UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED MARCH 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-14671
REPUBLIC SECURITY FINANCIAL CORPORATION
Exact name of registrant as specified in its charter)
FLORIDA 59-2335075
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4400 CONGRESS AVENUE, WEST PALM BEACH, FL 33407
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 840-1200
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Common Stock, $.01 Par Value Per Share
(TITLE OF CLASS)
Preferred Stock, $10.00 Par Value Per Share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 9, 1995, was approximately $15,211,394. The number
of shares outstanding of the Registrant's $.01 par value Common Stock as of
June 9, 1995 was 4,264,150.
DOCUMENTS INCORPORATED BY REFERENCE:
The Proxy Statement for the Registrant's 1995 Annual Meeting of Shareholders
(Exhibit 23a hereto) is incorporated by reference into Parts III & IV of this
Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Republic Security Financial Corporation, (the "Company"), incorporated in
Florida in 1983, is a savings bank holding company. The Company's wholly owned
subsidiary, Republic Security Bank, (the "Bank"), is principally engaged in the
savings bank business. The Bank is a federally chartered savings bank and its
deposits are insured by the FDIC up to applicable limits. The Bank commenced
operations on November 19, 1984, and is a member of the Federal Home Loan Bank
of Atlanta ("FHLB"). On April 17, 1995, the Bank filed application to convert
from a Federal Savings Bank to a State of Florida, commercial bank charter and
at the same time the Company applied with the Federal Reserve Board to become a
bank holding company. The Company expects the conversion to a commercial bank
to be complete in fiscal 1996.
On November 30, 1994, the Bank acquired Governor's Bank ("Governors"), a
commercial bank headquartered in West Palm Beach. The acquisition was
accounted for as a purchase and resulted in Republic Security Bank acquiring
assets of $64.3 million, liabilities of $62.3 million and 2 additional branch
locations.
Republic Security Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision (the "OTS") and the FDIC.
BUSINESS SEGMENTS
The Bank has been engaged in two business segments; banking and mortgage
banking. The principal business of the banking segment is to attract deposits
from the general public and invest such deposits, together with funds from
borrowings and operations, in loans and investments. Loans are made to enable
borrowers to purchase, refinance, construct or improve residential, commercial
and other real estate and are usually secured by mortgages on such real estate.
Origination of business purpose and consumer loans increased in 1995 and are
expected to increase in future years. Funds are provided for the operations of
the Bank through proceeds from the sale of loans, from new depositors, and
repayment of outstanding loans, borrowings from the Atlanta FHLB and others,
and from working capital. A majority of earnings depend upon the difference
between (1) revenues from loans and investments, and (2) expenses incurred in
connection with obtaining funds for lending (including interest paid on savings
deposits and borrowings) and expenses relating to day-to-day operations. The
banking segment distributes its financial services products through seven
branches in Palm Beach and Dade counties.
The principal business of the mortgage banking segment consists of
originating and purchasing residential mortgage loans, selling these loans in
secondary markets, and servicing loans for others. Activity in the mortgage
banking industry significantly declined during 1995. The Bank closed five of
its loan production offices during 1995 and currently conducts mortgage banking
activities from its corporate headquarters. Effective April 1, 1995, mortgage
banking activities will be included in banking operations.
Loans are sold primarily to the Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA") and various private
investors. The mortgage banking segment also engages in the business of
servicing loans for FHLMC, FNMA and private investors which provides the Bank
with servicing fees, float on escrow and pass-thru payments, and other loan
related fees.
The Bank's banking and mortgage banking segments are not materially
affected by seasonal fluctuations. For a further discussion of the Bank's
business segments, please refer to Note 8 of the Financial Statements in
Item 8 on pages 64 and 65.
COMPETITION
The Bank experiences strong competition both in attracting deposits and
originating loans in its South Florida market area. Direct competition for
deposits comes from other savings and loan associations, commercial banks,
credit unions, money market funds, and other providers of financial services,
and is significant largely due to the desire of financial institutions to
access the high proportion of retirees with above average liquid assets who
live in South Florida. The Bank competes with other savings and loan
associations, commercial banks, and credit unions for loans. In addition,
mortgage banking companies are competitors for residential real estate loans.
Many of these competitors have greater financial resources, larger branch
networks, better name recognition, greater economies of scale, less regulatory
burdens, less capital requirements, and larger employee bases than the Bank.
The primary methods used to attract deposit accounts include interest
rates offered, variety and quality of services offered, convenience of branches
and advertising and promotions. The bank competes for loans through interest
rates and loan fees and efficient, quality service provided to borrowers, home
builders, real estate brokers and automobile dealers.
LENDING ACTIVITIES OF THE BANK
General. Under applicable regulations, the Bank originates, purchases
and sells loans, or participating interests in loans. See "REGULATION --
Federal Regulation" for a description of applicable regulations which limit
lending in relation to assets or net worth. The Bank originates, purchases and
participates in loans for its own portfolio and for sale in the secondary
market. Lending activities include the origination and purchase of long-term
adjustable-rate and to a lesser extent fixed-rate residential mortgage loans,
construction loans, commercial, commercial real estate loans and consumer
loans. During 1995 the level of commercial, commercial real estate, and
consumer loan originations increased from prior years.
<TABLE>
The following table sets forth total loans and loans held for sale
that were originated, purchased, sold and repaid during the periods indicated:
<CAPTION>
YEARS ENDED MARCH 31,
1995 1994 1993
(in thousands)
<S> <C> <C> <C>
Real estate loan origination $90,308 $149,568 $154,213
Consumer and other loan originations 22,045 8,936 2,216
----- ----- -----
o Total loan origination 112,353 158,504 156,429
Purchases of real estate loans 6,193 47,209 1,704
----- ----- -----
Total loan origination and purchases 118,546 205,713 158,133
LESS:
o Principal repayment on loans and loans held
for sale 35,034 36,066 35,803
o Sale of loans and loans held for sale 53,927 138,617 129,145
------ ------- -------
Total repayments and sale of loans 88,961 174,683 164,948
o Total increase (decrease) in principal loan
balances 29,585 31,030 (6,815)
Loans acquired in mergers 41,682 28,919
Net (increase) decrease in deferred loan fees,
premiums and discounts (816) 101 838
Net decrease (increase) in loans in process 1,416 (3,586) (4,951)
Net (increase) decrease in allowance for loss (1,436) 176 (472)
----- ------ -----
o Net increase in loans and loans held for
sale $70,431 $27,721 $17,519
====== ====== ======
</TABLE>
The Bank provides real estate construction and mortgage loans, installment
loans to individuals and commercial and financial loans. Loans secured by real
estate generally include construction loans, loans to refinance or purchase
existing properties, home equity loans and land acquisition and development
loans.
Real Estate Mortgage Loans. The Bank's real estate mortgage loans
consist of commercial and residential mortgage loans, which are secured by
existing properties. The Bank's residential mortgage loans have terms which do
not exceed thirty years and are secured by one-to-four family residences. The
majority of residential mortgages which the Bank holds in its portfolio provide
for interest rate adjustments every year and such adjustments are limited to 5%
to 6% over the term of the loan. Loans made for 80% to 95% of the appraised
value of the financed residences (the balance of the Bank's residential
mortgages) are primarily originated with private mortgage insurance which
essentially insures that portion of the loan which is in excess of 80% of the
appraised value of the financed residences.
The Bank's loan portfolio includes $24 million of residential loans which
have loan to value ratios of greater than 80%, when originated, and have no
private mortgage insurance.
Residential mortgage loans generally are underwritten by the Bank in
accordance with guidelines of the FHLMC. The Bank is an approved
seller/servicer for the FNMA and the FHLMC.
Loans secured by commercial properties generally have terms ranging from
one to five years and interest rate adjustment periods ranging from monthly to
three years. Amortization periods for commercial mortgage loans generally do
not exceed 25 years. Commercial real estate loans originated by the Bank are
primarily secured by income producing properties such as office buildings and
retail space. Generally, in underwriting commercial real estate loans, the
Bank requires the personal guaranty of borrowers, a maximum loan to value ratio
of 80%, and a cash flow to debt service ratio of 1.2 to 1.
Construction Loans. Real estate construction loans comprised ap-
proximately 18%, 28%, and 30% of the Bank's total loan portfolio as of
March 31, 1995, 1994 and 1993, respectively. Of the total real estate
construction loan portfolio of $45.4 million as of March 31, 1995, all are for
one to four-family residential properties.
The Bank originates one-to-four family residential loans through
developers and to individuals on a pre-sold and speculative basis. The Bank's
underwriting guidelines regarding residential construction loans require an
analysis of the financial condition of the developer or the borrower, the
appraised value of the property, and the marketability of the proposed
residence, including location and overall portfolio concentrations.
Limitations are imposed by the Bank on the amount of loans for the purpose of
construction of residences that have not been pre-sold.
Construction loans generally have terms of between six and twelve months
and interest rates which adjust monthly based upon a designated prime rate.
Loan proceeds are advanced as construction progresses and inspections warrant.
Construction loans are structured either to be converted to permanent loans at
the end of the construction phase, or to be paid off upon receipt of financing
from another lender.
The Bank's construction loans are secured by first mortgages on the
underlying real estate and have loan-to-value ratios which generally do not
exceed 80%. All such loans provide for recourse to the borrower or a related
individual in the event of a default. Certain loan agreements allow the Bank
to advance funds for fees.
Construction loans afford the Bank the opportunity to increase the
interest rate sensitivity of its loan portfolio and to receive yields higher
than those obtainable on adjustable rate mortgage loans secured by existing
residential properties. These higher yields correspond to the higher risks
associated with construction lending. Construction funds are disbursed in many
cases without commitment from the ultimate users of a project to acquire or
lease it, or to borrowers who do not have commitments for permanent financing
on completed projects. Construction loans involve additional risks
attributable to the fact that loan funds are advanced upon the security of a
project under construction, which security is of uncertain value prior to its
completion. Because of the uncertainties inherent in estimating construction
costs, as well as the market value of the complete project (which is often
beyond the control of the borrower), and the effects of governmental regulation
on real property, it is relatively difficult to accurately evaluate the total
funds required to complete a project and the related loan-to-value ratio.
As a result of the foregoing, construction lending often involves the
disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project rather than the ability of the borrower or
guarantor to repay principal and interest. If the Bank is forced to foreclose
on a project prior to or at completion due to a default, there can be no
assurance that the Bank will be able to recover all of the unpaid balance of,
and accrued interest on, the loan as well as the related foreclosure and
holding costs. In addition, the Bank may be required to fund additional
amounts to complete a project and may have to hold the property for an
indeterminable period of time. The Bank has underwriting procedures designed
to identify what it believes to be acceptable levels of risk.
The Bank extends loans for other purposes including land, acquisition and
development, residential lot loans, various consumer loans, SBA and commercial
business loans.
Consumer Loans. Consumer loans are extended for a variety of purposes
including the purchase of automobiles, home improvement, lines of credit,
unsecured personal loans, and education. Loans secured by automobiles are the
dominant consumer loan and represented $30.1 million or 83% of total consumer
loans as of March 31, 1995.
Consumer loan underwriting standards include an examination of the
applicant's payment history on other debts and an evaluation of their ability
to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary importance, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. While consumer loans generally involve a
higher element of credit risk than one-to-four family residential loans,
consumer loans are typically made at higher interest rates and for shorter
terms, and are helpful in maintaining a profitable spread between the Banks'
loan yield and its cost of funds.
Commercial Business Loans. Commercial business loans excluding SBA
("Small Business Administration") loans, totalled $15.1 million as of March 31,
1995, representing 6% of total loans. Commercial business loan underwriting
practices assess the borrower's credit worthiness and ability to repay,
including an evaluation of the value of any collateral securing the proposed
loan. While commercial business loans generally are made for shorter terms and
at a higher yields than one-to-four family residential loans, such loans
generally involve a higher level of risk than one-to-four family residential
loans. The Bank expanded its commercial business lending activities in 1995
and plans to continue to grow in the commercial loan area.
SBA loans are underwritten in accordance with the guidelines of the SBA.
These loans are made to small businesses and usually require that significant
collateral be assigned to the Bank from the borrower. Typically, the SBA
guarantees 80% to 90% of an SBA loan which is then sold in secondary markets
with the unguaranteed portion retained by the Bank. The portion retained by
the Bank normally is not guaranteed. SBA loans totalled $1.4 million or .6% of
the total portfolio at March 31, 1995. SBA loans are similar to commercial
business loans in yield and credit risk. The guaranteed portion of an SBA loan
is salable in secondary markets.
Lending Procedures. Loan applications may be approved by the Board of
Directors, its Executive Committee or the Management Loan Committee. The
review of each loan application includes the applicant's credit history, income
level, financial condition, and the value of any collateral to secure the loan
(which, in the case of real estate loans, utilizes a review of an appraisal
report prepared by an independent appraiser). In the case of major real estate
loans, the loan underwriting process typically involves an analysis of the
economic feasibility of the proposed project.
The Management Loan Committee is currently comprised of the President,
Executive Vice President-Finance, the Senior Vice President-Lending, the Senior
Vice President-Operations, the Senior Vice President-Commercial Lending and the
Vice President-Loan Administration. The Management loan committee is
authorized to approve residential and commercial mortgage/commercial
non-mortgage loans up to $500,000. The committee is also authorized to approve
consumer loan applications up to $100,000. All other loan applications are
subject to the approval of the Board of Directors or its Executive Committee.
With respect to any approved real estate loan, the Bank issues a written
commitment to the applicant, setting forth the terms under which the loan will
be extended. A title insurance commitment for the mortgaged property is
obtained from an approved title company prior to the closing. Fire, casualty,
and flood insurance (where applicable) are obtained, naming the Bank as a
mortgagee.
In accordance with the Bank's policies and applicable law, the documenta-
tion of each real estate loan includes: an application signed by the applicant,
disclosing the purpose for which the loan is sought and the identity of the
property; one or more written appraisal reports disclosing the fair market
value of the security offered by the applicant; a signed financial statement of
the applicant or a written credit report prepared by the Bank or by others at
its request; documentation showing the date, amounts, purpose, and recipient of
every disbursement of loan proceeds; an opinion of the Bank's attorney; a title
insurance policy or other documentary evidence customarily used in the
appropriate jurisdiction, affirming the quality and validity of the Bank's lien
on the relevant real estate; documentation covering all modifications of the
original mortgage contract showing appropriate approval for each such
modification; and documentation covering all releases of any portion of the
collateral supporting the loan.
MORTGAGE BANKING ACTIVITIES
Mortgage banking is the origination or purchase and subsequent sale and
servicing of mortgage loans. Since 1986, the Company has emphasized mortgage
banking activities. However, due to the significant decline in the mortgage
banking industry, the Company reduced its operations in mortgage banking
activities during 1995. The Bank will continue mortgage banking activities at
the Company's headquarters but at a significantly reduced level of activity.
Loans sold through the mortgage banking activities are generated from
commissioned loan officers, correspondent relationships, and salaried loan
officers. Loans originated under these programs are underwritten, approved, and
funded based upon the requirements of the purchaser. In the case of FHLMC, FNMA
and some institutional purchasers, the Bank pays commitment fees to the
purchasers prior to delivery of the loan by the Bank. In most instances these
fees are non-refundable.
One-to-four family residential loans are sold on a non-recourse basis.
The Bank generally continues to service these loans after their sale. The Bank
sells certain adjustable-rate loans to the FHLMC and institutional investors,
most of whom are other savings and loan institutions. The Bank generally does
not enter into commitments to sell adjustable rate mortgages or take other
action to hedge its adjustable-rate loans originated for its mortgage banking
activities.
SERVICING OF MORTGAGE LOANS. The Bank services virtually all of its loan
portfolio and, as of March 31, 1995, was servicing $323 million in loans and
loan participations for others. The Bank services both loans and loan
participations it has sold to others and loans pursuant to the purchase of
servicing rights.
The Bank has placed emphasis on the development of a mortgage loan
servicing portfolio. During 1995, the Bank purchased rights to service
approximately $198 million in loans for $2.3 million. Mortgage loan servicing
involves collecting principal, interest and escrow funds for taxes and insurance
from mortgage loan borrowers, paying principal and interest to mortgage loan
investors, paying property taxes and insurance premiums on mortgaged property,
supervising foreclosures in the event of unremedied defaults, and performing all
related accounting and reporting activities. When the Bank sells loans through
its mortgage banking division in the secondary market, it generally continues to
service such loans.
With regard to purchased servicing rights, such rights are typically
purchased from other financial institutions and mortgage banking companies. In
purchasing servicing rights, a valuation of the servicing rights and an
assessment of the portfolio is conducted by the Bank. A computer model is
utilized in the evaluation process which assesses prepayment expectations, costs
to establish servicing files, the on-going costs of servicing, the mortgage loan
coupon range and concentrations, servicing margin, payment remittance cycles and
utilization of escrow funds.
Although the originator or its assignee retains title and reimburses the
servicer for the majority of expenses should foreclosure be required, the
purchase of servicing rights involves risks to the servicer, particularly should
the underlying loans be prepaid faster than that assumed in the servicing rights
valuation process. Should loan prepayments be accelerated, the amortization of
the amount paid for servicing rights (which amount is amortized over the
estimated life of the underlying loan utilizing the interest method) must also
be accelerated thereby reducing income or potentially creating servicing losses
such as those that were incurred in the years ended March 31, 1994, and 1993.
The Bank seeks to mitigate such risks by diversifying the servicing portfolio
between fixed-rate and adjustable-rate mortgage loans and diversifying the
portfolio among various states, including Florida, California, Iowa and
Illinois.
<TABLE>LOAN PORTFOLIO AND ACTIVITY
<CAPTION>
The following tables set forth the composition of the Bank's loan portfolio by type of loan as of:
MARCH 31,
1995 1994 1993 1992 1991
TYPE OF LOAN AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
* Residential property $123,700 49% $105,405 59% $ 77,386 54% $ 59,164 53% $ 39,258 44%
* Construction loans 45,396 18 49,196 28 43,107 30 30,687 27 26,127 30
* Commercial real estate 26,746 11 11,752 7 13,498 9 12,397 11 12,676 14
* Residential lot 2,989 1 1,728 1 2,798 2 3,206 3 4,792 5
* Land, acquisition and development 450 * 850 1 644 1
------ --- ------ --- ------ --- ------ --- ------ ---
Total Real Estate Loans 198,831 79 168,531 95 136,789 95 106,304 95 83,497 94
------ --- ------ --- ------ --- ------ --- ------ ---
Consumer Loans:
* Home equity lines of credit 2,852 1 2,192 1 2,150 1 2,401 2 2,032 2
* Personal and Other 2,587 1 1,271 1 2,343 2 1,624 2 1,497 2
* Automobile 30,134 12 3,763 2 221 * 285 * 141 *
* Savings accounts 712 * 415 * 586 * 185 * 96 *
------ --- ------ --- ------ --- ------ --- ------ ---
Total consumer loans 36,285 14 7,641 4 5,300 3 4,495 4 3,766 4
------ --- ------ --- ------ --- ------ --- ------ ---
Commercial business loans: 16,484 7 2,356 1 2,528 2 1,423 1 1,303 2
------ --- ------ --- ------ --- ------ --- ------ ---
TOTAL LOANS 251,600 100% 178,528 100% 144,617 100% 112,222 100% 88,566 100%
=== === === === ===
Less:
Loans in process 21,460 22,876 19,290 14,339 8,624
Discounts, premiums and deferred loan
fees 1,022 206 307 1,145 1,629
Allowance for losses 2,507 1,071 1,247 775 602
------ ------ ------ ------ ------
TOTAL $226,611 $154,375 $123,773 $ 95,963 $ 77,711
======= ======= ======= ======= =======
<FN>
* Less than one percent
</TABLE>
<TABLE> The following table sets forth at March 31, 1995, the principal
amounts of the Bank's construction and commercial non-mortgage loans with
contractual maturities during the periods indicated.
<CAPTION>
March 31, 1995
MATURING
AFTER 1 YEAR
THROUGH 5 YEARS
(IN THOUSANDS) WITHIN 1 YEAR AFTER 5 YEARS TOTAL
<S> <C> <C> <C> <C>
REAL ESTATE CONSTRUCTION $22,892 $ 4,033 $26,925
COMMERCIAL AND FINANCIAL 6,138 7,056 $3,290 16,484
----- ----- ----- -----
TOTAL $29,030 $11,089 $3,290 $43,409
===== ====== ===== =======
MATURING AFTER ONE YEAR WITH:
VARIABLE INTEREST RATES $10,242 $2,895
FIXED INTEREST RATES 847 395
------ -----
TOTAL $11,089 $3,290
====== =====
</TABLE>
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
<TABLE>
The Bank's non-performing assets consist of real estate acquired through
foreclosures ("real estate owned") and loans which are sixty days or more past
due. Accrued interest on loans which are more than 60 days past due is excluded
from income and any previously accrued and unpaid interest is reversed through
interest income. As of March 31, 1995, the Bank had non-performing assets of
$3.4 million representing 1.2% of the Bank's total assets. The following table
details the Bank's non-performing assets for the five-year period ending March
31:
<CAPTION>
1995 1994 1993 1992 1991
(in thousands)
<S> <C> <C> <C> <C> <C>
LOANS:
Consumer non-mortgage $ 352 $ 61 $ 241 $ 99 $ 60
Commercial non-mortgage 631 377 398 70 140
Residential mortgage 908
Commercial mortgage 550
Repossessed automobiles 117
REAL ESTATE OWNED:
Residential construction 141 552 70 402
Residential 1,269 1,378 2,473 2,641 1,337
Land for residential use 305 317 330
Land for commercial use 764 555 574 280 344
Commercial real estate 162 52 115 292
---- ---- ---- ---- ----
Total non-performing assets $3,436 $3,228 $4,125 $5,395 $2,173
===== ====== ===== ====== =====
</TABLE>
All of the Bank's assets are reviewed at least quarterly by a committee
comprised of five members of the Bank's management (the "Committee") for the
purpose of determining a loan's classification as special mention, substandard,
doubtful, or loss, as appropriate. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity
of the obligor or the collateral pledged. "Substandard" assets include those
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Assets classified as
doubtful have all of the weaknesses inherent in those classified as
substandard, with the added characteristic that the weaknesses present make
collection or liquidation in full on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
General allowances represent loss allowances which have been established
to recognize the inherent risk associated with lending activities, unlike
specific allowances which have not been allocated to a particular problem
asset. Assets classified as loss are those considered uncollectible and of such
little value that their continuance as assets is not warranted. The Bank
charges off 100% of assets classified as a loss. The Bank's determination as
to the classification of its assets and the amount of its valuation allowances
is subject to review by the OTS, who can order the establishment of additional
general or specific loss allowances.
Although the Bank uses its best judgment in underwriting each loan,
industry experience indicates that a portion of the Bank's loans will become
delinquent. Regardless of the underwriting criteria utilized by savings and loan
associations, losses may be experienced as a result of many factors beyond their
control including, among other things, changes in market conditions affecting
the value of security and unrelated problems affecting the credit of the
borrower. Due to the concentration of loans in South Florida, adverse economic
conditions in this area could result in a decrease in the value of a significant
portion of the Bank's collateral.
<TABLE>
In the normal course of business, the Bank has recognized and will continue to recognize losses
resulting fromthe inability of certain borrowersto repay loans and theinsufficient realizable value of
collateralsecuring suchloans. Accordingly,management hasestablished anallowance for loanlosses, which
totalled $2.5 million as of March 31, 1995, which is allocated according to the following table:
<CAPTION>
YEAR ENDED MARCH 31,
1995 1994 1993 1992 1991
(IN THOUSANDS)
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE OF
FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL FOR LOANS
LOAN LOSS LOANS LOAN LOSS LOANS LOAN LOSS LOANS LOAN LOSS LOANS LOAN LOSS TO TOTAL
LOANS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate construction $ 281 19% $ 212 29% $ 137 31% $174 31% $146 36%
Real estate mortgage 535 60 481 66 632 63 440 64 380 59
Commercial & financial 531 7 114 1 152 2 70 1 62 1
Consumer 406 14 163 4 201 4 91 4 14 4
Unallocated 754 101 125
------ ----- ------- ---- ------- ---- ----- ---- ------ -----
TOTAL $2,507 100% $1,071 100% $1,247 100% $775 100% $602 100%
====== ===== ======= ==== ======= ===== ===== ===== ====== ======
</TABLE>
In evaluating the adequacy of the allowance for loan losses, management
has taken into consideration the loan portfolio, past loan loss
experience, current economic conditions, workout arrangements, pending
sales, the financial strength of the borrowers, and the appraised value
of the collateral at the time reserves were established. Although
management believes the allowance for losses is adequate, their
evaluation is dependent upon future events. Management's evaluation
of losses is a continuing process which may necessitate adjustments to the
allowance in future periods.
<TABLE>
The following table details information concerning real estate owned and past due loans on the periods
indicated:
<CAPTION>
MARCH 31,
1995 1994 1993 1992 1991
(in thousands)
<S> <C> <C> <C> <C> <C>
Real Estate Owned $2,336 $2,790 $3,486 $3,768 $1,973
Past-due loans and repossessed automobiles 1,100 438 639 1,627 200
Total Real Estate Owned and Past Due Loans $3,436 $3,228 $4,125 $5,395 $2,173
Real Estate owned and past due loans to total assets 1.23% 1.56% 2.43% 3.99% 1.76%
</TABLE>
<TABLE>
The following table details the charge-offs, recoveries, net charge-offs and ending balance of the allowance for loan losses as
follows:
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31,
1995 1994 1993 1992 1991
(in thousands)
<S> <C> <C> <C> <C> <C>
Beginning Balance $1,071 $1,247 $ 775 $512 $504
Reserves Acquired in Connection with Merger 1,399 319
Charge offs:
* Real Estate Mortgage 344 274 530 427 787
* Real Estate Construction 10 11 138 43
* Consumer 105 8 102 6
* Commercial 158 459 226
--- --- --- --- ---
SUBTOTAL - Charge-Offs 617 752 996 476 787
--- --- --- --- ---
Recoveries:
* Real Estate Mortgage 166 235 138 35 10
* Consumer 15 8
* Commercial 273 127
--- --- --- --- ---
SUBTOTAL - Recoveries 454 362 146 35 10
--- --- --- --- ---
Net Charge-Offs 163 390 850 441 777
Provision for Losses 200 214 1,003 704 875
--- --- --- --- ---
Ending Balance $2,507 $1,071 $1,247 $775 $602
===== ===== ===== ==== ====
Ratio of Net Charge-Offs During the Period to Average Loans
Outstanding During the Period .08% .27% .92% .55% .76%
</TABLE>
There are no interest-earnings assets, other than loans, at March 31,
1995, classified by the Bank as non-accrual, past due, special mention or
problem assets.
DEPOSITS
The Bank offers a variety of deposit programs, including Negotiable Order
of Withdrawal ("NOW") accounts, money market deposit accounts, statement savings
accounts, and variable or fixed rate certificates of deposit with maturities
ranging from thirty days to five years. The principal difference among
certificate accounts relate to minimum balance, term, interest rate, and method
of compounding.
As of March 31, 1995, certificate accounts in the amount of $100,000 or
more amounted to approximately $14.7 million representing 6.3% of total
deposits. The dollar amount of certificate accounts $100,000 or greater at
March 31, 1995 increased from $9.3 million at March 31, 1994 but remained
relatively flat as a percent of total deposits.
<TABLE>
The following table sets forth the amounts and the weighted-average
interest rate on each category of the Bank's deposit accounts as of the dates
indicated:
<CAPTION>
March 31,
1995 1994 1993
WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL
AMOUNT STATED DEPOSITS AMOUNT STATED RATE DEPOSITs AMOUNT STATED DEPOSITS
RATE RATE
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and
Statement Accounts $ 19,395 2.45 8.44 $ 19,885 2.40% 12.69% $ 19,945 2.85% 13.67%
Commercial Checking
Accounts 26,149 11.38 6,027 3.85 6,408 4.39
Money Market Deposit
Accounts 14,581 2.45 6.35 12,217 2.40 7.80 10,052 3.00 6.89
NOW Accounts 26,688 2.00 11.62 25,498 2.00 16.28 19,300 2.80 13.23
18-month IRA/Keogh
Variable Rate
Certificates 61 8.15 .03 171 3.76 0.11 3 3.22
30-day Certificates
of Deposit 533 3.15 .23 947 2.53 0.60 687 2.92 .47
90-day Certificates
of Deposit 2,441 4.35 1.06 2,254 2.99 1.44 2,719 3.05 1.86
180-day Certificates
of Deposit 29,202 5.61 12.71 24,431 3.33 15.60 29,571 3.36 20.27
270-day Certificates
of
Deposit 12,809 6.05 5.58 1,610 3.48 1.03
1-year Certificate
of Deposit 57,813 5.49 25.17 37,929 3.76 24.21 34,024 3.92 23.32
11/4-year
Certificates of
Deposit 2,832 5.83 1.23 287 3.69 0.18
11/2-year
Certificates of
Deposit 13,384 5.09 5.83 7,636 4.01 4.87 5,712 4.39 3.91
2-year Certificates
of Deposit 7,464 4.48 3.25 9,482 4.44 6.05 9,890 5.50 6.78
3-year Certificates
of Deposit 1,656 4.99 .72 1,309 4.79 0.84 1,446 7.63 .99
4-year Certificates
of Deposit 6 7.00 8 7.00 0.01 10 7.00 .01
5-year Certificates
of Deposit 13,591 5.76 5.91 6,067 6.10 3.87 4,602 6.77 3.15
Jumbo Certificates
(varying maturities) 1,130 5.58 .49 893 4.54 0.57 1,542 4.40 1.06
----- ----- ----- -------- ----- ----- ----- ----- -----
TOTAL DEPOSITS $229,735 4.00% 100.00% $156,651 3.11% 100.00% $145,911 3.51% 100.00%
</TABLE>
<TABLE>
The following table sets forth the deposit activity of the Bank for
the periods indicated:
<CAPTION>
YEAR ENDED MARCH 31,
(DOLLARS IN THOUSANDS)
Deposit Activity 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net Deposits (withdrawals) (1) $68,303 $ 7,097 $24,212 $ 956 $(6,291)
Interest credited (2) 4,781 3,643 4,350 6,524 7,220
------ ----- ----- ------ ------
Net increase in deposits $73,084 $10,740 $28,562 $7,480 $ 929
====== ====== ====== ====== =====
<FN>
(1) Includes $58.1 million and $41.8 million of deposits acquired in
connection with mergers in 1995 and 1993, respectively.
(2) Excludes interest paid directly to account holders.
</TABLE>
<TABLE>
The following table presents, by stated interest rate ranges, the amount
of certificates of deposits outstanding (in thousands) at March 31, 1995, 1994,
1993, 1992 and 1991, and the periods to maturity of the certificates of deposits
by the stated interest rate ranges at March 31, 1995:<CAPTION>
MARCH 31, MARCH 31, 1995
0-6 7-12 13-18 19-24
1995 1994 1993 1992 1991 MONTHs MONTHS MONTHS MONTHS THEREAFTER
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Up to 3.00% $3,124 $1,307
3.01 to 4.00% $7,768 68,517 60,753 $3,188 $7,050 $590 $128
4.01 to 5.00% 37,616 14,415 11,404 30,466 30,190 5,030 1,118 $496 $782
5.01 to 6.00% 48,575 4,180 9,258 22,998 26,762 10,582 1,485 142 9,604
6.01 to 7.00% 44,725 1,237 4,382 14,144 $13,243 38,620 3,076 133 2,391 505
Over 7.01% 4,238 1,551 3,102 3,277 73,230 494 1,032 1,731 855 126
TOTAL $142,922 $93,024 $90,206 $74,073 $86,473 $103,116 $20,310 $4,595 $3,884 $11,017
Percent of Total 100.0% 72% 14% 3% 3% 8%
</TABLE>
BORROWINGS
The Bank generally may borrow from the Atlanta FHLB upon the security of
the capital stock of the Atlanta FHLB owned by the Bank, certain of its home
mortgages, and certain other assets (principally obligations of or guaranteed
by, the United States Government or a federal agency). Several credit options
are made available to banks from time to time by the Atlanta FHLB to meet
seasonal or other withdrawals of deposits and to permit the expansion of lending
activities. Each credit option has specified maturity and either a fixed or a
variable interest rate determined by the Atlanta FHLB. Rates offered for
variable interest FHLB borrowings are set from time to time by the Atlanta
FHLB. FHLB policy prescribes the acceptable use to which the proceeds of such
borrowings may be used. As of March 31, 1995 the Bank had $15 million in such
borrowings outstanding.
FHLB advances are collateralized by FHLB stock and mortgage loans pledged
in accordance with an agreement the Bank entered into with the FHLB. In
accordance with the agreement, the Bank had pledged as collateral loans with an
aggregate principal balance of approximately $44,435,000, $48,000,000, and
$21,000,000 at March 31, 1995, 1994 and 1993, respectively.
From time to time the Bank enters into repurchase agreements with
customers, securities dealers and commercial banks. A repurchase agreement is a
form of securities borrowing which involves the sale and delivery of securities
by the Bank to a securities broker or dealer in an amount equal to a percentage
of the fair market value of the securities, coupled with the Bank's agreement to
repurchase the securities at a later date. The Bank pays the broker or dealer a
fixed-rate of interest for the use of the funds for the period involved which
ranges from overnight to two years. At maturity, the loans are repaid and the
securities are returned to the Bank. The amounts of securities sold under such
agreements vary widely and depend on many factors which include the terms
available for such transactions, the ability of the Bank to apply the proceeds
to investments having higher returns, the demand for such transactions, and
management's perception of trends in short-term interest rates. The Bank, in
each such transaction, requires the broker or dealer to adhere to procedures for
the safekeeping of the Bank's securities. As of March 31, 1995, the Bank had
$2,748,000 outstanding in repurchase agreements.
<TABLE>
The following table presents selected information on borrowings (dollars
in thousands):
<CAPTION>
MARCH 31,
SHORT TERM BORROWINGS: 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
FHLB Advances:
Amounts outstanding at end of year $15,000 $20,000
Weighted average rate at end of year 6.15% 3.86%
Maximum amount outstanding at any month end 20,000 40,000 $13,000 $14,800
Approximate average amount outstanding
during year 16,000 15,000 3,331 5,045
Approximate weighted average rate for year 4.71% 3.45% 8.25% 8.60%
OTHER BORROWED MONEY:
Amounts outstanding at end of year $2,748 $37
Weighted average rate at end of year 5.96% 11.00%
Maximum amount outstanding at any month end 2,748 37
Approximate average outstanding during year 663 127
Approximate weighted average rate for year 5.60% 8.42%
</TABLE>
On May 4, 1989, the Company issued $2.0 million of Debentures due May 1, 1999
currently bearing interest at the rate of 11.5%, and Cancelable Mandatory Stock
Purchase Contracts, permitting the purchase of $2.0 million in Common Stock at a
price of $2.90 per share no later than May 1, 1996.
On March 29, 1995, the Company's outstanding Redeemable Subordinated
Debentures and Cancelable Mandatory Stock Purchase Contracts were called for
redemption. Upon surrender of the Debentures, and at the option of the
Bondholder, the Bondholder will receive a number of shares of the Company's
common stock equal to the principal amount of the Debenture divided by the
adjusted per share price of $2.90 or cash equal to 104% of the principal amount
of the Debenture.
Interest on the Debentures is payable quarterly on the 15th day of January,
April, July and October. Each Debenture bears interest from the first date of
issuance and will mature on May 1, 1999 unless previously redeemed. The
Debentures are subordinate and junior in right of payment to certain present and
future indebtedness of the Company. The Debentures are unsecured debt
obligations of the Company, are not obligations of the Bank, and are not
insured.
SHAREHOLDERS' EQUITY
During September, 1993, the Company issued 1,150,000 and 402,500 shares of
common and preferred stock, respectively. Capital was raised to support the
growth of the Bank and fund potential mergers with other financial
institutions. For a further discussion of the equity offering, please see
Note 11 of the Consolidated Financial Statements in Item 8 on pages 67, 68
and 69.
On March 29, 1995, the Company's outstanding redeemable subordinated
debentures and cancelable mandatory stock purchase contracts were called for
redemption. Upon surrender of the debentures, and at the option of the
Bondholder, the Bondholder will receive a number of shares of the Company's
common stock or cash. The Company expects equity to increase by approximately
$1.8 million as a result of these transactions. See Note 10 of the
Consolidated Financial Statements in Item 8 on page 67 for further discussion
of this transaction.
The Company declared quarterly dividends of $.01 per share for the quarter
ended June 30, 1994, $0.02 per share for the remaining three quarters during the
year ended March 31, 1995 and $.01 per share during the fiscal year end March
31, 1994. The Company paid no cash dividends prior to the fiscal year ended
March 31, 1994. The Company declared $217,000 and $116,000 of common stock
dividends during 1995 and 1994, respectively, which represents a dividend pay
out ratio of 18.6% and 5.5%, respectively.
INVESTMENT ACTIVITIES
Minimum levels of liquid assets are required by federal regulations. See
"REGULATION -- Federal Regulation" and "Managements's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity". The Bank considers
such factors as liquidity, yields, interest rate exposure, and general economic
conditions in determining the composition of its investments portfolio. At
March 31, 1995, the Bank's investment portfolio consists primarily of U.S.
government securities that were acquired in connection with the Governors
merger. The Company had cash and cash equivalents of $17.6 million and
investments of $14.1 million representing 11% of its total assets at March 31,
1995. See Note 3 of the Consolidated Financial Statements in Item 8 on
page 61 for further analysis of the Company's investments.
ANALYSIS OF NET INTEREST INCOME
The Company's net interest margin reflects the difference between the average
dollar and yield on interest-earning assets and the average dollar amount and
cost of interest-bearing liabilities. The table in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations" -- on pages 49, 50, and 51 sets forth certain information relating
to the Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid at March 31, 1995. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Interest on problem assets is not
accrued and therefore excluded from the analysis of net interest income.
REGULATION
GENERAL
Federally chartered savings banks, such as the Bank, are subject to extensive
regulation by the Office of Thrift Supervision ("OTS") and the Federal Deposit
Insurance Corporation ("FDIC") and must regularly file financial and other
reports with those agencies. Periodic examinations are conducted by the OTS and
the FDIC to test compliance by the Bank with various regulatory requirements.
The Bank is also a member of the Federal Home Loan Bank ("FHLB") System and is
subject to certain limited regulation by the Federal Reserve Board (the "FRB").
This supervision and regulation is intended primarily for the protection of
depositors. In addition, the Company is subject to the various reporting
requirements imposed by the Securities Exchange Act of 1934, as amended (the
"Exchange Act") as administered by the Securities and Exchange Commission (the
"SEC").
In April 1995, the Bank filed an application with the Florida Department of
Banking and Finance to convert its charter to that of a commercial bank
organized under the laws of the State of Florida, and filed an application with
the Federal Reserve Bank of Atlanta for membership upon conversion to a
commercial bank. Contemporaneously, the Company filed an application with the
Board of Governors of the Federal Reserve System for approval to become a bank
holding company under the Bank Holding Company Act of 1956, as amended
("BHCA"). The Company anticipates that regulatory approval of these
applications will be received and the conversion of the Bank will occur in the
fourth calendar quarter of 1995.
Upon conversion of the Bank to a commercial bank and the Company becoming a
bank holding company subject to regulation under the BHCA, most of the
regulations to which the Bank is currently subject will remain materially
unchanged, such as capital requirements, transactions with affiliates and
insurance of accounts and other assessments. The Bank will be subject to
regulation by the State of Florida and the FRB and the Company will be subject
to regulation by the FRB. The Bank will continue to be eligible for FHLB bank
advances, which eligibility will vary based on the Bank's asset portfolio and
rating on the QTL test described below. The Bank will be able to originate and
invest in commercial and consumer loans without limitation as to percentage of
assets, and will have increased liquidity requirements.
The Company will be subject to increased regulation and limitations on its
activities as a bank holding company. Under the BHCA, the activities of bank
holding companies are limited to business so closely related to banking,
managing or controlling banks as to be properly incident thereof. Currently,
the Company is not subject to any material restrictions on its activities
outside of those related to banking, although the Company has not engaged nor
does it anticipate engaging in activities not permissible for bank holding
companies. The Company will also be subject to capital requirements applied on
a consolidated basis in a form substantially similar to those currently required
of the Bank and anticipated to be in effect subsequent to its conversion to a
commercial bank. As a savings and loan holding company, the Company is not
currently subject to such consolidated capital requirements.
Because of concerns relating to competitiveness and the safety and soundness
of the industry, Congress is considering a number of wide-ranging proposals for
altering the structure, regulation and competitive relationships of the nation's
financial institutions. Among such bills are proposals to prohibit banks and
bank holding companies from conducting certain types of activities, to subject
banks to increased disclosure and reporting requirements, to alter the statutory
separation of commercial and investment banking and to further expand the powers
of banks, bank holding companies and competitors of banks. It cannot be
predicted whether or in what form any of these proposals will be adopted or the
extent to which the business of the Company may be affected thereby.
REGULATION OF THE BANK
The Bank is chartered under the Home Owners' Loan Act (the "HOLA"). HOLA
imposes certain obligations and restrictions upon, and grants certain powers to,
associations such as the Bank.
Federally chartered savings banks, such as the Bank, have the power to
originate, invest in, sell, purchase, service, participate and otherwise deal
in: (i) loans made on the security of residential and nonresidential real
estate, (ii) commercial loans, and (iii) consumer loans, including credit card
loans. The lending authority of federally chartered associations is subject to
numerous OTS requirements including, as applicable, requirements governing
amortization, term, loan-to-value ratio, percentage-of-assets limits and loans-
to-one-borrower limits. The percentage of assets limitations on the ability of
a federally-chartered savings bank to own commercial and consumer loans were a
primary factor in the Bank's decision to convert to a Florida commercial bank.
A federally chartered savings bank may invest, without limitation, in the
following assets: (i) obligations of the United States Government or certain
agencies or instrumentalities thereof; (ii) stocks or loans issued by the FHLBs
or the FHLMC; (iii) obligations issued or guaranteed by FNMA, the Student Loan
Marketing Association, GNMA or any agency of the United States Government; (iv)
stock issued by a national housing partnership corporation; (v) demand, time or
savings deposits, shares, or accounts of any insured depository institution;
(vi) certain "liquidity" investments approved by the OTS to meet its liquidity
requirements; (vii) shares of registered investment companies whose portfolios
are limited to investments that a federal association is otherwise authorized to
make; (viii) mortgage-backed securities; and (ix) general obligations of any
state of the United States or any political subdivision or municipality thereof,
provided not more than 10% of an association's capital may be invested in the
general obligations of any one issuer. Federally chartered savings banks are
authorized by the HOLA to make investments in business development credit
corporations, certain commercial paper and corporate debt securities, service
corporations and small business investment companies, all of which investments
are subject to percentage-of-assets and various other limitations.
The Federal Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which
recapitalizes the Bank Insurance Fund ("BIF") of the FDIC and imposes certain
supervisory and regulatory reforms on insured depository institutions, was
enacted on December 19, 1991. In addition to certain matters affected by
various provisions of FDICIA discussed elsewhere herein, the federal banking
agencies prescribed minimum operational standards with respect to asset quality,
earnings, compensation arrangements and minimum ratios of market-to-book value.
Institutions failing to meet the operational standards are required to submit
corrective plans and are subject to sanctions for failure to submit or comply
with a plan. The acceptance and renewal of brokered deposits is limited to
well-capitalized institutions.
In addition, FDICIA and regulations promulgated thereunder: (i) require
annual audits by independent public accountants for all insured institutions
with assets in excess of specified levels; (ii) require the formation of
independent audit committees of the board of directors of certain insured
depository institutions; and (iii) impose annual on-site examinations on all
depository institutions except those well-capitalized institutions with assets
of less than $100 million. FDICIA also made certain changes to the Qualified
Thrift Lender ("QTL") requirements imposed on savings associations. See
"Regulation -- Qualified Thrift Lender Test." FDICIA also required the
establishment of a risk-based deposit insurance assessment system. See
"Regulation -- Insurance of Accounts and Other Assessments." Pursuant to
FDICIA, the federal banking agencies adopted final prompt corrective action
regulations, effective December 19, 1992, which permit the regulatory agencies
to take action against an insured depository institution when it falls below
certain capital levels. See "Regulation -- Capital Requirements -- Prompt
Corrective Action."
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") reorganized and reformed the regulatory structure applicable to
savings associations generally and significantly impacted the thrift industry.
FIRREA, among other things, increased the capital requirements for savings
associations which, subject to certain exceptions, cannot be less stringent than
the capital standards applied by the Office of the Comptroller of the Currency
("OCC") to national banks (See "Regulation -- Capital") and subjects savings
associations to the maximum loans-to-one-borrower limits applicable to national
banks.
FIRREA substantially expanded the enforcement powers available to federal
banking regulators and the Department of Justice. FIRREA made certain
provisions of the Federal Deposit Insurance Act (the "FDIA") applicable to
savings associations and granted both the OTS and the FDIC expanded enforcement
authority over "institution-affiliated parties" (i.e., officers, directors,
controlling shareholders, as well as attorneys, appraisers or accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution). Federal banking regulators have greater
flexibility to bring enforcement actions against insured institutions and
institution-affiliated parties, including cease and desist orders, prohibition
orders, civil money penalties, termination of insurance and the imposition of
operating restrictions and capital plan requirements. See "Regulation --
Enforcement Authority."
Restrictions on Acquisitions and Branching. The Company must obtain approval
from the OTS before acquiring control of any other savings association.
Currently, acquisitions by savings and loan holding companies are generally
prohibited if they result in a savings and loan holding company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
Subject to certain statutory restrictions in HOLA and the FDIA, the Bank is
authorized to branch on a nationwide basis. Certain other restrictions that
apply to branching by savings associations, generally, such as the Community
Reinvestment Act and capital compliance, also apply.
In September 1994, Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act"). Effective September
29, 1995, the Interstate Act will eliminate many existing restrictions on
interstate banking by authorizing interstate acquisitions of banks by bank
holding companies without geographic limitations and without regard to whether
such acquisitions are permissible under state law. In addition, beginning
June 1, 1997, the Interstate Act will allow interstate branching in states that
have not passed legislation prohibiting interstate branching. Prior to June 1,
1997, interstate branching will be possible in states that pass laws
affirmatively authorizing interstate branching.
Florida recently enacted the Florida Reciprocal Banking Act (the "Florida
Act") which became effective May 1, 1995. The Florida Act only permits
acquisitions of Florida banks in existence two years or more (or their bank
holding companies) by bank holding companies based in states that have
reciprocal legislation. The Interstate Act, however, will supersede this
restriction, unless Florida, prior to June 1, 1997, expressly enacts legislation
opting out of the interstate banking provisions of the Interstate Act.
Florida law has permitted interstate reciprocal acquisitions of and by
Florida savings institutions since 1986. The effect of the Interstate Act and
the Florida Act, which will expand the number of out-of-state bank holding
companies permitted to acquire Florida banks, on the Company cannot be predicted
at this time. It is anticipated that these acts may facilitate further
consolidation in the banking industry and, by permitting out-of-state banks
nationwide to acquire Florida banks, may increase competition in the Company's
market.
Transactions With Affiliates. The authority of the Bank to engage in
transactions with related parties or "affiliates" or to make loans to insiders
is limited by certain provisions of law and regulations. Savings associations,
such as the Bank, are prohibited from making extensions of credit to any
affiliate that engages in an activity not permissible under the regulations of
the FRB for a bank holding company. Pursuant to Section 11 of HOLA, such
savings associations are subject to restrictions regarding transactions with
affiliates ("Covered Transactions") substantially similar to those imposed upon
member banks under Sections 23A and 23B of the Federal Reserve Act ("FRA").
With respect to any Covered Transaction, the term "affiliate" includes any
company that controls or is controlled by a company that controls the Bank, a
bank or savings association subsidiary of the Bank, any persons who own, control
or vote more than 25% of any class of stock of the Bank or the Company and any
persons who exercise a controlling influence over the management of the Bank or
the Company. The term "affiliate" also includes any company controlled by
controlling stockholders of the Bank or the Company and any company sponsored
and advised on a contractual basis by the Bank or any subsidiary or affiliate of
the Bank. Such transactions between the Bank and its respective affiliates are
subject to certain requirements and limitations, including limitations on the
amounts of such Covered Transactions that may be undertaken with any one
affiliate and with all affiliates in the aggregate. The Director of the OTS may
further restrict such transactions with affiliates in the interest of safety and
soundness.
Section 23A of the FRA limits Covered Transactions with any one affiliate to
10% of an association's capital stock and surplus and limits aggregate affiliate
transactions to 20% of the Bank's capital stock and surplus. Sections 23A and
23B of the FRA provide that a loan transaction with an affiliate generally must
be collateralized (but may not be collateralized by a low quality asset or
securities issued by an affiliate) and that all Covered Transactions, as well as
the sale of assets, the payment of money or the provision of services by the
Bank to an affiliate, must be on terms and conditions that are substantially the
same, or at least as favorable to the Bank, as those prevailing for comparable
nonaffiliated transactions. A Covered Transaction generally is defined as a
loan to an affiliate, the purchase of securities issued by an affiliate, the
purchase of assets from an affiliate, the acceptance of securities issued by an
affiliate as collateral for a loan, or the issuance of a guarantee, acceptance
or letter of credit on behalf of an affiliate. In addition, the Bank generally
may not purchase securities issued or underwritten by an affiliate.
In July 1991, the OTS issued a final regulation to implement and clarify the
application of Sections 23A and 23B of the FRA to savings associations. The
regulation requires savings associations, such as the Bank, to attribute to an
affiliate the amounts of all transactions conducted with subsidiaries of that
affiliate and grants the Director of the OTS the authority to deem certain
subsidiaries of such a savings association as affiliates.
20<PAGE>
Certain transactions between savings associations and their affiliated
persons are also subject to conflict of interest regulations enforced by the
OTS. For these purposes, affiliated persons include officers, directors and
controlling stockholders. These regulations require regulatory approvals for
transactions by the Bank and its subsidiaries with affiliated persons (as
defined for purposes of the OTS's conflict regulations) involving the sale or
purchase of property. Loans to executive officers, directors or to any person
who directly or indirectly, or acting through or in concert with one or more
persons, owns, controls or has the power to vote more than 10% of any class of
voting securities of such institution ("Principal Shareholders") and their
related interests (i.e., any company controlled by such executive officer,
director, or Principal Shareholders), or to any political or campaign committee
the funds or services of which will benefit such executive officers, directors,
or Principal Shareholders or which is controlled by such executive officers,
directors or Principal Shareholders are subject to Sections 22(g) and 22(h) of
the FRA and the regulations promulgated thereunder (Regulation O).
Among other things, these loans must be made on terms substantially the same
as those prevailing on transactions made to unaffiliated individuals and certain
extensions of credit to such persons must first be approved in advance by a
disinterested majority of the entire board of directors. Section 22(h)
prohibits loans to any such individuals where the aggregate amount exceeds an
amount equal to 15% of an institution's unimpaired capital and surplus plus an
additional 10% of unimpaired capital and surplus in the case of loans that are
fully secured by readily marketable collateral, or when the aggregate amount on
all such extensions of credit outstanding to all such persons would exceed the
Bank's unimpaired capital and unimpaired surplus. Section 22(g) identifies
limited circumstances in which the Bank is permitted to extend credit to
executive officers.
Federal Home Loan Bank System. The Bank is member of the FHLB system, which
consists of twelve regional FHLBs, each subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"), an agency created by FIRREA. The
FHLB provides a central credit facility primarily for member thrift institutions
as well as other entities involved in home mortgage lending. The Bank, as a
member of the Atlanta-FHLB, is required to purchase and hold shares of the
capital stock in that FHLB in an amount at least equal to the greater of: (1)
1% of the aggregate principal amount of its unpaid mortgage loans, home purchase
contracts and similar obligations at the beginning of each year; (2) 0.3% of
its assets; or (3) 5% (or such greater fraction as established by the FHLB) of
its advances from the FHLB. The Bank is in compliance with this requirement.
Each FHLB bank serves as a reserve or central bank for its home financing
members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLBs. It makes loans
to members (i.e., advances) in accordance with policies and procedures,
including, collateral requirements, established by the respective boards of
directors of the FHLBs. These policies and procedures are subject to the
regulation and oversight of the FHFB.
All long-term advances are required to provide funds for residential home
financing. The FHFB has also established standards of community or investment
service that members must meet to maintain access to such long-term advances.
Liquidity. The Bank is required to maintain a daily average balance of
liquid assets (cash, certain time deposits, bankers' acceptances, corporate debt
securities, and commercial paper, securities of certain mutual funds, reserves
maintained pursuant to FRB requirements, and specified government, state or
federal agency obligations) equal to a certain percentage of net withdrawable
deposit accounts and borrowings payable in one year or less. The liquidity
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. Currently,
OTS regulations require a savings association, such as the Bank, to maintain
liquid assets equal to not less than 5% of its net withdrawable deposit accounts
and borrowings payable in one year or less and short-term liquid assets of not
less than 1%. Penalties may be imposed for failure to meet the liquidity
requirements. Throughout fiscal year 1995, the Bank has been in compliance with
OTS liquidity requirements. Upon conversion to a commercial bank, the Bank will
have increased liquidity requirements. Management does not anticipate any
difficulty in meeting these additional requirements nor any adverse impact on
financial condition or results of operations.
Qualified Thrift Lender Test. Effective January 1, 1988, the Bank, like all
savings associations, was required to meet a QTL test for, among other things,
future eligibility for FHLB bank advances. An association must have invested at
least 65% of its portfolio tangible assets in qualifying thrift investments and
must maintain this level of qualifying thrift investments for each subsequent
two-year period beginning on July 1, 1991, as measured on a monthly average
basis in nine of every 12 months.
"Portfolio assets" are defined as total assets less intangibles, properties
used to conduct business and liquid assets (up to 20% of total assets). The
following assets may be included as qualifying thrift investments without
limit: domestic residential housing or manufactured housing loans; home equity
loans and mortgage-backed securities backed by residential housing or
manufactured housing loans; a designated percentage of consumer loans; FHLB
stock as well as certain obligations of the FSLIC, the FDIC and certain other
related entities. Other qualifying assets, which may be included up to an
aggregate of 15% of portfolio assets, are: (i) 50% of originated residential
mortgage loans sold within 90 days of origination; (ii) investments in debt or
equity of service corporations that derive 80% of their gross revenues from
housing-related activities; (iii) 200% of certain loans to and investment in
low cost one- to four-family housing; (iv) 200% of loans for residential real
property, churches, nursing homes, schools and small businesses in areas where
the credit needs of low- and moderate-income families are not met; (v) other
loans for churches, schools, nursing homes and hospitals; and (vi) personal,
family, household, or education loans (up to 5% of total portfolio assets).
Any savings association that fails to meet the QTL test must convert to a
commercial bank charter, unless it requalifies as a QTL on an average basis in
at least three out of every four quarters for two out of three years and
thereafter remains a QTL. If an institution that fails the QTL test has not yet
requalified and has not converted to a commercial bank, its new investments and
activities are limited to those permissible for a national bank. In addition,
the association is immediately ineligible to receive any new FHLB advances and
is subject to national bank limits for payment of dividends and may not
establish a branch office at any location at which a national bank located in
the savings association's home state could not establish a branch. If such
association has not requalified or converted to a commercial bank charter three
years after its failure to meet the QTL test, it must divest all investments and
cease all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLB advances. Certain temporary and limited
exceptions from meeting the QTL test may be granted by the OTS.
Capital Requirements. FIRREA mandated that the OTS establish new capital
standards for all savings associations effective December 7, 1989 and that such
capital standards generally be at least as stringent as those imposed on
national banks by the OCC. As noted below, these new standards generally
require savings associations to maintain higher levels of capital than were
previously required. Effective December 7, 1989, the OTS promulgated a new
capital regulation having three components: a leverage limit, a tangible
capital requirement and a risk-based capital requirement.
Leverage Limit. The leverage limit requires that a savings association
maintain "core capital" of at least 3% of its adjusted total assets. For
purposes of this requirement, total assets are adjusted to exclude intangible
assets and investments in certain subsidiaries, and to include the assets of
certain other subsidiaries, certain intangibles arising from prior period
supervisory transactions, and permissible purchased mortgage servicing rights.
"Core capital" includes (i) common shareholders' equity and retained earnings,
noncumulative perpetual preferred stock and related surplus and minority
interests in consolidated subsidiaries, minus (ii) those intangibles (including
goodwill) and investments in subsidiaries not permitted as capital for national
banks, plus (iii) certain purchased mortgage servicing rights and certain
goodwill arising from prior regulatory accounting practices.
Although accounted for under GAAP as an intangible asset, certain purchased
mortgage servicing rights need not be deducted in computing core capital.
Generally, the lower of (i) 90% of the fair market value of readily marketable
purchased mortgage servicing rights, (ii) 90% of the original cost of purchased
mortgage servicing rights, or (iii) the current amortized book value as
determined under GAAP may be included in core capital.
At March 31, 1995, the Bank had an amortized carrying value of purchased
mortgage servicing rights of $2.8 million. This amount approximates its fair
market value.
FIRREA also requires deductions from core capital for savings associations
that own certain service corporations and other subsidiaries. In determining
core capital, all investments in and loans to subsidiaries engaged in activities
not permissible for national banks, which are generally more limited than
activities permissible for savings associations and their subsidiaries
("nonconforming subsidiaries"), generally must be deducted in calculating a
savings association's core capital. Certain exceptions are provided, including
exceptions for mortgage banking subsidiaries and subsidiaries engaged in agency
activities for customers (unless determined otherwise by the FDIC on safety and
soundness grounds). Generally, all subsidiaries engaged in activities
permissible for national banks are required to be consolidated for purposes of
calculating capital compliance by the parent savings association. This
requirement does not have a material impact on the Bank's core capital
requirements.
Tangible Capital Requirements. The tangible capital requirement mandates
that a savings association maintain tangible capital of at least 1.5% of
adjusted total assets. For purposes of this requirement, adjusted total assets
are calculated on the same basis as for the leverage limit. Tangible capital is
defined in the same manner as core capital, except that all goodwill must be
deducted.
Risk-based Capital Requirements. The risk-based requirement promulgated by
the OTS is required by FIRREA to track the standard applicable to national
banks, except as the OTS may determine to reflect interest rate and other risks
not specifically included in that standard. However, such deviations from the
national bank standard may not result in a materially lower risk-based
requirement for savings associations than for national banks. The risk-based
standard adopted by the OTS is similar to the OCC standard for national banks.
The risk-based standards of the OTS require, as of January 1, 1993,
maintenance of core capital equal to at least 4% of risk-weighted assets, and
total capital equal to at least 8% of risk-weighted assets. Total capital
includes core capital plus supplementary capital (except that includable
supplementary capital may not exceed core capital). Supplementary capital
includes: cumulative perpetual preferred stock; mutual capital, income capital
and net worth certificates; nonwithdrawable accounts and pledged deposits to the
extent not included in core capital; perpetual and mandatory convertible
subordinated debt and maturing capital instruments meeting specified
requirements; and general loan and lease loss allowances, up to a maximum of
1.25% of risk-weighted assets.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet assets, are multiplied by a risk factor ranging from
0% to 100%, as assigned by the OTS based on the risks it believes inherent in
the type of asset. Comparable weights are assigned to off-balance sheet
activities.
At March 31, 1995, the capital requirements for the Bank were approximately
$4.1 million or 1.5% of adjusted total assets, $8.2 million or 3.0% of adjusted
total assets and $14.7 million or 8.0% of risk-weighted assets. The Bank's
tangible capital of $16.3 million or 6% of adjusted total assets, core capital
of $16.3 million or 6% of adjusted total assets and risk-based capital of $19.3
million or 11% of risk-weighted assets exceeded the requirements by $12.2
million, $8.1 million and $4.6 million, respectively.
Interest Rate Risk Component. In December 1990, the OTS issued for comment a
proposed rule designed to ensure that a savings association's risk-based capital
requirement would be based, in part, on the level of its exposure to interest
rate risk ("IRR"). This would be accomplished by adding an interest rate risk
component to the risk-based capital requirement discussed above. In September
1992, the OTS issued a supplemental notice of proposed rulemaking which proposed
certain modifications to its earlier proposal. In August 1993, the OTS adopted
final rules governing IRR. Under the final rules, only institutions with more
than a "normal" level of IRR would be required to add on an IRR component in
addition to the existing 8% risk-based capital requirement. The IRR component
is calculated as one-half of the difference between the institution's measured
IRR and 2%, multiplied by the market value of its assets.
Failure to Meet Requirements. Any savings association that fails to meet its
regulatory capital requirement is subject to enforcement actions by the OTS or
the FDIC. In addition, any such savings association is prohibited from
increasing its liabilities during any two consecutive calendar quarters at a
rate in excess of 12.5% or making any capital distributions without regulatory
approval. See "Regulation -- Federal Regulation -- Capital Distributions." The
OTS must limit the asset growth of any undercapitalized association and issue a
capital directive against the association. Failure to maintain minimum levels
of required regulatory capital requires the association to file a capital plan
with the OTS which indicates how the association will achieve compliance with
the capital rules. If the capital plan is not accepted by the OTS, it may
result in the imposition by the OTS of various operational restrictions.
Prompt Corrective Action. The FDICIA authorizes and, under certain
circumstances, requires the OTS to take certain actions against associations
that fail to meet certain capital-based requirements. Under the FDICIA, the
federal banking agencies, including the OTS, are required to establish five
levels of insured depository institutions based on leverage limit and risk-based
capital requirements established for institutions subject to their jurisdiction,
plus, in their discretion, individual additional capital requirements for such
institutions.
Under the final rules that have been adopted by each of the federal banking
agencies, an institution will be designated well-capitalized if the institution
has a total risk-based capital ratio of 10% or greater, a core risk-based
capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive, or
prompt corrective action directive to meet and maintain a specific capital level
for any capital measure.
An institution will be designated adequately capitalized if the institution
has a total risk-based capital ratio of 8% or greater, a core risk-based capital
ratio of 4% or greater, and a leverage ratio of 4% or greater (or a leverage
ratio of 3% or greater if the institution is rated composite 1 in its most
recent report of examination).
An institution will be designated undercapitalized if the institution has a
total risk-based capital ratio that is less than 8%, a core risk-based capital
ratio that is less than 4%, or a leverage ratio that is less than 4% (or a
leverage ratio that is less than 3% if the institution is rated composite 1 in
its most recent report of examination).
An institution will be designated significantly under-capitalized if the
institution has a total risk-based capital ratio that is less than 6%, a core
risk-based capital ratio that is less than 3%, or a leverage ratio that is less
than 3%.
An institution will be designated critically under-capitalized if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%.
Undercapitalized institutions are required to submit capital restoration
plans to the appropriate federal banking agency and are subject to certain
operational restrictions. Moreover, companies controlling an undercapitalized
institution are required to guarantee the subsidiary institution's compliance
with the capital restoration plan subject to an aggregate limitation of the
lesser of 5% of the institution's assets or the amount of the capital deficiency
when the institution first failed to meet the plan.
Significantly or critically undercapitalized institutions and
undercapitalized institutions that did not submit or comply with acceptable
capital restoration plans will be subject to regulatory sanctions. A forced
sale of shares or merger, restriction on affiliate transactions and restrictions
on rates paid on deposits are required to be imposed by the banking agency
unless it is determined that they would not further capital improvement. The
FDICIA generally requires the appointment of a conservator or receiver within 90
days after an institution became critically undercapitalized.
The federal banking agencies have adopted uniform procedures for the issuance
of directives by the appropriate federal banking agency. Under these
procedures, an institution will generally be provided advance notice when the
appropriate federal banking agency proposes to impose one or more of the
sanctions set forth above. These procedures provide an opportunity for the
institution to respond to the proposed agency action or, where circumstances
warrant immediate agency action, an opportunity for administrative review of the
agency's action.
Inasmuch as the Bank exceeds the fully phased-in capital requirements of the
OTS, management of the Company does not believe that the provisions of the
FDICIA imposing restrictions on undercapitalized institutions will impact the
Bank.
Capital Distributions. Limitations are imposed upon all "capital
distributions" by savings associations, including cash dividends, payments by an
institution in a cash-out merger and other distributions charged against
capital. The capital distribution regulation establishes a three-tiered system,
with the greatest flexibility afforded to well capitalized institutions.
Under the capital distribution regulation, an association that immediately
prior to a proposed capital distribution, and on a pro forma basis after giving
effect to a proposed capital distribution, has capital that is equal to or
greater than the amount of its fully phased-in capital requirement is a Tier 1
association ("Tier 1 Association"). An association that immediately prior to a
proposed capital distribution, and on a pro forma basis after giving effect to a
proposed capital distribution, has capital that is equal to or in excess of its
minimum capital requirements is a Tier 2 association. An association
immediately prior to a proposed capital distribution, and on a pro forma basis
after giving effect to a proposed capital distribution, has capital that is less
than its minimum regulatory capital requirement is a Tier 3 association. The
Bank currently qualifies as a Tier 1 Association.
A Tier 1 Association may make capital distributions during a calendar year up
to 100% of its net income to date during the calendar year, plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year. A Tier 1 Association may not make capital distributions in
excess of the foregoing limitations except upon notice to the OTS and
opportunity for OTS objection to such capital distribution.
Changes in Directors and Senior Executive Officers. Section 914 of FIRREA
requires a depository institution or holding company thereof to give 30 days'
prior written notice to its primary federal regulator of any proposed director
or senior executive officer if the institution: (i) has been chartered less
than two years; (ii) has undergone a change in control within the preceding two
years; or (iii) is not in compliance with the minimum capital requirements or
otherwise is in a "troubled condition." The regulator would have the
opportunity to disapprove any such appointment.
The OTS has adopted rules to implement section 914 of FIRREA with respect to
savings associations and savings and loan holding companies. The rule broadly
defines "senior executive officer" to include the president, chief financial
officer, chief lending officer, chief investment officer, general counsel, or
their functional equivalents, or any individual who exercises significant
influence over, or participates in, major policy making decisions without regard
to title, salary or compensation. The term "senior executive officer" also
includes any employee of another entity hired to perform the functions of
positions listed above.
The term "troubled condition" with respect to a savings association means a
savings association: (i) that has received a composite rating of 4 or 5 in its
most recent examination; (ii) that is the subject of a capital directive or
formal enforcement action or proceeding or written agreement entered into with
the OTS relating to safety or soundness or financial viability; or (iii) that is
informed in writing by the OTS that it has been deemed to be in a troubled
condition for purposes of section 914 of FIRREA. A savings and loan holding
company is in troubled condition if it meets condition (ii) or (iii), above, or
if the OTS determines that the holding company has a detrimental or burdensome
effect on its subsidiary savings association or that it requires more than the
normal level of supervision. The rule covers the promotion or change in
responsibilities of a senior executive officer.
The Bank is not subject to the notice requirements of section 914 or its
implementing regulations.
Enforcement Authority. Pursuant to FIRREA, the OTS was granted enhanced,
extensive enforcement authority over all savings associations. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Since the
enactment of FIRREA, the OTS has significantly increased the use of written
agreements to correct compliance deficiencies with respect to applicable laws
and regulations and to ensure safe and sound practices. Violations of such
written agreements are grounds for initiation of cease-and-desist proceedings.
FIRREA significantly increased the amount of, and grounds for, civil money
penalties assessable against savings associations and "institution-affiliated
parties." The FDICIA granted the FDIC back-up enforcement authority to
recommend enforcement action to an appropriate federal banking agency and to
bring such enforcement action against a savings association or an institution-
affiliated party if such federal banking agency fails to follow the FDIC's
recommendation. In addition, FIRREA requires, except under certain circum-
stances, public disclosure of final enforcement actions by the OTS.
FIRREA also expanded the grounds for appointment of a conservator or receiver
for a savings association. Grounds for such appointment include: insolvency;
substantial dissipation of assets or earnings; existence of an unsafe or unsound
condition to transact business; likelihood that the association will be unable
to pay its obligations in the normal course of business; and insufficient
capital or the incurring or likely incurring of losses that will deplete
substantially all capital with no reasonable prospect for replenishment.
The FDICIA added additional grounds for the appointment of a conservator or
receiver of a savings association, which include: under-capitalization where
the association (i) has no reasonable prospect of becoming adequately
capitalized, (ii) fails to become adequately capitalized when required to do so,
(iii) fails to timely submit an acceptable capital restoration plan, or
(iv) materially fails to implement a capital restoration plan, or the
association is "critically undercapitalized" or "otherwise has substantially
insufficient capital."
The federal banking agencies as well as the Department of Justice were
granted enhanced enforcement power pursuant to the Comprehensive Thrift and Bank
Fraud Prosecution and Taxpayer Recovery Act of 1990, enacted into law on
November 29, 1990. This enactment increased the penalties for certain banking-
related crimes, gave the OTS and the conservators and receivers of savings
associations the right to seek prejudgment attachment of assets of institution-
affiliated parties and other persons in certain circumstances. It also made
changes in the bankruptcy law that will increase the likelihood that capital
commitments made by holding companies will be fulfilled.
Insurance of Accounts and Other Assessments. The Bank's deposit accounts are
insured by both the SAIF and BIF of the FDIC to a maximum of $100,000 for each
insured depositor. The OTS requires an annual audit by independent accountants
and, as noted earlier, the OTS and the FDIC make their own periodic examinations
of the Bank. The FDIC or the OTS may revalue assets of an insured institution
based upon appraisals, and require establishment of specific reserves in amounts
equal to the difference between such revaluation and the book value of the
assets, as well as require specific charge-offs relating to such assets. The
FDIC may prohibit any FDIC-insured institution from engaging in any activity the
FDIC determines by regulation or order poses a serious threat to the insurance
fund.
FIRREA established certain premium assessment rates for SAIF deposit
insurance as well as a designated reserve ratio for the fund of 1.25%, or such
higher rate (not to exceed 1.5%) determined by the FDIC to be justified by
circumstances that raise a significant risk of substantial future losses to the
SAIF. The Omnibus Reconciliation Act of 1990 (the "Reconciliation Act") removed
the ceiling on the designated reserve ratio, and provided that the assessment
rates set forth in FIRREA established minimum rates which the FDIC could
impose. Provisions in FIRREA limiting the maximum assessment and the percent
of increase in the assessment that would be permissible in any one year were
repealed by the Reconciliation Act.
Through December 31, 1992, all FDIC-insured institutions paid the same
premium (23 cents per $100 of domestic deposits) under a flat-rate system
mandated by law. FDICIA required the FDIC to raise the reserves of the BIF and
the SAIF, implement a risk-related premium system and adopt a long-term schedule
for recapitalizing the BIF. Effective January 1, 1993, the FDIC amended its
regulations regarding insurance premiums to provide that a bank or thrift would
pay an insurance assessment within a range of 23 cents to 31 cents per $100 of
domestic deposits, depending on its risk classification.
The FDIC has recently proposed an amendment to the BIF risk-based assessment
schedule which, if adopted as proposed, could lower the deposit insurance
assessment rate for most commercial banks and other depository institutions with
deposits insured by the BIF to 0.04% of insured deposits. At the same time, the
FDIC has indicated it anticipates that the assessment rate for SAIF-insured
institutions in even the lowest risk-based premium category will not fall below
the current 0.23% of insured deposits before the year 2002. Under the FDIC
proposal, the assessment rates for BIF-insured institutions would range from
0.31% of insured deposits for undercapitalized BIF-insured institutions in
supervisory Subgroup C to 0.04% of deposits for well-capitalized institutions in
supervisory Subgroup A, which constitute over 90% of BIF-insured institutions.
The proposal would authorize the FDIC to adjust the BIF assessment rate schedule
by up to five basis points as deemed necessary to maintain the BIF reserve ratio
at the designated reserve ratio. If adopted, the FDIC proposal could not become
effective until the semi-annual period after the BIF achieves its designated
reserve ratio which the FDIC estimates may occur as early as mid-1995. The FDIC
proposal, if adopted, would result in a substantial disparity in the deposit
insurance premiums paid by BIF and SAIF members and could place SAIF-insured
savings associations such as the Bank at a significant competitive disadvantage
to BIF-insured institutions.
Under present guidelines, to arrive at a risk-based assessment for each bank
and thrift, the FDIC places it in one of nine risk categories using a two-step
process based first on capital ratios and then on other relevant information.
Each institution is assigned to one of three groups (well capitalized,
adequately capitalized or undercapitalized) based on its capital ratios. A
well-capitalized institution is one that has at least a 10% "total risk-based
capital" ratio (the ratio of total capital to risk-weighted assets), a 6% "Tier
1 risk-based capital" ratio (the ratio of Tier 1 (core) capital to risk-weighted
assets) and a 5% "leverage capital" ratio (the ratio of core capital to adjusted
total assets). An adequately capitalized institution has at least an 8% total
risk-based capital ratio, a 4% Tier 1 (core) risk-based capital ratio and a 4%
leverage capital ratio. An undercapitalized institution is one that does not
meet either of the above definitions.
<TABLE>The FDIC also assigns each institution to one of three supervisory
subgroups based on an evaluation of the risk posed by the institution. The FDIC
makes this evaluation based on reviews by the institution's primary federal or
state supervisor, statistical analyses of financial statements and other
information relevant to gauging the risk posed by the institution. These
supervisory evaluations therefore modify premium rates within each of the three
capital groups -- the result being the nine risk categories and the corresponding
assessment rates (cents per one thousand dollars of deposits) as follows:
<CAPTION>
SUPERVISORY SUBGROUP
MEETS NUMERICAL STANDARDS FOR: A B C
<S> <C> <C> <C>
Well capitalized 23 26 29
Adequately capitalized 25 29 30
Undercapitalized 29 30 31
</TABLE>
The Bank's consolidated insurance assessment for the fiscal year ending
March 31, 1996, is expected to be between $526,000 and $572,000 depending upon
deposit growth.
As part of the funding of the RTC and the resolution of the insolvency of
the FSLIC, Congress created FICO and REFCO. Each of these entities, under
specified conditions, may assess premiums on SAIF-insured associations. Such
premiums may not exceed assessments able to be made by the SAIF, and are payable
in lieu thereof. FIRREA provides that the Treasury Department shall make
contributions to the SAIF if assessments actually paid to it are insufficient to
maintain certain statutorily prescribed capital levels for the SAIF.
In addition, FIRREA empowers the OTS to issue regulations for the collection
of fees in order to recover the expenses of the agency, the cost of supervision
of savings associations, the examination of affiliates of savings associations,
and the processing of applications, filings, notices and other requests of
associations filed with the OTS. The OTS adopted a two-pronged sliding scale
approach in 1990 by which all institutions pay a general assessment and troubled
associations pay an additional premium assessment. The Bank was subject to only
the general assessment in 1994. In addition to the general (and special
assessments), the OTS also collects application fees which apply to virtually
all regulatory and securities applications and filings as well as to fees to
cover the costs of examinations of savings associations, holding companies,
subsidiaries and affiliates. The Bank's consolidated assessments amounted to
approximately $414,000 in the aggregate during the fiscal year ended March 31,
1995.
Federal Reserve Board. The FRB requires all depository institutions (i.e.,
savings associations) to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
Reserves of 3% must be maintained against total transaction accounts of $51.9
million or less (subject to adjustment by the FRB) and an initial reserve of
$1,557,000 plus 10% (subject to adjustment by the FRB to a level between 8% and
14%) must be maintained against that portion of total transaction accounts in
excess of such amount. The balances maintained to meet the reserve requirements
imposed by the FRB may be used to satisfy liquidity requirements imposed by the
OTS. See "Regulation -- Liquidity."
Savings association are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB advances, before
borrowing from the Federal Reserve Bank.
REGULATION OF THE COMPANY
Activities Restrictions. The Company presently operates as a unitary savings
and loan holding company. There are generally no restrictions on the activities
of a unitary savings and loan holding company. However, if the Director of the
OTS determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of an activity constitutes a serious risk
to the financial safety, soundness or stability of its subsidiary savings
institution, the Director of the OTS may impose such restrictions as deemed
necessary to address such risk including limiting: (i) payment of dividends by
the savings institution; (ii) transactions between the savings institution and
its affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the QTL test, then such unitary holding company shall also presently
become subject to the activities restrictions applicable to multiple holding
companies, and unless the savings institution requalifies as a QTL within one
year thereafter, register as and become subject to the restrictions applicable
to a bank holding company. See "Regulation of the Bank -- Qualified Thrift
Lender Test."
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Company
would thereupon become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
the activities of the Company and any of its subsidiaries (other than the Bank
or other subsidiary savings institutions) would thereafter be subject to further
restrictions. Among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings institution shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, except upon prior
notice to and no objection by the OTS, other than: (i) furnishing or performing
management services for a subsidiary savings institution; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution; (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting as trustee under deeds of trust; (vi) those activities authorized by
regulation as of March 5, 1987, to be engaged in by multiple holding companies;
or (vii) unless the Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies, those activities authorized
by the FRB as permissible for bank holding companies. Those activities
described in (vii) above and must also be approved by the Director of the OTS
prior to being engaged in by a multiple holding company.
Legislation has been recently introduced into the U.S. Congress which would
subject all unitary holding companies to the same restrictions on activities as
are currently applied to multiple holding companies. If such legislation is
enacted in its current form, the ability of the Company to engage in certain
activities that are currently permitted to a unitary holding company may be
restricted. Since the Company does not and has no current plans to engage in
any business activity impermissible for a multiple holding company, such
legislation would not require the Company to discontinue any current activity.
In addition, such legislation would preclude companies that are engaged in
activities not permitted to multiple holding companies from acquiring control of
the Company. No prediction can be made at this time as to whether such
legislation will be enacted or whether it will be enacted in its current form.
Restrictions on Acquisitions. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings institution or savings and loan holding company or
substantially all the assets thereof; or (ii) more than 5% of the voting shares
of a savings institution or holding company thereof which is not a subsidiary.
Under certain circumstances, a registered savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the voting shares of an under-capitalized savings institution pursuant to a
"qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance", the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6 1/2% of total assets there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings institution, and transactions between the savings institution and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the FRA. Except with the prior approval of the Director
of the OTS, no director or officer of a savings and loan holding company or
person owning or controlling by proxy or otherwise more than 25% of such
company's stock, may also acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the FDIA; or
(iii) the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
Under the BHCA, bank holding companies are specifically authorized to acquire
control of any savings association. Pursuant to rules promulgated by the FRB,
owning, controlling or operating a savings institution is a permissible activity
for bank holding companies, if the savings institution engages only in deposit-
taking activities and lending and other activities that are permissible for bank
holding companies. A bank holding company that controls a savings institution
may merge or consolidate the assets and liabilities of the savings institution
with, or transfer assets and liabilities to, any subsidiary bank which is a
member of the BIF with the approval of the appropriate federal banking agency
and the FRB. The resulting bank will be required to continue to pay assessments
to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the BHCA.
FEDERAL SECURITIES LAWS
The Company is subject to the reporting requirements of the Exchange Act, as
implemented by the SEC, and is required to file periodic and other reports with
the SEC. In addition, certain individuals and entities are required to file
reports and are subject to various restrictions in connection with their
ownership of shares of the Company and transactions involving such shares.
TAXATION
Federal. The Company, on behalf of itself and its subsidiaries, files a
calendar tax year consolidated federal income tax return and reports income and
expenses using the accrual method of accounting.
Savings associations are generally taxed in the same manner as other
corporations. Unlike other corporations, however, savings associations such as
the Bank that meet certain tests relating to the nature of their supervision,
income, assets and business operations are allowed to establish a reserve for
bad debts and, for each tax year, are permitted to deduct additions to that
reserve on "qualifying real property loans" using the more favorable of one of
the following two alternative methods: (i) a method based on the association's
actual loss experience (the "experience method") or (ii) a method based on a
specified percentage of the institution's taxable income (the "percentage of
taxable income method"). "Qualifying real property loans" are, in general,
loans secured by interests in improved residential real property. The addition
to the reserve for losses on nonqualifying real property loans must be computed
under the experience method. Upon conversion to a commercial bank, the Bank
will no longer be permitted to deduct additions to such reserve for federal
income tax purposes.
Under the percentage of a taxable income, a qualifying association generally
may deduct 8% of its taxable income, subject to the limitations discussed
below. The net effect of the percentage of taxable income method deduction is
that the maximum effective federal income tax rate on income computed
without regard to actual bad debts for qualifying associations is 31.28%.
Under the experience method, a thrift institution is permitted to deduct an
amount based on its average yearly loan losses over the current and the
previous five years.
The amount of the bad debt deduction that a savings institution may claim
with respect to additions to its reserve for bad debts is subject to certain
limitations. First, the deduction may be reduced or eliminated entirely
(regardless of the method of computation) if at least 60% of the savings
institution's assets do not fall within certain designated categories. Second,
the bad debt deduction attributable to "qualifying real property loans" cannot
exceed the greater of (i) the amount deductible under the experience method or
(ii) the amount which, when added to the bad debt deduction for nonqualifying
loans, equals the amount by which 12% of the sum of the total deposits and the
advance payments by borrowers for taxes and insurance at the end of the taxable
year exceeds the sum of the surplus, undivided profits, and reserves at the
beginning of the taxable year. Third, the amount of bad debt deduction
attributable to qualifying real property loans computed using the percentage of
taxable income method is permitted only to the extent that the institution's
reserve for losses on qualifying real property loans at the close of the taxable
year, taking into account the addition to that reserve for that taxable year,
does not exceed 6% of such loans outstanding at such time. Fourth, the amount
of the bad debt deduction is reduced, but not below zero, by the amount of the
addition to reserves for losses on nonqualifying loans for the taxable year.
Finally, a savings institution that computes its bad debt deduction using the
percentage of taxable income method and files its federal income tax return as
part of a consolidated group is required to reduce proportionately its bad debt
deduction for losses attributable to activities of nonsavings institution
members of the consolidated group that are "functionally related" to the savings
institution member. (The savings institution member is permitted, however, to
proportionately increase its bad debt deduction in subsequent years to recover
any such reduction to the extent the nonsavings institution members realize
income in subsequent years from their "functionally related" activities.)
To the extent that (i) the Bank's reserve for losses on qualifying real
property loans exceeds the amount that would have been allowed under the
experience method and (ii) the Bank makes distributions to its stockholders that
are considered to result in withdrawals from that excess bad debt reserve, then
the amounts withdrawn will be included in the Bank's taxable income. The amount
considered to be withdrawn by such a distribution will be the amount of the
distribution plus the amount necessary to pay the tax with respect to the
withdrawal. Dividends paid out of the Bank's current or accumulated earnings
and profits as calculated for federal income tax purposes, however, will not be
considered to result in withdrawals from the Bank's bad debt reserve. Dividends
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation of the Bank will be considered to result in withdrawals from the
Bank's bad debt reserves.
State Taxation. Under the laws of the State of Florida, the Bank is subject,
generally, to a 5.5% tax on net income. The tax may be reduced by a credit of
up to 65% (40% prior to July 1, 1990) of the tax due as a result of certain
intangible taxes. The tax is deductible by the Bank in determining its federal
income tax liability.
Item 2. Properties
The Bank operates seven full-service branches of which three of the
facilities are owned and four are leased. The Bank owns an office building in
West Palm Beach, Florida which houses its corporate office headquarters and a
full-service branch. Two-thirds of the building serves as the Company's
corporate headquarters which includes the Bank's loan servicing, item
processing, proof-of-deposit, accounting, and administration departments as well
as a loan production and branch depository facility. The remaining office space
is fully leased to unaffiliated parties. Two branches located in Palm Beach
Gardens and Homestead, Florida were relocated from leased space to Company owned
buildings which were both constructed during 1995. Net book value for office
buildings and land was $4.5 million at March 31, 1995.
The Bank leases four full-service branches in Palm Beach County, Florida, of
which two branches were acquired in connection with the Governors merger.
Item 3. Legal Proceedings
The Company is at various times involved in litigation arising out of the
ordinary course of business. At present the Company is not aware of any
litigation which would have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended March 31, 1995, the
Company did not submit any matter to a vote of security holders.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
MARKET PRICE AND DIVIDENDS
<TABLE>
The Common Stock of the Company, par value $.01 per share, is traded on
the over-the-counter market and is listed on NASDAQ under the symbol RSFC. The
table sets forth the high and low bid prices for the common stock as reported by
NASDAQ.
<CAPTION>
BID PRICE
YEAR ENDED MARCH 31, 1995 1994
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First quarter $4 1/4 $3 3/8 $4 $3
Second quarter $4 1/2 $3 3/4 $3 1/2 $2 7/8
Third quarter $4 3/8 $3 1/4 $4 1/4 $3 1/2
Fourth quarter $4 3/8 $3 3/4 $4 1/2 $3 5/8
</TABLE>
As of May 15, 1995, the number of record holders of the common stock was
approximately 1,500.
Currently the Company has nine market makers in its common stock:
Advest, Inc.
Robert W. Baird & Co., Inc.
Allen C. Ewing & Co.
Herzog, Heine, Geduld, Inc.
F. J. Morrissey & Co., Inc.
Mayer & Schweitzer, Inc.
Ryan Beck & Co., Inc.
Sherwood Securities Corp.
William R. Hough & Co.
<TABLE>
The Board of Directors has declared cash dividends for shareholders for
nine consecutive quarters as follows:
<CAPTION>
Declaration Record Per Share
Date Date Dividend
<S> <C> <C>
April 21, 1993 May 15, 1993 $.01
July 21, 1993 August 2, 1993 .01
October 20, 1993 November 1, 1993 .01
January 26, 1994 February 15, 1994 .01
April 27, 1994 May 20, 1994 .01
July 27, 1994 August 19, 1994 .01
October 26, 1994 November 10, 1994 .02
February 3, 1995 February 16, 1995 .02
April 26, 1995 May 15, 1995 .02
</TABLE>
On August 12, 1991, January 27, 1992, April 1, 1993, and January 21, 1994,
the Company issued a 10%, 5%, 10%, and 5%, respectively, stock dividend for
shareholders.
Future payment of dividends will be subject to determination and
declaration by the Board of Directors. See Note 11 of the financial statements
in Item 8 for discussion of OTS' regulations of dividend payments.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
CONSOLIDATED SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31,
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993 1992 1991
SUMMARY OF OPERATING RESULTS
<S> <C> <C> <C> <C> <C>
Interest income $16,288 $12,487 $11,237 $11,366 $12,016
Interest expense 7,397 5,512 4,560 6,950 8,821
----- ----- ----- ----- -----
Net interest income 8,891 6,975 6,677 4,416 3,195
Provision for loan losses 200 214 1,003 704 616
----- ----- ----- ----- -----
Net interest income after
provision for loan losses 8,691 6,761 5,674 3,712 2,579
Non-interest income 2,999 4,389 3,058 3,812 3,335
Operating expenses 9,860 8,739 6,932 6,266 5,274
----- ----- ----- ----- -----
Income before income tax,
extraordinary item & accounting change 1,830 2,411 1,800 1,258 640
Income taxes 663 818 582 466 205
----- ----- ----- ----- -----
Income before extraordinary item
and accounting change 1,167 1,593 1,218 792 435
Extraordinary item 278 205
Change in accounting for income taxes 500
----- ----- ----- ----- -----
Net income $1,167 $2,093 $1,218 $1,070 $640
===== ===== ===== ===== =====
<CAPTION>
PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Income before extraordinary item
and change in accounting for income taxes $.23 $.42 $.50 $.42 $.27
===== ===== ===== ===== =====
Net income $.23 $.55 $.50 $.55 $.39
===== ===== ===== ===== =====
Average common shares and common stock
equivalents outstanding (in thousands) 4,474 3,927 2,895 2,389 1,643
===== ===== ===== ===== =====
<CAPTION>
MARCH 31, 1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $280,039 $206,637 $169,474 $135,330 $123,786
Investments 14,185 24,481 248 248 2,447
Loans receivable - net 226,611 154,375 123,773 95,963 77,711
Total deposits 229,735 156,651 145,911 117,349 109,869
Borrowed money 19,733 21,995 2,000 2,000 2,000
Shareholders' equity 20,446 19,648 10,793 7,104 5,935
</TABLE>
<TABLE>
AT OR FOR THE YEAR ENDED
MARCH 31,
<CAPTION> 1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OTHER DATA
Return on average assets .50% 1 .13% (A) .91% .81% .50%
Return on average
shareholders' equity 5 .82 12.63 14.57 16.04 11.41
Average shareholders' equity to
average total assets 8 .60 8 .92 6.25 5.03 4.42
Allowance for loan losses to
total loans (net) 1 .10 .69 .96 .70 .50
Net charge-offs to average loans .09 .27 .92 .55 .76
Non-performing assets to total assets
at year end 1 .23 1 .56 2.43 3.99 1.76
Net interest margin 4 .00 3 .60 5.00 3.00 3.10
Net yield 4 .25 4 .00 5.50 3.10 2.90
Number of full-service offices 7 5 5 3 3
Loan servicing portfolio
(in millions) $323 $189 $267 $402 $409
<FN>
(A) Includes cumulative effect of change in accounting for income taxes
</TABLE>
<TABLE>
QUARTERLY FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1995
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Interest income . . . . . . . . . . . . . $3,361 $3,624 $4,051 $5,252
Interest expense . . . . . . . . . . . . 1,509 1,539 1,861 2,488
----- ----- ----- -----
Net interest income . . . . . . . . . . . 1,852 2,085 2,190 2,764
Provision for loan losses . . . . . . . . 75 75 25 25
------ ------ ------ ----
Net interest income after provision for
loan losses . . . . . . . . . . . . . . . 1,777 2,010 2,165 2,739
Non-interest income . . . . . . . . . . . 854 602 742 801
Operating expense . . . . . . . . . . . . 2,211 2,138 2,407 3,104
----- ----- ----- -----
Income before income taxes . . . . . . . 420 474 500 436
Income taxes . . . . . . . . . . . . . . 155 170 180 158
----- ----- ----- -----
Net income . . . . . . . . . . . . . . . $265 $304 $320 $278
==== ==== ==== ====
Net income per common share . . . . . . . $.05 $.06 $.06 $.05
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1994
FIRST SECOND THIRD FOURTH
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Interest income . . . . . . . . . . . . . . . . . . . . . $3,090 $3,039 $3,274 $3,084
Interest expense . . . . . . . . . . . . . . . . . . . . 1,228 1,308 1,545 1,431
----- ----- ----- -----
Net interest income . . . . . . . . . . . . . . . . . . . 1,862 1,731 1,729 1,653
Provision for loan losses . . . . . . . . . . . . . . . . 64 75 25 50
----- ----- ----- -----
Net interest income after provision for loan losses . . . 1,798 1,656 1,704 1,603
Non-interest income . . . . . . . . . . . . . . . . . . . 996 1,178 1,134 1,081
Operating expense . . . . . . . . . . . . . . . . . . . . 2,249 2,160 2,185 2,145
----- ----- ----- -----
Income before income taxes and accounting change . . . .
545 674 653 539
Income taxes . . . . . . . . . . . . . . . . . . . . . . 178 231 225 184
----- ----- ----- -----
Income before accounting change . . . . . . . . . . . . . 367 443 428 355
Cumulative effect of change in accounting principle . . .
500
----- ----- ----- -----
Net Income . . . . . . . . . . . . . . . . . . . . . . . $867 $443 $428 $355
==== ==== ==== =====
Per share data:
Income before cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . $.13 $.14 $.09 $.07
Cumulative effect of change in accounting principle . . . .16
----- ----- ----- -----
Net Income . . . . . . . . . . . . . . . . . . . . . . . $.29 $.14 $.09 $.07
==== ==== ==== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1993
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Interest income . . . . . . . . . . . . . $2,866 $2,600 $2,562 $3,209
Interest expense . . . . . . . . . . . . 1,380 952 1,006 1,222
----- ----- ----- -----
Net interest income . . . . . . . . . . . 1,486 1,648 1,556 1,987
Provision for loan losses . . . . . . . . 96 96 551 260
----- ----- ----- -----
Net interest income after provision for 1,390 1,552 1,005 1,727
loan losses . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . 690 657 1,199 512
Operating expense . . . . . . . . . . . . 1,647 1,673 1,730 1,882
----- ----- ----- -----
Income before income taxes . . . . . . . 433 536 474 357
Income taxes . . . . . . . . . . . . . . 161 208 167 46
----- ----- ----- -----
Net income . . . . . . . . . . . . . . . $272 $328 $307 $311
==== ==== ==== ====
Net income per common share . . . . . . . $.14 $.16 $.15 $.13
==== ==== ==== ====
</TABLE>
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORPORATE OVERVIEW
In fiscal 1995, Republic Security Financial Corporation (the "Company")
continued its growth in total assets, deposits, and net interest income.
Effective November 30, 1994, the Bank acquired Governors Bank ("Governors"), a
commercial bank headquartered in West Palm Beach. As a result of the merger
Republic's assets increased $64.3 million, deposits increased $58.1 million and
the banking center network expanded to seven full-service offices.
After several years of transition, fiscal 1995 marked the first year of
noticeable growth in the Bank's commercial and consumer loan portfolios. In
addition, on April 17, 1995, the Bank filed application to convert from a
Federal Savings Bank to a State of Florida, commercial bank charter. At the
same time, Republic Security Financial Corporation filed application with the
Federal Reserve Board to become a bank holding company.
FINANCIAL CONDITION
Balance Sheet Comparison
The Company's consolidated total assets increased $73.4 million or 35.5%
from 1994 to 1995. Assets increased $64.3 million as a result of the merger
with Governors. The remaining increase is a direct result of increases in loan
and deposit demand. Net loans increased 45.1% from 1994 to 1995. Loans
acquired in the merger contributed 26% to the net increase in loans while loan
originations was the primary contributor to the remaining increase during the
year ended March 31, 1995. Cash and cash equivalents increased from $13.1
million to $17.6 million from 1994 to 1995 as a result of the sale of trading
investments offset by increased loan and deposit demand. Investments decreased
$10.3 million from 1994 to 1995 primarily due to an increase in loan demand and
the purchase of Governors for $5.3 million. Deposits increased $73 million or
46.6% from 1994 to 1995 as a result of the merger with Governors Bank and an
increase in deposit demand. Federal Home Loan Bank ("FHLB") advances decreased
from $20 million to $15 million from 1994 to 1995, while securities under
agreements to repurchase increased from nil to $2.7 million at March 31, 1995.
Republic Security Financial Corporation's consolidated assets increased
$37.2 million or 21.9% from 1993 to 1994. The increase in assets was a direct
result of increases in loan and deposit demand as well as an increase in
borrowings from the FHLB. Net loans increased by $30.6 million due to an
increase in loans purchased for portfolio and increased customer demand for
construction loans during the year ended March 31, 1994. Cash and cash
equivalents decreased $12.6 million from 1993 to 1994 due to the increase in
portfolio loan purchases. FHLB advances increased $20 million during 1994 and
the funds were invested in adjustable rate mortgage funds to increase the Bank's
net interest margin. Deposits increased from $145.9 million to $156.7 million
from 1993 to 1994 due to normal growth in the bank's operations. An offering of
preferred and common stock resulted in net proceeds of approximately $6.9
million in 1994.
Loans
In line with the Company's strategic objective to penetrate the non-
residential consumer and commercial business markets, the composition of the
Bank's loan portfolio reflects significant increases in consumer, commercial,
and commercial real estate loans. Consumer loans increased $28.6 million and
commercial real estate and commercial and financial loans increased $28.7
million during 1995. The acquisition of Governors contributed $13 million in
consumer loans and $19 million in commercial and commercial real estate loans.
The remaining increase of $15.6 million and $9.7 million in consumer and
commercial loans, respectively, were achieved through the Bank's commercial
lending unit targeting individual consumers and high quality commercial
businesses.
<TABLE>
The following table illustrates the stratification of the Bank's
loan portfolio:
<CAPTION>
MARCH 31,
1995 % 1994 % 1993 %
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential construction $45,396 18% $49,196 28% $43,107 30%
Residential permanent 123,699 49 105,405 59 77,386 54
Residential lot 2,989 1 1,728 1 2,798 2
Commercial and other
real estate 26,747 11 12,202 7 13,498 9
Consumer 36,285 14 7,641 4 5,300 4
Commercial and financial 16,484 7 2,356 1 2,528 1
TOTAL $251,600 100% $178,528 100% $144,617 100%
======= ==== ======= ==== ======= ====
</TABLE>
Although the Bank is targeting growth primarily in the consumer,
commercial real estate, and commercial business markets, the Bank is positioned
to maintain its presence in the residential real estate market and expand its
residential construction lending.
Property and Equipment
Property and equipment increased from $4.0 million to $6.1 million from
1994 to 1995. The increase is primarily a result of building two branch offices
to relocate existing leased branch offices. In addition, the Corporate
headquarters' office space was expanded during fiscal 1995 to accommodate the
addition of the item processing and proof-of-deposit departments as well as
additional expansion of existing departments. The property and equipment
acquired as a result of the Governors acquisition was minimal as the majority of
the premises and equipment were leased.
Property and equipment increased from $2.7 million to $4.0 million from
1993 to 1994, respectively. During the fiscal year ended March 31, 1994, the
Bank made improvements to its corporate facilities which totaled approximately
$1.2 million.
RETAIL BANKING
<TABLE>
Retail banking entails attracting deposits from customers and
lending funds to borrowers. Retail banking revenues consist of net interest
income and varied fees for services. Retail banking's income before taxes
increased 47% from 1994 to $2.96 million in 1995. Non-interest income increased
65% from 1994 to 1995 as a result of an increase in fees charged and an increase
in commercial business accounts. Net interest income increased 28% due to an
increase in higher yielding assets as well as an overall increase in interest
rates during 1995. These increases were offset with a 29% increase in non-
interest expenses resulting from the expansion of the branch network and
additions of the item processing and proof-of-deposit departments. Retail
banking income before taxes remained flat from 1993 to 1994. Deposit account
composition is as follows at March 31:
<CAPTION>
(DOLLARS IN THOUSANDS)
1995 % 1994 % 1993 %
<S> <C> <C> <C> <C> <C> <C>
Transaction Accounts $86,813 38% $63,627 41% $55,705 38%
Certificate of Deposit 142,922 62 93,024 59 90,206 62
----- --- ----- --- ------ ----
$229,735 100% $156,651 100% $145,911 100%
======== ==== ======== ==== ======== ====
</TABLE>
Retail banking is the Bank's main focus of growth in 1996. New consumer
and commercial products such as credit cards and cash management products and
services were introduced by the Bank in 1995 and additional products are
currently being developed for introduction in 1996. Growth in commercial and
consumer business is expected in 1996 with the anticipation of increasing the
Company's net interest margin through increases in higher interest yielding
assets and reduction of higher interest-bearing liabilities.
MORTGAGE BANKING
Mortgage banking consists of lending funds primarily to residential
borrowers, selling those loans in secondary markets, servicing loans purchased
and originated, and purchasing and selling mortgage service rights and mortgage
loans in secondary markets. Activity in the mortgage banking industry
significantly declined in 1995 as compared to 1994 due to an overall increase in
market interest rates which resulted in a decrease in the volume of loan
originations and refinancings. In March 1995, the Bank significantly reduced
its operations in mortgage banking. Five loan production offices were closed
and the current mortgage banking production activities are conducted from the
corporate headquarters in West Palm Beach.
Mortgage banking income before taxes decreased from $397,000 in 1994 to a
loss of $1.1 million in 1995. Gain on the sale of loans and servicing decreased
$2.5 million from 1994 to 1995, while loan servicing income increased $798,000.
Net interest income increased $292,000 and non-interest expense decreased
$125,000 which also offset the decrease in gains on the sales of loans and loan
servicing in 1995.
<TABLE>
Mortgage banking revenues consist of the following:
<CAPTION>
YEAR ENDED MARCH 31, 1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C>
Net interest income after
provision for loan losses $1,297 $1,005 $1,279
Gain on sale of loans and
servicing rights 1,175 3,657 3,844
Loan servicing income 1,118 1,033 1,530
Amortization of loan servicing
rights (505) (1,218) (2,922)
Other 182 174
----- ----- -----
$3,085 $ 4,659 $ 3,905
====== ====== ======
</TABLE>
<TABLE>
Mortgage banking production is depicted by the following table:
<CAPTION>
YEAR ENDED MARCH 31,
(DOLLARS IN THOUSANDS)
1995 1994 1993
<S> <C> <C> <C>
Loans originated $ 48,157 $139,393 $122,272
Purchases 5,140 20,579 1,704
Sales (55,102) (142,274) (132,988)
------ ------- -------
Net cash outflow (inflow) from
mortgage banking operations $(1,805) $ 17,698 $(9,012)
======= ======= ========
</TABLE>
Loan originations and loan purchases related to mortgage banking
activities decreased $107 million or 67% in 1995 compared to 1994. Loan sales
decreased 61% in 1995. These decreases are attributable to the decline in loan
refinancings. Similar declines were experienced in the mortgage banking
industry as a whole. Gain on sale of loans and servicing rights decreased $2.5
million in 1995 compared to 1994. The decline in the gain on sale of loans of
$2.1 million is directly related to the decline in loan sales.
Loan servicing income in 1995 remained relatively flat in comparison to
1994 while the amortization of loan servicing rights decreased from $1.2 million
in 1994 to $505,000 in 1995 due to the decrease in loan prepayments which
resulted primarily from a rise in interest rates. The Bank purchased $2.3
million of loan servicing rights in 1995. Mortgage banking non-interest expense
remained flat from 1994 to 1995 as compensation expense decreased 36% in 1995
due to a decrease in loan originations while other non-interest expenses
increased.
Loan originations increased from $122.3 million in 1993 to $139.4 million
in 1994. Gain on sale of loans and servicing rights was $3.8 million in 1993 as
compared to $3.7 million in 1994.
Loan servicing income net of amortization of loan servicing rights
increased from a loss of $1.4 million in 1993 to a loss of $185,000 in 1994.
Amortization of servicing rights was unusually high during the two year period
due to heavy prepayments resulting from falling interest rates. The Bank
experienced prepayment rates of 30% and 44% during 1993 and 1994, respectively.
While there are many factors that affect prepayment rates on loans,
prevailing loan origination rates are the primary factor. Loan prepayments
generally will increase when interest rates decrease and vice versa.
Mortgage banking non-interest expense increased from $2.8 million in 1993
to $4.2 million in 1994 due to increases in loans originated for sale.
ASSET QUALITY
The Bank's non-performing assets as a percent of total assets decreased
from 1.56% at March 31, 1994 to 1.23% at March 31, 1995. The Bank has seen an
improvement in asset quality for three consecutive years as non-performing
assets as a percent of total assets decreased to 1.56% at March 31, 1994 from
2.43% at March 31, 1993. Assets delinquent 60 days or more and real estate
owned totalled $3.4 million and $3.2 million at March 31, 1995, and 1994,
respectively.
<TABLE>
Non-performing assets were composed of the following at March 31:
<CAPTION>
1995 1994 1993
(dollars in thousands)
<S> <C> <C> <C>
Consumer non-mortgage loans $470 $61 $241
Commercial non-mortgage loans 630 377 398
Real Estate owned:
Residential construction 141 552 70
Residential 1,269 1,378 2,473
Land for residential use 305 317
Land for commercial use 764 555 574
Commercial real estate 162 52
----- ----- -----
Total non-performing assets $3,436 $3,228 $4,125
===== ===== =====
</TABLE>
Management continues to work out problem assets and believes that it has
established sufficient reserves to cover future losses.
Loan Concentrations and Highly Leveraged Loans
The Bank's loan portfolio includes $24 million of residential loans which
have loan to value ratios greater than 80% and no private mortgage insurance at
March 31, 1995. The remaining loans had loan to value ratios of 80% or less or
had mortgage insurance from a private insurer. Of the total loan portfolio $6.0
million or 2.0% are loans to builders for speculative residential properties.
These loans are predominately located in Palm Beach and Martin Counties.
LIQUIDITY
Liquidity is defined as cash and certain marketable securities which are
not committed or pledged. The liquidity portfolio of the Company totaled
approximately $22.7 million at March 31, 1995. Regulations of the Office of
Thrift Supervision ("OTS") require each savings institution to maintain for each
calendar month an average daily balance of liquid assets equal to at least 5% of
the average daily balance of its net withdrawable accounts plus short-term
borrowings during the preceding calendar month. OTS regulations also require
each savings institution to maintain for each calendar month an average daily
balance of short-term liquid assets (generally those having maturities of 12
months or less) equal to at least 1% of the average daily balance of its net
withdrawal accounts plus short-term borrowing during the preceding calendar
month. During the month of March 31, 1995, average short-term liquidity ratio
of the Bank was 8.5%.
Cash Inflows and Outflows
The Company's cash inflows consist primarily of amounts generated from the
sale of loans, the collection of loan principal payments, and increases in
deposits and borrowings. Uses of cash have historically been primarily to
originate and purchase mortgage loans. However, in 1996, uses of cash are
expected to consist of originations of commercial, commercial real estate,
consumer and residential loans, as well as purchases of investment securities.
Sources of borrowings include advances from the FHLB, borrowings under
repurchase agreements, commercial bank lines of credit, and, under certain
conditions, direct borrowings from the Federal Reserve System.
Access to funds from depositors is affected by the rate the Bank pays on
certificates of deposit and, convenience and service provided to our transaction
based account holders. The rate the Bank pays on certificates of deposits is
dependent on rates paid by other financial institutions within the Bank's area.
The Bank manages the cash inflows and outflows from certificates of deposits by
increasing or decreasing the rates offered in its market area.
The Company's sources of liquidity are impacted by various matters beyond
the control of the Company. Scheduled loan payments are a relatively stable
source of funds while loan prepayments and deposit flows vary widely in reaction
to market conditions, primarily prevailing interest rates. Asset sales are
influenced by the availability of loans for sale, general market demand, and
other unforeseen market conditions. The Company's ability to borrow at
attractive rates is affected by its credit ratings and other market conditions.
In order to manage the uncertainty inherent in its sources of funds, the
Company continually evaluates alternate sources of funds and maintains and
develops diversity and flexibility in the number of such sources. The effect of
a decline in any one source of funds generally can be offset by use of an
alternative source although potentially at a different cost to the Company.
CAPITAL
Capital Compliance
OTS regulations contain a three part capital standard for savings
institutions. The regulations require savings institutions to maintain "core"
capital of at least 3.0% of adjusted total assets "tangible capital" of at least
1.5% of adjusted total assets and "risk-based capital" of at least 8.0% of risk-
weighted assets.
The Bank is in compliance with its regulatory capital requirements. At
March 31, 1995, Republic Security had core capital of 6.0% of adjusted total
assets, tangible capital of 6.0% of adjusted total assets, and risk-based
capital of 11.0% of risk-weighted assets (see Note 11 to Consolidated Financial
Statements). The Company's goal is to maintain core, tangible, and risk-based
capital ratios in excess of 6%, 6%, and 10%, respectively.
ASSET/LIABILITY MANAGEMENT
<TABLE>
The Bank manages its interest rate risk exposure by limiting the amount of
fixed rate loans it holds for investment, increasing or decreasing the amount of
long-term borrowings and deposits and/or purchasing commitments to sell loans.
The following table presents the Bank's exposure to interest rate risk at March
31 1995:
<CAPTION>
March 31, 1995
One Year 1 to 3 3 to 5 Over 5
or Less Years Years Years TOTAL
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total interest-earning Assets $149,836 $30,072 $31,790 $43,148 $254,846
Total interest-bearing
Liabilities 187,796 42,215 18,589 868 249,468
------ ------ ------- ----- ------
Interest Rate Sensitivity Gap $(37,960) $(12,143) $13,201 $42,280 $5,378
======= ======== ======== ======= ======
Cumulative Interest Rate
Sensitivity Gap $(37,960) $(50,103) $(36,902) $5,378
======= ======== ======== =======
Cumulative Interest Rate
Sensitivity Gap as a
Percent of Assets (13.5%) (17.9%) (13.2%) 1.9%
======= ======== ======== =======
</TABLE>
In addition to the above, the Bank is committed to fund $5.90 million in new
loans and $21.50 million in construction loans-in-process. These loans and
commitments are largely protected from interest rate fluctuations because they
are either adjustable rate loans or are fixed rate loans which the Bank has
obtained commitments to sell in the secondary market. This relationship is not
linear or consistent with other interest rate assets and liabilities on the
Bank's balance sheet and management uses computer modeling in its efforts to
reduce the effects that interest rate fluctuations have on income. The Bank's
earnings are reasonably well hedged against changes in interest rates.
RESULTS OF OPERATIONS
The Company's net income decreased by $926,000 from 1994 to 1995. Net income
for the period ending March 31, 1994 included a $500,000 cumulative effect of a
change in accounting principle related to the adoption of SFAS No. 109. The
decrease in earnings for 1995, excluding the cumulative effect of a change in
accounting principle, is due to an increase of $1.92 million in net interest
income and a $476,000 increase in other non-interest income offset by a decrease
of $1.87 million in mortgage banking income, a $200,000 loss on trading account
investments, and an increase of $1.12 million in operating expenses.
<TABLE>
NET INTEREST INCOME, AVERAGE BALANCE AND RATES: At
<CAPTION>Year ended March 31,
March 31, 1995 1994 1993 1995
(dollars in thousands)
Average Yield/ Average Yield/ Average Yield/ Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans-net $191,442 15,254 7.80% $144,359 $11,525 8.00% $112,854 $10,774 9.50% 8.90%
Interest-bearing deposits 10,743 462 4.30 14,113 300 2.10 8,156 385 4.70 3.00
Investments 6,809 572 8.40 15,284 662 4.30 1,247 78 6.30 8.30
------- ----- ------ ------- ------- ------ ------- ------- ---- ------
Total interest-earning
assets 208,994 16,288 7.90 173,756 12,487 7.20 122,257 11,237 9.20 8.60
Other assets 20,737 12,008 11,497
------- ------- -------
Total 229,731 $185,764 $133,754
======= ======= =======
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $19,393 607 3.10% $19,168 $545 2.80% $13,504 $385 2.90% 3.00%
NOW 27,794 419 1.50 20,439 326 1.60 12,892 255 2.00 1.50
Money market 14,067 437 3.30 7,825 368 4.70 7,365 234 3.20 3.00
Certificate of deposits 105,659 4,781 4.50 89,494 3,494 3.90 72,572 3,445 4.70 5.40
Borrowed money 18,829 1,153 6.10 17,445 779 4.50 2,024 241 11.90 7.20
------ ------ ----- ------ ----- ----- ------ ----- ----- -----
Total interest-bearing
liabilities 185,742 7,397 3.90 154,371 5,512 3.60 108,357 4,560 4.20 4.55
------ ------ ----- ------ ------ ----- ------ ----- ----- -----
Non-interest-bearing
deposits 10,428 8,243 8,724
Other liabilities 13,115 6,576 8,315
Shareholders' equity 20,446 16,574 8,358
------ ------ -----
Total liabilities and
shareholders' equity $229,731 185,764 $133,754
======= ======= =======
Net interest/income
rate spread $8,891 4.00% $6,975 3.60% $6,677 5.00% 4.05%
====== ==== ======= ==== ====== ===== ======
Net average interest-
earning assets/net
yield on average
interest-earning assets $24,252 4.25% $19,385 4.00% $13,900 5.50%
====== ==== ======= ===== ======= =====
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 1.13x 1.13x 1.13x
===== ===== =====
</TABLE>
<TABLE>
Net interest income before provision for losses can be analyzed in terms of
the impact of changing rates and changing volumes of interest-earning assets and
liabilities. The following table sets forth certain information regarding
changes in net interest income due to changes in the average balance of
interest-earning assets and interest-bearing liabilities and due to changes in
average rates for the periods indicated. For purposes of this table,
rate/volume changes have been allocated solely to rate changes and non-accrual
loans are included in average balances.
<CAPTION>
YEAR ENDED MARCH 31,
1995 versus 1994 1994 versus 1993
Increase (decrease) due to Increase (decrease) due to
change in: change in:
Average Average Net Average Average Net
Rate Volume Change Rate Volume Change
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans - net $(23) $3,752 $3,729 $(2,257) $3,008 $751
Interest-bearing deposits 307 (145) 162 (366) 281 (85)
Investments 622 (712) (90) (294) 878 584
--- --- --- --- --- ---
906 2,895 3,801 (2,917) 4,167 1,250
--- --- --- --- --- ---
Interest expense:
Savings deposits 55 7 62 (1) 161 160
NOW accounts (18) 111 93 (78) 149 71
Money Market (125) 194 69 119 15 134
Certificates of Deposit 556 731 1,287 (754) 803 49
Borrowed money 289 85 374 (1,298) 1,836 538
--- --- --- --- --- ---
757 1,128 1,885 (2,012) 2,964 952
--- --- --- --- --- ---
Net Interest Income $149 $1,767 $1,916 $(905) $1,203 $ 298
==== ===== ===== ===== ===== =====
</TABLE>
Net interest income increased 27% in 1995 compared to 1994 primarily due
to an increase in loan volume during 1995 offset by an increase in the rate and
volume of interest-bearing liabilities of $1.9 million. Net interest income
remained flat from 1993 to 1994 as the increase in loan and deposit volumes were
offset by the decrease in interest rates during the period.
Gain on Sales of Loans and Servicing Rights
Due to a decrease in loan production volume gain on sales of loans and
servicing rights decreased $2.48 million in 1995 compared to 1994. The decrease
in mortgage banking activities is attributable to the increase in interest rates
which decreased the volume of loan originations and refinancings. Gain on sales
of loans and servicing rights remained relatively flat from 1993 to 1994.
Provision for Loan Losses
The provision for loan losses did not significantly change from 1994 to
1995. The provision for loan losses reflects management's assessment of the
adequacy of the allowance for loan losses. The amount of future provisions is a
function of the ongoing evaluation of the allowance for loan losses which
considers the characteristics of the loan portfolio, economic conditions, and
other relevant factors. The provision for loan losses was significantly higher
in 1993 than in 1994 due to poor economic conditions in South Florida during
1991, 1992, and 1993.
Loan Servicing Income and Amortization of Loan Servicing Rights
Net loan servicing income increased $428,000 in 1995 compared to 1994 due
to an increase in the amount of loans serviced and a decrease in the
amortization of loan servicing rights. The decrease in amortization of loan
servicing rights is due to a decrease in loan prepayment speeds. Net loan
servicing loss decreased from $1.40 million in 1993 to $185,000 in 1994. The
decrease is due to a decrease in the amortization of loan servicing rights in
1994.
Operating Expenses
Operating expenses increased from $8.74 million in 1994 to $9.86 million
in 1995. The increase is primarily due to increases in employee compensation
and benefits, occupancy and equipment, and data processing. These increases are
a result of the Bank's growth in 1995 and the employee costs associated with
reducing staffing levels. Growth in 1995 included expansion of the banking
center network from five branches in 1994 to seven branches in 1995 and the
addition of item processing and proof-of-deposit departments as well as growth
in the commercial/consumer loan and loan servicing departments. Other causes
of the increase are higher volumes of deposit transaction accounts and
additional expenses associated with operations acquired as a result of the
merger. Operating expenses increased from $6.93 million in 1993 to $8.74
million in 1994. The majority of the increase was the result of additional loan
production activity during 1994. Occupancy and equipment and data processing
expenses also contributed to the increase. These increases are the result of
increased volume in deposit and loan accounts as well as overall growth.
Operating expenses however, as a percent of average total assets, has remained
relatively stable over the three year period at 4.3%, 4.7%, and 5.2% for the
years ended March 31, 1995, 1994, and 1993, respectively.
Change in Accounting for Income Taxes
The change in accounting for income taxes benefit of $500,000 in the
fiscal year ended March 31, 1994 was the result of the Company's adoption of
SFAS No. 109. This change is a one time benefit that will not recur in future
years.
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial
information presented in this annual report have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or same magnitude as the price of
goods and services.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION> MARCH 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $3,566 $3,408
Interest-bearing deposits in other financial institutions 14,050 9,746
Investments held to maturity (market value of $14,229
and $257 in 1995 and 1994, respectively) 14,153 249
Investments - trading 32 24,232
Real estate mortgages-held for sale (market value of $1,819) 1,805
Loans receivable - net 226,611 154,375
Property and equipment - net 6,103 4,016
Real estate owned 2,338 2,790
Loan servicing rights 2,796 775
Premium on sale of loans 485 689
Accrued interest receivable 2,041 985
Other assets 7,864 3,567
------ -----
TOTAL $280,039 $206,637
====== =====
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Deposits $229,735 $156,651
Federal Home Loan Bank advances 15,000 20,000
Securities sold under agreements to repurchase 2,748
Redeemable subordinated debentures 1,985 1,995
Advances from borrowers for taxes and insurance 1,598 1,445
Bank drafts payable 4,148 4,425
Other liabilities 4,379 2,473
------ -----
Total liabilities 259,593 186,989
------ -----
<CAPTION>
Commitments and contingencies
<S> <C> <C>
Shareholders' equity:
Preferred stock $10.00 par value; 10,000,000 shares
authorized; 402,500 shares issued and outstanding at
March 31, 1995 and 1994 4,025 4,025
Common stock $.01 par value; 20,000,000 shares authorized;
3,652,743 and 3,609,979 shares issued and outstanding at
March 31, 1995 and 1994, respectively 36 36
Additional paid-in capital 14,363 14,213
Retained earnings 2,022 1,374
------ -----
Total shareholders' equity 20,446 19,648
------ -----
TOTAL $280,039 $206,637
====== =====
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION> YEAR ENDED MARCH 31,
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $15,254 $11,525 $10,774
Interest and dividends on investments 1,034 962 463
------ ------ ------
16,288 12,487 11,237
------ ------ ------
INTEREST EXPENSE:
Interest on deposits 6,244 4,733 4,319
Interest on short-term borrowings 935 559 1
Interest on long-term borrowings 218 220 240
------ ------ ------
7,397 5,512 4,560
------ ------ ------
Net interest income 8,891 6,975 6,677
Provision for loan losses 200 214 1,003
------ ------ ------
Net interest income after
provision for loan losses 8,691 6,761 5,674
------ ------ ------
NON-INTEREST INCOME:
Mortgage banking income 1,788 3,654 2,626
Other income 1,211 735 432
------ ------ ------
2,999 4,389 3,058
------ ------ ------
OPERATING EXPENSES:
Employee compensation and benefits 4,595 4,109 3,167
Occupancy and equipment 1,488 1,201 803
Professional fees 652 707 653
Advertising and promotion 233 268 233
Outside services 232 163 177
Communications 352 332 285
Data processing 307 211 130
Insurance 570 556 413
Real estate owned - net 70 127 199
Other 1,361 1,065 872
------ ------ ------
9,860 8,739 6,932
------ ------ ------
Income before income taxes
and accounting change 1,830 2,411 1,800
Income taxes 663 818 582
------ ------ ------
Income before accounting change 1,167 1,593 1,218
Change in accounting for income taxes 500
------ ------ ------
NET INCOME $1,167 $2,093 $1,218
====== ====== ======
Income per common share:
Income before extraordinary item
and accounting change $.23 $.42 $.50
Change in accounting for income taxes .13
------ ------ ------
Net income $.23 $.55 $.50
====== ====== ======
Average common shares and common stock
equivalents outstanding (in thousands) 4,474 3,927 2,895
====== ====== ======
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
Additional Retained
Preferred Common Paid-in Earnings
Stock Stock Capital (Deficit)
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1992 $15 $7,217 $(128)
401(K) Plan - 12,010 shares 48
Stock Grants - 17,917 shares 75
Repurchase of - 15,661 shares (70)
Common stock issued in connection
with purchase of Homestead Federal
Savings Bank - 575,325 shares 5 2,413
Net income 1,218
---- ---- ---- ----
BALANCE, MARCH 31, 1993 20 9,683 1,090
Stock dividends - 377,303 shares 4 1,525 (1,529)
Stock grants - 6,352 shares 22
401(K) Plan - 14,582 shares 50
Cash dividends - common stock (116)
Cash dividends - preferred stock (164)
Exercise of equity contracts - 6,557 shares 21
Issuance of preferred stock - 402,500 shares $4,025 (550)
Issuance of common stock - 1,150,000 shares 12 3,462
Net income 2,093
---- ---- ---- ----
BALANCE, MARCH 31, 1994 4,025 36 14,213 1,374
Issuance of common stock
for fixed asset purchase - 7,701 shares 27
Stock grants - 9,196 shares 38
Exercise of stock options - 4,337 shares 10
Exercise of equity contracts - 13,786 shares 40
401 (K) Plan - 7,744 shares 35
Cash dividends - common stock (217)
Cash dividends - preferred stock (302)
Net income 1,167
---- ---- ---- ----
BALANCE, MARCH 31, 1995 $4,025 $36 $14,363 $2,022
===== ==== ===== =====
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<CAPTION>
YEAR ENDED MARCH 31,
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $1,167 $2,093 $1,218
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for loan and real estate losses 291 300 1,194
Provision for depreciation 459 410 274
Deferred income taxes 139 100 518
Amortization of loan servicing rights
and premium on sale of loans 505 1,218 2,922
Amortization of deferred loan fees and costs (215) (439) (764)
Amortization of goodwill 73
Gain on sale of loans and servicing (1,175) (3,657) (3,844)
Loan costs deferred (471) (894) (955)
Loans originated for sale (48,157) (139,393) (122,272)
Purchase of loans for sale (5,140) (20,759) (1,704)
Sale of loans and loan participation certificates 55,102 142,274 132,988
Proceeds from the sale of investments - trading 24,000
Purchase of investments held for trading (24,233)
Loss on investments trading 200
Other - net (1,962) 440 103
------ ------- ------
Net cash provided by (used in) operating activities 28,740 (42,540) 9,678
------ ------- ------
INVESTING ACTIVITIES:
Cash and cash equivalents acquired in
mergers-net 1,819 12,589
Maturities of investments 1,350
Loans purchased for investment (1,053) (26,450)
Loans originated for investment (67,990) (13,950) (27,671)
Principal collected on loans 35,034 37,313 34,933
Purchase of property and equipment (2,295) (1,745) (2,253)
Purchase of loan servicing rights (2,322)
Other - net 1,408 74 1,333
------ ------- ------
50<PAGE>
Net cash provided by (used in)
investing activities (34,049) (4,758) 18,931
------ ------- ------
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposit,
NOW accounts, Money Market
accounts and savings accounts (1,414) 7,922 10,425
Proceeds from sales of certificates of deposit 56,414 39,402 30,838
Payment for maturing certificates of deposits (40,185) (36,584) (54,467)
Sale of common and preferred stock -
net of stock issuance costs 6,949
Net increase (decrease) from short-term borrowings 233 (35)
(Decrease) increase in FHLB advances (5,000) 20,000
Cash dividends (519) (280)
Other - net 242 (2,776) 216
------ ------- ------
Net cash provided by (used in)
financing activities 9,771 34,633 (13,023)
------ ------- ------
Increase (decrease) in cash and cash equivalents 4,462 (12,665) 15,586
Cash and cash equivalents at beginning of year 13,154 25,819 10,233
------ ------- ------
Cash and cash equivalents at end of year $17,616 $13,154 $25,819
====== ======= ======
<FN>
See notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Republic Security Financial
Corporation and subsidiaries conform to generally accepted accounting
principles and to general practices within the savings and loan and
mortgage banking industries. The following is a summary of the
significant accounting policies.
Principles of Consolidation
The consolidated financial statements include the accounts of
Republic Security Financial Corporation (the "Company" or "RSFC") and its
wholly-owned subsidiary, Republic Security Bank, (the "Bank"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds sold. The
Company paid $512,000, $180,000, and $630,000 of income tax payments
during the years ended March 31, 1995, 1994, and 1993, respectively. The
Company paid $6,634,000, $5,471,000 and $4,590,000 of interest on deposits
and other borrowings during the years ended March 31, 1995, 1994, and
1993, respectively. Approximately $1,367,000, $2,258,000, and $1,317,000
was transferred from loans to REO during 1995, 1994, and 1993,
respectively. In addition, assets of $64,307,000 were acquired and
$62,310,000 liabilities assumed related to the merger of Governors Bank
during 1995.
Trading Account Assets
Trading account assets are held for resale in anticipation of short-
term market movements. Trading account assets, consisting of adjustable
rate mortgage funds are stated at fair value. Realized and unrealized
gains and losses on trading securities are included in other non-interest
income. Dividends earned on trading account assets are included in
interest and dividends on investments.
Securities Held To Maturity
Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Debt securities are classified as held to
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Held to maturity securities are stated at
amortized cost.
Real Estate Mortgages - Held for Sale
Real estate mortgages held for sale are valued at the lower of cost
or market considering outstanding forward commitments to sell loans to
investors. All mortgage loans held for sale are committed for sale to
secondary market investors under firm agreements at or prior to closing
date on the individual loan. Fees and costs associated with originating
mortgage loans sold are considered in determining the gain or loss on sale
of loans.
Allowance for Loan Losses
The allowance for loan losses is established by provision for loan
losses charged against earnings. In evaluating the adequacy of the
allowance for loan losses, management considers the loan portfolio, past
loan loss experience, current economic conditions, workout arrangements,
fair value of the underlying collateral, and other relevant factors.
While management believes the allowance for loan losses is adequate for
losses in the loan portfolio, additional provisions for potential loan
losses may be necessary in future periods should economic or other factors
change substantially.
In May 1993, the Financial Accounting Standards Board issued
Statement No. 114, "Accounting by Creditors for Impairment of Loans" (SFAS
No.114), which is effective for fiscal years beginning after December 15,
1994. The new standard requires impaired loans within the scope of SFAS
No.114 be measured based on discounted cash flows using the loan's
effective interest rate or the fair value of the collateral for collateral
dependent loans. The Company will adopt SFAS No.114 effective April 1,
1995. The adoption of SFAS No.114 will not have a material impact on the
financial condition or operations of the Company.
Real Estate Owned
Property acquired by foreclosure, or deed in lieu of foreclosure,
and loans considered in-substance foreclosure are recorded at the lower of
the loan balance or estimated fair value minus estimated costs to sell at
the time of foreclosure or deemed in-substance foreclosure. Costs related
to the development and improvement of the property are capitalized,
whereas costs related to maintaining the property are charged to real
estate owned expense. In addition, any subsequent reductions in the
valuation of the property is included in real estate owned expense. All
real estate loans 60 days or more past due are classified as in-substance
foreclosure.
Loans Receivable
Loans receivable are stated at the principal amount outstanding plus
or minus any purchased premiums or discounts. Interest on loans is
accrued as earned. Amortization of premiums and accretion of discounts
are recognized as adjustments to interest income over the lives of the
related loans. Loans contractually past due 60 days or more are placed on
non-accrual and any previously accrued and unpaid interest is charged
against interest income. Loans remain on non-accrual status until the
obligation is brought current and has performed in accordance with the
terms of the loan for a reasonable period of time. Accrual of interest
on loans is discontinued when, in the opinion of management, reasonable
doubt exists as to the full, timely collection of interest or principal.
The Bank defers substantially all loan fees and direct costs associated
with loan originations. Deferred loan fees and costs are amortized as a
yield adjustment over the life of the loan.
Property and Equipment
Property and equipment is carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over
the estimated useful lives of the assets ranging from five to twelve years
for furniture and equipment and twenty-five years for office buildings.
Leasehold improvements are amortized over the lesser of the lease terms or
the assets' estimated useful lives. Repairs and maintenance is charged to
expense and gains or losses on disposals are credited or charged to
earnings.
Income per Common Share
Income per common share is computed by dividing net income less
preferred stock dividends by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period.
Common stock equivalents consisting of stock options, warrants, and equity
contracts are included in the computation of earnings per share using the
treasury stock method.
Income Taxes
Effective April 1, 1993, deferred income taxes are accounted for
under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes (SFAS No. 109)". Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities, and their respective tax basis. To the extent
current available evidence raises doubt about the future realization of a
deferred tax asset, a valuation allowance must be established. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109,
the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enacted rate.
Prior to the adoption of SFAS No. 109, income tax expense was determined
using the deferred method, whereby deferred tax expense was based on items
of income and expense that were reported in different years in the
financial statements and tax returns and were measured at the tax rate in
effect in the year the difference originated.
Reclassification
Certain amounts in the 1994 and 1993 financial statements have been
reclassified to conform with the 1995 presentation.
2. MERGER
On November 30, 1994, the Company acquired Governors Bank
Corporation (Governors) for $5,154,000, plus $153,000 in merger related
costs. Governors was a state chartered commercial bank headquartered in
West Palm Beach, Florida. The acquisition was accounted for as a purchase
and approximately $3.3 million in goodwill was recognized representing the
acquisition cost in excess of the fair value of the net assets acquired.
Goodwill is being amortized over 15 years using the straight-line method.
<TABLE>
The following summarizes the fair value of the Governors' assets
acquired and liabilities assumed:
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash $6,973
Investment securities 15,160
Loans, net 40,283
Accrued interest receivable 513
Other assets 1,378
------
TOTAL ASSETS $64,307
Deposits $58,140
Accrued interest payable 874
Securities sold under repurchase agreements 2,515
Other liabilities 781
-----
TOTAL LIABILITIES 62,310
-----
NET ASSETS ACQUIRED $1,997
======
</TABLE>
<TABLE>
Pro forma financial information for RSFC, as if the merger had taken
place as of April 1, 1994 and 1993, for income and per share data is as
follows:
<CAPTION>
(IN THOUSANDS)
YEAR ENDED MARCH 31,
1995 1994
<S> <C> <C>
Total interest income $19,702 $18,268
====== ======
Net interest income after provision for loan losses $10,625 $6,431
====== ======
Income before taxes and cumulative effect of
accounting change $2,357 $191
====== ======
Net income $1,507 $507
====== ======
Net income per common share $.30 $.14
====== ======
</TABLE>
The year ended March 31, 1994 includes a $3.2 million provision for
loan losses attributable to the Governors' loan portfolio while the year
ended March 31, 1995 includes a $102,000 provision related to the
Governors' loan portfolio.
On January 22, 1993, RSFC merged with Homestead Federal Savings Bank
("HFSB"). HFSB was a federally chartered savings bank with headquarters
in Homestead, Florida. The merger was accounted for as a purchase under
generally accepted accounting principles where the Company issued 575,325
shares of its common stock and 442,558 warrants to acquire the common
stock of HFSB. The term of the warrants is three years from the date of
merger and entitles the holder to purchase one share of RSFC stock, per
warrant, at a price of $3.90 per share. Assets and liabilities acquired
included approximately $12.6 million in cash, $28.9 million in net loans,
$2.7 million in investments, and $41.8 million in deposits. The results
of operations of HFSB are included within the results of the Company since
January 23, 1993.
3. INVESTMENTS
<TABLE>
The following is a summary of held to maturity securities at March
31:
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE YIELD
(in thousands)
<S> <C> <C> <C> <C> <C>
1995
U.S. Government securities $13,528 $78 $13,606 7.20%
Foreign Government securities 75 75 7.50%
Other debt securities 550 $2 548 5.70%
------ ---- --- ------ ------
TOTAL DEBT SECURITIES $14,153 $78 $2 $14,229 7.15%
====== ==== === ====== ======
1994
U.S. Government securities $199 $8 $207 7.50%
Other 50 50 2.50%
------ ---- --- ------ ------
TOTAL DEBT SECURITIES $249 $8 $257 6.50%
====== ==== === ====== ======
</TABLE>
At March 31, 1995 and 1994, securities with a book value of $5,409,000 and
$199,000, respectively, were pledged to collateralize repurchase agreements,
public deposits and other items.
<TABLE>
The amortized cost and estimated market value of debt securities at March
31, 1995 by contractual maturity are shown below:
<CAPTION>
AMORTIZED MARKET
(in thousands) COST VALUE
<S> <C> <C>
Due in 1 year or less $7,804 $7,781
Due after 1 through 5 years 6,224 6,323
Due after 5 years through 10 years 125 125
----- ------
$14,153 $14,229
===== ======
</TABLE>
Net unrealized holding gains on trading securities amounted to $551,000
for the year ended March 31, 1994, and is included in interest and dividends on
investments. Realized losses on trading securities for the year ended March 31,
1995, amounted to ($200,000) and is included in other non-interest income.
4. LOANS RECEIVABLE - NET
<TABLE>
Loans receivable - net is summarized as follows:
<CAPTION> (IN THOUSANDS)
YEAR ENDED MARCH 31, 1995 1994
<S> <C> <C>
Real estate mortgage $150,446 $117,607
Real estate construction 48,385 50,924
Installment loans to individuals 36,285 7,641
Commercial and financial 16,484 2,356
------ -------
Total loans 251,600 178,528
Deferred loan fees (921) (740)
Discount on loans purchased (656) (258)
Premium on loans purchased 555 792
Undisbursed portion of loans-in- process (21,460) (22,876)
Allowance for loan losses (2,507) (1,071)
------ -------
Loans receivable - net $226,611 $154,375
====== =======
</TABLE>
5. NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The Bank's non-performing assets consist of real estate owned ("real
estate owned"), loans which are 60 days or more past due, and repossessed
assets. Non-performing assets as of March 31, 1995 and 1994 were
$3,436,000 and $3,228,000, respectively, of which $2,338,000 and
$2,790,000, respectively, was real estate owned and $981,000 and $438,000,
respectively was loans 60 days or more past due. Interest income not
recognized on such loans was $15,000 and $7,000 during 1995 and 1994,
respectively.
Although management uses its best judgement in underwriting each
loan, industry experience indicates that a portion of the Bank's loans
will become delinquent. Regardless of the underwriting criteria utilized
by financial institutions losses may be experienced as a result of many
factors beyond their control including, among other things, changes in
market conditions affecting the value of security and unrelated problems
affecting the credit of the borrower. Due to the concentration of loans
in South Florida, adverse economic conditions in this area could result in
a decrease in the value of a significant portion of the Bank's collateral.
<TABLE>
An analysis of changes in the allowance for loan losses is
summarized as follows:
<CAPTION>
(IN THOUSANDS)
YEAR ENDED MARCH 31, 1995 1994 1993
<S> <C> <C> <C>
Beginning balance $1,071 $1,247 $775
Reserves acquired
during merger 1,399 319
Provision for losses 200 214 1,003
Recoveries 454 362 146
Charge-offs (617) (752) (996)
---- ---- ----
Ending balance $2,507 $1,071 $1,247
===== ===== =====
</TABLE>
The Bank follows the practice of reducing the carrying value of
individual properties in real estate owned for any amounts in excess of
the fair value of properties. Provision for real estate losses during the
years ended March 31, 1995, 1994, and 1993 totaled $91,000, $86,000, and
$191,000, respectively, and is included in real estate owned expense on
the consolidated statement of income.
6. CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS
The Bank is required to maintain a non-interest-bearing reserve
balance with the Federal Reserve Bank. The average reserve balance was
approximately $4.5 million in 1995.
7. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment is summarized as follows:
<CAPTION>
(in thousands)
MARCH 31,
1995 1994
<S> <C> <C>
Office building $4,707 $2,961
Leasehold improvements 410 305
Furniture & equipment 2,607 1,950
----- -----
Total 7,724 5,216
Less accumulated depreciation 1,621 1,200
----- -----
Property and equipment-net $6,103 $4,016
===== =====
</TABLE>
Rent expense for the years ended March 31, 1995, 1994, and 1993, was
$419,000, $418,000, and $329,000, respectively.
8. MORTGAGE BANKING ACTIVITIES
The Bank purchases and sells whole and participating interests in
loans. Mortgage loans held for sale are reported at the lower of cost or
market value on an aggregate loan basis as of the balance sheet date.
When loans are sold, a gain or loss is recognized to the extent that the
sales proceeds exceed or are less than the carrying value of the loans.
Additionally, gain is recorded on the present value of net servicing fees
over the expected life of the loans, which results in capitalization of
the net servicing rights. Capitalized loan servicing rights are amortized
using the interest method over the expected life of the loan.
The Bank is also engaged in the business of acquiring the rights to
service mortgage loans for others. The costs incurred to acquire such
rights are capitalized and amortized using the interest method in
proportion to, and over the period of, estimated net servicing income
(servicing revenue in excess of servicing costs) and are reflected on the
consolidated statements of financial condition as loan servicing rights.
At March 31, 1995, 1994, and 1993, the Bank serviced mortgage loans
for others in the amount of $323 million, $189 million, and $267 million,
respectively. Accumulated amortization relating to premiums on sale of
loans was $4,817,000 and $4,613,000 for the years ended March 31, 1995 and
1994, respectively. Accumulated amortization relating to loan servicing
rights was $4,976,000 and $4,675,000 for the years ended March 31, 1995
and 1994, respectively.
<TABLE>
The amount capitalized and amortized relating to premiums on sale of
loans and loan servicing rights for the years ended March 31, 1995, 1994,
and 1993 are included in the table below:
<CAPTION>
PREMIUM LOAN
ON SALE SERVICING
OF LOANS RIGHTS TOTAL
(in thousands)
<S> <C> <C> <C>
Balance March 31,1992 $ 2,838 $2,695 $5,533
Amortization (1,641) (1,281) (2,922)
------ ------ ------
Balance March 31, 1993 1,197 1,414 2,611
Amount Capitalized 71 71
Amortization (579) (639) (1,218)
------ ------ ------
Balance March 31, 1994 689 775 1,464
Amount Capitalized 2,322 2,322
Amortization (204) (301) (505)
------ ------ ------
Balance March 31, 1995 $485 $2,796 $3,281
====== ====== ======
</TABLE>
The amount of aggregate gains on sales of servicing included in operations
in 1995, 1994, and 1993 was $299,000, $708,000 and $749,000, respectively.
9. DEPOSITS
<TABLE>
The weighted-average nominal rate payable on all deposits at March
31, 1995 and 1994, was 4.0% and 3.1%, respectively. The nominal rates at
which the Bank incurred interest on deposits and related balances of such
deposits are as follows:
<CAPTION>
(in thousands)
MARCH 31,
1995 1994
<S> <C> <C>
Non-interest bearing accounts $26,149 $6,027
NOW accounts (2.0%) 26,688 25,498
Savings accounts (2.85%) 19,395 19,885
Money Market deposit account (2.88%) 14,581 12,217
Certificate accounts:
Up to 3.0% 3,124
3.01% to 3.5% 884 24,666
3.51% to 4.0% 6,884 43,851
4.01% to 4.5% 14,590 11,161
4.51% to 5.0% 23,026 3,254
5.01% to 5.5% 20,988 3,180
5.51% to 6.0% 27,587 1,000
6.01% to 6.5% 38,440 165
6.51% to 7.0% 6,285 1,072
Over 7.0% 4,238 1,551
------ -----
Total certificates 142,922 93,024
------ -----
TOTAL $229,735 $156,651
======= =======
</TABLE>
<TABLE>
The Bank incurred interest on deposits as follows:
<CAPTION>
(IN THOUSANDS)
YEAR ENDED MARCH 31, 1995 1994 1993
<S> <C> <C> <C>
Savings accounts $607 $545 $385
NOW accounts 419 326 255
Money market deposit accounts 437 368 234
Certificate accounts 4,781 3,494 3,445
----- ----- -----
TOTAL $6,244 $4,733 $4,319
===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
The amounts and scheduled maturities of The amounts and scheduled maturities of
certificate accounts at March 31, 1995 are as certificate accounts in the amount of $100,000 or
follows (IN THOUSANDS): more at March 31, 1995 are as follows (IN
THOUSANDS):
<S> <C> <S> <C>
Within 12 months $121,184
12 to 24 months 10,835 Within 3 months $2,876
24 to 36 months 4,468 3 to 6 months 5,067
36 to 48 months 5,949 6 to 12 months 4,233
Over 48 months 486 Over 12 months 2,496
------ ------
Total $142,922 Total $14,672
======== =======
</TABLE>
10. BORROWED MONEY
<TABLE>
The Bank has entered into an agreement with the Federal Home Loan
Bank ("FHLB") which enables the Bank to obtain advances that are
collateralized by FHLB stock and mortgage loans. In accordance with the
agreement the Bank has pledged as collateral loans with principal balances
of approximately $44,435,000 and $48,000,000 at March 31, 1995 and 1994,
respectively. Outstanding advances from the Federal Home Loan Bank
consisted of the following:
<CAPTION>
(IN THOUSANDS) MARCH 31,
MATURE DURING 1995 1994 INTEREST RATE
<S> <C> <C> <C>
1995 $10,000 3.84%
1996 $15,000 10,000 6.08% to 6.35%
------- ------
$15,000 $20,000
======= =======
</TABLE>
At March 31, 1995, the Company has outstanding $1,985,000 of
redeemable subordinated debentures (the "Debentures") due May 1, 1999
bearing interest of 11.5%, and cancelable mandatory stock purchase
contracts ("Equity Contracts") requiring the purchase of $1,985,000 in
common stock at a price of $2.90 per share no later than May 1, 1996.
Interest on the Debentures is payable quarterly on the 15th day of
January, April, July, and October, and commenced on July 15, 1989. Each
Debenture bears interest from the date of issuance. The Debentures are
subordinate and junior in right of payment to certain present and future
indebtedness of the Company. The Debentures are unsecured debt
obligations of the Company, are not obligations of the Bank, and are not
insured.
The Equity Contracts are considered common stock equivalents and are
included in income per share calculations.
On March 29, 1995, the Company's outstanding redeemable subordinated
debentures and cancelable mandatory stock purchase contracts were called
for redemption. Upon surrender of the Debentures, and at the option of
the Bondholder, the Bondholder will receive a number of shares of the
Company's common stock equal to the principal amount of the Debenture
dividend by the adjusted per share price of $2.90 or cash equal to 104% of
the principal amount of the Debenture. The maximum number of common
shares that may be issued related to the redemption of the Debentures is
approximately 684,000.
During 1995, the Bank entered into sales of securities under
agreements to repurchase. Variable rate reverse repurchase agreements are
treated as financings, and the obligations to repurchase securities sold
are reflected as liabilities in the consolidated statement of financial
condition at March 31, 1995. Securities sold under agreements to
repurchase are collateralized by U.S. Government Treasury notes and U.S.
Government agency notes with an aggregate carrying value of $3,963,000,
accrued interest of $51,000, and a market value of $4,002,000 at March 31,
1995. All agreements mature daily and have a weighted interest rate of
5.96% at March 31, 1995. All securities underlying agreements are held by
an independent safekeeping agent and all agreements are to repurchase the
same securities. Securities sold under agreements to repurchase averaged
$623,000 during the year ended March 31, 1995, and the maximum amount
outstanding at any month-end during 1995 was $2,748,000. No securities
were sold under agreements to repurchase during 1994.
11. SHAREHOLDERS' EQUITY
Regulations require savings institutions to maintain "core capital"
of at least 3% of adjusted total assets, "tangible capital" of at least
1.5% of adjusted total assets and "risk-based capital" of at least 8% of
risk-weighted assets. In the event of a capital shortfall, a savings
institution could be precluded from paying dividends and would become
subject to certain restrictions on operations.
<TABLE>
The following table shows the capital amounts and ratios of the Bank
as compared to regulatory requirements at March 31, 1995:
<CAPTION>
CAPITAL REQUIREMENT THE BANK REGULATORY REQUIREMENT
<S> <C> <C>
Core 6.0% 3.0%
Tangible 6.0% 1.5%
Risk-based capital 11.0% 8.0%
</TABLE>
The Company's ability to pay cash dividends on its common stock is
limited to the amount of dividends it could receive from the Bank plus its
own cash and cash equivalents. At March 31, 1995, these amounts were
$3,587,000 and $1,018,000, respectively. The amount of dividends the Bank
is permitted to pay to the Company is restricted by regulation to 100% of
its calendar year to date net income plus 50% of the amount in excess of
the required regulatory capital at the beginning of the year.
<TABLE>
The balance, activity, exercise price, and expiration dates of the
Company's options, warrants, and equity contracts for the years ended
March 31, 1995, 1994, and 1993 are as follows:
<CAPTION>
EQUITY
OPTIONS WARRANTS CONTRACTS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance March 31, 28,014 97,024 80,707 1,334 165,216 674,754
1992
Issued 408,924
Expired (4,002)
------ ------ ------ ----- ------ ------ ------ ------
Balance March 31, 24,012 97,024 80,707 1,334 165,216 408,924 674,754
1993
Issued 42,000 102,229
Expired (4,622)
------ ------ ------ ----- ------ ------ ------ ------
Balance March 31, 19,390 97,024 80,707 1,334 42,000 165,216 511,153 674,754
1994
Expired (3,622)
Exercised (1,000) (2,003) (1,334) (13,786)
------ ------ ------ ----- ------ ------ ------ ------
Balance March 31, 14,768 97,024 78,704 0 42,000 165,216 511,153 660,968
1995
====== ====== ====== ===== ====== ====== ======= ========
Exercise Price $2.50 $2.48 $2.62 $2.08 $3.33 $5.00 $3.90 $2.90
Expiration Date(Annually) 4,622 9/25/01 2/24/98 2/24/98 6/1/03 11/1/00 1/22/96 5/1/96
</TABLE>
In December 1994, the Company granted stock options to purchase
20,000 shares of the Company's common stock at various option prices
ranging from $4.50 per share to $6.50 per share. The grant was made with
certain vesting terms of which none of the conditions have occurred as of
March 31, 1995. The options expire in December 1997.
The Company issued 5% and 10% stock dividends on January 21, 1994,
and April 1, 1993, respectively. All references in the consolidated
financial statements and notes to amounts per common share and to number
of common shares have been restated to give retroactive effect for these
stock dividends.
During the year ended March 31, 1990, the Company adopted a
restricted stock award plan for key executive officers and awarded 9,196,
6,352, and 17,917 shares of common stock under the plan during the years
ended March 31, 1995, 1994, and 1993, respectively. The Company has
reserved 100,000 shares of common stock for this plan.
All stock grants by the Company have been at the fair market value
of the stock on the date of grant.
During September, 1993, the Company issued 1,150,000 and 402,500
shares of common and cumulative and non-voting preferred stock,
respectively. Each share of Series A Preferred can be convertible at any
time, at the option of the holder, into 2.47 shares of common stock at a
conversion price of $4.05 per common share. The preferred stock bears a
dividend rate of 7.5% on its face value of $10.00 per share. The
preferred stock can be redeemed at the option of the Company at any time
on or after June 30, 1998, at a redemption price ranging from $10.40 per
share to $10.00 per share, subject to certain events.
In 1995, the Company adopted a shareholder rights plan. Under the
terms of the plan, preferred share purchase rights will be distributed as
a dividend at the rate of one right for each share of common stock held as
of April 14, 1995. Each right will entitle the holder to buy 1/100th of a
share of Series B Junior Participating Preferred Share at an exercise
price of $18.00 per share. Each preferred share fraction will have voting
and dividend rights equivalent to one common share. The rights become
exercisable upon the occurrence of certain events as defined in the
Shareholder Rights Plan and expire April 4, 2005.
12. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments primarily include commitments to
extend credit.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments is represented
by the contractual notional amount of those instruments. The Bank uses
the same credit policies in making commitments as it does for on-balance
sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The total
commitment amounts do not necessarily represent future cash requirements
as some commitments expire without being drawn upon. The Bank evaluates
each customer's credit worthiness on a case by case basis. The amount of
collateral obtained if deemed necessary by the Bank upon extension of
credit is based on management's credit evaluation of the counterparty.
At March 31, 1995, the Bank had adjustable rate commitments to
extend credit of $18,627,000 excluding the undisbursed portion of loans in
process. These commitments are primarily for commercial lines of credit
secured by commercial real estate or other business assets and one-to-four
family residential properties.
<TABLE>
The Company and its subsidiaries have entered into
noncancellable operating leases with future minimum lease payments of the
following:
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996 $609
1997 529
1998 480
1999 329
2000 87
Thereafter 19
------
$2,053
======
</TABLE>
Certain leases contain provisions for renewal and for rents to
adjust with the consumer price index. In addition, the Company subleases
portions of the leased space. Future minimum lease payments to be
received by the Company amounts to $73,000, $74,000, and $54,000 in 1996,
1997, and 1998, respectively.
The Company has a non-qualified unfunded retirement plan for three
present and one former executive of the Company. Pension costs consisting
of service costs and interest costs amounted to $90,000, $129,000, and
$131,000 for the years ended March 31, 1995, 1994, and 1993,
respectively. The retirement benefit to the employee will range between
30% to 70% of his or her average base salary for the last three years of
employment and will commence no earlier than age 55 nor later than age
62. A discount rate of 8% and a rate of compensation increase of 5%
is used to measure the projected benefit obligation. The net pension
liability (all vested) at March 31, 1995 and 1994 was $578,000 and
$550,000, respectively.
In October 1991, the Company established a 401(K) plan covering
substantially all full-time hourly and salary employees. The employer
contribution to the 401(K) plan is determined annually by the Board of
Directors. Expense under the plan for the years ended March 31, 1995,
1994 and 1993 amounted to $95,000, $59,000, and $44,000, respectively.
The Company has employment agreements with two executives which
provide for severance arrangements in the event of involuntary termination
from a change in control (as defined) of the Company.
In addition to the above commitments and contingencies, there are
various matters of litigation pending against the Company that management
has reviewed with legal counsel. Management believes that the aggregate
liability or loss, if any, resulting from such litigation will not be
material to the consolidated financial statements.
13. RELATED PARTY TRANSACTIONS
A Director of the Company and the Bank owns an appraisal firm which
receives fees from the Bank for appraisals of real estate relating to
various residential loan transactions. During the years ended March 31,
1995, 1994, and 1993, such fees aggregated approximately $140,000,
$241,000, and $281,000, respectively.
<TABLE>
An analysis of the activity of the aggregate loans to officers and
directors is as follows:
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance March 31, 1993 $1,051
Additions 310
Principal Reductions (600)
------
Balance March 31, 1994 761
Additions 327
Principal Reductions (95)
------
Balance March 31, 1995 $993
======
</TABLE>
14. INCOME TAXES
Effective April 1, 1993, the Company adopted Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes."
As permitted by SFAS No. 109, the Company elected not to restate the
financial statements of any prior years. The effect of the change on
income from continuing operations for the year ended March 31, 1994 was
not material; however, the cumulative effect of the change increased net
income by $500,000 or $.13 per share.
<TABLE>
Significant components of the Company's deferred tax assets and
liabilities as of March 31, 1995 and 1994 are as follows:
<CAPTION>
(IN THOUSANDS)
1995 1994
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating
loss carryforward $1,138 $300
Tax credits 178 183
Loan loss provision 271 153
Deferred compensation 114 122
Depreciation 90 123
Accrued expenses 73
Investment basis 81
Other 43
----- -----
1,945 924
Valuation allowance (1,136)
----- -----
Deferred tax assets, net of allowance 809 924
----- -----
DEFERRED TAX LIABILITIES:
Excess servicing rights 171 258
Deferred loan fees 217 453
Other 21 20
----- -----
Total 409 731
----- -----
Net deferred tax asset $400 $193
===== =====
</TABLE>
<TABLE>
Significant components of the provision for income tax expenses for the
years ended March 31, 1995, 1994, and 1993 are as follows:
<CAPTION>
LIABILITY DEFERRED
(IN THOUSANDS) METHOD METHOD
1995 1994 1993
<S> <C> <C> <C>
CURRENT:
FEDERAL $480 $605 $64
STATE 44 113
---- ---- ----
$524 $718 $64
==== ==== ====
DEFERRED (BENEFIT):
Federal $119 $102 $446
State 20 (2) 72
---- ---- ----
139 100 518
---- ---- ----
$663 $818 $582
==== ==== ====
</TABLE>
<TABLE>
Timing differences on the recognition of income and expense for tax
and financial reporting purposes for 1993 resulted in deferred income tax
benefits as follows:
<CAPTION>
(IN THOUSANDS)
1993
<S> <C>
Book depreciation in excess of tax depreciation $(4)
Deferred compensation (48)
Deferred leasing activity (27)
Amortization of premium of sale of loans (600)
Book provision for loan losses 864
Deferred loan fees, net 265
Other, net 68
----
Deferred income taxes $518
====
(/TABLE>
</TABLE>
<TABLE>
A reconciliation of income tax expense with the amount computed by
applying the statutory federal income tax rate of 34% to income before income
taxes is as follows for the year ended March 31:
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
<S> <C> <C> <C>
Income taxes at federal rate $623 $820 $612
Differences resulting from:
State income taxes, net of federal tax benefit 42 73 48
Amortization of purchase accounting adjustment 10 229 (125)
Reduction in valuation allowance (297)
Other, net (12) (7) 47
---- ---- ----
Income taxes $663 $818 $582
==== ==== ====
</TABLE>
Since the Bank meets certain definition tests and other conditions
prescribed by the Internal Revenue Code, it is allowed to deduct, with
limitations, a bad debt deduction. This deduction can be computed as a
percentage of taxable income before such deduction or based on experience.
As of March 31, 1995, the Company had net operating loss
carryforwards, acquired in connection with the Homestead and Governors
mergers, of approximately $3,162,000 for income tax purposes that expire
over various time periods through the year 2008. As a result of the
ownership changes, the utilization of these net operating loss
carryforwards is limited annually to specified amounts determined in
accordance with the Internal Revenue Code. For financial reporting
purposes, a valuation allowance of approximately $1,136,000 has been
recognized primarily to offset the deferred tax assets related to the net
operating loss carryforwards resulting from the Governors merger. When
realized, the tax benefit for those items will be applied to reduce
goodwill related to this merger.
An alternative minimum tax ("AMT") carryforward of approximately
$150,000 is available for use in future years to offset regular tax in
excess of AMT liability in any given year. This credit has no expiration
date.
<TABLE>
15. PARENT COMPANY FINANCIAL INFORMATION
<CAPTION> (IN THOUSANDS)
STATEMENTS OF FINANCIAL CONDITION MARCH 31,
1995 1994
<S> <C> <C>
ASSETS
Investments in and advances to subsidiaries $21,940 $14,500
Cash and cash equivalents 1,018 7,954
Other assets 87 138
------ ------
TOTAL $23,045 $22,592
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $614 $949
Redeemable subordinated debentures 1,985 1,995
------ ------
TOTAL LIABILITIES 2,599 2,944
------ ------
SHAREHOLDERS' EQUITY
Preferred stock 4,025 4,025
Common stock 36 36
Additional paid-in capital 14,363 14,213
Retained earnings 2,022 1,374
------ ------
Total shareholders' equity 20,446 19,648
------ ------
TOTAL $23,045 $22,592
====== ======
</TABLE>
<TABLE>
(in thousands)
YEAR ENDED MARCH 31,
<CAPTION>
STATEMENTS OF INCOME 1995 1994 1993
<S> <C> <C> <C>
INCOME:
Interest $410 $285 $218
Other 96 96 96
--- --- ---
Total 506 381 314
EXPENSES:
Interest 240 220 240
General and administrative 278 136 216
--- --- ---
Total 518 356 456
--- --- ---
(Loss) income before undistributed earnings
of subsidiaries and income tax benefit (12) 25 (142)
Income tax (benefit) expense (5) 89 (52)
--- --- ---
Loss before undistributed
earnings of subsidiaries (7) (64) (90)
Equity in undistributed earnings of subsidiaries 1,174 2,157 1,308
--- --- ---
Net income $1,167 $2,093 $1,218
===== ====== =====
</TABLE>
<TABLE> (in thousands)
YEAR ENDED MARCH 31,
<CAPTION>
STATEMENTS OF CASH FLOWS 1995 1994 1993
<S> <C> <C> <C>
Operating Activities:
Net income $1,167 $2,093 $1,218
Adjustments to reconcile net income
to net cash (used in) provided by operating activities (895) (1,907) (1,227)
----- ------ ------
Net cash (used in) provided by operating activities 272 186 (9)
----- ------ ------
Net cash (used in) provided by investing activities (6,802) (579) 756
Financing Activities:
Sale of common and preferred stock, net of stock
issuance costs 6,949
Cash dividends (519) (280)
Other, net 113 835 48
----- ------ ------
Net cash (used in) provided by financing activities (406) 7,504 48
----- ------ ------
(Decrease) increase in cash and cash equivalents (6,936) 7,111 795
Cash and cash equivalents at beginning of year 7,954 843 48
----- ------ ------
Cash and cash equivalents at end of year $1,018 $7,954 $843
===== ====== ======
</TABLE>
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following is a disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet for
which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement
of the instrument. Certain financial instruments and all non-financial
instruments are excluded from its disclosure requirements. Accordingly,
the aggregate fair value amount presented does not represent the
underlying value of the Bank.
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and interest-bearing deposits in other financial institutions: The
carrying amounts reported in the balance sheet for these assets
approximate their fair values.
Investments: Fair value for investments are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for certain fixed rate mortgage loans (e.g., one-
to-four family residential), and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair
values for other loans (e.g., commercial real estate and rental property
mortgage loans) are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The fair values of mortgage-backed
securities are based on quoted market prices.
Premium on sale of loans: The fair value of originated mortgage servicing
rights is based upon the estimated discounted cash flow net of servicing
costs as a market discount rate. Estimated cash flows are based upon
estimated market prepayment speeds for similar loan servicing portfolios.
Accrued interest receivable: The fair value of accrued interest
receivable is assumed to be equal the carrying value due to its short
maturity.
Off-balance-sheet instruments: Fair values for the Bank's lending
commitments are based on estimated market prices of comparable instruments
taking into account the remaining terms of the agreements and the
counterparties' credit standing.
Deposit liabilities: The fair value disclosed for demand deposits (e.g.,
interest and non-interest checking, statement savings, and certain types
of money market accounts) are, by definition, equal to the amount payable
on demand at the reporting date (e.g., their carrying amounts). The
carrying amounts for variable-rate, fixed-term money market accounts and
certificates of deposits approximate their fair values at the reporting
date. Fair value for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated
contractual monthly maturities on time deposits.
Other borrowings: The fair values of FHLB advances, securities sold under
agreement to repurchase, and redeemable subordinated debentures are
estimated using discounted cash flow analysis, based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
Bank drafts payable: The fair value of Bank drafts payable is assumed to
equal its carrying value due to its short maturity.
<TABLE>
The estimated fair values of the Company's financial instruments at
March 31, 1995 and 1994 are as follows:
<CAPTION>
1995 1994
CARRYING FAIR Carrying FAIR
(IN THOUSANDS) AMOUNT VALUE Amount VALUE
<S> <C> <C> <C> <C>
ASSETS
Cash and interest-bearing deposits $ 17,616 $17,616 $13,154 $13,154
Investments 14,185 14,261 24,481 24,491
Loans receivable - net and
loans held for sale 226,611 227,208 156,180 156,700
Premium on sale of loans 485 550 689 694
Accrued interest receivable 2,041 2,041 985 985
----- ----- ------ -----
Total financial assets 260,938 $261,676 195,489 $196,024
======= ------- ========
Non-financial assets 19,101 11,148
------
Total assets $280,039 $206,637
======= =======
LIABILITIES
Deposits $229,735 $229,877 $ 156,651 $156,991
FHLB advances 15,000 14,976 20,000 19,997
Securities sold under agreements to
repurchase 2,748 2,748
Redeemable subordinated
debentures 1,985 1,985 1,995 2,205
Bank drafts payable 4,148 4,148 4,425 4,425
------ ------ ------ -------
Total financial liabilities 253,616 $253,734 183,071 $183,618
====== =======
Non-financial liabilities 5,977 3,918
------ ------
Total liabilities $259,593 $186,989
======= =======
</TABLE>
The fair value of demand deposits is the amount payable on demand,
without adjusting for any value derived from retaining those deposits for
an expected future period of time. That component, commonly referred to
as a deposit base intangible, is not considered in the above fair value
amount nor is it recorded as an intangible asset in the balance sheet.
The Bank's commitments to extend credit are either extensions to
fund variable rate loans or fixed rate loans. The fair value of
commitments to extend credit is $18,627,000 and $7,040,000 at March 31,
1995 and 1994, respectively.
17. SEGMENT INFORMATION
The Bank operated in two industry segments (as defined by Statement
of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise"). The two industry segments were
banking and mortgage banking. However, due to the significant decline in
the mortgage banking industry, the Company significantly reduced its
operations in mortgage banking activities. As a result of the Company's
reduction in mortgage banking activities, the Company no longer operates
in the mortgage banking industry segment (as defined by SFAS No. 14).
Effective April 1, 1995, all mortgage banking activities will be included
in banking operations.
<TABLE>
Revenues in the banking segment consist primarily of interest on
mortgage loans and investment securities. Mortgage banking activities
derive revenues primarily from interest on loans held for sale, sales of
loans in the secondary mortgage market, sale of loan servicing rights, and
fees on loans serviced. Intercompany transactions have been eliminated
from the industry segments and consolidated financial data presented
below. The following is a presentation of the revenues, operating profits
(losses), assets, and capital expenditures for the years ended March 31,
1995, 1994, and 1993:
<CAPTION>
Banking MORTGAGE BANKING CONSOLIDATED
YEAR ENDED MARCH 31, 1995 1994 1993 1995 1994 1993 1995 1994 1993
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $7,394 $5,756 $4,395 $1,297 $1,005 $1,279 $8,691 $6,761 $5,674
Non-interest income 1,211 735 432 1,211 735 432
Mortgage banking income 1,788 3,654 2,626 1,788 3,654 2,626
Depreciation 280 308 92 179 101 166 459 409 258
Non-interest expense 5,365 4,169 2,718 4,036 4,161 3,956 9,401 8,330 6,674
------ ------ ------ ------ ----- ----- ----- ------ ------
Income before taxes $2,960 $2,014 $2,017 $(1,130) $397 $(217) $1,830 $2,411 $1,800
====== ======= ====== ======== ===== ===== ====== ====== =====
<CAPTION>
MARCH 31, 1995 1994 1993
<S> <C> <C> <C>
ASSETS
Banking $275,374 $202,033 $161,393
Mortgage banking 4,665 4,604 8,081
------- ------- -------
$280,039 $206,637 $169,474
======= ======= =======
CAPITAL EXPENDITURES, NET:
Banking $2,275 $1,723 $901
Mortgage banking 349 20 1,352
------- ------- -------
$2,624 $1,743 $2,253
======= ======= =======
</TABLE>
18. SUBSEQUENT EVENT
On April 17, 1995, the Bank filed application to convert from a
Federal Savings Bank to a State of Florida, commercial bank charter. At
the same time, Republic Security Financial Corporation filed application
with the Federal Reserve Board to become a bank holding company.
ERNST & YOUNG (logo)
Independent Certified Public Accountants
THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF REPUBLIC SECURITY FINANCIAL
CORPORATION
We have audited the accompanying consolidated statements of financial
condition of Republic Security Financial Corporation and subsidiaries as of
March 31, 1995 and 1994, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended March 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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, consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Republic Security Financial Corporation and subsidiaries at March 31, 1995 and
1994, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended March 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in the year ended
March 31, 1994.
West Palm Beach, Florida
May 10, 1995
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is set forth in the Registran-
t's "Notice of Annual Meeting of Shareholders to be Held on July 26, 1995"
(Proxy Statement) on page 2 through 4 and such information is incorporated
herein by reference.
Item 11. Executive Compensation
The information required by this Item 11 is set forth in Registrant's
"Notice of Annual Meeting of Shareholders to be Held on July 26, 1995" (Proxy
Statement) on page 5 and such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is set forth in Registrant's
"Notice of Annual Meeting of Shareholders to be Held on July 26, 1995" (Proxy
Statement) on page 1 and such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is set forth in Registrant's
"Notice of Annual Meeting of Shareholders to be Held on July 26, 1995" (Proxy
Statement) on pages 5 and 10 and such information is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Schedules and Exhibits:
1. Financial Statements Page
Consolidated statements of financial condition March 31, 1995
and 1994 53
Consolidated statements of income years ended March 31, 1995, 1994
and 1993 54
Consolidated statements of shareholders' equity years ended
March 31, 1995, 1994 and 1993 55
Consolidated statements of cash flows years ended March 31, 1995,
1994 and 1993 56
Notes to consolidated financial statements 57
2. Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
Exhibits
3. a) Articles of Incorporation, as amended of Republic Security
Financial Corporation.*
b) Bylaws, as amended of Republic Security Financial Corporation.*
c) Articles of Incorporation, as amended of Republic Security
Financial Corporation.****
d) Articles of Incorporation, as amended, of Republic Security
Financial Corporation.*****
e) Articles of Amendment to Articles of Incorporation of Republic
Security Financial Corporation.*******
4. a) Form of Indenture to be entered into between Republic Security
Financial Corporation and Mellon Bank, N.A.*
b) Form of Equity Contract Agency Agreement to be entered into
between Republic Security Financial Corporation and
Mellon Bank, N.A.*
c) Debentures (contained in Sections 202 and 204 of Exhibit 4(a)).*
d) Mandatory Stock Purchase Contracts (contained in Exhibits A and B
to Exhibit 4(b)).*
e) Rights Agreement by and between Republic Security Financial
Corporation and IBJ Schroder Bank and Trust Company.*******
10. a) Officers and Directors Liability Insurance Policy.*
b) Savings and Loan Blanket Bond Policy.*
c) Employment Agreement between Registrant and R.E. Schupp, as
amended.*
d) Employment Agreement between Republic Security Bank and R. E.
Schupp, as amended.*
e) Employment Agreement between Registrant and Richard J. Haskins.*
f) Employment Agreement between Republic Security Bank and Richard J.
Haskins, as amended.**
g) Employment Agreement between Republic Security Bank and Ronald N.
Long.*
h) Description of Employment Arrangement for Philip A. Cody.*
i) Lease Agreement dated February 28, 1985 between Registrant and
First American Bank and Trust, for executive offices at 675 West
Indiantown Road.*
j) Lease Agreement dated February 6, 1984, as amended, between
Republic Security Bank and Guy W. Held, as Trustee, for the
branch at 851 West Indiantown Road.*
k) Lease Agreement dated as of March 1, 1985, between Republic
Security Bank and K&R Associates, for the branch in Delray Beach.*
l) Agreement dated as of June 13, 1985, between Data Systems Leasing,
Inc., Registrant and Bank of New England, N.A.*
m) Forms of Supplement Executive Retirement Plan Agreements.*
n) Supplemental Executive Retirement Program Agreement -
Richard J. Haskins**
o) Supplemental Executive Retirement Program Agreement -
R. E. Schupp.**
p) Restricted Stock Plan.**
q) Restricted Stock Plan Agreement - Richard J. Haskins.**
r) Restricted Stock Plan Agreement - R. E. Schupp.**
s) Employment Agreement between Republic Security Bank and R. E.
Schupp, as amended.***
t) Employment Agreement between Republic Security Bank and Richard J.
Haskins, as amended. ***
u) Employment Agreement between Republic Security Bank and R. E.
Schupp, as amended.****
v) Employment Agreement between Republic Security Bank and Richard J.
Haskins, as amended. ****
w) Employment Agreement between Republic Security Bank and R. E.
Schupp, as amended.*****
x) Employment Agreement between Republic Security Bank and Richard J.
Haskins, as amended. *****
11. a) Statement RE: Computation of Per Share Earnings ******
22. a) Subsidiaries.******
23. a) 1995 Proxy Statement. ******
* Incorporated by reference to Registration Statement on
Form S-1, File No. 2-99505.
** Incorporated by reference to Form 10-K as filed with the Securities and
Exchange Commission on June 28, 1990.
*** Incorporated by reference to Form 10-K as filed with the Securities
and Exchange Commission on June 26, 1992.
**** Incorporated by reference to Form 10-K, as filed with the Securities
and Exchange Commission on June 26, 1993.
***** Incorporated by reference to Form 10-K as filed with the Securities and
Exchange Commission on June 24, 1994
****** Filed herewith
******* Incorporated by reference to Registration Statement on Form 8-A as
filed with the Securities and Exchange Commission on April 27, 1995.
b) Reports on Form 8-K
Not applicable
c) Exhibit Index
2.(a) Agreement and plan of merger by and among Republic Security
Financial Corporation, Republic Security Bank, a Federal
Savings Bank, Governors Bank Corporation and Governors Bank.
3.(c) Articles of Incorporation, as amended of Republic Security
Financial Corporation.
10.(u) Employment Agreement between Republic Security Bank and R. E.
Schupp, as amended.
(v) Employment Agreement between Republic Security Bank and Richard
J. Haskins, as amended.
11.(a) Statement RE: Computation of Per Share Earnings.
22.(a) Subsidiaries.
23.(a) 1995 Proxy Statement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
REPUBLIC SECURITY FINANCIAL CORPORATION
BY: /s/ Rudy E. Schupp
Rudy E. Schupp
Chairman of the Board
Chief Executive Officer
/s/ Richard J. Haskins
Richard J. Haskins
Executive Vice President
Chief Financial and Accounting Officer
Dated:
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ H. Gearl Gore /s/ Victor Siegel
H. Gearl Gore, Director Victor Siegel, Director
/s/ Richard J. Haskins /s/ William F. Spitznagel
Richard J. Haskins, Director William F. Spitznagel,
Director
/s/ Lennart Lindahl /s/ Bruce E. Wiita
Lennart Lindahl, Director Bruce E. Wiita, Director
/s/ Richard C. Rathke /s/ Ashok Dalal
Richard C. Rathke, Director Ashok Dalal, Director
/s/ Rudy E. Schupp /s/ William F. Wolfson
Rudy E. Schupp, Director William F. Wolfson,
Director
EXHIBIT 22(a)
SUBSIDIARIES OF REGISTRANT
1. Republic Security Bank, a Federal Savings Bank.
2. Data Systems Leasing, Inc., a Florida corporation.
3. Republic Brokerage Corporation, a Florida corporation.
4. Governors Bank Corporation, a Florida corporation.
<TABLE> EXHIBIT 11(a)
STATEMENT 11. RE: COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
YEAR ENDED MARCH 31
1995 1994 1993
<S> <C> <C> <C>
Average shares outstanding 3,631,774 2,919,744 1,795,496
Net effect of diluitive stock options,
warrants and equity contracts based on the modified
treasury stock method using average market price 841,745 1,006,916 1,099,757
------- ------- --------
Total weighted average number of shares
outstanding 4,473,519 3,926,660 2,895,253
======== ========= =========
Income before extraordinary item and
accounting change $1,167,000 $1,593,000 $1,218,000
Add income effect of utilizing net proceeds from
conversion of options, warrants and equity
contracts to reduce debt and invest excess in
government bonds - net of income tax effect 158,000 212,000 227,000
Deduct preferred dividends 302,000 165,000
------- ------- --------
Income before extraordinary item and accounting
change available to common stockholders $1,023,000 $1,640,000 $1,445,000
======== ========= =========
Income before extraordinary item and accounting
change, per share amount $.23 $.42 $.50
======== ========= =========
Net income $1,167,000 $2,093,000 $1,218,000
Add income effect of utilizing net proceeds from
conversion of options, warrants and equity
contracts to reduce debt and invest excess in
government bonds - net of income tax effect 158,000 212,000 227,000
Deduct preferred stock dividends 302,000 165,000
------- ------- --------
Income available to common stockholders $1,023,000 $2,140,000 $1,445,000
======== ========= =========
Net income per share amount $.23 $.55 $.50
======== ========= =========
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Republic
Security Financial Corporation March 31, 1995 Form 10-K and is qualified in its
entirety by reference to such Form 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<MULTIPLIER> 000
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 3,566
<INT-BEARING-DEPOSITS> 14,050
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 32
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 14,153
<INVESTMENTS-MARKET> 14,229
<LOANS> 229,118
<ALLOWANCE> 2,507
<TOTAL-ASSETS> 280,039
<DEPOSITS> 229,735
<SHORT-TERM> 17,748
<LIABILITIES-OTHER> 10,125
<LONG-TERM> 1,985
<COMMON> 36
0
4,025
<OTHER-SE> 16,385
<TOTAL-LIABILITIES-AND-EQUITY> 280,039
<INTEREST-LOAN> 15,254
<INTEREST-INVEST> 1,034
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,288
<INTEREST-DEPOSIT> 6,244
<INTEREST-EXPENSE> 1,153
<INTEREST-INCOME-NET> 8,891
<LOAN-LOSSES> 200
<SECURITIES-GAINS> (200)
<EXPENSE-OTHER> 1,361
<INCOME-PRETAX> 1,830
<INCOME-PRE-EXTRAORDINARY> 1,830
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,167
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
<YIELD-ACTUAL> 4.25
<LOANS-NON> 981
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,071
<CHARGE-OFFS> (617)
<RECOVERIES> 454
<ALLOWANCE-CLOSE> 2,507
<ALLOWANCE-DOMESTIC> 2,507
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,507
</TABLE>
