATION." The capital stock
of Bancshares will represent nonwithdrawable capital and will not be insured by
Bancshares, the FDIC, or any other government agency.
Common Stock
Voting Rights. Each share of Bancshares Common Stock will have the same
relative rights and will be identical in all respects with every other share of
the Common Stock. The holders of the Common Stock will possess exclusive voting
rights in Bancshares, except to the extent that shares of serial preferred stock
issued in the future may have voting rights, if any. Each holder of the Common
Stock will be entitled to only one vote for each share held of record on all
matters submitted to a vote of holders of the Common Stock and will not be
permitted to cumulate their votes in the election of Bancshares' directors.
Upon payment of the purchase price for the Common Stock all such stock
will be duly authorized, fully paid and nonassessable.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of Bancshares, the holders of the Common Stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company (including all deposits with us and accrued interest thereon); (ii) any
accrued dividend claims; (iii) liquidation preferences of any serial preferred
stock which may be issued in the future; and (iv) any interests in the
liquidation account established upon the Conversion and Reorganization for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders
who continue to have their deposits with the Bank.
Restrictions on Acquisition of the Common Stock. See "RESTRICTIONS ON
ACQUISITION OF THE COMPANY" for a discussion of the limitations on acquisition
of shares of the Common Stock.
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. Therefore, the Board of Directors may sell shares of
capital stock of Bancshares without first offering such shares to existing
stockholders of the Company. The Common Stock is not subject to call for
redemption.
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Issuance of Additional Shares. Except as disclosed herein, Bancshares
has no present plans, proposals, arrangements or understandings to issue
additional authorized shares of the Common Stock. In the future, the authorized
but unissued and unreserved shares of the Common Stock will be available for
general corporate purposes, including, but not limited to, possible issuance:
(i) as stock dividends; (ii) in connection with mergers or acquisitions; (iii)
under a cash dividend reinvestment or stock purchase plan; (iv) in a public or
private offering; or (v) under employee benefit plans. See "RISK FACTORS --
Possible Dilutive Effect of 1997 Stock Options and Effect of Purchases by the
Recognition Plan and ESOP" and "PRO FORMA DATA." Normally no stockholder
approval would be required for the issuance of these shares, except as described
herein or as otherwise required to approve a transaction in which additional
authorized shares of the Common Stock are to be issued.
For additional information, see "REGULATION -- Limitations on Dividends
and Other Capital Distributions" with respect to restrictions on the payment of
cash dividends; and "RESTRICTIONS ON ACQUISITION OF THE COMPANY" for information
regarding restrictions on acquiring Common Stock of the Company.
Serial Preferred Stock
None of the 10,000,000 authorized shares of serial preferred stock of
Bancshares will be issued in the Conversion and Reorganization. After the
Conversion and Reorganization is completed, the Board of Directors of Bancshares
will be authorized to issue serial preferred stock and to fix and state voting
powers, designations, preferences or other special rights of such shares and the
qualifications, limitations and restrictions thereof, subject to regulatory
approval but without stockholder approval. If and when issued, the serial
preferred stock is likely to rank prior to the Common Stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights. The Board of Directors, without stockholder approval, can issue serial
preferred stock with voting and conversion rights which could adversely affect
the voting power of the holders of the Common Stock. The Board of Directors has
no present intention to issue any of the serial preferred stock.
LEGAL AND TAX MATTERS
The legality of the Common Stock will be passed upon for Bancshares by
Peabody & Brown, Washington, D.C. Certain legal matters for FBR will be passed
upon by Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation,
Washington, D.C. The federal income tax consequences of the Conversion and
Reorganization have been passed upon by Peabody & Brown, Washington, D.C. The
Florida income tax consequences of the Conversion and Reorganization have been
passed upon by Dean, Mead, Egerton, Bloodworth, Capouano & Bogarth, P.A.,
Orlando, Florida.
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EXPERTS
The financial statements of Bancorp as of and for the years ended
September 30, 1997, 1996 and 1995 included in this Prospectus have been audited
by KPMG Peat Marwick LLP, independent auditors, as set forth in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
RP Financial has consented to the publication herein of a summary of
its letters to Bancorp setting forth its opinion as to the estimated pro forma
market value of the Mutual Holding Company in the converted form and its belief
concerning the value of subscription rights and to the use of its name and
statements with respect to it appearing in this Prospectus.
REGISTRATION REQUIREMENTS
Bancorp Common Stock of Bancorp is currently registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Bancorp is subject to the information, proxy solicitation, insider
trading restrictions, tender offer rules, periodic reporting and other
requirements of the SEC under the Exchange Act. After the Conversion and
Reorganization the Common Stock will be so registered and Bancshares will be
subject to the same requirements. Bancshares may not deregister the Common Stock
under the Exchange Act for a period of at least three years following the
Conversion and Reorganization. The Common Stock of Bancshares will be registered
pursuant to Section 12(g) of the Exchange Act and will be subject to the same
information, proxy solicitation, insider trading restrictions, tender offer
rules, and period reporting requirements of the SEC under the Exchange Act as
Bancshares.
ADDITIONAL INFORMATION
Bancshares has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Conversion Stock and
Exchange Shares offered hereby. As permitted by the rules and regulations of the
SEC, this Prospectus does not contain all the information set forth in the
Registration Statement. Such information can be examined without charge at the
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public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the SEC
at prescribed rates. The SEC maintains a World Wide Web site on the Internet
that contains reports, proxy and information statements and other information
regarding registrants such as the Company that file electronically with the SEC.
The address of such site is: http://www.sec.gov. The statements contained in
this Prospectus as to the contents of any contract or other document filed as an
exhibit to the Registration Statement describe all material provisions of such
contracts or other documents. Nevertheless, such statements are, of necessity,
brief descriptions thereof and are not necessarily complete; each such statement
is qualified by reference to such contract or document.
The Mutual Holding Company has filed an Application for Conversion with
the OTS with respect to the Conversion and Reorganization. Bancshares has filed
an application with OTS to become a savings and loan holding company. This
Prospectus omits certain information contained in this application. These
applications may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552, and OTS Southeast Regional Office, 1475 Peachtree
Street, N.E., Atlanta, GA 30309.
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HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report F-2
Consolidated Statement of Financial Condition - September 30, 1997 and 1996 F-3
Consolidated Statements of Earnings - Years ended September 30, 1997, 1996, and F-4
1995
Consolidated Statements of Stockholders' Equity - Years ended September 30, 1997, F-5
1996, and 1995
Consolidated Statement of Cash Flows -Years ended September 30, 1997, 1996, and F-6
1995
Notes to the Consolidated Financial Statements F-8
</TABLE>
All schedules are omitted as they are not required or are not applicable or
the required information is shown in the applicable consolidated financial
statements or notes thereto.
Harbor Financial, M.H.C has limited assets and liabilities, other than the
stock of Harbor Florida Bancorp, Inc. Accordingly, the financial statements of
Harbor Financial, M.H.C. are omitted due to immateriality.
F-1
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Independent Auditors' Report
Board of Directors
Harbor Florida Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Harbor Florida Bancorp, Inc., (formerly Harbor Federal Savings
Bank) and subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended September 30, 1997. These
consolidated financial statements are the responsibility of Harbor Florida
Bancorp, Inc.'s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Harbor
Florida Bancorp, Inc. and subsidiaries at September 30, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
West Palm Beach, Florida
November 14, 1997
F-2
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands except share data)
September 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
- ------ ----------- -----------
<S> <C> <C>
Cash and amounts due from depository institutions $ 16,899 $ 16,137
Interest-bearing deposits in other banks 15,736 16,350
Federal funds sold 250 16,075
Investment securities held to maturity (estimated market value of
$4,993 in 1997 and $20,016 in 1996) 5,000 20,000
Investment securities available for sale (estimated market value of
$47,553 in 1997 and $33,493 in 1996) 47,553 33,493
Mortgage-backed securities held to maturity (estimated market value
of $178,954 in 1997 and $153,288 in 1996) 176,854 153,293
Loans held for sale (estimated market value of $144 in 1997 and
$4,870 in 1996) 141 4,870
Loans, net 834,270 765,019
Accrued interest receivable 7,033 6,621
Real estate owned 2,314 3,118
Premises and equipment 13,313 10,543
Federal Home Loan Bank stock 7,595 7,158
Goodwill 3,045 3,587
Other assets 1,021 1,179
----------- -----------
Total assets $ 1,131,024 $ 1,057,443
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 911,576 $ 851,853
Short-term borrowings 30,100 25,000
Long-term debt 70,375 70,674
Advance payments by borrowers for taxes and insurance 15,924 15,212
Income taxes payable 628 962
Other liabilities 5,619 8,910
----------- -----------
Total liabilities 1,034,222 972,611
=========== ===========
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock; $.01 par value; authorized 1,000,000 shares; none
issued and outstanding -- --
Common stock; $.01 par value; authorized 13,000,000 shares; issued
and outstanding 4,973,428 shares at September 30, 1997 and 4,934,454
shares at September 30, 1996 50 49
Paid-in capital 26,876 25,339
Retained earnings, substantially restricted 71,203 60,893
Common stock purchased by:
Employee stock ownership plan (ESOP) (374) (674)
Recognition and retention plans (RRP) -- (53)
Deferred compensation plan (946) (673)
Net unrealized loss on investment securities available for sale,
net of income taxes (7) (49)
----------- -----------
Total stockholders' equity 96,802 84,832
----------- -----------
Total liabilities and stockholders' equity $ 1,131,024 $ 1,057,443
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Dollars in thousands except per share data)
Years ended September 1997, 1996, and 1995
1997 1996 1995
-------- -------- --------
Interest income:
Loans $ 68,847 $ 59,751 $ 51,050
Investment securities 3,866 2,462 2,352
Mortgage-backed securities 10,088 10,155 9,613
Other 2,013 1,989 1,869
-------- -------- --------
Total interest income 84,814 74,357 64,884
-------- -------- --------
Interest expense:
Deposits 39,144 34,440 29,627
Other 6,015 4,674 3,653
-------- -------- --------
Total interest expense 45,159 39,114 33,280
-------- -------- --------
Net interest income 39,655 35,243 31,604
Provision for (recovery of) loan losses 782 (76) 460
-------- -------- --------
Net interest income after provision
for (recovery of) loan losses 38,873 35,319 31,144
-------- -------- --------
Other income:
Other fees and service charges 3,308 2,797 2,566
Income (losses) from real estate operations 145 (301) (40)
Gain (loss) on sale of mortgage loans 188 (40) 91
Other 572 429 290
-------- -------- --------
Total other income 4,213 2,885 2,907
-------- -------- --------
Other expenses:
Compensation and employee benefits 11,931 10,690 10,048
Occupancy 3,046 2,632 2,291
Professional fees 599 527 699
SAIF deposit insurance premium 785 6,300 1,556
Other 4,787 3,983 3,604
-------- -------- --------
Total other expense 21,148 24,132 18,198
-------- -------- --------
21,938 14,072 15,853
Income before income taxes
Income tax expense 8,611 5,432 5,958
-------- -------- --------
Net income $ 13,327 $ 8,640 $ 9,895
======== ======== ========
Net income per share $ 2.66 $ 1.75 $ 2.03
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Common stock Unrealized
Common Common purchased by gain (loss) on
stock stock deferred securities
Common Paid-in Retained purchased by purchased compensation available
stock capital earnings ESOP by RRP's plan for sale, net Total
--- ------- -------- ------------ --------- ------------- -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 $49 $23,975 $46,416 $(1,273) $(481) $(435) $ - $68,251
Net income - - 9,895 - - - - 9,895
Stock options exercised - 168 - - - - - 168
Amortization of award of ESOP
and RRP's - 264 - 299 214 - - 777
Tax benefit of RRP's - 48 - - - - - 48
Dividends paid - - (1,639) - - - - (1,639)
--- ------- ------- ----- ----- ----- ---- -------
Balance at September 30, 1995 $49 $24,455 $54,672 $(974) $(267) $(435) $ - $77,500
--- ------- ------- ----- ----- ----- ---- -------
Net income - - 8,640 - - - - 8,640
Stock options exercised - 234 - - - - - 234
Amortization of award of ESOP
and RRP's - 482 - 300 214 - - 996
Tax benefit of RRP's - 137 - - - - - 137
Dividends paid - - (2,419) - - - - (2,419)
Unrealized gain on securities
available for sale, net - - - - - - 126 126
Change in unrealized gain
(loss) on securities
available for sale, net - - - - - - (175) (175)
Tax benefit of non- qualified
stock options - 31 - - - - - 31
Stock purchased by deferred
compensation plan - - - - - (238) - (238)
--- ------- ------- ----- ----- ----- ---- -------
Balance at September 30, 1996 $49 $25,339 $60,893 $(674) $( 53) $(673) $(49) $84,832
--- ------- ------- ----- ----- ----- ---- -------
Net income - - 13,327 - - - - 13,327
Stock options exercised 1 389 - - - - - 390
Amortization of award of ESOP - 856 - 300 53 - - 1,209
and RRP's
Tax benefit of RRP's - 193 - - - - - 193
Dividends paid - - (3,017) - - - - (3,017)
Change in unrealized gain - - - - - - 42 42
(loss) on securities
available for sale, net
Tax benefit of non- qualified - 99 - - - - - 99
stock options
Stock purchased by deferred - - - - - (273) - (273)
compensation plan
=== ======= ======= ===== === ===== === =======
Balance at September 30, 1997 $50 $26,876 $71,203 $(374) $ - $(946) $(7) $96,802
=== ======= ======= ===== === ===== === =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash provided by operating activities:
Net income 13,327 8,640 $ 9,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of stock benefit plans 1,209 996 777
Tax benefit of stock plans credited to capital 292 168 48
Originations of loans held for sale (5,360) (8,554) (9,929)
Proceeds from sale of loans held for sale 8,395 4,693 8,945
Depreciation and amortization 1,103 1,104 1,017
Deferred income tax provision (benefit) 1,781 (1,365) 1,559
Increase in deferred loan fees and costs 1,133 1,047 881
Amortization of deferred loan fees and costs (926) (973) (1,090)
Amortization of goodwill 236 71 --
Net accretion of other purchase accounting
adjustments (12) (20) --
Gain on sale of premises and equipment (239) -- --
(Gain) loss on sale of real estate owned (127) 39 (180)
Accretion of discount on purchased loans (17) (24) (258)
Increase in accrued interest receivable (411) (184) (1,277)
Provision for (recovery of) loan losses 782 (76) 460
Provision for (recovery of) losses on real estate owned (150) 117 35
(Increase) decrease in other assets 157 (143) 70
Increase (decrease) in income taxes payable (334) 469 267
Increase (decrease) in other liabilities (5,098) 4,178 (165)
-------- -------- --------
Net cash provided by operating activities 15,741 10,183 11,055
-------- -------- --------
Cash used by investing activities:
Net increase in loans (69,732) (72,973) (55,545)
Purchase of mortgage-backed securities (61,769) (29,265) (65,609)
Proceeds from principal repayments of mortgage-backed
securities 38,031 40,068 20,780
Proceeds from maturities of investment securities held
to maturity 35,000 -- 25,042
Purchase of investment securities held to maturity (20,000) (20,000) (10,000)
Proceeds from maturities of investment securities
available for sale 15,533 10,595 --
Proceeds from sale of investment securities available
for sale -- 6,745 --
Purchase of investment securities available for sale (29,500) (17,939) --
Proceeds from sale of real estate owned 2,202 1,434 2,022
Purchase of premises and equipment (4,068) (1,423) (2,020)
Proceeds from sale of premises and equipment 587 1,590 180
FHLB stock purchase (437) (619) (706)
Purchase of Treasure Coast Bank, net of cash acquired -- (4,451) --
Other 306 -- --
-------- -------- --------
Net cash used by investing activities (93,847) (86,238) (85,856)
-------- -------- --------
</TABLE>
F-6
<PAGE>
HARBOR FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended September 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash provided by financing activities:
Net increase in deposits 59,816 60,679 47,152
Net proceeds from short-term borrowings 5,100 15,000 --
Repayments of long-term borrowings (299) (300) (300)
Net proceeds from long-term borrowings -- 15,000 20,000
Increase (decrease) in advance payments by
borrowers for taxes and insurance 712 (1,995) 697
Stock dividend paid (3,017) (2,419) (1,639)
Common stock options exercised 390 235 168
Purchase of common stock by deferred
compensation plan (273) (238) --
-------- -------- --------
Net cash provided by financing activities 62,429 85,962 66,078
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents (15,677) 9,907 (8,723)
Cash and cash equivalents - beginning of period 48,562 38,655 47,378
-------- -------- --------
Cash and cash equivalents - end of period $ 32,885 $ 48,562 $ 38,655
======== ======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 45,159 $ 39,324 $ 33,228
Taxes 6,918 6,161 4,114
Noncash investing and financing activities:
Additions to real estate acquired in settlement
of loans through foreclosure 2,459 2,879 1,312
Sale of real estate owned financed by the
Company 1,337 1,044 658
Transfer of investment securities from held to
maturity to available for sale -- 26,011 --
Change in unrealized gain (loss) on securities
available for sale 68 (79) --
Change in deferred taxes related to securities
available for sale (26) 29 --
Transfer of loans held for sale to held for
maturity 1,693 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies
(a) Reorganization
On June 25, 1997, Harbor Federal Savings Bank (the "Bank") completed its
reorganization into the two-tier form of mutual holding company ownership.
Pursuant to the reorganization, the Bank is now the wholly owned subsidiary of
Harbor Florida Bancorp, Inc. (the "Company"), a Delaware corporation. The
Company is the majority owned subsidiary of Harbor Financial, M.H.C. (The
"Holding Company"). Pursuant to the reorganization, each share of the Bank's
outstanding common stock was automatically converted into one share of the
Company's common stock. The reorganization was accounted for in a manner
similar to a pooling of interests and did not result in any significant
accounting adjustments. The consolidated financial statements for prior
periods have been restated to reflect the change in the par value of the
Company's common stock from $1.00 to $.01 per share. Certain conditions were
imposed upon the Company by the OTS as part of the reorganization, including
requirements to obtain a federal charter, provisions related to minority stock
issuances, and other regulatory requirements.
The Company conducts no business other than holding the common stock of the
Bank. Consequently, its net income is derived from the Bank.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Harbor Florida Bancorp, Inc. and its wholly-owned subsidiaries. In
consolidation, all significant intercompany accounts and transactions have
been eliminated.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the statement of financial condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and real estate owned, management obtains independent
appraisals for significant properties.
As of September 30, 1997, substantially all of the Company's loans and
investment in real estate owned are secured by real estate in the counties in
which the Company has branch facilities: St. Lucie, Indian River, Brevard,
Martin and Volusia Counties, Florida. Accordingly, the ultimate collectibility
of a substantial portion of the Company's loan portfolio and the recovery of a
substantial portion of the carrying amount of real estate owned are
susceptible to changes in market conditions in the above counties. Management
believes that the allowances for losses on loans and real estate owned are
adequate. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowances may be
necessary based on changes in economic conditions, particularly in the above
counties. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowances for
losses on loans and real estate owned. Such agencies may require the Company
to recognize additions to the allowances based on their judgments about
information available to them at the time of their examination.
(c) Loan Origination and Commitment Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred, and the net
fee is recognized in income using the interest method over the contractual
life of the loans. Commitment fees and costs relating to commitments whose
likelihood of exercise is remote are recognized over the commitment period on
a straight-line basis. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the life of the loan as an adjustment of yield.
F-8
<PAGE>
HARBOR FLORIDA BANCORP, INC.
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 include securities
that are being held for an unspecified period of time, such as those the
Company would consider selling to meet liquidity needs or as part of the
Company's risk management program. Unrealized holding gains and losses, net of
tax, on available-for-sale securities are reported as a net amount in a
separate component of stockholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses.
On November 15, 1995, the Financial Accounting Standards Board (FASB) issued
Special Report No. 155-B, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities", (the
"Special Report"). Pursuant to the Special Report, the Company was permitted
to conduct a one-time reassessment of the classification of all securities
held at that time. Any reclassification from the held-to-maturity category
made in conjunction with that reassessment would not call into question an
enterprise's intent to hold other debt securities to maturity in the future.
The Company undertook such a reassessment and, effective December 31, 1995,
all investment securities were reclassified as available for sale. On the
effective date of the reclassification, the securities transferred had a
carrying value of $25.8 million and an estimated fair value of $26.0 million,
resulting in a net increase to stockholders' equity for the net unrealized
appreciation of $126,000, after deducting applicable income taxes of $76,000.
Prior to October 1, 1994, investment and mortgage-backed securities were
carried at cost, adjusted for premiums and discounts that were recognized in
interest income using the interest method over the period to maturity.
The Company does not purchase, sell or utilize off-balance sheet derivative
financial instruments or derivative commodity instruments.
At September 30, 1997 and 1996, the Company had no commitments to sell
investment or mortgage-backed securities.
<PAGE>
(f) Loans Receivable
Loans receivable are stated at unpaid principal balances, less loans in
process, the allowances for loan losses and net deferred loan origination fees
and discounts.
Discounts on mortgage loans are amortized to income using the interest method
over the remaining period to contractual maturity.
The Company follows a consistent procedural discipline and accounts for loan
loss contingencies in accordance with Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies" (Statement 5). The following
is a description of how each portion of the allowance for loan losses is
determined.
The Company segregates the loan portfolio for loan loss purposes into the
following broad segments such as: commercial real estate; residential real
estate; commercial business; and consumer loan. The Company provides for a
general allowance for losses inherent in the portfolio by the above
categories, which consists of two components. General loss percentages are
calculated based upon historical analyses. A supplemental portion of the
allowance is calculated for inherent losses which probably exist as of the
evaluation date even though they might not have been identified by the more
objective processes used for the portion of the allowance described above.
This is due to the risk of error and/or inherent imprecision in the process.
This portion of the allowance is particularly subjective and requires
judgments based on qualitative factors which do not lend themselves to exact
mathematical calculations such as: trends in delinquencies and nonaccruals;
migration trends in the portfolio; trends in volume, terms, and portfolio mix;
new credit products and/or changes in the geographic distribution of those
products; changes in lending policies and procedures; loan review reports on
the efficacy of the risk identification process; changes in the outlook for
local, regional and national economic conditions; concentrations of credit;
and peer group comparisons.
F-9
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Specific allowances are provided in the event that the specific collateral
analysis on each classified loan indicates that the probable loss upon
liquidation of collateral would be in excess of the general percentage
allocation. The provision for loan loss is debited or credited in order to
state the allowance for loan losses to the required level as determined above.
The Company considers a loan to be impaired when it is probable that the
Company will be unable to collect all amounts due, both principal and
interest, according to the contractual terms of the loan agreement. When a
loan is impaired, the Company may measure impairment based on (a) the present
value of the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (b) the observable market price of
the impaired loans, or (c) the fair value of the collateral of a
collateral-dependent loan. The Company selects the measurement method on a
loan-by-loan basis, except for collateral-dependent loans for which
foreclosure is probable must be measured at the fair value of the collateral.
In a troubled debt restructuring involving a restructured loan, the Company
measures impairment by discounting the total expected future cash flows at the
loan's original effective rate of interest.
(g) Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market,
comprised of 1-4 family residential loans, are carried at the lower of cost or
estimated market value, in the aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("Statement 122") which
eliminated the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. Statement 122 requires an entity to
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. Statement 122 requires the
periodic evaluation of capitalized mortgage servicing rights for impairment
based on fair value. On October 1, 1996, this statement was implemented
prospectively. The impact of Statement 122 upon implementation was not
significant to the Company's financial condition or results of operations upon
adoption. Effective January 1, 1997, Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("Statement 125") superseded Statement
122. The impact of the implementation of Statement 125 was not significant to
the Company's financial position and results of operations upon adoption.
(h) Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are
to be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in income
(losses) from real estate operations.
(i) Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation of premises and equipment is provided on the straight-line method
over the estimated useful lives of the related assets. Estimated lives are
three to fifty years for buildings and improvements and three to ten years for
furniture and equipment. Leasehold improvements are amortized on the
straight-line method over the shorter of the remaining term of the related
leases or their estimated useful lives.
Maintenance and repairs are charged to expense as incurred and improvements
are capitalized. The cost and accumulated depreciation relating to premises
and equipment retired or otherwise disposed of are eliminated from the
accounts and any resulting gains or losses are credited or charged to income.
F-10
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(j) Goodwill
Goodwill is being amortized on a straight-line basis over its estimated useful
life of 15 years. Goodwill is evaluated by management for impairment whenever
events or changes in circumstances indicate that the carrying amount of
goodwill may not be recoverable based on facts and circumstances related to
the value of net assets acquired that gave rise to the goodwill.
(k) Income Taxes
The Company uses the asset and liability method to account for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
The tax bad debt reserve method currently available to thrift institutions was
repealed for the Company for the year beginning October 1, 1996. As a result,
the Company must change from the reserve method to the specific charge-off
method to compute its bad debt deduction.
The Company is required generally to recapture into income for tax purposes
the portion of its bad debt reserves (other than the supplemental reserve)
that exceeds its base year reserves (i.e., its tax reserves for the last tax
year beginning before 1988). For financial statement purposes, the Company has
previously provided deferred taxes on the amount of the bad debt reserve in
excess of the base year. Such reserves subject to recapture and base year
reserves were approximately $7.1 million and $14.5 million, respectively, at
September 30, 1997.
The recapture amount resulting from the change in the method of accounting for
its bad debt reserves generally will be taken into taxable income ratably (on
a straight-line basis) over a six-year period. If the Company meets a
"residential loan requirement", as defined for a tax year beginning in 1996 or
1997, the recapture of the reserves will be suspended for such tax year. The
Company met such requirement for the tax year beginning October 1, 1996.
Certain events, as defined, will still trigger a recapture of the base year
reserve. However, the base year will not be recaptured if a thrift converts to
a bank charter or is merged into a bank. The base year reserves also remain
subject to income tax penalty provisions which, in general, require recapture
upon certain stock redemptions of, and excess distributions to, shareholders.
<PAGE>
(l) Pension Plan
The Company's policy is to fund pension costs as they accrue based on normal
cost.
(m) Stock-Based Compensation
In October, 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" (Statement 123). This
standard allows the use of either the fair value based method described in
Statement 123 or the intrinsic value based method prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." ("APB 25") The Company has
elected to continue accounting for stock based compensation under the APB 25
method and disclose the pro-forma impact of Statement 123.
(n) Statement of Cash Flows
Cash equivalents include amounts due from banks, interest-bearing deposits in
other banks and Federal funds sold. For purposes of cash flows, the Company
considers all highly liquid debt instruments with original maturities when
purchased of three months or less to be cash equivalents.
(o) Net Income Per Share
Net income per share totaled $2.66, $1.75 and $2.03 based upon 5,006,312,
4,947,108 and 4,880,054 weighted average number of common and common
equivalent shares outstanding during the years ended September 30, 1997, 1996,
and 1995, respectively.
(p) Reclassification
Certain amounts included in the 1996 and 1995 consolidated financial
statements have been reclassified in order to conform to the 1997
presentation.
F-11
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(q) Derivative Instruments
The Company does not purchase, sell or enter into derivative financial
instruments or derivative commodity instruments as defined by Statement of
Financial Accounting Standards No. 119, "Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments."
(r) New Accounting Pronouncements
In June, 1996, the FASB issued Statement of Financial Accounting Standards No.
125 ("Statement 125"), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." Statement 125, which superseded
Statement 122 as of January 1, 1997, provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment
of liabilities based on a financial-components approach that focuses on
control. Statement 125 was effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring on or after January 1,
1997 and is prospectively applied. Implementation of Statement 125 did not
have a material impact on the financial position or the results of operations
of the Company.
In February, 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 is effective
for financial statements issued for periods ending after December 15, 1997.
Statement 128 establishes standards for computing and presenting earnings per
share ("EPS"), simplifies the standards previously found in APB No. 15,
"Earnings Per Share", and makes them comparable to international EPS
standards. The Company will begin disclosing EPS in accordance with Statement
128 beginning with the quarter ended December 31, 1997.
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("Statement 130"). Statement 130 is
effective for fiscal years beginning after December 15, 1997. Statement 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Statement 130 requires all items recognized under accounting standards as
components of comprehensive income be reported in a financial statement with
equal prominence as other financial statements. Such statement will be
presented by the Company beginning with the quarter ended December 31, 1998.
In June, 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 is effective for periods beginning after
December 15, 1997. Statement 131 establishes standards for the way that public
business enterprises report information about operating segments, based on how
the enterprise defines such segments. The Company is required to report
operating segment information, to the extent such segments are defined,
beginning with the year ended September 30, 1999.
F-12
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2). Investment and Mortgage-backed Securities
The amortized cost and estimated market value of investment and
mortgage-backed securities as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
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 118,951 1,250 --- 120,201
FNMA mortgage-backed securities 57,903 850 --- 58,753
-------- ------ ------ --------
176,854 2,100 --- 178,954
-------- ------ ------ --------
$229,418 $2,103 $ 21 $231,500
======== ====== ===== ========
</TABLE>
The amortized cost and estimated market value of investment and
mortgage-backed securities as of September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
Treasury notes $ 23,457 $ --- $ 110 $ 23,347
FHLB notes 10,000 31 --- 10,031
Other securities 115 --- --- 115
-------- ------ ------ --------
33,572 31 110 33,493
-------- ------ ------ --------
Held to maturity:
FHLB notes 20,000 16 --- 20,016
-------- ------ ------ --------
FHLMC mortgage-backed securities 114,072 --- 333 113,739
FNMA mortgage-backed securities 39,221 328 --- 39,549
-------- ------ ------ --------
153,293 328 333 153,288
-------- ------ ------ --------
$206,865 $ 375 $ 443 $206,797
======== ====== ===== ========
</TABLE>
The amortized cost and estimated market value of debt securities at September
30, 1997 and September 30, 1996 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
F-13
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996
----------------------- ------------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
Due in one year or less $ 22,482 $ 22,482 $ 15,505 $ 15,539
Due in one to five years 25,000 24,989 17,952 17,839
Other securities 82 82 115 115
-------- -------- -------- --------
47,564 47,553 33,572 33,493
-------- -------- -------- --------
Held to maturity:
Due in one year or less -- -- -- --
Due in one to five years 5,000 4,993 20,000 20,016
Other securities -- -- -- --
-------- -------- -------- --------
5,000 4,993 20,000 20,016
-------- -------- -------- --------
FHLMC mortgage-backed securities 118,951 120,201 114,072 113,739
FNMA mortgage-backed securities 57,903 58,753 39,221 39,549
-------- -------- -------- --------
176,854 178,954 153,293 153,288
-------- -------- -------- --------
$229,418 $231,500 $206,865 $206,797
======== ======== ======== ========
</TABLE>
There were no realized gains or losses on available for sale securities during
1997. During 1996, gross realized gains and gross realized losses on available
for sale securities were $19,000 and $0, respectively. As of September 30,
1997, the Company had pledged mortgage-backed securities with a market value
of $493,000 and a carrying value of $481,000 to collateralize the public funds
on deposit. The Company had also pledged mortgage-backed securities with a
market value of $2,040,000 and a carrying value of $1,991,000 to collateralize
Treasury, tax and loan accounts as of September 30, 1997.
F-14
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3). Loans
Loans are summarized below:
1997 1996
-------- --------
Mortgage loans: (Dollars in thousands)
Construction 1-4 family $ 47,800 $ 43,994
Permanent 1-4 family 629,906 584,297
Multi-family 15,326 17,804
Nonresidential 54,983 41,970
Land 33,182 29,034
-------- --------
Total mortgage loans 781,197 717,099
-------- --------
Other loans:
Commercial nonmortgage 11,287 8,199
Home improvement 20,614 20,679
Manufactured housing 16,399 15,784
Other consumer 51,988 44,265
-------- --------
Total other loans 100,288 88,927
-------- --------
Total loans receivable 881,485 806,026
-------- --------
Less:
Loans in process 32,078 26,788
Deferred loan fees and discounts 3,446 3,203
Allowance for loan losses 11,691 11,016
-------- --------
47,215 41,007
-------- --------
Total loans receivable, net $834,270 $765,019
======== ========
Weighted average yield 8.47% 8.54%
<PAGE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 11,016 $ 10,083 $ 9,434
Provision for (recovery of) loan
losses 782 (76) 460
Allowance for loan losses acquired --- 885 ---
Charge-offs (262) (366) (384)
Recoveries 155 490 573
-------- -------- --------
Ending balance $ 11,691 $ 11,016 $ 10,083
======== ======== ========
</TABLE>
At September 30, 1997 and 1996, loans with unpaid principal balances of
approximately $2,580,000 and $2,172,000, respectively, were 90 days or more
contractually delinquent or on nonaccrual status. Interest income relating to
nonaccrual loans not recognized for the years ended September 30, 1997, 1996,
and 1995 totaled approximately $131,000, $140,000 and $231,000, respectively.
As of September 30, 1997 and 1996, approximately $2,377,000 and $2,081,000,
respectively, of loans 90 days or more contractually delinquent were in the
process of foreclosure.
The investment in impaired loans (primarily consisting of classified loans),
other than those evaluated collectively for impairment at September 30, 1997
and 1996 was $12,157,000 and $11,053,000 respectively. The average recorded
investment in impaired loans during the years ended September 30, 1997 and 1996
were approximately $12,122,000 and $13,651,000, respectively. The total
specific allowance for loan losses related to these loans was approximately
$117,000 and $174,000, respectively, on September 30, 1997 and 1996. Interest
income on impaired loans of approximately $1,147,000 and $1,346,000 was
recognized in the year ended September 30, 1997 and 1996, respectively.
F-15
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 1997 and September 30, 1996, mortgage loans
which had been sold on a recourse basis had outstanding principal balances of
$3,185,000 and $4,424,000, respectively.
Accrued interest receivable is summarized below:
1997 1996
------ ------
(In thousands)
Loans $4,874 $4,625
Investment securities 759 676
Mortgage-backed securities 1,261 1,190
FHLB stock dividends 139 130
------ ------
$7,033 $6,621
====== ======
The Company is a party to financial instruments in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statements of
condition. The contract or notional amounts of these instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments. The Company uses the same credit policies in making commitments
as it does for on-balance sheet instruments. The Company controls the credit
risk of these transactions through credit approvals, limits, and monitoring
procedures. Such commitments are agreements to lend to a customer as long as
there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. Standby
letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Company holds collateral
supporting those commitments for which collateral is deemed necessary. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.
Outstanding mortgage loan commitments (excluding loans in process), which
generally expire in 60 days, amounted to approximately $12,254,000 ($4,226,000
fixed rate, interest rates from 6.5% to 9.5%) as of September 30, 1997. In
addition, as of September 30, 1997, the Company had determined that
$16,879,000 may be lent to certain home builders on a variable rate and
home-by-home basis, subject to underwriting and product approval by the
Company.
<PAGE>
4) Loan Servicing
Mortgage loans, including those underlying pass through securities, serviced
for others are not included in the accompanying consolidated financial
statements. The unpaid principal balances of these loans are summarized as
follows:
1997 1996 1995
-------- -------- --------
(In thousands)
FHLMC $ 22,888 $ 30,169 $ 39,252
FNMA 34,217 33,521 33,961
Other Investors 2,767 3,547 3,873
-------- -------- --------
$ 59,872 $ 67,237 $ 77,086
At September 30, 1997 and 1996, collection of principal and interest to be
remitted to FHLMC and FNMA and advance payment for taxes and insurance
relating to FNMA serviced loans are reflected in the consolidated statements
of financial condition as advance deposits by borrowers for taxes and
insurance.
F-16
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5). Real Estate Owned
Real estate owned includes the following:
1997 1996
------ ------
(In thousands)
Real estate acquired in satisfaction of loans $ 2,892 $ 4,830
Allowance for losses (578) (1,712)
------- -------
$ 2,314 $ 3,118
======= =======
Activity in the allowance for losses on real estate owned is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 1,712 $ 1,857 $ 2,008
Provision for (reversal of) losses (150) 117 35
Allowance for losses acquired 0 21 ---
Charge-offs (984) (283) (186)
-------- ------- --------
Ending balance $ 578 $ 1,712 $ 1,857
======== ======= ========
</TABLE>
Provision for losses on real estate owned is included in income (losses) from
real estate operations in the consolidated statements of earnings.
Legal and consulting fees relating to real estate operations and real estate
owned are included in professional fees on the consolidated statements of
earnings.
(6) Premises and Equipment
Premises and equipment are summarized as follows:
1997 1996
-------- --------
(In thousands)
Land $ 5,239 $ 3,818
Buildings and leasehold improvements 9,170 7,656
Furniture, fixtures and equipment 8,080 7,518
22,489 18,992
Less accumulated depreciation and amortization (9,176) (8,449)
-------- --------
$ 13,313 $ 10,543
======= =======
Depreciation expense for the years ended September 30, 1997, 1996 and 1995
totaled $952,000, $902,000, and $729,000, respectively.
F-17
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
Period-end Period-end
Amount stated rate Amount stated rate
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial checking $ 22,032 $ 19,653
Noninterest-bearing personal
checking accounts 18,717 13,961
NOW 52,045 1.32% 54,806 1.51%
Passbook 76,540 1.69% 77,304 1.78%
Money market checking 1,492 1.26% 1,625 1.32%
Money market investment 41,909 2.55% 40,936 2.63%
Official checks 9,081 6,661
221,816 214,946
-------
Certificate accounts:
2.01 - 3.00% 545 307
3.01 - 4.00% --- 1
4.01 - 5.00% 88,472 155,121
5.01 - 6.00% 553,986 378,999
6.01 - 7.00% 46,333 101,780
7.01 - 8.00% 424 603
8.01 - 9.00% --- 3
Premiums on deposits
purchased --- 93
689,760 636,907
--------- ---------
$ 911,576 $ 851,853
========= =========
Weighted average interest rate 4.47% 4.41%
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows:
1997 1996
--------- ---------
(In thousands)
Less than one year $467,204 $ 438,168
One to three years 180,702 159,085
Over three years 41,854 39,654
--------- ---------
$ 689,760 $ 636,907
========= =========
The aggregate amount of certificates of deposit in amounts of $100,000 or more
was approximately $62,006,000 and $56,259,000 at September 30, 1997 and 1996,
respectively. Balances of individual certificates in excess of $100,000 are
not federally insured.
F-18
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Passbook accounts $ 1,356 $ 1,506 $ 1,718
Now, money market checking, and money market 1,896
investment accounts 1,724 1,782
Certificate accounts 35,892 31,210 26,127
-------- -------- --------
$ 39,144 $ 34,440 $ 29,627
</TABLE>
Early withdrawal penalties for the years ended September 30, 1997, 1996 and
1995 aggregated $205,702, $173,560 and $229,633, respectively, and are netted
against interest expense on certificate accounts.
Accrued interest payable of $145,989 and $145,831 at September 30, 1997 and
1996, respectively, is included in other liabilities.
(8) Short-Term Borrowings
At September 30, 1997, short-term borrowings were comprised of $30 million in
advances from the Federal Home Loan Bank (FHLB) due at various dates through
March, 1998, with fixed terms and fixed interest rates of 5.63% to 5.81% and a
$100,000 note payable, maturing January, 1998, relating to the purchase of
land.
At September 30, 1996, short-term borrowings were comprised of $25 million in
advances from the Federal Home Loan Bank (FHLB) due at various dates through
February, 1997, with fixed terms and fixed interest rates of 5.58% to 5.94%.
<PAGE>
Information concerning short-term borrowings is summarized as follows:
1997 1996
(Dollars in thousands)
Average balance during the year $ 29,301 $ 5,997
======== ========
Average interest rate during the year 5.62% 5.87%
======== ========
Maximum month-end balance during the year $ 40,000 $ 25,000
======== ========
(9) Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- --------
(In thousands)
<S> <C> <C>
Advances from the Federal Home Loan Bank (FHLB), due at
various dates through December, 2005, with fixed terms and
fixed interest rates of 5.86% to 6.5% $70,000 $70,000
ESOP Loan, maturing December, 1998 with a variable interest
rate of prime plus .25%, 8.75% at September 30, 1997 375 674
------- --------
$70,375 $ 70,674
======= ========
</TABLE>
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.
F-19
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 1997 and 1996, the FHLB advances and the ESOP loan have
fiscal year maturity dates as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
Year ending September 30, Weighted average Weighted average
Amount rate Amount rate
------ ---------------- ------ ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1997 $ --- --- $ 299 8.50%
1998 300 8.75% 300 8.50%
1999 75 8.75% 75 8.50%
2000 10,000 6.17% 10,000 6.17%
2001 5,000 6.13% 5,000 6.13%
2002 and after 55,000 6.10% 55,000 6.10%
------ ---- ------ ----
$ 70,375 6.13% $ 70,674 6.14%
======== ==== ======== ====
</TABLE>
Other interest expense is summarized as follows:
1997 1996 1995
------- ------- -------
(In thousands)
Advances from the FHLB $ 5,962 $ 4,593 $ 3,546
ESOP loan 49 76 105
Other 4 5 2
------- ------- -------
$ 6,015 $ 4,674 $ 3,653
======= ======= =======
(10) Income Taxes
Income tax expense (benefit) on income from continuing operations is
summarized as follows:
1997 1996 1995
------- ------- -------
In thousands
Current:
Federal $ 5,868 $ 5,832 $ 3,766
State 962 965 633
------- ------- -------
6,830 6,797 4,399
======= ======= =======
Deferred:
Federal 1,527 (1,170) 1,334
State 254 (195) 225
------- ------- -------
1,781 (1,365) 1,559
------- ------- -------
$ 8,611 $ 5,432 $ 5,958
======= ======= =======
F-20
<PAGE>
HARBOR FLORIDA BANCORP, INC.
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, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts $ 1,713 $ 1,440
Valuation of real estate owned 626 704
Deferred compensation 692 681
SAIF special assessment -- 1,929
Other 71 71
------- -------
3,102 4,825
Less valuation allowance (250) (250)
------- -------
Total deferred tax assets 2,852 4,575
------- -------
Deferred tax liability
Net deferred loan fees and costs 3,332 3,333
FHLB stock dividend 840 840
Premises and equipment depreciation difference 447 355
Purchase accounting adjustments 360 350
Cash to accrual adjustment 88 132
Installment sales 128 128
Other 17 16
Total deferred tax liability 5,212 5,154
------- -------
2,360 579
Unrealized loss on available for sale securities (3) (29)
------- -------
Net deferred tax liability 2,357 550
Less liability at beginning of year (550) (2,055)
Deferred tax asset acquired from Treasure Coast
Bank -- 111
Change in unrealized loss on available for sale
securities (26) 29
------- -------
Provision (benefit) for deferred income taxes $ 1,781 $(1,365)
======= =======
</TABLE>
Income tax expense on income from continuing operations is different than the
amount computed by applying the United States Federal income tax rate of 34%
to income from continuing operations before income taxes because of the
following:
1997 1996 1995
------ ------ ------
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State income tax (net of Federal income 3.6 3.6 3.6
tax benefit)
Other 1.7 1.0 ---
----- ----- -----
Effective tax expense rate 39.3% 38.6% 37.6%
===== ===== =====
Deferred income taxes payable of approximately $2,357,000 and $550,000 at
September 30, 1997 and 1996, respectively, are included in other liabilities.
Included in deferred income taxes payable at September 30, 1996 is a net
deferred tax asset of approximately $110,000 acquired from Treasure Coast
Bank, FSB (see note 17).
F-21
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retained earnings at September 30, 1997 includes approximately $14,500,000
base year tax bad debt reserve for which no deferred Federal and state income
tax liability has been recognized. These amounts represent an allocation of
income to bad debt deductions for tax purposes only. Reduction of amounts so
allocated for purposes other than tax bad debt losses or adjustments arising
from carryback of net operating losses would create income for tax purposes
only, which would be subject to the then current corporate income tax rate.
The unrecorded deferred income tax liability on the above amounts was
approximately $5,600,000 at September 30, 1997.
(11) Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
adjusted tangible assets (as defined). Management believes, as of September
30, 1997, that the Bank meets all capital adequacy requirements to which it is
subject.
As of September 30, 1997, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
F-22
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank's actual capital amounts and ratios are also presented in the table.
Dollars in thousands
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purpose Action Provisions
------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997
Total Capital (to
risk-weighted assets) $89,721 15.15% $47,371 >8.0% $59,213 >10.0%
Tier I Capital (to
risk-weighted assets) 82,269 13.89% 23,685 >4.0% 35,528 > 6.0%
Tier I Capital (to
adjusted tangible
assets) 82,269 7.29% 33,842 >3.0% 56,404 > 5.0%
Tangible Capital (to
adjusted tangible
assets) 82,269 7.29% 16,921 >1.5% n/a n/a
As of September 30, 1996
Total Capital (to
risk-weighted assets) 87,890 16.13% 43,593 > 8.0% 54,492 > 10.0%
Tier I Capital (to
risk-weighted assets) 81,030 14.87% 21,797 > 4.0% 32,695 > 6.0%
Tier I Capital (to
adjusted tangible 81,030 7.69% 31,609 > 3.0% 52,682 > 5.0%
assets)
Tangible Capital (to
adjusted tangible
assets) 81,030 7.69% 15,805 > 1.5% n/a n/a
</TABLE>
The following is a reconciliation of the Bank's capital under generally
accepted accounting principles (GAAP) to regulatory capital (in thousands):
<TABLE>
<CAPTION>
Tangible Risk-based
Equity capital capital capital
-------------- ------- -------
September 30, 1997
- ------------------
<S> <C> <C> <C>
GAAP capital/equity capital $ 85,307 $ 85,307 $ 85,307
========
Unrealized loss on investment securities available for 7 7
sale, net
Goodwill (3,045) (3,045)
General valuation allowance --- 7,452
-------- --------
Regulatory capital measure $ 82,269 $ 89,721
======== ========
</TABLE>
F-23
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Tangible Risk-based
Equity capital capital capital
-------------- ------- -------
September 30, 1996
<S> <C> <C> <C>
GAAP capital/equity capital $ 84,832 $ 84,832 $ 84,832
========
Unrealized loss on investment securities available for 49 49
sale, net
Investment in and advance to nonincludable subsidiary (264) (264)
required to be deducted
Goodwill (3,587) (3,587)
General valuation allowance --- 6,860
-------- --------
Regulatory capital measure $ 81,030 $ 87,890
======== ========
September 30, 1995
GAAP capital/equity capital $ 77,500 $ 77,500 $ 77,500
========
General valuation allowance --- 5,773
-------- --------
Regulatory capital measure $ 77,500 $ 83,273
======== ========
</TABLE>
At September 30, 1997, $8,361,000 of retained earnings is restricted relating
to the dividends on the Company's shares owned by the Holding Company which
have been waived. The dividend waiver was approved by the OTS and is available
only to the Holding Company. The dividend will be accrued only when the
payment of such amount is probable.
In the unlikely event of a complete liquidation of the Mutual Holding Company
in its present mutual form, each depositor of the Bank would receive his pro
rata share of any assets of the Mutual Holding Company remaining after payment
of claims of all creditors. Each depositor's pro rata share of such remaining
assets would be in the same proportion as the value of his deposit account was
to the total value of all deposit accounts in the Bank at the time of
liquidation.
The Certificate of Incorporation of the Company provides that in no event
shall any record owner of any outstanding Common Stock which is beneficially
owned, directly or indirectly, by a person who beneficially owns in excess of
10% of the then outstanding shares of Common Stock (the "Limit") be entitled
or permitted to any vote in respect of the shares held in excess of the Limit.
The Company has authorized but not issued preferred stock, subject to
regulatory restrictions and determination of rights and preferences to be
determined by the Board of Directors.
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.
F-24
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments and Contingencies
As of September 30, 1997, the Company had irrevocable letters of credit
aggregating approximately $501,000.
The Company and certain other entities are defendants in a class action
lawsuit which was filed in May 1991. The plaintiffs in the litigation are
purchasers of parcels of developed and undeveloped land from General
Development Corporation ("GDC") who allege that GDC, through fraudulent means,
induced them to buy land at inflated values. The Company is a defendant in
this matter along with a number of other financial institutions, purchasers of
loans in the secondary market, broker dealers, an insurance company and
numerous other individuals and companies. The involvement of the Company
arises from its purchase from GDC of land sales contracts originated by GDC.
The Company, along with the other defendants, filed a motion to dismiss the
case which was granted. The plaintiffs filed an appeal with the Third Circuit
Court of Appeals which remanded the case to the District Court for
reconsideration. The District Court entered its order dismissing the case
again.
The plaintiffs filed a motion requesting the District Court to amend the
dismissal order to permit the plaintiffs to file another amended complaint.
The District Court denied the plaintiff's motion. The plaintiffs appealed that
order to the Third Circuit and both sides were directed to submit
supplementary briefs. Management believes that the position of the plaintiffs
is without merit.
The Company and subsidiaries are defendants in certain other claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial statements of the Company and subsidiaries.
(13) Related Party Transactions
Directors, executive officers and principal stockholders of the Company had
certain transactions with the Company in the ordinary course of business, as
described below.
Loan transactions were made on substantially the same terms as those
prevailing at the time for comparable loans to other persons, did not involve
more than normal risk of collectibility, and are performing as agreed.
The summary of changes in the related party loans follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Outstanding loans - beginning of year $ 1,786 $ 1,478 $ 1,386
New loans 3,015 842 176
Repayments (2,517) (534) (84)
------- ------- -------
Outstanding balance - end of year $ 2,284 $ 1,786 $ 1,478
======= ======= =======
</TABLE>
The Company paid approximately $150,000, $125,000 and, $159,000 of legal fees
in the years ended September 30, 1997, 1996 and 1995, respectively, to a law
firm in which a director of the Company is a partner.
Richard K. Davis, a director of the Company, is also chairman of Richard K.
Davis Construction Corp ("Davis Construction"). In the years ended September
30, 1997 and 1996, the Company paid Davis Construction a total of $27,057 and
$76,887, respectively, for a roof on a new branch facility and re-roofing of
existing branch facilities. Additionally, Davis Construction is currently
constructing a new office and drive-in facility for the Company. This
contract, worth $905,499, was awarded June 25, 1997. The contract was put out
for competitive bid and was awarded to Davis Construction because it submitted
the lowest bid for the contract. During 1997, total payments related to this
contract were $216,795.
F-25
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to Richard N. Bird's nomination, and subsequent election, to the Board
of Director's of the Company, Bird Realty Group, Inc. entered into a listing
agreement with the Company on property listed at $3,895,000. The commission
related to the sale could be up to 6% of the selling price if Bird Realty also
becomes the selling broker. The listing expires on December 16, 1997. A
commission of $25,000 was also paid to Bird Realty during 1997 with regard to
the sale of property.
(14) Other Expense
Other expense consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Data processing $ 1,188 $ 1,092 $ 994
Advertising 942 735 622
Postage 364 294 252
Insurance 162 214 216
Telephone 280 265 252
OTS assessment 212 190 171
Other 1,639 1,193 1,097
------- ------- -------
$ 4,787 $ 3,983 $ 3,604
======= ======= =======
</TABLE>
(15) Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and Amounts Due From Depository Institutions, Interest-Bearing Assets in
Other Banks and Federal Funds Sold - The carrying amount of these assets is a
reasonable estimate of their fair value.
Investment Securities and Mortgage-Backed Securities Held to Maturity - Fair
value equals quoted market price, if available. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
Investment Securities Available for Sale - Fair value equals carrying value.
Loans - The fair value of loans is estimated by discounting future cash flows
using the current rate at which similar loans would be made to borrowers with
similar credit ratings for the same remaining maturities.
Deposits - The fair value of demand deposits, interest-bearing checking
accounts, savings and money market deposits is the amount payable on demand at
the reporting date. The fair value of certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
Short and Long Term Advances from the FHLB - Rates currently available to the
Company for FHLB advances with similar terms and remaining maturities are used
to estimate the fair value of FHLB advances.
ESOP Loan - The carrying amount of the ESOP loan is a reasonable estimate of
fair market value.
Commitments to Extend Credit and Standby Letters of Credit - The fair value of
commitments is insignificant.
F-26
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company's financial instruments at
September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Carrying Fair Carrying Fair
amount value amount value
-------- ----- -------- -------
Assets: (In thousands)
<S> <C> <C> <C> <C>
Cash and amounts due from depository $ 16,899 $ 16,899 $ 16,137 $ 16,137
institutions
Interest-bearing deposits in other
banks 15,736 15,736 16,350 16,350
Federal funds sold 250 250 16,075 16,075
Investment securities held to
maturity 5,000 4,993 20,000 20,016
Investment securities available for
sale 47,553 47,553 33,493 33,493
Mortgage-backed securities held to
maturity 176,854 178,954 153,293 153,288
Loans held for sale 141 144 4,870 4,870
Loans 845,961 858,944 776,035 776,346
Less allowance for loan losses (11,691) --- (11,016) ---
------- ------- ------- -------
Loans, net 834,270 858,944 765,019 776,346
------- ------- ------- -------
Liabilities
Commercial checking, non-interest-
bearing personal, NOW, passbook,
money market accounts and official
checks 221,816 221,816 214,946 214,946
Certificate accounts 689,760 691,406 636,907 638,592
FHLB advances 100,000 98,887 95,000 91,882
ESOP loan 375 375 674 674
</TABLE>
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(16) Benefit Plans
The Company has a noncontributory-defined benefit pension plan covering all
employees who have attained one year of service and 21 years of age. Pension
expense was $8,500, $7,400, and $8,500, respectively, for the years ended
September 30, 1997, 1996 and 1995. The plan is a multi-employer plan. Separate
actuarial valuations are not made for each employer nor are plan assets so
segregated. The assumed average rate of return used in determining the
actuarial present value of accumulated plan benefits was 7.5%. The date of the
most recent actuarial evaluation is June 30, 1996.
The Company has a deferred compensation plan for Directors (the "Directors'
Deferred Compensation Plan") who may elect to defer all or part of their
annual director fees to fund the Directors' Deferred Compensation Plan. The
plan provides that deferred fees are to earn interest at an annual rate equal
to the 30-month certificate of deposit rate, adjusted and compounded
quarterly. At September 30, 1997 and 1996, deferred directors fees included in
other liabilities aggregated $195,069 and $309,790, respectively. Directors
may elect to have their deferred compensation balance invested in shares of
the Company's common stock. When the Company purchases common stock in the
open market to fund such investment, these purchases are reflected as a
reduction in stockholders' equity. Such purchases were approximately $273,000
and $238,000 in 1997 and 1996, respectively. No shares were purchased in 1995.
F-27
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also has a retirement plan for nonemployee directors (the "Plan").
The annual basic benefit under the Plan is based on a percentage of the
average three years director's fees preceding the termination of service
multiplied by the number of years of service, not to exceed 50% of the average
annual director's fees. During the years ended September 30, 1997, 1996 and
1995, the charge to earnings relating to the Plan was insignificant.
As part of the reorganization to the stock form of ownership, the Company's
Employee Stock Ownership Plan ("ESOP") purchased 149,800 shares of the
Company's common stock at $10 per share, or $1,498,000, which was funded by a
loan from an unaffiliated lender. The ESOP covers all eligible employees of
the Company age 21 and over. The Company makes scheduled cash contributions to
the ESOP sufficient to service the amount borrowed. Dividends paid on
unallocated shares reduce the Company's cash contribution to the ESOP. For the
years ended September 30, 1997 and 1996, total contributions to the ESOP,
which were used to fund principal and interest payments on the ESOP debt,
totaled approximately $259,000 and $375,000, respectively. At September 30,
1997, there were 95,356 allocated shares, 22,485 shares committed to be
released, and 37,435 suspense(unallocated and not yet committed to be
released) shares held by the ESOP. Allocated shares and shares committed to be
released are included in the weighted average common shares outstanding used
to compute earnings per share. Total compensation expense charged to earnings
in the years ended September 30, 1997 and 1996, totaled $1,165,500 and
$766,500, respectively. At September 30, 1997, the fair value of the
unallocated shares was $3,355,520.
Additionally, the Company's Recognition and Retention Plans ("RRP") purchased
64,200 shares at $10 per share totaling $642,000. The funds used to acquire
the RRP shares were contributed by the Company. The purchase price of $642,000
will be amortized as compensation expense ratably over the participants'
vesting period of three years.
The Company's 401(k) Profit Sharing Plan and Trust (the "401(k) Plan") covers
all eligible employees of the Company age 21 and over. An eligible employee
may elect to contribute to the 401(k) Plan in the form of deferrals of between
1% and 15% of the total compensation that would otherwise be payable to the
employee. Employee contributions are fully vested and nonforfeitable at all
times. The 401(k) Plan permits contributions by the Company. The Company
intends initially to make matching contributions of 25% of the first 6% of
each participant's contributions. For the years ended September 30, 1997 and
1996, the Company's matching contribution totaled approximately $83,000 and
$75,000, respectively.
At September 30, 1997, the Company had a stock option plan for the benefit of
directors, officers, and other key employees of the Company. The Company
applies APB Opinion 25 and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plan since stock option exercise prices are equal to market price
at date of grant. The number of shares of common stock reserved for issuance
under the stock option plan is equal to 214,000 shares, or 9.6% of the total
number of common shares issued in the minority offering pursuant to the
Company's reorganization to the stock form of ownership. The stock options
vest in equal installments over varying periods not to exceed 10 years,
depending upon the individual's position in the Company.
F-28
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's stock option plan is presented below:
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996 1995
Weighted Weighted Weighted
average average average
exercise exercise exercise
Number price Number price Number price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding beginning of year 170,106 $10.73 191,569 $10.25 208,660 $10.00
Options granted 4,500 $34.47 4,500 $27.00 7,400 $16.50
Options exercised (38,974) $10.00 (23,463) $10.00 (16,791) $10.00
Options forfeited (1,334) $18.95 (2,500) $10.00 (7,700) $10.00
------- ------ ------- ------ ------- ------
Options outstanding end of year 134,298 $11.66 170,106 $10.73 191,569 $10.25
------- ------ ------- ------ ------- ------
Options exercisable at year-end 50,264 34,913 20,792
======= ======= =======
Weighted average fair value of
options granted during the year $ 7.38 $ 6.60
======= =======
The following table summarizes information about stock options outstanding at
September 30, 1997:
Options exercisable
Options outstanding ---------------------------------
Range of Number Weighted average Weighted average Number Weighted average
exercise outstanding @ remaining exercise exercisable @ exercise
prices 9/30/97 contractual life price 9/30/97 price
-------- ------------- ---------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$10.00 118,398 6.1 $10.00 50,264 $10.00
$16.50 7,400 7.2 $16.50 --- ---
$27.00 4,500 8.1 $27.00 --- ---
$33.88 to 3,500 9.1 $33.98 --- ---
34.00
$38.25 to 500 9.6 $38.50 --- ---
40.75
</TABLE>
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with Statement 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below:
1997 1996
---- ----
Net income As reported $ 13,327 $ 8,640
Pro forma 13,294 8,611
Net income per share As reported 2.66 1.75
Pro forma 2.66 1.74
Only options granted after October 1, 1995 are included in pro-forma amounts.
F-29
<PAGE>
HARBOR FLORIDA BANCORP, INC.
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 4,500 $ 6.60 $ 27.00 5.421% 5 38.71 $ 1.60
11/27/96 1,000 7.27 33.88 5.912 5 29.89 1.80
01/06/97 3,000 7.13 34.00 6.291 5 28.33 1.80
06/16/97 450 9.01 38.25 6.276 5 30.71 1.90
06/20/97 50 10.05 40.75 6.271 5 31.11 1.90
</TABLE>
(17) Acquisition of Treasure Coast
On June 1, 1996, the Company acquired all of the outstanding common stock of
Treasure Coast Bank, FSB ("Treasure Coast"), a Florida based bank, for
approximately $6.8 million in cash. The acquisition was accounted for using
the purchase method. Treasure Coast had assets of approximately $75 million.
The acquisition added one branch to the Company's branch network. The results
of operations of Treasure Coast from June 1, 1996 to September 30, 1996 are
included in the consolidated financial statements of the Company.
The fair value of assets acquired and liabilities assumed in conjunction with
the acquisition of Treasure Coast was as follows:
(In thousands)
Cash $ 2,315
Investments 7,039
Mortgage-backed securities 287
Loans receivable, net 62,575
Accrued interest receivable 437
Real estate owned 86
Property and equipment 1,778
Goodwill 3,365
Other assets 542
-------
Fair value of assets acquired 78,424
Deposits 70,239
Other liabilities 1,712
-------
Fair value of liabilities assumed 71,951
Acquisition costs 293
-------
Purchase of Treasure Coast 6,766
Cash acquired 2,315
-------
Purchase of Treasure Coast, net of cash acquired $ 4,451
-------
F-30
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table indicates the estimated net decrease in earnings resulting
from the net amortization/accretion of the adjustments, including goodwill,
resulting from the use of the purchase method of accounting during each of the
years 1997 through 2001. The amounts (in thousands) assume no sales or
dispositions of the related assets or liabilities.
Net decrease
of net
Years ending September 30, earnings
-------------------------- ------------
1997 (232)
1998 (325)
1999 (325)
2000 (298)
2001 (245)
Thereafter (2,364)
Adjustments to fair value are being amortized on a straight-line basis, which
approximates the level yield method, over the estimated average term of four
years for loans, and one year for deposits. Goodwill does not qualify for
amortization for tax purposes. Goodwill is being amortized on a straight-line
basis over its estimated useful life of 15 years. Goodwill as of September 30,
1997 is $3.0 million.
The following is pro forma information for the years ended September 30, 1996
and 1995 as if the Treasure Coast purchase was consummated on October 1, 1995
and 1994, respectively (in thousands, except for per share data), after giving
effect to certain adjustments, including amortization of goodwill and other
purchase accounting adjustments, and interest income assumed foregone on the
funding of the acquisition:
<TABLE>
<CAPTION>
For the year ended For the year ended
September 30, 1996 September 30, 1995
-------------------------- ---------------------------
Historical Pro forma Historical Pro forma
---------- --------- ---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income $ 74,357 $ 77,840 $ 64,885 $ 69,855
Interest expense 39,114 41,214 33,281 36,411
Provision for (recovery of) loan losses (76) 510 460 536
Net interest income after provision
for loan losses 35,319 36,116 31,144 32,908
Net income 8,640 7,971 9,895 9,748
Net income per share $ 1.75 $ 1.61 $ 2.03 $ 2.00
</TABLE>
These pro forma results may not be representative of the actual results that
would have occurred or may occur in the future.
F-31
<PAGE>
HARBOR FLORIDA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Quarterly Results of Operations (Unaudited)
The quarterly results of operations for the years ended September 30, 1997 and
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended Fiscal 1997
September 30 June 30 March 31 December 31
------------ ------- -------- -----------
<S> <C> <C> <C> <C>
Interest income $ 22,009 $ 21,554 $ 20,723 $ 20,528
Interest expense 11,777 11,447 11,002 10,932
-------- -------- -------- --------
Net interest income 10,232 10,107 9,721 9,596
Provision for loan losses 326 205 126 125
-------- -------- -------- --------
Net interest income after
provision for loan losses 9,906 9,902 9,595 9,471
Total other income 1,318 1,041 860 994
Total other expenses 5,442 5,318 5,106 5,282
-------- -------- -------- --------
Income before income taxes $ 5,782 $ 5,625 $ 5,349 $ 5,183
======== ======== ======== =======
Net income $ 3,510 $ 3,416 $ 3,301 $ 3,101
======== ======== ======== =======
Net income per share (1) $ 0.70 $ 0.68 $ 0.66 $ 0.62
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended Fiscal 1996
September 30 June 30 March 31 December 31
------------ ------- -------- -----------
<S> <C> <C> <C> <C>
Interest income $ 19,885 $ 18,618 $ 18,221 $ 17,632
Interest expense 10,461 9,754 9,471 9,428
-------- -------- -------- --------
Net interest income 9,424 8,864 8,750 8,204
Provision for loan losses 72 (19) 28 (158)
-------- -------- -------- --------
Net interest income after 9,352 8,883 8,722 8,362
provision for loan losses
Total other income 744 562 827 752
Total other expenses (2) 9,481 4,857 5,057 4,737
-------- -------- -------- --------
Income before income taxes $ 615 $ 4,588 $ 4,492 $ 4,377
======== ======== ======== =======
Net income $ 390 $ 2,807 $ 2,736 $ 2,707
======== ======== ======== =======
Net income per share (1) $ 0.08 $ 0.57 $ 0.55 $ 0.55
======== ======== ======== =======
</TABLE>
(1) Net income per share was computed by dividing net income by the weighted
average number of shares of common stock outstanding during the quarters.
Adjustments have been made, where material, to give effect to the shares that
would be outstanding, assuming the exercise of dilutive stock options, all of
which are considered common stock equivalents.
(2) The quarter ended September 30, 1996 amounts include a one time SAIF
assessment of $4,552,000.
(19) Subsequent Event
On August 27, 1997, the Company announced that the Board of Directors of their
Mutual Holding Company, Harbor Financial, M.H.C., has determined to convert
the Mutual Holding Company to a capital stock corporation. Upon completion of
the Conversion, the Mutual Holding Company will cease to exist. Pursuant to
the Plan of Conversion, shares of Harbor Florida Bancorp, Inc. previously held
by the Mutual Holding Company will be sold. The remaining shares will be sold
in subscription and community offerings. The Conversion is expected to be
completed in the first calendar quarter of 1998.
F-32
<PAGE>
Direct costs of the sale of stock, if completed, will be recorded as a
reduction in proceeds from the sale of stock and applied to paid in capital.
If the sale of stock is not completed, such costs will be charged to expense.
At September 30, 1997, $30,000 of such costs had been incurred and were
included in other assets on the balance sheet.
The Plan of Conversion provides for the establishment, upon the completion of
the Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal
to the amount of any dividends waived by the Mutual Holding Company plus the
greater of (1) 100% of the Bank's retained earnings of $34.5 million at
September 30, 1992, the date of the latest balance sheet contained in the
final offering circular utilized in the Bank's initial public offering in the
Mutual Holding Company Reorganization, or (2) 53.41% of the Bank's total
stockholders' equity as reflected in its latest balance sheet contained in the
final Prospectus utilized in the Offerings plus the amounts distributed to the
mid-tier holding company by the Bank at the formation of the Mid-tier Holding
Company. Each eligible Account Holder and Supplemental Eligible Account
Holder, if such person were to continue to maintain such person's deposit
account at the Bank, would be entitled, upon a complete liquidation of the
Bank after the conversion, to an interest in the liquidation account prior to
any payment to the Company as the sole stockholder of the Bank.
For a period of one year after the date of the Conversion, total dividends
paid to stockholders must not exceed the net income of the Company during the
one year period.
Pursuant to OTS regulations, certain restrictions will be imposed upon
directors, executive officers and their associates, and the Company with
respect to stock purchases for the period following completion of the
Conversion.
F-33
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by Bancshares.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of Bancshares since the date hereof or that the information contained
herein is correct as of any time subsequent to its date. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the registered securities to which it relates. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy such securities in any circumstances or jurisdictions in which such offer or
solicitation is unlawful.
TABLE OF CONTENTS
SUMMARY......................................................1
HARBOR FLORIDA BANCSHARES, INC...............................1
HARBOR FLORIDA BANCORP, INC..................................1
HARBOR FEDERAL SAVINGS BANK..................................1
HARBOR FINANCIAL, M.H.C......................................2
THE CONVERSION...............................................2
SELECTED CONSOLIDATED FINANCIAL DATA........................17
RECENT DEVELOPMENTS.........................................21
RISK FACTORS................................................25
HARBOR FLORIDA BANCSHARES,
INC.......................................................32
HARBOR FLORIDA BANCORP, INC.................................33
HARBOR FEDERAL SAVINGS BANK.................................35
HARBOR FINANCIAL, M.H.C.....................................37
HARBOR FINANCIAL, M.H.C.....................................37
USE OF PROCEEDS.............................................37
DIVIDEND POLICY.............................................38
MARKET FOR COMMON STOCK.....................................39
CAPITALIZATION..............................................41
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE.................44
PRO FORMA DATA..............................................46
HARBOR FLORIDA BANCORP, INC. CONSOLIDATED
CONDENSED STATEMENTS OF EARNINGS..........................51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................54
BUSINESS OF HARBOR FLORIDA BANCSHARES, INC..................72
BUSINESS OF HARBOR FLORIDA BANCORP, INC.....................73
BUSINESS OF HARBOR FEDERAL SAVINGS BANK.....................75
REGULATION.................................................111
MANAGEMENT OF BANCSHARES...................................124
MANAGEMENT OF THE BANK.....................................125
BENEFICIAL OWNERSHIP OF COMMON STOCK.......................141
PROPOSED SUBSCRIPTIONS BY DIRECTORS AND
EXECUTIVE OFFICERS.......................................143
THE CONVERSION AND REORGANIZATION..........................144
COMPARISON OF STOCKHOLDERS'
RIGHTS IN BANCORP AND
BANCSHARES...............................................171
RESTRICTIONS ON ACQUISITION
OF THE COMPANY...........................................172
DESCRIPTION OF CAPITAL STOCK
OF BANCSHARES............................................178
LEGAL AND TAX MATTERS......................................181
EXPERTS....................................................182
REGISTRATION REQUIREMENTS..................................182
ADDITIONAL INFORMATION.....................................182
Until the later of __________________1998, or 25 days after
commencement of the Offering all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Underwriting Fees and Expenses....................................$793,500
Legal Fees and Expenses............................................160,000
Printing, Postage and Mailing......................................260,000
Accounting Fees and Expenses........................................80,000
Appraisal and Business Plan Fees and Expenses.......................35,000
Blue Sky Filing Fees and Expenses
(including legal counsel).........................................10,000
Federal Filing Fees (OTS and SEC)...................................59,000
Conversion Agent Fees...............................................10,000
Stock Certificates...................................................5,000
Transfer Agent.......................................................3,000
Other Expenses......................................................50,000
----------
Total...........................................................$1,465,500
==========
Item 14. Indemnification of Directors and Officers
Article VI of the Harbor Florida Bancshares Inc.'s Bylaws sets forth
circumstances under which directors, officers, employees and agents may be
indemnified against liability which they may incur in their capacities as
follows:
ARTICLE VI
Indemnification
SECTION 1. Indemnification of Directors, Officers and Employees.
The Corporation shall indemnify to the full extent authorized by law
any Director or officer made or threatened to be made a party to an action, suit
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he, his testator or intestate is or was a Director or
officer of the Corporation or is or was serving, at the request of the
Corporation, as a Director or officer of another corporation, partnership, joint
venture, trust or other enterprise.
The Corporation may, at the discretion of the Board of Directors,
indemnify to the full extent authorized by law any employee or agent made or
threatened to be made a party to an action, suit or proceeding, whether
criminal, civil, administrative or investigative by reason of the fact that he,
II-1
<PAGE>
his testator or intestate is or was an employee or agent of the Corporation or
is or was serving at the request of the Corporation as an employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
SECTION 2. Expenses Advanced.
Expenses incurred with respect to any claim, action or proceeding of
the character, actual or threatened, described in Section 1 of this Article VI,
may be advanced by the Corporation prior to the final disposition thereof upon
receipt of an undertaking by such person to repay the amount so advanced if and.
to the extent it shall ultimately be determined by a court of competent
jurisdiction that he was not entitled to indemnification under this Bylaw.
SECTION 3. Automatic Conformity to Law.
The intention of this Bylaw is to provide indemnification with the
broadest and most inclusive coverage permitted by law (a) at the time of the act
or omission to be indemnified against, or (b) so permitted at the time of
carrying out such indemnification, whichever of (a) or (b) may be broader or
more inclusive and permitted by law to be applicable. If the indemnification
permitted by law at this present time, or at any future time, shall be broader
or more inclusive than the provisions of this Bylaw, then indemnification shall
nevertheless extend to the broadest and most inclusive permitted by law at any
time and this Bylaw shall be deemed to have been amended accordingly. If any
provision or portion of this Article shall be found, in any action, suit or
proceeding, to be invalid or ineffective, the validity and effect of the
remaining parts shall not be affected.
Item 15. Recent Sales of Unregistered Securities.
Not applicable.
Item 16. Exhibits:
The exhibits schedules filed as a part of this registration statement are as
follows:
*1.1 Engagement Letter with Friedman, Billings, Ramsey & Co., Inc.
*1.2 Agency Agreement with Friedman, Billings, Ramsey & Co., Inc.
2. Plan of Conversion and Reorganization
3.1 Certificate of Incorporation of Harbor Florida Bancorp, Inc.
(Incorporated by reference to Exhibit 3(a) of the Registration
Statement on Form S-4 filed December 20, 1996.
3.2 Bylaws of Harbor Florida Bancorp, Inc. (Incorporated by reference to
Exhibit 3(b) of the Registration Statement on Form S-4 filed December
20, 1996.
II-2
<PAGE>
*3.3 Proposed Certificate of Incorporation of Harbor Florida Bancshares,
Inc.
*3.4 Proposed bylaws of Harbor Florida Bancshares, Inc.
*3.5 Proposed Federal stock charter of Harbor Florida Bancorp, Inc.
*4 Form of Stock Certificate of Harbor Florida Bancshares Inc.
*5.1 Opinion of Peabody & Brown regarding legality of securities being
registered
8.1 Federal Tax Opinion of Peabody & Brown
8.2 Florida Tax Opinion of Dean, Mead, Egerton, Bloodworth, Capouano &
Bozarth, P.A.
*8.3 Opinion of RP Financial, LC as to the value of subscription rights for
tax purposes
*10.1 Form of Change in Control Agreements
23.1 Consents of Peabody & Brown
23.2 Consent of KPMG Peat Marwick, LLP
*23.3 Consent of RP Financial, LC
23.4 Consent of Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, P.A.
(reference is made to Exhibit 8.2)
*24 Power of Attorney (reference is made to the signature page)
27 Financial Data Schedule
*99.1 Proposed Stock Order Form and Form of Certification
99.2 Proxy Statement for Special Meeting of Members of Harbor Financial
M.H.C.
99.3 Proxy Statement for Special Meeting of Stockholders of Harbor Florida
Bancorp, Inc.
II-3
<PAGE>
*99.4 Miscellaneous Solicitation and Marketing Materials
99.5 Appraisal Report, without exhibits
- -----------
* Previously Filed
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 ("Securities Act").
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly authorized this registration statement to be signed on its
behalf by the undersigned, in the City of Ft. Pierce, State of Florida, on
January 9, 1998.
HARBOR FLORIDA BANCSHARES, INC.
By: /s/
-----------------------------------
Michael J. Brown, Sr.
Director, President and Chief
Executive Officer
(Duly Authorized Representative)
<PAGE>
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Title Date
---------- ----- ----
/s/ President, Chief 1/9/98
- --------------------- Executive Officer and Director
Michael J. Brown, Sr.
/s/ Senior Vice President 1/9/98
- --------------------- Chief Financial Officer
Don W. Bebber
/s/* Chairman 1/9/98
- ---------------------
Edward G. Enns
/s/* Vice Chairman 1/9/98
- ---------------------
Bruce R. Abernethy, Sr.
/s/* Director 1/9/98
- ---------------------
Richard N. Bird
/s/* Director 1/9/98
- ---------------------
Richard B. Hellstrom
/s/* Director 1/9/98
- ---------------------
Richard K. Davis
/s/* Director 1/9/98
- ---------------------
Frank N. Fee III
* Michael J. Brown, Sr.
Attorney-in-Fact
Exhibit 2
AMENDED PLAN OF CONVERSION
AND REORGANIZATION
of
HARBOR FINANCIAL, M.H.C.
and
AGREEMENT AND PLAN OF MERGER
between
HARBOR FINANCIAL, M.H.C.
and
HARBOR FLORIDA BANCORP, INC.
and
HARBOR FLORIDA BANCSHARES, INC.
and
HARBOR FEDERAL SAVINGS BANK
DECEMBER 23, 1997
<PAGE>
TABLE OF CONTENTS
Page
----
1. INTRODUCTION.............................................................1
2. DEFINITIONS..............................................................3
3. GENERAL PROCEDURE FOR CONVERSION.........................................9
4. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF
CONVERSION STOCK.....................................................11
5. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS
(FIRST PRIORITY).....................................................12
6. SUBSCRIPTION RIGHTS OF THE TAX-QUALIFIED EMPLOYEE
STOCK BENEFIT PLANS (SECOND PRIORITY)................................13
7. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS (THIRD PRIORITY).............................................13
8. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)..................14
9. PUBLIC STOCKHOLDERS OFFERING............................................15
10. COMMUNITY OFFERING AND OTHER OFFERINGS.................................15
11. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF
CONVERSION STOCK.....................................................17
12. TIMING OF SUBSCRIPTION OFFERING., MANNER OF EXERCISING
SUBSCRIPTION RIGHTS AND ORDER FORMS................................18
13. PAYMENT FOR CONVERSION STOCK...........................................20
14. ACCOUNTHOLDERS IN NONQUALIFIED STATES OR FOREIGN
COUNTRIES..........................................................21
15. VOTING RIGHTS OF STOCKHOLDERS..........................................22
16. LIQUIDATION ACCOUNT....................................................22
17. TRANSFER OF DEPOSIT ACCOUNTS...........................................24
18. REQUIREMENTS FOLLOWING CONVERSION FOR REGISTRATION,
MARKET MAKING AND STOCK EXCHANGE LISTING...........................24
19. DIRECTORS AND OFFICERS OF THE BANK AND THE
HOLDING COMPANY....................................................24
20. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND
OFFICERS FOLLOWING THE CONVERSION..................................24
21. RESTRICTIONS ON TRANSFER OF STOCK......................................25
22. RESTRICTIONS ON ACQUISITION OF STOCK OF BANCSHARES.....................25
23. TAX RULINGS OR OPTIONS.................................................26
24. STOCK COMPENSATION PLANS...............................................26
25. DIVIDEND AND REPURCHASE RESTRICTIONS ON STOCK..........................27
26. PAYMENT OF FEES TO BROKERS.............................................27
27. EFFECTIVE DATE.........................................................27
28. AMENDMENT OR TERMINATION OF THE PLAN...................................28
29. INTERPRETATION OF THE PLAN.............................................28
ANNEX A - PLAN OF MERGER BETWEEN
HARBOR FLORIDA BANCORP, INC. AND HARBOR FEDERAL SAVINGS BANK...........A-1
ANNEX B - PLAN OF MERGER BETWEEN HARBOR FINANCIAL, M.H.C. AND
HARBOR FEDERAL SAVINGS BANK............................................B-1
<PAGE>
1. INTRODUCTION
For purposes of this section, all capitalized terms have the meaning
ascribed to them in Section 2.
On January 6, 1994, Harbor Federal Savings Bank, a federally chartered
mutual savings institution reorganized into the mutual holding company form of
organization and consummated a sale of stock to its members. To accomplish this
transaction, the Bank organized a federally chartered, stock savings bank as a
wholly owned subsidiary. The mutual Bank then transferred substantially all of
its assets and liabilities to the stock Bank in exchange for 4,894,200 shares of
Bank Common Stock, and reorganized itself into a federally chartered mutual
holding company known as Harbor Financial, M.H.C. and sold 2,239,831 shares of
Bank Common Stock to directors, employees and members of the Bank. On June 25,
1997, the Bank completed a reorganization in which the Bank became a wholly
owned subsidiary of a stock middle tier holding company known as Harbor Florida
Bancorp, Inc. ("Holding Company"). Shareholders of the Bank, as a result of the
reorganization, became shareholders of the Holding Company. As of, June 30,
1997, the Mutual Holding Company and the Public Stockholders own an aggregate of
53.4 and 46.6% of the outstanding Holding Company Common Stock, respectively.
The Boards of Directors of the Mutual Holding Company and the Holding
Company believe that a conversion of the Mutual Holding Company to stock form
pursuant to this Plan of Conversion and Reorganization is in the best interests
of the Mutual Holding Company and the Bank, as well as the best interests of
their respective Members and Stockholders. The Boards of Directors determined
that this Plan of Conversion and Reorganization equitably provides for the
interests of Members through the granting of subscription rights and the
establishment of a liquidation account. The Conversion will result in the
raising of additional capital and should result in a more active and liquid
market for the Holding Company Common Stock than currently exists, although
there can be no assurances that this will be the case. The Conversion is
designed to enable the Bank and Holding Company to compete more effectively in a
market which is undergoing consolidation.
If the Bank had undertaken a standard conversion involving the
formation of a stock holding company in 1994, applicable OTS regulations would
have required a greater amount of Bank Common Stock to be sold than resulted in
the amount of net proceeds raised in the Bank's initial public offering
undertaken with the mutual holding company reorganization. In addition, if a
standard conversion had been conducted in 1994, management of the Bank believes
that it would have been difficult to profitably invest the larger amount of
capital that would have been raised, when compared to the amount of net proceeds
raised in the Bank's initial public offering. A standard conversion in 1994 also
would have immediately eliminated all aspects of the mutual form of organization
and possibly have subjected the Association to greater interference from
stockholders and from an unwanted acquisition or other change in control of the
Bank.
1
<PAGE>
Subsequent to the formation of the Mutual Holding Company, there have
been certain changes in the policies of the OTS relating to mutual holding
companies. In addition, market conditions for the stocks of savings institutions
and their holding companies have improved. The Bank and the Holding Company have
also gained experience in being a company required to meet the filing
requirements of the Securities and Exchange Act of 1934 and in conducting
stockholder meetings and other stockholder matters, such as communications,
press releases, NASD matters and dividend payments. In light of the foregoing,
the Boards of Directors of the Mutual Holding Company and the Holding Company
believe that it is in the best interests of such companies and their respective
Members and Stockholders to reorganize into the stock form of organization at
this time, and that the most feasible way to do so is through the Conversion and
Merger.
The Bank formed the Holding Company which became the holding company
for the Bank pursuant to a reorganization completed in June of 1997. In the
current transaction, as described in more detail herein, the Mutual Holding
Company will convert to an interim federal stock savings association and will
simultaneously merge with and into the Bank pursuant to the Plan of Merger
included as Annex B hereto, pursuant to which the Mutual Holding Company will
cease to exist and a liquidation account will be established by the Bank for the
benefit of depositor Members as of specified dates. Stock of the Holding Company
held by Public Shareholders shall be automatically converted into the right to
receive additional shares of stock of a newly formed holding company, Harbor
Florida Bancshares, Inc. ("Bancshares"), based on an Exchange Ratio plus cash in
lieu of any fractional share interest. Preceding this transaction the Holding
Company will convert first to an interim federal stock corporation and then to
an interim federal stock savings bank and merge with and into the Bank with the
Bank as the surviving entity. Annex A hereto describes this transaction.
In connection with the Conversion, the newly formed Holding Company,
Harbor Florida Bancshares, Inc. ("Bancshares") will offer shares of Conversion
Stock in the Offerings as provided herein. Shares of Conversion Stock will be
offered in a Subscription Offering in descending order of priority to Eligible
Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental
Eligible Account Holders, Other Members and Public Stockholders. Any shares of
Conversion Stock remaining unsold after the Subscription Offering will be
offered for sale to the public through a Community Offering as determined by the
Boards of Directors of Bancshares.
The Conversion is intended to provide support to the Bank's lending and
investment activities and thereby enhance the Bank's capabilities to serve the
borrowing and other financial needs of the communities it serves.
2
<PAGE>
This Plan was adopted by the Boards of Directors of the Mutual Holding
Company, the Holding Company and the Bank on September 24, 1997. It was amended
on October 31, 1997, and December 23, 1997.
This Plan is subject to the approval of the OTS and must be adopted by
(1) at least a majority of the total number of votes eligible to be cast by
Voting Members of the Mutual Holding Company at the Special Meeting and (2)
holders of at least two-thirds of the outstanding Holding Company Common Stock
at the Stockholders' Meeting. In addition, the Primary parties have conditioned
the consummation of the Conversion on the approval of the Plan by at least a
majority of the votes cast, in person or by proxy, by the Public Stockholders at
the Stockholders' Meeting.
After the Conversion, the Bank will continue to be regulated by the
OTS, as its chartering authority, and by the FDIC, which insures the Bank's
deposits. In addition, the Bank will continue to be a member of the Federal Home
Loan Bank System, and all insured savings deposits will continue to be insured
by the FDIC up to the maximum provided by law.
2. DEFINITIONS
As used in this Plan, the terms set forth below have the following
meaning:
Actual Purchase Price means the price per share at which the Conversion
Stock is ultimately sold by the Holding Company in the Offerings in accordance
with the terms hereof.
Affiliate means a Person who, directly or indirectly, through one or
more intermediaries, controls or is controlled by or is under common control
with Person specified.
Associate, when used to indicate a relationship with any Person, means
(i) a corporation or organization (other than the Mutual Holding Company, the
Bank, a majority-owned subsidiary of the Bank or the Holding Company) of which
such Person is a director, officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such Person has a substantial beneficial interest
or as to which such Person serves as trustee or in a similar fiduciary capacity,
provided, however, that such term shall not include any Tax-Qualified Employee
Stock Benefit Plan of the Holding Company or the Bank in which such Person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity, and (iii) any relative or spouse of such Person, or any relative of
such spouse, who has the same home as such Person or who is a director or
officer of the a Holding Company or the Bank or any of the subsidiaries of the
foregoing. Harbor Florida Bancshares, Inc. is the newly formed, Delaware
chartered holding company, the shares of which will be exchanged for shares of
the Holding Company, Harbor Florida Bancorp, Inc.
3
<PAGE>
Bank means Harbor Federal Savings Bank in its mutual or stock form or
Harbor Federal Savings Bank following consummation of the Conversion, as the
context of the reference indicates.
Bank Common Stock means the common stock of the Bank, par value $1.00
per share, which stock is not and will not be insured by the FDIC or any other
governmental authority.
Code means the Internal Revenue Code of 1986, as amended.
Community Offering means the offering for sale by Bancshares of any
shares of Conversion Stock not subscribed for in the Subscription Offering to
(i) natural persons residing in the Local Community, and (ii) such other Persons
within or without the State of Florida as may be selected by the Holding Company
within its sole discretion.
Control (including the terms "controlling," "controlled by," and "under
common control with") means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
Conversion means (i) the conversion of the Mutual Holding Company to an
interim federal stock savings association and the subsequent merger, pursuant to
which the Mutual Holding Company will cease to exist, and (ii) the issuance of
Conversion Stock by the Holding Company in the Offerings as provided herein,
which will increase the number of shares of a Holding Company Common Stock
outstanding (subject to approval by Holding Company Shareholders) and the
capitalization of the Holding Company and the Bank.
Conversion Stock means the Holding Company Common Stock to be issued
and sold in the Offerings pursuant to the Plan of Conversion and Reorganization.
Deposit Account means savings and demand accounts, including passbook
accounts, money market deposit accounts and negotiable order of withdrawal
accounts, and certificates of deposit and other authorized accounts of the Bank
held by a Member.
Director, Officer and Employee means the terms as applied respectively
to any person who is a director. officer or employee of the Mutual Holding
Company, the Bank, the Holding Company or any subsidiary thereof.
Exchange Ratio means the rate at which shares of the Holding Company
held by the Public Stockholders will be increased in connection with the Holding
Company Merger and the Mutual Holding Company merger into the Bank and the
subsequent reorganization of the Bank into a wholly owned subsidiary of
Bancshares. The exact rate shall be determined by the Mutual Holding Company and
4
<PAGE>
Bancshares in order to ensure that upon consummation of the Conversion the
Public Stockholders will own in the aggregate approximately the same percentage
as Bancshares Common Stock to be outstanding upon completion of the Conversion
as the percentage of Holding Company Common Stock owned by them in the aggregate
on the Effective Date, before giving effect to (a) cash paid in lieu of any
fractional interests of Holding Company Common Stock and (b) any shares of
Conversion Stock purchased by the Public Stockholders in the Offerings or
tax-qualified employee stock benefit plans thereafter.
Exchange Shares means the additional shares of Holding Company Common
Stock to be issued to the Public Stockholders in connection with the Holding
Company Merger with Bancshares.
Eligible Account Holder means any Person holding a Qualifying Deposit
on the Eligibility Record Date for purposes of determining subscription rights
and establishing subaccount balances in the liquidation account to be
established pursuant to the provision herein.
Eligibility Record Date means the date for determining Qualifying
Deposits of Eligible Account Holders and is the close of business on July 31,
1996.
Estimated Price Range means the range of the estimated aggregate pro
forma market value of the Conversion Stock to be issued in the Offerings, as
determined by the Independent Appraiser in accordance with Section 4 hereof.
FDIC means the Federal Deposit Insurance Corporation or any successor
thereto.
Holding Company means Harbor Florida Bancorp, Inc., a corporation
organized under the laws of the State of Delaware. Upon completion of the June
1997 Reorganization, the Holding Company held all of the outstanding capital
stock of the Bank.
Holding Company Common Stock means the Common Stock of the Holding
Company, par value $0.01 per share, which stock cannot and will not be insured
by the FDIC or any other governmental authority.
Independent Appraiser means the independent investment banking or
financial consulting firm retained by the Holding Company and the Bank to
prepare an appraisal of the estimated pro forma market value of the Conversion
Stock.
Initial Purchase Price means the price per share to be paid initially
by Participants for shares of Conversion Stock subscribed for in the
Subscription Offering and by Persons for shares of Conversion Stock ordered in
the Community Offering.
5
<PAGE>
Interim means one or more interim federal stock savings associations,
which will be formed as a result of the conversion of Harbor Financial, M.H.C.
into the stock form of organization and the reorganization under which
Bancshares will own 100% of the Bank.
Local Community means all counties in which the Bank has its home
office or a branch office.
Member means any Person qualifying as a member of the Mutual Holding
Company in accordance with its mutual charter and bylaws and the laws of the
United States.
MHC Merger means the merger of the Interim Banks with and into the
Holding Company and/or the Bank pursuant to the terms of each of the Plans of
Merger included as Annex A and B hereto.
Mid-Tier Holding Company - Harbor Florida Bancorp, or Holding Company,
a Delaware chartered corporation which owns 100% of the common stock of Harbor
Federal Savings Bank.
Mutual Holding Company means Harbor Financial, M.H.C. (an owner of
53.4% of the common stock of Holding Company) prior to the MHC's conversion into
an interim federal stock savings association.
Offerings means the Subscription Offering, the Public Stockholders
Offering and the Community Offering.
Officer means the president, all senior vice-presidents, secretary,
treasurer or principal financial officer, comptroller or principal accounting
officer and any other person performing similar functions with respect to any
organization whether incorporated or unincorporated.
Order Form means the form or forms provided by the Holding Company,
containing all such terms and provisions as set forth herein, to a Participant
or other Person by which Conversion Stock may be ordered in the Offerings.
Other Member means a Voting Member who is not an Eligible Account
Holder or a Supplemental Eligible Account Holder.
OTS means the Office of Thrift Supervision or any successor thereto.
Participant means any Eligible Account Holder, Tax-Qualified Employee
Stock Benefit Plan, Supplemental Eligible Account Holder and Other Member.
6
<PAGE>
Person means an individual, a corporation, a partnership, an
association, a joint stock company, a trust, an unincorporated organization or a
government or any political subdivision thereof.
Plan of Conversion and Reorganization and Plan of Merger means this
Plan of Conversion and Reorganization and the Plan of Merger as adopted by the
Boards of Directors of the Mutual Holding Company, the Holding Company, and the
Bank and any amendment hereto approved as provided herein.
Primary Parties means the Mutual Holding Company, the Holding Company,
Bancshares and the Bank.
Prospectus means the one or more documents to be used in offering the
Conversion Stock in the Offerings.
Public Stockholders mean those Persons who own shares of Bancorp Common
Stock, excluding the Mutual Holding Company, as of the Stockholder Voting Record
Date.
Public Stockholders Offering means the offering for sale by Bancshares
of any shares of Conversion Stock not subscribed for in the Subscription
Offering to Public Stockholders, at the sole discretion of the bank and
Bancshares.
Qualifying Deposit means the aggregate balance of all Deposit Accounts
in the Bank of (i) an Eligible Account Holder at the close of business on the
Eligibility Record Date, provided such aggregate balance is not less than $50,
and (ii) a Supplemental Eligible Account Holder at the close of business on the
Supplemental Eligibility Record Date, provided such aggregate balance is not
less than $50.
Resident means any person who, on the date designated for that category
of subscriber in the Plan, maintained a bona fide residence within the Local
Community . The designated dates for Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are July 31, 1996, December 31, 1997
and January 9, 1998, respectively. To the extent the person is a corporation or
other business entity, the principal place of business or headquarters shall be
within the Local Community. To the extent the person is a personal benefit plan,
the circumstances of the beneficiary shall apply with respect to this
definition. In the case of all other benefit plans, circumstances of the trustee
shall be examined for purposes of this definition. The Bank may utilize deposit
or loan records or such other evidence provided to it to make a determination as
to whether a person is a bona fide resident of the Local Community. Subscribers
in the Community Offering who are natural persons will have a purchase
preference if they were residents of the Local Community on the date of the
Prospectus. In all cases, however, such determination shall be in the sole
discretion of the Bank and Bancshares.
7
<PAGE>
SEC means the Securities and Exchange Commission.
Special Meeting means the Special Meeting of Members of the Mutual
Holding Company and Public Stockholders called for the purpose of submitting
this Plan to the Members for their approval, and matters related to stockholders
including any adjournments of such meeting.
Stockholders means those Persons who own shares of the Holding Company
Common Stock.
Stockholders' Meeting means the annual or special meeting of
Stockholders of the Holding Company called for the purpose of submitting this
Plan to the Stockholders for their approval, including any adjournments of such
meeting.
Stockholder Voting Record Date means the date for determining the
Public Stockholders of the Bank eligible to vote at the Stockholders' Meeting.
Subscription Offering means the offering of the Conversion Stock to
Participants.
Subscription Rights means nontransferable rights to subscribe for
Conversion Stock granted to Participants pursuant to the terms of this Plan.
Supplemental Eligible Account Holder means any Person and their
Associates. holding a Qualifying Deposit at the close of business on the
Supplemental Eligibility Record Date.
Supplemental Eligibility Record Date, if applicable, means the date for
determining Qualifying Deposits of Supplemental Eligible Account Holders and
shall be required if the Eligibility Record Date is more than 15 months prior to
the date of the latest amendment to the Application for Conversion filed by the
Mutual Holding Company prior to approval of such application by the OTS. If
applicable, the Supplemental Eligibility Record Date shall be the last day of
the calendar quarter preceding OTS approval of the Application for Conversion
submitted by the Mutual Holding Company pursuant to this Plan of Conversion and
Reorganization.
Tax-Qualified Employee Stock Benefit Plan means any defined benefit
plan or defined contribution plan, such as an employee stock ownership plan,
stock bonus plan, profit-sharing plan or other plan, which is established for
the benefit of the employees of the Holding Company and the Bank and which, with
its related trust, meets the requirements to be "qualified" under Section 401 of
the Code as from time to time in effect. A "Non-Tax-Qualified Employee Stock
Benefit Plan" is any defined benefit plan or defined contribution stock benefit
plan which is not so qualified.
8
<PAGE>
Voting Member means a Person who at the close of business on the Voting
Record Date is entitled to vote as a Member of the Mutual Holding Company in
accordance with its mutual charter and bylaws.
Voting Record Date means the date or dates for determining the
eligibility of Members to vote at the Special Meeting
3. GENERAL PROCEDURE FOR CONVERSION
A. An application for the Conversion, including the Plan of Conversion
and Reorganization and all other requisite material (the "Application for
Conversion"), shall be submitted to the OTS for approval. The Mutual Holding
Company and the Holding Company also will cause notice of the adoption of the
Plan by the Boards of Directors of the Mutual Holding Company and the Holding
Company to be given by publication in a newspaper having general circulation in
each community in which an office of the Bank is located; and will cause copies
of the Plan to be made available at each office of the Mutual Holding Company
and the Bank for inspection by Members and Stockholders. The Mutual Holding
Company and the Bank will post the notice of the filing of the Application for
Conversion in each of their offices and will again cause to be published, in
accordance with the requirements of applicable regulations of the OTS, a notice
of the filing with the OTS of an application to convert the Mutual Holding
Company from mutual to stock form.
B. Promptly following receipt of requisite approval of the OTS, this
Plan will be submitted to the Members for their consideration and approval at
the Special Meeting. The Mutual Holding Company may, at its option, mail to all
Members as of the Voting Record Date, at their last known address appearing on
the records of the Mutual Holding Company and the Holding Company, a proxy
statement in either long or summary form describing the Plan which will be
submitted to a vote of the Members at the Special Meeting. The Holding Company
also shall mail to all such Members (as well as other Participants) either a
Prospectus and Order Form for the purchase of Conversion Stock or a letter
informing them of their right to receive a Prospectus and Order Form and a
postage prepaid card to request such materials, subject to the provisions
herein. The Plan must be approved by the affirmative vote of at least a majority
of the total number of votes eligible to be cast by Voting Members at the
Special Meeting.
C. Subscription Rights to purchase shares of Conversion Stock will be
issued without payment therefor to Eligible Account Holders, Tax-Qualified
Employee Plans, Supplemental Eligible Account Holders and Other Members.
D. The Holding Company shall file preliminary proxy materials with the
OTS and SEC in order to seek the approval of the Plan by its Stockholders.
Promptly following clearance of such proxy materials by the OTS and the SEC and
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the receipt of any other requisite approval of the OTS, Bancshares will mail
definitive proxy materials to all Stockholders of the Holding Company as of the
Stockholder Voting Record Date, at their last known address appearing on the
records of the Holding Company, for their consideration and approval of this
Plan at the Stockholders' Meeting. The Plan must be approved by the holders of
at least two-thirds of the outstanding Holding Company Common Stock as of the
Voting Record Date. In addition, the Primary Parties have conditioned the
consummation of the Conversion on the approval of the Plan by at least a
majority of the votes cast, in person or by proxy, by the Public Stockholders as
of the Stockholder Voting Record Date at the Stockholders' Meeting.
E. The Conversion Stock shall be first offered for sale in a
Subscription Offering to Eligible Account Holders, Tax-Qualified Employee Stock
Benefit Plans, Supplemental Eligible Account Holders and Other Members. It is
anticipated that any shares of Conversion Stock remaining unsold after the
Subscription Offering will be sold first through the Public Stockholders
Offering and then through a Community Offering. The purchase price per share for
the Conversion Stock shall be a uniform price determined in accordance with the
provisions herein. Bancshares shall contribute to the Bank an amount of the net
proceeds received from the sale of Conversion Stock as shall be determined by
the Boards of Directors of Bancshares, and the Bank and as shall be approved by
the OTS.
F. The Effective Date of the Conversion shall be the date set forth in
Section 27 hereof. Upon the effective date, the following transactions shall
occur:
(i) The Mutual Holding Company shall convert into an interim
federal stock savings bank - Bank 1. The middle tier holding company
shall first adopt a federal stock charter and then convert into an
interim federal stock savings bank - Bank 2. Bank 2 shall then merge
with and into the Bank with the Bank being the survivor. Immediately
thereafter, Bank 1 shall merge with and into the Bank with the Bank as
being the survivor, and the shares of Bank 1 and its shares of Bancorp
shall be cancelled.
(ii) The Bank shall form two subsidiaries, a new Delaware
corporation (Bancshares) and an interim federal savings association
(Interim). Interim shall merge with and into the Bank resulting in a
new structure in which Bancshares owns 100% of the Bank.
(iii) Bancshares shall sell the Conversion Stock in the
Offerings, as provided herein.
G. The Primary parties may retain and pay for the services of financial
and other advisors and investment bankers to assist in connection with any or
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all aspects of the Conversion, including in connection with the Offerings, the
payment of fees to brokers and investment bankers for assisting Persons in
completing and/or submitting Order Forms. All fees, expenses, retainers and
similar items shall be reasonable.
4. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
A. The aggregate price at which shares of Conversion Stock shall be
sold in the Offerings shall be based on a pro forma valuation of the aggregate
market value of the Conversion Stock prepared by the Independent Appraiser. The
valuation shall be based on financial information relating to the Primary
Parties, market, financial and economic conditions, a comparison of the Primary
Parties with selected publicly held financial institutions and holding companies
and with comparable financial institutions and holding companies and such other
factors as the Independent Appraiser may deem to be important. The valuation
shall be stated in terms of an Estimated Price Range, the maximum of which shall
generally be no more than 15% above the average of the minimum and maximum of
such price range and the minimum of which shall generally be no more than 15%
below such average. The valuation shall be updated during the Conversion as
market and financial conditions warrant and as may be required by the OTS.
B. Based upon the independent valuation, the Boards of Directors of the
Primary Parties shall fix the Initial Purchase Price and the number (or range)
of shares of Conversion Stock ("Offering Range") to be offered in the
Subscription Offering, Public Stockholders Offering and Community Offering, if
applicable. The Actual Purchase Price and the total number of shares of
Conversion Stock to be issued in the Offerings shall be determined by the Boards
of Directors of the Primary Parties upon conclusion of the Offerings in
consultation with the Independent Appraiser and any financial advisor or
investment banker retained by the Primary Parties in connection therewith.
C. Subject to the approval of the OTS, the Estimated Price Range may be
increased or decreased to reflect market, financial and economic conditions
prior to completion of the Conversion, and under such circumstances the Primary
Parties may correspondingly increase or decrease the total number of shares of
Conversion Stock to be issued in the Conversion to reflect any such change.
Notwithstanding anything to the contrary contained in this Plan, no
resolicitation of subscribers shall be required and subscribers shall not be
permitted to modify or cancel their subscriptions unless the gross proceeds from
the sale of the Conversion Stock issued in the Conversion are less than the
minimum or (excluding purchases, if any, by the Holding Company's Tax-Qualified
Employee Stock Benefit Plans) more than 15% above the maximum of the Estimated
Price Range set forth in the Prospectus. In the event of an increase in the
total number of shares offered in the Conversion due to an increase in the
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Estimated Price Range, the priority of share allocation shall be as set forth in
this Plan, provided, however, that such priority will have no effect whatsoever
on the ability of the Tax Qualified Employee Stock Benefit Plans to purchase
additional shares pursuant to Section 4.D.
D. (i) The Tax Qualified Employee Stock Benefit Plan may purchase stock
as a first priority subscriber in the event the Offering reaches the supermax
range. In the event that Tax-Qualified Employee Stock Benefit Plans are unable
to purchase the number of shares subscribed for by such Tax-Qualified Employee
Stock Benefit Plans due to an oversubscription for shares of Conversion Stock
pursuant to Section 5 hereof, Tax-Qualified Employee Stock Benefit Plans may
then purchase from Bancshares, and Bancshares may sell to the Tax-Qualified
Employee Stock Benefit Plans, such additional shares ("Additional Shares") of
Bancshares Common Stock necessary to fill the subscriptions of the Tax-Qualified
Employee Stock Benefit Plans, provided that such Additional Shares may not
exceed 10% of the total numbers of shares of Conversion Stock sold in the
Conversion. The sale of Additional Shares, if necessary, will occur
contemporaneously with the sale of the Conversion Stock. The sale of Additional
Shares to Tax-Qualified Employee Stock Benefit Plans by the Holding Company is
conditioned upon receipt by the Holding Company of a letter from the Independent
Appraiser to the effect that such sale would not have a material effect on the
Conversion or the Actual Purchase Price and the approval of the OTS. The ability
of the Tax-Qualified Employee Stock Benefit Plans to purchase up to an
additional 10% of the total number of shares of Conversion Stock sold in the
Conversion shall not be affected or limited in any manner by the priorities or
purchase limitations otherwise set forth in this Plan of Conversion and
Reorganization.
(ii) Notwithstanding anything to the contrary contained in this Plan,
if the final valuation of the Conversion Stock exceeds the maximum of the
Estimated Price Range, up to 10% of the total number of shares of Conversion
Stock sold in the Conversion may be sold to Tax-Qualified Stock Benefit Plans
prior to filling any other orders for Conversion Stock from such shares in
excess of the Estimated Price Range.
5. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
A. Each Eligible Account Holder shall receive, without payment,
nontransferable subscription rights equal to the greater of (i) the maximum
purchase limitation established for the Community Offering, (ii) one-tenth of 1%
of the total offering of shares of Conversion Stock in the Subscription
Offering, or (iii) 15 times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Conversion Stock offered
in the Subscription Offering by a fraction, of which the numerator is the amount
of the Qualifying Deposit of the Eligible Account Holder and the denominator is
the total amount of all Qualifying Deposits of all Eligible Account Holders,
subject to Section 14 hereof.
B. In the event of an oversubscription for shares of Conversion Stock
pursuant to the provisions herein, available shares shall be allocated among
subscribing Eligible Account Holders so as to permit, to the extent possible, to
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purchase a number of shares which will make his or her total allocation equal to
the lesser of the number of shares subscribed for or 100 shares. Any available
shares remaining after each subscribing Eligible Account Holder has been
allocated the lesser of the number subscribed for or 100 shares shall be
allocated among the subscribing Eligible Account Holders in the proportion which
the Qualifying Deposit of each such subscribing Eligible Account Holder bears to
the total Qualifying Deposits of all such subscribing Eligible Account Holders,
provided that no fractional shares shall be issued. Subscription Rights of
Eligible Account Holders who are also Directors or Officers and their Associates
shall be subordinated to those of other Eligible Account Holders to the extent
that they are attributable to increased deposits during the one-year period
preceding the Eligibility Record Date.
C. All of the purchase limitations herein shall include Exchange Shares
which shall be received as a result of the Exchange.
6. SUBSCRIPTION RIGHTS OF THE TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLANS (SECOND
PRIORITY)
Notwithstanding the purchase limitations discussed below, Tax-Qualified
Employee Stock Benefit Plans of the Holding Company, Bancshares and the Bank
shall receive, without payment, nontransferable Subscription Rights to purchase
in the aggregate up to 10% of the Conversion Stock, including first priority to
purchase any shares of Conversion Stock to be issued in the Conversion as a
result of an increase in the Estimated Price Range after commencement of the
Subscription Offering and prior to completion of the Conversion. Consistent with
applicable laws and regulations and policies and practices of the OTS,
Tax-Qualified Employee Stock Benefit Plans may use funds contributed by the
Holding Company, Bancshares or the Bank and/or borrowed from an independent
financial institution to exercise such Subscription Rights, and the Holding
Company, Bancshares and the Bank may make scheduled discretionary contributions
thereto, provided that such contributions do not cause the Holding Company or
the Bank to fail to meet any applicable regulatory capital requirement.
7. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD PRIORITY)
A. In the event that the Eligibility Record Date is more than 15 months
prior to the date of the latest amendment to the Application for Conversion
filed prior to OTS approval, then, and only in that event, a Supplemental
Eligibility Record Date shall be set and each Supplemental Eligible Account
Holder, shall, subject to the further limitations of Section 11 hereof, receive,
without payment, nontransferable Subscription Rights to purchase up to the
greater of (i) the maximum purchase limitation established for the Community
Offering, (ii) one-tenth of 1% of the total offering of shares of Conversion
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Stock in the Subscription Offering, or (iii) 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of shares of
Conversion Stock offered in the Subscription Offering by a fraction, of which
the numerator is the amount of the Qualifying Deposits of the Supplemental
Eligible Account Holder and the denominator is the total amount of all
Qualifying Deposits of all Supplemental Eligible Account Holders, subject to
Section 14 hereof and the availability of shares of Conversion Stock for
purchase after taking into account the shares of Conversion Stock purchased by
Eligible Account Holders and Tax-Qualified Employee Stock Benefit Plans though
the exercise of Subscription Rights under Sections 5 and 6 hereof.
B. In the event of an oversubscription for shares of Conversion Stock,
available shares shall be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares which will make his total
allocation equal to the lesser of the number of shares subscribed for or 100
shares. Any available shares remaining after each subscribing Supplemental
Eligible Account Holder has been allocated the lesser of the number subscribed
for or 100 shares shall be allocated among the subscribing Supplemental Eligible
Account Holders in the proportion which the Qualifying Deposit of each such
subscribing Supplemental Eligible Account Holder bears to the total Qualifying
Deposits of all such subscribing Supplemental Eligible Account Holders, provided
that no fractional shares shall be issued.
C. All of the purchase limitations herein shall include Exchange Shares
which shall be received as a result of the Exchange.
8. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
A. Each Other Member, as of the Voting Record Date ("Other Members"),
shall, subject to the further limitations of Section 11, hereof, receive without
payment, Subscription Rights to purchase up to the greater of (i) the maximum
purchase limitation established for the Community Offering or (ii) one-tenth of
1% of the total offering of shares of Conversion Stock in the Subscription
Offering, in each case subject to Section 14 hereof and the availability of
shares of Conversion Stock for purchase after taking into account the shares of
Conversion Stock purchased by Eligible Account Holders, Tax-Qualified Employee
Stock Benefit Plans, and Supplemental Eligible Account Holders, if any, through
the exercise of Subscription Rights under Sections 5, 6 and 7 hereof.
B. If, pursuant to this Section, Other Members subscribe for a number
of shares of Conversion Stock in excess of the total number of shares of
Conversion Stock remaining, available shares shall be allocated among
subscribing Other Members shares so as to permit each such Other Member, to the
extent possible, to purchase a number of shares which will make his total
allocations equal to the lesser of the number of shares subscribed for or 100
shares. Any remaining shares after each subscribing Other Member has been
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allocated the lesser of the number subscribed for or 100 shares shall be
allocated among subscribing Other Members on a pro rata basis in the same
proportion as each such Other Member's subscription bears to the total
subscriptions of all such subscribing Other Members, provided that no fractional
shares shall be issued.
C. All of the purchase limitations herein shall include Exchange Shares
which shall be received as a result of the Exchange.
9. PUBLIC STOCKHOLDERS OFFERING
A. If less than the total number of shares of Conversion Stock are sold
in the Subscription Offering, all remaining shares of Conversion Stock shall,
subject to the further limitations of Section 11 hereof, be sold to Public
Stockholders as of the Stockholder Voting Record Date in an amount up to the
greater of (i) the maximum purchase limitation established for the Community
Offering or (ii) one tenth of 1% of the total offering of shares of Conversion
Stock in the Subscription Offering, in each case subject to Section 14 hereof
and the availability of shares of Conversion Stock for purchase after taking
into account the shares of Conversion Stock purchased by Eligible Account
Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible
Account Holders and Other Members. The ability of Public Stockholders to
purchase stock in the Public Stockholders Offering is subject to the right of
the Primary Parties in their absolute discretion to accept or reject in whole or
in part all orders in the Public Stockholders Offering.
B. If, pursuant to this Section, Public Stockholders as of the
Stockholder Voting Record Date subscribe for a number of shares of Conversion
Stock in excess of the total number of shares of Conversion Stock remaining,
available shares shall be allocated among subscribing Public Stockholders as of
the Stockholder Voting Record Date in an equitable manner as determined by the
Board of Directors, provided that no fractional shares shall be issued.
C. All of the purchase limitations herein shall include Exchange Shares
which shall be received as a result of the Exchange.
10. COMMUNITY OFFERING AND OTHER OFFERINGS
A. If less than the total number of shares of Conversion Stock are sold
in the Subscription Offering and Public Stockholders Offering, it is anticipated
that all remaining shares of Conversion Stock shall, if practicable, be sold in
a Community Offering. Subject to the requirements set forth herein, the manner
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in which the Conversion Stock is sold in the Community Offering shall have as
the objective the achievement of the widest possible distribution of such stock,
subject to the right of the Primary Parties, in their absolute discretion, to
accept or reject in whole or in part all orders in the Community Offering.
B. In the event of a Community Offering, all shares of Conversion Stock
which are not subscribed for in the Subscription Offering and Public
Stockholders Offering shall be offered for sale by means of a direct community
marketing program, which may provide for the use of brokers, dealers or
investment banking firms experienced in the sale of financial institution
securities. Any available shares in excess of those not subscribed for in the
Subscription Offering will be available for purchase by members of the general
public to whom a Prospectus is delivered by the Holding Company or on its
behalf, with preference given to natural persons who are Residents of the Local
Community ("Preferred Subscribers").
C. A Prospectus and Order Form shall be furnished to such Persons as
the Primary Parties may select in connection with the Community Offering, and
each order for Conversion Stock in the Community Offering shall be subject to
the absolute right of the Primary Parties to accept or reject any such order in
whole or in part either at the time of receipt of an order or as soon as
practicable following completion of the Community Offering. Available shares
will be allocated first to each Preferred Subscriber whose order is accepted in
an amount equal to the lesser of 100 shares or the number of shares subscribed
for by each such Preferred Subscriber, if possible. Thereafter, unallocated
shares shall be allocated among the Preferred Subscribers whose accepted orders
remain unsatisfied in an equitable manner as determined by the Board of
Directors. If there are any shares remaining after all accepted orders by
Preferred Subscribers have been satisfied, any remaining shares shall be
allocated to other members of the general public who place orders in the
Community Offering, applying the same allocation described above for Preferred
Subscribers.
D. The amount of Conversion Stock that any Person may purchase in the
Community Offering shall (subject to the further limitations of Section 11
hereof) not exceed the number of shares of Conversion Stock as shall equal that
when combined with Exchange Shares $500,000 divided by the Actual Purchase
Price, provided, however, that this amount may be decreased or increased by up
to 5%, subject to any required regulatory approval but without the further
approval of Members of the Mutual Holding Company or the Stockholders of the
Holding Company. The Primary Parties may commence the Community Offering
concurrently with, at any time during, or as soon as practicable after the end
of, the Subscription Offering and Public Stockholders Offering, and the
Community Offering must be completed within 45 days after the completion of the
Subscription Offering and Public Stockholders Offering, unless extended by the
Primary Parties with any required regulatory approval.
E. In the event that any insignificant residue of shares of Conversion
Stock is not sold in the Subscription Offering or Community Offering, the
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Primary Parties shall use their best efforts to obtain other purchasers for such
shares in such manner and upon such conditions as may be satisfactory to the
OTS.
11. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF CONVERSION STOCK
The following limitations shall apply to all purchases of Conversion
Stock:
A. The maximum number of shares of Conversion Stock which may be
purchased by any Person in the First Priority, Third Priority and Fourth
Priority in the Subscription Offering, any Person in the Public Stockholders
Offering and any person in the Community Offering shall not exceed the number of
shares of Conversion Stock that, when combined with the Exchange Shares, shall
equal $500,000 divided by the Actual Purchase Price.
B. Except for the Tax-Qualified Employee Stock Benefit Plans, the
maximum number of shares of Conversion Stock which may be purchased in all
categories in the Conversion by any Person together with any Associate or group
of persons Acting in Concert shall not exceed such number of shares that when
combined with Exchange Shares shall equal $4,7500,000 divided by the Actual
Purchase Price per share.
C. The number of shares of Conversion Stock which Directors and
Officers and their Associates may purchase in the aggregate in the Offering
shall not, when combined with Exchange Shares, exceed 25% of the total number of
shares of Conversion Stock sold in the Offerings, including any shares which may
be issued in the event of an increase in the maximum of the Estimated Price
Range to reflect changes in market, financial and economic conditions after
commencement of the Subscription Offering and prior to completion of the
Offerings.
D. No Person may purchase fewer than 25 shares of Conversion Stock in
the Offerings, to the extent such shares are available; provided, however, that
if the Actual Purchase Price is greater than $20.00 per share, such minimum
number of shares shall be adjusted so that the aggregate Actual Purchase Price
for such minimum shares will not exceed $500.00.
E. For purposes of the foregoing limitations and the determination of
Subscription Rights, (i) Directors, Officers and Employees shall not be deemed
to be Associates or a group acting in concert solely as a result of their
capacities as such, (ii) shares purchased by Tax-Qualified Employee Stock
Benefit Plans shall not be attributable to the individual trustees or
beneficiaries of any such plan for purposes of determining compliance with the
limitations set forth in this Section, and (iii) Exchange Shares shall be valued
at the Actual Purchase Price.
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F. Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the Members of
the Mutual Holding Company or the Stockholders of the Holding Company, the
Primary Parties may increase or decrease any of the individual or aggregate
purchase limitations set forth herein to a percentage which does not exceed 5%
of the maximum purchase amount set forth herein whether prior to, during or
after the Subscription Offering or Community Offering. In the event that an
individual purchase limitation is increased after commencement of the
Subscription Offering or any other offering, the Primary Parties shall permit
any Person who subscribed for the maximum number of shares of Conversion Stock
to purchase an additional number of shares, so that such Person shall be
permitted to subscribe for the then maximum number of shares permitted to be
subscribed for by such Person, subject to the rights and preferences of any
Person who has priority Subscription Rights. In the event that an individual
purchase limitation is decreased after commencement of the Subscription Offering
or any other offering, the orders of any Person who subscribed for more than the
new purchase limitation shall be decreased by the minimum amount necessary so
that such Person shall be in compliance with the then maximum number of shares
permitted to be subscribed for by such Person.
G. The Primary Parties shall have the right to take all such action as
they may, in their sole discretion, deem necessary, appropriate or advisable in
order to monitor and enforce the terms, conditions, limitations and restrictions
contained in this Section and elsewhere in this Plan and the terms, conditions
and representations contained in the Order Form, including, but not limited to,
the absolute right (subject only to any necessary regulatory approvals or
concurrences) to reject, limit or revoke acceptance of any subscription or order
and to delay, terminate or refuse to consummate any sale of Conversion Stock
which they believe might violate, or is designed to, or is any part of a plan
to, evade or circumvent such terms, conditions, limitations, restrictions and
representations. Any such action shall be final, conclusive and binding on all
persons, and the Primary Parties and their respective Boards shall be free from
any liability to any Person on account of any such action.
H. Notwithstanding anything to the contrary and except as otherwise
required by the OTS, contained in this Plan, the Public Stockholders will not
have to sell any Holding Company Common Stock or be limited in receiving
Distribution Exchange Shares even if their ownership of Holding Company Common
Stock when converted into Distribution Exchange Shares would exceed an
applicable purchase limitation.
12. TIMING OF SUBSCRIPTION OFFERING, MANNER OF EXERCISING SUBSCRIPTION RIGHTS
AND ORDER FORMS
A. The Subscription Offering may be commenced concurrently with or at
any time after the mailing to Voting Members of the Mutual Holding Company and
Stockholders of the Holding Company of the proxy statement(s) to be used in
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connection with the Special Meeting and the Stockholders' Meeting. The
Subscription Offering may be closed before the Special Meeting and the
Stockholders' Meeting, provided that the offer and sale of the Conversion Stock
shall be conditioned upon the approval of the Plan by the Voting Members of the
Mutual Holding Company and the Stockholders of the Bank at the Special Meeting
and the Stockholders' Meeting, respectively.
B. The exact timing of the commencement of the Subscription Offering
shall be determined by the Primary Parties in consultation with the Independent
Appraiser and any financial or advisory or investment banking firm retained by
them in connection with the Conversion. The Primary Parties may consider a
number of factors, including, but not limited to, their current and projected
future earnings, local and national economic conditions, and the prevailing
market for stocks in general and stocks of financial institutions in particular.
The Primary Parties shall have the right to withdraw, terminate, suspend, delay,
revoke or modify any such Subscription Offering, at any time and from time to
time, as they in their sole discretion may determine, without liability to any
Person, subject to compliance with applicable securities laws and any necessary
regulatory approval or concurrence.
C. The Primary Parties shall, promptly after the SEC has declared the
Registration Statement, which includes the Prospectus, effective and all
required regulatory approvals have been obtained, distribute or make available
the Prospectus, together with Order Forms for the purchase of Conversion Stock,
to all Participants for the purpose of enabling them to exercise their
respective Subscription Rights, subject to Section 14 hereof. The Primary
Parties may elect to mail a Prospectus and Order Form only to those Participants
who request such materials by returning a postage-paid card to the Primary
Parties by a date specified in the letter informing them of their Subscription
Rights. Under such circumstances, the Subscription Offering shall not be closed
until the expiration of 30 days after the mailing by the Primary Parties of the
postage-paid card to Participants.
D. A single Order Form for all Deposit Accounts maintained with the
Bank by an Eligible Account Holder and any Supplemental Eligible Account Holder
may be furnished, notwithstanding the number of Deposit Accounts maintained with
the Bank on the Eligibility Record Date and Supplemental Eligibility Record Date
respectively.
E. The recipient of an Order Form shall have no less than 20 days and
no more than 45 days from the date of mailing of the Order Form (with the exact
termination date to be set forth on the Order Form) to properly complete and
execute the Order Form and deliver it to the Primary Parties. The Primary
Parties may extend such period by such amount of time as they determine is
appropriate. Failure of any Participant to deliver a properly executed Order
Form to the Primary Parties, along with payment (or authorization for payment by
withdrawal) for the shares of Conversion Stock subscribed for, within time
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limits prescribed, shall be deemed a waiver and release by such person of any
rights to subscribe for shares of Conversion Stock. Each Participant shall be
required to confirm to the Primary Parties by executing an Order Form that such
Person has fully complied with all of the terms, conditions, limitations and
restrictions in the Plan.
F. The Primary Parties shall have the absolute right, in their sole
discretion and without liability to any Participant or other Person, to reject
any Order Form, including, but not limited to, any Order Form that is (i)
improperly completed or executed; (ii) not timely received; (iii) transmitted
via facsimile; (iv) not accompanied by the proper payment (or authorization of
withdrawal for payment) or, in the case of institutional investors in the
Community Offering, not accompanied by an irrevocable order together with a
legally binding commitment to pay the full amount of the purchase price prior to
48 hours before the completion of the Offerings; or (v) submitted by a Person
whose representations the Primary Parties believe to be false or who they
otherwise believe, either alone, or acting in concert with others, is violating,
evading or circumventing, or intends to violate, evade or circumvent, the terms
and conditions of the Plan. The Primary Parties may, but will not be required
to, waive any irregularity on any Order Form or may require the submission of
corrected Order Forms or the remittance of full payment for shares of Conversion
Stock by such date as they may specify. The interpretation of the Primary
Parties of the terms and conditions of the Order Forms shall be final and
conclusive.
13. PAYMENT FOR CONVERSION STOCK
A. Payment for shares of Conversion Stock subscribed for by
Participants in the Subscription Offering and payment for shares of Conversion
Stock ordered by Persons in the Stockholders Offering and Community Offering
shall be equal to the Initial Purchase Price multiplied by the number of shares
which are being subscribed for or ordered, respectively. Such payment may be
made in cash, if delivered in person, or by check or money order at the time the
Order Form is delivered to the Primary Parties. Wire transfers of funds may be
accepted in the sole discretion of the Primary Parties and there shall be no
liability for failing to accept such funds. In addition, the Primary Parties may
elect to provide Participants and/or other Persons who have a Deposit Account
with the Bank the opportunity to pay for shares of Conversion Stock by
authorizing the Bank to withdraw from such Deposit Account an amount equal to
the aggregate Purchase Price of such shares. If the Actual Purchase Price is
less than the Initial Purchase Price, the Primary Parties shall refund the
difference to all Participants and other Persons, unless the Primary Parties
choose to provide Participants and other Persons the opportunity on the Order
Form to elect to have such difference applied to the purchase of additional
whole shares of Conversion Stock. If the Actual Purchase Price is more than the
Initial Purchase Price, the Primary Parties shall reduce the number of shares of
Conversion Stock ordered by Participants and other Persons and refund any
remaining amount which is attributable to a fractional share interest, unless
the Primary Parties choose to provide Participants and other Persons the
opportunity to increase the Actual Purchase Price submitted to them.
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B. Consistent with applicable laws and regulations and policies and
practices of the OTS, payment for shares of Conversion Stock subscribed for by
Tax-Qualified Employee Stock Benefit Plans may be made with funds contributed by
the Holding Company, and/or the Bank and/or funds obtained pursuant to a loan
from an unrelated financial institution pursuant to a loan commitment which is
in force from the time that any such plan submits an Order Form until the
closing of the transactions contemplated hereby.
C. If a Participant or other Person authorizes the Bank to withdraw the
amount of the Initial Purchase Price from his or her Deposit Account, the Bank
shall have the right to make such withdrawal or to freeze funds equal to the
aggregate Initial Purchase Price upon receipt of the Order Form. Notwithstanding
any regulatory provisions regarding penalties for early withdrawals from
certificate accounts, the Bank intends to allow payment by means of withdrawal
from certificate accounts without the assessment of such penalties. In the case
of an early withdrawal of only a portion of such account, the certificate
evidencing such account shall be canceled if any applicable minimum balance
requirement ceases to be met. In such case, the remaining balance will earn
interest at the regular passbook rate. However, where any applicable minimum
balance is maintained in such certificate account, the rate of return on the
balance of the certificate account shall remain the same as prior to such early
withdrawal. This waiver of the early withdrawal penalty applies only to
withdrawals made in connection with the purchase of Conversion Stock and is
entirely within the discretion of the Primary Parties.
D. The Bank shall pay interest, at not less than the passbook rate, for
all amounts paid in cash, by check or money order to purchase shares of
Conversion Stock in the Subscription Offering and the Community Offering from
the date payment is received until the date the Conversion is completed or
terminated.
E. The Bank shall not knowingly loan funds or otherwise extend credit
to any Participant or other Person to purchase Conversion Stock.
F. Each share of Conversion Stock shall be non-assessable upon payment
in full of the Actual Purchase Price.
14. ACCOUNTHOLDERS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES
The Primary Parties shall make reasonable efforts to comply with the
securities laws of all jurisdictions in the United States in which Participants
reside. However, no Participant will be offered or receive any Conversion Stock
under the Plan if such Participant resides in a foreign country or resides in a
jurisdiction of the United States with respect to which any of the following
apply; (a) there are few Participants otherwise eligible to subscribe for shares
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under this Plan who reside in such jurisdiction; (b) the granting of
Subscription Rights or the offer or sale of shares of Conversion Stock to such
Participants would require any of the Primary Parties or their respective
Directors and Officers, under the laws of such jurisdiction, to register as a
broker-dealer, salesman or selling agent or to register or otherwise qualify the
Conversion Stock for sale in such jurisdiction, or any of the Primary Parties
would be required to qualify as a foreign corporation or file a consent to
service of process in such jurisdiction; and (c) such registration,
qualification or filing in the judgment of the Primary Parties would be
impracticable or unduly burdensome for reasons of cost or otherwise.
15. VOTING RIGHTS OF STOCKHOLDERS
Following consummation of the Conversion, voting rights with respect to
the Bank shall be held and exercised exclusively by Bancshares as holder of all
of the Bank's outstanding voting capital stock, and voting rights with respect
to Bancshares shall be held and exercised exclusively by the holders of
Bancshares' voting capital stock.
16. LIQUIDATION ACCOUNT
A. At the time of the MHC Merger and middle tier mergers into the Bank,
a liquidation account shall be established by the Bank in an amount equal to the
amount of the dividends from Bank Common Stock waived by the Mutual Holding
Company plus the greater of (i) $38,728,073, which is equal to 100% of the
retained earnings of the Bank as of June 30, 1993, the date of the latest
statement of financial condition contained in the final offering circular
utilized in the Bank's initial public offering, or (ii) 53.4% of the Holding
Company's total stockholders' equity as reflected in its latest statement of
financial condition contained in the final Prospectus utilized in the
Conversion. The function of the liquidation account will be to preserve the
rights of certain holders of Deposit Accounts in the association who maintain
such accounts in the Bank following the Conversion to a priority for
distributions in the unlikely event of a liquidation of the Bank subsequent to
the Conversion.
B. The liquidation account shall be maintained by the Bank for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders,
if any, who maintain their Deposit Accounts in the Bank after the Conversion.
Each such account holder will, with respect to each Deposit Account held, have a
related inchoate interest in a portion of the liquidation account balance, which
interest will be referred to in this Section 16 as the "subaccount balance." All
Deposit Accounts which have the same social security number will be aggregated
for purposes of determining the initial subaccount balance with respect to such
Deposit Accounts, except as provided in this Section.
C. In the event of a complete liquidation of the Bank subsequent to the
Conversion (and only in such event), each Eligible Account Holder and
Supplemental Eligible Account Holder, if any, shall be entitled to receive a
liquidation distribution from the liquidation account in the amount of the then
current subaccount balances for Deposit Accounts then held (adjusted as
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described below) before any liquidation distribution may be made with respect to
the capital stock of the Bank. No merger, consolidation, sale of bulk assets or
similar combination transaction with another FDIC-insured institution in which
the Bank is not the surviving entity shall be considered a complete liquidation
for this purpose. In any merger or consolidation transaction, the liquidation
account shall be assumed by the surviving entity.
D. The initial subaccount balance for a Deposit Account held by an
Eligible Account Holder and Supplemental Eligible Account Holder, if any, shall
be determined by multiplying the opening balance in the liquidation account by a
fraction, of which the numerator is the amount of the Qualifying Deposits of
such account holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders, if any. For Deposit Accounts in existence at both the Eligibility
Record Date and the Supplemental Eligibility Record Date, if any, separate
initial subaccount balances shall be determined on the basis of the Qualifying
Deposits in such Deposit Accounts on each such record date. Initial subaccount
balances shall not be increased, and shall be subject to downward adjustment as
provided below.
E. If the aggregate deposit balance in the Deposit Account(s) of any
Eligible Account Holder or Supplemental Eligible Account Holder, if any, at the
close of business on any annual closing date and the Supplemental Eligibility
Record Date for Eligible Account Holders and subsequent to the Eligibility
Record Date for Supplemental Eligible Account Holders, is less than the lesser
of (a) the aggregate deposit balance in such Deposit Account(s) at the close of
business on any other annual closing date subsequent to such record dates or (b)
the aggregate deposit balance in such Deposit Account(s) as of the Eligibility
Record Date or the Supplemental Eligibility Record Date, the subaccount balance
for such Deposit Accounts(s) shall be adjusted by reducing such subaccount
balance in an amount proportionate to the reduction in such deposit balance. In
the event of such a downward adjustment, the subaccount balance shall not be
subsequently increased, notwithstanding any subsequent increase in the deposit
balance of the related Deposit Account(s). The subaccount balance of an Eligible
Account Holder or Supplemental Eligible Account Holder, if any, will be reduced
to zero if the Account Holder ceases to maintain a Deposit Account at the Bank
that has the same social security number as appeared on his Deposit Account(s)
at the Eligibility Record Date or, if applicable, the Supplemental Eligibility
Record Date.
F. Subsequent to the Conversion, the Bank may not pay cash dividends
generally on deposit accounts and/or capital stock of the Bank, if such dividend
would reduce the Bank's regulatory capital below the aggregate amount of the
then current subaccount balances for Deposit Accounts then held; otherwise, the
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existence of the liquidation account shall not operate to restrict the use or
application of any of the net worth accounts of the Bank.
G. For purposes of this Section, a Deposit Account includes a
predecessor/successor account which is held by an Account Holder with the same
social security number.
17. TRANSFER OF DEPOSIT ACCOUNTS
Each Deposit Account in the Bank at the time of the consummation of the
Conversion shall become, without further action by the holder, a Deposit Account
in the Bank equivalent in withdrawable amount to the withdrawal value (as
adjusted to give effect to any withdrawal made for the purchase of Conversion
Stock), and subject to the same terms and conditions (except as to voting and
liquidation rights) as such Deposit Account in the Bank immediately preceding
consummation of the Conversion. Holders of Deposit Accounts in the Bank shall
not, as such holders, have any voting rights.
18. REQUIREMENTS FOLLOWING CONVERSION FOR REGISTRATION, MARKET MAKING AND STOCK
EXCHANGE LISTING
In connection with the Conversion, the Holding Company shall have
registered its Common Stock pursuant to Section 12(g) of the Securities Exchange
Act of 1934, as amended, and undertaken not to deregister such stock for a
period of three years thereafter. Bancshares also shall use its best efforts to
(i) encourage and assist a market maker to establish and maintain a market for
its Common Stock and (ii) Bancshares Common Stock on a national or regional
securities exchange or to have quotations for such stock disseminated on the
National Association of Securities Dealers Automated Quotation System.
19. DIRECTORS AND OFFICERS OF THE BANK AND THE HOLDING COMPANY
Each person serving as a Director or Officer of the Bank at the time of
the Conversion shall continue to serve as a Director or Officer of the Bank for
the balance of the term for which the person was elected prior to the
Conversion, and until a successor is elected and qualified. Directors or
officers of the Holding Company shall continue to serve in the same capacity and
for the same terms in respect to Bancshares.
20. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS FOLLOWING THE
CONVERSION
For a period of three years following the Conversion, the Directors and
Officers of Bancshares, the Bank and their Associates may not purchase, without
the prior written approval of the OTS, Bancshares Common Stock except from a
broker-dealer registered with the SEC. This prohibition shall not apply,
however, to (i) a negotiated transaction arrived at by direct negotiation
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between buyer and seller and involving more than 1% of the outstanding
Bancshares Common Stock and (ii) purchases of stock made by and held by any
Tax-Qualified Employee Stock Benefit Plan (and purchases of stock made by and
held by any Non-Tax-Qualified Employee Stock Benefit Plan following the receipt
of stockholder approval of such plan) which may attributable to individual
officers or directors.
The foregoing restriction on purchases of Bancshares Common Stock shall
be in addition to any restrictions that may be imposed by federal and state
securities laws.
21. RESTRICTIONS ON TRANSFER OF STOCK
All shares of the Conversion Stock which are purchased by Persons other
than Directors and Officers shall be transferable without restriction, except in
connection with a transaction prohibited by Section 22 of this Plan. Shares of
Conversion Stock purchased by Directors and Officers, the Holding Company,
Bancshares and the Bank on original issue from Bancshares (by subscription or
otherwise) shall be subject to the restriction that such shares shall not be
sold or otherwise disposed of for value for a period of one year following the
date of purchase, except for any disposition of such shares following the death
of the original purchaser or pursuant to any merger or similar transaction
approved by the OTS. The shares of Conversion Stock issued by Bancshares to
Directors and Officers shall bear the following legend giving appropriate notice
of such one-year restriction.
The shares of stock evidenced by this Certificate are
restricted as to transfer for a period of one year from the date of
this Certificate pursuant to Part 563b of the Rules and Regulations of
the Office of Thrift Supervision. These shares may not be transferred
during such one-year period without a legal opinion of counsel for the
Company that said transfer is permissible under the provisions of
applicable law and regulation. This restrictive legend shall be deemed
null and void after one year from the date of this Certificate.
In addition, Bancshares shall give appropriate instructions to the
transfer agent for the Common Stock with respect to the applicable restrictions
relating to the transfer of restricted stock. Any shares issued at a later date
as a stock dividend, stock split or otherwise with respect to any such
restricted stock shall be subject to the same holding period restrictions as may
then be applicable to such restricted stock.
The foregoing restriction on transfer shall be in addition to any
restrictions on transfer that may be imposed by federal and state securities
laws.
22. RESTRICTIONS ON ACQUISITION OF STOCK OF BANCSHARES
The articles of incorporation of Bancshares shall prohibit any Person
together with Associates or group of Persons acting in concert from offering to
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acquire or acquiring, directly or indirectly, beneficial ownership of more than
10% of any class of equity securities of Bancshares, or of securities
convertible into more than 10% of any such class, for five years following
completion of the Conversion. The articles of incorporation of Bancshares also
shall provide that all equity securities beneficially owned by any Person in
excess of 10% of any class of equity securities during such five-year period
shall be considered "excess shares," and that excess shares shall not be counted
as shares entitled to vote and shall not be voted by any Person or counted as
voting shares in connection with any matters submitted to the stockholders for a
vote. The foregoing restrictions shall not apply to (i) any offer with a view
toward public resale made exclusively to Bancshares by underwriters or a selling
group acting on this behalf, (ii) the purchase of shares by a Tax-Qualified
Employee Stock Benefit Plan established for the benefit of the employees of
Bancshares and its subsidiaries which is exempt from approval requirements under
12 C. F. R. ss.574.3(c)(1)(vi) or any successor thereto, and (iii) any offer or
acquisition approved in advance by the affirmative vote of two-thirds of the
entire Board of Directors of Bancshares. Directors, Officers or Employees of
Bancshares or the Bank or any subsidiary thereof shall not be deemed to be
Associates or a group acting in concert with respect to their individual
acquisition of any class of equity securities of Bancshares solely as a result
of their capacities as such.
23. TAX RULINGS OR OPINIONS
Consummation of the Conversion is conditioned upon prior receipt by the
Primary Parties of either a ruling or an opinion of counsel, a tax advisor with
respect to federal tax laws, and either a ruling or an opinion of counsel or tax
advisor with respect to Florida tax laws, to the effect that consummation of the
transactions contemplated hereby will not result in a taxable reorganization
under the provisions of the applicable codes or otherwise result in any material
adverse tax consequences to the Primary Parties or to account holders receiving
Subscription Rights before or after the Conversion, except in each case to the
extent, if any, that Subscription Rights are deemed to have fair market value on
the date such rights are issued.
24. STOCK COMPENSATION PLANS
A. Bancshares is authorized to adopt Tax-Qualified Employee Stock
Benefit Plans in connection with the Conversion, including without limitation an
employee stock ownership plan.
B. Bancshares is also authorized to adopt stock option plans,
restricted stock grant plans and other Non-Tax-Qualified Employee Stock Benefit
Plans, provided that no stock options shall be granted, and no shares of
Conversion Stock shall be purchased, pursuant to any of such plans prior to the
earlier of (i) the one-year anniversary of the consummation of the Conversion or
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(ii) the receipt of stockholder approval of such plans at either the annual or
special meeting of stockholders of Bancshares to be held not earlier than six
months after the completion of the Conversion.
C. Existing as well as any newly created Tax-Qualified Employee Stock
Benefit Plans may purchase shares of Conversion Stock in the Offerings, to the
extent permitted by the terms of such benefit plans and this Plan.
25. DIVIDEND AND REPURCHASE RESTRICTIONS ON STOCK
A. Except as may otherwise may be permitted by the OTS, Bancshares may
not repurchase any shares of its capital stock during the first year following
consummation of the Conversion. During the second and third years following
consummation of the Conversion, Bancshares may not repurchase any of its capital
stock from any person, other than pursuant to (i) an offer to repurchase made by
Bancshares on a pro rata basis to all of its stockholders and which is approved
by the OTS, (ii) the repurchase of qualifying shares of a director, if any,
(iii) purchases in the open market by a Tax-Qualified or Non-Tax-Qualified
Employee Stock Benefit Plan in an amount reasonable and appropriate to fund the
plan, or (iv) a repurchase program approved by the OTS.
B. The Bank may not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect thereof would cause the regulatory
capital of the Bank to be reduced below the amount required for the liquidation
account. Any dividend declared or paid on, or repurchase of, the Bank's capital
stock also shall be in compliance with Section 563.134 of the Regulations, or
any successor thereto.
C. Notwithstanding anything to the contrary set forth herein,
Bancshares may repurchase its capital stock to the extent and subject to the
requirements set forth in Section 563b.3(g)(3) of the Regulations, or any
successor thereto, or as otherwise may be approved by the OTS.
26. PAYMENT OF FEES TO BROKERS
The Primary Parties may elect to offer to pay fees on a per share basis
to securities brokers who assist purchasers of Conversion Stock in the
Offerings.
27. EFFECTIVE DATE
The Effective Date of the Conversion shall be the date upon which the
last of the following actions occurs: (i) the filing of Articles of Combination
with the OTS with respect to the MHC Merger and Mid-Tier Holding Company merger
with the Bank, (ii) the closing of the issuance of the shares of Conversion
Stock in the Offerings. The filing of Articles of Combination relating to the
MHC and Mid-Tier Holding Company Mergers and the closing of the issuance of
shares of Conversion Stock in the Offerings shall not occur until all requisite
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regulatory, Member and Stockholder approvals have been obtained, all applicable
waiting periods have expired and sufficient subscriptions and orders for the
Conversion Stock have been received. It is intended that the closing of the MHC
Merger, and Mid-Tier Holding Company Merger and the sale of shares of Conversion
Stock in the Offerings shall occur consecutively and substantially
simultaneously with, however, the merger of the Mid-Tier Holding Company into
Bank occurring first.
28. AMENDMENT OR TERMINATION OF THE PLAN
If deemed necessary or desirable by the Boards of Directors of the
Primary Parties, this Plan may be substantively amended, as a result of comments
from regulatory authorities or otherwise, at any time prior to the solicitation
of proxies from members and Stockholders to vote on the Plan and at any time
thereafter with the concurrence of the OTS. Any amendment to this Plan made
after approval by the Members and Stockholders with the concurrence of the OTS
shall not necessitate further approval by the Members or Stockholders unless
otherwise required by the OTS. This Plan shall terminate if the sale of all
shares of Conversion Stock is not completed within 24 months from the date of
the Special Meeting. Prior to the earlier of the Special Meeting and the
Stockholders' Meeting, this Plan may be terminated by the Boards of Directors of
the Primary Parties without approval of the OTS; after the Special Meeting or
the Stockholder's Meeting, the Boards of Directors may terminate this Plan only
with the approval of the OTS.
29. INTERPRETATION OF THE PLAN
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of each of the Boards of Directors of the
Primary Parties shall be final, subject to the authority of the OTS.
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ANNEX A
PLAN OF MERGER
PLAN OF MERGER, dated as of December 23, 1997 ("Plan of Merger") by and
between Harbor Florida Bancorp, Inc. (the "Holding Company") and Harbor Federal
Savings Bank (the "Bank"). Unless otherwise noted, defined terms shall have the
same meaning as those set forth in the Plan of Conversion and Reorganization of
the Mutual Holding Company dated December 23, 1997 of which this Plan of Merger
is an Annex thereto.
WITNESSETH:
WHEREAS, Harbor Financial, M.H.C. (the "Mutual Holding Company"),
through a reorganization and conversion, owned 53.4% of the Common Stock of
Harbor Federal Savings Bank (the "Bank");
WHEREAS, on June 25, 1997, the Bank effected an additional
reorganization as a result of which the Bank became a wholly owned subsidiary of
Holding Company and the Holding Company became the owner of 100% of the common
stock of the Bank;
WHEREAS, Holding Company now has 53.4% of its shares of common stock
owned by the Mutual Holding Company and 46.6% of its shares held by the public
(the "Minority Shareholders");
WHEREAS, the Board of Directors of the Mutual Holding Company has
determined that it is in the best interests of the Mutual Holding Company and
its members to convert from the mutual to stock form of organization;
WHEREAS, the Bank is wholly owned by Holding Company;
WHEREAS, the conversion of the Mutual Holding Company to stock form
will be facilitated by causing the Mutual Holding Company to convert from the
mutual form to a federal interim stock savings bank to be known as "Interim Bank
Number 1" ("Interim") and simultaneously merge with the Bank; and
WHEREAS, the Holding Company, after it adopts a federal stock charter,
will convert to an interim federal stock bank known as Interim Bank Number 2;
and
WHEREAS, immediately upon completion of the Conversion, the Mutual
Holding Company and the existing minority stockholders of the Holding Company
will exchange their current shares of Holding Company Common Stock for shares of
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common stock of Bancshares based upon an Exchange Ratio established in
accordance with the independent appraisal of the Bank upon its merger with
Interim Bank Number 2 and Interim Bank Number 1 and the remaining shares will be
sold in subscription and community offerings, giving priority subscription
rights as set forth in the Plan in accordance with OTS conversion regulations.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, and in accordance with federal law, the Holding
Company and the Bank hereby agree that, subject to the conditions hereinafter
set forth, the Holding Company shall convert from a Delaware chartered
corporation to a federal stock corporation and from a federal stock corporation
to a federal interim stock savings bank -- Interim Bank Number 2. The mutual
form to a federal interim stock savings bank, and Interim Bank Number 2 shall
then be merged with and into the Bank with the Bank as the surviving entity.
Thereafter, the Bank shall be merged with a federal interim association
subsidiary of a newly formed Delaware corporation -- Bancshares and shall become
as a result thereof a wholly owned subsidiary of Bancshares. The terms and
conditions of such merger shall be as follows:
1. Regulatory Approvals. The merger, including the merger of the Mutual
Holding Company, shall not become effective until receipt of approval of the OTS
and any other agency having jurisdiction over the merger, if any.
2. Identity and Name of Resulting Bank. The resulting savings bank in
the Merger shall be the Bank.
3. Offices of Resulting Bank. The home office of the Bank shall be the
Bank's office located at 100 S. Second Street, Fort Pierce, Florida. The
locations of the branch offices of the Bank shall be those of the Bank in
existence on the date of this Plan of Merger. In addition, the Bank shall
operate branch offices at such additional locations as may be approved by the
OTS.
4. The Bank's Federal Charter and Bylaws. The federal stock charter and
bylaws of the Bank as in effect immediately prior to the effectiveness of the
Mergers shall be amended as necessary to accomplish the Merger.
5. Effective Date. The effective date of the Conversion ("Effective
Date") shall be the date as soon as practicable after the issuance and/or
execution by the OTS and any other federal or state regulatory agencies, of all
approvals, certificates and documents as may be required in order to cause the
Conversion to become effective.
6. Stockholder Approval. The affirmative vote of the holders of
two-thirds of the outstanding Holding Company Common Stock and at least a
majority of such Holding Company Common Stock not held by the Mutual Holding
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Company voting at a meeting of the Holding Company stockholders shall be
required to approve this Plan of Merger.
7. Mutual Holding Company Approval. The approval of a majority of the
members of the Mutual Holding Company, as of a specified date shall be required
to approve this Plan of Merger.
8. Cancellation of Holding Company Common Stock held by the Mutual
Holding Company and Member Interests; Liquidation Account.
(a) On the Effective Date, (i) the ownership interest in each share of
Holding Company Common Stock issued and outstanding immediately prior to the
Effective Date shall, by virtue of the Reorganization and without any action on
the part of the holder thereof, be canceled and exchanged for Exchange Shares
held by public shareholders, (ii) the interests in the Mutual Holding Company of
any person, firm or entity who or which qualified as a member of the Mutual
Holding Company in accordance with its mutual charter and bylaws and the laws of
the United States prior to the Mutual Holding Company's conversion from mutual
to stock form (the "Members") shall, by virtue of the Merger described in Annex
B and without any action on the part of the holder thereof, be canceled, and
(iii) a liquidation account shall be established on behalf of each depositor
member of the Mutual Holding Company by the Bank, as defined in the Plan, in
accordance with Section 16 of the Plan.
(b) At or after the Effective Date and prior to the Merger, each
certificate or certificates theretofore evidencing issued and outstanding shares
of Holding Company Common Stock, other than any such certificate or certificates
owned by the Mutual Holding Company, which ownership interest shall be
extinguished, shall continue to represent issued and outstanding shares of
Holding Company Common Stock.
9. Dissenting Shares. No stockholder of the Holding Company shall have
any dissenter or appraisal rights in connection with the Conversion.
10. Deposits of the Bank. All deposit accounts of the Bank shall be and
will continue without change in their respective terms, interest rates,
maturities, minimum required balances or withdrawal values. After the Effective
Date, the resulting savings bank will continue to issue deposit accounts on the
same basis as immediately prior to the Effective Date.
11. Effect of Conversion. Upon the Effective Date of the Conversion,
all assets and property (real, personal and mixed, tangible and intangible,
chooses in action, rights and credits) then owned by the Bank, the Holding
Company, Bancshares or the Mutual Holding Company or which would inure to either
of them, shall immediately by operation of law and without any conveyance,
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transfer or further action, become the property of Bancshares (or the Bank as
the case may be), which shall have, hold and enjoy them in its own right as
fully and to the same extent as they were possessed, held and enjoyed by the
Bank, the Holding Company, Bancshares and the Mutual Holding Company immediately
prior to the Effective Date of the Conversion.
12. Directors and Executive Officers. The persons who are the current
officers and directors of the Holding Company will be the directors and officers
of Bancshares and such terms or positions will be unchanged.
13. Abandonment of Plan of Merger. This Plan of Merger may be abandoned
by either the Holding Company or Bancshares at any time before the Effective
Date in the manner set forth in Section 28 of the Plan.
14. Amendment of this Plan of Merger. This Plan of Merger may be
amended or modified at any time by mutual agreement of the Boards of Directors
of the Holding Company and Bancshares in the manner set forth in Section 28 of
the Plan.
15. Governing Law. This Plan of Merger is made pursuant to, and shall
be construed and be governed by, the laws of the United States, and the rules
and regulations promulgated thereunder, including without limitation, the rules
and regulations of the OTS.
16. All Terms Included. This Plan of Merger sets forth all terms,
conditions, agreements and understandings of the Holding Company and Bancshares
with respect to the Conversion and Merger.
17. Counterparts. This Plan of Merger may be executed in several
identical counterparts, each of which when executed by the Parties and delivered
shall be an original, but all of which together shall constitute a single
instrument. In making proof of this Plan of Merger, it shall not be necessary to
produce or account for more than one such counterpart.
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IN WITNESS WHEREOF, the parties have caused this Plan of Merger to be
executed by their duly authorized officers as of the date first above written.
HARBOR FLORIDA BANCSHARES, INC.
Attest: By: ___________________________
______________________ Michael J. Brown, Sr.
Secretary
HARBOR FLORIDA BANCORP, INC.
Attest: By: ____________________________
______________________ Michael J. Brown, Sr.
Secretary
HARBOR FEDERAL SAVINGS BANK
Attest: By: ____________________________
______________________ Michael J. Brown, Sr.
Secretary
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ANNEX B
PLAN OF MERGER
PLAN OF MERGER, dated as of December 23, 1997 ("Plan of Merger") by and
between Harbor Financial, M.H.C. (the "Mutual Holding Company"), Harbor Federal
Savings Bank (the "Bank"). Unless otherwise noted, defined terms shall have the
same meaning as those set forth in the Plan of Conversion and Reorganization and
Plan of Reorganization of the Mutual Holding Company dated December 23, 1997 (of
which this Plan of Merger is an Annex thereto).
WITNESSETH:
WHEREAS, the Mutual Holding Company, through a reorganization and
conversion, owned 53.4% of the Common Stock of Harbor Federal Savings Bank (the
"Bank");
WHEREAS, on June 25, 1997, the Bank effected an additional
reorganization as a result of which the Bank became a wholly owned subsidiary of
Holding Company and the Holding Company became the owner of 100% of the common
stock of the Bank;
WHEREAS, Holding Company now has 53.4% of its shares of common stock
owned by the Mutual Holding Company and 46.6% of its shares held by the public
(the "Minority Shareholders");
WHEREAS, the Board of Directors of the Mutual Holding Company has
determined that it is in the best interests of the Mutual Holding Company and
its members to convert from the mutual to stock form of organization;
WHEREAS, the Bank is wholly owned by Holding Company;
WHEREAS, the conversion of the Mutual Holding Company to stock form
will be facilitated by causing the Mutual Holding Company to convert from the
mutual form to a federal interim stock savings bank to be known as "Interim Bank
Number 1" and merge with the Bank, a federal savings bank; and
WHEREAS, immediately upon completion of the Conversion and the Merger,
the Mutual Holding Company shares will be cancelled and minority stockholders of
Holding Company will exchange their current shares of Holding Company Common
Stock for shares of common stock of Bancshares based upon an Exchange Ratio
established in accordance with the independent appraisal of the Bank and Holding
Company upon Bank's merger with Interim Bank Number 1, and the remaining shares
will be sold in subscription and community offerings, giving priority
subscription rights as set forth in the Plan in accordance with OTS conversion
regulations.
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NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, and in accordance with federal law, the Mutual
Holding Company hereby agrees that, subject to the conditions hereinafter set
forth, the Mutual Holding Company shall convert from the mutual form to a
federal interim stock savings bank, known as Interim Bank Number 1 and shall
then be merged with and into Bank with the Bank as the surviving entity. The
merger shall occur after the merger of Interim Bank Number 2, as described in
Annex A, merges into Bank. Thereafter, the Bank shall be, through a federal
interim association, acquired by a newly formed Delaware corporation --
Bancshares. The terms and conditions of such merger shall be as follows:
1. Regulatory Approvals. The merger, including the Merger of the
Holding Company, shall not become effective until receipt of approval of the OTS
and any other agency having jurisdiction over the merger, if any.
2. Identity and Name of Resulting Bank. The resulting savings bank in
the Merger shall be the Bank.
3. Offices of Resulting Bank. The home office of the Bank shall be the
Bank's office located at 100 S. Second Street, Fort Pierce, Florida. The
locations of the branch offices of the Bank shall be those of the Bank in
existence on the date of this Plan of Merger. In addition, the Bank shall
operate branch offices at such additional locations as may be approved by the
OTS.
4. The Bank's Federal Charter and Bylaws. The federal stock charter and
bylaws of the Bank as in effect immediately prior to the effectiveness of the
Merger shall be amended as necessary to accomplish the Merger.
5. Effective Date. The effective date of the Conversion ("Effective
Date") shall be the date as soon as practicable after the issuance and/or
execution by the OTS and any other federal or state regulatory agencies, of all
approvals, certificates and documents as may be required in order to cause the
Conversion to become effective.
6. Holding Company Stockholder Approval. The affirmative vote of the
holders of two-thirds of the outstanding Holding Company Common Stock and at
least a majority of such Holding Company Common Stock not held by the Mutual
Holding Company voting at a meeting of the Holding Company stockholders shall be
required to approve this Plan of Merger.
7. Mutual Holding Company Approval. The approval of a majority of the
members of the Mutual Holding Company, as of a specified date shall be required
to approve this Plan of Merger.
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8. Cancellation of Holding Company Common Stock held by the Mutual
Holding Company and Member Interests; Liquidation Account.
(a) On the Effective Date, (i) the ownership interest in each share of
Holding Company Common Stock issued and outstanding immediately prior to the
Effective Date and held by the Mutual Holding Company shall, by virtue of the
Merger and without any action on the part of the holder thereof, be canceled,
(ii) the interests in the Mutual Holding Company of any person, firm or entity
who or which qualified as a member of the Mutual Holding Company in accordance
with its mutual charter and bylaws and the laws of the United States prior to
the Mutual Holding Company's conversion from mutual to stock form (the
"Members") shall, by virtue of the Merger and without any action on the part of
the holder thereof, be canceled, and (iii) a liquidation account shall be
established by the Bank on behalf of each depositor member of the Mutual Holding
Company, as defined in the Plan, in accordance with Section 16 of the Plan.
(b) At or after the Effective Date and prior to the Merger, each
certificate or certificates theretofore evidencing issued and outstanding shares
of Holding Company Common Stock, other than any such certificate or certificates
owned by the Mutual Holding Company, which ownership interest shall be
extinguished, shall continue to represent issued and outstanding shares of
Holding Company Common Stock and shall be entitled to be exchanged for shares of
Bancshares pursuant to an exchange ratio established by an independent
appraisal.
9. Dissenting Shares. No Member of the Mutual Holding Company or
stockholder of the Holding Company shall have any dissenter or appraisal rights
in connection with the Conversion.
10. Deposits of the Bank. All deposit accounts of the Bank shall be and
will continue without change in their respective terms, interest rates,
maturities, minimum required balances or withdrawal values. After the Effective
Date, the resulting savings bank will continue to issue deposit accounts on the
same basis as immediately prior to the Effective Date.
11. Effect of Conversion. Upon the Effective Date of the Conversion,
all assets and property (real, personal and mixed, tangible and intangible,
chooses in action, rights and credits) then owned by the Bank, the Holding
Company, Bancshares or the Mutual Holding Company or which would inure to either
of them, shall immediately by operation of law and without any conveyance,
transfer or further action, become the property of Bancshares (or the Bank as
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the case may be), which shall have, hold and enjoy them in its own right as
fully and to the same extent as they were possessed, held and enjoyed by the
Bank, Bancshares, the Holding Company and the Mutual Holding Company immediately
prior to the Effective Date of the Conversion.
12. Directors and Executive Officers. The persons who are the current
officers and directors of the Holding Company will be the directors and officers
of Bancshares and such terms or positions will be unchanged.
13. Abandonment of Plan of Merger. This Plan of Merger may be abandoned
by either the Holding Company, Bancshares or the Mutual Holding Company at any
time before the Effective Date in the manner set forth in Section 28 of the
Plan.
14. Amendment of this Plan of Merger. This Plan of Merger may be
amended or modified at any time by mutual agreement of the Boards of Directors
of the Holding Company and the Mutual Holding Company in the manner set forth in
Section 28 of the Plan.
15. Governing Law. This Plan of Merger is made pursuant to, and shall
be construed and be governed by, the laws of the United States, and the rules
and regulations promulgated thereunder, including without limitation, the rules
and regulations of the OTS.
16. All Terms Included. This Plan of Merger sets forth all terms,
conditions, agreements and understandings of the Holding Company and the Mutual
Holding Company with respect to the Conversion and Merger.
17. Counterparts. This Plan of Merger may be executed in several
identical counterparts, each of which when executed by the Parties and delivered
shall be an original, but all of which together shall constitute a single
instrument. In making proof of this Plan of Merger, it shall not be necessary to
produce or account for more than one such counterpart.
IN WITNESS WHEREOF, the parties have caused this Plan of Merger to be
executed by their duly authorized officers as of the date first above written.
HARBOR FINANCIAL, M.H.C.
Attest: By: ____________________________
______________________ Michael J. Brown, Sr.
Secretary
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HARBOR FEDERAL SAVINGS BANK
Attest: By: ____________________________
______________________ Michael J. Brown, Sr.
Secretary
HARBOR FLORIDA BANCSHARES, INC.
Attest: By: ____________________________
______________________ Michael J. Brown, Sr.
Secretary
B-5
Exhibit 8.1
December 9, 1997
Board of Directors
Harbor Federal Savings Bank
100 S. Second Street
P.O. Box 249
Fort Pierce, Florida 34954-0249
Gentlemen:
You have asked that we provide you our opinion in regard to certain
federal income tax matters relating to the Amended Plan of Conversion and
Reorganization of Harbor Financial M.H.C. and Agreement and Plan of Merger
between Harbor Financial M.H.C., Harbor Florida Bancorp, Inc., Harbor Federal
Savings Bank and Harbor Florida Bancshares, Inc. dated as of October 31, 1997
(the "Plan").
We have examined the Plan and certain other documents as we deemed
necessary in order to provide our opinions. Unless otherwise defined, all terms
used in this letter have the meanings given to them in the Plan.
In our examination, we assumed that original documents were authentic,
copies were accurate and signatures were genuine. We have further assumed the
absence of adverse facts not apparent from the face of the instruments and
documents we examined. In rendering our opinion, we have relied upon certain
written representations of Harbor Federal Savings Bank ("Bank") and Harbor
Financial M.H.C. ("MHC") (collectively referred to herein as the
"Representations") which are attached hereto.
We assumed that the Plan has been or will be duly and validly
authorized and approved and adopted and that all parties will comply with the
terms and conditions of the Plan, and that the various representations and
warranties which have been provided to us are accurate, complete, true and
correct. Accordingly, we express no opinion concerning the effect, if any, of
variations from the foregoing. We specifically express no opinion concerning tax
matters relating to the Plan under state and local tax laws.
In issuing the opinions set forth below, we have referred solely to
existing provisions of (1) the Internal Revenue Code of 1986, as amended
("Code"), and existing and proposed Treasury Regulations thereunder; and (2)
current administrative rulings, notices and procedures and court decisions. Such
<PAGE>
laws, regulations, administrative rulings, notices and procedures and court
decisions are subject to change at any time. Any such change could affect the
continuing validity of the opinions set forth below. This opinion is as of the
date hereof, and we disclaim any obligation to advise you of any change after
the date hereof.
There can be no assurance that our opinions would be adopted by the
Internal Revenue Service (the "Service") or a court. The outcome of litigation
cannot be predicted. We have, however, attempted in good faith to opine as to
the merits of each tax issue with respect to which an opinion was requested.
STATEMENT OF FACTS
On January 6, 1994, Harbor Federal Savings Bank, a federally chartered
mutual savings institution, was reorganized into the mutual holding company form
of organization and consummated a sale of stock to its members. To accomplish
this transaction, the Bank organized a federally chartered, stock savings bank
as a wholly owned subsidiary. The mutual Bank then transferred substantially all
of its assets and liabilities to the stock Bank in exchange for 4,894,200 shares
of Bank Common Stock, and reorganized itself into a federally chartered mutual
holding company known as Harbor Financial, M.H.C. and sold 2,239,831 shares of
Bank Common Stock to directors, employees and members of the Bank. On June 25,
1997, the Bank completed a reorganization in which the Bank became a wholly
owned subsidiary of a stock middle tier holding company known as Harbor Florida
Bancorp, Inc. ("Holding Company"). Shareholders of the Bank became, as a result
of the reorganization, shareholders of the Holding Company. As of June 30, 1997,
MHC and the Public Stockholders own an aggregate of 53.4 and 46.6% of the
outstanding Holding Company Common Stock, respectively.
The Boards of Directors of MHC and the Holding Company believe that a
conversion of the MHC to stock form pursuant to this Plan is in the best
interests of MHC and the Bank, as well as the best interests of their respective
Members and Stockholders. The Boards of Directors determined that this Plan
equitably provides for the interests of Members through the granting of
subscription rights and the establishment of a liquidation account. The
Conversion will result in the raising of additional capital and is designed to
enable the Bank to compete more effectively in a market which is undergoing
consolidation.
For valid business reasons, the present corporate structure of the MHC
and the Bank will be changed pursuant to the following proposed transactions:
(i) Holding Company will convert from a Delaware holding company into a
federal holding company and thereafter into a federal stock savings bank
("Interim
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Holding") and MHC will convert from a mutual form to a federal interim stock
savings bank ("Interim MHC").
(ii) Interim Holding will merge into Bank with the Bank being the
surviving corporation ("Merger 1").
(iii) Immediately after Merger 1, Interim MHC will merge with and into
the Bank, with the Bank being the surviving corporation ("Merger 2"). The Bank
stock which was previously held by the MHC will be extinguished. Eligible
members of the MHC as of certain specified dates set forth in the Plan will be
granted interests in a liquidation account to be established by the Bank
(referred to herein as "Bank Liquidation Accounts").
The initial balance of the liquidation account will be equal to the
amount of dividends from Bank Common Stock waived by MHC plus the greater of:
(i) 100% of the retained earnings of the Bank as of June 30, 1993, or (ii) 53.4%
of the Bank's Holding Company's total shareholder equity as reflected in its
latest statement of financial condition contained in the Prospectus to be
utilized in the MHC's mutual-to-stock Conversion.
(iv) The Bank will form a Delaware corporation as a new, wholly owned,
first tier subsidiary ("Bancshares"), which will become a new holding company.
(v) Bancshares will form an interim corporation ("Interim Corp") as a
new, wholly owned first tier subsidiary that is a federally-chartered stock
savings bank.
(vi) Immediately following Merger 2, Interim Corp will merge with and
into the Bank, with the Bank surviving entity ("Merger 3"). Merger 1, Merger 2,
and Merger 3 will be completed in accordance with applicable federal and state
laws. As a result of Merger 3, the Bank stock deemed held by the Public
Stockholders will be converted into Bancshares stock based upon an exchange
ratio which ensures that the Public Stockholders will own, in the aggregate,
approximately the same percentage of Bancshares stock outstanding upon
completion of the Conversion as the percentage of Bank Holding Company stock
owned by them in the aggregate immediately prior to the consummation of the
Conversion, before giving effect to: (a) cash paid in lieu of fractional shares,
and (b) any shares of Bancshares stock purchased by Public Stockholders in the
Offering; in addition, the shares of Interim Corp will be converted into shares
of Bank stock.
(vii) Simultaneously with the consummation of Merger 3, Bancshares will
sell additional shares of Bancshares stock, with priority subscription rights
granted to certain members of the MHC and the Bank at specified dates, and to
tax qualified employee benefit plans, directors, and employees of the Bank.
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ANALYSIS AND OPINION
Section 354 of the Code provides that no gain or loss shall be
recognized by stockholders who exchange common stock in a corporation, which is
a party to a reorganization, solely for common stock in another corporation
which is a party to the reorganization. Section 356 of the Code provides that
stockholders shall recognize gain to the extent they receive money as part of a
reorganization, such as money received in lieu of fractional shares. Section 358
of the Code provides that, with certain adjustments for money received in a
reorganization, a stockholder's basis in the common stock he or she receives in
a reorganization shall equal the basis of the common stock which he or she
surrendered in the transaction. Section 1223(1) states that, where a stockholder
receives property in an exchange which has the same basis as the property
surrendered, he or she shall be deemed to have held the property received for
the same period as the property exchanged, provided that the property exchanged
had been held as a capital asset.
Section 361 of the Code provides that no gain or loss shall be
recognized to a corporation which is a party to a reorganization on any transfer
of property pursuant to a plan of reorganization. Section 362 of the Code
provides that if property is acquired by a corporation in connection with a
reorganization, then the basis of such property shall be same as it would be in
the hands of the transferor immediately prior to the transfer. Section 1223(2)
of the Code states that where a corporation will have a carryover basis in
property received from another corporation which is a party to a reorganization,
the holding period of such assets in the hands of the acquiring corporation
shall include the period for which such assets were held by the transferor,
provided that the property transferred had been held as a capital asset. Section
1032 of the Code states that no gain or loss shall be recognized to a
corporation on the receipt of property in exchange for common stock.
Section 368(a)(1)(F) of the Code provides that a mere change in
identity, form, or place of organization, however effected, is a reorganization.
When MHC converts itself from a federal mutual holding company to a federal
interim stock savings bank, the changes at the corporate level will be
insubstantial. Similarly, when Holding Company adopts a federal charter and
converts itself to a federal stock savings bank, the changes at the corporate
level will be insubstantial. In addition, Rev. Rul. 80-105 provides that the
conversion of a federal mutual savings and loan association to a state or
federal stock savings and loan association, and the conversion of a state
chartered mutual savings and loan association to a stock savings and loan
association in the same state are reorganizations under Code Section
368(a)(1)(F). Therefore, the change in the form of operation of MHC and Holding
Company should constitute reorganizations within the meaning of Section
368(a)(1)(F) of the Code.
Section 368(a)(1)(A) of the Code defines the term "reorganization" to
include a "statutory merger or consolidation" of corporations. Section
368(a)(2)(E) of the Code provides that a transaction otherwise qualifying as a
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merger under Section 368(a)(1)(A), shall not be disqualified by reason of the
fact that common stock of a corporation which before the merger was in control
of the merged corporation, is used in the transaction if (i) after the
transaction, the corporation surviving the merger holds substantially all of its
properties and the properties of the merged corporation; and (ii) former
stockholders of the surviving corporation exchanged, for an amount of voting
common stock of the controlling corporation, an amount of common stock in the
surviving corporation which constitutes control of such corporation.
In order to qualify as a reorganization under Section 368(a)(1)(A), a
transaction must constitute a merger or consolidation effected pursuant to the
corporation laws of the United States or a state. Merger 1, Merger 2 and Merger
3 will be consummated in accordance with applicable federal and state laws.
In addition, a transaction qualifying as a reorganization under Section
368(a)(1)(A) of the Code must satisfy the "continuity of interest doctrine"
which requires that the continuing common stock interest of the former owners of
an acquired corporation, considered in the aggregate, represents a "substantial
part" of the value of their former interest and provides them with a "definite
and substantial interest" in the affairs of the acquiring corporation or a
corporation in control of the acquiring corporation. Helvering v. Minnesota Tea
Co., 296 U.S. 378 (1935); Southwest Natural Gas Co. v. Comm'r., 189 F.2d 332
(5th Cir. 1951), cert. denied, 342 U.S. 860 (1951).
As a result of Merger 1, the shareholders of Holding Company receive an
interest in Bank which will subsequently be converted into an interest in
Bancshares. Consequently, the continuity of interest doctrine should be
satisfied with regard to Merger 1.
With regard to Merger 2, the MHC, as a federally-chartered mutual
holding company, does not have stockholders and has no authority to issue
capital stock. Instead, the MHC has members who are accorded a variety of
proprietary rights such as voting rights and certain rights in the unlikely
event of liquidation. Prior to Merger 2, certain depositors in the Bank have
both a deposit account in the institution and a pro rata inchoate proprietary
interest in the net worth of the MHC based upon the balance in his account in
the Bank, an interest which may only be realized in the event of a liquidation
of the MHC. However, this inchoate proprietary interest is tied to the
depositor's account and has no tangible market value separate from such deposit
account. A depositor who reduces or closes his account receives a portion or all
of the balance in the account but nothing for his ownership interest in the net
worth of the MHC, which is lost to the extent that the balance in the account is
reduced.
In accordance with the Plan, the Members will receive Bank Liquidation
Accounts and continue their inchoate proprietary interests in the Bank following
Merger 2. Although the Bank Liquidation Accounts would not allow the Members the
right to vote or the right to pro rata distributions of earnings, they would be
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entitled to share in the distribution of assets upon the liquidation of the Bank
following Merger 2. The Members' liquidation interests in the Bank is
substantially similar to their current ownership interest in the MHC (a
liquidation interest in the MHC). Because the Members are not in effect "cashing
out" their inchoate proprietary interests in the MHC, they would continue to
maintain an inchoate proprietary interest in the Bank upon the consummation of
Merger 2. Such payments to be received as Bank Liquidation Accounts are not
guaranteed and can only be received by Members who continue to maintain deposit
accounts in the Bank following Merger 1. Therefore, it would seem that the
exchange of the Members' equity interests in the MHC for Bank Liquidation
Accounts should not violate the continuity of interest requirement of Section
1.368-1(b) of the Treasury Regulations. In addition, in PLR 9510044, the Service
held on facts which are identical to those of Merger 2, as described above, that
the continuity of interest doctrine was satisfied. Although a private letter
ruling cannot be cited as precedent, it is illustrative of the Service's
position on an issue.
As a result of Merger 3, the shareholders of Bank will receive a
continuing interest in Bancshares, the sole shareholder of Bank. Consequently,
the continuity of interest doctrine should be satisfied with regard to Merger 3.
One of the requirements of Section 368(a)(2)(E) of the Code is that
subsequent to the transaction, the corporation surviving the merger must hold
substantially all of its properties and the properties of the merged
corporation. The Bank has represented in the Representations that, following
Merger 3, it will hold at least 90% of the fair-market value of its net assets
and at least 70% of the fair-market value of its gross assets, and at least 90%
of the fair-market value of Interim Corp's net assets and at least 70% of the
fair-market value of Interim Corp's gross assets held immediately prior to
Merger 3. Based upon the representations, the Bank will clearly satisfy this
requirement of Code Section 368(a)(2)(E).
Pursuant to Code Section 368(a)(2)(E), Bancshares must also acquire
control of the Bank in Merger 3. Control is defined as at least 80% of the total
combined voting power of all classes of stock entitled to vote, and at least 80%
of the total number of shares. Subsequent to Merger 3, Bancshares will hold all
of the Bank stock. However, there is an issue as to whether the Bank Liquidation
Accounts must be taken into account for purposes of the "control" test. If the
Bank Liquidation Accounts are to be included in determining whether Bancshares
acquired control of the Bank in Merger 3, it would be necessary to recognize
such interests as another class of Bank stock. Although the Bank Liquidation
Accounts may be compared to the equity interests held by members of the MHC,
which afforded members an equity/ownership interest in the MHC, these interests
in the Bank are too remote to qualify as a separate class of Bank stock.
Therefore, the Bank Liquidation Accounts should be disregarded in determining
whether Bancshares acquires control of the Bank in Merger 3. The Service's
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analysis in PLR 9510044 supports this conclusion. PLR 9510044 involved the
conversion of a mutual holding company from mutual to stock form and a
subsequent merger of mutual holding company into stock savings bank with bank
surviving. The stock of the savings bank held by mutual holding company was
extinguished and members of mutual holding company were granted interests in a
liquidation account established at bank. Subsequent thereto, the bank engaged in
a typical reorganization under Section 368(a)(2)(E) of the Code to create a
holding company structure identical to the structure of Bank subsequent to
Merger 3. The Service held that the liquidation interests in bank (as well as
stock previously held by mutual holding company in bank) were to be disregarded
in determining whether control of the bank was obtained by the holding company
in accordance with Section 368(c) of the Code.
In addition to the requirements discussed above, there is a judicially
created substance over form concept often referred to as the "step transaction
doctrine" which applies throughout tax law, including the corporate
reorganization area. The step transaction doctrine is an extremely amorphous
concept. Often, application of the doctrine hinges on whether a court finds that
a particular series of transactions runs counter to a significant tax policy.
Notwithstanding years of litigation and hundreds of cases, the exact contours of
the step transaction doctrine, and even its proper formulation, are still the
subject of intense debate. Consequently, it often will be difficult to determine
with a high degree of certainty whether a series of related transactions will be
stepped together in some fashion for tax purposes.
The courts over the years have developed three distinct verbal
formulations of the doctrine: (i) the binding commitment test, (ii) the end
result test, and (iii) the interdependence test. While the courts nominally
apply one or more of these three tests, a careful reading of the relevant cases
indicates that the courts, as a preliminary matter, in deciding whether to apply
the step transaction doctrine, tend to focus primarily on two key factors:
intent and temporal proximity. However, case law and the Service's
pronouncements indicate that there are limitations on the ability to assert the
step transaction doctrine, regardless of (i) the taxpayer's intent at the time
of the first transaction to engage in the later transactions, and (ii) the short
period of time that elapses between the transactions.
Case law and the Service's pronouncements indicate that if two or more
transactions carried out pursuant to an overall plan have economic significance
independent of each other, the transactions generally will not be stepped
together. The Service's most significant pronouncement regarding independent
economic significance is Rev. Rul. 79-250. In that ruling, the Service asserted
that:
the substance of each of a series of steps will be recognized and the
step transaction doctrine will not apply, if each such step
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demonstrates independent economic significance, is not subject to
attack as a sham, and was undertaken for valid business purposes and
not mere avoidance of taxes.
The parties to Merger 2 maintain a separate and distinct business
purpose for consummating Merger 2 (e.g., allowing for the conversion of the MHC
from mutual to stock form). Immediately after the consummation of Merger 2, the
Bank will no longer be controlled by the MHC but will instead be controlled by
its public stockholders. The facts indicate that the merger of MHC with and into
the Bank will result in a real and substantial change in the form of ownership
of the Bank that is sufficient to conclude that Merger 2 comports with the
underlying purposes and assumptions of a reorganization under Section
368(a)(1)(A) of the Code.
In addition, we believe that, because the various steps contemplated by
the Plan were necessitated by the requirements of the Office of Thrift
Supervision, each of Merger 1, Merger 2 and Merger 3 has a business purpose and
independent significance and, as a result, the step transaction should not be
applied to this transaction. However, our opinion is not binding upon the
Service, and there can be no assurance that the Service will not assert a
contradictory position. Revenue Ruling 72-405 involved Corporation X which
formed a wholly owned subsidiary, merged an unrelated corporation Y into the
subsidiary and then liquidated the subsidiary. The Service held that the overall
plan for the transactions was the acquisition of Corporation Y assets by
Corporation X and that the transitory existence of the subsidiary did not have
independent economic significance. As a result, the step transaction doctrine
was applied, the transitory existence of the subsidiary was ignored and the
transaction was treated as a direct acquisition of Corporation Y assets by
Corporation X.
It is possible that the Service could assert, based upon reasoning
similar to that which was applied in Revenue Ruling 72-405, that the overall
plan of the transactions contemplated by the Plan is the maintenance of the
Bank's holding company structure and the merger of MHC into Bank and that, as a
result, the step transaction doctrine should be applied and the transitory
elimination of the holding company structure in Merger 1 and re-creation of the
holding company structure in Merger 3 should be ignored for tax purposes. If the
Service were successful with such an assertion, the transaction would be treated
as a direct merger of MHC into Bank which may not qualify as a tax free
reorganization resulting in taxable gain to the parties to the transaction.
The Service is currently reviewing the question of whether certain
downstream mergers of a parent corporation into its subsidiary or inversion
transactions, where a parent and its subsidiary reverse positions, which
otherwise qualify for tax-free treatment nevertheless should be treated as
taxable transactions because they circumvent the repeal of the "General
Utilities doctrine." We do not believe that the transactions undertaken pursuant
to the Plan constitute the type of transactions which circumvent the "General
Utilities doctrine."
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Based upon the foregoing, and assuming Merger 1, Merger 2 and Merger 3
are consummated as described herein and in the Plan, and assuming that the
change in the form of operation of MHC to a federal stock savings bank and the
change in the form of the operation of Holding Company to a federal stock
savings bank constitute reorganizations under Section 368(a)(1)(F) of the Code,
we are of the opinion that:
1. Merger 1 and Merger 2 each qualify as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code. MHC, Holding Company and the Bank
will be a party to a "reorganization" as defined in Section 368(b) of the Code.
2. Interim MHC and Interim Holding will recognize no gain or loss
pursuant to Merger 1 and Merger 2.
3. No gain or loss will be recognized by the Bank upon the receipt of
the assets of Interim Holding and Interim MHC in Merger 1 and Merger 2,
respectively.
4. Merger 3 qualifies as a reorganization within the meaning of Section
368(a)(1)(A) of the Code. Therefore, the Bank, Bancshares, and Interim Corp will
each be a party to a reorganization as defined in Section 368(b) of the Code.
5. No gain or loss will be recognized by Interim Corp upon the transfer
of its assets to the Bank pursuant to Merger 3.
6. No gain or loss will be recognized by the Bank upon the receipt of
the assets of Interim Corp.
7. No gain or loss will be recognized by Bancshares upon the receipt of
Bank stock solely in exchange for Bancshares stock.
8. No gain or loss will be recognized by the Holding Company Public
Stockholders upon the receipt of Bancshares stock.
9. The basis of the Bancshares Stock to be received by the Public
Stockholders will be the same as the basis of the Holding Company stock
surrendered before giving effect to any payment of cash in lieu of fractional
shares.
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10. The holding period of the Bancshares Stock to be received by the
Public Stockholders will include the holding period of the Holding Company
stock, provided that the Holding Company stock was held as a capital asset on
the date of the exchange.
11. No gain or loss will be recognized by Bancshares upon the sale of
Bancshares Stock to investors.
12. The Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members (as such terms are defined in the Plan) will
recognize gain, if any, upon the issuance to them of: (i) withdrawable savings
accounts in the Bank following the Conversion, (ii) Bank Liquidation Accounts,
and (iii) nontransferable subscription rights to purchase Conversion Stock, but
only to the extent of the value, if any, of the subscription rights.
13. The tax basis to the holders of Conversion Stock purchased in the
offerings will be the amount paid therefor, and the holding period for such
shares will begin on the date of exercise of the subscription rights if
purchased through the exercise of subscription rights. If purchased in the
Community Offering or Public Stockholder Offering (as such terms are defined in
the Plan), the holding period for such stock will begin on the day after the
date of purchase.
The opinions set forth above represent our conclusions as to the
application of existing federal income tax law to the facts of the instant
transaction. We can give no assurance that changes in such law, or in the
interpretation thereof, will not affect the opinions expressed by us. Moreover,
there can be no assurance that contrary positions may not be taken by the
Service, or that a court considering the issues would not hold contrary to such
opinions. However, we believe that a court, if such issues were litigated, is
more likely than not to concur with our opinion.
All of the opinions set forth above are qualified to the extent that
the validity or enforceability of any provision of any agreement may be subject
to or affected by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the rights of creditors generally. We do not express
any opinion as to the availability of any equitable or specific remedy upon any
breach of any of the covenants, warranties or other provisions contained in any
agreement. We have not examined, and we express no opinion with respect to the
applicability of, or liability under, any Federal, state or local law,
ordinance, or regulation governing or pertaining to environmental matters,
hazardous wastes, toxic substances, asbestos, or the like.
Further, the opinions set forth above represent our conclusions based
upon the documents reviewed by us and the facts presented to us. Any material
amendments to such documents or changes in any significant fact would affect the
opinions expressed herein.
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We have not been asked to, and we do not, render any opinion with
respect to any matters other than those expressly set forth above.
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CONSENT
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement on Form S-1 ("Form S-1") to be filed by the Holding
Company with the Securities and Exchange Commission, and as an exhibit to the
MHC's Application for Conversion on the Form AC as filed with the OTS ("Form
AC"), and to the references to our firm in the Prospectus which is part of both
the Form S-1 and the Form AC.
Very truly yours,
12
Exhibit 8.2
[DEAN MEAD LETTERHEAD]
December 9, 1997
Board of Directors
Harbor Federal Savings Bank
100 S. Second Street
P.O. Box 249
Fort Pierce, FL 34954-0249
Gentlemen:
You have asked that we provide you our opinion with regard to certain
Florida income tax consequences relating to the Amended Plan of Conversion and
Reorganization of Harbor Financial, M.H.C. and Agreement and Plan of Merger
between Harbor Financial, M.H.C. ("Mutual Holding Company"), Harbor Florida
Bancorp., Inc. ("Holding Company") and Harbor Florida Bancshares, Inc.
("Bancshares") and Harbor Federal Savings Bank ("Bank") dated as of October 31,
1997 (the "Plan").
We have reviewed the Plan. Unless otherwise defined herein, all capitalized
terms used in this letter will have the meanings given to them in the Plan. In
addition, we have reviewed and relied upon the opinion letter prepared by
Peabody & Brown, a copy of which is attached hereto as Exhibit "A" (the "Peabody
& Brown Opinion").
In rendering our opinion, we have also relied upon certain written
representations of Bank and Mutual Holding Company (collectively referred to
herein as the "Representations") which are attached to the Peabody & Brown
Opinion.
We have examined the relative provisions of Chapter 220 of the Florida
Statutes ("Florida Income Tax Code"), the related Florida Administrative Code
and such other Florida laws, regulations, rulings and court decisions we deemed
appropriate to render this opinion. Such laws, regulations, administrative
rulings and court decisions are subject to change at any time. Any such change
could affect the continuing validity of the opinions set forth below.
<PAGE>
Board of Directors
Harbor Federal Savings Bank
December 9, 1997
Page 2
- --------------------------------------------
There can be no assurance that our opinions would be adopted by the Florida
Department of Revenue (the "Department") or a court. The outcome of litigation
cannot be predicted. We have, however, attempted in good faith to opine as to
the matters herein.
Because the Florida income tax consequences of the transactions
contemplated by the Plan are dependent upon the Federal income tax consequences
of the transactions contemplated by the Plan, you have authorized us to base our
opinions set forth herein with respect to the Florida income tax consequences of
such transactions on the opinions regarding the Federal income tax consequences
set forth in the Peabody & Brown Opinion. Accordingly, based solely upon the
assumption that the Federal income tax consequences of the transactions are as
set forth in item Nos. 1-13 on pages 9 and 10 of the Peabody & Brown Opinion, it
is our opinion that the Florida income tax consequences of the reorganization
under the Florida Income Tax Code will be substantially the same as the Federal
income tax consequences set forth in item Nos. 1-13 of the Peabody & Brown
Opinion.
The opinions herein expressed are subject to the following assumptions,
qualifications and limitations:
(i) The opinions set forth herein represent our conclusions as to the
application of the existing Florida Income Tax Code to the facts of the
instant transactions contemplated by the Plan. We can give no assurance
that changes in such law, or in the interpretation thereof, will not affect
the opinions expressed by us. Moreover, there can be no assurance that
contrary positions may not be taken by the Department or that the court
considering the issues would not hold contrary to such opinions.
(ii) All of the opinions set forth above are qualified to the extent
that the validity or enforceability of any provision of any agreement may
be subject to or affected by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of
creditors generally. We do not express any opinion as to the availability
of any equitable or specific remedy upon any breach of any of the
covenants, warranties or other provisions contained in any agreement. We
have not examined, and we express no opinion with respect to the
applicability or liability under any Federal, State or local law, ordinance
or regulation governing or pertaining to environmental matters, hazardous
waste, toxic substances, asbestos or the like. Further, the opinions set
forth above represent
<PAGE>
Board of Directors
Harbor Federal Savings Bank
December 9, 1997
Page 3
- --------------------------------------------
our conclusions based upon the documents reviewed by us and the facts
presented to us. Any material amendments to such documents or changes in
any significant fact would affect the opinions expressed herein.
(iii) We have not been asked to, and we do not, render any opinion
other than with respect to the Florida income tax matters referred to
above. Specifically, we render no opinion concerning any Federal tax
matters, matters of other states, local tax matters, or any other Florida
tax matters, including, but not limited to, those involving intangible
taxes, documentary stamps and ad valorem taxes.
(iv) We have assumed that the Plan as submitted to us has been or will
be duly and validly authorized and approved and adopted and that all
parties will comply with the terms and conditions of the Plan as submitted
to us, and that the Representations are accurate, complete, true and
correct. Accordingly, we express no opinion concerning the effect, if any,
of variations from the foregoing.
(v) We have assumed that the Peabody & Brown Opinion will be rendered
in exactly the form attached hereto, that the assumptions therein are
correct and that the opinions rendered in item Nos. 1-13 of the Peabody &
Brown Opinion are accurate and correct.
(vi) We have assumed that there are no other agreements or
understandings among the parties which would modify the terms of the Plan
or the respective rights or obligations of the parties under the Plan.
(vii) We have made no examination or investigation to verify the
accuracy or completeness of any financial, accounting, statistical or other
information furnished to anyone in connection with the Plan and express no
opinion with respect thereto.
(viii) Our opinions expressed herein are specifically qualified by
reference to, and are based solely upon, laws, rules and regulations in
effect on the date hereof, and are subject to modification to the extent
such laws, rules and regulations may be changed in the future with
retroactive affect.
<PAGE>
Board of Directors
Harbor Federal Savings Bank
December 9, 1997
Page 4
- --------------------------------------------
(ix) The opinions expressed herein are rendered as of the date hereof
and do not purport to analyze, evaluate or consider the legal effect of any
event subsequent to the date hereof. We do not undertake (and expressly
disclaim) any obligation to inform you of any changes in the facts,
statutes, rules, regulations or case law coming to our attention or
occurring after the date of this opinion letter.
(x) We are qualified to practice law only in Florida, and we are not
experts in, and express no opinion as to, the laws of any other State or
jurisdiction other than the State of Florida.
(xi) No opinions are implied or to be inferred beyond the opinions
expressly stated herein.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement on Form S-1 ("Form S-1") to be filed by the Holding
Company with the Securities and Exchange Commission, and as an exhibit to the
Mutual Holding Company's Application for Conversion on the Form AC as filed with
the OTS ("Form AC"), and to the references to our firm in the Prospectus which
is part of both the Form S-1 and the Form AC.
Sincerely,
DEAN, MEAD, EGERTON, BLOODWORTH, CAPOUANO
& BOZARTH, P.A.
/s/ Steven C. Lee
-----------------
Steven C. Lee, Vice President
SCL/cdj
Enclosure
Exhibit 23.1
CONSENT OF PEABODY & BROWN
The Boards of Directors
Harbor Financial, M.H.C.
Harbor Florida Bancorp, Inc.
We hereby consent to the use of our firm's name in the Form AC and Form
S-1, Registration Statement, and Amendments thereto as filed with the Office of
Thrift Supervision and the Securities and Exchange Commission by Harbor
Financial, M.H.C. and Harbor Florida Bancorp, Inc., respectively, and to the
references to our opinion therein under the heading "Legal and Tax Matters."
Peabody & Brown
Washington, D.C.
January 9, 1998
Exhibit 23.2
Accountants' Consent
The Board of Directors
Harbor Florida Bancorp, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick
West Palm Beach, Florida
January 6, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001029407
<NAME> Harbor Florida Bancorp, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 16,899
<INT-BEARING-DEPOSITS> 15,736
<FED-FUNDS-SOLD> 250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,553
<INVESTMENTS-CARRYING> 181,854
<INVESTMENTS-MARKET> 183,947
<LOANS> 834,411
<ALLOWANCE> 11,691
<TOTAL-ASSETS> 1,131,024
<DEPOSITS> 911,576
<SHORT-TERM> 30,100
<LIABILITIES-OTHER> 118,923
<LONG-TERM> 70,375
0
0
<COMMON> 50
<OTHER-SE> 96,752
<TOTAL-LIABILITIES-AND-EQUITY> 1,131,024
<INTEREST-LOAN> 68,847
<INTEREST-INVEST> 13,954
<INTEREST-OTHER> 2,013
<INTEREST-TOTAL> 84,814
<INTEREST-DEPOSIT> 39,144
<INTEREST-EXPENSE> 45,159
<INTEREST-INCOME-NET> 39,655
<LOAN-LOSSES> 782
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,148
<INCOME-PRETAX> 21,938
<INCOME-PRE-EXTRAORDINARY> 21,938
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,327
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.66
<YIELD-ACTUAL> 3.72
<LOANS-NON> 2,580
<LOANS-PAST> 0
<LOANS-TROUBLED> 3,774
<LOANS-PROBLEM> 7,758
<ALLOWANCE-OPEN> 11,016
<CHARGE-OFFS> 262
<RECOVERIES> 155
<ALLOWANCE-CLOSE> 11,691
<ALLOWANCE-DOMESTIC> 11,691
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99.2
NOTICE OF SPECIAL MEETING OF MEMBERS
HARBOR FINANCIAL M.H.C.
100 S. Second Street
Fort Pierce, Florida 34950
(561) 461-2414
NOTICE OF SPECIAL MEETING OF MEMBERS
To Be Held on February____, 1998
NOTICE IS HEREBY GIVEN that a special meeting ("Special Meeting") of
the members of Harbor Financial M.H.C. (the "Mutual Holding Company") will be
held at _________________________ located at ________________________ Fort
Pierce, Florida on February____, 1998 at ________, Florida time, to consider and
vote upon:
1. The approval of the Plan of Conversion of the Mutual Holding
Company and Agreement and Plan of Reorganization between the
Mutual Holding Company, Harbor Florida Bancorp, Inc. ("Bancorp"),
Harbor Florida Bancshares, Inc. ("Bancshares") and Harbor Federal
Savings Bank (the "Bank") (the "Plan" or "Plan of Conversion");
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; and
3. Such other business as may properly come before the Special
Meeting or any adjournment thereof. Except with respect to
procedural matters incident to the conduct of the meeting,
management is not aware of any other such business.
The Board of Directors has fixed December 31, 1997 as the voting record
date for the determination of members entitled to notice of and to vote at the
Special Meeting and at any adjournment thereof. Only those members of the Mutual
Holding Company of record as of the close of business on that date will be
entitled to vote at the Special Meeting or at any such adjournment.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ ___________________________________
Michael J. Brown, Sr.
President and Chief Executive Officer
Fort Pierce, Florida
January____,1998
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU SIGN, DATE AND MARK THE
ENCLOSED PROXY CARD IN FAVOR OF THE ADOPTION OF THE PLAN AND THE ADJOURNMENT OF
THE SPECIAL MEETING AND RETURN IT PROMPTLY IN THE ENCLOSED SELF-ADDRESSED
STAMPED ENVELOPE. PROXY CARDS MUST BE RECEIVED PRIOR TO THE COMMENCEMENT OF THE
SPECIAL MEETING. RETURNING PROXY CARDS WILL NOT PREVENT YOU FROM VOTING IN
PERSON IF YOU ATTEND THE SPECIAL MEETING.
YOUR VOTE IS IMPORTANT. NOT VOTING WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE PLAN. VOTING ON THE PLAN DOES NOT REQUIRE YOU TO PURCHASE STOCK IN
THE OFFERINGS.
2
<PAGE>
HARBOR FINANCIAL M.H.C.
------------------
PROXY STATEMENT
------------------
SPECIAL MEETING OF MEMBERS
To Be Held On February_____, 1998
INTRODUCTION
This Proxy Statement is being furnished to you in connection with the
solicitation by the Board of Directors of Harbor Financial M.H.C. (the "Mutual
Holding Company") of proxies to be voted at the Special Meeting of Members of
the Mutual Holding Company (the "Special Meeting") to be held on February __,
1998 at ___________________________ located at ___________________________ Fort
Pierce, Florida at ____, Florida time, and at any adjournments thereof. This
Special Meeting is being held for the purpose of considering and voting upon a
Plan of Conversion of the Mutual Holding Company and Agreement and Plan of
Reorganization ("Plan" or the "Plan of Conversion") between the Mutual Holding
Company and Harbor Florida Bancorp Inc. ("Bancorp"), Harbor Florida Bancshares,
Inc. ("Bancshares") and Harbor Federal Savings Bank (the "Bank") pursuant to
which Bancorp shall adopt a Federal stock charter and then convert into an
interim federal stock savings bank ("Bank 2") and then be merged into the Bank
with the Bank as a survivor. The Mutual Holding Company shall then convert into
an interim Federal stock savings bank ("Bank 1") and be merged into the Bank
with the Bank being the survivor. Bancshares shall be created as a subsidiary of
the Bank and Bancshares shall form an interim Federal savings bank ("Interim").
Interim shall merge with and into the Bank, resulting in a new structure in
which Bancshares owns 100% of the Bank. As a result of each of the merger of the
Mutual Holding Company and Bancorp with and into the Bank all shares of Bancorp
Common Stock except those held by the Mutual Holding Company (the "Public
Bancorp Shares") will be deemed to be Exchange Shares pursuant to the Exchange
Ratio, as defined in the Prospectus, which will result in the holders of such
shares receiving in the aggregate approximately the same percentage of
Bancshares Common Stock to be outstanding upon the completion of the conversion
as the percentage of Public Bancorp Shares owned by them in the aggregate
immediately prior to the consummation of the conversion. Additionally Bancshares
will offer by means of a Prospectus shares of its Common Stock to the public.
The offer and sale of the Common Stock and the conversion of the Mutual Holding
Company are referred to herein as the "Conversion".
3
<PAGE>
Voting in favor of the Plan of Conversion will not obligate any person
to purchase Common Stock. Common Stock is being offered only by the Prospectus,
which is included herewith.
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
Depositors of the Bank are members of the Mutual Holding Company under
its current Charter (the "Members"). All of the Members as of the close of
business on December 31, 1997 (the "Voting Record Date") who continue to be
Members on the date of the Special Meeting or any adjournment thereof will be
entitled to vote on the Plan of Conversion. If there are not sufficient votes
for approval of the Plan at the time of the Special Meeting, the Special Meeting
may be adjourned to permit further solicitation of proxies. See "Adjournment of
Meeting."
At the Special Meeting, each depositor Member will be entitled to cast
one vote for every $100.00, or fraction thereof, of the total withdrawal value
of all of his accounts in the Bank as of the Voting Record Date up to a maximum
of 1,000 votes. Additionally, each borrower member of the Mutual Holding Company
as of both January 6, 1994, and the Voting Record Date, who continues to be a
borrower as of the date of the Special Meeting will be entitled to cast one vote
as a borrower member, in addition to any votes he or she may be entitled to cast
as a depositor. As of the Voting Record Date, the Bank had approximately
_________ deposit accounts, the holders of which are entitled to cast a total of
approximately ___________ votes at the Special Meeting.
Pursuant to Office of Thrift Supervision ("OTS") regulations,
consummation of the Conversion is conditioned upon the approval of the Plan by
the OTS, as well as (1) the approval of the holders of at least a majority of
the total number of votes eligible to be cast by the Members as of the close of
business on the Voting Record Date at the Special Meeting, and (2) the approval
of the holders of at least two-thirds of the shares of the outstanding Common
Stock held by the Mutual Holding Company and the holders of the Public Bancorp
Shares (the "Public Stockholders") (collectively, the "Stockholders") as of the
Voting Record Date at a Special Meeting of Stockholders called for the purpose
of considering the Plan (the "Stockholders' Meeting"). In addition, the Mutual
Holding Company, Bancorp, Bancshares and the Bank (the "Primary Parties") have
conditioned the consummation of the Conversion on the approval of the Plan by
the holders of at least a majority of the votes cast, in person or by proxy, by
the Public Stockholders at the Stockholders' Meeting. The Mutual Holding Company
intends to vote its shares of Bancorp Common Stock, which amount to 53.37% of
the outstanding shares at September 30, 1997, in favor of the Plan at the
Stockholder's Meeting.
The approval of the Plan by the OTS does not constitute any endorsement
or recommendation of the Plan by the OTS. Further, final regulatory approval of
the Plan or of the application to form a holding company, e.g. Bancshares, have
4
<PAGE>
not yet been obtained. Such approval may require changes to the Plan. Any
material change will require a resolicitation of member approval of the Plan.
This Proxy Statement and related materials are first being mailed to
Members on or about January___,1998.
PURCHASE RIGHTS OF MEMBERS
Voting in favor of the Plan does not require or obligate you to
purchase stock in the Offerings. Instead, Common Stock is being offered to
Members of the Mutual Holding Company in a Subscription Offering by means of
nontransferable subscription rights being granted in the following order of
priority: (i) first priority to depositors of the Bank with account balances of
$50 or more as of the close of business on July 31, 1996 (the "Eligible Account
Holders"); (ii) second priority to the Employee Stock Ownership Plan of the
Bank; (iii) third priority to the depositors of the Bank with account balances
of $50 or more as of the close of business on December 31, 1997 (the
"Supplemental Eligible Account Holders"); and (iv) fourth priority depositors of
the Bank as of the Voting Record Date, other than Eligible Account Holders and
Supplement Eligible Account Holders, and certain borrowers (collectively the
"Members"). Therefore, while all Members will receive subscription rights, they
will receive them in different priorities. Therefore, there is no assurance that
an individual Member who is not an Eligible Account Holder will be able to
purchase Bancshares Common Stock in the Subscription Offering.
PROXIES
The Board of Directors of the Mutual Holding Company is soliciting the
proxy which accompanies this Proxy Statement for use at the Special Meeting.
Each proxy solicited hereby, if properly executed, duly returned before the
Special Meeting, and not revoked prior to or at the Special Meeting, will be
voted at the Special Meeting in accordance with the Member's instructions
indicated thereon. If no contrary instructions are given on the proxy, the
proxy, if signed, will be voted in favor of the Plan of Conversion and, if
necessary, in favor of adjournment of the Special Meeting. If you do not return
a proxy or vote at the meeting, it will have the same effect as a vote against
the Plan of the Conversion. If any other matters properly come before the
Special Meeting, the persons named as proxies will vote upon such matters
according to their discretion. Except with respect to procedural matters
incident to the conduct of the meeting, no additional matters are expected to
come before the Special Meeting.
Any Member giving a proxy may revoke it at any time before it is voted
by delivering to the Secretary of the Mutual Holding Company either a written
revocation of the proxy or a duly executed proxy bearing a later date, or by
voting in person at the Special Meeting. Proxies are being solicited only for
use at the Special Meeting and any and all adjournments thereof and will not be
used for any other meeting.
5
<PAGE>
Proxies may be solicited by officers, directors and employees of the
Mutual Holding Company personally, by telephone or further correspondence
without additional compensation.
Deposits held in a trust or other fiduciary capacity may be voted by
the trustee or other fiduciary to whom voting rights are delegated under the
trust instrument or other governing document or applicable law. In the case of
individual retirement accounts and Keogh trusts established at the Bank, the
beneficiary may direct the trustee's vote on the Plan of Conversion by returning
a completed proxy card to the Mutual Holding Company. For retirement accounts
and Keogh trusts, if no proxy card is returned, the trustee will vote in favor
of approval of the Plan of Conversion on behalf of such beneficiary.
The Board of Directors urges you to mark, sign, date and return the
enclosed proxy card in the enclosed postage-paid envelope as soon as possible,
even if you do not intend to purchase Conversion Stock. This will ensure that
your vote will be counted.
ADJOURNMENT OF MEETING
In the event there are not sufficient votes to approve the Plan at the
Special Meeting, the Plan cannot be approved unless the Special Meeting is
adjourned in order to permit further solicitation of proxies. In order to allow
proxies which have been received by the Mutual Holding Company at the time of
the Special Meeting to be voted for such adjournment, if necessary, the Mutual
Holding Company has submitted, as a separate proposal, the question of
adjournment, under such circumstances, to its Members as a separate matter for
their consideration. The Board of Directors recommends that Members vote their
proxies in favor of such adjournment under this proposal so that their proxies
may be used for such purposes in the event it should become necessary. If it is
necessary to adjourn the Special Meeting and the adjournment is for a period of
fewer than thirty (30) days, no notice of the time and place of the adjourned
meeting or of the business to be transacted at the adjourned meeting is required
to be given to Members other than an announcement of such at the Special
Meeting. Approval of adjournment, if necessary, requires the affirmative vote by
the majority of votes represented at the Special Meeting and entitled to vote.
The Board of Directors recommends that shareholders vote FOR the
adjournment of the Special Meeting.
INCORPORATION OF INFORMATION BY REFERENCE
The accompanying Prospectus of Bancshares is incorporated herein by
reference. The Prospectus sets forth a description of the Plan of Conversion and
the related offering of common stock by the Company under the caption "THE
CONVERSION AND REORGANIZATION." Such caption also describes the effects of the
Conversion on the stockholders of Bancorp and the members of the Mutual Holding
6
<PAGE>
Company, including the tax consequences of the Conversion and the establishment
of a liquidation account for the benefit of certain depositors of Harbor Federal
Savings Bank.
Information regarding Bancshares, Bancorp, the Bank and the Mutual
Holding Company are set forth in the Prospectus under the captions "Harbor
Florida Bancshares, Inc.," "Harbor Florida Bancorp, Inc.," "Harbor Federal
Savings Bank" and "Harbor Financial M.H.C.," respectively, as well as under the
caption "Summary." The Prospectus also describes the business and financial
condition of the Bank under the captions "Business of the Bank" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The historical financial statements of Bancorp and the Bank are
included in the Prospectus. Information regarding the use of proceeds of the
Offerings conducted in connection with the Conversion, the historical
capitalization of the Bank and the pro forma capitalization of Bancshares, and
other pro forma data are set forth in the Prospectus under the captions "Use of
Proceeds," "Capitalization" and "Pro Forma Data," respectively.
The Prospectus sets forth certain information as to the Bancorp Common
Stock beneficially owned by (i) the only persons or entities who or which were
known to Bancorp to be the beneficial owner of more than 5% of the issued and
outstanding Bancorp Common Stock, (ii) the directors and executive officers of
Bancorp , and (iii) all directors and executive officers of Bancorp as a group.
See "Beneficial Ownership of Capital Stock" in the Prospectus.
REVIEW OF OTS ACTION
Any person aggrieved by a final action of the OTS which approves, with
or without conditions, or disapproves a plan of conversion may obtain review of
such action by filing in the court of appeals of the United States for the
circuit in which the principal office or residence of such person is located, or
in the United States Court of Appeals for the District of Columbia, a written
petition praying that the final action of the OTS be modified, terminated or set
aside. Such petition must be filed within 30 days after the publication of
notice of such final action in the Federal Register, or 30 days after the
mailing by the applicant of the notice to members as provided for in 12 C.F.R.
ss. 563b.6(c), whichever is later. The further procedure for review is as
follows: A copy of the petition is forthwith transmitted to the OTS by the clerk
of the court and thereupon the OTS files in the court the record in proceeding,
as provided in Section 2112 of Title 28 of the United States Code. Upon the
filing of the petition, the court has jurisdiction, which upon the filing of the
record is exclusive, to affirm, modify, terminate, or set aside in whole or in
part, the final action of the OTS. Review of such proceedings is as provided in
Chapter 7 of Title 5 of the United States Code. The judgment and decree of the
court is final, except that they are subject to review by the Supreme Court upon
certiorari as provided in Section 1254 of Title 28 of the United States Code.
7
<PAGE>
REGISTRATION REQUIREMENTS
The Common Stock will be registered under the Securities Exchange Act
of 1934, as amended ("Exchange Act"). In connection with the Conversion,
Bancshares has agreed not to deregister such shares for a period of three years
following the Conversion. The proxy rules, tender offer rules, insider reporting
requirements and trading restrictions, annual and periodic reporting and other
requirements of the Exchange Act are applicable to Bancorp. Bancorp will
continue to furnish its stockholders with annual reports containing audited
financial statements as promptly as practicable after the end of each fiscal
year.
HOW TO OBTAIN ADDITIONAL INFORMATION
A copy of the Plan of Conversion is attached hereto as Exhibit A. You
may obtain a copy of the Certificate of Incorporation and Bylaws of Bancshares
from any office of the Bank or in writing from the Mutual Holding Company. Any
such requests should be directed to Harbor Financial M.H.C., 100 S. Second
Street, Fort Pierce, Florida 34950, Attention: Secretary. So that you have
sufficient time to receive and review the requested materials, it is recommended
that any such requests be sent so that they are received by the Mutual Holding
Company by January ___, 1998.
AVAILABLE INFORMATION
The Mutual Holding Company has filed with the OTS an Application for
Conversion pursuant to which it will reorganize in accordance with the terms of
the Plan. This Proxy Statement and the Prospectus omit certain information
contained in such Application. The Application may be inspected at the offices
of the OTS, 1700 G Street, N.W., Washington, D.C. 20552, and at the Northeast
Regional Office of the OTS located at 10 Exchange Place, 18th Floor, Jersey
City, New Jersey 07302.
The Company has filed with the Securities and Exchange Commission
("SEC") a Registration Statement on Form S-1 (File No. 333-37275) ("Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
Conversion Stock and Exchange Shares being offered in the Offerings. This Proxy
Statement and the Prospectus do not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. Such information may be inspected at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and copies may be obtained at prescribed
rates from the Public Reference Section of the SEC at the same address. The SEC
maintains a World Wide Web site on the Internet that contains reports, proxy and
information statements and other information regarding registrants such as
Harbor Florida that file electronically with the SEC. The address of such site
is: http://www.sec.gov. The statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
Registration Statement describe all material provisions of such contracts or
8
<PAGE>
other documents. Nevertheless, such statements are, of necessity, brief
descriptions thereof and are not necessarily complete; each such statement is
qualified by reference to such contract or document.
------------------------
PLEASE REMEMBER TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR IMPORTANT VOTE WILL BE
COUNTED AT THE SPECIAL MEETING.
------------------------
THIS PROXY STATEMENT IS NEITHER AN OFFER TO SELL NOR THE SOLICITATION
OF ANY OFFER TO BUY STOCK. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
9
<PAGE>
EXHIBIT A
10
Exhibit 99.3
HARBOR FLORIDA BANCORP, INC.
100 S. Second Street
Fort Pierce, Florida 34950
(561) 461-2414
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY ___, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Harbor
Florida Bancorp, Inc. ("Bancorp") will be held at ________________________
located at _______________________, on February ____,_1998 ____________ at
________ Florida time, for the following purposes, as more completely set forth
in the accompanying Proxy Statement:
1 . To approve and adopt the Plan of Conversion and Agreement and Plan
of Reorganization (the "Plan" or "Plan of Conversion"), pursuant to which
Bancorp shall adopt a Federal stock charter and then be merged into the Bank
with the Bank as a survivor. Harbor Financial M.H.C. (the "Mutual Holding
Company") shall then convert into an interim Federal stock savings bank and be
merged into the Bank with the Bank being the survivor. The Bank shall then form
an interim savings bank ("Interim"). Interim shall merge with and into the Bank,
resulting in a new structure in which Harbor Florida Bancshares, Inc.
("Bancshares") currently a wholly owned subsidiary of the Bank, will own 100% of
the Bank. As a result of the merger of each of the Mutual Holding Company and
Bancorp with and into the Bank all stockholders of Bancorp except the Mutual
Holding Company (the "Public Stockholders") will receive a distribution of
shares of common stock of Bancshares (the "Common Stock") pursuant to the
Exchange Ratio, as defined in the Prospectus, which will result in the holders
of such shares owning in the aggregate approximately the same percentage of
Common Stock to be outstanding upon completion of the conversion. In addition,
Bancshares is offering additional shares of its Common Stock for sale by means
of a Prospectus. The sale of such stock and the conversion are referred to
herein as the "Conversion."
2. To consider and vote upon a proposal to adopt a federal stock
charter for Harbor Florida Bancorp, Inc. in order to facilitate the consummation
of the Plan.
3. 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.
4. To transact such other business as may properly come before the
meeting. Except with respect to procedural matters incident to the conduct of
the meeting, management of Bancorp is not aware of any matters other than those
set forth above which may properly come before the meeting.
<PAGE>
Pursuant to Delaware law, stockholders of Bancorp do not have
dissenters' rights or appraisal rights in connection with the Conversion.
The Board of Directors of Harbor Florida has fixed December 31, 1997 as
the voting record date for the determination of stockholders entitled to notice
of and to vote at the Special Meeting. Only those stockholders of record as of
the close of business on the date will be entitled to vote at the Special
Meeting.
BY ORDER OF THE BOARD OF
DIRECTORS
/s/ _______________________________
Michael J. Brown, Sr.
President & CEO
January ___, 1998
Fort Pierce, Florida
YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE SPECIAL MEETING YOU MAY
VOTE EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN
WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF. PROXIES MUST BE
RECEIVED PRIOR TO THE COMMENCEMENT OF THE MEETING.
YOUR VOTE IS VERY IMPORTANT. VOTING ON THE PLAN, THE ADOPTION OF A NEW
CHARTER OR ADJOURNMENT OF THE SPECIAL MEETING DOES NOT REQUIRE YOU TO PURCHASE
STOCK IN THE OFFERINGS.
<PAGE>
HARBOR FLORIDA BANCORP, INC.
----------
PROXY STATEMENT
----------
SPECIAL MEETING OF STOCKHOLDERS
This Proxy Statement is being furnished to the holders of the common
stock, par value $0.01 per share ("Bancorp Common Stock"), of Harbor Florida
Bancorp, Inc. ("Bancorp"), in connection with the solicitation of proxies by the
Board of Directors for use at its Special Meeting of Stockholders ("Special
Meeting") to be held at _________________________ located at
______________________ Fort Pierce, Florida, on February _____, 1998, at ______,
Florida time, for the purposes set forth in the Notice of Special Meeting of
Stockholders. This Proxy Statement is first being mailed to stockholders on or
about January ____, 1998.
Each proxy solicited hereby, if properly signed and returned to Bancorp
and not revoked prior to its use, will be voted in accordance with the
instructions indicated on the proxies. If no contrary instructions are given,
each signed proxy received will be voted in favor of the Plan of Conversion, in
favor of the adoption of the Federal stock charter, in favor of the adjournment
of the Special Meeting and, in the discretion of the proxy holder, as to any
other matter which may properly come before the Special Meeting. Only proxies
that are returned can be counted and voted at the Special Meeting.
A Bancorp stockholder who has given a proxy may revoke it at any time
prior to its exercise at the Special Meeting by (i) giving written notice of
revocation to the Secretary of Bancorp, (ii) properly submitting to Bancorp a
duly-executed proxy bearing a later date, or (iii) attending the Special Meeting
and voting in person. All written notices of revocation and other communications
with respect to revocation of proxies should be addressed as follows: Harbor
Florida Bancorp, Inc., 100 S. Second Street, Fort Pierce, Florida 34950,
Attention: Secretary. Proxies solicited hereby may be exercised only at the
Special Meeting and will not be used for any other meeting.
VOTING SECURITIES AND REQUIRED VOTE
Pursuant to Office of Thrift Supervision ("OTS") regulations,
consummation of the Conversion is conditioned upon the approval of the Plan by
the OTS, as well as (1) the approval of the holders of at least a majority of
the total number of votes eligible to be cast by the members of the Harbor
Financial M.H.C. (the "Members") as of the close of business on the voting
record date at a special meeting of Members called for the purpose of
considering the Plan (the "Members' Meeting"), and (2) the approval of the
1
<PAGE>
holders of at least two-thirds of the shares of the outstanding Common Stock
held by the stockholders as of the voting record date at the Special Meeting. In
addition, Bancorp, Bancshares, the Bank and the Mutual Holding Company (the
"Primary Parties") have conditioned the consummation of the Conversion on the
approval of the Plan by the holders of at least a majority of the votes cast, in
person or by proxy, by the holders of Bancorp Common Stock excluding the Mutual
Holding Company (the "Public Stockholders") at the Special Meeting.
The approval of the Plan by the OTS does not constitute an endorsement
or recommendation of the Plan by the OTS. Further, final regulatory approval of
the Plan has not yet been obtained. Such approval may require changes to the
Plan. Any material change will require resolicitation of stockholder approval of
the Plan. In addition, approval of the Conversion and Reorganization is
conditioned upon approval of the holding company application for the formation
of Bancshares by the OTS. While filed, that application has not yet been
approved.
The affirmative vote of the holders of record of a majority of the
outstanding shares of Bancorp entitled to vote is necessary to adopt a new
Federal stock charter. The affirmative vote of the majority of the outstanding
shares of Bancorp present or represented by proxy at the Special Meeting is
necessary to adjourn the Special Meeting. The Mutual Holding Company intends to
vote its shares of Common Stock, which amounted to approximately 53.37% of the
outstanding shares at September 30, 1997, in favor of the Plan, in favor of the
new charter at the Special Meeting and in favor of the adjournment of the
Special Meeting. In addition, as of October 31, 1997, directors and executive
officers of Bancorp as a group (persons) beneficially owned 311,064 shares
(excluding exercisable stock options) or 6.26% of the outstanding Bancorp Common
Stock, which shares can also be expected to be voted in favor of the Plan,
adoption of the new charter and the adjournment at the Special Meeting.
Only holders of record Common Stock at the close of business on
December 31, 1997 (the "Voting Record Date") will be entitled to notice of and
to vote at the Special Meeting. On the Voting Record Date, there were 4,973,428
shares of Bancorp Common Stock issued and outstanding and Bancorp had no other
class of equity securities outstanding. Each share of Common Stock is entitled
to cast one vote at the Special Meeting on all matters properly presented at the
Special Meeting.
Pursuant to a new OTS policy, the Exchange Ratio by which Public
Stockholders will receive shares of Bancorp Common Stock must take into account
dividends previously paid by the Bank and Bancorp. These dividends were waived
by the Mutual Holding Company. Specifically, the Public Stockholders currently
own 46.63% of Bancorp Common Stock. Pursuant to the Exchange Ratio, at the
consummation of the Conversion and Reorganization, the Public Stockholders will
own 45.72% of the Common Stock, before taking into account purchases by Public
Stockholders in the Offering and payment of cash in lieu of fractional shares.
2
<PAGE>
Therefore, the Public Stockholders' interest will be diluted by approximately
.91%. See "THE CONVERSION AND REORGANIZATION -- The Exchange Ratio" in the
Prospectus.
The presence in person or by proxy of at least a majority of the issued
and outstanding shares of Bancorp Common Stock entitled to vote is necessary to
constitute a quorum at the Special Meeting. Shares as to which the "ABSTAIN" box
has been marked on the proxy and any shares held by brokers in street name for
customers which are present at the Special Meeting and are not voted in the
absence of instructions from the customers ("broker non-votes") will be counted
as present for determining if a quorum is present. Because adoption of the Plan
of Conversion must be approved by the holders of at least two-thirds of the
outstanding Bancorp Common Stock, and the adoption of the new charter must be
approved by the holders of at least a majority of the outstanding Bancorp Common
Stock, abstentions and broker non-votes will have the same effect as a vote
against both proposals. The Plan also conditions consummation of the Conversion
on the approval of the Plan by at least a majority of the votes cast, in person
or by proxy, at the Special Meeting by the Public Stockholders. Abstentions and
broker non-votes will have no effect on the required vote of the Public
Stockholders.
ADOPTION OF FEDERAL STOCK CHARTER
Bancorp is seeking shareholder approval to adopt a Federal stock
charter. The Federal stock charter will be used solely to implement the Plan.
Pursuant to OTS policy, its adoption is necessary to allow Bancorp to merge into
the Bank, which has a federal stock charter. The Plan provides that upon
consummation of the Conversion Bancorp and the Mutual Holding Company will be
merged out of existence. Bancshares will then own 100% of the Bank and the
Common Stock will be held by the Public Stockholders and those who purchase
Common Stock in the Offerings. Therefore, upon consummation of the Conversion,
Public Stockholders' rights will be governed by the incorporating documents of
Bancshares. The Certificate of Incorporation of Bancshares, a Delaware
corporation, is substantially similar to that of Bancorp. For a discussion of
the differences between these two certificates of incorporation, see "Comparison
of Stockholder Rights" in the Prospectus.
The Boards of Directors of Bancorp and the Mutual Holding Company
recommend stockholders vote in favor of the adoption of the Federal stock
charter. The Mutual Holding Company intends to vote its shares in favor of the
adoption of the Federal stock charter. Its passage, therefore, is assured.
ADJOURNMENT OF THE SPECIAL MEETING
In the event there are not sufficient votes to approve the Plan at the
time of the Special Meeting, it could not be approved unless the Special Meeting
were adjourned. In order to allow proxies that have been received by Bancorp at
the time of the Special Meeting to be voted for such adjournment, if necessary,
3
<PAGE>
Bancorp has submitted as a separate proposal the question of adjournment under
such circumstances to its stockholders as a separate matter and for their
consideration. The Board of Directors recommends that stockholders vote their
proxies in favor of such adjournment. If it is necessary to adjourn the Special
Meeting and the adjournment is for a period of fewer than 30 days, no notice of
the time and place of the adjourned meeting or if the business of the adjourned
meeting is required to be given to stockholders other than announcement of such
at the Special Meeting.
The Mutual Holding Company intends to vote its shares in favor of the
adjournment of the Special Meeting. Therefore, if necessary, the adjournment of
the Special Meeting is assured.
INCORPORATION OF INFORMATION BY REFERENCE
The accompanying Prospectus of Bancshares is incorporated herein by
reference. The Prospectus sets forth a description of the Plan of Conversion and
the related offering of common stock by the Company under the caption "THE
CONVERSION AND REORGANIZATION." Such caption also describes the effects of the
Conversion on the stockholders of Bancorp and the members of the Mutual Holding
Company, including the tax consequences of the Conversion and the establishment
of a liquidation account for the benefit of certain depositors of Harbor Federal
Savings Bank (the "Bank").
Information regarding Bancshares, Bancorp, the Bank and the Mutual
Holding Company are set forth in the Prospectus under the captions "Harbor
Florida Bancshares, Inc.," "Harbor Florida Bancorp, Inc.," "Harbor Federal
Savings Bank" and "Harbor Financial M.H.C.," respectively, as well as under the
caption "Summary." The Prospectus also describes the business and financial
condition of the Bank under the captions "Business of the Bank" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The historical financial statements of Bancorp and the Bank are
included in the Prospectus. Information regarding the use of proceeds of the
Offerings conducted in connection with the Conversion, the historical
capitalization of the Bank and the pro forma capitalization of Bancshares, and
other pro forma data are set forth in the Prospectus under the captions "Use of
Proceeds," "Capitalization" and "Pro Forma Data," respectively.
The differences between the Certification of Incorporation of Harbor
Florida Bancorp and Harbor Florida Bancshares is found under the caption
"Comparison of Stockholder Rights."
The Prospectus sets forth certain information as to the Bancorp Common
Stock beneficially owned by (i) the only persons or entities who or which were
known to Bancorp to be the beneficial owner of more than 5% of the issued and
outstanding Bancorp Common Stock, (ii) the directors and executive officers of
4
<PAGE>
Bancorp, and (iii) all directors and executive officers of Bancorp as a group.
See "Beneficial Ownership of Common Stock" in the Prospectus.
STOCKHOLDER PROPOSALS
Any proposal which a stockholder wished to have included in the proxy
solicitation materials to be used in connection with the next annual meeting of
stockholders of Bancorp which is expected to be held in April 1998, if the
Conversion is not consummated, must have been received at the main office of
Bancorp no later than September 19, 1997.
OTHER MATTERS
Each proxy solicited hereby also confers discretionary authority on the
Board of Directors of Bancorp to vote the proxy upon such other matters as may
properly come before the Special Meeting. Management is not aware of any
business that may properly come before the Special Meeting other than those
matters described above in this Proxy Statement. However, if any other matters
should properly come before the Special Meeting, it is intended that the proxies
solicited hereby will be voted with respect to those other matters in accordance
with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by Bancorp. Bancorp
will reimburse brokerage firms and other custodians, nominees and fiduciaries
for reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of the Bancorp Common Stock. In addition to solicitations by
mail, directors, officers and employees of Bancorp may solicit proxies
personally or by telephone without additional compensation.
A copy of the Plan of Conversion is attached hereto as Exhibit A. You
may obtain a copy of the Certificate Incorporation and Bylaws of Bancorp in
writing from the Bank. Any such requests should be directed to Harbor Florida
Bancorp, Inc., 100 S. Second Street, Fort Pierce, Florida 34950, Attention:
Secretary. So that you have sufficient time to receive and review the requested
materials, it is recommended that any such requests be sent so that they are
received by Bancorp by January ____, 1998.
YOUR VOTE IS IMPORTANT! THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE PLAN OF CONVERSION AND THE ADOPTION OF THE FEDERAL STOCK CHARTER AND THE
ADJOURNMENT OF THE SPECIAL MEETING. WE URGE YOU TO MARK, SIGN AND DATE THE
ENCLOSED PROXY CARD AND RETURN IT TODAY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
5
<PAGE>
EXHIBIT A
6
Exhibit 99.5
CONVERSION APPRAISAL UPDATE REPORT
HARBOR FLORIDA BANCSHARES, INC.
PROPOSED HOLDING COMPANY FOR
HARBOR FEDERAL SAVINGS BANK
Fort Pierce, Florida
Stock Prices As Of:
December 19, 1997
Prepared By:
RP Financial, LC.
1700 North More Street
Suite 2210
Arlington, Virginia 22209
<PAGE>
[LETTER HEAD FOR RP FINANCIAL, LC.]
December 19, 1997
Boards of Directors
Harbor Financial, M.H.C.
Harbor Florida Bancorp, Inc.
Harbor Florida Bancshares, Inc.
Harbor Federal Savings Bank
100 South Second Street
Fort Pierce, Florida 34950
Gentlemen:
At your request, we have completed and hereby provide an updated
independent appraisal ("Appraisal Update") of the estimated pro forma market
value of the common stock which is to be issued by Harbor Florida Bancshares,
Inc. (the "Holding Company"), in connection with the mutual-to-stock conversion
of Harbor Financial, M.H.C., Fort Pierce, Florida (the "Mutual Holding Company"
or the "MHC"). The Mutual Holding Company currently has a majority ownership
interest in, and its principal asset consists of, approximately 53 percent of
the common stock of Harbor Florida Bancorp, Inc. ("Harbor Florida"), a mid-tier
savings institution holding company whose principal asset consists of 100
percent of the outstanding common stock of Harbor Federal Savings Bank, Fort
Pierce, Florida ("Harbor Federal" --throughout the remainder of the Appraisal
Update, the consolidated operations of Harbor Florida will be referred to as
either Harbor Florida or the "Bank"). The remaining 47 percent of Harbor
Florida's common stock is owned by public stockholders (the "Public Shares"). It
is our understanding that the Holding Company will offer its stock to
depositors, the Bank's employee stock ownership plan ("ESOP"), members of the
local community and the public at large. This appraisal update is being
furnished to the Office of Thrift Supervision ("OTS"). Our original appraisal
report, dated September 19, 1997 (the "Original Appraisal"), is incorporated
herein by reference. As in the preparation of our Original Appraisal, we believe
the data and information used herein is reliable; however, we cannot guarantee
the accuracy and completeness of such information.
This updated appraisal reflects the following: (1) a review of recent
developments in the Bank's financial condition, including updated financial data
through September 30, 1997; (2) an updated comparison of Harbor Florida's
financial condition and operating results versus the Peer Group companies
identified in the Original Appraisal; and (3) a review of stock market
conditions since the Original Appraisal date, along with updated stock prices as
of December 19, 1997.
Pro forma market value is defined as the price at which Harbor
Florida's stock, immediately upon completion of the conversion offering, would
change hands between a willing buyer and a willing seller, neither being under
any compulsion to buy or sell and both having reasonable knowledge of relevant
facts.
<PAGE>
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
common stock. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the conversion will thereafter be able to buy or sell
such shares at prices related to the foregoing valuation of the pro forma market
value thereof. RP Financial is not a seller of securities within the meaning of
any federal and state securities laws and any report prepared by RP Financial
shall not be used as an offer or solicitation with respect to the purchase or
sale of any securities. RP Financial maintains a policy which prohibits the
company, its principals or employees from purchasing stock of its client
institutions.
Discussion of Relevant Considerations
1. Financial Results
Table 1 presents summary balance sheet and income statement details for
the twelve months ended June 30, 1997 and updated unaudited financial
information through September 30, 1997. The overall composition of Harbor
Florida's September 30, 1997 balance sheet was comparable to the June 30, 1997
data, with the Bank posting a moderate increase in assets consistent with recent
trends. Updated earnings for the Bank also reflect modest growth due in part, to
growth of interest-earning assets which has contributed to growth of Harbor
Florida's net interest margin.
Harbor Florida's total assets increased moderately by $14.3 million
from June 30, 1997 to a level of $1.1 billion at September 30, 1997,
representing an annual growth rate of approximately 5.2 percent. Consistent with
the limited change in the total assets balance, the composition of the Bank's
interest-earning assets ("IEA") reflected modest change as well, with slight
increases in loans receivable and mortgage-backed securities ("MBS") and a
slight decrease in cash and investments. Reflecting Harbor Florida's continued
retail banking emphasis, the balance sheet remains dominated by loans receivable
with the balance of net loans receivable equal to $834.4 million. Overall, the
concentration of loans increased slightly from 73.3 percent of total assets to
73.7 percent as of September 30, 1997.
The balance of interest-earning assets consisted of cash, investments
and mortgage-backed securities ("MBS"). Over recent years, the Bank has utilized
MBS as a means to increase the level of interest-earning assets, as an avenue to
deploy excess liquidity, and as an investment vehicle to leverage the balance
sheet. MBS equaled $176.8 million at September 30, 1997, equal to 15.6 percent
of assets, which reflects an increase from the 14.0 percent of assets at June
30, 1997. The balance of interest-earning assets have been invested in cash,
interest-earning assets and investment securities which totaled $93.0 million,
equal to 8.2 percent of total assets as of September 30, 1997, down from a level
of 10.3 percent of assets as of the prior quarter end. Harbor Florida
anticipates the level of cash and investments will initially increase following
the completion of the second step conversion and stock offering and be gradually
reduced as the Bank redeploys such funds into loans, which is its long-term use
of proceeds.
Asset quality ratios remained favorable for the Bank, with the ratio of
non-performing assets to total assets equaling 0.43 percent as of September 30,
1997, as compared to 0.46 percent as of June 30, 1997. Similarly, reserve
coverage ratios and allowances for loan losses as a percent of total loans did
not change materially over the quarter.
2
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Table 1
Harbor Florida Bancorp, Inc.
Recent Financial Data
At June 30, 1997 At September 30, 1997
---------------------- -----------------------
(% of (% of
Amount Assets) Amount Assets)
------ ------- ------ -------
($000) (%) ($000) (%)
Balance Sheet Data
Total Assets ................. $1,116,718 100.0% $1,131,024 100.0%
Loans Receivable, Net ........ 818,879 73.3 834,411 73.7
Mortgage-Backed Securities ... 156,559 14.0 176,854 15.6
Cash & Investments ........... 114,851 10.3 93,033 8.2
Real Estate Owned ............ 2,896 0.3 2,314 0.2
Goodwill ..................... 3,100 0.3 3,045 0.3
Deposits ..................... 904,904 81.0 911,576 80.6
Borrowings ................... 100,449 9.0 100,475 8.9
Stockholders' Equity ......... 93,706 8.4 96,802 8.6
Tangible Stockholders' Equity 90,606 8.1 93,757 8.3
<TABLE>
<CAPTION>
12 Months Ended 12 Months Ended
June 30, 1997 September 30, 1997
------------------------ -------------------------
(% of (% of
Avg. Avg.
Amount Assets) Amount Assets)
------ ------- ------ -------
($000) (%) ($000) (%)
Summary Income Statement
<S> <C> <C> <C> <C>
Interest Income ...................... $ 82,691 7.61% $ 84,814 7.75%
Interest Expense ..................... (43,843) (4.03) (45,159) (4.13)
-------- ---- -------- ----
Net Interest Income ................ $ 38,848 3.57% $ 39,665 3.63%
Provision for Loan Losses ............ (529) (0.05) (782) (0.07)
-------- ---- -------- ----
Net Interest Income After Provisions $ 38,319 3.52% $ 38,873 3.55%
Other Income ......................... 3,574 0.33 3,880 0.36
Operating Expense .................... (20,635) (1.90) (21,148) (1.93)
-------- ---- -------- ----
Net Operating Income ............... $ 21,258 1.96% $ 21,605 1.97%
Gain on Sale of MBS & Other Sec ...... 50 0.00 188 0.02
Income from RE Opns .................. 15 0.00 145 0.01
Special SAIF Assessment .............. (4,552) (0.42) -- --
-------- ---- -------- ----
Gains and Net Non-Operating Income . ($ 4,487) (0.38)% $ 333 0.03%
Net Income Before Tax ................ 16,771 1.54 21,938 2.00
Income Taxes ......................... (6,564) (0.60) (8,611) (0.79)
-------- ---- -------- ----
Net Income (Loss) .................. $ 10,207 0.94% $ 13,327 1.22%
-------- ---- -------- ----
Estimated Core Income (1) ............ $ 12,904 1.19% $ 13,129 1.20%
======== ==== ======== ====
</TABLE>
- ------------
(1) Addback non-operating items on tax effected basis using a 39.3 percent
effective rate as of June 30, 1997 and a 40.7 percent effective rate as of
September 30, 1997.
Source: Harbor Florida's prospectus and RP Financial calculations.
3
<PAGE>
Harbor Florida's operations continued to be funded primarily with
retail deposits, as deposits constituted 80.6 percent of total liabilities and
capital at September 30, 1997. During the quarter, deposits increased modestly
to equal $911.6 million as of September 30, 1997. Harbor Florida also utilizes
borrowed funds as a supplement to deposits to fund operations, with borrowings
comprising 8.9 percent of total liabilities at capital at September 30, 1997.
The overall balance of borrowed funds was $100.5 million at September 30, 1997,
substantially unchanged from the June 30, 1997 balance. The increase in assets
over the most recent quarter was funded primarily by the increase in deposits
and retained earnings.
Positive earnings during the quarter ended September 30, 1997 supported
the increase in the Bank's capital to $96.8 million at September 30, 1997,
versus a comparative balance of $93.7 million at June 30, 1997. Asset growth
during the quarter was slower than the growth in capital, resulting in the
Bank's capital ratio increasing from 8.4 percent at June 30, 1997 to 8.6 percent
at September 30, 1997. Tangible capital increased to $93.8 million or 8.3
percent of assets as of September 30, 1997.
Harbor Florida's operating results for the twelve months ended June 30,
1997 and September 30, 1997 are also set forth in Tabley1. Updated earnings for
the Bank were significantly higher, which was largely attributable to the one
time SAIF assessment being omitted from the trailing twelve month earnings base
as of September 30, 1997. Core earnings (omitting the impact of the SAIF
assessment and other non-operating items) was modestly higher compared to the
trailing twelve month earnings base from June 30, 1997. Overall, Harbor
Florida's core earnings benefitted from balance sheet growth which caused the
net interest margin to expand at a faster pace the operating expenses. For the
twelve months ended June 30, 1997 and September 30, 1997, estimated core
earnings for the Bank totaled $12.9 million and $13.1 million, respectively.
The Bank's updated net interest income increased to $39.7 million from
$38.8 million, and the ratio of net interest income to average increased to 3.57
percent from 3.63 percent. Net interest income increased as a result of higher
interest income as measured as a percent of average assets and the
aforementioned balance sheet growth.
Operating expenses were also higher as the larger asset size and higher
level of business activity increased overall operating costs. For the twelve
months ended September 30, 1997, Harbor Florida's operating expenses equaled
$21.1 million, equal to 1.93 percent of average assets, as compared to $20.6
million, or 1.90 percent of average assets for the twelve months ended June 30,
1997. No material increases to the Bank's expenses are anticipated by management
in the future although Harbor Florida may likely experience upward pressures on
expense levels due to inflation and the cost of stock based benefit plans
resulting from the second step conversion.
Harbor Florida's relatively undiversified lending operations continue
to provide a relatively modest level of non-interest "other" income. During the
quarter, the Bank's other income increased from $3.6 million to $3.9 million for
the twelve months ended September 30, 1997, increasing from 0.33 percent to 0.36
percent of average assets.
Other components of Harbor Florida's income and expenses remained
relatively unchanged on a trailing twelve month basis incorporating updated
financial data. Provision for loans losses equaled $0.5 million or 0.05 percent
of average assets for the twelve months ended June 30, 1997 and $0.8 million or
0.07 percent for the twelve months ended September 30, 1997. The most
significant difference between the June and September figures is in "gains and
other non-operating income", which improved from a loss of $4.5 million or 0.38
percent of average assets at June 30, 1997 to a gain of $0.3 million or 0.03
percent of average assets at September 30, 1997. The primary difference between
the two quarters is the elimination of the SAIF assessment from the trailing
twelve month earnings base for the September 30, 1997 quarter. (NOTE: the core
earnings figures used in the valuation omitted the impact of the SAIF
assessment.)
4
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Overall, due primarily to the aforementioned elimination of the SAIF
assessment as of September 30, 1997, net income increased by $3.1 million to
equal $13.3 million or 1.22 percent of average assets for the twelve months
ended September 30, 1997. Core earnings adjusted to exclude net non-operating
items on a tax effected basis realized a more modest increase and equaled $13.1
million, or 1.20 percent of average assets based on updated financial data.
2. Peer Group Financial Comparisons
Tables 2 and 3 present the financial characteristics and operating
results for Harbor Florida, the Peer Group and all publicly-traded SAIF-insured
thrifts. Harbor Florida's financial information is based on results through
September 30, 1997, while financial data for the Peer Group is as of September
30, 1997 or June 30, 1997 (i.e, the latest data which is publicly available).
In general, the comparative balance sheet ratios for the Bank and the
Peer Group did not vary significantly from the ratios exhibited in the Original
Appraisal. Relative to the Peer Group, the Bank's interest-earning asset
composition continued to reflect a higher concentration of loans, a comparable
concentration of MBS, and a significantly lower level of cash and investments. A
more detailed analysis of the respective loan portfolios of Harbor Florida and
the Peer Group set forth in the Original Appraisal continue to indicate that
both Harbor Florida and the Peer Group are primarily residential mortgage
lenders and Harbor Florida has a greater proportion of its portfolio invested in
residential construction loans while conversely, the Peer Group has diversified
its portfolio to include a higher proportion of income producing property loans.
Overall, the Bank's interest-earning assets amounted to 97.5 percent of assets,
which remains comparable to the Peer Group ratio of 97.0 percent.
The mix of deposits and borrowings maintained by Harbor Florida and the
Peer Group also did not change significantly. Harbor Florida's funding
composition continued to reflect a higher concentration of deposits and a lower
level of borrowed funds. Updated interest-bearing liabilities to assets ratios
equaled 89.5 percent and 82.5 percent for the Bank and the Peer Group,
respectively, with Harbor Florida's higher ratio continuing to be largely
attributable to the maintenance of a lower capital position. Harbor Florida
posted an updated equity-to-assets ratio of 8.6 percent, versus a comparative
ratio of 15.7 percent for the Peer Group. Goodwill was 0.5 percent of assets for
the Peer Group while intangibles equaled 0.3 percent of assets for Harbor
Florida, reducing tangible equity to 8.3 percent of assets. Overall, Harbor
Florida's updated interest-earning assets to interest-bearing liabilities
("IEA/IBL") ratio equaled 108.9 percent, which remained below the comparative
Peer Group average of 117.6 percent. As noted in the Original Appraisal, the
additional capital realized from the stock conversion should serve to largely
address the lower IEA/IBL ratio currently maintained by the Bank.
Updated growth rates for Harbor Florida and the Peer Group growth rates
reflect growth for the twelve months ended September 30, 1997 or the most recent
data available. In general, comparable growth trends between Harbor Florida and
the Peer Group were unchanged, with the Bank posting positive growth in all
major balance sheet items including total assets, loans & MBS, deposits and net
worth. The Peer Group continued to post faster growth rates for total assets and
loans. Specifically, asset growth rates of positive 7.0ypercent and 16.6 percent
were posted by the Bank and the Peer Group, respectively. The Bank's asset
growth measures reflect the strong loan growth was recorded during the period
(positive growth rate of 9.5 percent), with funding for the loan portfolio being
largely provided by the cash and investments portfolio (shrinkage of 14.8
percent) and growth in deposits and equity (growth of 7.0 percent and 14.1
percent respectively). The Peer Group's asset growth measures reflect faster
growth in loans & MBS (positive growth rate of 22.2 percent) funded primarily
with deposits (9.8 percent growth). These relative growth trends are consistent
with those cited in the Original Appraisal.
5
<PAGE>
<TABLE>
<CAPTION>
Table 2
Balance Sheet Composition and Growth Rates
Comparable Institution Analysis
As of September 30, 1997
Balance Sheet as a Percent of Assets
-----------------------------------------------------------------------------------------------
Cash and Borrowed Subd. Net Goodwill Tng Net MEMO:
Investments Loans MBS Deposits Funds Debt Worth & Intang Worth Pref. Stock
----------- ----- --- -------- ----- ---- ----- -------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Harbor Florida Bancorp
September 30, 1997 .................. 8.2 73.7 15.6 80.6 8.9 0.0 8.6 0.3 8.3 0.0
SAIF-Insured Thrifts ................ 17.4 68.3 11.1 70.0 15.3 0.2 12.8 0.2 12.6 0.0
State of FL ......................... 14.5 70.5 9.7 69.6 15.7 2.4 9.1 0.3 8.8 0.2
Comparable Group
Average ............................ 20.6 63.6 12.8 66.7 15.8 0.0 15.7 0.5 15.2 0.0
Mid-Atlantic Companies ............ 25.1 53.0 19.0 67.1 14.3 0.0 16.4 0.5 15.8 0.0
North-West Companies .............. 13.8 69.8 13.7 54.5 27.1 0.0 16.6 0.5 16.1 0.0
South-East Companies .............. 19.4 72.2 4.3 66.5 16.7 0.0 15.4 0.9 14.5 0.0
Other Comparative
Companies ........................ 17.0 75.5 5.1 78.1 7.1 0.0 13.4 0.1 13.3 0.0
Comparable Group
- ----------------
Florida Companies
- -----------------
FFLC FFLC Bancorp of
Leesburg FL ........................ 14.2 76.7 6.8 80.2 5.2 0.0 13.7 0.0 13.7 0.0
Mid-Atlantic Companies
- ----------------------
DIME Dime Community
Bancorp of NY ...................... 22.9 57.0 15.9 72.0 12.7 0.0 13.5 1.9 11.6 0.0
FFIC Flushing Fin
Corp. of NY ........................ 18.9 59.3 19.1 67.0 17.2 0.0 14.2 0.6 13.6 0.0
GAF GA Financial Corp
of PA .............................. 32.5 37.8 28.1 56.9 25.0 0.0 14.6 0.1 14.5 0.0
JSB JSB Financial,
Inc. of NY ......................... 36.1 60.7 0.3 73.3 0.0 0.0 23.2 0.0 23.2 0.0
OCFC Ocean Fin. Corp
of NJ(1) ........................... 15.3 50.1 31.6 66.3 16.8 0.0 16.3 0.0 16.3 0.0
North-West Companies
- --------------------
FWWB First Savings
Bancorp of WA ...................... 13.0 66.7 17.0 51.7 32.8 0.0 13.7 1.0 12.6 0.0
KFBI Klamath First
Bancorp of OR(1) ................... 14.7 73.0 10.3 57.2 21.4 0.0 19.5 0.0 19.5 0.0
South-East Companies
- --------------------
HFNC HFNC Financial
Corp. of NC ........................ 11.4 79.3 6.0 51.0 28.5 0.0 18.8 0.0 18.8 0.0
ISBF ISB Financial
Corp. of LA(1) ..................... 27.4 65.0 2.6 82.0 5.0 0.0 12.0 1.8 10.2 0.0
Western Companies (Excl CA)
- ---------------------------
FFBA First Colorado
Bancorp of CO ...................... 19.7 74.2 3.5 76.0 8.9 0.0 13.1 0.2 12.9 0.0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Annual Growth Rates
------------------------------------------------------------------------------------
Cash and Loans Borrows. Net Tng Net
Assets Investments & MBS Deposits & Subdebt Worth Worth
------ ----------- ----- -------- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Harbor Florida Bancorp
September 30, 1997 ................... 6.96 -14.82 9.54 7.01 5.02 14.11 15.40
SAIF-Insured Thrifts ................. 11.00 4.74 12.85 7.76 15.24 3.01 2.42
State of FL .......................... 22.04 -9.25 32.52 17.31 32.22 11.85 7.25
Comparable Group
Average ............................. 16.58 -1.07 22.20 9.78 30.19 -7.50 -9.22
Mid-Atlantic Companies ............. 19.25 3.20 28.95 5.63 NM -2.79 -4.23
North-West Companies ............... 15.78 -11.20 22.01 6.90 42.03 -5.72 -5.40
South-East Companies ............... 20.26 14.63 18.45 25.74 34.08 -18.60 -24.61
Other Comparative
Companies ......................... 6.99 -33.38 9.27 7.08 10.57 -7.61 -7.63
Comparable Group
- ----------------
Florida Companies
- -----------------
FFLC FFLC Bancorp of
Leesburg FL ......................... 14.10 -33.38 30.35 11.09 NM -3.39 -3.39
Mid-Atlantic Companies
- ----------------------
DIME Dime Community
Bancorp of NY ....................... 13.04 -9.55 24.07 5.93 NM -13.10 -13.89
FFIC Flushing Fin
Corp. of NY ......................... 24.68 -25.71 50.17 12.81 NM 1.09 -2.96
GAF GA Financial Corp
of PA ............................... 36.23 42.54 38.60 9.56 NM -7.51 -8.41
JSB JSB Financial,
Inc. of NY .......................... 0.81 -11.73 10.53 -2.45 NM 8.34 8.34
OCFC Ocean Fin. Corp
of NJ(1) ............................ 21.51 20.47 21.41 2.31 NM NM NM
North-West Companies
- --------------------
FWWB First Savings
Bancorp of WA ....................... 16.01 -10.71 22.24 8.16 42.03 0.63 1.26
KFBI Klamath First
Bancorp of OR(1) .................... 15.55 -11.85 21.78 5.64 NM -12.07 -12.07
South-East Companies
- --------------------
HFNC HFNC Financial
Corp. of NC ......................... 2.58 -30.87 8.81 0.78 70.21 -34.20 -34.20
ISBF ISB Financial
Corp. of LA(1) ...................... 37.95 60.13 28.09 50.70 -2.05 -2.99 -15.01
Western Companies (Excl CA)
- ---------------------------
FFBA First Colorado
Bancorp of CO ....................... -0.13 NM -11.81 3.06 10.57 -11.84 -11.87
</TABLE>
<PAGE>
Regulatory Capital
------------------------------------
Tangible Core Reg. Cap.
-------- ---- ---------
Harbor Florida Bancorp
September 30, 1997 ................... 7.29 7.29 15.15
SAIF-Insured Thrifts ................. 11.02 11.07 22.62
State of FL .......................... 9.01 9.01 16.19
Comparable Group
Average ............................. 12.00 12.07 24.30
Mid-Atlantic Companies ............. 11.76 11.76 24.98
North-West Companies ............... 11.06 11.84 23.22
South-East Companies ............... 13.50 13.50 25.36
Other Comparative
Companies ......................... 11.56 11.64 22.64
Comparable Group
- ----------------
Florida Companies
- -----------------
FFLC FFLC Bancorp of
Leesburg FL ......................... 11.30 11.30 22.60
Mid-Atlantic Companies
- ----------------------
DIME Dime Community
Bancorp of NY ....................... 9.62 9.62 19.44
FFIC Flushing Fin
Corp. of NY ......................... 10.17 10.17 21.05
GAF GA Financial Corp
of PA ............................... 12.07 12.07 33.50
JSB JSB Financial,
Inc. of NY .......................... 15.07 15.07 20.78
OCFC Ocean Fin. Corp
of NJ(1) ............................ 11.89 11.89 30.15
North-West Companies
- --------------------
FWWB First Savings
Bancorp of WA ....................... NM 12.61 23.31
KFBI Klamath First
Bancorp of OR(1) .................... 11.06 11.06 23.12
South-East Companies
- --------------------
HFNC HFNC Financial
Corp. of NC ......................... 16.70 16.70 31.41
ISBF ISB Financial
Corp. of LA(1) ...................... 10.29 10.29 19.30
Western Companies (Excl CA)
- ---------------------------
FFBA First Colorado
Bancorp of CO ....................... 11.82 11.97 22.67
- ------------
(1) Financial information is for the quarter ending June 30, 1997.
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP Financial, LC. calculations. The
information provided in this table has been obtained from sources
we believe are reliabile, but we cannot guarantee the accuracy or
completeness of such information.
6
<PAGE>
Table 3
Income as a Percent of Average Assets and Yields, Costs, Spreads
Comparable Institution Analysis
For the Twelve Months Ended September 30, 1997
<TABLE>
<CAPTION>
Net Interest Income Other Income
--------------------------------- -----------------------------
Loss NII
Net Provis. After Loan R.E. Other
Income Income Expense NII on IEA Provis. Fees Oper. Income
------ ------ ------- --- ------ ------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Harbor Florida Bancorp
September 30, 1997 ................... 1.22 7.75 4.13 3.63 0.07 3.55 0.00 0.00 0.36
SAIF-Insured Thrifts ................. 0.89 7.42 4.13 3.29 0.13 3.16 0.12 0.01 0.30
State of FL .......................... 1.06 7.68 4.48 3.20 0.27 2.93 0.19 0.31 0.35
Comparable Group
Average ............................. 1.02 7.31 3.74 3.57 0.07 3.49 0.07 0.01 0.19
Mid-Atlantic Companies ............. 1.02 7.14 3.38 3.76 0.09 3.67 0.10 0.01 0.15
North-West Companies ............... 1.03 7.54 4.09 3.45 0.09 3.37 0.04 0.00 0.14
South-East Companies ............... 0.92 7.56 4.07 3.49 0.00 3.49 0.05 0.01 0.29
Other Comparative
Companies ......................... 1.10 7.24 3.97 3.27 0.07 3.20 0.04 0.01 0.25
Comparable Group
- ----------------
Florida Companies
- -----------------
FFLC FFLC Bancorp of
Leesburg FL ......................... 0.99 7.42 4.02 3.40 0.15 3.25 0.09 0.00 0.15
Mid-Atlantic Companies
- ----------------------
DIME Dime Community
Bancorp of NY ....................... 1.09 7.24 3.46 3.78 0.29 3.49 0.05 -0.03 0.21
FFIC Flushing Fin
Corp. of NY ......................... 0.95 7.47 3.72 3.74 0.02 3.73 0.06 -0.02 0.19
GAF GA Financial Corp
of PA ............................... 1.08 7.18 3.54 3.64 0.04 3.60 0.00 0.00 0.26
JSB JSB Financial,
Inc. of NY .......................... 1.93 7.03 2.06 4.43 0.04 4.39 0.22 0.08 0.05
OCFC Ocean Fin. Corp
of NJ(1) ............................ 0.03 6.77 3.57 3.20 0.07 3.13 0.14 0.03 0.03
North-West Companies
- --------------------
FWWB First Savings
Bancorp of WA ....................... 1.24 7.66 4.14 3.52 0.12 3.40 0.08 0.00 0.22
KFBI Klamath First
Bancorp of OR(1) .................... 0.81 7.42 4.03 3.38 0.05 3.33 0.00 0.01 0.06
South-East Companies
- --------------------
HFNC HFNC Financial
Corp. of NC ......................... 1.23 7.65 4.23 3.43 -0.06 3.48 0.00 0.01 0.13
ISBF ISB Financial
Corp. of LA(1) ...................... 0.62 7.46 3.91 3.55 0.06 3.49 0.10 0.00 0.45
Western Companies (Excl CA)
- ---------------------------
FFBA First Colorado
Bancorp of CO ....................... 1.21 7.07 3.92 3.14 -0.01 3.15 0.00 0.02 0.34
</TABLE>
<PAGE>
G&A/Other Exp. Non-Op. Items
--------------- ---------------
Total
Other G&A Goodwill Net Extrao.
Income Expense Amort. Gains Items
------ ------- ------ ----- -----
Harbor Florida Bancorp
September 30, 1997 .............. 0.36 1.88 0.05 0.03 0.00
SAIF-Insured Thrifts ............ 0.43 2.20 0.02 0.01 0.00
State of FL ..................... 0.84 2.58 0.03 0.41 0.00
Comparable Group
Average ........................ 0.27 1.90 0.04 -0.15 0.00
Mid-Atlantic Companies ........ 0.25 1.93 0.04 -0.22 0.00
North-West Companies .......... 0.18 1.66 0.04 -0.26 0.00
South-East Companies .......... 0.35 2.21 0.07 -0.04 0.00
Other Comparative
Companies .................... 0.00 1.78 0.01 0.05 0.00
Comparable Group
- ----------------
Florida Companies
- -----------------
FFLC FFLC Bancorp of
Leesburg FL .................... 0.24 1.99 0.00 0.09 0.00
Mid-Atlantic Companies
DIME Dime Community
Bancorp of NY .................. 0.23 1.83 0.19 0.05 0.00
FFIC Flushing Fin
Corp. of NY .................... 0.23 2.18 0.00 -0.06 0.00
GAF GA Financial Corp
of PA .......................... 0.26 2.12 0.02 0.04 0.00
JSB JSB Financial,
Inc. of NY ..................... 0.35 1.83 0.00 0.32 0.00
OCFC Ocean Fin. Corp
of NJ(1) ....................... 0.20 1.68 0.00 -1.46 0.01
North-West Companies
- --------------------
FWWB First Savings
Bancorp of WA .................. 0.30 1.86 0.08 0.11 0.00
KFBI Klamath First
Bancorp of OR(1) ............... 0.06 1.47 0.00 -0.63 0.00
South-East Companies
- --------------------
HFNC HFNC Financial
Corp. of NC .................... 0.14 1.89 0.00 0.26 0.00
ISBF ISB Financial
Corp. of LA(1) ................. 0.56 2.53 0.13 -0.35 0.00
Western Companies (Excl CA)
- ---------------------------
FFBA First Colorado
Bancorp of CO .................. 0.37 1.57 0.02 0.02 0.00
<PAGE>
Yields, Costs, and Spreads
---------------------------
MEMO: MEMO:
Yield Cost Yld-Cost Assets/ Effective
On Assets Of Funds Spread FTE Emp. Tax Rate
--------- -------- ------ -------- --------
Harbor Florida Bancorp
September 30, 1997 ........... 7.94 4.61 3.33 3,556 39.30
SAIF-Insured Thrifts ......... 7.58 4.77 2.81 4,223 37.04
State of FL .................. 8.21 5.09 3.12 3,985 36.52
Comparable Group
Average ..................... 7.55 4.63 2.92 4,622 44.28
Mid-Atlantic Companies ..... 7.40 4.20 3.19 5,077 51.70
North-West Companies ....... 7.75 5.16 2.59 3,527 37.15
South-East Companies ....... 7.84 5.07 2.77 5,092 39.53
Other Comparative
Companies ................. 7.42 4.71 2.71 4,111 37.63
Comparable Group
- ----------------
Florida Companies
- -----------------
FFLC FFLC Bancorp of
Leesburg FL ................. 7.59 4.76 2.83 3,043 37.30
Mid-Atlantic Companies
- ----------------------
DIME Dime Community
Bancorp of NY ............... 7.59 4.20 3.39 5,632 40.22
FFIC Flushing Fin
Corp. of NY ................. 7.68 4.50 3.18 5,334 47.54
GAF GA Financial Corp
of PA ....................... 7.47 4.38 3.10 3,933 38.49
JSB JSB Financial,
Inc. of NY .................. 7.24 3.48 3.76 4,325 40.23
OCFC Ocean Fin. Corp
of NJ(1) .................... 6.99 4.45 2.54 6,162 92.02
North-West Companies
- --------------------
FWWB First Savings
Bancorp of WA ............... 7.94 5.03 2.92 3,775 33.91
KFBI Klamath First
Bancorp of OR(1) ............ 7.55 5.29 2.26 3,279 40.38
South-East Companies
- --------------------
HFNC HFNC Financial
Corp. of NC ................. 7.87 5.56 2.31 7,048 38.74
ISBF ISB Financial
Corp. of LA(1) .............. 7.82 4.58 3.24 3,136 40.31
Western Companies (Excl CA)
- ---------------------------
FFBA First Colorado
Bancorp of CO ............... 7.26 4.67 2.59 5,180 37.97
- ------------
(1) Financial information is for the quarter ending June 30, 1997.
Source: Audited and unaudited financial statements, corporate reports and
offering circulars, and RP Financial, LC. calculations. The
information provided in this table has been obtained from sources
we believe are reliabile, but we cannot guarantee the accuracy or
completeness of such information.
7
<PAGE>
The Bank continued to post a stronger capital growth rate than the Peer
Group (positive 14.1 percent versus negative 7.5 percent for the Peer Group).
Higher dividend payments and stock repurchases (the Peer Group is comprised of
full stock companies), as well as possible negative SFAS 115 adjustments, were
likely factors that accounted for the Peer Group's negative capital growth rate.
Following the increase in capital realized from conversion proceeds, the Bank's
capital growth rate will be depressed by a higher pro forma capital position and
comparatively lower marginal returns, dividends which will be paid on all
outstanding shares (dividends on shares owned by the mutual holding company have
been waived to date) and potentially stock repurchases.
Table 3 displays comparative operating results for Harbor Florida and
the Peer Group, based on their earnings for the twelve months ended September
30, 1997 or the most recent data available, respectively. Updated earnings for
the Bank relative to the Peer Group changed from the Original Appraisal as a
result of omitting the SAIF assessment from the trailing twelve month earnings
(for the Bank only). Omitting the impact of the SAIF assessment from the Peer
Group companies, however, suggests that the overall composition of earnings is
largely unchanged from the Original Appraisal. For example, Harbor Florida
continues to generate a comparable level of net interest income relative to the
Peer Group (3.63 percent of average assets versus 3.57 percent for the Peer
Group), a more favorable level of non-interest "other" income (0.36 percent of
average assets versus 0.27 percent) and a lower more favorable level of G&A
expenses.
As a result of elimination of the SAIF assessment from the trailing
twelve month earnings base at September 30, 1997, the Bank's level of
non-operating losses in the Updated Appraisal was considerably more favorable
than the Peer Group (several companies of whose trailing twelve month earnings
still included the SAIF assessment). Non-operating items totaled a positive 0.03
percent of average assets for Harbor Florida versus 0.15 percent loss for the
Peer Group. Both Harbor Florida and the Peer Group companies are in a fully
taxable position with effective tax rates in the range of 39.3 and 44.3 percent,
respectively.
3. Stock Market Conditions
Since the date of the Original Appraisal, the performance of the
overall stock market has been mixed. Lower interest rates provided for a
positive stock market environment in the beginning of October. However,
congressional testimony by the Federal Reserve Chairman, in which he indicated
that it would be difficult to maintain the current balance between tight labor
markets and low inflation, caused stock and bond prices to skid in mid-October.
Disappointing third quarter earnings in the technology the sector sharpened the
sell-off in the stock market, with the Dow Jones Industrial Average ("DJIA")
posting consecutive losses of more than 1.0 percent on October 16 and 17.
Stocks bounced back in early-week trading the following week,
reflecting positive third quarter earnings surprises posted by some of the blue
chip stocks. However, the recovery was abbreviated by global selling pressure
led by the decline in the Hong Kong stock market, as the DJIA posted a two-day
loss approximating 320 points on October 23 and 24. The sell-off in the world
financial markets turned into a rout on the following Monday, with a 5.8 percent
decline in the Hong Kong stock market fueling the largest ever point decline in
the DJIA. On October 24, the DJIA declined 554 points or 7.2 percent. While the
selling was broad based, technology stocks sensitive to Asian demand experienced
some of the sharpest declines. The turmoil in the stock market provided for a
sharp rally in bond prices, reflecting a flight to quality by skittish
investors. The stock market recovered strongly the day after the record breaking
point decline, as the DJIA surged a record breaking 337 points on October 28.
Bond prices declined sharply as investors pulled out of the Treasury market to
reinvest into the stock market. Market conditions remained uneven through the
week ended October 31, which was followed by a soaring stock market on November
3. The DJIA posted a 232 point increase on November 3, which was supported by a
resurgence in the Hong Kong market.
8
<PAGE>
Following the one day rally, volatility returned to the stock market
through mid-December. The market's uneven performance was largely attributable
to the ongoing influence of the international markets, particularly the Asian
and Latin American markets. Bond prices benefitted from the turbulent stock
market environment, despite the October unemployment rate dropping to a 24-year
low of 4.7 percent. In mid-November, the yield on the 30-year bellwether
Treasury issue approached 6.0 percent, its lowest level since February 1996 and
the yield on the long bond dropped below 6.0 percent in mid-December. On
December 19, 1997, the DJIA closed at 7756.3 a decline of 2.0 percent since the
date of the Original Appraisal.
Since the Original Appraisal, thrift issues in general have
outperformed the overall stock market. Declining interest rates supported an
advance in thrift prices in early-October; however, the upward trend in thrift
prices stalled in mid-October, as interest rates moved higher following warnings
by the Federal Reserve Chairman of inflation creeping back into the economy due
to the tight labor markets. Thrift stocks gyrated in conjunction with the
overall market in late-October, with the SNL index declining by 5.2 percent on
October 27 and increasing by 2.4 percent on October 28. Thrift prices further
recovered on October 29, which was supported by a rally in the bond market.
Aided by the favorable interest rate climate, thrift stocks posted further gains
in early-November and then retreated modestly in mid-November. Thrift and bank
issues retreated on concerns that a slowing U.S. economy could lead to weaker
loan demand and higher delinquency rates. However, led by the strengthening bond
market, thrift and bank issues moved higher during the third week of November.
On December 19, 1997, the SNL Index for all publicly-traded thrifts closed at
793.0, an increase of 8.8 percent since the date of the Original Appraisal.
Consistent with the SNL index, the pricing measures for all
publicly-traded SAIF-insured thrifts were generally higher since the date of the
Original Appraisal. Comparatively, the pricing measures for the Peer Group
exhibited slightly less notable increases since the date of the Original
Appraisal. Consistent with the original appraisal, the Peer Group maintained a
slightly lower price/book ratio and a slightly higher price/core earnings
multiple relative to the comparative averages for all publicly-traded
SAIF-insured thrifts. Since the date of the Original Appraisal, eight out of the
eleven Peer Group companies were trading at higher prices as of December 19,
1997.
Average Pricing Characteristics
At At
Sept 19, Dec. 19, %
1997 1997 Change
---- ---- ------
Peer Group
- ----------
Price/Earnings(x) ............................ 23.69x 22.94x (3.2)%
Price/Core Earnings(x) ....................... 22.87 23.18 1.4
Price/Book(%) ................................ 145.70% 154.27% 5.9
Price/Tangible Book(%) ....................... 151.90 162.77 7.2
Price/Assets(%) .............................. 23.11 23.21 0.4
Avg. Market Capitalization ($Mil) ............ $240.92 $256.48 6.5
SAIF-Insured Thrifts
- --------------------
Price/Earnings(x) ............................ 21.97x 19.71x (10.3)%
Price/Core Earnings(x) ....................... 19.21 20.54 6.9
Price/Book(%) ................................ 147.62% 160.69% 8.9
Price/Tangible Book(%) ....................... 151.49 164.70 8.7
Price/Assets(%) .............................. 18.04 19.62 8.8
Avg. Market Capitalization ($Mil) ............ $163.06 $179.01 9.8
Recent Conversions Last Three Months(1)
- ----------------------------------------
Price/Core Earnings(x) ...................... 29.17x 27.03x (7.3)%
Price/Tangible Book(%) ....................... 119.82% 134.46% 12.2
- ----------
(1) Ratios based on conversions completed for prior three months.
9
<PAGE>
Shown in Table 4 is a summary of recently completed conversions which
closed in the last three months. Relative to the Original Appraisal date, which
reflected pricing ratios as of September 19, 1997, the newly converted companies
increased in value by 12.2 percent on a price-to-book basis, from an average
119.82 percent pro forma P/TB ratio at September 19, 1997, to 134.46 percent as
of December 19, 1997. Comparatively, a 7.3 percent decrease was recorded in the
pro forma core P/E multiple for the recent conversions over the corresponding
time frame.
Table 5 reflects the pricing characteristics and after-market trends
for second step conversions of mutual holding companies. The Bank's P/B ratio is
priced at a premium relative to these transactions reflecting today's strong
market for thrift issues generally as well as new issues.
Summary of Adjustments
We have changed one key valuation parameter since the Original
Appraisal, as shown below.
Current
Previous Valuation
Key Valuation Parameters: Valuation Adjustment Adjustment
- ------------------------- -------------------- ----------
Financial Condition .................... No Adjustment No Change
Profitability, Growth and Viability
of Earnings .......................... Slight Downward No Change
Asset Growth ........................... No Adjustment No Change
Primary Market Area .................... Slight Upward No Change
Dividends .............................. No Adjustment No Change
Liquidity of the Shares ................ No Adjustment No Change
Marketing of the Issue ................. No Adjustment No Change
Management ............................. No Adjustment No Change
Effect of Government Regulations
& Regulatory Reform .................. No Adjustment Moderate Downward
There were no material changes in the updated financial condition of
the Bank and the Peer Group and in their updated operating results. Harbor
Florida's balance sheet remained substantially unchanged while core earnings
remained above the Peer Group average. The factors concerning the valuation
parameters of asset growth, primary market area, dividends, liquidity of the
shares, marketing of the issue, and management did not change since the Original
Appraisal date. Accordingly, those parameters were not discussed further in this
update.
The adjustment for the effect of government regulations and regulatory
reform has been changed from a "no adjustment" to a "moderate downward"
adjustment due to a change in regulatory policy adopted by the Office of Thrift
Supervision regarding waived dividends by MHC institutions that were previously
grandfathered. Specifically, the change in policy requires an adjustment to the
minority ownership interest to reflect waived dividends considered to be excess
dividends by the OTS. Based on this change in OTS policy, the minority
stockholders will in aggregate hold a lower ownership interest after the second
step. The downward valuation adjustment for this factor is warranted because the
Peer Group members are not subject to this change in policy.
The new issue market for thrift stocks remains strong with all the
recent issues being oversubscribed and trading above their IPO price. We also
considered the updated pricing information indicated for the Peer Group (which
is slightly higher relative to the Original Appraisal) and the continued
retention of earnings by Harbor Florida through the quarter ended September 30,
1997. We have also considered the increase in the trading price of Harbor
Florida's stock from $57.50 as of September 19, 1997 to $66.00 as of December
19, 1997, but have
10
<PAGE>
Table 4
Market Pricing Comparatives
Prices As of December 19, 1997
<TABLE>
<CAPTION>
Market Per Share Data
Capitalization ---------------
------------------ Core Book Pricing Ratios(3)
Price/ Market 12-Mth Value/ ------------------------------------------------
Financial Institution Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/CORE
- --------------------- -------- ----- ------ ----- --- --- --- ---- ------
($) ($Mi1) ($) ($) (x) (%) (%) (%) (x)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SAIF-Insured Thrifts ............ 23.76 179.01 1.08 15.02 19.71 160.69 19.62 164.70 20.54
Converted Last
3 Mths (no MHC) ................ 15.82 57.26 0.49 12.05 27.03 133.41 25.00 134.46 27.03
Comparable Group
- ----------------
Converted Last 3 Mths (no MHC)
- ------------------------------
EBI Equality Bancorp
of MO .......................... 14.75 36.67 0.53 9.95 27.83 148.24 14.70 148.24 27.83
FSFF First SecurityFED
Fin of IL ...................... 16.00 102.53 0.61 12.80 26.23 125.00 33.79 125.00 26.23
HCBC High Country
Bancorp of CO .................. 15.25 20.18 0.38 12.86 NM 118.58 23.08 118.58 NM
OTFC Oregon Trail
Fin. Corp of OR ................ 15.94 74.84 0.59 13.29 27.02 119.94 28.80 119.94 27.02
RVSB Riverview
Bancorp of WA .................. 15.50 94.98 0.45 9.56 NM 162.13 33.65 168.48 NM
SHSB SHS Bancorp,
Inc. of PA ..................... 17.50 14.35 0.41 13.83 NM 126.54 15.99 126.54 NM
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Characteristics(6)
Dividends(4) -------------------------------------------------------------
------------------------- Reported Core
Amount/ Payout Total Equity/ NPAs -------------- --------------
Financial Institution Share Yield Ratio(5) Assets Assets Assets ROA ROE ROA ROE
- --------------------- ----- ----- -------- ------ ------ ------ --- --- --- ---
($) (%) (%) ($Mil) (%) (%) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SAIF-Insured Thrifts ......... 0.37 1.58 30.69 1,161 13.14 0.76 0.89 7.87 0.86 7.60
Converted Last
3 Mths (no MHC) ............. 0.00 0.00 0.00 212 18.97 0.43 0.84 4.93 0.83 4.87
Comparable Group
- ----------------
Converted Last 3 Mths (no MHC)
- ------------------------------
EBI Equality Bancorp
of MO ....................... 0.00 0.00 0.00 249 9.92 0.29 0.53 5.33 0.53 5.33
FSFF First SecurityFED
Fin of IL ................... 0.00 0.00 0.00 303 27.03 NA 1.29 4.77 1.29 4.77
HCBC High Country
Bancorp of CO ............... 0.00 0.00 0.00 87 19.46 0.23 0.58 2.95 0.58 2.95
OTFC Oregon Trail
Fin. Corp of OR ............. 0.00 0.00 0.00 260 24.02 0.07 1.07 4.44 1.07 4.44
RVSB Riverview
Bancorp of WA ............... 0.00 0.00 0.00 282 20.76 0.14 1.22 9.14 1.17 8.75
SHSB SHS Bancorp,
Inc. of PA .................. 0.00 0.00 0.00 90 12.64 1.43 0.37 2.96 0.37 2.96
</TABLE>
- ------------
(1) Average of High/Low or Bid/Ask price per share.
(2) EPS (estimated core basis) is based on actual trailing twelve month data,
adjusted to omit non-operating items (including the SAIF assessment) on a
tax effected basis.
(3) P/E - Price to earnings; P/B - Price to book; P/A - Price to assets; P/TB -
Price to tangible book value; and P/CORE - Price to estimated core
earnings.
(4) Indicated twelve month dividend, based on last quarterly dividend declared.
(5) Indicated dividend as a percent of trailing twelve month estimated core
earnings.
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios
based on trailing twelve month earnings and average equity and assets
balances.
(7) Excludes from averages those companies the subject of actual or rumored
acquisition activities or unusual operating characteristics.
Source: Corporate reports, offering circulars, and RP Financial, LC.
calculations. The information provided in this report has been
obtained from sources we believe are reliable, but we cannot guarantee
the accuracy or completeness of such information.
11
<PAGE>
Table 5
Pricing Characteristics and After--Market Trends
Second Step Conversions
<TABLE>
<CAPTION>
Institutional Information Pre-Conversion Data
----------------------------------------
Financial Info. Asset Quality
-------------------- --------------
Conversion Equity/ NPAs/ Res.
Institution State Date Ticker Assets Assets Assets Cov.
- ----------- ----- ---- ------ ------ ------ ------ ----
(Mil) (%) (%)(2) (%)
------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Equality Bancorp. Inc. MO* 12/02/97 EBI $ 239 5.82% 0.29% 41%
Riverview Bancorp. Inc. WA 10/01/97 RVSB 230 11.24 0.14 245
Bayonne Bancshares NJ 08/22/97 FSNJ 577 8.33 0.81 53
Montgomery Fin. Corp. IN 07/01/97 MONT 94 9.83 0.91 20
Cumberland Mtn. Bancshrs KY* 04/01/97 P.Sheet 92 5.14 1.31 19
Kenwood Bancorp OH* 07/01 96 P.Sheet 48 6.88 0.00 NM
Commonwealth Bancorp PA* 06/17/96 CMSB 2,054 6.71 0.51 109
Westwood Financial Corp. NJ 06/07/96 WWFC 85 7.05 0.00 NM
Jacksonville Bancorp TX 04/01/96 JXVL 198 10.47 1.41 36
North Central Bancshares IA 03/21/96 FFFD 180 16.47 0.17 562
Fidelity Financial of Ohio OH* 03/04/96 FFOH 227 13.23 0.50 69
First Colorado Bancorp CO* 01/02/96 FFBA 1,400 12.71 0.31 20
Charter Financial IL* 12/29/95 CBSB 293 12.17 0.27 281
American Nat'l Bancorp MD* 11/03/95 ANBK 426 6.80 2.23 67
First Definance Fin. Corp. OH* 10/02/95 FDEF 476 15.27 0.24 135
Community Bank Shares IN* 04/10/95 CBIN 205 7.00 0.33 80
Fed One Bancorp WV* 01/19/95 FOBC 305 9.2 0.32 142
Home Financial Corp. FL* 10/25/94 HOFL 1,005 13.4 0.91 44
Jefferson Bancorp LA* 08/18/94 JEBC 257 6.3 0.9 25
Averages: $ 442 9.69% 0.61% 115%
Medians: $ 239 9.25% 0.33% 53%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Offering Information Insider Purchases
------------------------------ --------------------------------
Benefit Plans
-------------------
Gross % of Exp./ Recog. Mgmt.
Proc. Mid. Proc. ESOP Plans & Dirs
----- ---- ----- ---- ----- ------
($Mil) (%) (%) (%) (%) (%)(3)
------------------------------ -------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Equality Bancorp. Inc. $ 13.2 115% 3.9% 9.0% 5.0% 10.6%
Riverview Bancorp. Inc. 35.7 132 2.8 8.0 4.0 2.9
Bayonne Bancshares 48.7 132 3.8 8.0 4.0 10.0
Montgomery Fin. Corp. 11.9 132 4.5 8.0 4.0 4.6
Cumberland Mtn. Bancshrs 4.4 132 8.0 6.2 4.0 4.5
Kenwood Bancorp 1.6 102 22.2 8.0 4.0 6.4
Commonwealth Bancorp 98.7 110 1.9 8.0 4.0 0.1
Westwood Financial Corp. 3.9 99 9.9 0.0 0.0 2.5
Jacksonville Bancorp 16.2 106 4.4 8.0 4.0 2.0
North Central Bancshares 26 106 3.5 3.2 0.0 0.5
Fidelity Financial of Ohio 22.8 132 3.2 8.0 4.0 5.6
First Colorado Bancorp 134.1 105 1.9 10.0 2.0 2.0
Charter Financial 29.2 116 3.4 3.3 0.0 0.1
American Nat'l Bancorp 21.8 132 3.3 8.0 4.0 0.6
First Definance Fin. Corp. 64.8 132 2.3 8.0 4.0 0.9
Community Bank Shares 10.1 132 4.4 8.0 0.0 17.9
Fed One Bancorp 16.1 85 7.7 7.0 4.0 0.9
Home Financial Corp. 175.6 112 3.1 8.0 4.0 0.6
Jefferson Bancorp 16.1 107 3.9 7.0 3.0 1.5
Averages: $ 39.5 117% 5.2% 7.0% 3.1% 3.9%
Medians: $ 21.8 115% 3.8% 8.0% 4.0% 2.0%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Data
----------------------------------------------------------------------------------
Pricing Rations(4) Fin. Characteristics
-------------------------------------------- ------------------------------
P/TB P/E(7) P/Core P/A ROA TE/A ROE
---- ------ ------ --- --- ---- ---
(%) (x) (x) (%) (%) (%) (%)
-------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Equality Bancorp. Inc. 100.5% 18.8 18.8 10.0% 0.5% 9.9% 5.4%
Riverview Bancorp. Inc. 109.0 17.7 17.7 23.6 1.3 21.6 6.2
Bayonne Bancshares 100.9 NM NM 14.6 -0.5 14.4 -6.6
Montgomery Fin. Corp. 89.1 24.1 24.1 16.0 0.7 17.9 3.7
Cumberland Mtn. Bancshrs 81.2 13.8 13.8 7.1 0.5 8.8 5.9
Kenwood Bancorp 67.6 NM NM 6.0 0.1 8.8 1.7
Commonwealth Bancorp 109.3 12.1 12.5 8.4 0.7 6.7 10.4
Westwood Financial Corp. 80.0 10.1 10.1 7.3 0.7 9.2 7.9
Jacksonville Bancorp 77.7 14.9 14.9 12.6 0.8 16.2 5.2
North Central Bancshares 74.2 12.1 12.5 19.7 1.6 26.5 6.1
Fidelity Financial of Ohio 82.6 18.1 18.1 16.6 0.9 20.0 4.6
First Colorado Bancorp 87.0 12.7 13.4 13.2 1.0 15.2 6.9
Charter Financial 81.4 12.3 12.3 15.5 1.3 19.1 6.6
American Nat'l Bancorp 83.9 17.7 17.7 9.0 0.5 10.7 4.7
First Definance Fin. Corp. 85.6 18.2 18.2 20.6 1.1 24.1 4.7
Community Bank Shares 85.5 10.3 9.0 9.3 0.9 10.9 8.3
Fed One Bancorp 67.9 9.0 9.0 8.8 1.0 13.0 7.6
Home Financial Corp. 86.4 10.6 12.4 21.3 2.0 24.6 8.2
Jefferson Bancorp 71.7 10.2 10.2 7.9 0.8 11.1 7.0
Averages: 85.3% 14.3 14.4 13.0% 0.8% 15.2% 5.5%
Medians: 83.9% 12.3 12.5 12.6% 0.8% 14.4% 6.1%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Post-IPO Pricing Trends
--------------------------------------------------------------------------------
Closing Price:
--------------------------------------------------------------------
First After After
IPO Trading % First % First %
Price Day Chg. Week(5) Chg. Month(6) Chg.
----- --- ---- ------- ---- -------- -----
($) ($) (%) ($) (%) ($) (%)
------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Equality Bancorp. Inc. $10.00 $13.50 35.0% $15.38 53.8% $14.50 45.0%
Riverview Bancorp. Inc. 10.00 13.25 32.5 13.63 36.2 13.25 32.5
Bayonne Bancshares 10.00 11.75 17.5 11.88 18.8 12.38 23.8
Montgomery Fin. Corp. 10.00 11.13 11.2 11.25 12.5 12.13 21.2
Cumberland Mtn. Bancshrs 10.00 11.88 18.8 12.25 22.5 12.63 26.3
Kenwood Bancorp 10.00 NT NA NT NA NT NA
Commonwealth Bancorp 10.00 10.50 5.0 10.75 7.5 10.00 0.0
Westwood Financial Corp. 10.00 10.75 7.5 10.38 3.8 10.62 6.2
Jacksonville Bancorp 10.00 9.75 -2.5 9.63 -3.8 9.88 -1.2
North Central Bancshares 10.00 10.88 8.7 10.69 6.9 10.44 4.4
Fidelity Financial of Ohio 10.00 10.50 5.0 10.00 0.0 10.13 1.3
First Colorado Bancorp 10.00 11.44 14.4 11.63 16.3 12.00 20.0
Charter Financial 10.00 10.81 8.1 10.88 8.7 11.38 13.8
American Nat'l Bancorp 10.00 9.38 -6.3 9.75 -2.5 9.88 -1.2
First Definance Fin. Corp. 10.00 10.38 3.8 10.31 3.1 10.13 1.3
Community Bank Shares 10.00 12.00 20.0 12.75 27.5 12.25 22.5
Fed One Bancorp 10.00 11.00 10.0 11.00 10.0 11.62 16.2
Home Financial Corp. 10.00 9.59 -4.1 10.00 0.0 10.31 3.1
Jefferson Bancorp 10.00 13.00 30.0 14.25 42.5 14.25 42.5
Averages: $10.00 11.19% 11.9% $11.47 14.7% $11.54 15.4%
Medians: $10.00 10.88% 8.7% $10.88 8.7% $11.38 13.8%
</TABLE>
- ------------
Note: "NT" - Not Traded; "NA" - Not applicable, Not available.
(1) Non-OTS regulated thrifts.
(2) As reported in summary pages of prospectus.
(3) As reported in prospectus.
(4) Does not take into account the adoption of SOP 93-6.
(5) Latest price if offering less than one week old.
(6) Latest price if offering more than one week but less than one month old.
(7) Price to core earnings if converted after 9/30/96 due to impact of SAIF
assessment.
12
<PAGE>
discounted this factor somewhat given the different characteristics of the
minority shares versus the shares following the second step conversion. In
addition, the current trading price of the stock does not reflect the market's
perception regarding the change in OTS policy regarding dividend waivers and
accordingly cannot be relied upon as an indicator of value. Overall, taking into
account the foregoing factors and placing significant weight on the approximate
2-7 percent increase in the Peer Group pricing, we believe that an increase in
Harbor Florida's pro forma value is appropriate.
Valuation Approaches
In applying the accepted valuation methodology promulgated by the OTS,
i.e., the pro forma market value approach, we considered the three key pricing
ratios in valuing Harbor Florida's to-be-issued stock -- the price/earnings
("P/E"), price/book ("P/B"), and price/assets ("P/A") approaches -- all
performed on a pro forma basis including the effects of the conversion proceeds
from selling the MHC's interest to the public. In computing the pro forma impact
of the conversion and the related pricing ratios, the valuation parameters for
effective tax rate, reinvestment rate, offering expenses and stock benefit plan
assumptions have been derived from the assumptions set forth in the prospectus.
The pro forma assumptions are summarized in Exhibits 3 and 4.
Consistent with the Original Appraisal, this updated appraisal
continues to be based primarily on fundamental analysis techniques applied to
the Peer Group, including the P/E approach, the P/B approach and the P/A
approach. To capture the anticipated aftermarket trading of the Holding
Company's stock, the updated appraisal also incorporates a technical analysis of
recently completed stock conversions, including principally the P/B approach
which (as discussed in the Original Appraisal) is the most meaningful pricing
ratio as the pro forma P/E ratios reflect an assumed reinvestment rate and do
not yet reflect the actual use of proceeds.
Based on the foregoing, we have concluded that the pro forma market
value range of the Holding Company's stock is subject to an increase. Therefore,
as of December 19, 1997, the pro forma market value of the Holding Company's
conversion stock has been increased from $215,334,643 to $232,129,698 (please
note that these figures reflect rounding of the stock offering amount). This
updated midpoint value reflects a 7.8 percent increase in value relative to the
Original Appraisal. The increase takes into account the improved financial
condition of Harbor Florida, the updated pricing of the Peer Group companies,
the upward change in the valuation adjustment for stock market conditions, the
downward adjustment in the valuation adjustment for the effect of government
regulations and regulatory reform, and other factors that we considered
relevant.
Since the date of the Original Appraisal, a limited number of stock
options have been exercised such that the ownership interest held by the MHC has
been reduced slightly from 53.41 percent in the Original Appraisal to 53.37
percent currently. Pursuant to federal policy as established subsequent to
February 1, 1995, the minority ownership interest is required to be adjusted
pursuant to a two-step process to reflect both waived dividends and assets held
by the MHC. While the MHC was formed prior to this date (and thus dividends
waived by the MHC would normally be exempt from this minority ownership interest
adjustment), the OTS has determined that portion of the dividends waived by the
MHC are considered to be excess and should result in a dilution in the minority
stockholders' ownership interest. Taking this adjustment into account will
increase the resulting MHC ownership interest to 54.28 percent on a pro forma
basis. Thus, our calculations for the exchange ratio and the size of the
offering were based upon a pro forma ownership interest of 45.72 percent and
54.28 percent, respectively, for the Public Shares and the offering shares.
The Bank has adopted Statement of Position ("SOP" 93-6) which will
cause earnings per share computations to be based on shares issued and
outstanding excluding shares owned by an ESOP where there is not a commitment to
release such shares.
13
<PAGE>
For the purpose of preparing the pro forma pricing tables and exhibits, we have
reflected all shares issued in the offering including shares purchased by the
ESOP as outstanding to capture the full dilutive impact of such stock to the
Bank's shareholders. However, we have considered the impact of the Bank's
adoption of SOP 93-6 in the determination of pro forma value.
1. P/TB Approach. Based on the updated midpoint value of $232.1
million, the Holding Company's pro forma P/TB ratio at the midpoint equaled
114.20 percent (compared to 113.02 percent in the Original Appraisal). The
resulting discount relative to the Peer Group's average P/TB ratio equaled 29.8
percent. Relative to the average of recent conversions, the Holding Company's
pro forma P/TB ratio was at a discount of 15.1 percent.
2. P/E Approach. The application of the P/E valuation method requires
calculating the Bank's pro forma market value by applying a valuation P/E
multiple times the pro forma earnings base. Ideally, the pro forma earnings base
is composed principally of the Bank's recurring earnings base, that is, earnings
adjusted to exclude any one-time non-operating items, plus the estimated
after-tax earnings benefit of the reinvestment of net conversion proceeds. As
shown below, the Bank recorded a limited number of non-operating items during
the twelve month period which were all deemed non-operating and not included in
the core earnings base. The Bank's core earnings were calculated to equal the
following (Note: the adjustments applied to the Peer Group's earnings in the
calculation of core earnings are shown in Exhibit 2, including the SAIF
assessment):
Amount
------
($000)
Net Income $13,327
Less: Non-Operating Income (333)
Tax-Effect Adjustments @40.7% 135
-------
Adjusted (Core) Income After Tax $13,129
Based on Harbor Florida's core earnings, and incorporating the impact
of the pro forma assumptions discussed previously, the Holding Company's core
P/E multiple at the midpoint value of $232.1 million equaled 14.73 times (versus
the 13.68 times multiple indicated by the midpoint valuation in the Original
Appraisal). Comparatively, the Peer Group posted an average core P/E multiple of
23.18 times, which indicated a discount of 36.4 percent in the Holding Company's
core P/E multiple (versus a discount of 40.2 percent as indicated in the
Original Appraisal). The implied conversion pricing ratios relative to the Peer
Group's pricing ratios are indicated in Table 6, and the updated pro forma
calculations are detailed in Exhibits 3 and 4.
3. P/A Approach. P/A ratios are generally not as a reliable indicator
of market value, as investors do not place significant weight on total assets as
a determinant of market value. Investors place significantly greater weight on
book value and earnings -- which have received greater weight in our valuation
analysis. At the $232.1 million updated midpoint value, Harbor Florida exhibited
a pro forma P/A ratio of 18.71 percent (compared to 17.71 percent in the
Original Appraisal). In comparison to the Peer Group's average P/A ratio of
23.21 percent, Harbor Florida's P/A ratio indicated a discount of 19.4 percent
(versus a discount of 23.4 percent at the midpoint valuation in the Original
Appraisal).
Summary
We have concluded that Harbor Florida's estimated pro forma market
value should be increased since the date of the Original Appraisal based on the
growth of the Bank's capital and earnings and updated market prices.
14
<PAGE>
Accordingly, it is our opinion, as of December 19, 1997 the aggregate pro forma
market value of the Holding Company, inclusive of the sale of the MHC's
ownership interest in the Subscription and Community Offering was $232,129,698
at the midpoint. Based on this valuation and the approximate 54.28 percent
ownership interest being sold in the Subscription and Community Offerings, the
midpoint value of the Holding Company's stock offering was $126,000,000 (i.e.,
0.5428 x $232,129,698), equal to 12,600,000 shares at a per share value of
$10.00. Pursuant to OTS conversion guidelines, the 15 percent offering range
includes a minimum offering value of $107,100,000 and a maximum value of
$144,900,000. Based on the $10.00 per share offering price, this range equates
to an offering of 10,710,000 shares at the minimum to 14,490,000 shares at the
maximum. The Holding Company's offering also includes a provision for a
superrange, which if exercised, would result in an offering size of
$166,635,000, equal to 16,663,500 shares at the $10.00 per share offering price.
The comparative pro forma valuation ratios relative to the Peer Group are shown
in Tabley6, and the key valuation assumptions are detailed in Exhibity3. The pro
forma calculations for the range are detailed in Exhibit 4.
Establishment of Exchange Ratio
OTS regulations provide that in a conversion of a mutual holding
company, the minority stockholders are entitled to exchange their shares of the
Bank's common stock for common stock of the Holding Company. The Board of
Directors of the Mutual Holding Company has independently established a formula
to determine the exchange ratio. The formula takes into account the dividends
considered to be excess by the OTS, resulting in a pro forma ownership for the
Public Shares of 45.72 percent. Pursuant to the formula, the Exchange Ratio will
be determined at the end of the Holding Company's stock offering based on the
total number of shares sold in the Subscription and Community offerings. Based
upon this formula, and the valuation conclusion and offering range concluded
above, the Exchange Ratio would be 3.8899 shares, 4.5764 shares, 5.2629 shares
and 6.0523 shares of Harbor Florida Bancorp stock issued for each Public Share,
at the minimum, midpoint, maximum and supermaximum of the offering,
respectively. The Exchange Ratio formula and share exchange procedures were
determined independently by the Board of Directors. RP Financial expresses no
opinion on the proposed exchange of Holding Company shares for the Public Shares
or on the proposed Exchange Ratio.
Respectfully submitted,
RP FINANCIAL, LC.
William E. Pommerening
Chief Executive Officer
James J. Oren
Vice President
15
<PAGE>
Table 6
Public Market Pricing
Harbor Florida Bancorp and the Comparables
As of December 19, 1997
<TABLE>
<CAPTION>
Market Per Share Data
Capitalization -------------- Dividends(4)
---------------- Core Book Pricing Ratios(3) ------------------------
Price/ Market 12-Mth Value/ ------------------------------------ Amount/ Payout
Share(1) Value EPS(2) Share P/E P/B P/A P/TB P/CORE Share Yield Ratio(5)
-------- ------ ------ ------ ----- ------ ----- ------ ------ ------- ----- --------
($) ($Mil) ($) ($) (x) (%) (%) (%) (x) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Harbor Florida Bancorp of FL
- ----------------------------
Superrange 10.00 306.99 0.55 7.88 18.26 126.97 24.06 128.59 18.48 0.23 2.31 42.24
Range Maximum 10.00 266.95 0.61 8.35 16.32 119.81 21.24 121.47 16.52 0.27 2.66 43.42
Range Midpoint 10.00 232.13 0.69 8.89 14.55 112.52 18.71 114.20 14.73 0.31 3.06 44.51
Range Minimum 10.00 197.31 0.79 9.62 12.68 103.95 16.12 105.65 12.85 0.36 3.60 45.65
SAIF-Insured Thrifts(7)
- -----------------------
Averages 23.76 179.01 1.08 15.02 19.71 160.69 19.62 164.70 20.54 0.37 1.58 30.69
Medians -- -- -- -- 19.34 152.52 18.22 155.86 20.36 -- -- --
All Non-MHC State of FL(7)
- --------------------------
Averages 23.59 462.45 0.85 11.42 19.16 195.87 20.79 223.77 25.08 0.22 0.78 19.61
Medians -- -- -- -- 20.01 218.63 12.62 277.45 25.19 -- -- --
Comparable Group Averages
- -------------------------
Averages 26.14 256.48 1.14 17.40 22.94 154.27 23.21 162.77 23.18 0.49 1.77 41.06
Medians -- -- -- -- 23.23 153.59 21.42 159.19 22.04 -- -- --
State of FL
- -----------
BANC BankAtlantic Bancorp of FL 16.12 359.09 0.64 7.03 13.21 229.30 12.62 277.45 25.19 0.13 0.81 20.31
BKUNA BankUnited SA of FL 15.37 146.52 0.44 7.03 NM 218.63 6.83 277.94 NM 0.00 0.00 0.00
FFLC FFLC Bancorp of Leesburg FL 22.00 84.37 0.89 13.73 23.40 160.23 22.01 160.23 24.72 0.29 1.32 32.58
FFPB First Palm Beach Bancorp of FL 39.25 198.13 1.55 22.39 21.22 175.30 10.96 179.47 25.32 0.70 1.78 45.16
OCN Ocwen Financial Corp. of FL 25.19 1524.12 0.75 6.91 18.80 NM 51.56 NM NM 0.00 0.00 0.00
Comparable Group
- ----------------
DIME Dime Community Bancorp of NY 23.50 269.69 1.07 14.81 21.36 158.68 21.42 184.17 21.96 0.24 1.02 22.43
FFLC FFLC Bancorp of Leesburg FL 22.00 84.37 0.89 13.73 23.40 160.23 22.01 160.23 24.72 0.29 1.32 32.58
FFBA First Colorado Bancorp of Co 23.62 389.38 1.10 12.00 21.28 196.83 25.74 199.32 21.47 0.52 2.20 47.27
FWWB First Savings Bancorp of WA 26.87 275.34 0.94 14.92 27.14 180.09 25.63 194.99 28.59 0.28 1.04 29.79
FFIC Flushing Fin. Corp. of NY 23.00 183.61 1.04 17.08 23.23 134.66 19.12 140.24 22.12 0.24 1.04 23.08
GAF GA Financial Corp. of PA 18.50 147.50 0.91 14.72 19.68 125.68 18.38 126.89 20.33 0.48 2.59 52.75
HFNC HFNC Financial Corp. of NC 14.56 250.32 0.53 9.48 23.48 153.59 28.88 153.59 27.47 0.28 1.92 52.83
ISBF ISB Financial Corp. of LA 29.00 200.13 0.96 16.70 29.90 173.65 20.93 202.94 NM 0.50 1.72 52.08
JSB JSB Financial, Inc. of NY 49.19 486.88 2.64 35.91 16.56 136.98 31.80 136.98 18.63 1.40 2.85 53.03
KFBI Klamath First Bancorp of OR 20.87 209.10 0.85 14.42 24.55 144.73 21.34 159.19 24.55 0.32 1.53 37.65
OCFC Ocean Fin. Corp. of NJ 36.44 297.93 1.66 27.63 21.69 131.89 20.01 131.89 21.95 0.80 2.20 48.19
</TABLE>
<PAGE>
Table 6 (Continued)
<TABLE>
<CAPTION>
Financial Characteristics(6)
----------------------------------------------
Reported Core MEMO: MEMO:
Total Equity/ NPAs/ ---------- ---------- Exchange Conversion
Assets Assets Assets ROA ROE ROA ROE Ratio Proceeds
------ ------- ------ ---- ---- ---- ---- -------- ----------
($Mil) (%) (%) (%) (%) (%) (%) ($000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Harbor Florida Bancorp of FL
- ----------------------------
Superrange 1,276 18.95 0.38 1.32 6.95 1.30 6.87 6.0523 $166.64
Range Maximum 1,257 17.72 0.39 1.30 7.34 1.29 7.25 5.2629 144.90
Range Midpoint 1,241 16.63 0.39 1.29 7.73 1.27 7.64 4.5764 126.00
Range Minimum 1,224 15.51 0.40 1.27 8.20 1.25 8.09 3.8899 107.10
SAIF-Insured Thrifts(7)
- -----------------------
Averages 1,161 13.14 0.76 0.89 7.87 0.86 7.60
Medians -- -- -- -- -- -- --
All Non-MHC State of FL(7)
- --------------------------
Averages 2,028 8.55 1.62 1.20 14.66 0.80 9.61
Medians -- -- -- -- -- -- --
Comparable Group Averages
- -------------------------
Averages 1,086 15.21 0.43 1.13 6.64 1.08 6.39
Medians -- -- -- -- -- -- --
State of FL
- -----------
BANC BankAtlantic Bancorp of FL 2,845 5.50 0.92 1.04 18.10 0.54 9.50
BKUNA BankUnited SA of FL 2,145 3.12 0.62 0.31 7.68 0.28 6.90
FFLC FFLC Bancorp of Leesburg FL 383 13.73 0.18 1.00 6.81 0.94 6.44
FFPB First Palm Beach Bancorp of FL 1,808 6.25 0.57 0.58 8.65 0.49 7.25
OCN Ocwen Financial Corp. of FL 2,956 14.14 5.79 3.10 32.06 1.73 17.94
Comparable Group
- ----------------
DIME Dime Community Bancorp of NY 1,385 13.50 0.60 1.09 6.91 1.06 6.72
FFLC FFLC Bancorp of Leesburg FL 383 13.73 0.18 1.00 6.81 0.94 6.44
FFBA First Colorado Bancorp of Co 1,513 13.08 0.20 1.21 8.92 1.20 8.84
FWWB First Savings Bancorp of WA 1,074 14.23 0.27 1.06 6.79 1.01 6.44
FFIC Flushing Fin. Corp. of NY 960 14.20 0.39 0.95 5.92 0.99 6.22
GAF GA Financial Corp. of PA 802 14.63 0.24 1.09 6.28 1.05 6.08
HFNC HFNC Financial Corp. of NC 867 18.80 0.92 1.23 5.43 1.05 4.64
ISBF ISB Financial Corp. of LA 956 12.05 0.27 0.75 5.87 0.74 5.81
JSB JSB Financial, Inc. of NY 1,531 23.22 1.07 1.93 8.61 1.71 7.65
KFBI Klamath First Bancorp of OR 980 14.74 0.03 1.14 5.81 1.14 5.81
OCFC Ocean Fin. Corp. of NJ 1,489 15.17 0.52 1.01 5.69 1.00 5.62
</TABLE>
(1) Average of high/low or bid/ask price per share.
(2) EPS (core basis) is based on actual trailing twelve month data, adjusted to
omit the impact of non-operating items (including the SAIF assessment) on a
tax effected basis, and is shown on a pro forma basis where appropriate.
(3) P/E = Price to Earnings; P/B = Price to Book; P/A = Price to Assets; P/TB =
Price to Tangible Book; and P/CORE = Price to Core Earnings.
(4) Indicated twelve month dividend, based on last quarterly dividend declared.
(5) Indicated twelve month dividend as a percent of trailing twelve month
estimated core earnings.
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios
based on trailing twelve month common earnings and average common equity
and total assets balances.
(7) Excludes from averages and medians those companies the subject of actual or
rumored acquisition activities or unusual operating characteristics.
Source: Corporate reports, offering circulars, and RP Financial, Inc.
calculations. The information provided in this report has been obtained
from sources we believe are reliable, but we cannot guarantee the
accuracy or completeness of such information.
Copyright (c) 1997 by RP Financial, LC.
