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 4
Independent Auditors' Report 15
Consolidated Statements of Financial Condition
- September 30, 2000 and 1999 16
Consolidated Statements of Earnings -
Years ended September 30, 2000, 1999, and 1998 17
Consolidated Statements of Stockholders'
Equity and Comprehensive Income - Years
ended September 30, 2000, 1999, and 1998 18
Consolidated Statements of Cash Flows -Years
ended September 30, 2000, 1999, and 1998 20
Notes to the Consolidated Financial Statements 22
All schedules are omitted as they are not required or are not applicable or the
required information is shown in the applicable consolidated financial
statements or notes thereto.
<PAGE>
Selected Consolidated Financial Data
Selected Consolidated Financial Condition Data
<TABLE>
<CAPTION>
September 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets $1,582,695 $1,462,550 $1,350,583 $1,131,024 $1,057,443
Loans (net) (1) 1,251,669 1,070,335 944,700 834,270 765,019
Federal funds sold --- --- 20,000 250 16,075
Investment securities (2) 85,967 87,076 101,505 52,553 53,493
Mortgage-backed securities 165,059 196,971 201,049 176,854 153,293
Real estate owned 871 911 2,534 2,314 3,118
Deposits 1,098,537 977,595 918,126 911,576 851,853
Short-term borrowings 18,000 --- --- 30,100 25,000
Long-term debt 220,091 225,000 145,000 70,375 70,674
Stockholders' equity 219,384 235,922 263,719 96,802 84,832
</TABLE>
(1) Excludes loans held for sale of $2,548,000, $1,747,000, $714,000, $141,000,
and $4.9 million, as of September 30, 2000, 1999, 1998, 1997, and 1996,
respectively.
(2) Includes investments available for sale of $85.8 million, $76.1 million,
$71.5 million, $47.6 million, and $33.5 million in 2000, 1999, 1998, 1997
and 1996, respectively.
Selected Consolidated Operating Data
<TABLE>
<CAPTION>
Years Ended September 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $112,322 $103,884 $95,158 $84,814 $74,357
Interest expense 55,215 48,840 46,658 45,159 39,114
------ ------ ------ ------ ------
Net interest income 57,107 55,044 48,500 39,655 35,243
Provision for (recovery of) loan losses 847 816 297 782 (76)
---- ----- ----- ------ ----
Net interest income after provision for loan losses 56,260 54,228 48,203 38,873 35,319
------ ------ ------ ------ ------
Other income:
Other fees and service charges 6,812 5,505 4,074 3,319 2,797
Other 1,058 675 1,864 905 88
----- --- ----- --- --
Total other income 7,870 6,180 5,938 4,224 2,885
----- ----- ----- ----- -----
Other expenses:
Compensation and benefits 16,503 15,413 14,282 11,931 10,690
Occupancy 4,185 3,422 3,365 3,046 2,632
SAIF deposit insurance premium 299 552 572 785 6,300
Other 7,676 6,648 6,313 5,397 4,510
----- ----- ----- ----- -----
Total other expenses 28,663 26,035 24,532 21,159 24,132
------ ------ ------ ------ ------
Income before income taxes. 35,467 34,373 29,609 21,938 14,072
Income tax expense 13,719 13,154 12,243 8,611 5,432
------ ------ ------ ----- -----
Net income $ 21,748 $ 21,219 $ 17,366 $ 13,327 $ 8,640
======== ======== ======== ======== =======
Net income per share:
Basic $.89 $.77 $.58 $.44 $.29
Diluted $.88 $.76 $.57 $.43 $.29
</TABLE>
2
<PAGE>
Selected Financial Ratios
<TABLE>
<CAPTION>
At or for the years ended September 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (1) 1.44% 1.49% 1.40% 1.22% .91%
Return on average stockholders' equity (1) 9.82 8.54 9.34 14.72 10.51
Net interest rate spread 3.34 3.30 3.40 3.36 3.40
Net yield on average interest-earning assets 3.91 3.99 4.04 3.72 3.79
Noninterest expense to average assets (1) 1.90 1.83 1.98 1.93 2.53
Average interest-earnings assets to average
interest-bearing liabilities 115.34 119.76 116.54 108.33 109.24
Efficiency Ratio (1) 44.49 42.84 46.96 48.83 62.83
Asset Quality Ratios:
Nonperforming assets to total assets .23 .24 .37 .43 .50
Allowance for loan losses to total loans 1.02 1.12 1.25 1.40 1.44
Allowance for loan losses to nonperforming
loans 460.19 470.31 483.13 453.11 507.25
Capital Ratios:
Average stockholders' equity to average assets 14.65 17.45 15.01 8.26 8.62
Stockholders' equity to assets at period end 13.86 16.13 19.53 8.56 8.02
</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%.
3
<PAGE>
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.
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, insurance commissions, 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 data processing services. 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, 2000, the Company's
cumulative one-year interest rate sensitivity "gap" was negative 11.33%.
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
4
<PAGE>
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.
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, 2000. 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
three months Twelve months years five years Over five years Total
------------ ------ ----- ---------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Mortgage loans (2)
Fixed rate $ 26,737 $ 78,690 $175,018 $ 136,792 $ 376,002 $ 793,239
Adjustable rate 41,621 132,403 86,820 60,213 7,286 328,343
Other loans (2):
Fixed rate 15,414 46,243 31,283 4,455 740 98,135
Adjustable rate 37,086 7,943 325 228 1,647 47,229
Mortgage-backed securities:
Fixed rate (3) 6,968 20,495 42,162 37,066 48,880 155,571
Adjustable rate 986 8,502 -- -- -- 9,488
Investment securities and
other assets 13,229 29,846 49,392 -- 200 92,667
------ ------ ------ --------- ------------ ------
Total $ 142,041 $ 324,122 $ 385,000 $ 238,754 $ 434,755 $1,524,672
--------- --------- --------- --------- --------- ----------
Interest-bearing liabilities:
Deposits (4):
NOW accounts $ 7,088 $ 21,264 $ 27,218 $ 9,799 $ 5,512 $ 70,881
Passbook accounts 14,315 42,944 32,065 5,130 977 95,431
Money market accounts 19,045 57,134 18,283 731 30 95,223
Certificates of deposits 139,818 305,947 263,648 12,109 1,217 722,739
Borrowings 13,000 25,000 117,091 78,000 5,000 238,091
------------ ------ ------- ------ ----- -------
Total $ 193,266 $ 452,289 $ 458,305 $105,769 $ 12,736 $ 1,222,365
--------- --------- --------- -------- -------- -----------
Excess (deficiency) of interest
earning assets over
interest-bearing liabilities $ (51,225) $ (128,167) $ (73,305) $ 132,985 $ 422,019 $ 302,307
========== =========== ========== ========= ========= =========
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities $ (51,225) $ (179,392) $ (252,697) $ (119,712) $ 302,307
========== =========== =========== =========== =========
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities as a percent of
total assets (3.24)% (11.33)% (15.97)% (7.56)% 19.10%
======= ======== ======== ======= ======
</TABLE>
--------------------------
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments. Estimated
prepayment statistics were obtained from the research department of a
primary securities dealer. For fixed rate mortgages and mortgage-backed
securities, annual prepayment rates from 9 to 49%, 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 $81.5 million at September 30, 2000.
Nonperforming loans aggregating $2.8 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 $47.1 million at September 30, 2000.
5
<PAGE>
(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
$279.1 million, or negative 17.64% of total assets.
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 present values for assets,
liabilities and off-balance sheet contracts using a discounted cash flow
methodology. These amounts are netted together to determine net portfolio value.
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.
Presented below is an analysis of the Company's interest rate risk at September
30, 2000 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. $ 193,137 $(57,799) (23.0)%
+100 B.P. $ 219,743 $(31,193) (12.4)%
0 B.P. $ 250,936 $ 0 0 %
-100 B.P. $ 276,926 $ 25,990 10.4 %
-200 B.P. $ 283,726 $ 32,790 13.1 %
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 Pricing 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 prices for available
for sale equity securities. Equity pricing risk is managed through company
diversification and individual position limits established in the investment
policy. At September 30, 2000 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, 2000 based on percentage changes
in fair value.
Percent change Fair value of available-
in fair value for-sale securities
------------- -------------------
(Dollars in thousands)
20 % $7,835
10 % $7,182
0 % $6,529
(10)% $5,876
(20)% $5,223
Actual future price appreciation or depreciation may be different from the
changes identified in the table above.
Analysis of Net Interest Income
The Company's earnings historically depended primarily upon its 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,
-------------------------
2000 1999 1998
---- ---- ----
Interest Interest Interest
Average & Yield/ Average & Yield/ Average & Yield/
Balance Dividends Rate Balance Dividends Rate Balance Dividends Rate
------- --------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets (1):
Federal funds sold $ --- $ --- ---% $ 5,699 $ 299 5.25% $ 7,959 $ 448 5.63%
Interest-bearing deposits 15,416 844 5.47 45,317 2,198 4.85 40,531 2,233 5.51
Investment securities 97,490 5,849 6.00 102,585 6,107 5.95 82,076 4,945 6.02
Mortgage-backed
securities 180,460 11,537 6.39 207,544 13,173 6.35 173,177 11,301 6.53
Mortgage loans 1,035,615 81,928 7.91 902,964 71,600 7.93 791,491 66,329 8.38
Other loans 130,580 12,164 9.32 114,359 10,507 9.19 105,287 9,902 9.40
------- ------ ---- ------- ------ ---- ------- ----- ----
Total interest-earning
assets 1,459,561 112,322 7.70 1,378,468 103,884 7.54 1,200,521 95,158 7.93
--------- ------- ---- --------- ------- ---- --------- ------ ----
Total noninterest-earning
assets 52,207 45,038 38,155
------ ------ ------
Total assets 1,511,768 1,423,506 1,238,676
========= ========= =========
Liabilities and
Stockholders' Equity:
Interest-bearing liabilities
Deposits:
Transaction accounts $ 221,001 $2,466 1.12% $ 180,662 $1,781 0.99% $ 158,723 $1,894 1.19%
Passbook savings 106,465 2,002 1.88 103,272 1,993 1.93 87,760 1,674 1.91
Official checks 9,161 --- .00 8,693 --- .00 8,004 --- .00
Certificate savings 695,866 37,546 5.40 660,584 33,945 5.14 670,628 36,651 5.47
------- ------ ---- ------- ------ ---- ------- ------ ----
Total deposits 1,032,493 42,014 4.07 953,211 37,719 3.96 925,115 40,219 4.35
FHLB advances 232,917 13,195 5.67 197,767 11,117 5.62 104,877 6,419 6.12
Other borrowings
16 6 35.15 --- 4 .00 167 20 11.98
-- - ----- ---- - --- --- -- -----
Total interest-bearing
liabilities 1,265,426 55,215 4.36 1,150,978 48,840 4.24 1,030,159 46,658 4.53
--------- ------ ---- --------- ------ ---- --------- ------ ----
Noninterest-bearing
liabilities 24,922 24,058 22,648
------ ------ ------
Total liabilities 1,290,348 1,175,036 1,052,807
Stockholders' equity 221,420 248,470 185,869
------- ------- -------
Total liabilities and
stockholders'
equity 1,511,768 1,423,506 1,238,676
========= ========= =========
Net interest income/
interest rate spread
(2) $ 57,107 3.34% $ 55,044 3.30% $ 48,500 3.40%
====== ==== ======== ==== ======== ====
Net interest-earning
assets/net interest
margin (3) $ 194,135 3.91% $ 227,490 3.99% $ 170,362 4.04%
========= ==== ========= ==== ========= ====
Interest-earning assets to
interest-bearing
liabilities 115.34% 119.76% 116.54%
======= ====== ======
</TABLE>
---------------
(1) Average balances and rates include nonaccruing loans.
8
<PAGE>
(2) Interest rate spread represents the difference between weighted average
interest rates earned on interest-earning assets and the weighted average
interest rates paid on interest-bearing liabilities.
(3) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
Rate/Volume Analysis
The relationship between the volume and rates of the Company's interest-earning
assets and interest-bearing liabilities influences the Company's net interest
income. The following table reflects the sensitivity of the Company's interest
income and interest expense to changes in volume and in prevailing interest
rates. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on effects attributable to: (1) changes in
volume (changes in volume multiplied by old rate); (2) changes in rate (changes
in rate multiplied by old volume); and (3) net change. Changes attributable to
the combined impact of volume and rates have been allocated proportionately to
changes due to volume and changes due to rate.
<TABLE>
<CAPTION>
Years Ended September 30,
Increase (Decrease)
-------------------
2000 vs. 1999 1999 vs. 1998 1998 vs. 1997
------------- ------------- -------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- --- ------ ---- ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits $ (1,935) $ 282 $(1,653) $ 118 $ (302) $(184) $ 638 $30 $668
Investment securities (288) 30 (258) 1,163 (1) 1,162 1,086 (7) 1,079
Mortgage-backed securities (1,731) 95 (1,636) 2,181 (309) 1,872 1,294 (81) 1,213
Mortgage loans 10,499 (171) 10,328 8,954 (3,683) 5,271 6,207 122 6,329
Nonmortgage loans:
Commercial loans 446 81 527 520 (74) 446 417 (22) 395
Consumer loans 1,075 55 1,130 320 (161) 159 601 59 660
----- -- ----- --- ---- --- --- -- ---
Total interest income 8,066 372 8,438 13,256 (4,530) 8,726 10,243 101 10,344
----- --- ----- ------ ------ ----- ------ --- ------
Interest expense:
Deposits:
Transaction accounts $ 437 $248 $ 685 $ 213 $(326) $ (113) $ 224 $ (226) $ (2)
Passbook savings 123 (114) 9 299 20 319 192 126 318
Certificate savings 1,904 1,697 3,601 (516) (2,190) (2,706) 409 350 759
----- ----- ----- ---- ------ ------ --- --- ---
Total deposits 2,464 1,831 4,295 (4) (2,496) (2,500) 825 250 1,075
FHLB advances 1,911 167 2,078 4,736 (38) 4,698 331 126 457
Other borrowings 2 --- 2 (16) --- (16) (36) 3 (33)
- - --- --- --- - ---
Total interest expense 4,377 1,998 6,375 4,716 (2,534) 2,182 1,120 379 1,499
----- ----- ----- ----- ------ ----- ----- --- -----
Net interest income $3,689 $ (1,626) $ 2,063 $8,540 $ (1,996) $ 6,544 $9,123 $ (278) $ 8,845
====== ========= ======= ====== ========= ======= ====== ======= =======
</TABLE>
9
<PAGE>
Results of Operations
Year Ended September 30, 2000 Compared to Year Ended September 30, 1999
General
Diluted earnings per share for the year ended September 30, 2000, increased
15.8% to 88 cents per share on net income of $21.7 million, compared to 76 cents
per share on net income of $21.2 million for the same period last year. This
increase was due primarily to the growth in the loan portfolio, increased
non-interest income due to the growth in transaction accounts partially offset
by increased operating expenses and a decrease in the average number of shares
outstanding as a result of the stock repurchase plan. Net interest income
increased 3.7% to $57.1 million for the year ended September 30, 2000, compared
to $55.0 million for the year ended September 30, 1999. This increase was due to
an increase in interest income of $8.4 million offset by an increase in interest
expense of $6.3 million. Other income increased to $7.9 million for the year
ended September 30, 2000 from $6.2 million for the year ended September 30,
1999. Other expenses increased to $28.7 million for the year ended September 30,
2000 from $26.0 million for the year ended September 30, 1999.
Interest Income
Total interest income increased to $112.3 million for the year ended September
30, 2000 from $103.9 million for the year ended September 30, 1999 as a result
of an increase in average interest-earning assets to $1.5 billion for the year
ended September 30, 2000 from $1.4 billion for the year ended September 30,
1999. The average rate earned on interest-earning assets increased to 7.70% for
the year ended September 30, 2000, from 7.54% for the year ended September 30,
1999, a increase of 16 basis points. This increase was due primarily to the
change in the mix of interest-earning assets resulting from the increase in
higher yielding loans and the decrease in lower yielding securities and
interest-bearing deposits in other banks. Interest income on loans increased
$12.0 million to $94.1 million for the year ended September 30, 2000 from $82.1
million for the year ended September 30, 1999. This increase was a result of a
$148.9 million increase in the average balance to $1.2 billion in 2000 from $1
billion in 1999. The average yield on loans remained constant at 8.07% in 2000
and 1999. 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 mortgage-backed
securities decreased $1.7 million to $11.5 million for the year ended September
30, 2000 from $13.2 million for the year ended September 30, 1999. This decrease
was primarily the result of a $27.1 million decrease in the average balance to
$180.5 million in 2000 from $207.5 million in 1999. The decrease in the average
balance of mortgage-backed securities was primarily due to repayments. Other
interest income, mainly consisting of interest on interest-bearing deposits in
other banks and federal funds sold, decreased $1.7 million to $844,000 for the
year ended September 30, 2000 from $2.5 million for the year ended September 30,
1999. This decrease was primarily the result of a $35.6 million decrease in the
average balance to $15.4 million in 2000 from $51.0 million in 1999. The
decrease in the average balance of interest-bearing deposits and federal funds
sold was primarily due to the funding of the repurchase of the Company's common
stock.
Interest Expense
Total interest expense increased to $55.2 million for the year ended September
30, 2000 from $48.8 million for the year ended September 30, 1999. This increase
was due primarily to an increase in average interest-bearing liabilities to $1.3
billion for the year ended September 30, 2000 from $1.2 billion for the year
ended September 30, 1999. The average interest rate paid on interest-bearing
liabilities was 4.36% for the year ended September 30, 2000 compared to 4.24%
for the year ended September 30, 1999, an increase of 12 basis points. Interest
expense on deposits increased $4.3 million to $42.0 million for the year ended
September 30, 2000 from $37.7 million for the year ended September 30, 1999.
This increase was a result of a $79.3 million increase in the average balance to
$1 billion in 2000 from $953.2 million in 1999 and an increase of 11 basis
points in the average interest rate paid to 4.07% for the year ended September
30, 2000 from 3.96% for the year ended September 30, 1999. The average deposit
mix changed to 32.6% and 67.4% of core deposits and certificates, respectively,
for the year ended September 30, 2000 from 30.7% and 69.3% for the same period
in 1999. Interest expense on FHLB advances and other borrowings increased $2.1
million to $13.2 million for the year ended September 30, 2000 from $11.1
million for the year ended September 30, 1999. This increase was the result of
an increase of $35.1 million in the average balance to $232.9 million in 2000
from $197.8 million in 1999 primarily due to proceeds from new short-term daily
rate advances taken in order to fund short-term cash operating needs in 2000 and
new long-term fixed rate advances taken in order to fund the purchase of
mortgage-backed securities and investment securities in 1999.
10
<PAGE>
Provision for Loan Losses
The provision for loan losses was $847,000 for the year ended September 30,
2000, compared to $816,000 for the year ended September 30, 1999. The provision
for loan losses for the year ended September 30, 2000 was principally comprised
of a credit of approximately $99,000 related to a decrease in the level of
classified loans, a charge of approximately $876,000 due to overall loan
portfolio growth and a charge of approximately $70,000 for net chargeoffs. 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 chargeoffs.
The allowance for loan losses was at $12.7 million and $12.0 million for
September 30, 2000 and 1999, respectively. The allowance was 1.02% and 1.12% of
total loans at September 30, 2000 and 1999, respectively and was 277.9% and
230.7% of classified loans at September 30, 2000 and 1999, respectively. While
the Company's management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions.
Other Income
Other income increased by $1.7 million to $7.9 million for the year ended
September 30, 2000 from $6.2 million for the year ended September 30, 1999. This
increase is due primarily to an increase of $1.3 million in other fees and
service charges, an increase of $247,000 in insurance commissions and fees and
to a $169,000 gain on the sale of land partially offset by a decrease of
$156,000 in income from real estate operations. Other fees and service charges,
primarily from fees and service charges on deposit products, were $6.8 million
and $5.5 million for the years ended September 30, 2000 and 1999, respectively.
This increase was due primarily to the growth in transaction accounts. Insurance
commissions and fees were $418,000 and $171,000 for the years ended September
30, 2000 and 1999, respectively. This increase was due primarily to the
acquisition of two insurance agencies in 2000. Income from real estate
operations was $249,000 and $405,000 for the years ended September 30, 2000 and
1999, respectively. This decrease was due primarily to a $211,000 increase in
the provision for losses on real estate owned partially offset by an increase of
$67,000 in gain on sale of real estate owned. The provision was $25,000 for the
year ended September 30, 2000, compared to a credit of $186,000 for the
comparable period in 1999.
Other Expense
Other expense increased by $2.6 million to $28.6 million for the year ended
September 30, 2000 from $26.0 million for the year ended September 30, 1999. The
increase was due primarily to an increase of $1.1 million in compensation and
benefits, an increase of $763,000 in occupancy expense and an increase of
$490,000 in other expenses. The increase in compensation and benefits is due
primarily to annual salary increases and additional staff required to support
the growth in loans and deposits. The increase in occupancy expense is due
primarily to an increase in data processing equipment expense and expenses
resulting from the addition of three new branch offices during the last fiscal
year. The increase in other expense is due primarily to an increase of $215,000
in professional fees and other increases resulting from the growth in loans and
deposits. The increase in professional fees is due primarily to fees paid to a
consulting firm for a net interest margin and product pricing study.
Income Taxes
Income tax expense increased by $565,000 to $13.7 million for the year ended
September 30, 2000 from $13.2 million for the year ended September 30, 1999, due
primarily to an increase in pretax accounting income. The effective tax rates
were 38.7% and 38.3% for the years ended September 30, 2000 and 1999,
respectively.
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 $1.3 million 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.
11
<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 $1.4 billion for the year ended September 30, 1999 from $1.2
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 a 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 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 8.07% 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 $1.2
billion for the year ended September 30, 1999 from $1 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.
Other Income
Other income increased by $242,000 to $6.2 million for the year ended September
30, 1999 from $5.9 million for the year ended September 30, 1998. This increase
is due primarily to an increase of $1.4 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
12
<PAGE>
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 $5.5 million and $4.1 million for
the years ended September 30, 1999 and 1998, respectively. This increase was
primarily due to the growth in transaction accounts. 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 $1.5 million to $26.0 million for the year ended
September 30, 1999 from $24.5 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 38.3% and 41.3% for the years ended September 30, 1999 and 1998,
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, 2000, the Bank had cash and investments that exceeded
the minimum regulatory requirement. In addition, the Bank had certain
investments in mortgage-backed securities aggregating $165.0 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, 2000 was $280.1 million,
which was $236.5 million in excess of the minimum requirement of $43.6 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 as an alternative to increasing deposit account
interest rates. In addition, the Bank holds unpledged fixed and adjustable rate
mortgage-backed securities totaling $164.3 million at September 30, 2000 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 (i.e. cash items
affecting net income) was $24.7 million, $24.6 million, and $20.7 million for
the years ended September 30, 2000, 1999 and 1998, respectively.
Net cash used by the Company's investing activities (i.e. cash used primarily
from its investment securities, mortgage-backed securities and loan portfolios)
was $152.2 million, $115.5 million, and $188.2 million for the years ended
September 30, 2000, 1999 and 1998, respectively. The increase in cash flows in
2000 was due primarily to an increase of $56.9 million in net loans, a decrease
of $29.3 million in proceeds from maturity of investment securities and a
decrease of $16.1 million in the purchase of investment securities partially
offset by a $70.1 million decrease in the purchase of mortgage-backed securities
and a decrease of $42.2 million in proceeds from principal repayments from
mortgage-backed securities. The decrease in cash flows in 1999 was due primarily
to a decrease of $12.6 million in proceeds from maturity of investment
securities, a decrease of $73.7 million in the purchase of investment securities
and a $30.1 million decrease in the purchase of mortgage-backed securities
partially offset by a net increase of $13.5 million in loans.
Net cash provided by the Company's financing activities (i.e. cash receipts
primarily from net increases (decreases) in deposits and net FHLB advances) was
$94.2 million, $90.4 million, and $198.4 million for the years ended September
30, 2000, 1999, and 1998, respectively. The decrease in 1999 was due primarily
to $150.2 million net proceeds from the Stock Offering in 1998.
13
<PAGE>
The Bank's liquid assets consist primarily of investment securities and cash. At
September 30, 2000, the Bank had liquid assets of $115.8 million, with loan
commitments of $42.2 million (consisting of unused lines of credit to
homebuilders and residential and commercial loan commitments), letters of credit
of $5.1 million and unfunded loans in process of $77.1million (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 2000,
the holding company expended $8.6 million for dividends and expenses. As of
September 30, 2000, the holding company had $4.0 million in cash and $6.5
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, 2000, $62
million was available for distribution from the Bank to the holding company
without further regulatory approval.
Impact of New Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"). The effective date for Statement 133 was delayed by SFAS
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. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment to FASB Statement No.
133" ("Statement 138"). Statement 138 addresses a limited number of issues
causing implementation difficulties for numerous entities that apply FASB 133.
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 September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," ("Statement
140") which replaces SFAS No. 125. This statement provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. Because Statement 140 focuses on control after a
transfer of financial assets, an entity is required to recognize the financial
and servicing assets it controls and the liabilities it has incurred,
derecognize financial assets when control has been surrendered, and derecognize
liabilities when extinguished. All measurements and allocations should be based
on fair value. Statement 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. This statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company does not
expect implementation of this statement to have a material effect on the
Company's financial statements.
14
<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. and subsidiaries as of September 30, 2000 and
1999, 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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
October 13, 2000
West Palm Beach
15
<PAGE>
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, 2000 and 1999 2000 1999
---- ----
(In thousands except share data)
<S> <C> <C>
Assets:
Cash and amounts due from depository institutions $ 29,085 $ 30,214
Interest-bearing deposits in other banks 729 32,959
Investment securities held to maturity (estimated market value of $200 and $10,844 at
September 30, 2000 and 1999, respectively) 200 10,910
Investment securities available for sale at estimated market value 85,767 76,166
Mortgage-backed securities held to maturity (estimated market value of $161,853 and
$193,474 at September 30, 2000 and 1999, respectively) 165,059 196,971
Loans held for sale (estimated market value of $2,548 and $1,747 at September 30, 2000 and
1999, respectively) 2,548 1,747
Loans, net 1,251,669 1,070,335
Accrued interest receivable 8,387 7,580
Real estate owned 871 911
Premises and equipment, net 21,121 20,139
Federal Home Loan Bank stock 12,500 11,250
Goodwill, net 3,430 2,361
Other assets 1,329 1,007
----- -----
Total assets $1,582,695 $1,462,550
========== ==========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $ 1,098,537 $ 977,595
Short-term borrowings 18,000 ---
Long-term debt 220,091 225,000
Advance payments by borrowers for taxes and insurance 20,688 18,951
Income taxes payable 435 22
Other liabilities 5,560 5,060
----- -----
Total liabilities 1,363,311 1,226,628
--------- ---------
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; 31,139,509 shares issued
and 25,268,518 outstanding at September 30, 2000 and 31,099,967 shares issued and
28,008,627 outstanding at September 30, 1999 3,114 3,110
Paid-in capital 191,291 191,016
Retained earnings 109,941 96,485
Accumulated other comprehensive income (loss), net 233 (70)
Common stock purchased by:
Employee stock ownership plan (ESOP) (12,047) (12,746)
Recognition and retention plan (RRP) (5,385) (6,258)
Treasury stock, at cost, 5,870,991 shares and 3,091,340 shares at September 30, 2000
and 1999, respectively (67,763) (35,615)
----- ------- -------
Total stockholders' equity 219,384 235,922
------- -------
Total liabilities and stockholders' equity $1,582,695 $1,462,550
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Years ended September 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C>
Interest income:
Loans $94,092 $82,107 $76,231
Investment securities 5,849 6,107 4,945
Mortgage-backed securities 11,537 13,173 11,301
Other 844 2,497 2,681
--- ----- -----
Total interest income 112,322 103,884 95,158
------- ------- ------
Interest expense:
Deposits 42,014 37,719 40,219
Other 13,201 11,121 6,439
------ ------ -----
Total interest expense 55,215 48,840 46,658
------ ------ ------
Net interest income 57,107 55,044 48,500
Provision for loan losses 847 816 297
--- --- ---
Net interest income after provision for
loan losses 56,260 54,228 48,203
------ ------ ------
Other income:
Other fees and service charges 6,812 5,505 4,074
Insurance commissions and fees 418 171 222
Income (losses) from real estate operations 249 405 (41)
Gain on sale of mortgage loans 66 57 142
Gain on sale of securities 103 --- ---
Other 222 42 1,541
--- -- -----
Total other income 7,870 6,180 5,938
----- ----- -----
Other expenses:
Compensation and employee benefits 16,503 15,413 14,282
Occupancy 4,185 3,422 3,365
Data processing services 1,764 1,490 1,332
Advertising and promotion 1,049 1,038 1,010
Other 5,162 4,672 4,543
----- ----- -----
Total other expense 28,663 26,035 24,532
------ ------ ------
Income before income taxes 35,467 34,373 29,609
Income tax expense 13,719 13,154 12,243
------ ------ ------
Net income $ 21,748 $ 21,219 $ 17,366
======== ======== ========
Net income per share:
Basic $ .89 $ .77 $ .58
===== ===== =====
Diluted $ .88 $ .76 $ .57
===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Common Common
Compre- Stock stock
hensive Common Paid-in Retained Purchased purchased
Income Stock Capital earnings by ESOP by RRP
------ ----- ------- -------- - ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at September
30, 1997 $3,052 $23,874 $71,203 $(374) $ -
------ ------- ------- ------ ---
Comprehensive income
Net income $17,366 - - 17,366 - -
Other comprehensive
income, net of
tax:
Unrealized gain on
securities
available for
sale 666 - - - - -
-------
Comprehensive income $18,032
=======
Reorganization of MHC - - 200 - -
Proceeds of stock
offering, net - 163,493 - - -
Issuance of ESOP
shares - - - (13,269) -
Stock options
exercised 39 618 - - -
Amortization of
award of ESOP and
RRP - 1,798 - 299 -
Dividends paid - - (5,414) - -
Tax benefit of stock
plans - 175 - - -
Stock purchased by
deferred comp plan - - - - -
Satisfaction of
deferred
compensation
liability - - - - -
------- --- --- --- -------
Balance at September
30, 1998 $ 3,091 $ 189,958 $ 83,355 $ (13,344) $ -
------- --------- -------- ---------- ---
Comprehensive income
Net income $21,219 - - 21,219 - -
Other comprehensive
loss, net of tax:
Unrealized loss on
securities
available for
sale (729) - - - - -
--------
Comprehensive income $20,490
=======
Stock options
exercised 19 383 - - -
Amortization of
award of ESOP and
RRP - 515 - 598 913
Dividends paid - - (8,089) - -
Tax benefit of stock
plans - 160 - - -
Purchase RRP shares - - - - (7,171)
Purchase of treasury
shares - - - - -
-------- --- --- --- ---
Balance at September
30, 1999 $ 3,110 $ 191,016 $ 96,485 $ (12,746) $ (6,258)
------- --------- -------- ---------- ---------
18
<PAGE>
Common Common
Compre- Stock stock
hensive Common Paid-in Retained Purchased purchased
Income Stock Capital earnings by ESOP by RRP
------ ----- ------- -------- - ------- ------
Balance at September
30, 1999
(continued) $ 3,110 $ 191,016 $ 96,485 $ (12,746) $ (6,258)
------- --------- -------- ---------- ---------
Comprehensive income
Net income $21,748 - - 21,748 - -
Other comprehensive
income, net of
tax:
Unrealized gain on
securities
available for
sale 303 - - - - -
-------
Comprehensive income $22,051
=======
Stock options
exercised 4 92 - - -
Amortization of
award of ESOP and
RRP - 102 - 699 873
Dividends paid - - (8,292) - -
Tax benefit of stock
plans - 188 - - -
Treasury Stock
issued to
purchase
insurance agency - (107) - - -
Purchase of treasury
shares - - - - -
--------- --- --- --- ---
Balance at September
30, 2000 $ 3,114 $ 191,291 $109,941 $ (12,047) $ (5,385)
======= ========= ======== ========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Accum.
stock Other
purchased compre-
by deferred Treasury hensive
compensation stock income
plan purchased (loss) Total
---- --------- ------ -----
<S> <C> <C> <C> <C>
Balance at September
30, 1997 $(946) $- $ (7) $ 96,802
------ -- ----- --------
Comprehensive income - - - 17,366
Net income
Other comprehensive
income, net of
tax:
Unrealized gain on
securities
available for - - 666 666
sale
Comprehensive income
- - - 200
Reorganization of MHC
Proceeds of stock - - - 163,493
offering, net
Issuance of ESOP - - - (13,269)
shares
Stock options - - - 657
exercised
Amortization of
award of ESOP and - - - 2,097
RRP - - - (5,414)
Dividends paid
Tax benefit of stock - - - 175
plans
Stock purchased by (100) - - (100)
deferred comp plan
Satisfaction of
deferred
compensation 1,046 - 1,046
liability ----- ---- ----- -----
Balance at September $ - $- $ 659 $263,719
30, 1998 ---- ---- ----- --------
Comprehensive income - - - 21,219
Net income
Other comprehensive
loss, net of tax:
Unrealized loss on
securities
available for - - (729) (729)
sale
Comprehensive income
Stock options - - - 402
exercised
Amortization of
award of ESOP and - - - 2,026
RRP - - - (8,089)
Dividends paid
Tax benefit of stock - - - 160
plans - - - (7,171)
Purchase RRP shares
Purchase of treasury - (35,615) - (35,615)
shares --- -------- ---- --------
Balance at September $ - $ (35,615) $ (70) $235,922
30, 1999 --- ---------- ------ --------
<PAGE>
Common Accum.
stock Other
purchased compre-
by deferred Treasury hensive
compensation stock income
plan purchased (loss) Total
---- --------- ------ -----
Balance at September
30, 1999 $ - $ (35,615) $ (70) $235,922
(continued) --- ---------- ------ --------
Comprehensive income - - - 21,748
Net income
Other comprehensive
income, net of
tax:
Unrealized gain on
securities
available for - - 303 303
sale
Comprehensive income
Stock options - - - 96
exercised
Amortization of
award of ESOP and - - - 1,674
RRP - - - (8,292)
Dividends paid
Tax benefit of stock - - - 188
plans
Treasury Stock
issued to
purchase - 1,194 - 1,087
insurance agency
Purchase of treasury - (33,342) - (33,342)
shares --- -------- ----- --------
Balance at September
30, 2000 $ - $ (67,763) $ 233 $219,384
=== ========== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Cash Flows
Years ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash provided by operating activities:
Net income $ 21,748 $ 21,219 $ 17,366
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of investment securities available for sale (103) --- ---
Gain on sale of premises and equipment (167) (2) (594)
Gain on sale of real estate owned (271) (207) (176)
Provision for loan losses 847 816 297
Provision for (recovery of) losses on real estate owned 25 (186) 136
Depreciation and amortization 2,358 2,259 2,485
ESOP forfeitures transferred to treasury stock (23) (44) ---
Accretion of discount on purchased loans (13) (13) (352)
Deferred income tax benefit (432) (66) (208)
Originations of loans held for sale (6,023) (9,408) (9,556)
Proceeds from sale of loans held for sale 5,224 8,375 8,983
Increase in deferred loan fees and costs 1,592 2,156 1,816
(Increase) decrease in accrued interest receivable (807) 292 (839)
(Increase) decrease in other assets (322) (263) 277
Increase (decrease) in income taxes payable 601 (579) 308
Increase in other liabilities 468 216 746
--- --- ---
Net cash provided by operating activities 24,702 24,565 20,689
------ ------ ------
Cash used by investing activities:
Net increase in loans (183,741) (126,827) (113,365)
Purchase of mortgage-backed securities --- (70,074) (100,222)
Proceeds from principal repayments of
mortgage-backed securities 31,789 73,986 75,827
Proceeds from maturities and calls of investment
securities held to maturity 10,715 20,000 5,000
Purchase of investment securities held to maturity --- (915) (29,983)
Proceeds from maturities and calls of
investment securities available for sale --- 20,000 47,582
Proceeds from sale of investment securities available for sale 1,663 --- ---
Purchase of investment securities available for sale (10,613) (25,805) (70,427)
Proceeds from sale of real estate owned 1,626 1,818 2,111
Purchase of premises and equipment (2,842) (4,801) (5,602)
Proceeds from sale of premises and equipment 278 118 1,460
FHLB stock purchase (1,250) (3,038) (617)
Net cash provided from purchase of insurance agencies 158 --- ---
--- --- ---
Net cash used by investing activities (152,217) (115,538) (188,236)
--------- --------- ---------
20
<PAGE>
Cash provided by financing activities:
Net increase in deposits 120,942 59,469 6,751
Net proceeds from short-term borrowings 13,000 --- (30,400)
Repayments of long-term borrowings (8) --- (75)
Net proceeds from long-term borrowings --- 80,000 75,000
Increase in advance payments by borrowers for taxes and insurance 1,737 1,343 1,682
Dividends paid (8,292) (8,089) (5,414)
Common stock options exercised 96 402 657
Purchase of common stock by recognition and retention plan --- (7,171) ---
Purchase of treasury stock (33,319) (35,571) ---
Net proceeds from issuance of common stock --- --- 150,224
----- ----- -------
Net cash provided by financing activities 94,156 90,383 198,425
------ ------ -------
Net increase (decrease) in cash and cash equivalents (33,359) (590) 30,878
Cash and cash equivalents - beginning of year 63,173 63,763 32,885
------ ------ ------
Cash and cash equivalents - end of year $ 29,814 $ 63,173 $ 63,763
======== ======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 55,032 $ 48,435 $ 46,509
Taxes 13,550 13,799 12,142
Noncash investing and financing activities:
Additions to real estate acquired in
settlement of loans through foreclosure 2,049 1,488 2,815
Sale of real estate owned financed by the Company 709 1,685 524
Change in unrealized gain (loss) on securities available for sale 496 (1,187) 1,084
Change in deferred taxes related to securities available for sale (193) 458 (418)
Tax benefit of stock plans credited to capital 188 160 175
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 5,000 --- 300
Distribution of RRP shares 873 913 ---
Treasury stock issued to purchase insurance agency 1,087 --- ---
Note payable issued to purchase insurance agency 99 --- ---
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
September 30, 2000, 1999, and 1998
(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, 2000, substantially all of the Company's loans and
investment in real estate owned are secured by real estate in the counties in
which the Company has branch facilities: St. Lucie, Indian River, Brevard,
Martin and Volusia Counties, Florida. Accordingly, the ultimate collectibility
of a substantial portion of the Company's loan portfolio and the recovery of a
substantial portion of the carrying amount of real estate owned are susceptible
to changes in market conditions in the above counties. Management believes that
the allowances for losses on loans and real estate owned are adequate. While
management uses available information to recognize losses on loans and real
estate owned, future additions to the allowances may be necessary based on
changes in economic conditions, particularly in the above counties. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowances for losses on loans and real estate
owned. Such agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
(c) Loan Origination and Commitment Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred, and the net
fee is recognized in interest 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.
22
<PAGE>
(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 component of comprehensive income in 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.
At September 30, 2000 and 1999, 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 interest income using the interest
method over the remaining period to contractual maturity.
The Company follows a consistent procedural discipline and accounts for loan
loss contingencies in accordance with Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies" (Statement 5). The following is
a description of how each portion of the allowance for loan losses is
determined.
The Company segregates the loan portfolio for loan loss purposes into the
following broad segments: commercial real estate; residential real estate;
commercial business; and consumer. The Company provides for a general allowance
for losses inherent in the portfolio by the above categories, which consists of
two components. (1) General loss percentages are established based upon
historical analyses. (2) A supplemental portion of the allowance is established
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 losses 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 loan, or (c) the fair value of the collateral of a collateral-dependent
<PAGE>
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. The Company assesses the recoverability of goodwill by
determining whether the amortization over the remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
assessment of goodwill will be impacted if such estimated future operating cash
flows are not achieved and any impairment will be evaluated based on projected
discounted future operating cash flows.
(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 reserve. 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,
<PAGE>
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 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 Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("Statement 123"). This standard allows the use of either the fair
value based method described in Statement 123 or the intrinsic value based
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." ("APB 25") The Company has elected to continue accounting for stock
based compensation under the APB 25 method and disclose the pro forma impact of
Statement 123.
(n) Statement of Cash Flows
Cash equivalents include amounts due from banks and interest-bearing deposits in
other banks. 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 1999 and 1998 consolidated financial statements
have been reclassified in order to conform to the 2000 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 (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"). The effective date for Statement 133 was delayed by SFAS
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. In
<PAGE>
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment to FASB Statement No.
133" ("Statement 138"). Statement 138 addresses a limited number of issues
causing implementation difficulties for numerous entities that apply FASB 133.
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 September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," ("Statement
140") which replaces SFAS No. 125. This statement provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. Because Statement 140 focuses on control after a
transfer of financial assets, an entity is required to recognize the financial
and servicing assets it controls and the liabilities it has incurred,
derecognize financial assets when control has been surrendered, and derecognize
liabilities when extinguished. All measurements and allocations should be based
on fair value. Statement 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. This statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company does not
expect implementation of this statement to have a material effect on the
Company's financial statements.
<PAGE>
(2) Investment and Mortgage-backed Securities
The amortized cost and estimated market value of investment and mortgage-backed
securities at September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
FHLB notes $ 59,718 $79 $498 $ 59,299
FNMA notes 19,990 --- 51 19,939
------ -- ------
79,708 79 549 79,238
Equity securities 5,678 891 40 6,529
----- --- -- -----
85,386 970 589 85,767
------ --- --- ------
Held to maturity:
Municipal securities 200 --- --- 200
--- ---
200 --- --- 200
--- ---
FHLMC mortgage-backed securities 75,288 244 2,187 73,345
FNMA mortgage-backed securities 89,771 189 1,452 88,508
------ --- ----- ------
165,059 433 3,639 161,853
------- --- ----- -------
$250,645 $1,403 $4,228 $247,820
======= ===== ===== =======
</TABLE>
The amortized cost and estimated market value of investment and mortgage-backed
securities at September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Estimated
Amortized cost gains losses market value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
FHLB notes $ 50,000 $ --- $498 $ 49,502
FNMA notes 19,961 --- 86 19,875
------ --- -- ------
69,961 --- 584 69,377
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>
<PAGE>
The amortized cost and estimated market value of debt securities at September
30, 2000 and 1999 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>
2000 1999
---- ----
Estimated Estimated
Amortized market Amortized market
cost value cost value
(In thousands)
<S> <C> <C> <C> <C>
Available for sale:
Due in one year or less $ 29,990 $ 29,846 $ --- $ ---
Due in one to five years 49,718 49,392 69,961 69,377
------ ------ ------ ------
79,708 79,238 69,961 69,377
------ ------ ------ ------
Held to maturity:
Due in one year or less --- --- 9,995 9,992
Due after ten years 200 200 915 852
----- ---- ---- ---
200 200 10,910 10,844
--- --- ------ ------
FHLMC mortgage-backed securities 75,288 73,345 88,191 86,059
FNMA mortgage-backed securities 89,771 88,508 108,780 107,415
------ ------ ------- -------
165,059 161,853 196,971 193,474
------- ------- ------- -------
$244,967 $241,291 $277,842 $273,695
======= ======= ======= =======
</TABLE>
Gross realized gains and gross realized losses on sales of available for sale
securities totaled $103,279 and -0- during 2000. There were no sales of
available for sale securities during 1999 or 1998. As of September 30, 2000, the
Company had pledged securities with a market value of $200,000 and a carrying
value of $200,000 to collateralize the public funds on deposit. The Company had
also pledged mortgage-backed securities with a market value of $802,000 and a
carrying value of $795,000 to collateralize treasury, tax and loan accounts as
of September 30, 2000.
<PAGE>
(3) Loans
Loans at September 30, 2000 and 1999 are summarized below:
2000 1999
---- ----
(Dollars in thousands)
Mortgage loans:
Construction 1-4 family $ 106,063 $ 91,922
Permanent 1-4 family 899,229 788,408
Multi-family 20,474 15,141
Nonresidential 120,067 99,824
Land 54,731 41,882
------ ------
Total mortgage loans 1,200,564 1,037,177
--------- ---------
Other loans:
Commercial 28,606 21,192
Home improvement 21,636 17,205
Manufactured housing 15,736 16,190
Other consumer 79,363 65,489
------ ------
Total other loans 145,341 120,076
------- -------
Total loans 1,345,905 1,157,253
--------- ---------
Less:
Loans in process 77,074 70,722
Net deferred loan fees and discounts 4,433 4,244
Allowance for loan losses 12,729 11,952
------ ------
94,236 86,918
------ ------
Total loans, net $1,251,669 $1,070,335
========= =========
Weighted average yield 8.07% 8.07%
An analysis of the allowance for loan losses for the years ended September 30,
2000, 1999 and 1998 follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 11,952 $ 11,818 $ 11,691
Provision for loan losses 847 816 297
Charge-offs (233) (762) (574)
Recoveries 163 80 404
--- -- ---
Ending balance $ 12,729 $ 11,952 $ 11,818
====== ====== ======
</TABLE>
At September 30, 2000 and 1999, loans with unpaid principal balances of
approximately $2,766,000 and $2,541,000, 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, 2000, 1999 and
1998 totaled approximately $159,000, $184,000, and $135,000, respectively.
<PAGE>
As of September 30, 2000 and 1999, approximately $2,463,000 and $2,059,000,
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, 2000
and 1999 was $3,748,000 and $4,511,000, respectively. The average recorded
investment in impaired loans during the years ended September 30, 2000 and 1999
were approximately $3,435,000 and $5,118,000, respectively. The total specific
allowance for loan losses related to these loans was $-0- on September 30, 2000
and 1999. Interest income on impaired loans of approximately $311,000, $461,000
and $790,000 was recognized in the years ended September 30, 2000, 1999 and
1998, respectively.
As of September 30, 2000 and 1999, mortgage loans which had been sold on a
recourse basis had outstanding principal balances of $985,000 and $1,413,000,
respectively.
Accrued interest receivable at September 30, 2000 and 1999 is summarized below:
2000 1999
---- ----
(In thousands)
Loans $6,346 $5,241
Investment securities 834 1,002
Mortgage-backed securities 965 1,143
FHLB stock dividends 242 194
--- ---
$8,387 $7,580
====== ======
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 $21,700,000 ($8,922,000
fixed rate, interest rates from 7.75% to 10.13%) as of September 30, 2000. In
addition, as of September 30, 2000, the Company had determined that $19,196,000
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 other
loan commitments as of September 30, 2000 were approximately $1,279,000.
<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, 2000 and 1999 are
summarized as follows:
2000 1999
---- ----
(In thousands)
FHLMC $ 8,432 $ 11,868
FNMA 31,437 33,816
Other Investors 392 520
--- ---
$ 40,261 $ 46,204
======== ========
At September 30, 2000 and 1999, 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) Premises and Equipment
Premises and equipment at September 30, 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----- ----
(In thousands)
<S> <C> <C>
Land $ 6,841 $ 6,897
Buildings and leasehold improvements 14,137 12,724
Furniture, fixtures and equipment 12,841 11,755
------ ------
33,819 31,376
Less accumulated depreciation and amortization (12,698) (11,237)
------- -------
$ 21,121 $ 20,139
======= =======
</TABLE>
Depreciation expense for the years ended September 30, 2000, 1999 and 1998
totaled $1,725,000, $1,473,000, and $1,116,000, respectively.
<PAGE>
(6) Deposits
Deposits at September 30, 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Period-end Period-end
Amount weighted rate Amount weighted rate
------ ------------- ------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial checking $51,501 $40,455
Noninterest-bearing personal checking accounts 51,033 35,721
NOW 70,881 0.74% 66,184 1.09%
Passbook 95,431 1.58% 108,508 1.97%
Money market checking 1,398 1.27% 1,486 1.27%
Money market investment 93,825 4.54% 41,529 2.54%
Official checks 11,729 12,431
------ ------
375,798 306,314
------- -------
Certificate accounts:
2.01 - 3.00% 103 129
3.01 - 4.00% 5,081 11,275
4.01 - 5.00% 124,393 335,422
5.01 - 6.00% 300,063 298,719
6.01 - 7.00% 279,215 25,361
7.01 - 8.00% 13,866 375
8.01 - 9.00% 18 ---
--------- --------
722,739 671,281
------- -------
$ 1,098,537 $ 977,595
=========== =========
Weighted average interest rate 4.42% 3.86%
===== =====
</TABLE>
Maturities of outstanding certificates of deposit at September 30, 2000 and 1999
are summarized as follows:
2000 1999
---- ----
(In thousands)
Less than one year $ 445,765 $ 450,851
One to three years 263,648 203,099
Over three years 13,326 17,331
------ ------
$ 722,739 $ 671,281
========= =========
The aggregate amount of certificates of deposit in amounts of $100,000 or more
was approximately $83,795,000 and $68,922,000 at September 30, 2000 and 1999,
respectively. Balances of individual certificates in excess of $100,000 are not
federally insured.
<PAGE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Passbook accounts $ 2,002 $ 1,993 $ 1,674
NOW, money market checking,
and money market investment accounts 2,466 1,781 1,894
Certificate accounts 37,546 33,945 36,651
------ ------ ------
$ 42,014 $ 37,719 $ 40,219
======== ======== ========
</TABLE>
Early withdrawal penalties for the years ended September 30, 2000, 1999 and 1998
aggregated $282,540, $194,563, and $191,391, respectively, and are netted
against interest expense on certificate accounts.
Accrued interest payable of $342,364 and $137,425 at September 30, 2000 and
1999, respectively, is included in other liabilities.
(7) Short-term borrowings
At September 30, 2000, short-term borrowings from the Federal Home Loan Bank
(FHLB) were comprised of a $5 million advance due September 30, 2001, with fixed
terms and a fixed interest rate of 6.13%, and a $13 million daily advance, with
interest at September 30, 2000 of 6.94%. There were no short-term borrowings at
September 30, 1999.
Information concerning short-term borrowings is summarized as follows:
2000 1999
---- ----
(Dollars in thousands)
Average balance during the year $ 7,944 $ ---
Average interest rate during the year 6.62% ---
Maximum month-end balance during the year $ 18,000 $ ---
(8) Long-term debt
Advances from the Federal Home Loan Bank (FHLB) were $220 million and $225
million at September 30, 2000 and 1999, respectively. The debt is due at various
dates through December 2008, with fixed terms and fixed interest rates ranging
from 4.94% to 6.50%.
Also included in long-term debt is a note payable, maturing August 2002, with a
fixed interest rate of 8%, relating to the purchase of an insurance agency. The
balance at September 30, 2000 is approximately $91,000.
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.
<PAGE>
At September 30, 2000 and 1999, the FHLB advances have fiscal year maturity
dates as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Weighted Weighted
Amount average rate Amount average rate
------ ------------ ------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Year ending September 30,
2001 $ --- $ 5,000 6.13%
2002 10,000 6.10% 10,000 6.10%
2003 22,000 6.20% 22,000 6.20%
2004 25,000 5.80% 25,000 5.80%
2005 13,000 5.97% 13,000 5.97%
2006 and after 150,000 5.34% 150,000 5.34%
------- ----- ------- -----
$ 220,000 5.55% $ 225,000 5.56%
========= ===== ========= =====
</TABLE>
Other interest expense is summarized as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Advances from the FHLB $ 13,195 $ 11,117 $ 6,419
ESOP loan --- --- 15
Other 6 4 5
-------- -------- -------
$ 13,201 $ 11,121 $ 6,439
======== ======== =======
(9) Income Taxes
Income tax expense (benefit) for the years ended September 30, 2000, 1999 and
1998 is summarized as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Current:
Federal $12,133 $11,430 $10,751
State 2,018 1,790 1,700
----- ----- -----
14,151 13,220 12,451
------ ------ ------
Deferred:
Federal (370) (57) (195)
State (62) (9) (13)
---- --- ----
(432) (66) (208)
----- ---- -----
$ 13,719 $ 13,154 $ 12,243
======== ======== ========
<PAGE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at September 30, 2000 and 1999 are as
follows:
2000 1999
---- ----
(In thousands)
Deferred tax assets:
Allowance for bad debts $ 3,157 $ 2,418
Valuation of real estate owned 11 11
Deferred compensation 905 780
--- ---
Total deferred tax assets 4,073 3,209
----- -----
Deferred tax liability:
Net deferred loan fees and costs 3,752 3,424
FHLB stock dividend 840 840
Premises and equipment depreciation difference 717 654
Purchase accounting adjustments --- 21
Installment sales 96 95
--- --
Total deferred tax liabilities 5,405 5,034
----- -----
1,332 1,825
Unrealized gain (loss) on available for sale securities 150 (43)
--- ----
Net deferred tax liability 1,482 1,782
----- -----
Less liability at beginning of year (1,782) (2,306)
Deferred tax asset acquired from insurance agency 61 ---
Change in unrealized gain (loss) on available for sale
securities (193) 458
----- ---
Provision (benefit) for deferred income taxes $(432) $(66)
====== =====
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
2000, 1999 and 1998 to income from continuing operations before income taxes
because of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State income tax (net of Federal income tax benefit) 3.6 3.6 3.6
Other .1 (0.3) 2.7
---- ---- ----
Effective tax expense rate 38.7% 38.3% 41.3%
===== ===== =====
</TABLE>
Deferred income taxes payable of approximately $1,482,000 and $1,782,000 at
September 30, 2000 and 1999, respectively, are included in other liabilities.
Retained earnings at September 30, 2000 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 $5,696,000 at September 30, 2000.
<PAGE>
(10) 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, 2000, 1999 and 1998. 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>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income $21,748,045 $21,218,745 $17,366,095
========== ========== ==========
Weighted average common shares outstanding:
Shares outstanding 25,730,986 29,044,075 30,713,432
Less weighted average uncommitted ESOP shares (1,241,943) (1,316,732) (857,136)
----------- ----------- ---------
Total 24,489,043 27,727,343 29,856,296
========== ========== ==========
Basic earnings per share $ 0.89 $ 0.77 $ 0.58
===== ===== =====
Weighted average common shares outstanding 24,489,043 27,727,343 29,856,296
Additional dilutive shares related to stock options 215,280 268,481 416,444
------- ------- -------
Total weighted average common shares and equivalents
outstanding for
diluted earnings per share computation 24,704,323 27,995,824 30,272,740
========== ========== ==========
Diluted earnings per share $ 0.88 $ 0.76 $ 0.57
===== ===== =====
</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 year ended September 30, 2000, there were 143,900 common stock options and
23,304 unvested RRP shares that were antidilutive and therefore not included in
the above calculation. For the years ended September 30, 1999 and 1998, there
were 72,500 and 15,000 shares of common stock options, respectively, and no
unvested RRP shares that were antidilutive and not included in the above
calculation.
(11) 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). During 2000, the minimum ratio for Tier 1 capital was
adjusted from 4% to 3 % for savings associations that meet certain requirements.
Management believes, as of September 30, 2000, that the Bank meets all capital
adequacy requirements to which it is subject.
<PAGE>
As of September 30, 2000 and 1999, the most recent notification from the Office
of Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To be well capitalized
For capital Under prompt corrective
Actual Adequacy purpose action provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000
Total capital (to risk-weighted assets) $176,676 19.48% $72,549 >8.0% $90,687 >10.0%
Tier I (core) capital (to risk-weighted
assets) 166,527 18.36% 27,206 >3.0% 54,412 > 6.0%
Tier I (core) capital (to adjusted
tangible assets) 166,527 10.58% 47,205 >3.0% 78,675 > 5.0%
Tangible capital (to adjusted tangible
assets) 166,527 10.58% 23,602 >1.5% n/a N/a
As of September 30, 1999
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
</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 Offering
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
<PAGE>
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, 2000,
$62,023,000 was available for distribution from the Bank to the holding company
without further regulatory approval.
(12) Commitments and Contingencies
At September 30, 2000, the Company had irrevocable letters of credit aggregating
approximately $5,097,000.
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.
(13) Related Party Transactions
Directors, executive officers and principal stockholders of the Company had
certain transactions with the Company in the ordinary course of business, as
described below.
Loan transactions were made on substantially the same terms as those prevailing
at the time for comparable loans to other persons, did not involve more than
normal risk of collectibility, and are performing as agreed.
The summary of changes in the related party loans follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Outstanding loans - beginning of year $ 2,658 $ 1,882 $ 2,284
New loans 5,655 6,525 4,714
Repayments (6,511) (5,749) (5,116)
------- ------- -------
Outstanding balance - end of year $ 1,802 $ 2,658 $ 1,882
======= ======= =======
</TABLE>
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
$177,000, $126,000, and $122,000 of legal fees in the years ended September 30,
2000, 1999 and 1998, respectively, to this law firm.
Richard K. Davis, formerly a director of the Company, is also chairman of
Richard K. Davis Construction Corp. ("Davis Construction"). In the years ended
September 30, 2000 and 1999, the Company paid Davis Construction a total of
$201,229 and $43,806, respectively, for roof construction on branch facilities
and tenant improvements on rental property.
During 2000, the Company purchased the Enns Agency, owned by Edward G. Enns,
Chairman of the Company. (See Note 17.)
<PAGE>
(14) Other Expense
Other expense for the years ended September 30, 2000, 1999 and 1998 consists of
the following:
2000 1999 1998
---- ---- ----
(In thousands)
Professional fees $ 772 $ 558 $ 589
Office supplies and forms 417 394 399
Postage 501 409 397
Telephone 394 353 360
SAIF deposit insurance premium 299 552 572
Other 2,779 2,406 2,226
----- ----- -----
$ 5,162 $ 4,672 $ 4,543
======= ======= =======
(15) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Amounts Due From Depository Institutions, Interest-Bearing Assets in
Other Banks and Federal Funds Sold - The carrying amount of these assets is a
reasonable estimate of their fair value.
Investment Securities and Mortgage-Backed Securities Held to Maturity - Fair
value equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
Investment Securities Available for Sale - Fair value equals carrying value,
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.
Advances from the FHLB - The fair value of FHLB advances is estimated based on
rates currently available to the Company for FHLB advances with similar terms
and maturities.
Commitments to Extend Credit and Standby Letters of Credit - The fair value of
commitments is insignificant.
<PAGE>
The estimated fair values of the Company's financial instruments at September
30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets: (In thousands)
Cash and amounts due from depository institutions $ 29,085 $ 29,085 $ 30,214 $ 30,214
Interest-bearing deposits in other banks 729 729 32,959 32,959
Investment securities held to maturity 200 200 10,910 10,844
Investment securities available for sale 85,767 85,767 76,166 76,166
Mortgage-backed securities held to maturity 165,059 161,853 196,971 193,474
Loans held for sale 2,548 2,548 1,747 1,747
Loans 1,264,398 1,256,654 1,082,287 1,078,685
Less allowance for loan losses (12,729) --- (11,952) ---
-------- ----- -------- ---
Loans, net 1,251,669 1,256,654 1,070,335 1,078,685
--------- --------- --------- ---------
Liabilities:
Commercial checking, non-interest-bearing personal, NOW,
passbook, money market accounts and official checks 375,798 375,798 306,314 306,314
Certificate accounts 722,739 719,232 671,281 670,852
Short term borrowings 18,000 17,973 --- ---
Long term debt 220,091 212,870 225,000 215,007
</TABLE>
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(16) Benefit Plans
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, 2000, there were 880,354 allocated shares,
52,379 shares committed to be released, and 1,204,722 suspense (unallocated and
not yet committed to be released) shares held by the ESOP. As shares are
released, the Company recognizes compensation expense equal to the current
market price of the shares. 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, 2000, 1999 and 1998, totaled $802,072, $1,101,982, and
$2,064,654, respectively. At September 30, 2000, the fair value of the
unallocated shares was $15,163,781.
<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 Shares (RRP Shares) and
the granting of options to purchase common stock. As of September 30, 2000, the
Company has awarded 618,182 RRP shares at $10.76 average price per share
totaling $6,649,385. 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 Plan (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 shares. Total
compensation expense charged to earnings in the years ended September 30, 2000,
1999 and 1998, totaled $871,121, $924,354, and $33,013, respectively.
At September 30, 2000, 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 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, 2000, 255,767 shares were available for future awards.
A summary of the Company's stock option plans is presented below:
<TABLE>
<CAPTION>
Years Ended September 30,
2000 1999 1998
---- ---- ----
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 1,716,425 $9.69 1,919,673 $8.90 807,038 $1.94
Options granted 88,175 $12.28 60,000 $11.86 1,513,615 $10.70
Options exercised (39,542) $2.42 (190,137) $2.12 (387,496) $1.70
Options forfeited (169,464) $10.67 (73,111) $10.36 (13,484) $1.66
--------- ------ -------- ------ -------- -----
Options outstanding end of year 1,595,594 $9.91 1,716,425 $9.69 1,919,673 $8.90
========= ===== ========= ===== ========= =====
Options exercisable at year-end 428,242 305,253 146,733
======= ======= =======
Weighted average fair value of options
granted during the year $ 4.48 $ 4.35 $ 3.97
====== ====== ======
</TABLE>
<PAGE>
The following table summarizes information about stock options outstanding at
September 30, 2000:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Weighted average
Number outstanding remaining Weighted average Number exercisable Weighted average
Range of exercise prices @ 9/30/00 contractual life exercise price @ 9/30/00 exercise price
------------------------ --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.664 117,402 3.3 $ 1.66 117,402 $ 1.664
$ 2.746 to 4.493 39,860 4.9 $ 3.80 15,826 2.746
$ 5.638 to 5.658 21,032 6.3 $ 5.66 --- ---
$ 6.365 to 6.781 3,004 6.7 $ 6.41 --- ---
$ 10.69 to 12.00 1,340,896 8.0 $10.75 291,027 10.72
$ 12.38 to 12.44 73,400 9.2 $12.42 3,987 12.38
------ -----
Total 1,595,594 428,242
========= =======
</TABLE>
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with Statement 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C>
Net income As reported $ 21,748 $ 21,219 $17,366
Pro forma 20,565 20,119 17,326
Net income per share - basic As reported .89 .77 .58
Pro forma .84 .73 .58
Net income per share - diluted As reported .88 .76 .57
Pro forma .83 .72 .57
</TABLE>
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
12/08/99 53,131 4.60 12.44 6.050 5 33.90 .52
01/07/00 17,889 4.58 12.38 6.411 5 33.83 .52
01/21/00 10,000 4.65 12.38 6.632 5 33.33 .52
04/19/00 7,155 3.04 10.75 6.230 5 26.95 .52
</TABLE>
<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 $9,600, $11,500, and $8,700, respectively, for the years ended
September 30, 2000, 1999 and 1998. 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, 1999.
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, 2000, 1999 and
1998, the Company's matching contribution totaled approximately $88,000,
$96,000, and $89,000, 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, 2000 and 1999, deferred directors' fees included in other
liabilities aggregated $241,122 and $235,234, respectively. Directors may elect
to have their deferred compensation balance invested in shares of the Company's
common stock. Such purchases were approximately $137,000, $113,000, and $101,000
in 2000, 1999 and 1998, 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,
2000 and 1999, the Directors' Deferred Compensation Plan held 295,386 and
303,386 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, 2000, 1999 and 1998, the
charge to earnings relating to the Plan was insignificant.
(17) Acquisition of Insurance Agencies
On July 3, 2000, the Bank acquired all of the outstanding common stock of Haynes
and Haynes Insurance Company, a property and casualty insurance company located
in Ft. Pierce, Florida, for approximately $1.1 million in common stock of the
Company. The insurance company's name was subsequently changed to Harbor
Insurance Agency, Inc.
Harbor Insurance Agency, Inc., a wholly owned subsidiary of the Bank, will
continue to operate at Haynes and Haynes Insurance Company's location in Ft.
Pierce, Florida. The principal owners and managers of Haynes and Haynes
Insurance Company will continue as the management team for Harbor Insurance
Agency, Inc.
On July 21, 2000, Harbor Insurance Agency completed the acquisition of certain
assets of the Enns Agency for approximately $98,500 in cash and a $98,500 note
payable. (See Note 8.) The Enns Agency is located in Ft. Pierce, Florida and
specializes in property and casualty insurance. The Enns Agency was owned by
Edward G. Enns, Chairman of the Company.
The acquisitions were accounted for using the purchase method. The results of
operations of Harbor Insurance Agency from July 3, 2000 to September 30, 2000
are included in the consolidated financial statements of the Company.
<PAGE>
The fair value of assets acquired and liabilities assumed in conjunction with
the acquisitions of the insurance agencies was as follows:
(In thousands)
Cash $ 292
Premises and equipment 6
Deferred tax asset 61
Goodwill 1,256
Other assets 1
-----
Fair value of assets acquired 1,616
-----
Other liabilities 332
---
Fair value of liabilities assumed 332
---
Fair value of net assets acquired 1,284
-----
Acquisition costs 36
----
Purchase of insurance agencies 1,320
Cash acquired 292
Treasury shares issued 1,087
Notes Payable issued 99
---
Net cash provided from purchase of insurance
agencies $ (158)
====
The following table indicates the net decrease in earnings resulting from the
net amortization of goodwill resulting from the use of the purchase method of
accounting during each of the years 2000 through 2004.
Net decrease of
Years ending September 30, net earnings
-------------------------- ------------
(In thousands)
2001 $ 86
2002 86
2003 86
2004 86
Thereafter 928
Goodwill is being amortized on a straight-line basis over its estimated useful
life of 15 years. As of September 30, 2000, goodwill related to purchase of the
insurance agencies is approximately $1.3 million. Goodwill does not qualify for
amortization for tax purposes.
Pro forma income and earnings per share as if the purchases had been consummated
on October 1, 1999 and 1998, after giving effect to goodwill amortization, would
not be significantly different from actual net income and earnings per share.
<PAGE>
(18) Quarterly Results of Operations (Unaudited)
The quarterly results of operations for the years ended September 30, 2000 and
1999 are as follows: For the three months ended fiscal 2000
<TABLE>
<CAPTION>
September 30 June 30 March 31 December 31
------------ ------- -------- -----------
(In thousands except share data)
<S> <C> <C> <C> <C>
Interest income $ 29,655 $ 28,437 $ 27,283 $ 26,947
Interest expense 15,125 13,883 13,213 12,994
------ ------ ------ ------
Net interest income 14,530 14,554 14,070 13,953
Provision for loan losses 210 244 189 204
--- --- --- ---
Net interest income after provision for loan losses 14,320 14,310 13,881 13,749
Total other income 2,381 1,972 1,820 1,697
Total other expenses 7,341 7,081 7,203 7,038
----- ----- ----- -----
Income before income taxes 9,360 9,201 8,498 8,408
Income tax 3,632 3,540 3,287 3,260
----- ----- ----- -----
Net income $ 5,728 $ 5,661 $5,211 $ 5,148
======= ======= ====== =======
Net income per share
Basic $ 0.24 $ 0.24 $ 0.21 $0.20
====== ====== ====== =====
Diluted $ 0.24 $ 0.23 $ 0.21 $0.20
====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the three months ended fiscal 1999
September 30 June 30 March 31 December 31
------------ ------- -------- -----------
(In thousands except share data)
<S> <C> <C> <C> <C>
Interest income $ 26,343 $ 26,047 $ 25,847 $ 25,647
Interest expense 12,239 12,198 12,221 12,182
------ ------ ------ ------
Net interest income 14,104 13,849 13,626 13,465
Provision for loan losses 152 155 354 155
--- --- --- ---
Net interest income after provision for loan losses 13,952 13,694 13,272 13,310
Total other income 1,584 1,575 1,504 1,517
Total other expenses 6,771 6,390 6,349 6,525
----- ----- ----- -----
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
====== ====== ====== =====
</TABLE>
<PAGE>
(19) Parent Company Financial Information
Condensed Statements of Financial Condition at September 30, 2000 and 1999 and
Condensed Statements of Operations and Cash Flows for the years ended September
30, 2000, 1999 and 1998 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
September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Assets: (In thousands except share data)
Cash deposited at Harbor Federal $ 4,024 $ 9,832
Investment securities available for sale at market value 6,503 6,789
Investment in and advances to Harbor Federal 209,153 219,436
Income tax receivable from Harbor Federal 5 11
Accrued interest receivable 50 61
Other assets --- 6
--------- --------
Total assets $219,735 $236,135
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Other liabilities $ 351 $ 213
----- ------
Total liabilities 351 213
----- -- ---
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; 31,139,509 shares
issued and 25,268,518 outstanding at
September 30, 2000 and 31,099,967 shares
issued and 28,008,627 outstanding at September 30, 1999 3,114 3,110
Paid-in capital 191,291 191,016
Retained earnings 109,941 96,485
Accumulated other comprehensive income (loss), net 233 (70)
Common stock purchased by:
Employee stock ownership plan (ESOP) (12,047) (12,746)
Recognition and retention plan (RRP) (5,385) (6,258)
Treasury stock, at cost, 5,870,991 shares and
3,091,340 shares at September 30,
2000 and 1999, respectively (67,763) (35,615)
-------- --------
Total stockholders' equity 219,384 235,922
------- -------
Total liabilities and stockholders' equity $ 219,735 $ 236,135
========= =========
</TABLE>
<PAGE>
Condensed Statements of Operations
Years ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- ----
(In thousands)
<S> <C> <C> <C>
Interest on investment securities $ 214 $ 238 $ ---
--- --- ---
Total interest income 214 238 ---
--- --- ---
Gain on sale of securities available for sale 103 --- ---
--- --- ---
Total other income 103 --- ---
--- --- ---
Other expense
Management fee to Harbor Federal 175 175 161
Other expenses 330 423 197
--- --- ---
Total other expense 505 598 358
Loss before income tax benefit and earnings of
Harbor Federal (188) (360) (358)
Income tax benefit 63 136 76
-- --- --
Loss before earnings of Harbor Federal (125) (224) (282)
Equity in net earnings of Harbor Federal 21,873 21,443 17,648
------ ------ ------
Net income $21,748 $21,219 $17,366
======= ======= =======
</TABLE>
<PAGE>
Condensed Statements of Cash Flows
Years ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash used by operating activities: (In thousands)
Net income $ 21,748 $ 21,219 $ 17,366
Adjustments to net income:
Equity in earnings of Harbor Federal (21,873) (21,443) (17,648)
Gain on sale of securities available for sale (103) --- ---
(Increase) decrease in accrued interest receivable 11 (61) ---
(Increase) decrease in income tax receivable 6 23 (53)
(Increase) decrease in other assets 6 (6) ---
Increase in payable to Harbor Federal 175 175 160
Increase (decrease) in other liabilities (10) (56) 86
---- ---- --
Net cash used by operating activities (40) (149) (89)
---- ----- ----
Cash used by investing activities:
Purchase of investment securities available for sale (892) (5,805) (514)
Sale of investment securities available for sale 1,662 --- ---
----- --- ---
Net cash provided by (used by) investing activities 770 (5,805) (514)
--- ------- -----
Cash provided by financing activities:
Net proceeds from issuance of common stock --- --- 150,223
(Investment in)/amounts received from Harbor Federal 35,000 54,000 (143,889)
Dividends paid (8,292) (8,089) (5,414)
Purchase common stock to fund RRP Plan --- (7,171) ---
Purchase Treasury Stock (33,342) (35,571) ---
Common stock options exercised 96 402 657
-- --- ---
Net cash provided by (used by) financing activities (6,538) 3,571 1,577
------- ----- -----
Net (decrease) increase in cash and cash equivalents (5,808) (2,383) 974
Cash and cash equivalents - beginning of year 9,832 12,215 11,241
----- ------ ------
Cash and cash equivalents - end of year $ 4,024 $ 9,832 $ 12,215
======= ======= ========
Supplemental disclosures:
Changes in unrealized gain (loss) on securities available for
sale net of tax $ 303 $ (729) $ 666
Amortization of stock benefit plans 1,674 2,026 2,097
Issuance of ESOP common stock --- --- 13,269
Satisfaction of deferred compensation plan --- --- 1,046
Tax benefit of employee benefit plans 188 160 175
Distribution of RRP shares 873 913 ---
ESOP forfeitures transferred to treasury stock --- 44 ---
Treasury stock issued to purchase insurance agency 1,087 --- ---
</TABLE>
