SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended September 30, 1997
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________to________________
Commission File No. 33-97422
COUNTY FINANCIAL CORPORATION
(Name of Small Business Issuer as Specified in its Charter)
FLORIDA 59-2320497
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
801 N.E. 167 STREET
NORTH MIAMI BEACH, FLORIDA 33162
(Address of Principal Executive Offices)
ISSUER'S TELEPHONE NUMBER: (305) 651-7110
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes [X] No [ ]
As of September 30, 1997 the registrant had 1,265,081 outstanding
shares of common stock $.01 par value.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Total Pages: 29 Exhibit Index : Page 23
---- ----
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements of County Financial Corporation
and its subsidiaries (the "Company" or "CFC") for the nine months ended
September 30, 1997 and 1996 are set forth on pages 25 to 29 of this Form 10-QSB.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
RESULTS OF OPERATIONS
CFC's consolidated net income for the first nine months of 1997 was
$2,992,000 or 9.7% more than the $2,727,000 earned in the same period in 1996.
Net income per common share was $2.36 in 1997 compared to $2.16 in 1996.
CFC's performance in the first nine months of 1997 resulted in a
return on average stockholders' equity of 17.9%, compared to 17.2% in 1996. The
return on average assets was 1.67% in 1997, compared to 1.58% in 1996.
The improvement in CFC's performance is due to increased net interest
income, higher non-interest income (which was primarily from increased deposit
account fees and the sale of OREO), and the tax benefit resulting from payment
of a litigation settlement. The positive impact of these items was partially
offset by increased operating expenses incurred due to the opening of two branch
offices.
NET INTEREST INCOME
Net interest income is defined as the total of interest income on
earning assets less interest expense on deposits and other interest-bearing
liabilities. Earning assets, which consist of loans, investment securities and
federal funds sold are financed by a large base of interest-bearing funds in the
form of money-market, NOW, savings and time deposits. Earning assets are also
funded by the net amount of non-interest related funds, which consist of
non-interest bearing demand deposits, the allowance for loan losses and
stockholders' equity, reduced by non-interest bearing assets such as cash and
due from banks, and premises and equipment, and other real estate owned
("OREO").
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The following table sets forth the Company's average balance sheets
and related interest, yield and rate information for the first nine months of
1997 and 1996.
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
SEPTEMBER 30,
1997 1996
----------------------------------------- --------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
ANNUALIZED ANNUALIZED
<S> <C> <C> <C> <C> <C> <C>
ASSETS
EARNING ASSETS:
Loans, net of unearned income $142,115 $ 10,742 10.11% $139,300 $ 10,347 9.92%
Investment Securities 58,690 2,726 6.21% 61,043 2,728 5.97%
Federal funds sold 15,877 648 5.46% 10,153 401 5.28%
-------- -------- ------ -------- -------- -----
Total earning assets 216,682 14,116 8.71% 210,496 13,476 8.55%
-------- -------- ------ -------- -------- -----
NON-INTEREST EARNING
ASSETS:
Cash and due from banks 13,528 12,703
Premises and equipment, net 4,386 4,232
Other Real Estate Owned, net 3,376 3,307
Other assets 3,107 2,672
Allowance for loan losses (2,216) (2,617)
-------- --------
Total non-interest
earning assets 22,181 20,297
-------- --------
TOTAL ASSETS $238,863 $230,793
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
Savings accounts $ 24,512 $ 548 2.99% $ 23,763 $ 502 2.82%
Money market/NOW accounts 68,830 1,181 2.29% 73,170 1,279 2.33%
Time deposits 56,441 2,313 5.48% 50,832 2,033 5.34%
Repurchase agreements 1,898 48 3.38% 1,724 46 3.56%
Other borrowings 801 60 10.01% 901 68 10.08%
Total interest
bearing liabilities 152,482 4,150 3.64% 150,390 3,928 3.49%
-------- -------- ------ -------- -------- -----
NON-INTEREST BEARING
LIABILITIES:
Demand deposits 61,694 57,230
Other liabilities 2,359 2,016
-------- --------
Total non-interest
bearing liabilities 64,053 59,246
-------- --------
Total liabilities 216,535 209,636
STOCKHOLDERS' EQUITY 22,328 21,157
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $238,863 $230,793
======== ========
Net interest Income/Spread $ 9,966 5.07% $ 9,548 5.06%
-------- --------
Net Interest Yield 6.15% 6.06%
</TABLE>
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Notes:
- The amounts set forth as average balances are based on
daily averages for each period.
- Loan fees and accounts receivable discounts, which are
included in interest income and in the calculation of
average yields, were $496,000 and $201,000 in the first
nine months of 1997 and 1996, respectively.
- Tax exempt income is not calculated on a tax equivalent
basis.
- Non-accruing loans are included in average loans.
Net interest income is primarily affected by changes in the amounts
and types of earning assets, interest-bearing funds and net non-interest related
funds, as well as their relative sensitivity to interest rate movements.
Net interest income for the first nine months of 1997 was $9,966,000,
up 4.4% from $9,548,000 in 1996. This increase was due to higher yields on all
earning assets, as well as higher balances for loans and federal funds sold
(which offset a decline in investment securities). In this regard, average loans
increased from $139,300,000 in 1996 to $142,115,000 in 1997, or $2,815,000. The
increase in average loans was also accompanied by an increase in the yield,
which grew from 9.92% in 1996 to 10.11% in 1997. Federal funds sold increased
from $10,153,000 in 1996 to $15,877,000 in 1997 or $5,724,000. The yield on
these earning assets rose from 5.28% in 1996 to 5.46% in 1997. In contrast to
other earning assets, investment securities declined from $61,043,000 in 1996 to
$58,690,000 in 1997, or $2,353,000. During the same period, the yield on
investment securities increased from 5.97% to 6.21%. In general, the higher
yields on the Company's earning assets were a reflection of increasing interest
rates in the economy at large. The effect of the foregoing items was to increase
the yield on the Company's earnings assets from 8.55% for the first nine months
of 1996 to 8.71% for the first nine months of 1997.
Interest expense for the first nine months of 1997 was $4,150,000, up
5.7% from $3,928,000 in 1996. This increase was due to higher average balances
and higher yields for time deposits and savings accounts. Time deposit balances
increased 11.0% from $50,832,000 in 1996 to $56,441,000 in 1997 with a
corresponding increase in yield from 5.34% to 5.48%. Savings account balances
increased 3.2% from $23,763,000 to $24,512,000 and the yield increased from
2.82% to 2.99%. These increases were partially offset by a 7.7% decrease in
average money market account balances from $1,279,000 in 1996 to $1,181,000 in
1997 and slight decrease in yield from 2.33% to 2.29%.
An increase in the Company's non-interest bearing demand deposits,
which funded the majority of growth in interest bearing assets, was the primary
source of the improvement in the Company's net interest income.
The cumulative effect of the foregoing changes was to increase the
Company's net interest spread from 5.06% in 1996 to 5.07% in 1997 and net yield
from 6.06% to 6.15%.
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NON-INTEREST INCOME
Non-interest income in the first nine months of 1997 totaled
$2,378,000, compared with $2,063,000 in 1996. Deposit account fee income rose
$138,000 from $1,795,000 in 1996 to $1,933,000 in 1997. Additionally, gains on
the sale of O.R.E.O. for the first nine months of 1997 totaled $130,000 as
compared to $2,000 in gains for 1996.
INVESTMENT SECURITIES GAINS AND LOSSES
At September 30, 1997, the Company held investment securities with a
market value of $52,782,000, which was $148,000 higher than the amortized cost
of the portfolio. This difference consisted of $309,000 of gross unrealized
gains and $161,000 of gross unrealized losses. There were net losses of $ 12,000
from the sale of securities in the first nine months of 1997, versus net losses
of $11,000 for the same period of 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $ 18,000 in both the first nine
months of 1997 and 1996. See "Allowance and Provision for Loan Losses."
NON-INTEREST EXPENSES
Non-interest expenses for the first nine months of 1997 totaled
$9,334,000, which was up 5.9% from $8,812,000 in 1996. Non-interest expenses are
discussed below in more detail.
PERSONNEL. Personnel expense (which includes salaries and benefits)
represented 48.5% of total non-interest expenses in 1997. Personnel expenses
increased 7.1% to $4,525,000 in 1997 from $4,224,000 in 1996. Staff on a
full-time equivalent basis averaged 165 in 1997 compared to 159 in 1996. The
increase in personnel expenses was the result of salary increases, bonuses and
additional staffing for two new branches, which opened in February and
September, 1997.
OCCUPANCY EXPENSE. Net occupancy expense in 1997 totaled $1,394,000,
up 14.5% from $1,217,000 in 1996. The increase was due to the opening of two new
branch offices in Boca Raton, Florida in February and Pembroke Pines, Florida in
September. Higher maintenance and rent at existing branch locations due to
inflation increases also contributed to the increase.
PREMISES AND EQUIPMENT EXPENSE. Premises and equipment expense, which
includes furniture and equipment depreciation, rental and maintenance, totaled
$527,000 in 1997, up 19.0% from $443,000 in 1996. The increase is due to
additional depreciation and maintenance costs on computer equipment, equipment,
furniture and fixture purchases together with technological upgrades.
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OTHER NON-INTEREST EXPENSES. Other non-interest expenses for the first nine
months of 1997 totaled $2,888,000, down 1.3% from $2,928,000 in 1996. The
principal reason for the decrease was a drop in legal and professional fees,
which decreased from $1,141,000 for the first nine months of 1996 to $856,000
for the same period of 1997. This decrease was due to the settlement of several
legal proceedings related to the Premium Sales matter. See Part II - Item 1 -
Legal Proceedings. The foregoing decreases were partially offset by reductions
in the carrying value for OREO and higher management expenses for existing OREO
properties. These items increased from $177,000 in 1996 to $499,000 in 1997. The
Company also incurred increases in other expense categories due to the growth of
CNB.
PROVISION FOR INCOME TAX
CFC made no provisions for income taxes for the nine months ended September 30,
1997 compared with a provision of $54,000 for the same period in 1996. In 1997,
CFC was able to avoid any income tax liability due to the payment of $3,000,000
with respect to the settlement of the Premium Sales matter. See Part II, Item 1
- -- Legal Proceedings. This payment was made in January 1997. For accounting
purposes, this payment was recorded as an expense during the fourth quarter of
1996. The relatively low provision for income taxes for the first nine months of
1996 was attributable to the utilization of net operating losses inherited by
the Company by virtue of its merger with Carney Bank.
CAPITAL EXPENDITURES
CFC's capital expenditures are reviewed by its Board of Directors.
CFC makes capital expenditures in order to improve its ability to provide
quality services to its customers. Capital expenditures for the first nine
months of 1997 equaled $856,000 compared to $297,000 in 1996, and were
principally related to expenditures for two new branch offices and changes in
equipment due to technological advances. Capital expenditures through September
30, 1997 for the new branch opened February 1997 in Boca Raton, Florida totaled
$132,000 and for the branch opened September 1997 in Pembroke Pines, Florida
totaled $433,000.
ASSET QUALITY AND CREDIT RISK
INVESTMENT SECURITIES. CFC maintains a high quality investment
portfolio including U.S. Treasury securities, securities of other U.S.
government entities and other securities such as Federal Reserve Bank stock.
Securities issued by the U.S. Treasury or other U.S. government entities
constituted approximately 99.0% of CFC's investment portfolio at September 30,
1997. CFC believes that these securities have very little risk of default. At
September 30, 1997, 100% of the securities held in CFC's investment portfolio
were classified available for sale. Of those securities, 99.9% were rated "AAA",
the highest assigned rating. A rating of "A" or better means that the bonds are
of "upper medium grade, with strong ability to repay, possibly with some
susceptibility to adverse economic conditions or changing circumstances.".
Ratings are assigned by independent rating agencies and are subject to the
accuracy of reported information concerning the issuers and the subjective
judgment and analysis of the rating agencies. They are not a guarantee of
collectibility. Approximately 33.8% of these securities mature or reprice in one
year or less and 94.6% in five years or less. As such, the risk of significant
fluctuations in value due to changes in the general level of interest rates is
limited.
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The following table sets forth information regarding the composition
of the investment portfolio at September 30, 1997 and 1996 (amounts in
thousands).
INVESTMENT PORTFOLIO
SEPTEMBER 30,
1997 1996
(amounts in thousands)
U.S. Treasury Securities $33,170 $31,377
Securities of other U.S. Government 19,087 23,682
agencies and corporations
Obligations of states and political -0- 96
subdivisions
Other Securities 525 525
------- -------
Total investments $52,782 $55,680
======= =======
CFC's investment portfolio decreased by 5.2% from the period of
September 30, 1996 to September 30, 1997, primarily due to principal repayment
on U.S. government agency mortgage backed securities.
LOANS. CFC maintains a high quality portfolio of real estate,
commercial and consumer loans. All loans are reviewed and approved by CFC's loan
committee, which ensures that loans comply with applicable credit standards. In
most cases, CFC requires collateral from the borrower. The type and amount of
collateral varies but may include residential or commercial real estate,
deposits held by financial institutions, U.S. Treasury securities, other
marketable securities and personal property. Collateral values are monitored to
ensure that they are maintained at proper levels.
As of September 30, 1997, approximately 74% of all CFC's loans were
real estate loans secured by real estate in South Florida. This level of
concentration could present a potential credit risk to CFC because the ultimate
collectibility of these loans are susceptible to adverse changes in real estate
market conditions in this market. CFC has addressed this risk by limiting most
loans to a maximum of 70% of the appraised value of the underlying real estate
and maximum amortization schedules of 20 years.
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Most of the loans have a stated maturity of five to ten years and may
be renewed or rolled over at maturity. At that time, CFC undertakes a complete
review of the borrower's credit worthiness and the value of any collateral. If
these items are satisfactory, CFC will generally renew the loan at prevailing
interest rates. The following table divides CFC's loan portfolio into five
categories.
TYPES OF LOANS
SEPTEMBER 30,
------------------------
1997 1996
-------- --------
(amounts in thousands)
Commercial, financial and agricultural $ 35,609 $ 31,977
Real estate - construction 7,884 9,304
Real estate - mortgage 97,318 101,730
Installment loans 1,494 1,621
Overdrafts 257 157
-------- --------
Total loans $142,562 $144,789
======== ========
COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS. CFC makes commercial,
financial and agricultural loans to businesses located in South Florida. The
credit risk associated with business lending is influenced by general economic
conditions, deterioration in a borrower's capital position resulting in
increasing debt to equity ratios, deterioration in a borrower's cash position
resulting in a liquidity problem, and decreasing revenues due to inefficient
operations of the borrower. These loans are generally secured by corporate
assets, marketable securities or other liquid financial instruments. These loans
totaled approximately $35,609,000 at September 30, 1997, and $31,977,000 at
September 30, 1996. Legally binding commitments to extend credit and letters of
credit for these borrowers totaled $17,303,000 at September 30, 1997 compared to
$16,301,000 at September 30, 1996.
REAL ESTATE CONSTRUCTION LOANS. CFC makes real estate construction
loans from time to time for real estate projects located in South Florida. CFC
generally requires security in the form of a mortgage on the underlying real
property and the improvements constructed thereon and personal guarantees. CFC
attempts to limit its credit exposure to 70% of the appraised value of the
underlying real property. On September 30, 1997, construction loans totaled
$7,884,000. Risks associated with construction loans include variations from
vacancy projections, delays in construction, environmental factors, reliability
of subcontractors and timing and reliability of inspections, and costs overruns.
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REAL ESTATE MORTGAGE LOANS. CFC makes both commercial and residential
real estate loans. These loans were $97,318,000 at September 30, 1997. Risks
associated with real estate mortgage loans include reliability of appraisals,
deterioration of market value, environmental contamination, and accelerated
depreciation of property due to deferred maintenance.
CFC makes real estate loans secured by commercial real estate,
including loans to acquire or refinance office buildings, warehouses and
apartments. At September 30, 1997, these loans totaled $79 million, or 55.2% of
total loans. Most of these loans have a maturity of five years or less. Almost
all of these loans are secured by real property located in South Florida. These
loans generally require a loan-to-collateral value of not more that 70%. At
September 30, 1997, CFC had $741,000 in legally binding commitments to extend
credit or standby letters of credit involving commercial real estate borrowers,
compared to $3.7 million at September 30, 1996.
Residential real estate loans totaled $19 million, or 13.3% of total
loans at September 30, 1997, compared with $22 million, or 15.2% at September
30, 1996. Residential real estate loans are predominately adjustable rate home
mortgages which generally require a loan-to-collateral value of not more than
70% and equity credit lines, which generally limit the loan-to-collateral value
to not more than 70% to 80%. Most loans have a maximum term of five to seven
years. CFC does not ordinarily charge any points on its real estate loans.
Almost all of the residential real estate loans are secured by homes in South
Florida. Legally binding commitments to extend credit secured by residential
mortgages totaled $1,992,000 as of September 30, 1997 compared to $2,068,000 as
of September 30, 1996.
INSTALLMENT LOANS. CFC offers consumer loans and personal and secured
loans. The security for these loans ordinarily consists of automobiles, consumer
goods, marketable securities, certificates of deposit and similar items. These
loans totaled approximately $1.5 million, or 1.1% of total loans, on September
30, 1997, compared with $1.6 million, or 1.1% of total loans, on September 30,
1996. Risks associated with installment loans include loss of employment of
borrowers, declines in the financial condition of borrowers resulting in
delinquencies, and rapid depreciation of loan collateral.
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets consist of non-accrual loans and residential
and commercial properties acquired in partial or total satisfaction of problem
loans, which are known as "other real estate owned", or "OREO." Past due loans
are loans that are delinquent 30 days or more, which are still accruing
interest.
Maintaining a low level of non-performing assets is important to the
ongoing success of any financial institution. CFC's credit review and approval
process is critical to CFC's ability to minimize non-performing assets on a
long-term basis. In addition to the negative impact on interest income,
non-performing assets also increase operating costs due to the expense of
collection efforts. It is CFC's policy to place all loans which are past due 90
days or more on non-accrual status, subject to exceptions made on a case by case
basis.
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The following table presents CFC's non-performing assets and past due
loans for 1997 and 1996.
NON-PERFORMING ASSETS AND 90 DAY PAST DUE LOANS
SEPTEMBER 30,
-----------------------
1997 1996
--------- ---------
(amounts in thousands)
Non-Accrual Loans $ 1,386 $ 2,333
OREO, net 2,910 3,266
--------- ---------
Total Non Performing Assets $ 4,296 $ 5,599
========= =========
Accruing Loans Past Due $ 25 $ 0
90 Days ========= =========
Of the total loan portfolio of $142.6 million at September 30, 1997,
$4.3 million or 3.0%, was non-performing, a decrease of $1,303,000 from
September 30, 1996. Non-performing loans at September 30, 1997 consisted of
commercial and residential real estate loans. The decrease in non-accrual loans
of $947,000 was the result of the transfer of 5 loans from non-accrual status to
O.R.E.O.. Subsequently, four of these properties were sold. and three loans on
non-accrual status were paid in full.
Other real estate owned at September 30, 1997 consisted of $1,379,000
of residential real estate and $1,531,000 of commercial real estate. OREO at
September 30, 1996 consisted of $1,063,000 of residential real estate and
$2,203,000 of commercial real estate. CFC believes that the carrying value of
its OREO portfolio is realizable. The decrease in OREO was due to the sale of
one property and the increase in the reserves on five other properties.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
CFC evaluates the adequacy of its allowance for loan losses as part
of its ongoing credit review and approval process. The review process is
intended to identify, as early as possible, customers who may be facing
financial difficulties. Once identified, the extent of the client's financial
difficulty is carefully monitored by CFC's loan review officer, who recommends
to the directors loan committee the portion of any credit that needs a specific
reserve allocation or should be charged off. Other factors considered by the
loan committee in evaluating the adequacy of the allowance include overall loan
volume, historical net loan loss experience, the level and composition of
non-accrual and past due loans, local economic conditions, and value of any
collateral. From time to time, specific amounts of the reserve are designated
for certain loans in connection with the loan committee's and review officer's
analysis of the adequacy of the allowance for loan losses.
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While the largest portion of this allowance is typically intended to
cover specific loan losses, it is considered a general reserve, which is
available for all credit-related purposes. The allowance is not a precise
amount, but is derived based upon the above factors and represents management's
best estimate of the amount necessary to adequately cover probable losses from
current credit exposures. The provision for loan losses is a charge against
current earnings and is determined by management as the amount needed to
maintain an adequate allowance.
The overall credit quality of the loan portfolio has improved in
recent years as evidenced by CFC's relatively low level of non-performing loans
and net charge-offs. Management relied on these factors, as well as its
assessment of the financial condition of specific clients facing financial
difficulties, in deciding to permit the level of the allowance for loan losses
to drop to $2,143,000 at September 30, 1997, from $2,502,000 at September 30,
1996. CFC's allowance for loan losses at September 30, 1997 represents
approximately 1.50% of total loans.
For the nine months ended September 30, 1996, and the nine months
ended September 30, 1997, charge-offs decreased from 0.39% to 0.28% of the
entire loan portfolio. Net charge-offs declined from $556,000 for the first nine
months of 1996 to $399,000 for 1997. The net amounts charged off in 1997 were
$336,000 in commercial loans, and $32,000 in real estate loans, $33,000 in
checking. These charge offs were offset by recoveries of $2,000 in installment
loans.
FINANCIAL CONDITION
CFC's goal is to maintain a high quality and liquid balance sheet.
CFC seeks to achieve this objective through increases in collateralized loans, a
strong portfolio of real estate loans and a stable portfolio of investment
securities of high quality.
INVESTMENT SECURITIES. As of September 30, 1997, investment
securities averaged $58.7 million or 27.1% of total earning assets. CFC's
management strategy for its investment account is to maintain a very high
quality portfolio with generally short-term maturities. The average investment
portfolio, all of which has been classified as available for sale, decreased
3.9% from $61.0 million at September 30, 1996 to $ 58.7 million at September 30,
1997.
LOANS. Loans averaged $ 142.1 million in the first nine months of
1997 compared to $139.3 million for the same period of 1996, or an increase of
2.0%. See "Asset Quality and Credit Risk - Loans," above.
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INTEREST-BEARING LIABILITIES. Average total interest-bearing
liabilities increased from $150.4 million for the first nine months of 1996 to
$152.5 million for the same period in 1997. The composition of interest-bearing
liabilities changed as funds shifted from money market/NOW accounts to higher
yielding time deposits. As a result, average time deposits increased from 33.8%
of total interest-bearing liabilities in 1996 to 37.0% in 1997. The yield on
savings and time deposits increased while the yield on money market/NOW accounts
deceased slightly. The effect the changes in deposit mix and rates was to
increase the rate on total interest bearing liabilities from 3.49% in the first
nine of 1996 to 3.64% for the same period in 1997.
LIQUIDITY AND RATE SENSITIVITY
The principal functions of asset and liability management are to
provide for adequate liquidity, to manage interest rate exposure by maintaining
a prudent relationship between rate sensitive assets and liabilities and to
manage the size and composition of the balance sheet so as to maximize net
interest income.
Liquidity is the ability to provide funds at minimal cost to meet
fluctuating deposit withdrawals or loan demand. These demands are met by
maturing assets and the capacity to raise funds from internal and external
sources. CFC primarily utilizes cash, federal funds sold and securities
purchased under repurchase agreements to meet its liquidity needs. Although not
utilized in managing daily liquidity needs, the sale of investment securities
provides a secondary source of liquidity.
Fluctuating interest rates, increased competition and changes in the
regulatory environment continue to significantly affect the importance of
interest rate sensitivity management. Rate sensitivity arises when interest
rates on assets change in a different period of time or a different proportion
than that of interest rates on liabilities. The primary objective of interest
rate sensitivity management is to prudently structure the balance sheet so that
movements of interest rates on assets and liabilities are highly correlated and
produce a reasonable net interest margin even in periods of volatile interest
rates.
Regular monitoring of assets and liabilities that are rate sensitive
within 30 days, 90 days, 180 days and one year is an integral part of CFC's
rate-sensitivity management process. It is CFC's policy to maintain a reasonable
balance of rate-sensitive assets and liabilities on a cumulative one year basis,
thus minimizing net interest income exposure to changes in interest rates. CFC's
sensitivity position at September 30, 1997 was such that net interest income
would increase modestly if there was an increase in short-term interest rates.
CFC monitors the interest rate risk sensitivity with traditional gap
measurements. The gap table has certain limitations in its ability to accurately
portray interest sensitivity; however, it does provide a static reading of CFC's
interest rate risk exposure.
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As of September 30, 1997, CFC remained asset sensitive (interest
sensitive assets subject to repricing exceeded interest sensitive liabilities
subject to repricing) on a 365-day basis to the extent of $23.1 million. This
positive gap at September 30, 1997 was 9.1% of total assets compared with 10.5%
at September 30, 1996. The primary cause for this decrease in the gap was the
increase in short term certificates of deposit and savings accounts. This
increase of $16,641,000 exceeded a decrease in variable rate NOW/Plus and
moneyfund balances of $4,832,000 resulting in a net increase of $11,809,000.
Assets subject to 365-day repricing increased to a lesser degree as an increase
in federal funds sold of $23,187,000 exceeded the $12,329,000 decrease in one
year repricing loans and investments by $10,858,000.
CFC's targeted gap position is in the range of negative 5 percent to
positive 10 percent. Therefore, the 9.1% interest sensitive gap position for
September 30, 1997 is within established parameters. CFC measures its gap
position as a percentage of its total assets.
While the absolute level of gap is a measurement of interest rate
risk, the quality of the assets and liabilities in the balance sheet must be
analyzed in order to understand the degree of interest rate risk taken by CFC.
CFC does not invest in any derivative products in order to manage or hedge its
interest rate risk.
CAPITAL
One of management's primary objectives is to maintain a strong
capital position to merit the confidence of customers, bank regulators and
stockholders. A strong capital position helps CFC withstand unforeseen adverse
developments and take advantage of attractive lending and investment
opportunities when they arise. During the first nine months of 1997,
stockholders' equity increased by $3,147,000, or 14.9%, from December 31, 1996.
CFC is required to comply with Federal Reserve's rules pertaining to
risk-based capital.. Under these rules, at September 30, 1997, CFC's tier one
capital was 14.6% and the total capital was 15.9% of risk-based assets. These
risk-based capital ratios are well in excess of the minimum requirements of 4%
for tier one and 8% for total risk-based capital ratios. Both of these capital
ratios increased during the third quarter of 1997 as equity capital increased by
5.4% and risk-based assets only increased by 2.4%. CFC's leverage ratio (tier
one capital to total average quarterly assets) of 9.9% at September 30, 1997, is
also well in excess of the minimum 4% requirement.
PROPOSED MERGER WITH REPUBLIC SECURITY FINANCIAL CORPORATION
CFC and CNB have entered into an agreement and plan of merger dated
August 8, 1997 (the "Merger Agreement") with Republic Securities Financial
Corporation ("RSFC") and Republic Security Bank ("Republic Security"), pursuant
to which CFC has agreed to be merged with and into Republic Security.
<PAGE>
The Merger Agreement is described in detail in the Form S-4 filed by
Republic Security Financial Corporation (Registration No. 333-36717) with
respect to the proposed merger.
The consummation of the merger is subject to approval by the
shareholders of CFC and the shareholders of RSFC, together with certain other
conditions set forth in the Merger Agreement. Accordingly, there can be no
assurance that the merger will be consummated.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PREMIUM LITIGATION
County has been a party to several legal proceedings arising out of
the failure of the food "diverting" business owned and operated by Premium Sales
Corporation, Plaza Trading Corporation and certain of their affiliates and
associates (the "Premium Group"). In June 1993, the Premium Group was forced
into bankruptcy and a receiver was appointed for the principal members of the
Premium Group. It appears that the Premium Group financed a major portion of its
operations by attracting funds from private investors. Many of the investors in
the Premium Group alleged that the
14
<PAGE>
Premium Group was involved in a "Ponzi" scheme in which the Premium Group paid
high rates of return to early investors from funds raised from later investors.
WALCO INVESTMENTS ET AL. V. KENNETH THENEN, ET AL.
In June 1994 certain investors in the Premium Group filed a class
action complaint in the United States District Court for the Southern District
of Florida seeking in excess of $250 million in damages for losses sustained by
them by investing in the Premium Group.
On October 9, 1996 the class plaintiffs, County and Harley S. Tropin
as Trustee and Receiver for the Premium Group companies agreed to settle all
claims against County and Larry Robinette for $3,000,000. CFC expensed the
entire amount of the settlement for accounting purposes during the fiscal year
ending December 31, 1996 although the cash payment was not made until January
1997. The amount of the payment will be treated as a deduction for income tax
purposes during 1997. The amount of the payment has been treated as a deduction
for tax purposes during 1997. CFC funded the settlement from its existing cash
reserves, which were purposefully maintained at relatively high levels. As a
result, the settlement did not have a significant impact on CFC's liquidity
levels.
IN RE: PREMIUM SALES CORPORATION ET AL., DEBTOR, HARLEY S. TROPIN, TRUSTEE V.
COUNTY NATIONAL BANK OF SOUTH FLORIDA AND LARRY ROBINETTE
15
<PAGE>
In July 1995, Harley S. Tropin, as the Chapter 11 trustee for the
estates of Premium Sales Corporation, Plaza Trading Corporation and designated
corporate representative of Windsor Wholesale Corporation (the "Premium
Debtors"), commenced an adversary proceeding against County and Larry Robinette
in the United States Bankruptcy Court for the Southern District of Florida.
In October 1996, County and Harley s. Tropin, as trustee, agreed to
settle this case as part of the settlement for the WALCO case described above.
HARLEY S. TROPIN, AS RECEIVER, V. KENNETH THENEN, ET AL.
On December 23, 1993, Harley S. Tropin, as receiver for certain
members of the Premium Group, filed a complaint in the United States District
Court for the Southern District of Florida against various parties seeking to
recover unspecified damages suffered by the Premium Group from the defendant's
participation and assistance in the alleged fraudulent scheme conducted by the
Premium Group. In October 1995, the receiver amended its complaint to add County
as an additional defendant in the litigation.
In October 1996, County and Harley S. Tropin, as receiver, agreed to
settle this case as part of the settlement for the WALCO case described above.
GRAND JURY INVESTIGATION
16
<PAGE>
County is aware that the U.S. Attorney has convened a grand jury to
investigate possible criminal violations with respect to the Premium Group
matter. This has been under investigation for several years. To date, several
directors and officers of County have appeared as witnesses before the grand
jury. In August 1996, a federal grand jury indicted several principals of
Premium for fraud. One officer of County, Larry Robinette, has been indicted for
complicity in the fraud. Mr. Robinette has vigorously denied the charges and is
entitled to the constitutional presumption of innocence. No other officer or
director of County, nor County itself , has been named as either a target of the
investigation or charged with any wrongdoing.
LITIGATION INVOLVING FLORIDA HOME FINDERS, INC.
In June 1995, County made a loan in the amount of $2,000,000 to the
principals of Florida Home Finders, Inc. ("FHF"). The principals utilized the
loan proceeds to pay for part of the purchase price of FHF. The loan was secured
by a pledge of a $2,000,000 certificate of deposit established by FHF at
17
<PAGE>
the time of the loan. FHF is a property management company. As part of its
business, it apparently received security deposits from tenants at properties
managed by FHF. It has been alleged that FHF utilized these tenant security
deposits to establish the certificate of deposit at County.
In September, 1995, the Florida Department of Business Regulation
(the "DBR") filed an action in the Circuit Court for St. Lucie County, Florida
against FHF and its principals based on the alleged misuse of the tenant
security deposits and other items. As part of this proceeding, the DBR sought a
temporary injunction preventing CNB from offsetting the $2,000,000 certificate
of deposit against the amount of the loan. In seeking the injunction, the DBR
alleged that the certificate of deposit represented tenants' security deposits
and that such funds should have been held in segregated accounts by FHF. The
court granted the temporary injunction without notice to County. County
subsequently intervened in the proceeding and requested the court to dissolve
the injunction because: (i) County had a valid and perfected security interest
in the certificate of deposit, (ii) FHF had the right under Florida law to
utilize the security deposits to establish the certificate of deposit because it
had posted a $250,000 bond with the State of Florida; and (iii) certain other
reasons. The court subsequently held that the injunction would dissolve within
10 days unless the DBR either posted a bond in the amount of $25,000,000 with
the court, or filed a motion with the appellate court and secured a stay with
respect to its obligation to post the bond. The DBR failed to take either action
within the required time period.
In October, 1995, County took the position that the injunction
against County was dissolved because the DBR had failed to take either of the
actions required by the Circuit Court within the
18
<PAGE>
required time period. Accordingly, County applied the certificate of deposit
against the outstanding balance of the defaulted loan. The receiver for FHF
subsequently notified County that the setoff of the certificate of deposit was
allegedly improper, and demanded that the certificate of deposit be
reestablished.
In August 1996, the receivers for FHF filed an amended complaint
against a variety of defendants, including County, with respect to the
activities of FHF. In the amended complaint, the receivers sought, among other
things, the return of the $2,000,000 certificate of deposit set off by County
based upon theories of fraudulent conveyance, negligence and unjust enrichment.
In January 1997, the receivers of FHF voluntarily dismissed (without prejudice)
their complaint, purportedly for the purpose of conserving the assets of the
estate of FHF. The Court subsequently determined that County was entitled to an
award of costs and fees incurred in the defense of this action.
In June 1997, the receivers for FHF filed a new complaint against
County with the Circuit Court for St. Lucie County, Florida. In the new
complaint, the receivers sought a judgment against County in the amount of
$2,000,000, plus punitive and treble damages, interest and costs. The receivers'
complaint contained counts based on common law conversion, statutory conversion,
unjust enrichment, fraud, fraudulent transfer, money lent, negligence,
rescission of negotiable instruments and Civil RICO.
Pursuant to Court direction, in early October 1997, the receiver,
through counsel, accepted in writing an offer of judgment filed by County in the
amount of $10,000 to
19
<PAGE>
fully resolve the litigation. Others who purport to act on behalf of the
plaintiffs have moved the Court to reconsider its direction that the receivers
accept the offer of judgment. The court denied the motion on November 12, 1997.
EMPLOYMENT DISCRIMINATION LITIGATION
In May 1997, a complaint was filed by John Doe against County in the
United States District Court for the Southern District of Florida. In the
complaint, the plaintiff alleged that he was wrongfully terminated by County
because he was suffering from human immunodeficiency virus ("HIV"). The
plaintiff has asserted claims of discrimination under the Americans with
Disabilities Act, the Rehabilitation Act and the Florida Civil Rights Act. The
plaintiff is seeking compensatory damages, punitive damages, costs, and
attorney's fees. It is the position of County that the plaintiff was terminated
during his probationary period for failing to meet County's employment criteria
and that his dismissal was not related to any disability. County has filed a
motion to dismiss the compliant and is vigorously defending this litigation.
CERTAIN ENVIRONMENTAL MATTERS
20
<PAGE>
In 1993, Carney took title to the premises of a former dry cleaner
located in Coral Springs, Florida pursuant to a foreclosure sale. Carney then
arranged to sell the property to a third party. The purchaser required that an
environmental study be performed after the closing and that Carney indemnify the
purchaser against any expenses that might result from the presence of hazardous
substances on the property. After the sale, Carney engaged an independent
consultant to perform an environmental study of the property. This study
indicated that hazardous substances were located at the property. Based on this
study, Carney's environmental consultant prepared a remedial action plan (the
"RAP") and submitted it to the Broward County Department of Natural Resource
Protection ("Broward County"). The RAP sets forth a plan to clean up the
hazardous substances over a period of two years. Carney's consultant estimated
that the cost of the plan of cleanup will not exceed the estimate made by
Carney's consultant. The RAP has received final approval from Broward County.
In 1994, the State of Florida established a Dry Cleaning Solvent
Superfund program (the "Program") under which the State of Florida will pay for
the clean up of certain contaminated dry cleaning sites. In May 1996, the site
was accepted by the State of Florida for inclusion in the program. The Program
preempts local government and private enforcement actions with respect to
contaminated sites eligible for inclusion in the Program.
During 1995, Broward County requested County to proceed with the RAP
at its Carney's expense. Carney resisted this request because it would
jeopardize its right to receive benefits under the Program. In October, 1997,
Carney met with officials of Broward County to discuss this matter. Based on the
discussions, Carney concluded
21
<PAGE>
that it was unlikely that Broward County would institute an enforcement action
with respect to the property.
If Broward County institutes enforcement action against CFC with
respect to the property, CFC intends to vigorously defend such actions based on
applicable provisions of Florida law. Although there can be no assurance that
those defenses would be successful or that CFC would not be required to pay for
clean up of the property, the Company believes that any enforcement action
against CFC will not have a material adverse effect on the business or financial
position of CFC.
22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSB
(a) The exhibits set forth in the following Index of Exhibits are
files as a part of this report.
EXHIBIT NO. DESCRIPTION
None.
(b) The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1997.
23
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of North Miami Beach, Florida, on October
13, 1997.
COUNTY FINANCIAL CORPORATION
By: /s/ GEORGE M. APELIAN
------------------------------------
George M. Apelian
President, Chief Executive Officer
and Director (Principal Executive
Officer)
By: /s/ EILEEN A. SALSANO
------------------------------------
Eileen A. Salsano
Executive Vice President and Chief
Operating Officer (Principal Financial
Officer and Principal Accounting Officer)
24
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
================================================================================================
September 30, December 31,
ASSETS 1997 1996
(unaudited)
<S> <C> <C>
EARNING ASSETS:
Loans $ 142,562 $ 146,271
Less: Unearned Income (1)
Allowance for loan losses (2,143) (2,524)
--------- ---------
Total loans, net" 140,419 143,746
Securities available for sale 52,782 56,460
Federal funds sold 31,724 19,585
--------- ---------
Total earning assets 224,925 219,791
CASH AND DUE FROM BANKS 16,970 15,617
PREMISES AND EQUIPMENT, Net 4,552 4,186
OTHER REAL ESTATE OWNED, Net 2,910 3,338
INTEREST RECEIVABLE 1,510 1,450
OTHER ASSETS 1,680 1,564
--------- ---------
TOTAL $ 252,547 $ 245,946
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Savings accounts $ 26,179 $ 24,360
Interest checking, interest checking plus and moneyfund accounts 68,908 71,288
Certificate of deposit, $100,000 and over 22,504 14,437
Other certificates of deposit 38,998 38,275
--------- ---------
Total interest bearing deposits 156,589 148,360
Securities sold under repurchase agreements 1,623 4,750
Other borrowings 775 850
--------- ---------
Total interest bearing liabilities 158,987 153,960
Demand deposits 66,018 64,950
--------- ---------
Total 225,005 218,910
Interest payable 1,042 775
Other liabilities 2,214 5,122
--------- ---------
Total Liabilities 228,261 224,807
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value; 1,500,000 shares"
authorized; 1,265,081, issued and outstanding at 9/30/97"
1,264,328 issued and outstanding at 12/31/96" 13 13
Capital Surplus 13,568 13,562
Retained earnings 10,613 7,621
Net unrealized gain (loss) on securities available for sale,"
net of taxes 92 (57)
--------- ---------
Total stockholders' equity 24,286 21,139
--------- ---------
TOTAL $ 252,547 $ 245,946
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
25
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
===============================================================================================================================
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 3,608 $ 3,601 10,742 $ 10,347
Interest on investment securities:
Taxable 865 869 2,726 2,715
Non-taxable 2 13
Interest on federal funds sold 350 147 648 401
----------- ----------- ---------- -----------
Total interest income 4,823 4,619 14,116 13,476
INTEREST EXPENSE:
Savings 193 164 548 502
Interest checking, interest checking plus and moneyfund accounts 396 425 1,181 1,279
Certificates of deposit, $100,000 and over 287 173 754 533
Other certificates of deposit 539 490 1,559 1,500
Interest on other borrowings 36 34 108 114
----------- ----------- ---------- -----------
Total interest expense 1,451 1,286 4,150 3,928
----------- ----------- ---------- -----------
NET INTEREST INCOME 3,372 3,333 9,966 9,548
Provision for loan losses 6 6 18 18
----------- ----------- ---------- -----------
Net interest income after provision for loan losses 3,366 3,327 9,948 9,530
----------- ----------- ---------- -----------
NON-INTEREST OPERATING INCOME:
Service charges on deposit accounts 705 575 1,933 1,795
Net loss on sale of investment securities 0 (4) (12) (11)
Other 145 87 457 279
----------- ----------- ---------- -----------
Total non-interest operating income 850 658 2,378 2,063
----------- ----------- ---------- -----------
NON-INTEREST OPERATING EXPENSE:
Personnel expense 1,511 1,350 4,525 4,224
Occupancy expense, net 496 416 1,394 1,217
Premises and equipment expense 191 154 527 443
Other 924 1,040 2,888 2,928
----------- ----------- ---------- -----------
Total non-interest operating expense 3,122 2,960 9,334 8,812
----------- ----------- ---------- -----------
INCOME BEFORE INCOME TAXES 1,094 1,025 2,992 2,781
PROVISION FOR INCOME TAXES 54
----------- ----------- ---------- -----------
NET INCOME $ 1,094 $ 1,025 $ 2,992 $ 2,727
=========== =========== ========== ===========
NET INCOME PER COMMON SHARE
AND COMMON EQUIVALENT $ 0.86 $ 0.81 $ 2.37 $ 2.16
=========== =========== ========== ===========
AVERAGE SHARES OUTSTANDING 1,265,081 1,263,628 1,264,771 1,263,628
=========== =========== ========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
26
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
=======================================================================================================================
Net
Unrealized
Gain (loss) On
Securities
Common Capital Retained Available
Stock Surplus Earnings For Sale Total
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 13 $13,562 $ 7,621 $ (57) $21,139
Employee Stock Option 6 6
Net change in unrealized Gain (loss)
on securities available for sale,
net of taxes 149 149
Net income for the nine months ended 2,992 2,992
------- ------- ------- ------- -------
BALANCE SEPTEMBER 30, 1997 (unaudited) $ 13 $13,568 $10,613 $ 92 $24,286
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited financail statements.
27
<PAGE>
<TABLE>
<CAPTION>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
======================================================================================================
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,992 $ 2,727
----------- -----------
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Provision for loan losses 18 18
Depreciation and Amortization 440 339
Deferred income tax benefit 0 (17)
Net loss on sale of investment securities 12 11
(Increase) Decrease in interest receivable (60) 526
( Increase) decrease in other assets (110) 145
Increase (Decrease ) in interest payable 267 (30)
(Decrease ) Increase in other liabilities (2,907) 1,200
----------- -----------
Net cash provided by operating activities 652 4,919
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities available for sale 21,159 27,637
Purchase of securities available for sale (17,300) (23,710)
Decrease (increase) in loans, net 3,642 (5,024)
Proceeds from sale of other real estate owned 96 37
Purchases of premises and equipment, net (856) (297)
----------- -----------
Net cash provided (used) in provided by investing activities 6,741 (1,357)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in savings accounts 1,818 (142)
(Decrease) increase in interest checking, checking plus
and money fund (2,382) 636
Increase (Decrease) in certificates of deposit 8,792 (4,648)
Decrease in securities sold under repurchase agreements (3,127) (1,527)
Repayment of other borrowings (75) (75)
(Increase) decrease in demand deposits 1,067 (958)
Proceeds from Employee Stock Options 6 0
----------- -----------
Net cash provided (used) in financing activities 6,099 (6,714)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,492 (3,152)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,202 26,868
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,694 $ 23,716
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Interest $ 3,054 $ 3,958
=========== ===========
Income Taxes $ 185 0
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
28
<PAGE>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
County Financial Corporation ("C.F.C."), a one Bank holding company, its
wholly-owned banking subsidiary, County National Bank of South Florida
(the "Bank") and its inactive wholly-owned non-banking subsidiary, Carnco
Corporation ("Carnco") are primarily engaged in the traditional banking
practices of gathering deposits and investing in loans and investment
securities. The Bank offers these services through its main office and
thirteen branches located in Dade, Broward, and Palm Beach County,
Florida. Substantially all of the Bank's activities are conducted with
customers in South Florida.
The accounting and reporting policies and practices of C.F.C., the Bank,
and Carnco conform to the practices in the banking industry and generally
accepted accounting principles.
The accounting policies followed for quarterly reporting purposes are the
same as those disclosed in the 1996 Annual Report to Stockholders of
County Financial Corporation. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary for a fair
presentation of the information provided. These statements have been
prepared by C.F.C. without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnotes have been omitted pursuant to such rules and regulations.
Although C.F.C. believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these
unaudited consolidated financial statements be read in conjunction with
C.F.C.'s audited 1996 consolidated financial statements and the notes
thereto.
2. PENDING MERGER
On August 8, 1997 the Company and the Bank entered into a definitive
agreement whereby they will merge with Republic Security Bank, a wholly owned
subsidiary of Republic Security Financial Corporation, (Republic).The definitive
agreement provides for a fixed exchange ratio whereby shareholders of the
Company will receive 4.807 shares of Republic Security Financial Corporation
common stock for each share of the Company's common stock, subject to adjustment
as defined in the Merger Agreement. Republic will issue approximately 6.1
million shares of common stock in a tax free exchange. Management anticipates
the transaction will be accounted for as a pooling-of-interests. The Transaction
is subject to regulatory approval and approval by the Companies shareholders.
29
