UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
----------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 000-22817
HARBOR FLORIDA BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0813766
-------- ----------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
100 S. SECOND STREET
FORT PIERCE, FL 34950
(Address of principal executive offices)
(ZIP code)
Registrant's telephone number, including area code (561) 461-2414
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.10)
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
1
<PAGE>
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the average bid and asked price of
the common stock as of December 10, 1999 ($12.6875) was $344,764,124.
The number of shares of common stock outstanding on December 10, 1999
was 27,173,527.
Documents incorporated by reference:
- ------------------------------------
1. Annual Report to Stockholders for the fiscal year ended
September 30, 1999 (Parts II and III).
2. Proxy Statement for the 2000 Annual Meeting of
Stockholders (Part III).
2
<PAGE>
TABLE OF CONTENTS
Item Page
No. No.
Part I
1 Business................................................... 4
2 Properties................................................. 23
3 Legal Proceedings.......................................... 26
4 Submission of Matters to a Vote of Security-Holders........ 26
Part II
5 Market for Registrant's Common Equity and
Related Stockholder Matters................................ 26
6 Selected Financial Data.................................... 27
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 27
7A Quantitative and Qualitative Disclosures about Market Risk. 27
8 Financial Statements and Supplementary Data................ 27
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 27
Part III
10 Directors and Executive Officers of the Registrant......... 27
11 Executive Compensation..................................... 27
12 Security Ownership of Certain Beneficial Owners
and Management............................................. 28
13 Certain Relations and Related Transactions................. 28
14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................ 28
3
<PAGE>
PART I
Item 1. Business
General
Harbor Florida Bancshares, Inc. (the "Company" or "Bancshares") is the
holding company for Harbor Federal Savings Bank (the "Bank"). The Company owns
100% of the Bank's common stock. Currently, it engages in no other significant
activities beyond its ownership of the Bank's common stock. Consequently, its
net income is derived from the Bank. The Bank provides a wide range of banking
services and is engaged in the business of attracting deposits primarily from
the communities it serves and using these and other funds to originate primarily
one-to-four family first mortgage loans for retention in its portfolio.
Prior to March 18, 1998, the Company's predecessor entity, Harbor
Florida Bancorp, Inc. ("Bancorp"), was approximately 53.37% owned by Harbor
Financial M.H.C. ("Mutual Holding Company") and 46.63% by public shareholders.
On March 18, 1998, pursuant to a plan of conversion and reorganization, and
after a series of transactions: (1) a new entity, Bancshares, became the
surviving corporate entity, (2) Bancshares sold the ownership interest in
Bancorp previously held by the Mutual Holding Company to the public in a
subscription offering (the "Offering") (16,586,752 common shares at $10.00
resulting in net cash proceeds after costs and funding the ESOP of approximately
$150 million), (3) previous public shareholders of Bancorp had their shares
exchanged into 14,112,400 common shares of Bancshares (exchange ratio of 6.0094
to 1) (the "Exchange"), and (4) the Mutual Holding Company ceased to exist. The
total number of shares of common stock outstanding following the Offering and
Exchange was 30,699,152. The reorganization was accounted for in a manner
similar to a pooling of interests and did not result in any significant
accounting adjustments. As a result of the reorganization, the consolidated
financial statements for prior periods have been restated to reflect the changes
in the par value of common stock from $.01 to $.10 per share and in the number
of authorized shares of common stock from 13,000,000 to 70,000,000.
Market Area
The Company serves communities in six growing and diverse Florida
counties. Its headquarters are in Fort Pierce, Florida, located on the eastern
coast of Florida between Stuart and Daytona Beach. In addition to its
headquarters, it has sixteen branch offices in St. Lucie, Indian River and
Martin counties, located on Florida's "Treasure Coast." This area is
characterized by both a large retirement and vacation home population and a
significant agricultural economy, primarily citrus crops. The Company has five
branch offices located in Brevard County, which encompasses the "Space Coast" of
the state. Brevard County has a greater industrial base fueled primarily by
companies related to NASA and the John F. Kennedy Space Center. Prominent
electronics concerns such as Harris Corporation are also major employers in this
area. The Company also has one branch office in Okeechobee County, a rural,
agricultural area, and six branch offices in Volusia County, where tourism and a
large retirement population predominate.
Lending Activities
General. The Company's principal lending activity has historically
been, and will continue to be for the foreseeable future, the origination of
one-to-four family residential mortgage loans. Although the Company sells some
conforming loans, primarily to the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), and has, on
rare occasions, purchased whole loans and loan participations, it focuses
primarily on the origination of loans and retains them in its portfolio for
investment. See " -- Lending Activities -- One to Four Family Permanent
Residential Mortgage Loans" below. The Company also originates a substantial
amount of one-to-four family residential construction and consumer loans, and
consumer installment, commercial real estate and commercial business loans.
Substantially all of the Company's mortgage loans are secured by property in its
market area and most of its nonmortgage loans are made to borrowers in its
market area.
4
<PAGE>
The Company offers both fixed-rate and adjustable rate mortgage ("ARM")
loans. The Company has sought to increase its origination of ARM loans to reduce
its interest rate risk. However, the Company's ability to originate ARM loans
has been limited by borrower preference for fixed-rate loans in many instances,
particularly in low interest rate environments.
Loan and Mortgage - Backed Securities Portfolio Composition. The
following table sets forth a summary of the composition of the Company's loan
and mortgage-backed securities portfolio by type of loan.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- ----
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
(Dollars in thousands)
Mortgage Loans
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction 1 - 4 Family $ 91,922 7.94% $ 66,671 6.62% $ 47,800 5.42% $ 43,994 5.46% $ 40,634 6.07%
Permanent 1 - 4 Family... 788,408 68.12 707,078 70.26 629,906 71.46 584,297 72.49 487,480 72.84
Multifamily.............. 15,141 1.31 11,074 1.10 15,326 1.74 17,804 2.21 14,916 2.23
Nonresidential........... 99,824 8.63 84,254 8.37 54,983 6.24 41,970 5.21 31,980 4.78
Land..................... 41,882 3.62 27,562 2.75 33,182 3.76 29,034 3.60 20,460 3.06
--------- ----- ------- ------ ------- ------ ------- ------ -------- ----
Total Mortgage Loans. 1,037,177 89.62 896,639 89.10 781,197 88.62 717,099 88.97 595,470 88.98
--------- ----- ------- ------ ------- ------ ------- ------ ------- ------
Other Loans
- -----------
Commercial Nonmortgage... 21,192 1.83 15,074 1.50 11,287 1.28 8,199 1.02 8,468 1.27
Consumer:
Home Improvement..... 17,205 1.49 19,016 1.89 20,614 2.34 20,679 2.56 19,198 2.87
Manufactured
Housing.......... 16,190 1.40 16,418 1.63 16,399 1.86 15,784 1.96 15,045 2.25
Other Consumer (1)... 65,489 5.66 59,223 5.88 51,988 5.90 44,265 5.49 31,049 4.63
--------- ------ --------- ---- -------- ---- ------ ---- -------- ----
Total Other Loans.... 120,076 10.38 109,731 10.90 100,288 11.38 88,927 11.03 73,760 11.02
---------- ------ --------- ------ --------- ------ -------- ------ -------- ------
Total Loans Receivable... 1,157,253 100.00% 1,006,370 100.00% 881,485 100.00% 806,026 100.00% 669,230 100.00%
--------- ====== --------- ====== --------- ====== -------- ====== -------- ======
Less:
Loans in process......... 70,722 46,152 32,078 26,788 24,321
Deferred loan fees and
discounts............ 4,244 3,700 3,446 3,203 3,519
Allowance for loan losses 11,952 11,818 11,691 11,016 10,083
---------- ---------- --------- -------- --------
Subtotal............. 86,918 61,670 47,215 41,007 37,923
------ ---------- --------- -------- --------
Total Loans Receivable,
Net................. 1,070,335 944,700 834,270 765,019 631,307
Loans Held for Sale...... 1,747 714 141 4,870 1,009
Mortgage-Backed
Securities................ 196,971 201,049 176,854 153,293 164,759
---------- ---------- --------- -------- --------
Total.................... $1,269,053 $1,146,463 $1,011,265 $923,182 $797,075
========== ========== ========== ======== ========
</TABLE>
(1) Includes home equity and other second mortgage loans.
5
<PAGE>
The following table shows the maturity or period to repricing of the
Company's loan and mortgage-backed securities portfolios at September 30, 1999.
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 $278.0, $246.4 and $163.0 million for
fiscal years 1999, 1998 and 1997, respectively. Loans having no stated maturity
and no schedule of repayments (including delinquent loans), and demand loans are
reported as due within one year.
<TABLE>
<CAPTION>
One Three Five
Within through through through Ten through Beyond twenty
one year three years five years ten years twenty years years Total
-------- ----------- ---------- --------- ------------ ----- -----
(In thousands)
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C>
Permanent 1 - 4 family.. $129,109 $54,473 $45,516 $60,499 $238,820 $293,389 $821,806
Other................... 48,216 14,372 34,678 15,922 29,685 1,180 144,053
Other loans:
Consumer ............... 29,402 12,545 24,606 26,184 5,949 55 98,741
Commercial ............. 13,725 934 3,208 1,518 25 1,782 21,192
Nonperforming loans (1)... 2,486 --- --- --- --- --- 2,486
Mortgage-backed securities 13,316 7,940 20,477 42,918 112,297 23 196,971
------ ----- ------ ------ ------- ------ -------
Sub-total............. $236,254 $90,264 $128,485 $147,041 $386,776 $296,429 $1,285,249
======== ======= ======== ======== ======== ========
Deferred loan fees and
discounts............. (4,244)
Allowance for loan losses. (11,952)
Total (2)(3).............. $1,269,053
==========
</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
$1,747,000 at September 30, 1999.
--------------
The following table sets forth the amount of fixed-rate and adjustable-rate
loans at September 30, 1999 due after September 30, 2000.
<TABLE>
<CAPTION>
Adjustable
Fixed Rate Rate Total
---------- ---- -----
(In thousands)
Mortgage loans:
<S> <C> <C> <C>
Permanent 1 - 4 family......................... $589,108 $103,589 $692,697
Other.......................................... 49,308 46,529 95,837
Other loans:
Consumer ...................................... 69,339 --- 69,339
Commercial .................................... 7,467 --- 7,467
----- ----- -----
Total loans...................................... 715,222 150,118 865,340
Mortgage-backed securities....................... 183,655 --- 183,655
------- ------ -------
Total............................................ $898,877 $150,118 $1,048,995
======== ======== ==========
</TABLE>
6
<PAGE>
One-to-Four Family Permanent Residential Mortgage Loans. The Company's
primary lending activities focus on the origination of one-to-four family
residential mortgage loans. The Company generally does not originate one-to-four
family residential loans on properties outside of its market area. At September
30, 1999, $788.4 million or 68.1% of the Company's total loan portfolio and
53.9% of total assets consisted of one-to-four family loans and over 95% of such
loans were collateralized by properties located in the Company's market area.
The Company's fixed rate loans generally are originated and underwritten
according to standards that permit sales in the secondary market. However, the
decision to sell depends on a number of factors including the yield and the term
of the loan, market conditions, and the Company's current portfolio position.
The Company sells a small portion of newly originated 30 year fixed rate
mortgage loans. In addition, the Company sells loans under the single family
Mortgage Revenue Bond Programs through local County Housing Finance Authorities.
The servicing on these loans is also released.
The Company currently offers one-to-four family residential mortgage
loans with fixed, adjustable or a combination of fixed/adjustable interest
rates. Originations of fixed rate mortgage loans versus ARM loans are monitored
on an ongoing basis and are affected significantly by the level of market
interest rates, customer preference, the Company's interest rate gap position,
and loan products offered by the Company's competitors. In a low interest rate
environment, borrowers typically prefer fixed rate loans to ARM loans, and even
if management's strategy is to emphasize ARM loans, market conditions may be
such that there is greater demand for fixed rate mortgage loans.
The Company generates residential mortgage loan activity through local
advertising, its existing customers and referrals from local real estate brokers
and home builders. All loans are originated by Company loan officers, none of
whom have underwriting authority. Independent loan brokers are not used.
Residential loans are authorized and approved under central authority by
experienced underwriters. Underwriters have individual authority to approve
loans up to the maximum amount of $250,000. Residential mortgage loans in excess
of this amount are approved by management individually up to $750,000 or by
committee if above $750,000. The Company also has direct endorsement authority
from the Federal Housing Authority ("FHA") to allow for internal approval of FHA
insured loans. FHA loans are approved under central authority by an underwriter
with a "Direct Endorsement" designation from the FHA. The Company's underwriting
standards are intended to ensure that borrowers are sufficiently credit worthy,
and all of the Company's lending is subject to written underwriting policies and
guidelines approved by the Company's Board of Directors. Detailed loan
applications are designed to determine the borrower's ability to repay the loan
and certain information solicited in these applications is verified through the
use of credit reports, financial statements and other confirmations. The Company
obtains an appraisal of substantially all of the proposed security property in
connection with residential mortgage loans. Additionally, title insurance is
required for all mortgage loans except home equity loans of $50,000 or less.
The types, amounts, terms of and security for conventional loans (those
not insured or guaranteed by the U.S. government or agencies thereof, or state
housing agencies) originated by the Company are significantly prescribed by
federal regulation. The Office of Thrift Supervision ("OTS") regulations limit
the amount which the Company can lend up to specified percentages of the value
of the real property securing the loan, as determined by an appraisal at the
time the loan is originated (referred to as "loan-to-value ratios"). The Company
makes one-to-four family home loans and other residential real estate loans with
loan-to-value ratios generally of up to 80% of the appraised value of the
security property. In certain circumstances loan-to-value ratios exceed 80%, in
which case private mortgage insurance is generally required. A substantial part
of the Company's loan originations are made to borrowers to finance second homes
for vacation use or for use as a rental property. Such loans may be considered
to have a higher credit risk than loans to finance a primary residence.
One-to-Four Family Residential Construction Loans. A part of the
Company's loan originations are to finance the construction of one-to-four
family homes in the Company's market area. At September 30, 1999 the Company had
$91.9 million in such loans, representing 7.9% of total loans. It is the
Company's policy to disburse loan proceeds as construction progresses and as
inspections warrant.
7
<PAGE>
A portion of these loans is made directly to the individual who will
ultimately own and occupy the home. Of these, the vast majority is structured at
origination to guarantee the permanent financing to the Company as well. In
recent years the origination of these construction loans to individuals is
second in volume only to the origination of traditional loans to finance the
purchase or refinance of an existing home. However, the significance of this
type of lending to the Company is not evident from the amount of these loans in
its portfolio at any given time because these construction loans to individuals
usually "roll" into permanent financing.
Approximately one-half of the Company's one-to-four family construction
loans are to builders. In most instances these loans are also structured to
guarantee permanent financing by the Company.
Consumer Loans. The Company originates consumer loans as an essential
element in its retail-oriented strategy. Secured consumer loans include
automobile, manufactured housing, boat and truck loans, home equity and home
improvement loans as well as loans secured by the borrower's deposit accounts
with the Company. The loans for manufactured housing are generally originated
within quality, retirement lifestyle communities spread throughout the six
county market area that feature amenities such as full service clubhouse
facilities, swimming pools, and, in a number of cases, golf courses. These loans
are subject to the normal underwriting standards of the Company. Loans are made
on either a fixed-rate or adjustable-rate basis, with terms generally up to 20
years. A limited amount of unsecured consumer loans are also originated. At
September 30, 1999, consumer-oriented loans accounted for $98.9 million or 8.6%
of the Company's total loan portfolio.
Non-Residential and Land Mortgage Loans. In the late 1980's the Company
curtailed its lending in non-residential mortgages with the exception of loans
to finance the sale of the Company's real estate acquired through foreclosure.
In recent years, the Company re-entered this market and made a total of $34.7,
$38.3 million and $18.3 million of non-residential mortgage loans in 1999, 1998
and 1997, respectively. At September 30, 1999, nonresidential loans constituted
8.6% of the Company's total loan portfolio. Origination of these loans plays a
subordinate role to the origination of residential mortgage and consumer-related
loans. Non-residential mortgage loans are offered on properties within the
Company's primary market area using both fixed or adjustable rate programs.
Loans secured by non-residential real estate generally carry larger
balances and involve a greater degree of risk than one-to-four family
residential mortgage loans. This increased risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income-producing
properties, and the increased difficulty of evaluating and monitoring these
loans. Furthermore, the repayment of loans secured by non-residential property
is typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. See "Business -- Delinquent, Nonperforming and
Classified Assets."
The Company also originates developed building lot loans ("lot loans")
secured by individual improved lots for future residential construction. Lot
loans are offered with either a fixed or adjustable interest rate and with a
maximum term of up to 15 years. At September 30, 1999 these loans accounted for
$16.7 million or 1.4% of the Company's total loan portfolio.
Other Loans. The balance of the Company's lending consists of
multi-family mortgage and commercial non-mortgage loans. At September 30, 1999
these loans represented $15.1 million or 1.3% and $21.2 million or 1.8%,
respectively, of the Company's total loan portfolio. The multi-family mortgage
loans are secured primarily by apartment complexes. These loans are subject to
the same lending limits as apply to the Company's commercial real estate
lending. The commercial non-mortgage loans represent primarily equipment and
other business loans to professionals such as physicians and attorneys. These
loans are an integral part of the Company's strategy of seeking synergy between
its various deposit and loan products and as a service to existing customers.
8
<PAGE>
Origination and Sale of Loans
From time to time the Company has sold mortgage loans, primarily to the
FNMA and the FHLMC. Historically, the Company has not purchased significant
amounts of loans, particularly in light of its past policy to control asset
growth.
The Company sells a small portion of newly originated 30-year fixed rate
mortgage loans. In addition, the Company sells loans under the single family
Mortgage Revenue Bond Programs through local County Housing Finance Authorities.
The servicing on these loans is also released. The purpose of selling a portion
of fixed rate loans from current production is to reduce interest rate risk by
limiting the growth of longer term fixed rate loans in the portfolio and to
generate service fee income over time.
The following table shows total loan origination activity including
mortgage-backed securities, during the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997
---- ---- ----
(In thousands)
Mortgage loans (gross):
<S> <C> <C> <C>
At beginning of year (1).............. $897,363 $781,341 $722,435
Mortgage loans originated:
Construction 1-4 Family............. 112,508 83,429 63,237
Permanent 1-4 Family................ 162,866 173,758 84,853
Multi-family........................ 5,075 605 2,526
Nonresidential...................... 34,726 38,260 18,302
Land................................ 22,755 11,313 12,264
------ ------ ------
Total mortgage loans originated (2)... 337,930 307,365 181,182
Mortgage loans sold................... (8,432) (9,125) (8,583)
Principal repayments.................. (186,632) (179,354) (111,255)
Mortgage loans transferred to real
estate owned....................... (1,275) (2,864) (2,438)
------ -------- --------
At end of year........................ $1,038,954 $897,363 $781,341
========== ======== ========
Other loans (gross):
At beginning of year.................. $ 109,731 $ 100,288 $ 88,927
Other loans originated................ 101,949 77,044 63,406
Principal repayments.................. (91,604) (67,601) (52,045)
-------- --------- -------
At end of year........................ $120,076 $109,731 $100,288
======== ======== ========
Mortgage-backed securities (gross):
At beginning of year.................. $201,049 $176,854 $153,293
Mortgage-backed securities purchased.. 70,074 100,222 61,769
Principal repayments.................. (74,152) (76,027) (38,208)
------- ------- -------
At end of year........................ $196,971 $201,049 $176,854
======== ======== ========
</TABLE>
(1) Includes loans held for sale.
(2) Loans originated represent loans closed, however all loans may not be fully
disbursed at time of closing.
9
<PAGE>
Mortgage-backed Securities
A substantial part of the Company's business involves investments in
mortgage-backed securities issued or guaranteed by an agency of the United
States government. Historically, the Company's mortgage-backed securities
portfolio has consisted primarily of pass-through mortgage participation
certificates issued by FHLMC and FNMA. These pass-through certificates represent
a participation interest in a pool of single-family mortgages, the principal and
interest payments on which are passed from the loans' originators, through the
FHLMC and FNMA that pools and packages the participation interests into the form
of securities, to investors such as the Company. The FHLMC and FNMA guarantee
the payment of principal and interest. The underlying pool of mortgages can
consist of either fixed-rate or adjustable-rate loans. At September 30, 1999 the
Company's portfolio of mortgage-backed securities consisted entirely of FHLMC
and FNMA participation certificates. Of the $197.0 million in mortgage-backed
securities at that date, approximately $12.2 million or 6.2% represented
adjustable-rate securities and $184.8 million or 93.8% represented fixed-rate
securities with anticipated maturity dates from 2 months to 27 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 Company's fixed-rate mortgage-backed securities consist of both
long-term and balloon securities. The long-term securities have original
maturity terms of ten, fifteen and thirty years. The balloon securities have
principal and interest amortization based on a thirty-year maturity schedule
with final principal balloon payments due in five years or seven years from the
date of the security. Balloon mortgage-backed securities are held in the
portfolio as a means of reducing the average life of the fixed-rate portfolio. A
shorter average portfolio life will help reduce the interest rate risk
associated with these investments. As of September 30, 1999 long-term,
fixed-rate mortgage-backed securities amounted to $123.1 million and five-year
and seven-year balloon mortgage-backed securities amounted to $29.5 million and
$31.9 million, respectively.
During periods of declining interest rates, fixed-rate mortgage-backed
securities may have accelerated principal reductions due to increased
refinancing activity on the underlying mortgage loans. The reinvestment of the
accelerated principal reductions at lower prevailing rates could result in lower
overall portfolio yields and income. During periods of rising interest rates,
fixed-rate mortgage-backed securities will tend to depreciate in value. Thus,
total returns on fixed-rate mortgage-backed securities are expected to decline
as market interest rates rise.
If the Company purchases mortgage-backed securities at a premium,
accelerated principal repayments may result in some loss of principal investment
to the extent of the premium paid. Conversely, if mortgage-backed securities are
purchased at a discount, accelerated principal reductions will increase current
and total returns.
10
<PAGE>
Delinquent, Nonperforming and Classified Assets
Delinquent Loans. All delinquent loan results are reviewed monthly by the
Company's Board of Directors. The Company believes it has an effective process
and policy for dealing with delinquent loans.
Residential delinquencies are handled by the Loan Collections Department.
This department begins collection efforts on residential loans when a loan
appears on the 15-day delinquent list. Borrowers are sent a notice to accelerate
the debt when the debt is 45 days delinquent. If the delinquent account has not
been corrected, foreclosure proceedings are begun generally at the 75th day of
delinquency. At September 30, 1999, residential loans delinquent 90 days and
longer represented 0. 2% of the total residential loan portfolio.
Commercial delinquent accounts are processed by the Problem Asset and
Lending Departments. For commercial accounts classified as Substandard, as
defined below, or worse, the Problem Asset Department has jurisdiction over the
collection efforts. As with residential delinquent loans, any commercial loans
90 days past due or where the collection of the interest or full principal is
considered doubtful are placed on a non-accrual basis.
If a collection action is instituted on a consumer or commercial loan,
the Company, in compliance with the loan documents and the law, may repossess
and sell the collateral security for the loan through private sales or through
judicially ordered sales when necessary. Should the sale result in a deficiency
owing to the Company, the borrowers generally are pursued where such action is
deemed appropriate, including recourse based on personal loan guarantees by the
borrower's principals.
The following table shows the Company's loans delinquent 90 days or more
at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
Construction and land............... - $ --- - $ --- 2 $ 162
Permanent 1 - 4 family.............. 38 1,854 19 778 28 1,565
Other mortgage...................... 3 489 4 1,102 3 689
-- ---- -- ------ -- ---
Total mortgage loans................ 41 2,343 23 1,880 33 2,416
Other loans........................... 9 198 13 542 10 164
-- ------ -- ------- -- ------
Total loans........................... 50 $2,541 36 $2,422 43 $2,580
== ====== == ====== == ======
Delinquent loans to total loans....... .24% .26% .31%
</TABLE>
As of September 30, 1999, 1998 and 1997, $0, $25,000 and $0, respectively,
of loans were on nonaccrual status which were not 90 days past due.
11
<PAGE>
Nonperforming Assets. The Company also places emphasis on improving asset
quality. The Company's nonperforming assets as a percentage of total assets have
decreased from .43% at September 30, 1997 to .24% at September 30, 1999.
Loans 90 days past due are generally placed on non-accrual status. The
Company ceases to accrue interest on a loan once it is placed on non-accrual
status, and interest accrued but unpaid at that time is charged against interest
income. Additionally, any loan where it appears evident that the collection of
interest is in doubt is also placed on a non-accrual status. The investment in
impaired loans (primarily consisting of classified loans), other than those
evaluated collectively for impairment, at September 30, 1999 and 1998 was
$4,511,000 and $6,109,000, respectively. The average recorded investment in
impaired loans during the years ended September 30, 1999 and 1998 was
approximately $5,118,000 and $7,695,000, respectively. The total specific
allowance for loan losses related to these loans was approximately $0 and
$29,000, respectively, on September 30, 1999 and 1998. Interest income on
impaired loans of approximately $461,000 and $790,000 was recognized in the
years ended September 30, 1999 and 1998, respectively.
If a foreclosure action is instituted on a real estate-secured loan and the
loan is not reinstated, paid in full, refinanced, or deeded back to the Company,
the property is sold at a foreclosure sale at which the Company may be the
buyer. Thereafter, such acquired property is listed in the Company's real estate
owned ("REO") account or that of a subsidiary, until the property is sold. The
Company carries REO at the lower of cost or fair value less cost to dispose. The
Company also finances the sales of REO properties. Should the foreclosure sale
not produce sufficient proceeds to pay the loan balance and court costs, the
Company's attorneys, where appropriate, may pursue the collection of a
deficiency judgment against the responsible borrower.
It is the Company's policy to try to liquidate its holdings in REO on a
timely basis while considering both market conditions and the cost of carrying
REO properties. Upon acquisition the Company records all REO at the lower of its
fair value (less estimated costs to dispose), or cost. The fair value is based
upon the most recent appraisal and management's evaluation. If the fair value of
the asset is less than the loan balance outstanding, the difference is charged
against the Company's loan loss allowance prior to transferring the asset to
REO. Administration of REO property is handled by the Problem Asset Department,
which is responsible for the sale of all residential and commercial properties.
In those instances where the property may be located outside the Company's
market area or where the property, due to its nature, requires certain expertise
(i.e., hotels, apartment complexes), outside management firms may be utilized.
12
<PAGE>
At the dates indicated, nonperforming assets in the Company's portfolio were
as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accrual mortgage loans:
<S> <C> <C> <C> <C> <C>
Delinquent less than 90 days............. $ --- $ --- $ --- $ 323 $ 1,153
Delinquent 90 days or more............... 2,343 1,880 2,416 1,717 2,294
----- ----- ----- ----- -----
Total................................. 2,343 1,880 2,416 2,040 3,447
----- ----- ----- ----- -----
Non-accrual other loans:
Delinquent less than 90 days............. --- 25 --- --- ---
Delinquent 90 days or more............... 198 542 164 132 70
----- ---- ---- ------ ------
Total................................. 198 567 164 132 70
----- ---- ---- ------ ------
Total non-accrual loans.................... 2,541 2,447 2,580 2,172 3,517
Accruing loans 90 days or more delinquent . --- --- --- --- ---
----- ----- ----- ----- -----
Total nonperforming loans................ 2,541 2,447 2,580 2,172 3,517
----- ----- ----- ----- -----
Other nonperforming assets:
Real estate owned........................ 911 3,168 2,892 4,830 4,643
Less allowance for losses................ --- (634) (578) (1,712) (1,857)
----- ---- ---- ------ ------
Total................................ 911 2,534 2,314 3,118 2,786
----- ---- ---- ------ ------
Total nonperforming assets, net............ $3,452 $4,981 $4,894 $5,290 $6,303
====== ====== ====== ====== ======
Nonperforming loans to total net loans..... 0.24% 0.26% 0.31% 0.28% 0.56%
Total nonperforming assets to
total assets............................. 0.24% 0.37% 0.43% 0.50% 0.71%
</TABLE>
For the year ended September 30, 1999, interest income of $184,000 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.
Management evaluates each REO property on no less than a quarterly basis to
assure that the net carrying value of the property on the Company's books is no
greater than the fair market value less estimated costs to dispose. When
necessary, the property is written down or specific allowances are established
to reduce the carrying value.
REO Allowances
Years Ended September 30,
----------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
$1,712
Beginning balance.................... $634 $578
Provision for (recovery of) losses... (186) 136 (150)
Charge-offs.......................... (448) (80) (984)
---- --- ----
Ending balance....................... $ --- $634 $578
===== ==== ====
Provision for losses on REO is included in income (losses) from real estate
operations on the Company's consolidated statements of earnings.
Not included in the preceding table are net gains, (losses) or recoveries
on the sale of real estate owned of $207,000, $176,000 and $127,000 for the
years ended September 30, 1999, 1998 and 1997, respectively.
13
<PAGE>
Classified Assets. Under OTS regulations, problem assets of insured
institutions are classified as either "substandard," "doubtful" or "loss." An
asset is considered "substandard" if the current net worth and paying capacity
of the obligor and/or the value of the collateral pledged are no longer adequate
to support the loan. "Substandard" assets are characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. In
addition to the classification of assets as "substandard," "doubtful" or "loss,"
the OTS regulations also require that assets that do not currently expose the
Company to a sufficient degree of risk to warrant one of the three foregoing
classifications but which do possess credit deficiencies or potential weaknesses
deserving management's close attention must be designated "special mention."
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish specific allowances for
loan losses in an amount considered appropriate by management. See "--Allowance
for Loan Losses" below. Additionally, the institution establishes general
allowances to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies problem assets as "loss,"
it is required either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge-off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which can
order the establishment of additional general or specific loss allowances.
The following table presents the Company's classified assets at the dates
indicated.
September 30,
-------------
1999 1998 1997
---- ---- ----
(In thousands)
Substandard:
Real Estate Owned.......... $ 911 $ 3,168 $ 2,892
Loans...................... 5,180 5,375 9,832
----- ----- -----
Total Substandard........ 6,091 8,543 12,724
Doubtful..................... --- --- ---
Loss......................... --- 202 117
--- --- ---
$6,091 $8,745 $12,841
====== ====== =======
14
<PAGE>
Allowance for Loan Losses
Provisions for loan losses are charged to operations to establish an
allowance for loan losses; recognized loan losses (recoveries) are then charged
(credited) to the allowance. The Company evaluates the outstanding loan
portfolio with respect to the adequacy of the allowance for loan losses at least
quarterly.
Management's policy is to provide for estimated losses on the Company's
loan portfolio based on management's evaluation of the probable losses (existing
and inherent). Such evaluations are made for all major loans on which full
collectibility of interest and/or principal may not be reasonably assured. The
factors that the Company considers are the estimated value of the underlying
collateral, the management of the borrower, and current operating results,
trends and cash flow. In addition to analyzing individual loans, management also
analyzes on a regular basis its asset classification and recent loss experience
on other loans to help insure that prudent general allowances are maintained on
one-to-four family loans, automobile loans and home equity loans. Management
periodically evaluates the allowance percentages utilized for general allowance
purposes based upon delinquencies, charge-off, underwriting, and other trends.
The Company segregates the loan portfolio for loan loss purposes into the
following broad segments: commercial real estate, residential real estate,
commercial business and consumer loans.
The Company provides for a general allowance for losses inherent in the
portfolio by the above categories, which consists of two components. General
loss percentages are calculated based upon historical analyses. A supplemental
portion of the allowance is calculated for inherent losses which probably exist
as of the evaluation date even though they might not have been identified by the
more objective processes used for the portion of the allowance described above.
This is due to the risk of error and/or inherent imprecision in the process.
This portion of the allowance is particularly subjective and requires judgments
based on qualitative factors which do not lend themselves to exact mathematical
calculations such as: trends in delinquencies and nonaccruals; migration trends
in the portfolio; trends in volume, terms, and portfolio mix; new credit
products and/or changes in the geographic distribution of those products;
changes in lending policies and procedures; loan review reports on the efficacy
of the risk identification process; changes in the outlook for local, regional
and national economic conditions; concentrations of credit; and peer group
comparisons.
Specific allowances are provided in the event that the specific collateral
analysis on each classified loan indicates that the probable loss upon
liquidation of collateral would be in excess of the general percentage
allocation. The provision for loan loss is debited or credited in order to state
the allowance for loan losses to the required level as determined above.
15
<PAGE>
The following tables set forth an analysis of the Company's allowance for
loan losses at the dates indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year... $11,818 $11,691 $11,016 $10,083 $9,434
Provision for (recovery of)
losses..................... 816 297 782 (76) 460
Allowance for loan losses
acquired (1)............... --- --- --- 885 ---
Charge-offs:
Residential................ (22) (259) (43) (137) (109)
Commercial real estate..... (49) --- (91) --- (145)
Consumer................... (324) (213) (125) (48) (130)
Other...................... (367) (102) (3) (180) ---
------- ------ -------- ---- -------
Total charge-offs....... (762) (574) (262) (365) (384)
Recoveries:
Residential................ 39 86 44 149 117
Commercial real estate..... 21 2 19 86 270
Consumer................... 14 16 62 79 133
Other...................... 6 300 30 175 53
------- ------ -------- ---- -------
Total recoveries........ 80 404 155 489 573
Balance at end of year......... $11,952 $11,818 $11,691 $11,016 $10,083
======= ======= ======= ======= =======
Allowance for loan losses to total
loans...................... 1.12% 1.25% 1.40% 1.44% 1.60%
Allowance for loan losses to total
non-performing loans....... 470.31% 483.13% 453.11% 507.25% 286.70%
Allowance for loan losses and
allowance for REO to total non-
performing assets.......... 346.20% 221.80% 224.21% 181.78% 146.32%
Net charge-offs (recoveries) to
average loans outstanding during
the period................. 0.07% 0.02% 0.01% (0.02)% (0.03)%
Classified loans to total net loans 0.48% 0.59% 1.19% 1.11% 2.78%
</TABLE>
(1) Represents allowance acquired in conjunction with acquisition of Treasure
Coast Bank, F.S.B in 1996.
16
<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,
---------------------------------------------------------------
1999 1998 1997
---- ---- ----
Amount Percent(1) Amount Percent(1) Amount Percent(1)
------ ---------- ----------------- ------ ----------
(Dollars in thousands)
Allowance at end of period
applicable to:
<S> <C> <C> <C> <C> <C> <C>
Residential................. $ 2,605 76.06% $ 2,251 76.88% $ 2,141 76.88%
Commercial real estate...... 6,142 13.56 5,986 12.22 6,487 11.74
Consumer ................... 2,128 8.55 2,310 9.40 2,068 10.10
Commercial business......... 1,077 1.83 1,271 1.50 995 1.28
----- ---- ----- ---- ------ ----
Total................... $11,952 100.00% $11,818 100.00% $11,691 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
(1) Percent of loans in each category to total loans at the dates indicated.
Investment Activities
The Company invests primarily in overnight funds, U.S. Government and
agency obligations, and Federal Home Loan Bank of Atlanta capital stock. The
Company does not invest in derivatives, collateralized mortgage obligations or
other hedging instruments.
The table below summarizes the carrying value and estimated market value of
the Company's portfolio of investment securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998 1997
---- ---- ----
(In thousands)
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
Available for sale:
<S> <C> <C> <C> <C> <C> <C>
Treasury notes...... $ --- $ --- $ --- $ --- $17,985 $17,985
FHLB notes.......... 49,502 49,502 50,721 50,721 29,486 29,486
FNMA notes.......... 19,875 19,875 20,343 20,343 --- ---
Equity securities... 6,789 6,789 452 452 82 82
----- ----- ------ ------ ------ ------
Total $76,166 $76,166 $71,516 $71,516 $47,553 $47,553
====== ====== ====== ====== ====== ======
Held to maturity:
FHLB notes.......... 9,995 9,992 19,989 20,268 5,000 4,993
FNMA notes.......... --- --- 10,000 10,005 --- ---
Municipal securities 915 852 --- --- --- ---
----- ----- ------ ------ ------ ------
Total........... $10,910 $10,844 $29,989 $30,273 $ 5,000 $ 4,993
====== ====== ====== ====== ====== ======
FHLB stock............ $11,250 $11,250 $ 8,212 $ 8,212 $7,595 $7,595
</TABLE>
17
<PAGE>
The table below presents the contractual maturities and weighted average
yields of investment securities at September 30, 1999, excluding FHLB stock and
equity securities.
<TABLE>
<CAPTION>
One Year or Less One to Five Years More Than Five Years Total InvestmentSecurities
---------------- ----------------- -------------------- --------------------------------------------
(Dollars in thousands)
Average
Weighted Weighted Weighted Remaining Weighted
Carrying Average Carrying Average Carrying Average Years to Carrying Market Average
Value Yield Value Yield Value Yield Maturity Value Value Yield
----- ----- ----- ----- ----- ----- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHLB Notes $ 9,995 5.96% $49,502 5.87% $ --- 0.00% 1.9 $59,497 $59,494 5.89%
FNMA Notes --- 0.00 19,875 5.68 --- 0.00 .9 19,875 19,875 5.68
Municipal
Securities --- 0.00 --- .00 915 6.46 12.3 915 852 6.46
</TABLE>
Sources of Funds
Deposits. The Company offers a number of different deposit accounts,
including regular savings, interest-bearing checking or NOW accounts,
non-interest checking, money market deposit, term certificate accounts and
individual retirement accounts.
The Company has twenty-seven full-service banking offices and one in-store
branch location in addition to its home office in Fort Pierce. The Company's
strategy has been to have conveniently located offices in growth markets as one
of its main methods of attracting funds. The Company's deposits primarily are
obtained from areas surrounding its offices. Certificate accounts in excess of
$100,000 are not actively solicited nor are brokers used to obtain deposits.
During the quarter ending December 31, 1999, the Company will begin
offering internet banking services. This new online service will allow customers
the ability to access their accounts through any computer terminal that has
internet browser capabilities, using the most secure technology available.
Customers benefit by having access to their accounts and being able to initiate
transactions at the time that suits them best. The Company also offers a bill
pay service.
The Company had a decline in deposit balances for several years prior to
1993. This was a strategy that the Company used to improve its capital ratios.
Much of the decline was accomplished by the closing of less profitable branches.
With the Company's improved capital position in the beginning of 1993, it made
an effort to stabilize deposits and increase account balances. As part of this
strategy, the Company has upgraded a number of branch facilities and moved from
leased storefronts to full service free-standing offices.
Management believes that demand and passbook accounts are less sensitive to
changes in interest rates than other types of accounts, such as certificates of
deposit. As of September 30, 1999, the Company had 30.06% of its deposits in
passbook and demand accounts, 68.67% in certificates of deposit and 1.27% in
official checks. Due to the recent low interest rate environment, the Company
has also been pricing its certificates of deposit to encourage lengthening of
maturities. When management determines the levels of its deposit rates,
consideration is given to local competition, U.S. Treasury securities offerings,
and anticipated funding requirements.
18
<PAGE>
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated and the weighted average interest rates on each
category of deposits presented. Management does not believe that the use of
year-end balances instead of average monthly balances produces any material
difference in the information presented:
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998 1997
----- ----- ----
Weighted Weighted Weighted
Average Average Average
Nominal Nominal Nominal
Amount Percent Rate Amount Percent Rate Amount Percent Rate
------ ------- ---- ------ ------- ---- ------ ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
Non-interest
Bearing demand $ 76,176 7.79% N/A $ 54,954 5.99% N/A $ 40,749 4.47% N/A
NOW accounts 66,184 6.77 1.09% 60,129 6.55 1.13% 52,045 5.71 1.32%
Money market accounts 43,015 4.40 2.49 41,074 4.46 2.54 43,401 4.76 2.51
------ ---- ---- ------ ---- ---- ------ ---- ----
Subtotal 185,375 18.96 .97 156,157 17.00 1.10 136,195 14.94 1.30
Savings accounts:
Passbook 108,508 11.10 1.97 92,698 10.10 2.06 76,540 8.40 1.69
Certificates of deposit 671,281 68.67 5.03 658,842 71.76 5.43 689,760 75.67 5.47
Official checks 12,431 1.27 N/A 10,429 1.14 N/A 9,081 .99 N/A
------ ---- ---- ------ ---- ---- ----- --- ----
Total deposits $977,595 100.00% 3.86% $918,126 100.00% 4.29% $911,576 100.00% 4.47%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
The following table presents, by various categories, information concerning
the amounts and maturities of the Company's time deposits.
September 30,
----------------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
0.00 - 3.00%............. $ 128 $ 328 $ 545
3.01 - 4.00%............. 11,275 -- --
4.01 - 5.00%............. 335,421 84,192 88,472
5.01 - 6.00%............. 298,720 540,209 553,986
6.01 - 7.00%............. 25,361 33,674 46,333
7.01 - 8.00%............. 376 434 424
8.01 - 9.00%............. --- 5 ---
-------- ---------- -------
Total Certificate Accounts. $671,281 $658,842 $689,760
======== ======== ========
19
<PAGE>
At September 30, 1999, the Company had certificates of deposit in amounts of
$100,000 or more maturing as follows:
Amount
Maturity Period (In thousands)
3 Months or Less................... $ 15,374
Over 3 to 6 Months................. 16,025
Over 6 to 12 Months................ 14,939
Over 12 Months..................... 22,584
------
Total.............................. $68,922
=======
The following table contains information regarding deposit account activity
for the periods shown.
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------
1999 1998 1997
---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C>
Net increase (decrease) before interest credited $ 25,933 $ (28,838) $ 25,563
Interest credited 33,536 35,388 34,160
------ ------ ------
Deposit account increase $59,469 $ 6,550 $ 59,723
======= ======= ========
Weighted average cost of deposits during the year 3.96% 4.35% 4.42%
Weighted average cost of deposits at end of year 3.86% 4.29% 4.47%
</TABLE>
Borrowings. The Company is a member of the Federal Home Loan Bank of
Atlanta ("FHLB of Atlanta"). The FHLB of Atlanta offers various fixed rate and
variable rate advances to its members. Requests for advances with an original
term to maturity of five years or less may be approved for any sound business
purpose in which the member is authorized to engage. Requests for advances with
original maturity in excess of five years may be approved only for the purpose
of enabling that member to provide funds for residential housing finance. The
FHLB of Atlanta underwrites each advance request based on factors such as
adequacy and stability of capital position, quality and composition of assets,
liquidity management, level of borrowings from all sources and other such
factors. Pursuant to a collateral agreement with the FHLB, advances are secured
by all stock in the FHLB and a blanket floating lien that requires the Company
to maintain qualifying first mortgage loans as pledged collateral in an amount
equal to, when discounted at 75% of the unpaid principal balances, the advances.
As of September 30, 1999, the Company had $225 million of outstanding FHLB
advances. Of this amount, all have remaining maturity dates of twenty-four
months or longer.
As of September 30, 1999, the Company had a total credit limit of $364
million and an availability limit of $139 million with the FHLB of Atlanta.
20
<PAGE>
In addition to FHLB advances, the Company had $195.7 million of unpledged
mortgage-backed securities at September 30, 1999. These unpledged
mortgage-backed securities could be used as collateral under reverse repurchase
transactions with various security dealers. Such borrowing transactions could
provide additional cash and liquidity to the Company in the event of sudden or
unforeseen deposit withdrawals.
The Company recognizes the maturity characteristics of its time deposit
portfolio. Management believes that unused FHLB advances and other borrowing
sources would provide sufficient funding for potential deposit withdrawals.
The following table sets forth information regarding the Company's
borrowing at and for the periods indicated:
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
1999 1998 1997
---- ---- ----
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Average Balance............................ $197,767 $104,877 $ 99,342
Maximum balance at any month-end........... 225,000 145,000 110,000
Balance at year end........................ 225,000 145,000 100,000
Weighted average interest rate during the year 5.62% 6.12% 6.00%
Weighted average interest rate at year end. 5.56% 5.76% 6.00%
Other Borrowings:
Average Balance............................ $ --- $ 167 $ 561
Maximum balance at any month-end........... --- 475 674
Balance at year end........................ --- --- 475
Weighted average interest rate during the year --- 11.98% 9.48%
Weighted average interest rate at year end. --- --- 7.12%
Total Borrowings:
Average Balance............................ $197,767 $105,044 $99,903
Maximum balance at any month-end........... 225,000 145,000 110,674
Balance at year end........................ 225,000 145,000 100,475
Weighted average interest rate during the year 5.62% 6.13% 6.02%
Weighted average interest rate at year end. 5.56% 5.76% 6.01%
</TABLE>
21
<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 that a federal association may engage in directly.
The Bank has two active subsidiary corporations. Appraisal Analysts, Inc.
provides real estate appraisal services to the Bank as well as third parties. H.
F. Development Company, Inc. serves as a repository for some of the Company's
commercial REO properties held for disposition. See "Business -- Delinquent,
Nonperforming and Classified Assets".
Competition
The Company encounters strong competition both in attracting deposits and
in originating real estate and consumer loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations and credit unions in its market area. The Company expects
continued strong competition from such financial institutions in the foreseeable
future. The Company's market area includes branches of a number of commercial
banks that are substantially larger than the Company in terms of statewide
deposits. The Company competes for deposits by offering depositors a high level
of personal service, convenient locations and a competitive interest rate.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings associations.
Lending competition has increased substantially in recent years, as a result of
the large number of institutions seeking to benefit from the growth in the
Company's market area.
The Company competes for loans primarily through the interest rates and
loan fees it charges, the types of loans it offers, and the efficiency and
quality of services it provides borrowers, real estate brokers and builders.
Factors that affect competition include general and local economic conditions,
current interest rate levels and volatility of the mortgage markets. Based on
total assets, as of September 30, 1999, the Company was the largest savings
institution headquartered in the six county area served by the Company.
Employees
At September 30, 1999, the Company had a total of 366 full-time employees
and 99 part-time employees, none of whom were represented by a collective
bargaining unit. The Company considers its relations with its employees to be
good.
22
<PAGE>
Financial Services Modernization Bill
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley-Financial Services Modernization Act of 1999 (the "Act"),
federal legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. Generally, the Act: (i) repeals the historical restrictions and
eliminates many federal and state law barriers to affiliations among banks,
securities firms, insurance companies and other financial service providers;
(ii) provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies; (iii)
broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries; (iv)
provides an enhanced framework for protecting the privacy of consumer
information; (v) adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to modernize the
Federal Home Loan Bank system; (vi) modifies the laws governing the
implementation of the Community Reinvestment Act; and (vii) addresses a variety
of other legal and regulatory issues affecting day-to-day operations and
long-term activities of financial institutions.
Thrift holding companies such as the Company will be permitted to engage in
financial activities in the same manner as bank holding companies with respect
to insurance and securities activities. In addition, in a change from prior law,
thrift holding companies can be owned, controlled or acquired only by companies
engaged in financially-related activities.
The Company does not believe that the Act will have a material adverse
effect on its operations in the near-term. However, to the extent that the Act
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This could
result in a growing number of larger financial institutions that can offer a
wider variety of financial services than the Company currently offers and that
can aggressively compete in the markets the Company currently serves.
Item 2. Properties
The Company conducts its business from its headquarters in Fort Pierce and
through 27 full-service banking offices, one loan production office and one
in-store branch location. These offices are located in Brevard, Indian River,
Martin, Okeechobee, St. Lucie, and Volusia counties, Florida. The net book value
at September 30, 1999 of the Company's offices was $15.6 million. The following
table sets forth information regarding the Company's offices.
23
<PAGE>
<TABLE>
<CAPTION>
Year Lease
Location Opened Owned/Leased Expiration Date
-------- ------ ------------ ---------------
ST. LUCIE COUNTY
- ----------------
<S> <C> <C> <C>
MAIN OFFICE 1934 OWNED
100 SOUTH SECOND STREET
FORT PIERCE, FL 34950
VIRGINIA AVENUE 1968 OWNED
500 VIRGINIA AVENUE
FORT PIERCE, FL 34950
PSL MAIN 1975 OWNED
7181 SOUTH U.S. #1
PORT ST. LUCIE, FL 34952
H.F. CENTER 1981 OWNED
2400 S.E. MIDPORT RD., SUITE 300
PORT ST. LUCIE, FL 34952
LAKEWOOD PARK 1981 OWNED
5100 TURNPIKE FEEDER RD.
FORT PIERCE, FL 34951
DARWIN SQUARE 1991 OWNED
3201 S.W. PSL BLVD.
PORT ST. LUCIE, FL 34953
ORANGE BLOSSOM 1984 OWNED
4156 OKEECHOBEE ROAD
FORT PIERCE, FL 34947
ST. LUCIE WEST 1993 OWNED
1320 S.W. ST. LUCIE WEST BLVD.
PORT ST. LUCIE, FL 34986
INDIAN RIVER
- ------------
VERO MAIN 1978 OWNED
655 21st STREET
VERO BEACH, FL 32960
CAUSEWAY 1981 OWNED
1700 S.A1A
VERO BEACH, FL 32963
INDIAN RIVER MALL 1997 OWNED
6080 20TH ST.
VERO BEACH, FL 32966
SEBASTIAN 1979 OWNED
13397 U.S. HIGHWAY #1
SEBASTIAN, FL 32958
WEST SEBASTIAN 1998 OWNED
993 FELLSMERE ROAD
SEBASTIAN, FL 32958
MARTIN COUNTY
- -------------
PALM CITY 1978 LEASED 07/26/05
1251 S.W. 27TH STREET
PALM CITY, FL 34990
EAST OCEAN 1981 OWNED
1500 E. OCEAN BLVD.
STUART, FL 34996
STUART MAIN 1996 LEASED 08/14/01
789 S. FEDERAL HWY.
STUART, FL 34994
JENSEN BEACH 1999 LEASED 04/30/02
3639 NW FEDERAL HWY.
JENSEN BEACH, FL 34957
24
<PAGE>
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
WAL-MART 1998 LEASED 08/31/03
1000 N WICKHAM ROAD
MELBOURNE, FL 32935
LOAN PRODUCTION OFFICE 1998 LEASED 10/10/99
2460 N COURTENAY PARKWAY
SUITE 107
MERRITT ISLAND, FL 32953
OKEECHOBEE COUNTY
- -----------------
OKEECHOBEE 1980 OWNED
2801 HIGHWAY #441 SOUTH
OKEECHOBEE, FL 34974
VOLUSIA COUNTY
- --------------
NEW SMYRNA BEACH 1988 LEASED 09/30/99
REGIONAL SHOPPING CENTER
1940 STATE ROAD #44
NEW SMYRNA BEACH, FL 32168
PORT ORANGE 1983 OWNED
4035 NOVA ROAD
PORT ORANGE, FL 32127
ORMOND BEACH 1984 OWNED
75 N. NOVA ROAD
ORMOND BEACH, FL 32174
DELTONA 1998 OWNED
2901 HOWLAND BOULEVARD
DELTONA, FL 32725
DELAND
312 N. WOODLAND BOULEVARD 1999 OWNED
DELAND, FL 32720
ORMOND BY THE SEA
1190 OCEAN SHORE BOULEVARD 1999 OWNED
ORMOND BEACH, FL 32176
</TABLE>
25
<PAGE>
All leases are anticipated to renew upon their expiration.
The Company uses a data processing service located in Orlando, Florida for
record keeping activities. The data processor specializes in servicing savings
associations. The Company's current contract expires in 2002. All data
processing equipment that is used internally by the Company is owned by the
Company. The net book value of such data processing equipment and related
software as of September 30, 1999 was $2,731,000.
Item 3. Legal Proceedings
There are various claims and lawsuits in which the Company is periodically
involved incident to the Company's business. In the opinion of management, no
material loss is anticipated from any such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock trades on the NASDAQ National Market under the
symbol HARB. The approximate number of shareholders of record and beneficial
shareholders of the common stock at December 8, 1999 was 9,143, some of which
are street name holders.
The Company paid $0.29 in cash dividends per share for the twelve months
ended in fiscal 1999. Payments were $0.065 in the first quarter and $0.075 in
the second, third and fourth quarters. The Company currently expects that
comparable cash dividends will continue to be paid in the future.
On December 10, 1999 the closing sales price of the Company's common stock
was $12.6875 per share. The following table sets forth the price range of the
high and low closing sales price per share of common stock as reported by the
NASDAQ stock market for the four quarters of fiscal year 1999 and 1998.
On March 18, 1998, the conversion and reorganization of Harbor Financial,
M.H.C. was consummated. Pursuant to this transaction, the Company became the
stock holding company for the Bank and Harbor Financial, M.H.C., the Bank's
mutual holding company, ceased to exist. Each existing share of Harbor Florida
Bancorp, Inc., except for those shares held by Harbor Financial, M.H.C. were
exchanged for 6.0094 shares of the Company. The prices in the following table
have been adjusted to reflect this transaction.
Low $ High $
----- ------
FISCAL 1999
First Quarter................ 8.75 11.25
Second Quarter .............. 10.69 12.75
Third Quarter................ 11.44 13.69
Fourth Quarter............... 11.94 13.00
FISCAL 1998
First Quarter................ 9.29 11.61
Second Quarter .............. 10.65 12.56
Third Quarter................ 11.63 12.81
Fourth Quarter............... 9.31 13.56
26
<PAGE>
Item 6. Selected Financial Data.
The information contained in the table captioned "Selected Consolidated
Financial Data" in the Annual Report on pages 11-12 is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 12 through 24 in the Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information contained in the sections captioned "Market Risk and Asset
and Liability Management", "Interest Rate Sensitivity", "Interest Rate Risk" and
"Equity Risk" on pages 13 through 15 in the Annual Report is incorporated herein
by reference.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements listed in Item 14 herein,
together with the report thereon by KPMG LLP, are found in the Annual Report on
pages 25 through 55 and incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the sections captioned "Beneficial
Ownership of Common Stock," on pages 2 through 4 and "Section 16(A) Beneficial
Ownership Reporting Compliances" on page 13 through 14 in the Proxy Statement of
Harbor Florida Bancshares, Inc. (the "Proxy Statement) filed with the SEC on
December 15, 1999 is incorporated herein by reference.
Item 11. Executive Compensation.
The information contained under the sections captioned "Executive
Compensation" on pages 8 through 13 in the Proxy Statement filed with the SEC on
December 15, 1999 is incorporated herein by reference.
27
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners
The information required by this item under the sections captioned "Voting
Securities" on pages 1 through 2 and "Beneficial Ownership of Common Stock" on
pages 2 through 4 in the Proxy Statement filed with the SEC on December 15, 1999
is incorporated herein by reference.
(b) Security Ownership of Management
The information required by this item under the section captioned
"Beneficial Ownership of Common Stock" in the Proxy Statement filed with the SEC
on December 15, 1999 is incorporated herein by reference.
(c) Changes in Control
Management of the Company knows of no arrangements, including any pledge by
any persons of securities of the Company, the operation of which may, at a
subsequent date, result in a change in control of the Registrant.
Item 13. Certain Relations and Related Transactions
The information required by this item under the sections captioned "Voting
Securities" on pages 1 through 2, "Beneficial Ownership of Common Stock" on
pages 2 through 4 and "Certain Transactions" on page 13 in the Proxy Statement
filed with the SEC on December 15, 1999 is incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)Documents filed as a part of this Report:
(1) The Consolidated Financial Statements of the Registrant are attached
and are listed below:
Pages in Annual
Report
------
Independent Auditors' Report 17
Consolidated Statements of Financial Condition 18
Consolidated Statements of Earnings 19
Consolidated Statements of Stockholders' Equity
and Comprehensive Income 20
Consolidated Statements of Cash Flow 22
Notes to Consolidated Financial Statements 24
(2) The Consolidated Financial Statement Schedules of the Registrant as
required to be filed in this Report are either not applicable or are
included elsewhere in this Report.
28
<PAGE>
(3) Exhibit Index
The exhibits listed below are included with this Report or are
incorporated herein by reference to the identified document previously filed
with the Securities and Exchange Commission as set forth parenthetically.
<TABLE>
<S> <C>
3(i) Certificate of Incorporation of Registrant (Exhibit 3.3 to Pre-effective Amendment No. 1 to the Registration
Statement on Form S-1, No. 333-37275 filed November 10, 1997).
3(ii) Bylaws of Registrant. (Exhibit 3.4 to Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1, No.
333-37275, filed November 10, 1997).
10(i) Employment contract with Michael J. Brown, Sr. (Exhibit 10(a) to the Registration Statement on Form S-4 filed
December 20, 1996)
10(ii) 1994 Incentive Stock Option Plan (Exhibit 10(b) to the Registration Statement on Form S-4 filed December 20, 1996)
10(iii) 1994 Stock Option Plan for Outside Directors (Exhibit 10(c) to the Registration Statement on Form S-4 filed
December 20, 1996)
10(iv) Harbor Federal Savings Bank Non-Employee Directors' Retirement Plan (Exhibit 10(vi) to Form 10-Q for the quarter
ended June 30, 1997 filed August 11, 1997)
10(v) Unfunded Deferred Compensation Plan for Directors (Exhibit 10(vii) to Form 10-K for the year ended September 30,
1998 filed December 24, 1998)
10(vi) Change of Control Agreements (Exhibit 10(x) to Form 10-K for the year ended September 30, 1998 filed December 24,
1998)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Consolidated Financial Statements of the Registrant (Annual Report to Stockholders for fiscal
year September 30, 1999)
</TABLE>
(b) Reports on Form 8-K
None.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HARBOR FLORIDA BANCSHARES, INC.
(Registrant)
Dated: December 27, 1999 By: /s/
----------------------------------
Michael J. Brown, Sr.
President and Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ December 27, 1999
- ---------------------------------------------
Michael J. Brown, Sr.
President, Chief Executive
Officer and Director
/s/ December 27, 1999
- ---------------------------------------------
Don W. Bebber
Senior Vice President, Finance
(Principal Financial and Accounting Officer)
/s/ December 27, 1999
- ---------------------------------------------
Bruce R. Abernethy, Sr., Director
/s/ December 27, 1999
- ---------------------------------------------
Richard K. Davis, Director
/s/ December 27, 1999
- ---------------------------------------------
Edward G. Enns, Director
/s/ December 27, 1999
- ---------------------------------------------
Frank H. Fee, III, Director
/s/ December 27, 1999
- ---------------------------------------------
Richard B. Hellstrom, Director
/s/ December 27, 1999
- ---------------------------------------------
Richard N. Bird, Director
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Registrant has one wholly-owned subsidiary corporation, the Bank, and the
Bank has six wholly-owned subsidiary corporations. Each is a Florida
corporation.
1. Appraisal Analysts, Inc.
2. H. F. Development Company, Inc.
3. Indigo Tree, Inc. (inactive)
4. The Palm Bay Inn Corporation (inactive)
5. Highland Communities, Inc. (inactive)
6. CFD, Inc. (inactive)
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Index to Annual Report
Page
Selected Consolidated Financial Data 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 3
Independent Auditors' Report 17
Consolidated Statements of Financial Condition -
September 30, 1999 and 1998 18
Consolidated Statements of Earnings - Years ended
September 30, 1999, 1998, and 1997 19
Consolidated Statements of Stockholders' Equity
and Comprehensive Income - Years ended
September 30, 1999, 1998, and 1997 20
Consolidated Statements of Cash Flows -Years
ended September 30, 1999, 1998, and 1997 22
Notes to the Consolidated Financial Statements 24
All schedules are omitted as they are not required or are not applicable or the
required information is shown in the applicable consolidated financial
statements or notes thereto.
1
<PAGE>
Selected Consolidated Financial Data
Selected Consolidated Financial Condition Data
<TABLE>
<CAPTION>
September 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ---->
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total assets $1,462,550 $1,350,583 $1,131,024 $1,057,443 $886,570
Loans (net) (1) 1,070,335 944,700 834,270 765,019 631,307
Federal funds sold --- 20,000 250 16,075 12,825
Investment securities (2) 87,076 101,505 52,553 53,493 25,186
Mortgage-backed securities 196,971 201,049 176,854 153,293 164,759
Real estate owned 911 2,534 2,314 3,118 2,786
Deposits 977,595 918,126 911,576 851,853 720,981
FHLB advances 225,000 145,000 100,000 95,000 65,000
Other borrowings --- --- 475 674 974
Stockholders' equity 235,922 263,719 96,802 84,832 77,500
</TABLE>
(1) Excludes loans held for sale of $1,747,000, $714,000, $141,000, $4.9
million, and $1 million, as of September 30, 1999, 1998, 1997, 1996 and
1995, respectively.
(2) Includes investments available for sale of $76.1 million, $71.5 million,
$47.6 million, $33.5 million and -0-in 1999, 1998, 1997, 1996 and 1995,
respectively.
Selected Consolidated Operating Data
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income $103,884 $ 95,158 $ 84,814 $ 74,357 $ 64,884
Interest expense 48,840 46,658 45,159 39,114 33,280
-------- -------- -------- -------- --------
Net interest income 55,044 48,500 39,655 35,243 31,604
Provision for (recovery of) loan losses 816 297 782 (76) 460
- --------------------------------------------- -------- -------- -------- -------- --------
Net interest income after provision for
loan losses 54,228 48,203 38,873 35,319 31,144
-------- -------- -------- -------- --------
Other income:
Income (loss) from real estate operations 405 (41) 145 (301) (40)
Gain (loss) on sale of mortgage loans 57 142 188 (40) 91
Other 5,532 5,749 3,880 3,226 2,856
-------- -------- -------- -------- --------
Total other income 5,994 5,850 4,213 2,885 2,907
-------- -------- -------- -------- --------
Other expenses:
Compensation and benefits 15,413 14,282 11,931 10,690 10,048
Professional fees 558 589 599 527 699
SAIF deposit insurance premium 552 572 785 6,300 1,556
Other 9,326 9,001 7,833 6,615 5,895
-------- -------- -------- -------- --------
Total other expenses 25,849 24,444 21,148 24,132 18,198
-------- -------- -------- -------- --------
Income before income taxes 34,373 29,609 21,938 14,072 15,853
Income tax expense 13,154 12,243 8,611 5,432 5,958
-------- -------- -------- -------- --------
Net income $ 21,219 $ 17,366 $ 13,327 $ 8,640 $ 9,895
======== ======== ======== ======== ========
</TABLE>
2
<PAGE>
Selected Financial Ratios
<TABLE>
<CAPTION>
At or for the years ended September 30,
---------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Performance Ratios:
<S> <C> <C> <C> <C> <C>
Return on average assets (1) 1.49% 1.40% 1.22% .91% 1.16%
Return on average stockholders' equity (1) 8.54 9.34 14.72 10.51 13.61
Net interest rate spread 3.30 3.40 3.36 3.40 3.42
Net yield on average interest-earning assets 3.99 4.04 3.72 3.79 3.80
Noninterest expense to average assets (1) 1.82 1.97 1.93 2.53 2.14
Average interest-earnings assets to average
interest-bearing liabilities 119.76 116.54 108.33 109.24 109.58
Efficiency Ratio (1) 42.67 46.87 48.83 62.83 52.76
Asset Quality Ratios:
Nonperforming assets to total assets .24 .37 .43 .50 .71
Allowance for loan losses to total loans 1.12 1.25 1.40 1.44 1.60
Allowance for loan losses to nonperforming
loans 470.31 483.13 453.11 507.25 286.70
Allowance for losses on real estate owned to
total real estate owned -- 20.01 19.99 35.45 40.00
Capital Ratios:
Average stockholders' equity to average assets 17.45 15.01 8.26 8.62 8.54
Stockholders' equity to assets at period end 16.13 19.53 8.56 8.02 8.74
</TABLE>
(1) Year ended September 30, 1996 includes one-time SAIF special assessment
expense of $4.6 million, $2.8 million, net of tax. Without the one-time SAIF
special assessment, return on average assets would have been 1.20%, return
on average equity would have been 13.92%, noninterest expense to average
assets would have been 2.05% and the efficiency ratio would have been
50.97%.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." Harbor Florida
Bancshares, Inc (the "Company") desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protections of the safe harbor with respect to all such forward-looking
statements. These forward-looking statements, which are included in Management's
Discussion and Analysis and elsewhere, describe future plans or strategies and
include the Company's expectations of future financial results. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements. The Company's ability to
predict results or the effect of future plans or strategies or qualitative or
quantitative changes based on market risk exposure is inherently uncertain.
Factors which could affect actual results include but are not limited to i)
change in general market interest rates, ii) general economic conditions, iii)
legislative/regulatory changes, iv) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve, v) changes in the quality or composition of
the Company's loan and investment portfolios, vi) demand for loan products, vii)
deposit flows, viii) competition, and ix) demand for financial services in the
Company's markets. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements.
3
<PAGE>
General
The Company'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 Company's noninterest income consists
primarily of fees and service charges, gains on sale of mortgage loans and,
depending on the period, real estate operations which have either provided
income or loss. The results of operations are also significantly impacted by the
amount of provisions for loan losses which, in turn, is dependent upon, among
other things, the size and makeup of the loan portfolio, loan quality, and
trends. The noninterest expenses consist primarily of employee compensation and
benefits, occupancy expense and federal deposit insurance premiums. Its results
of operations are affected by general economic and competitive conditions,
including changes in prevailing interest rates and the policies of regulatory
agencies.
Market Risk and Asset and Liability Management
The Company attempts to manage its assets and liabilities in a manner that
stabilizes net interest income and net economic value under a broad range of
interest rate environments. This is accomplished by matching maturity and
repricing periods on loans and investments to maturity and repricing periods on
deposits and borrowings.
The matching of assets and liabilities may be analyzed by determining the extent
to which such assets and liabilities are interest rate sensitive. An asset or
liability is considered to be interest rate sensitive within a specific time
period if it matures or reprices within that time period. Interest rate
sensitivity analysis, also known as "gap" analysis, attempts to measure the
difference between the amount of interest-earning assets expected to mature or
reprice within a specific time period compared to the amount of interest-bearing
liabilities expected to mature or reprice within that time period. An interest
rate sensitive "gap" is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities
maturing or repricing within a specified time period. A "gap" is considered
negative when the amount of interest rate sensitive liabilities exceed the
amount of interest rate sensitive assets that mature or reprice within a
specified time period. Interest rate sensitivity analysis is based on numerous
assumptions, such as estimates for paying loans off prior to maturity. Estimates
are revised annually to reflect the anticipated interest rate environment.
Generally, an institution with a positive interest rate sensitivity "gap" can
expect net interest income to increase during periods of rising interest rates
and decline during periods of falling interest rates. Likewise, an institution
with a negative "gap" can expect an increase in net interest income during
periods of falling interest rates and a decrease in net interest income during
periods of rising interest rates. At September 30, 1999, the Company's
cumulative one-year interest rate sensitivity "gap" was negative 9.46%.
The Board of Directors has established an asset/liability committee, which
consists of the Company's president and other senior officers. The committee
meets on a monthly basis to review loan and deposit pricing and production
volumes, interest rate risk analysis, liquidity and borrowing needs, and a
variety of other asset and liability management topics.
The Company currently utilizes the following strategies to reduce interest rate
risk: (a) the Company seeks to originate and hold in portfolio adjustable rate
loans which have annual interest rate adjustments; (b) the Company seeks to
lengthen the maturities of deposits when deemed cost effective through the
pricing and promotion of certificates of deposits; (c) the Company seeks to
attract low cost checking and transaction accounts which tend to be less
interest rate sensitive when interest rates rise; and (d) the Company has
utilized long term Federal Home Loan Bank ("FHLB") advances to fund the
origination of fixed rate loans. The Company also maintains a high level of
liquid assets consisting of shorter-term investments, which are expected to
increase in yield as interest rates rise.
4
<PAGE>
Interest Rate Sensitivity
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates as of September 30, 1999. For
borrowings, the table presents principal cash flows by expected maturity dates.
<TABLE>
<CAPTION>
More than one More than
Within Four to year to three three years to Over five
three months twelve months years five years years Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans (2)
Fixed rate $ 22,536 $ 67,614 $ 150,163 $ 116,220 $ 312,314 $ 668,847
Adjustable rate 38,290 120,688 58,320 72,117 5,671 295,086
Other loans (2):
Fixed rate 13,247 39,741 25,209 3,088 420 81,705
Adjustable rate 24,886 12,945 -- -- 586 38,417
Mortgage-backed securities:
Fixed rate (3) 8,195 23,961 50,878 37,568 64,189 184,791
Adjustable rate 1,282 10,898 -- -- -- 12,180
Investment securities and
other assets 44,209 9,995 49,570 19,807 915 124,496
---------- ---------- ---------- ---------- ---------- ----------
Total $ 152,645 $ 285,842 $ 334,140 $ 248,800 $ 384,095 $1,405,522
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities:
Deposits (4):
NOW accounts $ 6,618 $ 19,855 $ 25,415 $ 9,149 $ 5,147 $ 66,184
Passbook accounts 16,276 48,829 36,459 5,833 1,111 108,508
Money market accounts 8,603 25,809 8,259 330 14 43,015
Certificates of deposits 156,756 294,096 203,098 16,445 886 671,281
Borrowings -- -- 35,000 125,000 65,000 225,000
---------- ---------- ---------- ---------- ---------- ----------
Total $ 188,253 $ 388,589 $ 308,231 $ 156,757 $ 72,158 $1,113,988
---------- ---------- ---------- ---------- ---------- ----------
Excess (deficiency) of interest
earning assets over
interest-bearing liabilities $ (35,608) $ (102,747) $ 25,909 $ 92,043 $ 311,937 $ 291,534
========== ========== ========== ========== ========== ==========
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities $ (35,608) $ (138,355) $ (112,446) $ (20,403) $ 291,534
========== ========== ========== ========== ==========
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities as a percent of
total assets (2.43)% (9.46)% (7.69)% (1.40)% 19.93%
========== ========== ========== ========== ==========
</TABLE>
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments. Estimated
prepayment statistics were obtained from the research department of a
primary securities dealer. For fixed rate mortgages and mortgage-backed
securities, annual prepayment rates from 10% to 26%, based on the coupon
rate, were used.
(2) Balances have been reduced for loans in process and deferred loan fees and
discounts that aggregated to $75.0 million at September 30, 1999.
Nonperforming loans aggregating $2.5 million were included in the within
three month repricing period.
(3) Fixed rate mortgage-backed securities include amortizing securities that
balloon 5 years and 7 years from original issue date. Balloon securities
amounted to $61.4 million at September 30, 1999.
(4) The Company's negotiable order of withdrawal ("NOW") accounts, passbook
savings accounts and money market deposit accounts are generally subject to
immediate withdrawal. However, management considers a certain portion of
these accounts to be core deposits having significantly longer effective
maturities based on the Company's retention of such deposit accounts in
changing interest rate environments. NOW accounts, passbook savings accounts
and money market deposit accounts are assumed to be withdrawn at annual
rates of 40%, 60% and 80%, respectively, of the declining balance of such
accounts during the period shown. Management believes the rates are
indicative of expected withdrawal rates in a rising interest rate
environment. If all of the Company's NOW accounts, passbook savings
accounts, and money market deposit accounts had been assumed to be subject
to repricing within one year, the cumulative one-year deficiency of
interest-earning assets to interest-bearing liabilities would have been
$230.0 million, or negative 15.73% of total assets.
5
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in the event of an interest rate increase.
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."
Interest Rate Risk
The Company uses a computer model to quantify its interest rate risk. The
computer model measures the sensitivity of asset and liability fair values to
hypothetical changes in interest rates. Interest rate sensitive instruments used
in the computer model include: loans, mortgage-backed securities, investment
securities, federal funds sold, interest-bearing deposits in other banks, FHLB
stock, deposits, advances from the FHLB, and off- balance sheet loan servicing
rights and commitments. The model calculates net portfolio value of fair values
for assets, liabilities and off-balance sheet contracts using a discounted cash
flow methodology. Management estimates discount rates by using current market
yields on similar financial instruments. Discount rates are adjusted upward and
downward by 100 basis points and 200 basis points to reflect a hypothetical
parallel shift in interest rates. In addition, management estimates loan
prepayment rates, deposit decay rates, and values of certain assets that could
correspond with such hypothetical parallel shifts in interest rates. Management
also assumes that loan delinquency rates will not change as a result of changes
in interest rates, although there can be no assurance that this will be the
case.
Presented below is an analysis of the Company's interest rate risk at September
30, 1999 as calculated utilizing the Company's computer model. The table
presents net portfolio value, dollar and percent changes in net portfolio value,
for instantaneous and parallel shifts in the yield curve in 100 basis point
increments up and down.
Change in Net portfolio
rates value amount Dollar change Percent
----- ------------ ------------- -------
(Dollars in thousands)
+200 B.P $202,725 $(55,778) (21.6)%
+100 B.P $229,098 $(29,405) (11.4)%
0 B.P $258,503 $ 0 0 %
-100 B.P $284,529 $ 26,026 10.1 %
-200 B.P $288,966 $ 30,463 11.8 %
The preceding analysis is based on numerous assumptions that management believes
to be reasonable. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and market values of certain assets under various
interest rate scenarios. It was also assumed that delinquency rates would not
change as a result of changes in interest rates although there can be no
assurance that this will be the case. Even if interest rates change in the
designated increments, there can be no assurance that the Company's assets and
liabilities would perform as indicated in the table above. Since there is no
quoted market for most of the Company's financial instruments, management has no
basis to determine that values presented would be indicative of the amounts
realized in an actual negotiated sale. Furthermore, management has not
considered the tax effect or transaction costs that may be associated with
disposal of the Company's assets and liabilities. A change in U.S. Treasury
rates in the indicated amounts, accompanied by a change in the slope or shape of
the yield curve, could result in significantly different net portfolio values
than shown above.
6
<PAGE>
Equity Price Risk
The Company maintains a portfolio of available for sale equity securities which
subjects the Company to equity pricing risks. The change in fair values of
equity securities represents instantaneous changes in all equity prices for
available for sale equity securities. Equity price risk is managed through
company diversification and individual position limits established in the
investment policy. At September 30, 1999 the company did not maintain an equity
trading portfolio. The following are changes in the fair value of the Company's
available for sale securities at September 30, 1999 based on percentage changes
in fair value.
Percent change Fair value of available-
in fair value for-sale securities
(Dollars in thousands)
20 % $8,147
10 % $7,468
0 % $6,789
(10)% $6,110
(20)% $5,431
Actual future price appreciation or depreciation may be different.
Analysis of Net Interest Income
The Company's earnings have historically depended primarily upon the Company's
net interest income, which is the difference between interest income earned on
its loans and investments ("interest-earning assets") and interest paid on its
deposits and any borrowed funds ("interest-bearing liabilities"). Net interest
income is affected by (i) the difference between rates of interest earned on the
Company's interest-earning assets and rates paid on its interest-bearing
liabilities ("interest rate spread") and (ii) the relative amounts of its
interest-earning assets and interest-bearing liabilities.
The following tables present an analysis of certain aspects of the Company's
operations during the periods indicated. The first table presents the average
balances of, and the interest and dividends earned or paid on, each major class
of interest-earning assets and interest-bearing liabilities. No tax equivalent
adjustments were made. Average balances represent daily average balances. The
yields and costs include fees that are considered adjustments to yields.
7
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997
---- ---- ----
Average Interest Yield/ Average Interest & Yield/ Average Interest & Yield/
Balance &Dividends Rate Balance Dividends Rate Balance Dividends Rate
------- ---------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
Assets:
Interest-earning assets (1):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 5,699 $ 299 5.25% $ 7,959 $ 448 5.63% $ 7,404 $399 5.39%
Interest-bearing deposits 45,317 2,198 4.85 40,531 2,233 5.51 29,674 1,614 5.44
Investment securities 102,585 6,107 5.95 82,076 4,945 6.02 63,743 3,866 6.07
Mortgage-backed
securities 207,544 13,173 6.35 173,177 11,301 6.53 153,347 10,088 6.58
Mortgage loans 902,964 71,600 7.93 791,491 66,329 8.38 718,319 60,000 8.35
Other loans 114,359 10,507 9.19 105,287 9,902 9.40 94,634 8,847 9.35
------- ------ ---- ------- ----- ---- ------ ----- ----
Total interest-earning
assets 1,378,468 103,884 7.54 1,200,521 95,158 7.93 1,067,121 84,814 7.95
------- ---- ------ ---- ------ ----
Total noninterest
-earning assets 45,038 38,155 29,575
------ ------ ------
Total assets 1,423,506 1,238,676 1,096,696
========= ========= =========
Liabilities and
Stockholders' Equity:
Interest-bearing liabilities
Deposits:
Transaction accounts $ 180,662 $1,781 0.99% $ 158,723 $1,894 1.19% $ 138,721 $ 1,896 1.37%
Passbook savings 103,272 1,993 1.93 87,760 1,674 1.91 77,707 1,356 1.75
Official checks 8,693 --- .00 8,004 --- .00 5,612 --- .00
Certificate savings 660,584 33,945 5.14 670,628 36,651 5.47 663,143 35,892 5.41
------- ------ ---- ------- ------ ---- ------- ------ ----
Total deposits 953,211 37,719 3.96 925,115 40,219 4.35 885,183 39,144 4.42
FHLB advances 197,767 11,117 5.62 104,877 6,419 6.12 99,342 5,962 6.00
Other borrowings --- 4 .00 167 20 11.98 561 53 9.45
--------- -------- --- --------- ----- ----- ------- ------ ----
Total interest-bearing
liabilities 1,150,978 48,840 4.24 1,030,159 46,658 4.53 985,086 45,159 4.58
--------- ------ ------ --------- ------ ---- ------- ------ ----
Noninterest-bearing
liabilities 24,058 22,648 21,045
--------- --------- ---------
Total liabilities 1,175,036 1,052,807 1,006,131
Stockholders' equity 248,470 185,869 90,565
--------- --------- ------
Total liabilities and
stockholders' equity 1,423,506 1,238,676 1,096,696
========= ========= =========
Net interest income/
interest rate spread (2) $ 55,044 3.30% $ 48,500 3.40% $ 39,655 3.36%
======== ----- ======== ----- ======== ----
Net interest-earning assets/
net interest margin (3) $ 227,490 3.99% $ 170,362 4.04% $ 82,035 3.72%
========= ----- ========= ----- ======== ----
Interest-earning assets to
interest-bearing
liabilities 119.76% 116.54% 108.33%
------- ------ ------
</TABLE>
- ---------------
(1) Average balances and rates include nonaccruing loans.
(2) Interest rate spread represents the difference between weighted average
interest rates earned on interest-earning assets and the weighted average
interest rates paid on interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets. Net interest margin increase in 1998 is due
primarily to interest earned on cash proceeds from the conversion of Harbor
Financial, M.H.C. and concurrent stock offering.
8
<PAGE>
Rate/Volume Analysis
The relationship between the volume and rates of the Company's interest-earning
assets and interest-bearing liabilities influences the Company's net interest
income. The following table reflects the sensitivity of the Company's interest
income and interest expense to changes in volume and in prevailing interest
rates. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on effects attributable to: (1) changes in
volume (changes in volume multiplied by old rate); (2) changes in rate (changes
in rate multiplied by old volume); and (3) net change. Changes attributable to
the combined impact of volume and rates have been allocated proportionately to
changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
Years Ended September 30,
Increase (Decrease)
1999 vs. 1998 1998 vs. 1997 1997 vs. 1996
------------- ------------- -------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- --- ------ ---- ---
(Dollars in thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 118 $ (302) $(184) $ 638 $30 $668 $ 21 $ 3 $ 24
Investment securities 1,163 (1) 1,162 1,086 (7) 1,079 1,424 (20) 1,404
Mortgage-backed securities 2,181 (309) 1,872 1,294 (81) 1,213 29 (96) (67)
Mortgage loans 8,954 (3,683) 5,271 6,207 122 6,329 8,259 (496) 7,763
Nonmortgage loans:
Commercial loans 520 (74) 446 417 (22) 395 85 (72) 13
Consumer loans 320 (161) 159 601 59 660 1,289 31 1,320
----- ------- ----- ------ --- ------ ------ ----- ----
Total interest income 13,256 (4,530) 8,726 10,243 101 10,344 11,107 (650) 10,457
------ ------- ----- ------ --- ------ ------ ----- ------
Interest expense:
Deposits:
Transaction accounts $ 213 $(326) $ (113) $ 224 $ (226) $ (2) $ 278 $(106) $ 172
Passbook savings 299 20 319 192 126 318 (33) (117) (150)
Certificate savings (516) (2,190) (2,706) 409 350 759 5,013 (331) 4,682
----- ------- ------- --- --- --- ----- ----- -----
Total deposits (4) (2,496) (2,500) 825 250 1,075 5,258 (554) 4,704
FHLB advances 4,736 (38) 4,698 331 126 457 1,455 (86) 1,369
Other borrowings (16) --- (16) (36) 3 (33) (26) (2) (28)
---- ------ ---- ---- ----- ---- ---- ---- ----
Total interest expense 4,716 (2,534) 2,182 1,120 379 1,499 6,687 (642) 6,045
----- ------- ----- ----- ---- ----- ----- --- -----
Net interest income $8,540 $ (1,996) $ 6,544 $9,123 $ (278) $ 8,845 $ 4,420 $ (8) $ 4,412
====== ========= ======= ====== ======= ======= ======= ===== =======
</TABLE>
Results of Operations
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
General
Diluted earnings per share for the year ended September 30, 1999, increased
43.4% to 76 cents per share on net income of $21.2 million, compared to 53 cents
per share on net income of $16.0 million for the same period last year
(excluding the impact in 1998 of $1,345,000 after tax of nonrecurring income
from the payoff of a problem commercial real estate loan, sale of the Bank's
ownership interest in its data processing servicer and sale of land and
buildings). This increase was due primarily to an increase in average
interest-earning assets and a decrease in the average number of shares
outstanding. Reported diluted earnings per share for the year ended September
30, 1998 was 57 cents per share on net income of $17.4 million. Net interest
income increased 13.5% to $55.0 million for the year ended September 30, 1999,
compared to $48.5 million for the year ended September 30, 1998. This increase
was due to an increase in interest income of $8.7 million offset by an increase
in interest expense of $2.2 million. Other income increased to $6.0 million for
the year ended September 30, 1999 from $5.8 million for the year ended September
30, 1998. Other expenses increased to $25.8 million for the year ended September
30, 1999 from $24.4 million for the year ended September 30, 1998.
9
<PAGE>
Interest Income
Total interest income increased to $103.9 million for the year ended September
30, 1999 from $95.1 million for the year ended September 30, 1998 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-earnings assets
increased to $1.378 billion for the year ended September 30, 1999 from $1.201
billion for the year ended September 30, 1998. The average rate earned on
interest-earning assets decreased to 7.54% for the year ended September 30,
1999, from 7.93% for the year ended September 30, 1998, a decrease of 39 basis
points. The year ended September 30, 1998 included $874,000 of interest income
recognized on the payoff of a problem commercial real estate loan. The increase
in average interest-earning assets was due primarily to cash proceeds from the
conversion of Harbor Financial, M.H.C. and concurrent stock offering (the "Stock
Offering"), new FHLB advances and the increase in deposits. Interest income on
loans increased $5.9 million to $82.1 million for the year ended September 30,
1999 from $76.2 million for the year ended September 30, 1998. This increase was
a result of a $120.2 million increase in the average balance to $1.017 billion
in 1999 from $896.8 million in 1998 that was partially offset by a decrease of
43 basis points in the average yield to 8.01% in 1999 from 8.50% in 1998. The
increase in the average balance of total loans was mainly due to significant
growth in the residential and commercial loan portfolios resulting from
increased levels of loan originations. Interest income on investment securities
increased $1.1 million to $6.1 million for the year ended September 30, 1999
from $5.0 million for the year ended September 30, 1998. This increase was
primarily the result of a $20.5 million increase in the average balance to
$102.5 million in 1999 from $82.0 million in 1998. The increase in the average
balance of investment securities was primarily due to the purchase of FHLB and
FNMA Notes with the proceeds from the Stock Offering in 1998, new FHLB advances
and the increase in deposits. Interest income on mortgage-backed securities
increased $1.9 million to $13.2 million for the year ended September 30, 1999
from $11.3 million for the year ended September 30, 1998. This increase was
primarily the result of a $34.3 million increase in the average balance to
$207.5 million in 1999 from $173.2 million in 1998. The increase in the average
balance of mortgage-backed securities was primarily due to the purchase of
fifteen-year fixed rate securities with the proceeds from new FHLB advances.
Interest Expense
Total interest expense increased to $48.8 million for the year ended September
30, 1999 from $46.6 million for the year ended September 30, 1998. This increase
was due primarily to an increase in average interest-bearing liabilities to
$1.151 billion for the year ended September 30, 1999 from $1.030 billion for the
year ended September 30, 1998. The average interest rate paid on
interest-bearing liabilities was 4.24% for the year ended September 30, 1999
compared to 4.53% for the year ended September 30, 1998, a decrease of 29 basis
points. Interest expense on deposits decreased $2.5 million to $37.7 million for
the year ended September 30, 1999 from $40.2 million for the year ended
September 30, 1998. This decrease was due primarily to a decrease of 43 basis
points in the average interest rate paid on deposits to 3.96% for the year ended
September 30, 1999 from 4.39% for the year ended September 30, 1998. The average
balance of deposits increased by $28.1 million to $953.2 million for the year
ended September 30, 1999 from $925.1 million for the year ended September 30,
1998. The average deposit mix changed to 30.7% and 69.3% of core deposits and
certificates, respectively, for the year ended September 30, 1999 from 27.5% and
72.5% for the same period in 1998. Interest expense on FHLB advances and other
borrowings increased $4.7 million to $11.1 million for the year ended September
30, 1999 from $6.4 million for the year ended September 30, 1998. This increase
was the result of an increase of $92.9 million in the average balance to $197.8
million in 1999 from $104.9 million in 1998 primarily due to proceeds from new
long-term fixed rate advances taken in order to fund the purchase of
mortgage-backed securities and investment securities.
Provision for Loan Losses
The provision for loan losses was $816,000 for the year ended September 30,
1999, compared to $297,000 for the year ended September 30, 1998. The provision
for loan losses for the year ended September 30, 1999 was principally comprised
of a credit of approximately $511,000 related to a decrease in the level of
classified loans, a charge of approximately $645,000 due to overall loan
portfolio growth and a charge of approximately $682,000 for net charge offs. The
provision for loan losses for the year ended September 30, 1998 was principally
comprised of a credit of approximately $909,000 related to an decrease in the
level of classified loans, a charge of approximately $1.1 million due to overall
loan portfolio growth and a charge of approximately $103,000 for net charge
offs. The allowance for loan losses was at $12.0 million and $11.8 million for
September 30, 1999 and 1998, respectively. The allowance was 1.12% and 1.25% of
total loans at September 30, 1999 and 1998, respectively, and was 230.7% and
211.9% of classified loans at September 30, 1999 and 1998, respectively. While
the Company's management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions.
10
<PAGE>
Other Income
Other income increased by $144,000 to $6.0 million for the year ended September
30, 1999 from $5.8 million for the year ended September 30, 1998. This increase
is due primarily to an increase of $1.3 million in other fees and service
charges and an increase of $446,000 in income from real estate operations
partially offset by the $719,000 gain on the sale of the Company's ownership
interest in its data processing servicer and the $596,000 gain on the sale of
land and buildings in 1998. Other fees and service charges, primarily from fees
and service charges on deposit products, were $5.3 million and $4.0 million for
the years ended September 30, 1999 and 1998, respectively. This increase was
primarily due to the growth in deposits. Income from real estate operations was
$405,000 for the year ended September 30, 1999 compared to a loss of $41,000 for
the year ended September 30, 1998.
Other Expense
Other expense increased by $1.4 million to $25.8 million for the year ended
September 30, 1999 from $24.4 million for the year ended September 30, 1998. The
increase was due primarily to an increase of $1.1 million in compensation and
benefits and an increase of $129,000 in other expenses. The increase in
compensation and benefits is due primarily to additional staff required to
support the growth in loans and deposits. The increase in other expense is due
primarily to an increase of $185,000 in deposit account losses.
Income Taxes
Income tax expense increased by $911,000 to $13.2 million for the year ended
September 30, 1999 from $12.2 million for the year ended September 30, 1998, due
primarily to an increase in pretax accounting income. The effective tax rates
were 38% and 41% for the years ended September 30, 1999 and 1998, respectively.
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
General
Net income for the year ended September 30, 1998 increased 30.3% to $17.4
million or 57 cents per diluted share, compared to $13.3 million or 43 cents per
diluted share for the same period last year. Net interest income increased 22.3%
to $48.5 million for the year ended September 30, 1998, compared to $39.6
million for the year ended September 30, 1997. This increase was due to an
increase in interest income of $10.4 million offset by an increase in interest
expense of $1.5 million. Other income increased to $5.8 million for the year
ended September 30, 1998 from $4.2 million for the year ended September 30,
1997. Other expenses increased to $24.4 million for the year ended September 30,
1998 from $21.1 million for the year ended September 30, 1997.
Interest Income
Total interest income increased to $95.1 million for the year ended September
30, 1998 from $84.8 million for the year ended September 30, 1997. This increase
was due primarily to an increase in average interest-earning assets to $1.201
billion for the year ending September 30, 1998, compared to $1.067 billion for
the year ending September 30, 1997 and $874,000 of interest income recognized on
the payoff of a problem commercial real estate loan. The increase in average
interest-earning assets was due primarily to the cash proceeds from the Stock
Offering. Additionally, in the quarter ending December 31, 1997, the Company
received final payment on a commercial real estate loan. This loan was
performing, but had been seriously delinquent in the past and had other
characteristics which caused management to be uncertain about the ability of the
borrower to comply with the loan repayment terms. Additional interest income was
recognized in the amount of $874,000 due to deferred cash interest payments and
unearned purchase discount remaining at time of payoff of the loan. Interest
income on loans increased $7.4 million to $76.2 million for the year ended
September 30, 1998 from $68.8 million for the year ended September 30, 1997.
This increase was a result of a $83.8 million increase in the average balance to
$896.8 million in 1998 from $812.9 million in 1997 and the $874,000 of interest
income recognized on the payoff of the problem commercial real estate loan. The
increase in the average balance of total loans was mainly due to significant
growth in the residential and commercial loan portfolios resulting from high
levels of loan originations. Interest income on investment securities increased
$1.1 million to $5.0 million for the year ended September 30, 1998 from $3.9
million for the year ended September 30, 1997. This increase was primarily the
result of a $18.3 million increase in the average balance to $82.0 million in
1998 from $63.7 million in 1997. The increase in the average balance of
investment securities was primarily due to the purchase of FHLB and FNMA Notes
with the proceeds from the Stock Offering. Interest income on mortgage-backed
securities increased $1.2 million to $11.3 million for the year ended September
30, 1998 from $10.1 million for the year ended September 30, 1997. This increase
was primarily the result of a $19.8 million increase in the average balance to
$173.2 million in 1998 from $153.4 million in 1997. The increase in the average
balance of mortgage-backed securities was primarily due to the purchase of
seven-year balloon securities and fifteen-year fixed rate securities with the
proceeds from new FHLB advances.
11
<PAGE>
Interest Expense
Total interest expense increased to $46.6 million for the year ended September
30, 1998 from $45.1 million for the year ended September 30, 1997. This increase
was due primarily to an increase in average interest-bearing liabilities to
$1.030 billion for the year ended September 30, 1998 from $985.1 million for the
year ended September 30, 1997. The average interest rate paid on
interest-bearing liabilities was 4.53% for the year ended September 30, 1998
compared to 4.58% for the year ended September 30, 1997, a decrease of 5 basis
points. Interest expense on deposits increased $1.1 million to $40.2 million for
the year ended September 30, 1998 from $39.1 million for the year ended
September 30, 1997. This increase was due primarily to an increase of $39.9
million in the average balance to $925.1 million in 1998 from $885.2 million in
1997. The average interest rate paid on deposits decreased by 7 basis points to
4.35% for the year ended September 30, 1998 from 4.42% for the year ended
September 30, 1997. This decrease was primarily due to the change in deposit mix
to lower rate core deposits from higher rate certificates. The average deposit
mix changed to 27.5% and 72.5% of core deposits and certificates, respectively,
for the year ended September 30, 1998 from 25.1% and 74.9% for the same period
in 1997. Interest expense on FHLB advances and other borrowings increased
$424,000 to $6.4 million for the year ended September 30, 1998 from $6.0 million
for the year ended September 30, 1997. This increase was the result of an
increase of $5.1 million in the average balance to $105.0 million in 1998 from
$99.9 million in 1997 primarily due to proceeds from new long-term fixed rate
advances taken in order to fund the purchase of mortgage-backed securities,
partially offset by maturities in 1998 of short-term advances taken in 1997 to
fund purchases of FHLB Notes.
Provision for Loan Losses
The provision for loan losses was $297,000 for the year ended September 30,
1998,compared to $782,000 for the year ended September 30, 1997. The provision
for loan losses for the year ended September 30, 1998 was principally comprised
of a credit of approximately $909,000 related to a decrease in the level of
classified loans, a charge of approximately $1.1 million due to overall loan
portfolio growth and a charge of approximately $103,000 for net charge offs. The
provision for loan losses for the year ended September 30, 1997 was principally
comprised of a charge of approximately $600,000 related to an increase in the
level of classified commercial real estate loans, a charge of approximately
$100,000 due to an increase in classified consumer loans, and a charge of
approximately $80,000 for unidentified but probable losses due to growth in the
consumer loan portfolio. The allowance for loan losses was at $11.8 million and
$11.7 million for September 30, 1998 and 1997, respectively. The allowance was
1.25% and 1.40% of total loans at September 30, 1998 and 1997, respectively, and
was 211.9% and 117.5% of classified loans at September 30, 1998 and 1997,
respectively. The Company had net charge offs of $170,000 and $107,000 for the
years ended September 30, 1998 and 1997, respectively.
Other Income
Other income increased by $1.6 million to $5.8 million for the year ended
September 30, 1998 from $4.2 million for the year ended September 30, 1997, due
primarily to a $719,000 gain on the sale of the Company's ownership interest in
its data processing servicer, a $596,000 gain on the sale of land and buildings
and an increase of $678,000 in other fees and service charges. Other fees and
service charges, primarily from fees and service charges on deposit products,
were $4.0 million and $3.3 million for the years ended September 30, 1998 and
1997, respectively. This increase was primarily due to the growth in deposits.
Other Expense
Other expense increased by $3.3 million to $24.4 million for the year ended
September 30, 1998 from $21.1 million for the year ended September 30, 1997. The
increase was primarily due to an increase of $2.4 million in compensation and
benefits, an increase of $319,000 in occupancy expense, an increase of $839,000
in other expense partially offset by a decrease of $213,000 in SAIF deposit
insurance premiums. The increase in compensation and benefits is due primarily
to additional staff required to support the growth in loans and deposits and an
increase of $910,000 in noncash expense of stock benefit plans. The increase in
occupancy expense is due primarily to an increase in data processing equipment
expense. The increase in other expense is due primarily to an increase of
$116,000 in Delaware franchise tax, $108,000 in deposit account losses and other
increases resulting from the growth in loans and deposits. The decrease in SAIF
deposit insurance premiums is due to lower assessment rates resulting from The
Deposit Insurance Act of 1996.
12
<PAGE>
Income Taxes
Income tax expense increased by $3.6 million to $12.2 million for the year ended
September 30, 1998 from $8.6 million for the year ended September 30, 1997, due
primarily to an increase in pretax accounting income. The effective tax rates
were 41% and 39% for the years ended September 30, 1998 and 1997, respectively.
Liquidity and Capital Resources
On March 18, 1998, the Company completed its reorganization and stock offering
in connection with the conversion of Harbor Financial, M.H.C. The Company sold
16,586,752 shares of common stock for $10.00 per share in the Stock Offering.
Cash proceeds after costs and funding of the Company's ESOP was approximately
$150 million. The Company also issued 14,112,400 exchange shares (exchange ratio
of 6.0094 to 1) to existing Harbor Florida Bancorp, Inc. public stockholders.
The net proceeds were used for general corporate purposes, including investment
in home mortgages and other investments in the ordinary course of business.
The 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. It is the Bank's policy to maintain
average monthly levels of liquid assets of at least 50 basis points higher than
the minimum requirement, primarily as a part of its asset and liability
management strategy of increasing its levels of rate-sensitive interest-earning
assets. At September 30, 1999, the Bank had cash and investments that exceeded
the minimum regulatory requirement. In addition, the Bank had certain
investments in mortgage-backed securities aggregating $197.0 million that 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, 1999 was $344.1 million,
which was $305.4 million in excess of the minimum requirement of $38.7 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 Federal Home Loan Bank
of Atlanta from time to time to hedge against future increases in prevailing
deposit account interest rates. In addition, the Bank holds unpledged fixed and
adjustable rate mortgage-backed securities totaling $195.7 million at September
30, 1999 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 Company's operating activities was $24.6 million, $20.7
million, and $15.5 million for the years ended September 30, 1999, 1998 and
1997, respectively.
Net cash used by the Company's investing activities was $115.5 million, $188.2
million, and $93.8 million for the years ended September 30, 1999, 1998 and
1997, respectively. The decrease in 1999 was principally due to a $28.3 million
net decrease in mortgage-backed securities and a $61.1 million net decrease in
investment securities partially offset by a net increase of $13.5 million in
loans. The increase in 1998 was principally due to a $43.6 million net increase
in loans and a $50.9 million increase in the purchase of investment securities.
Net cash provided by the Company's financing activities was $90.4 million,
$198.4 million, and $62.7 million for the years ended September 30, 1999, 1998,
and 1997, respectively. The increase in 1998 was principally due to $150.2
million net proceeds from the Stock Offering.
The Bank's liquid assets consist primarily of investment securities, federal
funds and cash. At September 30, 1999, the Bank had liquid assets of $150.2
million, with loan commitments of $50.2 million (consisting of unused lines of
credit to homebuilders and residential and commercial loan commitments), letters
of credit of $2.0 million and unfunded loans in process of $70.7 million (the
latter consisting primarily of residential loans in process).
Harbor Florida Bancshares, Inc. (the holding company) has cash requirements to
pay dividends to shareholders and the holding company's expenses. During 1999,
the holding company expended $8.5 million for dividends and expenses. As of
September 30, 1999, the holding company had $9.8 million in cash and $6.8
million in available for sale securities and is eligible to receive dividends
from the Bank in order to meet future cash requirements. Management believes
that sufficient financial resources exist at the holding company level to meet
its obligations for the next twelve months. As of September 30, 1999, $20
million was available for distribution from the Bank to the holding company
without further regulatory approval.
13
<PAGE>
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"). The effective date for
Statement 133 was delayed by Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - deferral of
the effective date of FASB No. 133" ("Statement 137"), to fiscal years beginning
after June 15, 2000. Statement 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. It
is currently anticipated that the Company will adopt Statement 133 on October 1,
2000, and that the statement will not have a significant financial statement
impact upon adoption.
In October, 1998, the FASB issued Statement of Financial Accounting Standards
No. 134, "Accounting for Mortgage-backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." ("Statement 134") Statement 134 is effective for the first fiscal
year beginning after December 15, 1998, with earlier adoption permitted. This
statement conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with the
subsequent accounting for securities retained after the securitization of other
types of assets by a nonmortgage entity. It is currently anticipated that the
Company will adopt Statement 134 on October 1, 1999, and that the statement will
not have a significant financial statement impact upon adoption.
Year 2000 Considerations
The Year 2000 problem represents one of the biggest challenges to face the
information technology age. The problem results from efforts to store data
efficiently in the early years of computer development, when computer memory was
at a premium. In those years, computer programmers made the decision, almost
universally followed, to store the year as a two-digit number (e.g., 75) instead
of a four-digit number (e.g., 1975). Therefore, when the next century arrives,
the date "00" may be interpreted as "1900" instead of "2000". This can cause
systems to lock up, crash or provide erroneous information. The Year 2000
problem affects computer systems in all industries, both domestically and
internationally. It is a complex and difficult problem because of the number of
systems potentially impacted and the interdependence of systems.
The Company has been addressing Year 2000 issues, by developing plans and
implementing solutions utilizing the guidelines and five management phases
recommended by the Federal Financial Institutions Examination Council (FFIEC).
The five phases along with a sample of tasks within each phase follows: 1)
Awareness - Define the Year 2000 issues, gain executive level support, commit
resources to the Year 2000 challenge, establish a project team, develop a
strategy to address all internal and external systems, and contact vendors to
discuss their Year 2000 plans; 2) Assessment - Identify, assess, and prioritize
the Company's date sensitive items and processes then detail the magnitude of
effort necessary to address them, evaluate the Company's commercial customer's
readiness, and begin reviewing and modifying existing contingency plans as
necessary; 3) Renovation - Convert, replace or eliminate software, hardware and
other date sensitive items as needed and monitor vendors' Year 2000 progress; 4)
Validation - Test and verify software, systems components, other applicable date
sensitive items; and 5) Implementation - Put tested date sensitive items into
production, continue to monitor vendors' Year 2000 readiness, and implement
contingency plans as necessary.
The Year 2000 issue is the Company's top technology priority. Even so, the
Company is treating this problem as a "business" issue, and not one just
affecting technology. To successfully prepare for the Year 2000, enterprise
coordination has been established and resources have been mobilized across the
Company to support this effort. The Company developed a Year 2000 plan (the
"Millennium Plan") which was first presented to the Board of Directors during
June 1997. Management provides regular progress reports to the Company's Systems
Corporate Steering Committee, which oversees all Systems activities, including
the Year 2000. The Board of Directors is also updated monthly on the Company's
Year 2000 process.
14
<PAGE>
In addition, the Company has put together an extensive Year 2000 Awareness
program. Various activities have been implemented to educate both consumers and
employees on the Year 2000. Such activities include: enclosing various brochures
as statement stuffers for all account holders; conducting on-going contact with
our commercial customers; establishing a Year 2000 Hotline; printing the
telephone number for this hotline on customer transaction receipts; posting Year
2000 announcements, including scam alerts, on branches community bulletin
boards; publishing Year 2000 information on the Company's web site; providing
on-going Year 2000 training to all Company employees; and providing an internal
monthly Year 2000 newsletter to all Company employees.
The Company identified and assessed its system level operations including
applications software; data processing hardware platforms such as personal
computers and automated teller machines; customer, service bureau, and third
party interfaces; operating systems and networking software; and environmental
systems such as climate control systems, sprinklers, elevators, and security
systems. To assess the date sensitive items, each was identified as mission
critical, mission necessary, mission important and non-mission necessary.
Mission critical items are the primary focus for the Company. The largest
component of mission critical items is the Company's service bureau. The Company
is actively monitoring and involved with the service bureau's progress to
achieve Year 2000 readiness. The Company has had a significant role in testing
the service bureau's systems. The service bureau's core dollars system (the
Company's customer, general ledger, account, and database) is considered 100%
complete.
Management also continues to work with other third party vendors to monitor
their Year 2000 readiness. The Company is primarily reliant on external third
party vendors for its computer processing and output, as well as other
significant functions and services. Based upon the current assessment,
management believes that the Company's third party vendors are taking the
appropriate steps to ensure critical systems will function properly for the Year
2000.
While the Company has received such assurances from these vendors, risk exists
in that the assurances are not guarantees and may not be enforceable. Thus, in
the event such vendors' products and/or services are not Year 2000 compliant,
the Company's recourse may be limited. If the required modifications and
conversions are not completed on a timely basis, the Year 2000 issue could have
a material impact on the operations of the Company. Other risk factors
associated with the Year 2000 event include the risk that the Company's business
could be disrupted due to the service bureau and customer system failures, or
even the possible loss of electrical power or phone service. The Company could
also be subjected to litigation due to Year 2000 noncompliance from customers,
borrowers and vendors as a result of both internal and third party system
failures.
Because testing helps reduce the risk associated with Year 2000 failures, the
Company began testing during the last quarter of 1997. The Company met its goals
of having all internal mission critical and mission necessary systems compliant
before December 31, 1998 and substantially all other mission critical and
mission necessary systems tested and implemented by June 30, 1999.
It is the intention of the Company to maintain normal business operations during
the Year 2000 transition and beyond. The Company has developed its own
company-wide Year 2000 Contingency Plan and Procedures as an addition to the
Company's Corporate Contingency Plan. Together these documents provide the means
to help insure the continuity of daily operations in the event of a loss of
essential resources due to Year 2000 induced failures. They describe individual
contingency plans and procedures concerning distinctive software and hardware
issues, operational guidelines for continuing operations, and specific policies
and procedures to follow on the occurrence of a power outage, computer
interruptions, telecommunication interruptions, hurricanes, etc. These documents
also identify participants, processes and equipment that will be necessary to
permit the Company to continue operations. Testing of contingency actions
started August 1, 1998 and was completed by September 30, 1999. Adjustments and
further testing of contingency plans and procedures will be completed as
necessary.
15
<PAGE>
Management has also completed a review of risk related to the Company's
customers. Upon review of customer risk, it was determined that only commercial
loan customers posed any significant potential risk related to the Year 2000. As
of September 30, 1999, the Company had contacted all of its commercial loan
customers (672 outstanding commercial loans with a total dollar amount of
$161,400,238) regarding the customers' awareness of the Year 2000 problem. While
no assurance can be given that its customers will be Year 2000 compliant,
management believes, based on representations of such customers and reviews of
their operations, that the customers are either addressing the appropriate
issues to insure compliance or that they are not faced with material Year 2000
issues. As of September 30, 1999, such a reserve was not necessary. Furthermore,
in substantially all cases the credit extended to such borrowers is
collateralized by real estate, which inherently minimizes the Company's exposure
in the event that such borrowers do experience problems or delays becoming Year
2000 compliant. Additionally, management has developed a Year 2000 Cash and
Liquidity Contingency Plan should any unlikely problems occur with Fund Takers,
Funds Providers or Capital Market/Asset Management Counterparties.
A Year 2000 budget has been established. Although the costs of modifications to
the existing software is being primarily absorbed by the third party vendors,
the Company recognized the need to purchase new hardware and software. Based
upon current estimates, the Company has identified approximately $800,000 in
total costs, including hardware, software, and other issues, for completing the
Year 2000 project. Of that amount, approximately $490,000 was incurred during
the year ended September 30, 1998 and approximately $260,000 was incurred during
the year ending September 30, 1999. The remaining $50,000 is budgeted for year
ending September 30, 2000.
Due to the general uncertainty inherent in the Year 2000 issues, there can be no
assurance that potential systems interruptions or unanticipated additional
expense incurred to obtain Year 2000 compliance would not have a material
adverse effect on the Company's business, financial condition, results of
operations and business prospects. Nevertheless, the Company believes that, with
the implementation and completion of the Year 2000 process, the possibility of
significant interruptions of normal operations and additional expenses should be
reduced.
The Year 2000 information provided herein should be read in connection with the
Year 2000 Information and Readiness Disclosure Act which, among other things,
mandates that certain Year 2000 readiness disclosures may not be used in
litigation. Further, all disclosure concerning Year 2000 issues should be
considered "Year 2000 Readiness Disclosure" pursuant to the Year 2000
Information and Readiness Disclosure Act.
16
<PAGE>
Independent Auditors' Report
Board of Directors
Harbor Florida Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Harbor Florida Bancshares, Inc., (formerly Harbor Florida Bancorp, Inc.) and
subsidiaries as of September 30, 1999 and 1998, and the related consolidated
statements of earnings, stockholders' equity and comprehensive income and cash
flows for each of the years in the three-year period ended September 30, 1999.
These consolidated financial statements are the responsibility of Harbor Florida
Bancshares, Inc.'s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Harbor Florida
Bancshares, Inc. and subsidiaries at September 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
West Palm Beach, Florida
October 8, 1999
17
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
September 30, 1999 and 1998 1999 1998
---- ----
(Dollars in thousands except share
data)
Assets:
<S> <C> <C>
Cash and amounts due from depository institutions $ 30,214 $ 23,861
Interest-bearing deposits in other banks 32,959 19,902
Federal funds sold --- 20,000
Investment securities held to maturity (estimated
market value of $10,844 in 1999 and
$30,273 in 1998) 10,910 29,989
Investment securities available for sale at
estimated market value 76,166 71,516
Mortgage-backed securities held to maturity
(estimated market value of $193,474 in 1999
and $204,842 in 1998) 196,971 201,049
Loans held for sale (estimated market value
of $1,747 in 1999 and $736 in 1998) 1,747 714
Loans, net 1,070,335 944,700
Accrued interest receivable 7,580 7,872
Real estate owned 911 2,534
Premises and equipment, net 20,139 16,927
Federal Home Loan Bank stock 11,250 8,212
Goodwill, net 2,361 2,563
Other assets 1,007 744
---------- ----------
Total assets $1,462,550 $1,350,583
========== ==========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $ 977,595 $ 918,126
Long-term debt 225,000 145,000
Advance payments by borrowers for taxes and insurance 18,951 17,608
Income taxes payable 22 761
Other liabilities 5,060 5,369
--------- ---------
Total liabilities 1,226,628 1,086,864
--------- ---------
Stockholders' Equity:
Preferred stock; $.10 par value; authorized 10,000,000
shares; none issued and
outstanding --- ---
Common stock; $.10 par value; authorized 70,000,000
shares; 31,099,967 shares issued and 28,008,627
outstanding at September 30, 1999 and 30,909,830 issued and
outstanding at September 30, 1998 3,110 3,091
Paid-in capital 191,016 189,958
Retained earnings 96,485 83,355
Common stock purchased by:
Employee stock ownership plan (ESOP) (12,746) (13,344)
Recognition and retention plans (RRP) (6,258) ---
Accumulated other comprehensive income (loss), net (70) 659
Treasury stock, at cost, 3,091,340 shares at September 30, 1999 (35,615) ---
------- -------
Total stockholders' equity 235,922 263,719
---------- ----------
Total liabilities and stockholders' equity $1,462,550 $1,350,583
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Consolidated Statements of Earnings
Years ended September 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
(Dollars in thousands except per share data)
Interest income:
<S> <C> <C> <C>
Loans $82,107 $76,231 $68,847
Investment securities 6,107 4,945 3,866
Mortgage-backed securities 13,173 11,301 10,088
Other 2,497 2,681 2,013
------- ------ -----
Total interest income 103,884 95,158 84,814
------- ------ ------
Interest expense:
Deposits 37,719 40,219 39,144
Other 11,121 6,439 6,015
------ ----- -----
Total interest expense 48,840 46,658 45,159
------ ------ ------
Net interest income 55,044 48,500 39,655
Provision for loan losses 816 297 782
------ ------ ---
Net interest income after provision for
loan losses 54,228 48,203 38,873
------ ------ ------
Other income:
Other fees and service charges 5,319 3,986 3,308
Income (losses) from real estate operations 405 (41) 145
Gain on sale of mortgage loans 57 142 188
Other 213 1,763 572
--- ----- ---
Total other income 5,994 5,850 4,213
----- ----- -----
Other expenses:
Compensation and employee benefits 15,413 14,282 11,931
Occupancy 3,422 3,365 3,046
Data processing services 1,304 1,244 1,188
Advertising and promotion 1,038 1,010 942
Other 4,672 4,543 4,041
----- ----- -----
Total other expense 25,849 24,444 21,148
------ ------ ------
Income before income taxes 34,373 29,609 21,938
Income tax expense 13,154 12,243 8,611
------ ------ -----
Net income $ 21,219 $ 17,366 $ 13,327
======== ======== ========
Net income per share
Basic $ .77 $ .58 $ .44
===== ===== =====
Diluted $ .76 $ .57 $ .43
===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Common
stock Accum.
purch. other
Common Common by compre-
Compre- Stock stock deferred Treasury hensive
hensive Common Paid-in Retained Purchased purchased comp stock income
Income Stock Capital earnings by ESOP by RRP's plan purchased (loss) Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1996 $3,029 $22,359 $60,893 $(674) $(53) $(673) $ - $ (49) $84,832
Comprehensive income
Net income $13,327 - - 13,327 - - - - - 13,327
Other comprehensive
income, net of
tax:
Unrealized gain on
securities
available for
sale 42 - - - - - - - 42 42
-------
Comprehensive income $13,369
Stock options
exercised 23 367 - - - - - - 390
Amortization of
award of ESOP and
RRP's - 856 - 300 53 - - - 1,209
Dividends paid - - (3,017) - - - - - (3,017)
Stock purchased by
deferred comp.
Plan - - - - - (273) - - (273)
Tax benefit of stock
plans - 292 - - - - - - 292
------ ------- ------- ------ --- ------ -- ----- --------
Balance at September
30, 1997 $3,052 $23,874 $71,203 $(374) $ - $(946) $- $ (7) $ 96,802
------ ------- ------- ------ --- ------ -- ----- --------
Comprehensive income
Net income $17,366 - - 17,366 - - - - - 17,366
Other comprehensive
income, net of
tax:
Unrealized gain on
securities
available for
sale 666 - - - - - - - 666 666
-------
Comprehensive income $18,032 - - - - - - - - -
=======
Reorganization of MHC - - 200 - - - - - 200
Proceeds of stock
offering, net - 163,493 - - - - - - 163,493
Issuance of ESOP
shares - - - (13,269) - - - - (13,269)
Stock options
exercised 39 618 - - - - - - 657
Amortization of
award of ESOP and
RRP's - 1,798 - 299 - - - - 2,097
Dividends paid - - (5,414) - - - - - (5,414)
Tax benefit of stock
plans - 175 - - - - - - 175
Stock purchased by
deferred comp plan - - - - - (100) - - (100)
Satisfaction of
deferred
compensation
liability - - - - - 1,046 - 1,046
------- ------- -------- --------- --- ----- -- ----- --------
Balance at September
30, 1998 $ 3,091 $189,958 $ 83,355 $(13,344) $ - $ - $- $ 659 $263,719
------- -------- -------- --------- --- ----- -- ----- --------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Common
stock Accum.
purch. other
Common Common by compre-
Compre- Stock stock deferred Treasury hensive
hensive Common Paid-in Retained Purchased purchased comp stock income
Income Stock Capital earnings by ESOP by RRP's plan purchased (loss) Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1998
(continued) $ 3,091 $189,958 $ 83,355 $(13,344) $ - $ - $- $ 659 $263,719
Comprehensive income
Net income $21,219 - - 21,219 - - - - - 21,219
Other comprehensive
income, net of
tax:
Unrealized loss on
securities
available for
sale (729) - - - - - - - (729) (729)
-------
Comprehensive income $20,490 - - - - - - - - -
=======
Stock options
exercised 19 383 - - - - - - 402
Amortization of
award of ESOP and
RRP's - 515 - 598 913 - - - 2,026
Dividends paid - - (8,089) - - - - - (8,089)
Tax benefit of stock
plans - 160 - - - - - - 160
Purchase RRP shares - - - - (7,171) - - - (7,171)
Purchase treasury
shares - - - - - - (35,615) - (35,615)
------- ------- -------- ------- --------- --- --------- ------ --------
Balance at September
30, 1999 $ 3,110 $191,016 $ 96,485 $(12,746) $ (6,258) $ - $ (35,615) $ (70) $235,922
======= ======== ======== ======== ========= === ========= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Cash provided by operating activities:
Net income $ 21,219 $ 17,366 $ 13,327
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of stock benefit plans 2,026 2,097 1,209
Tax benefit of stock plans credited to capital 160 175 292
ESOP forfeitures transferred to treasury stock (44) --- ---
Originations of loans held for sale (9,408) (9,556) (5,360)
Proceeds from sale of loans held for sale 8,432 9,125 8,583
Depreciation and amortization 1,601 1,282 1,103
Deferred income tax provision (benefit) (66) (208) 1,781
Increase in deferred loan fees and costs 2,156 1,816 1,133
Amortization of deferred loan fees and costs (1,650) (1,195) (926)
Amortization of goodwill 202 221 236
Net amortization (accretion) of other purchase
accounting adjustments 80 80 (12)
Gain on sale of premises and equipment (2) (594) (239)
Gain on sale of real estate owned (207) (176) (127)
Gain on sale of loans held for sale (57) (142) (188)
Accretion of discount on purchased loans (13) (352) (17)
(Increase) decrease in accrued interest receivable 292 (839) (411)
Provision for loan losses 816 297 782
Provision for (recovery of) losses on real estate owned (186) 136 (150)
(Increase) decrease in other assets (263) 277 157
Increase (decrease) in income taxes payable (739) 133 (334)
Increase (decrease) in other liabilities 216 746 (5,371)
------ ------ ------
Net cash provided by operating activities 24,565 20,689 15,468
------ ------ ------
Cash used by investing activities:
Net increase in loans (126,827) (113,365) (69,732)
Purchase of mortgage-backed securities (70,074) (100,222) (61,769)
Proceeds from principal repayments of mortgage-
backed securities 73,986 75,827 38,031
Proceeds from maturities and calls of investment securities
held to maturity 20,000 5,000 35,000
Purchase of investment securities held to maturity (915) (29,983) (20,000)
Proceeds from maturities and calls of investment securities
available for sale 20,000 47,582 15,533
Purchase of investment securities available for sale (25,805) (70,427) (29,500)
Proceeds from sale of real estate owned 1,818 2,111 2,202
Purchase of premises and equipment (4,801) (5,602) (4,068)
Proceeds from sale of premises and equipment 118 1,460 587
FHLB stock purchase (3,038) (617) (437)
Other --- --- 306
--------- --------- -------- ---
Net cash used by investing activities (115,538) (188,236) (93,847)
--------- --------- --------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Cash provided by financing activities:
Net increase in deposits 59,469 6,751 59,816
Net (repayments of) proceeds from short-term borrowings --- (30,400) 5,100
Repayments of long-term borrowings --- (75) (299)
Net proceeds from long-term borrowings 80,000 75,000 ---
Increase in advance payments by borrowers for
taxes and insurance 1,343 1,682 712
Dividends paid (8,089) (5,414) (3,017)
Common stock options exercised 402 657 390
Purchase of common stock by recognition and retention plan (7,171) --- ---
Purchase of treasury stock (35,571) --- ---
Net proceeds from issuance of common stock --- 150,224 ---
------ ------- ------
Net cash provided by financing activities 90,383 198,425 62,702
------ ------- ------
Net increase (decrease) in cash and cash equivalents (590) 30,878 (15,677)
Cash and cash equivalents - beginning of period 63,763 32,885 48,562
------ ------ ------
Cash and cash equivalents - end of period $ 63,173 $ 63,763 $ 32,885
======== ======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 48,435 $ 46,509 $ 45,159
Taxes 13,799 12,142 6,918
Noncash investing and financing activities:
Additions to real estate acquired in settlement
of loans through foreclosure 1,488 2,815 2,459
Sale of real estate owned financed by the Company 1,685 524 1,337
Change in unrealized gain (loss) on securities
available for sale (1,187) 1,084 68
Change in deferred taxes related to securities
available for sale 458 (418) (26)
Transfer of loans held for sale to held for maturity --- --- 1,693
Issue ESOP common stock --- 13,269 ---
Addition to retained earnings due to merger of Harbor
Financial, M.H.C. --- 200 ---
Satisfaction of deferred compensation plan --- 1,046 ---
Transfer to short-term borrowings from long-term debt --- 300 ---
Distribution of RRP shares 913 --- ---
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
Notes to Consolidated Financial Statements
September 30, 1999, 1998, and 1997
(1) Summary of Significant Accounting Policies
(a) Nature of Business, Reorganization and Offering of Common Stock
Harbor Florida Bancshares, Inc. (the "Company" or "Bancshares") is the holding
company for Harbor Federal Savings Bank (the "Bank"). The Company owns 100% of
the Bank's common stock. Currently, it engages in no other significant
activities beyond its ownership of the Bank's common stock. Consequently, its
net income is derived from the Bank. The Bank provides a wide range of banking
services and is engaged in the business of attracting deposits primarily from
the communities it serves and using these and other funds to originate primarily
one-to-four family first mortgage loans for retention in its portfolio.
Prior to March 18, 1998, the Company's predecessor entity, Harbor Florida
Bancorp, Inc. ("Bancorp"), was owned approximately 53.37% by Harbor Financial
M.H.C. ("Mutual Holding Company") and 46.63% by public shareholders. On March
18, 1998, pursuant to a plan of conversion and reorganization, and after a
series of transactions: (1) a new entity, Bancshares, became the surviving
corporate entity, (2) Bancshares sold the ownership interest in Bancorp
previously held by the Mutual Holding Company to the public in a subscription
offering (the "Offering") (16,586,752 common shares at $10.00 resulting in net
cash proceeds after costs and funding the ESOP (note 17) of approximately $150
million), (3) previous public shareholders of Bancorp had their shares exchanged
into 14,112,400 common shares of Bancshares (exchange ratio of 6.0094 to 1) (the
"Exchange"), and (4) the Mutual Holding Company ceased to exist. The total
number of shares of common stock outstanding following the Offering and Exchange
was 30,699,152. The reorganization was accounted for in a manner similar to a
pooling of interests and did not result in any significant accounting
adjustments. As a result of the reorganization, the consolidated financial
statements for prior periods have been restated to reflect the changes in the
par value of common stock from $.01 to $.10 per share and in the number of
authorized shares of common stock from 13,000,000 to 70,000,000.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Harbor Florida Bancshares, Inc., the Bank and the Bank's wholly owned
subsidiaries. In consolidation, all significant intercompany accounts and
transactions have been eliminated.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP). In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the statement of financial
condition and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and real estate owned, management obtains independent appraisals
for significant properties.
As of September 30, 1999, 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.
24
<PAGE>
(c) Loan Origination and Commitment Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred, and the net
fee is recognized in income using the interest method over the contractual life
of the loans. Commitment fees and costs relating to commitments whose likelihood
of exercise is remote are recognized over the commitment period on a
straight-line basis. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the life of the loan as an adjustment of yield.
(d) Loan Interest Income
The Company reverses accrued interest related to loans which are 90 days or more
delinquent or placed on non-accrual status. Such interest is recorded as income
when collected. Amortization of net deferred loan 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 or
held-to-maturity securities. Available-for-sale securities are reported at
estimated market value and include securities that are being held for an
unspecified period of time, such as those the Company would consider selling to
meet liquidity needs or as part of the Company's risk management program.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of stockholders'
equity until realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary results in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
The Company does not purchase, sell or utilize off-balance sheet derivative
financial instruments or derivative commodity instruments.
At September 30, 1999 and 1998, the Company had no commitments to sell
investment or mortgage-backed securities.
(f) Loans
Loans are stated at unpaid principal balances, less loans in process, the
allowances for loan losses and net deferred loan origination fees and discounts.
Discounts on mortgage loans are amortized to income using the interest method
over the remaining period to contractual maturity.
The Company follows a consistent procedural discipline and accounts for loan
loss contingencies in accordance with Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies" (Statement 5). The following is
a description of how each portion of the allowance for loan losses is
determined.
25
<PAGE>
The Company segregates the loan portfolio for loan loss purposes into the
following broad segments: commercial real estate; residential real estate;
commercial business; and consumer. The Company provides for a general allowance
for losses inherent in the portfolio by the above categories, which consists of
two components. General loss percentages are calculated based upon historical
analyses. A supplemental portion of the allowance is calculated for inherent
losses which probably exist as of the evaluation date even though they might not
have been identified by the more objective processes used. This is due to the
risk of error and/or inherent imprecision in the process. This portion of the
allowance is particularly subjective and requires judgments based on qualitative
factors which do not lend themselves to exact mathematical calculations such as:
trends in delinquencies and nonaccruals; migration trends in the portfolio;
trends in volume, terms, and portfolio mix; new credit products and/or changes
in the geographic distribution of those products; changes in lending policies
and procedures; loan review reports on the efficacy of the risk identification
process; changes in the outlook for local, regional and national economic
conditions; concentrations of credit; and peer group comparisons.
Specific allowances are provided in the event that the specific collateral
analysis on each classified loan indicates that the probable loss upon
liquidation of collateral would be in excess of the general percentage
allocation. The provision for loan loss is debited or credited in order to state
the allowance for loan losses to the required level as determined above.
The Company considers a loan to be impaired when it is probable that the Company
will be unable to collect all amounts due, both principal and interest,
according to the contractual terms of the loan agreement. When a loan is
impaired, the Company may measure impairment based on (a) the present value of
the expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate, (b) the observable market price of the
impaired loans, or (c) the fair value of the collateral of a
collateral-dependent loan. The Company selects the measurement method on a
loan-by-loan basis, except for collateral-dependent loans for which foreclosure
is probable must be measured at the fair value of the collateral. In a troubled
debt restructuring involving a restructured loan, the Company measures
impairment by discounting the total expected future cash flows at the loan's
original effective rate of interest.
(g) Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market,
comprised of 1-4 family residential loans, are carried at the lower of cost or
estimated market value, in the aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income.
(h) Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, management periodically
performs valuations and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in income (losses) from real
estate operations.
(i) Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation of premises and equipment is provided on the straight-line method
over the estimated useful lives of the related assets. Estimated lives are three
to fifty years for buildings and improvements and three to ten years for
furniture and equipment. Leasehold improvements are amortized on the
straight-line method over the shorter of the remaining term of the related
leases or their estimated useful lives.
Maintenance and repairs are charged to expense as incurred and improvements are
capitalized. The cost and accumulated depreciation relating to premises and
equipment retired or otherwise disposed of are eliminated from the accounts and
any resulting gains or losses are credited or charged to income.
(j) Goodwill
Goodwill is being amortized on a straight-line basis over its estimated useful
life of 15 years. Goodwill is evaluated by management for impairment whenever
events or changes in circumstances indicate that the carrying amount of goodwill
may not be recoverable based on facts and circumstances related to the value of
net assets acquired that gave rise to the goodwill.
26
<PAGE>
(k) Income Taxes
The Company and its subsidiaries file consolidated income tax returns. The
Company uses the asset and liability method to account for income taxes. Under
the asset and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
The tax bad debt reserve method previously available to thrift institutions was
repealed for the Bank effective for the year beginning October 1, 1996.
Consequently, the Bank changed from the reserve method to the specific
charge-off method to compute its bad debt deduction for the tax year beginning
October 1,1996.
As a result of this change in accounting method, the Bank must recapture the
portion of its bad debt reserve (other than the supplemental reserve) that
exceeds its base year reserve (i.e., its tax reserve for the last tax year
beginning before 1988). For financial statement purposes, the Bank has
previously provided deferred taxes on the amount of the bad debt reserve in
excess of the base year. At the time the Bank was required to change its method
of accounting, the total reserve subject to recapture and the base year reserve
was approximately $6.8 million and $14.8 million, respectively.
The recapture amount resulting from the change in the method of accounting is
required to be taken into taxable income ratably (on a straight-line basis) over
a six-year period. If the Bank meets certain residential lending requirements,
the commencement of the recapture period may be delayed until the first taxable
year ending after December 31, 1997. The Bank met such requirements for the tax
years beginning October 1, 1996 and 1997 and began the recapture period in the
tax year beginning October 1, 1998.
The Bank's base year reserve must be recaptured into taxable income as a result
of certain non-dividend distributions. A distribution is a non-dividend
distribution to the extent that, for federal income tax purposes, (i) it is in
redemption of shares, (ii) it is pursuant to a liquidation of the institution,
or (iii) in the case of a current distribution it, together with all other such
distributions during the taxable year, exceeds the Bank's current and post-1951
accumulated earnings and profits. The amount charged against the bank's bad debt
reserves in respect to a distribution, which is includible in gross income, will
equal the amount of such distribution, increased by the amount of federal income
tax resulting from such inclusion.
(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.
27
<PAGE>
(n) Statement of Cash Flows
Cash equivalents include amounts due from banks, interest-bearing deposits in
other banks and Federal funds sold. For purposes of cash flows, the Company
considers all highly liquid debt instruments with original maturities when
purchased of three months or less to be cash equivalents.
(o) Net Income Per Share
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 is effective for
financial statements issued for periods ending after December 15, 1997.
Statement 128 replaced primary and fully diluted earnings per share ("EPS") with
basic and diluted EPS. Basic earnings per share excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if options, convertible securities or warrants to
issue common shares were exercised.
(p) Reclassification
Certain amounts included in the 1998 and 1997 consolidated financial statements
have been reclassified in order to conform to the 1999 presentation.
(q) Derivative Instruments
The Company does not purchase, sell or enter into derivative financial
instruments or derivative commodity instruments as defined by Statement of
Financial Accounting Standards No. 119, "Disclosures about Derivative Financial
Instruments and Fair Value of Financial Instruments."
(r) New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement
133"). The effective date for Statement 133 was delayed by Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - deferral of the effective date of FASB No. 133"
("Statement 137"), to fiscal years beginning after June 15, 2000. Statement 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. It is currently anticipated that the Company
will adopt Statement 133 on October 1, 2000, and that the statement will not
have a significant financial statement impact upon adoption.
In October, 1998, the FASB issued Statement of Financial Accounting Standards
No. 134, "Accounting for Mortgage-backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." ("Statement 134") Statement 134 is effective for the first fiscal
year beginning after December 15, 1998, with earlier adoption permitted. This
statement conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with the
subsequent accounting for securities retained after the securitization of other
types of assets by a nonmortgage entity. It is currently anticipated that the
Company will adopt Statement 134 on October 1, 1999, and that the statement will
not have a significant financial statement impact upon adoption.
28
<PAGE>
(2) Investment and Mortgage-backed Securities
The amortized cost and estimated market value of investment and mortgage-backed
securities at September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
(Dollars in thousands)
Available for sale:
<S> <C> <C> <C> <C>
FHLB notes $ 50,000 $ --- $498 $ 49,502
FNMA notes 19,961 --- 86 19,875
Equity securities 6,320 577 108 6,789
----- --- --- -----
76,281 577 692 76,166
------ --- --- ------
Held to maturity:
FHLB notes 9,995 --- 3 9,992
Municipal securities 915 --- 63 852
--- --- -- ---
10,910 --- 66 10,844
------ --- -- ------
FHLMC mortgage-backed securities 88,191 312 2,444 86,059
FNMA mortgage-backed securities 108,780 314 1,679 107,415
------- --- ----- -------
196,971 626 4,123 193,474
------- --- ----- -------
$284,162 $1,203 $4,881 $280,484
======= ===== ===== =======
</TABLE>
The amortized cost and estimated market value of investment and mortgage-backed
securities at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized Market
cost gains losses Value
---- ----- ------ -----
(Dollars in thousands)
Available for sale:
<S> <C> <C> <C> <C>
FHLB notes $ 50,000 $ 721 $--- $ 50,721
FNMA notes 19,929 414 --- 20,343
Other securities 514 --- 62 452
--- --- -- ---
70,443 1,135 62 71,516
------ ----- -- ------
Held to maturity:
FHLB notes 19,989 279 --- 20,268
FNMA notes 10,000 5 --- 10,005
------ - --- ------
29,989 284 --- 30,273
------ --- --- ------
FHLMC mortgage-backed securities 65,610 1,338 --- 66,948
FNMA mortgage-backed securities 135,439 2,455 --- 137,894
------- ----- --- -------
201,049 3,793 --- 204,842
------- ----- --- -------
$301,481 $5,212 $ 62 $306,631
======= ===== === =======
</TABLE>
29
<PAGE>
The amortized cost and estimated market value of debt securities at September
30, 1999 and September 30, 1998 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
1999 1998
---- ----
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
(Dollars in thousands)
Available for sale:
<S> <C> <C> <C> <C>
Due in one year or less $ --- $ --- $ --- $ ---
Due in one to five years 69,961 69,377 69,929 71,064
------ ------ ------ ------
69,961 69,377 69,929 71,064
------ ------ ------ ------
Held to maturity:
Due in one year or less 9,995 9,992 --- ---
Due in one to five years --- --- 29,989 30,273
Due after ten years 915 852 --- ---
--- --- --- ---
10,910 10,844 29,989 30,273
------ ------ ------ ------
FHLMC mortgage-backed securities 88,191 86,059 65,610 66,948
FNMA mortgage-backed securities 108,780 107,415 135,439 137,894
------- ------- ------- -------
196,971 193,474 201,049 204,842
------- ------- ------- -------
$277,842 $273,695 $300,967 $306,179
======= ======= ======= =======
</TABLE>
There were no sales of available for sale securities during 1999, 1998, or 1997.
As of September 30, 1999, the Company had pledged securities with a market value
of $919,000 and a carrying value of $972,000 to collateralize the public funds
on deposit. The Company had also pledged mortgage-backed securities with a
market value of $1,027,000 and a carrying value of $1,010,000 to collateralize
treasury, tax and loan accounts as of September 30, 1999.
30
<PAGE>
(3) Loans
Loans at September 30, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
1999 1998
---- ----
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C>
Construction 1-4 family $ 91,922 $ 66,671
Permanent 1-4 family 788,408 707,078
Multi-family 15,141 11,074
Nonresidential 99,824 84,254
Land 41,882 27,562
------ ------
Total mortgage loans 1,037,177 896,639
--------- -------
Other loans:
Commercial nonmortgage 21,192 15,074
Home improvement 17,205 19,016
Manufactured housing 16,190 16,418
Other consumer 65,489 59,223
------ ------
Total other loans 120,076 109,731
------- -------
Total loans 1,157,253 1,006,370
--------- ---------
Less:
Loans in process 70,722 46,152
Net deferred loan fees and discounts 4,244 3,700
Allowance for loan losses 11,952 11,818
------ ------
86,918 61,670
------ ------
Total loans, net $1,070,335 $ 944,700
========= =========
Weighted average yield 8.07% 8.50%
</TABLE>
An analysis of the allowance for loan losses for the years ended September 30,
1999, 1998 and 1997 follows:
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Beginning balance $ 11,818 $ 11,691 $ 11,016
Provision for loan losses 816 297 782
Charge-offs (762) (574) (262)
Recoveries 80 404 155
-- --- ---
Ending balance $ 11,952 $ 11,818 $ 11,691
====== ====== ======
At September 30, 1999 and 1998, loans with unpaid principal balances of
approximately $2,541,000 and $2,447,000, 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, 1999, 1998 and
1997 totaled approximately $184,000, $135,000 and $131,000, respectively.
As of September 30, 1999 and 1998, approximately $2,059,000 and $1,909,000,
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, 1999
and 1998 was $4,511,000 and $6,109,000, respectively. The average recorded
investment in impaired loans during the years ended September 30, 1999 and 1998
were approximately $5,118,000 and $7,695,000, respectively. The total specific
allowance for loan losses related to these loans was approximately $-0- and
$29,000, respectively, on September 30, 1999 and 1998. Interest income on
impaired loans of approximately $461,000, $790,000 and $1,147,000 was recognized
in the years ended September 30, 1999, 1998 and 1997, respectively.
31
<PAGE>
As of September 30, 1999 and September 30, 1998, mortgage loans which had been
sold on a recourse basis had outstanding principal balances of $1,413,000 and
$2,213,000, respectively.
32
<PAGE>
Accrued interest receivable at September 30, 1999 and 1998 is summarized below:
1999 1998
---- ----
(Dollars in thousands)
Loans $5,241 $4,983
Investment securities 1,002 1,460
Mortgage-backed securities 1,143 1,274
FHLB stock dividends 194 155
--- ---
$7,580 $7,872
====== ======
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), that
generally expire in 60 days, amounted to approximately $23,547,000 ($5,040,000
fixed rate, interest rates from 5.5% to 8.5%) as of September 30, 1999. In
addition, as of September 30, 1999, the Company had determined that $18,550,000
might be lent to certain homebuilders on a variable rate and home-by-home basis,
subject to underwriting and product approval by the Company. Outstanding
nonmortgage loan commitments as of September 30, 1999 were approximately
$8,114,000
33
<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 at September 30, 1999, 1998 and
1997 are summarized as follows:
1999 1998 1997
---- ---- ----
(Dollars in thousands)
FHLMC $ 11,868 $ 16,214 $ 22,888
FNMA 33,816 34,706 34,217
Other Investors 520 579 2,767
--- --- -----
$ 46,204 $ 51,499 $ 59,872
======== ======== ========
At September 30, 1999 and 1998, collection of principal and interest to be
remitted to FHLMC and FNMA and advance payment for taxes and insurance relating
to FHLMC and FNMA serviced loans are reflected in the consolidated statements of
financial condition as advance deposits by borrowers for taxes and insurance.
(5) Real Estate Owned
Real estate owned at September 30, 1999 and 1998 includes the following:
1999 1998
---- ----
(Dollars in thousands)
Real estate acquired in satisfaction of loans $ 911 $ 3,168
Allowance for losses --- (634)
--- ----
$ 911 $ 2,534
====== ======
Activity in the allowance for losses on real estate owned as of September 30,
1999, 1998 and 1997 is as follows:
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Beginning balance $ 634 $ 578 $ 1,712
Provision for (recovery of) losses (186) 136 (150)
Charge-offs (448) (80) (984)
----- --- ----
Ending balance $ --- $ 634 $ 578
======= ======= =======
Provision for losses on real estate owned is included in income (losses) from
real estate operations in the consolidated statements of earnings.
Legal and consulting fees relating to real estate operations and real estate
owned are included in other expenses in the consolidated statements of earnings.
34
<PAGE>
(6) Premises and Equipment
Premises and equipment at September 30, 1999 and 1998 are summarized as follows:
1999 1998
----- ----
(Dollars in thousands)
Land $ 6,897 $ 5,327
Buildings and leasehold improvements 12,724 11,639
Furniture, fixtures and equipment 11,755 10,091
------ ------
31,376 27,057
Less accumulated depreciation and amortization (11,237) (10,130)
------- -------
$ 20,139 $ 16,927
======= =======
Depreciation expense for the years ended September 30, 1999, 1998 and 1997
totaled $1,473,000, $1,116,000 and $952,000, respectively.
(7) Deposits
Deposits at September 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Period-end Period-end
Amount stated rate Amount stated rate
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial checking $40,455 $28,508
Noninterest-bearing personal
checking accounts 35,721 26,446
NOW 66,184 1.09% 60,129 1.13%
Passbook 108,508 1.97% 92,698 2.06%
Money market checking 1,486 1.27% 1,721 1.27%
Money market investment 41,529 2.54% 39,353 2.59%
Official checks 12,431 10,429
------ ------
306,314 259,284
------- -------
Certificate accounts:
2.01 - 3.00% 129 328
3.01 - 4.00% 11,275 ---
4.01 - 5.00% 335,422 84,192
5.01 - 6.00% 298,719 540,210
6.01 - 7.00% 25,361 33,673
7.01 - 8.00% 375 434
8.01 - 9.00% --- 5
------- -------
671,281 658,842
------- -------
$ 977,595 $ 918,126
========= =========
Weighted average interest rate 3.86% 4.29%
===== =====
</TABLE>
35
<PAGE>
Maturities of outstanding certificates of deposit are summarized as follows:
1999 1998
---- ----
(Dollars in thousands)
Less than one year $ 450,851 $ 460,798
One to three years 203,099 159,160
Over three years 17,331 38,884
------ ------
$ 671,281 $ 658,842
========= =========
The aggregate amount of certificates of deposit in amounts of $100,000 or more
was approximately $68,922,000 and $62,727,000 at September 30, 1999 and 1998,
respectively. Balances of individual certificates in excess of $100,000 are not
federally insured.
Interest expense on deposits is summarized as follows:
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Passbook accounts $ 1,993 $ 1,674 $ 1,356
NOW, money market checking, and money
market investment accounts 1,781 1,894 1,896
Certificate accounts 33,945 36,651 35,892
------ ------ ------
$ 37,719 $ 40,219 $ 39,144
======== ======== ========
Early withdrawal penalties for the years ended September 30, 1999, 1998 and 1997
aggregated $194,563, $191,391, and $205,702, respectively, and are netted
against interest expense on certificate accounts.
Accrued interest payable of $137,425 and $135,942 at September 30, 1999 and
1998, respectively, is included in other liabilities.
(8) Short-Term Borrowings
There were no short-term borrowings at September 30, 1999 or 1998.
Information concerning short-term borrowings is summarized as follows:
1999 1998
---- ----
(Dollars in thousands)
Average balance during the year $ --- $ 12,292
Average interest rate during the year --- 5.83%
Maximum month-end balance during the year $ --- $ 40,300
(9) Long-Term Debt
Long-term debt of $225 million and $145 million at September 30, 1999 and 1998,
respectively, consisted of advances from the Federal Home Loan Bank (FHLB). The
debt is due at various dates through December 2008, with fixed terms and fixed
interest rates of 4.94% to 6.5%.
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.
36
<PAGE>
At September 30, 1999 and 1998, the FHLB advances have fiscal year maturity
dates as follows:
1999 1998
---- ----
Weighted Weighted
Year ending September 30, Amount ave. rate Amount ave. rate
------ ---------- ------ ---------
(Dollars in thousands)
2001 $ 5,000 6.13% $ 5,000 6.13%
2002 10,000 6.10% 10,000 6.10%
2003 22,000 6.20% 22,000 6.20%
2003 and after 188,000 5.44% 108,000 5.62%
------- ----- ------- -----
$ 225,000 5.56% $ 145,000 5.76%
========= ===== ========= =====
Other interest expense is summarized as follows:
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Advances from the FHLB $ 11,117 $ 6,419 $ 5,962
ESOP loan --- 15 49
Other 4 5 4
-------- ------- -------
$ 11,121 $ 6,439 $ 6,015
======== ======= =======
(10) Income Taxes
Income tax expense (benefit) for the years ended September 30, 1999, 1998 and
1997 is summarized as follows:
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Current:
Federal $11,430 $10,751 $ 5,868
State 1,790 1,700 962
----- ----- ---
13,220 12,451 6,830
------ ------ -----
Deferred:
Federal (57) (195) 1,527
State (9) (13) 254
--- ---- ---
(66) (208) 1,781
---- ----- -----
$ 13,154 $ 12,243 $ 8,611
======== ======== =======
37
<PAGE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at September 30, 1999 and 1998 are as
follows:
1999 1998
---- ----
(Dollars in thousands)
Deferred tax assets:
Allowance for bad debts $ 2,418 $ 1,850
Valuation of real estate owned 11 648
Deferred compensation 780 690
--- ---
3,209 3,188
Less valuation allowance --- (130)
--- ----
Total deferred tax assets 3,209 3,058
----- -----
Deferred tax liability:
Net deferred loan fees and costs 3,424 3,220
FHLB stock dividend 840 840
Premises and equipment depreciation difference 654 653
Purchase accounting adjustments 21 52
Cash to accrual adjustment --- 44
Installment sales 95 140
--- ---
Total deferred tax liabilities 5,034 4,949
----- -----
1,825 1,891
Unrealized gain (loss) on available for sale securities (43) 415
---- ---
Net deferred tax liability 1,782 2,306
----- -----
Less liability at beginning of year (2,306) (2,357)
Change in unrealized gain (loss) on available for sale
securities 458 (418)
Other --- 261
--- ---
Provision (benefit) for deferred income taxes $(66) $ (208)
===== =======
Income tax expense on income from continuing operations is different than the
amount computed by applying the United States Federal income tax rate of 35% for
1999 and 1998 and 34% for 1997 to income from continuing operations before
income taxes because of the following:
1999 1998 1997
---- ---- ----
Statutory Federal income tax rate 35.0% 35.0% 34.0%
State income tax (net of Federal income tax benefit) 3.6 3.6 3.6
Other (0.3) 2.7 1.7
----- --- ---
Effective tax expense rate 38.3% 41.3% 39.3%
===== ===== =====
Deferred income taxes payable of approximately $1,782,000 and $2,306,000 at
September 30, 1999 and 1998, respectively, are included in other liabilities.
Retained earnings at September 30, 1999 includes approximately $14,800,000 base
year tax bad debt reserve for which no deferred income tax liability has been
recognized. This amount represents an allocation of income to bad debt
deductions. 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 income would be subject to the then
current corporate income tax rate. The unrecorded deferred income tax liability
on the above amounts was approximately $5,606,000 at September 30, 1999.
38
<PAGE>
(11) Net Income per Share
Net income per share was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the twelve months ended
September 30, 1999, 1998 and 1997. Adjustments have been made, where material,
to give effect to the shares that would be outstanding, assuming the exercise of
dilutive stock options, all of which are considered common stock equivalents.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $21,218,745 $17,366,095 $13,326,761
========== ========== ==========
Weighted average common shares outstanding:
Shares outstanding 29,044,075 30,713,432 30,426,407
Less weighted average uncommitted ESOP shares (1,316,732) (857,136) (322,047)
----------- --------- ---------
Total 27,727,343 29,856,296 30,104,360
========== ========== ==========
Basic earnings per share $ 0.77 $ 0.58 $ 0.44
===== ===== =====
Weighted average common shares outstanding 27,727,343 29,856,296 30,104,360
Additional dilutive shares related to stock options 268,481 416,444 535,587
------- ------- -------
Total weighted average common shares and
equivalents outstanding for
diluted earnings per share computation 27,995,824 30,272,740 30,639,947
========== ========== ==========
Diluted earnings per share $ 0.76 $ 0.57 $ 0.43
===== ===== =====
</TABLE>
Additional dilutive shares are calculated under the treasury stock method
utilizing the average market value of the Company's stock for the period. For
the years ended September 30, 1999, 1998 and 1997, there were 72,500, 15,000,
and -0- shares of common stock options, respectively, that were antidilutive and
not included in the above calculation.
(12) Regulatory and Capital Matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1999, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1999 and 1998, the most recent notification from the Office
of Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
39
<PAGE>
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To be well capitalized
For capital Under prompt corrective
Actual adequacy purpose action provisions
------ ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of September 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $153,633 19.50% $63,035 >8.0% $78,793 >10.0%
Tier I (core) capital (to risk-weighted
assets) 144,448 18.33% 31,517 >4.0% 47,276 > 6.0%
Tier I (core) capital (to adjusted
tangible assets) 144,448 9.93% 58,160 >4.0% 72,701 > 5.0%
Tangible capital (to adjusted tangible
assets) 144,448 9.93% 21,810 >1.5% n/a n/a
As of September 30, 1998
Total capital (to risk-weighted assets) $193,276 27.76% $55,700 >8.0% $69,625 >10.0%
Tier I (core) capital (to risk-weighted
assets) 185,730 26.68% 27,850 >4.0% 41,775 > 6.0%
Tier I (core) capital (to adjusted
tangible assets) 185,730 13.79% 53,883 >4.0% 67,354 > 5.0%
Tangible capital (to adjusted tangible
assets) 185,730 13.79% 20,206 >1.5% n/a n/a
</TABLE>
The Certificate of Incorporation of the Company provides that in no event shall
any record owner of any outstanding Common Stock which is beneficially owned,
directly or indirectly, by a person who beneficially owns in excess of 10% of
the then outstanding shares of Common Stock (the "Limit") be entitled or
permitted to any vote in respect of the shares held in excess of the Limit.
The Company has authorized but not issued preferred stock, subject to regulatory
restrictions and determination of rights and preferences to be determined by the
Board of Directors.
The Plan of Conversion (Note 1a) provided for the establishment of a special
"liquidation account" for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders in an amount equal to the amount of any
dividends waived by the Mutual Holding Company plus the greater of (1) 100% of
the Bank's retained earnings of $34.5 million at September 30, 1992, the date of
the latest balance sheet contained in the final offering circular utilized in
the Bank's initial public offering in the Mutual Holding Company Reorganization,
or (2) 53.41% of the Bank's total stockholders' equity as reflected in its
latest balance sheet contained in the final Prospectus utilized in the Offerings
plus the amounts distributed to Bancorp by the Bank at the formation of Bancorp
in 1998. 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.
Applicable rules and regulations of the OTS impose limitations on dividends paid
by the Bank. Within those limitations, certain "safe harbor" dividends are
permitted; subject to providing the OTS at least 30 days' advance notice. The
safe harbor amount is based upon an institution's regulatory capital level.
Thrift institutions which have capital in excess of all capital requirements
before and after the proposed dividend, are permitted to make capital
distributions during any calendar year up to the greater of (i) 100% of net
income to date during the calendar year, plus one-half of the surplus over such
institution's capital requirements at the beginning of the calendar year, or
(ii) 75% of net income over the most recent four-quarter period. Additional
restrictions would apply to an institution that does not meet its capital
requirement before or after a proposed dividend. As of September 30, 1999,
$20,041,000 was available for distribution from the Bank to the holding company
without further regulatory approval.
40
<PAGE>
13) Commitments and Contingencies
At September 30, 1999, the Company had irrevocable letters of credit aggregating
approximately $1,974,000.
The Company and subsidiaries are defendants in certain other claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated financial statements of the Company and subsidiaries.
(14) Related Party Transactions
Directors, executive officers and principal stockholders of the Company had
certain transactions with the Company in the ordinary course of business, as
described below.
Loan transactions were made on substantially the same terms as those prevailing
at the time for comparable loans to other persons, did not involve more than
normal risk of collectibility, and are performing as agreed.
The summary of changes in the related party loans follows:
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Outstanding loans - beginning of year $ 1,882 $ 2,284 $ 1,786
New loans 6,525 4,714 3,015
Repayments (5,749) (5,116) (2,517)
------- ------- -------
Outstanding balance - end of year $ 2,658 $ 1,882 $ 2,284
======= ======= =======
Frank H. Fee, III, a director of the Company, is also President of the law firm
of Fee & Koblegard, P.A., which does business under the registered name of Fee,
Koblegard & DeRoss, a general practice law firm. The Company paid approximately
$126,000, $122,000, and $150,000 of legal fees in the years ended September 30,
1999, 1998 and 1997, respectively, to this law firm.
Richard K. Davis, a director of the Company, is also chairman of Richard K.
Davis Construction Corp. ("Davis Construction"). In the years ended September
30, 1999 and 1998, the Company paid Davis Construction a total of $43,806 and
$106,668, respectively, for a roof on a new branch facility and re-roofing of
existing branch facilities. Additionally, Davis Construction constructed a new
office and drive-in facility for the Company. This contract for $926,984 was
awarded June 25, 1997. The contract was put out for competitive bid and was
awarded to Davis Construction because it submitted the lowest bid for the
contract. In the years ended September 30, 1999 and 1998, total payments
relating to this contract were $-0- and $853,990, respectively. Additional
payments made during 1998 for tenant improvements in the new office totaled
$102,938.
Richard B. Hellstrom, a director of the Company, is also President of Lindahl,
Browning, Ferrari & Hellstrom, (LBF&H), an engineering firm. During 1999 and
1998, payments to LBH&F for engineering services were $7,393 and $24,650,
respectively.
Prior to Richard N. Bird's nomination and subsequent election to the Board of
Directors of the Company, Bird Realty Group, Inc. entered into a listing
agreement with the Company on property listed at $3,895,000. Commissions of $-0-
and $30,833 were paid to Bird Realty in the years ended September 30, 1999 and
1998, respectively, with regard to the sale of the property.
41
<PAGE>
(15) Other Expense
Other expense for the years ended September 30, 1999, 1998 and 1997 consists of
the following:
1999 1998 1997
---- ---- ----
(Dollars in thousands)
SAIF deposit insurance premium $ 552 $ 572 $ 785
Professional fees 558 589 599
Office supplies and forms 394 399 306
Postage 409 397 364
Telephone 353 360 280
Other 2,406 2,226 1,707
----- ----- -----
$ 4,672 $ 4,543 $ 4,041
======= ======= =======
(16) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Amounts Due From Depository Institutions, Interest-Bearing Assets in
Other Banks and Federal Funds Sold - The carrying amount of these assets is a
reasonable estimate of their fair value.
Investment Securities and Mortgage-Backed Securities Held to Maturity - Fair
value equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Investment Securities Available for Sale - Fair value equals carrying value,
which 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.
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 by
discounting future cash flows using the rates currently offered for deposits of
similar remaining maturities.
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.
Commitments to Extend Credit and Standby Letters of Credit - The fair value of
commitments is insignificant.
42
<PAGE>
The estimated fair values of the Company's financial instruments at September
30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
Assets: (Dollars in thousands)
<S> <C> <C> <C> <C>
Cash and amounts due from depository institutions $ 30,214 $ 30,214 $ 23,861 $ 23,861
Interest-bearing deposits in other banks 32,959 32,959 19,902 19,902
Federal funds sold --- --- 20,000 20,000
Investment securities held to maturity 10,910 10,844 29,989 30,273
Investment securities available for sale 76,166 76,166 71,516 71,516
Mortgage-backed securities held to maturity 196,971 193,474 201,049 204,842
Loans held for sale 1,747 1,747 714 736
Loans 1,082,287 1,078,685 956,518 989,418
Less allowance for loan losses (11,952) --- (11,818) ---
-------- --------- ------- -------
Loans, net 1,070,335 1,078,685 944,700 989,418
--------- --------- ------- -------
Liabilities:
Commercial checking, non-interest-bearing personal, NOW,
passbook, money market accounts and official checks 306,314 306,314 259,284 259,284
Certificate accounts 671,281 670,852 658,842 665,877
Long term debt 225,000 215,007 145,000 148,046
</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.
(17) Benefit Plans
Employee Stock Ownership Plan
In January, 1994, as part of the reorganization to the stock form of ownership,
the Company's Employee Stock Ownership Plan ("ESOP") purchased 900,208 shares of
the Company's common stock at $1.664 per share, or $1,498,000, which was funded
by a loan from an unaffiliated lender. In March 1998 as part of the
reorganization and conversion of Harbor Financial, M.H.C., the Company's ESOP
purchased 1,326,940 shares of the Company's common stock at $10 per share, which
was funded by a loan from the Company. The ESOP covers all eligible employees of
the Company age 21 and over. Dividends paid on unallocated shares reduce the
Company's cash contribution to the ESOP. GAAP requires that any third party
borrowing by the ESOP be reflected as a liability on the Company's statement of
financial condition. The ESOP's borrowing from the Company is eliminated in
consolidation. At September 30, 1999, there were 877,433 allocated shares,
52,380 shares committed to be released, and 1,274,560 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, 1999, 1998 and
1997, totaled $1,101,982, $2,064,654 and $1,155,066, respectively. At September
30, 1999, the fair value of the unallocated shares was $16,172,745.
43
<PAGE>
Recognition and Retention Plans and Stock Option Plans
The Company's 1998 Stock Incentive Plan, adopted on September 18, 1998,
authorizes the award of Recognition and Retention Plan Stock (RRP Stock) and the
granting of options to purchase common stock. As of September 30, 1999, the
Company has awarded 642,828 RRP shares at $10.74 average price per share
totaling $6,900,000. The total award will be amortized as compensation expense
ratably over the participants' vesting periods of 5 to 10 years. In November and
December, 1998, the Company's Recognition and Retention Plans ("RRP") purchased
663,470 shares from market sources at an average cost of $10.81 per share
totaling $7,171,000 in order to fund the grants of RRP stock. In January 1994,
the Company's RRP purchased 385,803 shares at $1.664 per share totaling
$642,000. The Company contributed the funds used to acquire the RRP shares. The
purchase price of $642,000 was amortized as compensation expense ratably over
the participants' vesting period of three years. Total compensation expense
charged to earnings in the years ended September 30, 1999, 1998 and 1997,
totaled $924,354, $33,013 and $53,511, respectively.
At September 30, 1999, the Company had stock option plans for the benefit of
directors, officers, and other key employees of the Company. The Company applies
APB Opinion 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock option
plans since stock option exercise prices are equal to market price at dates of
grant. The number of shares of common stock reserved for issuance under the 1994
stock option plan is equal to 1,286,012 shares, or 9.6% of the total number of
common shares issued in the minority offering pursuant to the Company's
reorganization to the stock form of ownership. The number of shares of common
stock reserved for issuance under the 1998 Stock Incentive Plan is equal to
1,658,675 (1,558,615 shares granted at September 30, 1999) or 5.40% of the
outstanding shares of common stock as of the effective date of the plan. The
stock options vest in equal installments over varying periods not to exceed 10
years, depending upon the individual's position in the Company. At September 30,
1999, 174,478 shares were available for future awards.
A summary of the Company's stock option plans is presented below:
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997
---- ---- ----
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 1,919,673 $8.90 807,038 $1.94 1,022,234 $ 1.79
Options granted 60,000 $11.86 1,513,615 $10.70 27,042 $ 5.57
Options exercised (190,137) $2.12 (387,496) $1.70 (234,206) $ 1.66
Options forfeited (73,111) $10.36 (13,484) $1.66 (8,032) $ 3.15
-------- ------ -------- ----- ------- ------
Options outstanding end of year 1,716,425 $9.69 1,919,673 $8.90 807,038 $ 1.94
========= ===== ========= ===== ======= ======
Options exercisable at year-end 305,253 146,733 302,056
======= ======= =======
Weighted average fair value of options
granted during the year $ 4.35 $ 3.97 $ 1.23
====== ====== ======
</TABLE>
44
<PAGE>
The following table summarizes information about stock options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices @ 9/30/99 life price @ 9/30/99 price
- --------------- --------- ---- ----- --------- -----
<S> <C> <C> <C> <C> <C>
$ 1.664 150,358 4.3 $ 1.66 150,358 $ 1.664
$ 2.746 to 4.493 46,569 5.9 $ 3.76 7,912 2.746
$ 5.638 to 5.658 21,032 7.3 $ 5.66 --- ---
$ 6.365 to 6.781 3,004 7.7 $ 6.41 --- ---
$ 10.69 to 12.00 1,495,462 10.8 $10.75 146,983 10.69
</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:
1999 1998
---- ----
Net income As reported $ 21,219 $ 17,366
Pro forma 20,119 17,326
Net income per share - basic As reported .77 .58
Pro forma .73 .58
Net income per share - diluted As reported .76 .57
Pro forma .72 .57
Only options granted after October 1, 1995 are included in pro forma amounts.
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 Grant date Risk free Expected Expected Expected
Date of grant options granted fair value Exercise price interest rate life (years) volatility dividend
- ------------- --------------- ---------- -------------- ------------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
01/06/96 27,038 $ 1.10 $ 4.49 5.421% 5 38.71 $ .27
11/27/96 6,009 1.21 5.64 5.912 5 29.89 .30
01/06/97 18,028 1.19 5.66 6.291 5 28.33 .30
06/16/97 2,704 1.50 6.37 6.276 5 30.71 .32
06/20/97 300 1.67 6.78 6.271 5 31.11 .32
07/08/98 15,000 4.68 12.00 5.433 5 32.66 .38
09/18/98 1,498,615 3.96 10.69 4.517 5 35.13 .38
12/08/98 1,500 4.21 10.94 4.379 5 36.20 .46
04/19/99 58,500 4.35 11.88 5.044 5 32.25 .46
</TABLE>
45
<PAGE>
Other Plans
The Company has a noncontributory-defined benefit pension plan covering all
employees who have attained one year of service and 21 years of age. Pension
expense was $11,500, $8,700, and $8,500, respectively, for the years ended
September 30, 1999, 1998 and 1997. 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 8%. The date of the most recent
actuarial evaluation is July 1, 1998.
The Company's 401(k) Profit Sharing Plan and Trust (the "401(k) Plan") covers
all eligible employees of the Company age 21 and over. An eligible employee may
elect to contribute to the 401(k) Plan in the form of deferrals of between 1%
and 15% of the total compensation that would otherwise be payable to the
employee. Employee contributions are fully vested and nonforfeitable at all
times. The 401(k) Plan permits contributions by the Company. The Company
currently makes matching contributions of 25% of the first 6% of each
participant's contributions. For the years ended September 30, 1999, 1998 and
1997, the Company's matching contribution totaled approximately $96,000, $89,000
and $83,000, respectively.
The Company has a deferred compensation plan for Directors (the "Directors'
Deferred Compensation Plan") who may elect to defer all or part of their annual
director fees to fund the Directors' Deferred Compensation Plan. The plan
provides that deferred fees are to earn interest at an annual rate equal to the
30-month certificate of deposit rate, adjusted and compounded quarterly. At
September 30, 1999 and 1998, deferred directors' fees included in other
liabilities aggregated $235,234 and $216,737, respectively. Directors may elect
to have their deferred compensation balance invested in shares of the Company's
common stock. Such purchases were approximately $113,000, $101,000 and $273,000
in 1999, 1998 and 1997, respectively. After purchase of shares of the Company's
common stock, the Company's liability has been satisfied except for distribution
of the shares to the director when he ceases to be a director. At September 30,
1999 and 1998, the Directors' Deferred Compensation Plan held 303,386 and
323,799 shares of the Company's common stock, respectively.
The Company also has a retirement plan for nonemployee directors (the "Plan").
The annual basic benefit under the Plan is based on a percentage of the average
three years director's fees preceding the termination of service multiplied by
the number of years of service, not to exceed 50% of the average annual
director's fees. During the years ended September 30, 1999, 1998 and 1997, the
charge to earnings relating to the Plan was insignificant.
(18) Quarterly Results of Operations (Unaudited)
The quarterly results of operations for the years ended September 30, 1999 and
1998 are as follows:
For the three months ended fiscal 1999
--------------------------------------
Sept.30 June 30 March 31 December 31
------- ------- -------- -----------
(Dollars in thousands except share data)
Interest income 26,344 $ 26,047 $ 25,847 $ 25,647
Interest expense 12,239 12,198 12,221 12,182
------ ------ ------ ------
Net interest income 14,105 13,849 13,626 13,465
Provision for loan losses 152 155 354 155
--- --- --- ---
Net interest income after
provision for loan losses 13,953 13,694 13,272 13,310
Total other income 1,519 1,531 1,461 1,482
Total other expenses 6,707 6,346 6,306 6,490
----- ----- ----- -----
Income before income taxes 8,765 8,879 8,427 8,302
Income tax 3,197 3,405 3,204 3,348
----- ----- ----- -----
Net income $ 5,568 $ 5,474 $5,223 $ 4,954
======= ======= ====== =======
Net income per share
Basic $ 0.21 $ 0.20 $ 0.19 $0.17
====== ====== ====== =====
Diluted $ 0.21 $ 0.20 $ 0.18 $0.17
====== ====== ====== =====
46
<PAGE>
For the three months ended fiscal 1998
--------------------------------------
Sept. 30 June 30 March 31 December 31
-------- ------- -------- -----------
(Dollars in thousands except share data)
Interest income $ 25,015 $ 24,315 $ 22,773 $ 23,054
Interest expense 12,057 11,375 11,459 11,766
------ ------ ------ ------
Net interest income 12,958 12,940 11,314 11,288
Provision for (recovery of)
loan losses 66 (231) 651 (188)
-- ----- --- -----
Net interest income after
provision for (recovery
of)loan losses 12,892 13,171 10,663 11,476
Total other income 1,298 1,887 1,085 1,580
Total other expenses 6,412 5,987 5,927 6,117
----- ----- ----- -----
Income before income taxes 7,778 9,071 5,821 6,939
Income tax 3,231 3,736 2,432 2,844
----- ----- ----- -----
Net income $ 4,547 $ 5,335 $3,389 $ 4,095
======= ======= ====== =======
Net income per share
Basic $ 0.15 $ 0.18 $ 0.11 $0.14
====== ====== ====== =====
Diluted $ 0.15 $ 0.18 $ 0.11 $0.13
====== ====== ====== =====
47
<PAGE>
(19) Parent Company Financial Information
Condensed Statements of Financial Condition at September 30, 1999 and 1998 and
Condensed Statements of Operations and Cash Flows for the years ended September
30, 1999 and 1998 and the period June 25, 1997 through September 30, 1997 are
shown below (in thousands) for Bancshares and it's predecessor, Bancorp (Note
1a), which was formed on June 25, 1998 in a reorganization accounted for in a
manner similar to a pooling of interests:
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
1999 1998
---- ----
(Dollars in thousands
except share data)
Assets:
<S> <C> <C>
Cash deposited at Harbor Federal $ 9,832 $ 12,215
Investment securities available for sale at market value 6,789 453
Investment in Harbor Federal 216,450 249,956
Income tax receivable from Harbor Federal 11 34
Due from Harbor Federal 3,259 1,277
Accrued interest receivable 61 ---
Other assets 6 ---
-------- --------
Total assets $236,408 $263,935
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Due to Harbor Federal $ 273 $ 152
Other liabilities 213 64
--- --
Total liabilities 486 216
--- ---
Stockholders' Equity:
Preferred stock; $.10 par value; authorized
10,000,000 shares; none issued and
outstanding --- ---
Common stock; $.10 par value; authorized
70,000,000 shares; issued 31,099,967
shares issued and 28,008,627 outstanding
at September 30, 1999 and 30,909,830
issued and outstanding at September 30, 1998 3,110 3,091
Paid in capital 191,016 189,958
Retained earnings 96,485 83,355
Common stock purchased by:
Employee stock ownership plan (ESOP) (12,746) (13,344)
Recognition and Retention Plan ("RRP) (6,258) ---
Net unrealized gain on investment securities
available for sale, net of income
taxes (70) 659
Treasury stock, at cost, 3,091,340 shares (35,615) ---
-------- ---
Total stockholders' equity 235,922 263,719
------- -------
Total liabilities and stockholders' equity $ 236,408 $ 263,935
========= =========
</TABLE>
48
<PAGE>
Condensed Statements of Operations
<TABLE>
<CAPTION>
For the period
Year ended Year ended June 25, 1997
Sept. 30, Sept. 30, through Sept.
1999 1998 30, 1997
---- ---- --------
(Dollars in thousands)
<S> <C> <C> <C>
Interest on investment securities 238 --- ---
--- --- ---
Total interest income 238 --- ---
--- --- ---
Other expense
Management fee to Harbor Federal $ 175 $ 161 $ 38
Other expenses 423 197 27
--- --- --
Total other expense 598 358 65
Loss before income tax benefit
and earnings of
Harbor Federal (360) (358) (65)
Income tax benefit 136 76 10
--- -- --
Loss before earnings of Harbor Federal (224) (282) (55)
Equity in net earnings of Harbor Federal 21,443 17,648 3,565
------ ------ -----
Net income $21,219 $17,366 $3,510
======= ======= ======
</TABLE>
49
<PAGE>
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
For the period
June 25, 1997
Year ended September 30 through
----------------------- September 30,
1999 1998 1997
---- ---- ----
Cash used by operating activities: (Dollars in thousands)
<S> <C> <C> <C>
Net income $ 21,219 $ 17,366 $ 3,510
Adjustments to net income:
Equity in earnings of Harbor Federal (21,443) (17,648) (3,565)
Increase in accrued interest receivable (61) --- ---
(Increase) decrease in income tax receivable 23 (53) (10)
Increase in other assets (6) --- ---
Increase in payable to Harbor Federal 175 160 37
Increase (decrease) in other liabilities (56) 86 27
---- -- -- --
Net cash used by operating activities (149) (89) (1)
----- - ---- ---
Cash used by investing activities:
Purchase of investment securities available for sale (5,805) (514) ---
------- ----- ---
Net cash used by investing activities (5,805) (514) ---
------- ----- ---
Cash provided by financing activities:
Net proceeds from issuance of common stock --- 150,223 ---
(Investment in)/amounts received from Harbor Federal 54,000 (143,889) 12,000
Dividends paid (8,089) (5,414) (790)
Purchase common stock to fund RRP Plan (7,171) --- ---
Purchase Treasury Stock (35,571) --- ---
Common stock options exercised 402 657 32
----- ----- ------
Net cash provided by financing activities 3,571 1,577 11,242
----- ----- ------
Net (decrease) increase in cash and
cash equivalents (2,383) 974 11,241
Cash and cash equivalents - beginning of period 12,215 11,241 ---
------ ------ ---
Cash and cash equivalents - end of period $ 9,832 $ 12,215 $ 11,241
======= ======== ========
Supplemental disclosures:
Changes in unrealized gain (loss) on securities
available for
sale net of tax $ (729) $ 666 $ 36
Amortization of stock benefit plans 2,026 2,097 369
Issuance of ESOP common stock --- 13,269 ---
Satisfaction of deferred compensation plan --- 1,046 ---
Tax benefit of employee benefit plans 160 175 ---
Distribution of RRP shares 913 --- ---
ESOP forfeitures transferred to treasury stock 44 --- ---
</TABLE>
50
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001029407
<NAME> Harbor Florida Bancshares, Inc.
<MULTIPLIER> 1000
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 30214
<INT-BEARING-DEPOSITS> 32959
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76166
<INVESTMENTS-CARRYING> 207881
<INVESTMENTS-MARKET> 204318
<LOANS> 1072082
<ALLOWANCE> 11952
<TOTAL-ASSETS> 1462550
<DEPOSITS> 977595
<SHORT-TERM> 0
<LIABILITIES-OTHER> 24033
<LONG-TERM> 225000
0
0
<COMMON> 3110
<OTHER-SE> 232812
<TOTAL-LIABILITIES-AND-EQUITY> 1462550
<INTEREST-LOAN> 82107
<INTEREST-INVEST> 19280
<INTEREST-OTHER> 2497
<INTEREST-TOTAL> 103884
<INTEREST-DEPOSIT> 37719
<INTEREST-EXPENSE> 48840
<INTEREST-INCOME-NET> 55044
<LOAN-LOSSES> 816
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 25849
<INCOME-PRETAX> 34373
<INCOME-PRE-EXTRAORDINARY> 21219
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21219
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 3.99
<LOANS-NON> 2541
<LOANS-PAST> 0
<LOANS-TROUBLED> 992
<LOANS-PROBLEM> 2639
<ALLOWANCE-OPEN> 11818
<CHARGE-OFFS> 762
<RECOVERIES> 80
<ALLOWANCE-CLOSE> 11952
<ALLOWANCE-DOMESTIC> 11952
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
