[REPUBLIC SECURITY LOGO]
(Holding Company for Republic Security Bank, Federal Savings Bank)
1,800,000 SHARES OF COMMON STOCK
900,000 SHARES OF 7% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES C
Republic Security Financial Corporation, a Florida corporation (the
'Company'), is hereby offering 1,800,000 shares of its common stock, par value
$.01 per share (the 'Common Stock'), at a price of $5.25 per share, and 900,000
shares of its 7% Cumulative Convertible Preferred Stock, Series C (the 'Series C
Preferred'), at a price of $10.00 per share (the 'Offerings'). The Company has
granted Ryan, Beck & Co., Inc. ('Ryan, Beck' or the 'Underwriter') separate
options, exercisable within 30 days of the date of this Prospectus, to purchase
up to 270,000 additional shares of Common Stock and 135,000 additional shares of
Series C Preferred to cover overallotments, if any. If the options are exercised
in full, the total number of shares of Common Stock offered hereby shall
increase to 2,070,000 and the total number of shares of Series C Preferred
offered hereby shall increase to 1,035,000.
Each share of Series C Preferred, unless previously redeemed, will be
convertible at any time at the option of the holder into shares of Common Stock
at a conversion price of $6.45 per share (the 'Conversion Price') of Common
Stock (equivalent to approximately 1.55 shares of Common Stock per share of
Series C Preferred), subject to adjustment upon certain events. The Series C
Preferred is not redeemable prior to November 30, 1999 unless the Common Stock
has a closing bid price which is at least 140% of the Conversion Price for 20
consecutive trading days prior to the date of the notice of redemption. Subject
to the foregoing, the Series C Preferred may be redeemed at the Company's option
at a price of $10.00 per share, plus accrued and unpaid dividends, until
November 30, 1999. At any time on or after November 30, 1999, the Series C
Preferred may be redeemed at the Company's option at $10.42 per share and at
prices decreasing annually thereafter to $10.00 per share on and after November
30, 2005, plus in each case accrued and unpaid dividends.
The Common Stock is currently traded on the NASDAQ National Market
('NASDAQ') under the symbol 'RSFC.' On November 6, 1995, the last sale price of
the Common Stock as reported by the NASDAQ was $5.375 per share. See 'Market
Price and Dividend Data.' The Series C Preferred is a new issue of securities,
therefore, there has been no public market for the Series C Preferred. The
Series C Preferred will be listed on NASDAQ under the symbol 'RSFCO.' Ryan, Beck
has indicated its intention to be a market maker in the Series C Preferred.
There can be no assurance that a liquid market for the Series C Preferred will
develop.
------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE 'RISK FACTORS' ON PAGE 11.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS INSTITUTION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND, THE BANK
INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER
GOVERNMENT AGENCY, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, ANY
STATE SECURITIES COMMISSION, OR ANY OTHER GOVERNMENT AGENCY PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share of Common Stock $5.25 $0.355 $4.895
- ---------------------------------------------------------------------------------------------------------------------------
Per Share of Series C Preferred Stock $10.00 $0.60 $9.40
- ---------------------------------------------------------------------------------------------------------------------------
Total $18,450,000 $1,179,000 $17,271,000
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
(1) See 'Underwriting' for information concerning discounts and commissions and
indemnification of Ryan, Beck.
(2) Before deducting expenses estimated to be $355,000 payable by the Company.
(3) The Company has granted the Underwriter separate options, exercisable within
30 days of the date of this Prospectus, to purchase up to 270,000 shares of
Common Stock and 135,000 shares of Series C Preferred Stock at the
respective Price to Public less the applicable Underwriting Discount, to
cover overallotments, if any. If the overallotments are sold in full and
based on the assumptions stated in footnote (2), the Price to Public will
total $21,217,500, the Underwriting Discounts and Commissions will total
$1,355,850 and the Proceeds to the Company will total $19,861,650. See
'Underwriting.'
</FN>
</TABLE>
------------------------
The shares of Common Stock and Series C Preferred are being offered by
Ryan, Beck subject to delivery by the Company and acceptance by Ryan, Beck and
subject to prior sale and withdrawal, cancellation or modification of the offer
without notice. Delivery of the shares is expected to be made at the offices of
Ryan, Beck in West Orange, New Jersey on or about November 10, 1995.
[RYAN, BECK & CO. LOGO]
The date of this Prospectus is November 6, 1995.
<PAGE>
REPUBLIC SECURITY BANK
LOCATIONS FROM JUPITER TO HOMESTEAD
[Map of State of Florida, with a detail section highlighting Palm Beach County.
Detail portion of map shows specific locations of Bank's headquarters and
banking centers, as well as locations proposed to be acquired under existing
agreements. The Bank's Dade County banking center location is identified on the
full map of the state. Text surrounding the map lists the addresses of the
various locations identified by the map.]
------------------------
IN CONNECTION WITH THE OFFERINGS, RYAN, BECK MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND SERIES C PREFERRED AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and incorporated by reference herein. This summary does not purport
to be complete, and is qualified in its entirety by reference to the more
detailed information and consolidated financial statements, including the
consolidated notes thereto, included elsewhere in this Prospectus and in the
documents incorporated by reference herein.
THE COMPANY AND THE BANK
THE COMPANY
Republic Security Financial Corporation (the 'Company'), headquartered in
West Palm Beach, Florida, is a savings bank holding company. Its principal
business is the operation of Republic Security Bank, Federal Savings Bank, a
federal stock savings bank (the 'Bank'). As of June 30, 1995, the Company had
consolidated assets of $276 million, deposits of $225 million and shareholders'
equity of $22.7 million.
THE BANK
The Bank commenced operations on November 19, 1984 as a stock savings bank.
It is a member of the Federal Home Loan Bank (the 'FHLB') System, and its
deposits are insured by the Federal Deposit Insurance Corporation (the 'FDIC')
up to applicable limits. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision (the 'OTS') and the FDIC.
The Bank has seven full-service branches, six of which are located in Palm
Beach County and one in Dade County, Florida. The Bank's main business
activities are attracting deposits, originating loans, making investments and
servicing loans for the Bank and for others. Earnings depend primarily upon the
difference between interest received on loans and investments and interest paid
on the Bank's deposit base and borrowings.
ACQUISITIONS. On October 3, 1995, the Bank entered into an agreement to
acquire the West Palm Beach branch of Century Bank, a Federal Savings Bank (the
'Century Branch'). As a result of the acquisition, the Bank will assume
approximately $32.6 million of deposit liabilities and $31.5 million of assets.
See 'Recent Developments.'
On September 7, 1995, the Company entered into a definitive agreement with
Banyan Bank ('Banyan'), a commercial bank headquartered in Boca Raton, Florida,
which provides for the acquisition of all of the outstanding capital stock of
Banyan. As a result of the acquisition, Banyan will be merged into the Bank,
adding a branch in each of Boca Raton and Boynton Beach and assets of
approximately $48 million. See 'Use of Proceeds,' 'Proposed Acquisition of
Banyan Bank' and 'Pro Forma Combined Condensed Financial Information.'
The Company acquired Governors Bank ('Governors'), a commercial bank
headquartered in West Palm Beach, Florida, on November 30, 1994, in a merger
accounted for as a purchase. As a result of the merger, the Bank realized $3.3
million of goodwill and its assets increased by $64 million, deposits increased
by $58 million and the banking center network expanded by two full-service
branches. On January 22, 1993, in a transaction also accounted for as a
purchase, the Company acquired Homestead Federal Savings Bank ('Homestead'),
which was merged into the Bank, increasing the asset base by 36%, or $45.5
million, increasing the deposit base by $41.8 million and adding two branch
locations to the banking center network. See Note 2 of Notes to Consolidated
Financial Statements.
CHARTER CONVERSION. On April 17, 1995, the Bank filed an application to
convert its charter from a federal savings bank to a State of Florida commercial
bank, and at the same time the Company applied with the Board of Governors of
the Federal Reserve System ('FRB') to become a bank holding company. The
3
<PAGE>
Bank and the Company have received all necessary federal and state regulatory
approvals and anticipate the conversions to be completed on or before November
15, 1995. The charter conversion reflects the Bank's desire to overcome the
limitations on commercial and consumer loan generations imposed under its thrift
charter and is consistent with the Bank's shift in focus from traditional thrift
business activities to commercial banking activities.
As a consequence of the Bank's application for a commercial bank charter,
on July 26, 1995 the Company changed its fiscal year-end from March 31 to
December 31.
OPERATING STRATEGY. Historically, the Bank's operating strategy was to
originate long-term residential mortgage loans and short-term construction loans
on residential properties. Upon completion of the construction phase, many of
the construction loans became residential mortgage loans, most of which were
then sold into the national secondary market through the Bank's mortgage banking
operation, with the Bank retaining servicing on the loans sold as a source of
continuing income. Over two years ago, management began to shift the Bank's
business from traditional thrift activities to those more closely related to
commercial banking, with emphasis placed on originating consumer and commercial
loans, which typically provide higher yields and have shorter terms than
residential mortgage loans. In addition, the Bank began to focus on attracting
checking accounts in order to build customer relationships and develop lower
cost sources of funds than certificates of deposit.
In fiscal 1995, management continued these efforts and further
re-engineered the Bank's strategy in response to competitive and market factors,
including strong competition in the construction lending business and the
reduced profitability of the mortgage banking industry. The Bank's income from
mortgage banking was negatively impacted as interest rates increased,
residential loan originations and refinancings decreased and mortgage banking
profit margins narrowed.
The Bank's current business strategy includes (i) concentration on consumer
and commercial lending, (ii) emphasis on transaction accounts, particularly
business and personal checking accounts, (iii) focus on non-interest income from
loan and deposit service fees and new products and services, (iv) achievement of
a higher profile through additional strategically located banking offices, (v)
continued emphasis on residential construction lending, (vi) maintenance of a
presence in the residential mortgage market, and (vii) growth through a
combination of bank and branch acquisitions, as well as de novo expansion of the
branch network.
In fiscal 1995, significant effects of implementing the business strategy
were realized. In furtherance of its objectives, the Bank consummated the
November 1994 acquisition of Governors, which, as a commercial bank, had a
concentration of desired commerical business and consumer loans. In March 1995,
the Bank significantly downsized its mortgage banking operation, reducing staff
and closing outlying loan production offices, in order to reduce overhead and
centralize residential mortgage lending at the Bank's headquarters office.
Management expects to continue to pursue its business strategy while maintaining
asset quality, closely monitoring operating expenses and managing interest rate
risk.
Effects realized by implementation of the Company's business strategy
include the following:
- CAPITAL STRENGTH - At June 30, 1995, the Bank exceeded all applicable
regulatory capital requirements, with tangible and core capital ratios of 6.8%
and risk based capital ratio of 11.0%. The Bank intends to continue to be well
capitalized, striving for a leverage capital ratio in excess of 7% subsequent to
the Bank's conversion to a commercial bank.
- PROFITABILITY - After several years of steady increase, return on
average assets for the year ended March 31, 1995 declined. For fiscal 1995,
return on average assets was .50%, compared to .86% (excluding cumulative effect
of change in accounting for income taxes) for fiscal 1994. The decline was due,
in large part, to the unfavorable mortgage banking environment. Net income for
the quarter ended June 30, 1995 was almost twice that for the corresponding
quarter in 1994, increasing to $527,000, or $.10 per share, from
4
<PAGE>
$265,000, or $.05 per share. The improvement reflected the impact of the
acquisition of Governors and the effects of the re-engineering initiative. For
the quarter ended June 30, 1995, annualized return on average assets was .76%,
and annualized return on average equity was 9.78%, as compared to .51% and
5.37%, respectively, for the corresponding 1994 quarter.
Net interest income, a primary component of net income, is mainly a
function of the Bank's interest rate spread (the average yield on
interest-earning assets less the average rate paid on interest-bearing
liabilities), which was 4.98%, 3.62%, 3.81% and an annualized 3.66% during the
years ended March 31, 1993, 1994, 1995 and the quarter ended June 30, 1995,
respectively. In the event that market interest rates rise, it is likely that
net interest income will decline. At June 30, 1995, the dollar volume of
interest-bearing liabilities, primarily deposits and borrowings, that will
mature or reprice within one year exceeds the dollar volume of interest-earning
assets, primarily loans and investments, which are similarly expected to mature
or reprice. The Company's one-year cumulative interest rate sensitivity gap is
$8.6 million, or 3.1% of total assets, at June 30, 1995.
As a result of the Bank's decreased emphasis on mortgage banking
operations and the growth in commercial business and consumer loans, net income
in the future is expected to be more dependent on the level of net interest
income.
- EFFICIENCY RATIO - One of management's goals is to maintain a reasonable
efficiency ratio. The merger of Governors contributed to a less favorable ratio
in fiscal 1995 of 83% versus the ratio of 77% in the previous year. Another
contributing factor was the decrease in gains on sales of loans that resulted
from the unfavorable mortgage banking environment. The ratio improved to 76% for
the quarter ended June 30, 1995 as a result of an increase in fee-based
products, increased volume of loans serviced and careful monitoring of expenses.
- BUSINESS MIX - The transition from concentrating on residential mortgage
lending to commercial and consumer lending was most evident in fiscal 1995. At
March 31, 1994, 29% of the Bank's loan portfolio was comprised of residential
construction and lot loans, 59% was residential mortgages, 7% was commercial
real estate loans, 4% was consumer loans and 1% was commercial business loans.
At June 30, 1995, the mix had shifted dramatically, with 18% of the loan
portfolio in residential construction and lot loans, 49% in residential
mortgages, 11% in commercial real estate loans, 15% in consumer loans and 7% in
commercial business loans. Loans acquired from Governors accounted for
approximately 66% of the increase in commercial loans and approximately 42% of
the increase in consumer loans. Management is seeking further growth in
commercial and consumer lending, while maintaining a presence in the residential
real estate market and a continued emphasis on residential construction lending.
- ASSET QUALITY - The Bank seeks to maintain quality assets and moderate
credit risk. Despite growth in commercial business and consumer loans, which
generally pose more credit risk than residential loans, non-performing assets
decreased from 1.56% of assets at March 31, 1994 to 1.23% of assets at March 31,
1995, though the level of non-performing assets rose slightly, from $3.2 million
to $3.4 million, as a result of the acquisition of Governors. At June 30, 1995,
non-performing assets increased to $6.3 million, or 2.30% of assets, while the
allowance for loan losses at that date totalled $2.6 million, or 52.5% of
non-performing loans. The increase in non-performing assets from March 31, 1995
to June 30, 1995 was primarily due to two factors: (1) certain loans acquired in
connection with the acquisition of Governors, which had been identified at the
time of acquisition and classified by the Bank but remained performing until the
quarter ended June 30, 1995, and (2) a number of residential mortgage loans that
became delinquent during the period due to personnel vacancies in key loan
collection positions, which vacancies were subsequently filled.
- TRANSACTION ACCOUNTS - At June 30, 1995, 37% of the Bank's deposit base
consisted of core deposits, which includes non-interest-bearing checking
accounts, savings accounts, NOW checking accounts and money market accounts.
These accounts are considered to be more stable and are a lower cost
5
<PAGE>
source of funds than certificates of deposit or outside borrowings. The Bank's
efforts to attract checking accounts met with increased success in fiscal 1995.
At June 30, 1995, non-interest-bearing checking accounts and NOW accounts
represented 23% of deposits, as compared to 19% of deposits at March 31, 1994.
The Bank will continue to emphasize retail deposits by maintaining a network of
full-service offices, providing quality customer service, and providing
depositors with a full range of services and accounts. The flow of deposits,
however, is significantly influenced by competition and prevailing market rates.
- REALIGNMENT OF BRANCH NETWORK - In March 1995, in response to the
significant reduction in mortgage banking operations, the outlying residential
loan production offices were closed. With the expansion of the Bank's commercial
and consumer lending businesses, branch personnel are actively involved in the
marketing of commercial and consumer products, such as credit cards and cash
management products and services.
Subsequent to the anticipated relocation of the Bank's Delray Beach
branch, expected to occur in November 1995, and the construction of a new,
expanded office in Jupiter, all of the Bank's branches will be similar to
traditional commercial banking branch facilities. The branches will be
free-standing buildings with drive-up lanes, ATM facilities, night depositories
and safe deposit boxes.
- CONTROLLED GROWTH - Through strategic acquisitions and internal growth,
the Bank's assets increased over 100%, from $135 million at March 31, 1992 to
$276 million at June 30, 1995. Over the same period, the loan portfolio
increased from approximately $96 million to $230 million, while deposits
increased from $117 million to $225 million.
The Company will continue to pursue controlled growth through internal
expansion of products and services, opening of new branches and select
acquisitions of banks or branches. The Company has entered into a definitive
agreement to acquire Banyan, subject to completion of the Offerings and certain
other conditions. See 'Use of Proceeds' and 'Proposed Acquisition of Banyan.'
The Bank has also entered into an agreement to acquire the Century Branch. See
'Recent Developments.' Any further expansion is also anticipated to be in South
Florida, particularly in Palm Beach, Martin and Broward Counties.
THE OFFERINGS
UNDERWRITING
The Company has entered into an Underwriting Agreement with Ryan, Beck
pursuant to which the shares offered hereby will be purchased by Ryan, Beck for
resale to the public. Ryan, Beck's obligation to purchase the shares of Common
Stock and Series C Preferred will be subject to certain conditions, including,
among others, that Ryan, Beck will not be obligated to purchase any such shares
if certain events occur which could have a material adverse effect upon the
business or financial condition of the Company or the Bank or on the banking -
thrift industry or financial markets generally and/or which, in the sole
judgment of Ryan, Beck, make it impractical or inadvisable to proceed with the
Offerings. See 'Underwriting.'
SECURITIES OFFERED
1,800,000 shares of Common Stock and 900,000 shares of 7% Cumulative
Convertible Preferred Stock, Series C.
COMMON STOCK
As of September 30, 1995, 4,413,563 shares of Common Stock were issued and
outstanding. Pursuant to outstanding non-qualified stock options and warrants, a
total of 797,155 shares of the Common Stock
6
<PAGE>
were issuable at prices ranging from $2.48 to $6.50 as of September 30, 1995.
See 'Description of Securities.'
SERIES C PREFERRED
General. The Series C Preferred ranks senior to the Common Stock with
respect to dividend rights and rights upon liquidation, dissolution or winding
up of the Company. The Series C Preferred is junior to all of the Company's
outstanding indebtedness issued from time to time. The Series C Preferred will
rank equal to the Company's 7.5% Cumulative Convertible Preferred Stock, Series
A (the 'Series A Preferred') as to liquidation preference and dividends. As of
September 30, 1995, there were 401,500 shares of Series A Preferred outstanding.
The Company will have the right, without the consent of the holders of Series C
Preferred, to issue further series of preferred stock which rank equal or junior
to the Series C Preferred as to liquidation preference and dividends. See
'Description of Securities--Preferred Stock--Series C Preferred.'
Dividends. Dividends on the Series C Preferred are payable at an annual
rate equal to 7%, or $0.70 per share. Dividends on the Series C Preferred will
be payable when, as and if declared by the Company's Board of Directors,
quarterly in arrears, to holders on the last day of March, June, September and
December, with the first dividend payment, if any, on December 31, 1995,
prorated from the date of issuance. Dividends on the Series C Preferred will
accumulate if not paid. See 'Risk Factors--Ability to Make Dividend Payments.'
Conversion. Each share of Series C Preferred will be convertible at any
time at the option of the holder into shares of Common Stock at a conversion
price of $6.45 per share (the 'Conversion Price') of Common Stock (equivalent to
1.55 shares of Common Stock per share of Series C Preferred), subject to
adjustment upon certain events.
Optional Redemption. The Series C Preferred is not redeemable prior to
November 30, 1999 unless the Common Stock shall have a closing bid price which
is at least 140% of the Conversion Price for 20 consecutive trading days prior
to redemption. In the event the Series C Preferred becomes redeemable prior to
November 30, 1999, the Series C Preferred may be redeemed, in whole or in part,
at the Company's option at a price of $10.00 per share, plus accrued and unpaid
dividends (whether or not earned or declared) to the date fixed for redemption,
until November 30, 1999. At any time on or after November 30, 1999, the Series C
Preferred may be redeemed, in whole or in part, at the Company's option at the
following per share prices during the 12-month period beginning November 30:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ------------------------------------------------------ ----------------
<S> <C>
1999.................................................. $ 10.42
2000.................................................. 10.35
2001.................................................. 10.28
2002.................................................. 10.21
2003.................................................. 10.14
2004.................................................. 10.07
2005 and thereafter................................... 10.00
</TABLE>
together, in each case, with an amount equal to accrued plus unpaid dividends
(whether or not earned or declared) to the date fixed for redemption.
Liquidation Preference. $10.00 per share plus accumulated unpaid
dividends, but subordinated to all indebtedness of the Company.
7
<PAGE>
REGULATORY LIMITATIONS
To the extent that shares of Common Stock or Series C Preferred are to be
issued to any purchaser who in the sole opinion of the Company could be required
to obtain prior clearance or approval from or submit a notice to any state or
federal bank regulatory authority to acquire or control such shares, the Company
will not be required to issue shares if, at the Closing, such clearance or
approval has not been obtained and/or any required waiting period has not
expired and/or such notice has not been submitted. In such case, the Company
will issue to such purchaser only such number of shares as in the opinion of the
Company would not give rise to any such notice or prior clearance or approval
requirement and may elect not to issue such number of shares in excess thereof,
which excess shares will become available for purchase in the Offerings.
USE OF PROCEEDS
The Company intends to use approximately $9.5 million of the net proceeds
received by the Company from the sale of the Common Stock and Series C Preferred
in the Offerings, after deduction of commissions, underwriting discounts and
expenses, to fund the purchase of Banyan, in the event such acquisition is
consummated. See 'Proposed Acquisition of Banyan Bank.' Further, the Bank
intends to use approximately $3.3 million of the net proceeds to increase its
leverage capital ratio to a target level of at least 7% subsequent to the Bank's
conversion to a commercial bank and the acquisitions of Banyan and the Century
Branch. The balance of the net proceeds is expected to be utilized to increase
the Bank's regulatory capital in order to permit growth in the Bank's asset
size. The Bank intends to grow in asset size through additional deposit and
lending activities, acquisitions, the opening of new branches and an increase in
size of its existing branches. The Company intends to consider other
acquisitions of existing banks or branches located in the State of Florida. The
Company expects that any new branches would be located in Palm Beach County and
its adjoining counties, including Martin County and Broward County. See 'Use of
Proceeds.'
MARKET AND DIVIDEND FOR THE COMMON STOCK AND SERIES C PREFERRED
The Common Stock is listed for trading on NASDAQ under the symbol 'RSFC.'
The closing price of the Common Stock on November 6, 1995, as quoted on NASDAQ,
was $5.375. At September 30, 1995, the approximate number of record holders of
the Common Stock was 1,500. See 'Market Price and Dividend Data.'
The Company commenced the payment of quarterly cash dividends on the Common
Stock in 1993 at the rate of $.01 per share per quarter. With the dividend
declared on April 26, 1995, the amount of the quarterly dividend was increased
to $.02 per share and for the dividend payment declared on July 26, 1995, the
rate was increased to $.025 per share. It is the present intention of the
Company's Board of Directors to continue to pay regular quarterly cash
dividends; however, the declaration and payment of future dividends is at the
sole discretion of the Board of Directors and the amount, if any, depends upon
the earnings, financial condition and capital needs of the Company and the Bank,
as well as other factors, including restrictions arising from Federal banking
laws and regulations to which the Company and the Bank are subject.
Prior to the Offerings, there has been no market for the Series C
Preferred. The Series C Preferred will be listed on NASDAQ under the symbol
'RSFCO.' There can be no assurance that an active or liquid market for the
Series C Preferred will develop. See 'Underwriting.'
RISK FACTORS
Special attention should be given to certain factors discussed under 'Risk
Factors' including change in composition of loan portfolio, ability of the
Company and the Bank to make dividend payments, the effect of interest rates and
market conditions.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30, YEAR ENDED MARCH 31,
----------------- -----------------------------------------------
1995(1) 1994(1) 1995(2) 1994(3) 1993(2) 1992(3) 1991(3)
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS
Interest income............................................ $ 5,320 $ 3,361 $16,288 $12,487 $11,237 $11,366 $12,016
Interest expense........................................... 2,712 1,509 7,397 5,512 4,560 6,950 8,821
------- ------- ------- ------- ------- ------- -------
Net interest income........................................ 2,608 1,852 8,891 6,975 6,677 4,416 3,195
Provision for loan losses.................................. 25 75 200 214 1,003 704 616
------- ------- ------- ------- ------- ------- -------
Net interest income after provision for loan losses........ 2,583 1,777 8,691 6,761 5,674 3,712 2,579
Non-interest income........................................ 914 854 2,999 4,389 3,058 3,812 3,335
Operating expenses......................................... 2,679 2,211 9,860 8,739 6,932 6,266 5,274
------- ------- ------- ------- ------- ------- -------
Income before income tax, extraordinary item
and accounting change..................................... 818 420 1,830 2,411 1,800 1,258 640
Income taxes............................................... 291 155 663 818 582 466 205
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item and accounting change..... 527 265 1,167 1,593 1,218 792 435
Extraordinary item(4)...................................... 278 205
Change in accounting for income taxes...................... 500
------- ------- ------- ------- ------- ------- -------
Net income................................................. $ 527 $ 265 $ 1,167 $ 2,093 $ 1,218 $ 1,070 $ 640
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
PER SHARE DATA(5)
Income before extraordinary item and accounting change..... $.10 $.05 $.23 $.42 $.50 $.42 $.27
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Net income................................................. $.10 $.05 $.23 $.55 $.50 $.55 $.39
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Average common shares and common stock equivalents
outstanding (in thousands)................................ 4,459 4,480 4,474 3,927 2,895 2,389 1,643
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Dividends per share of common stock........................ $.02 $.01 $.07 $.04
------- ------- ------- -------
------- ------- ------- -------
Stated book value(6)....................................... $4.26 $4.11 $4.19 $4.08 $4.31 $3.85 $3.40
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Tangible book value(6)..................................... $3.73 $4.11 $3.63 $4.08 $4.31 $3.85 $3.40
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30, YEAR ENDED MARCH 31,
---------------------- --------------------------------------------------------
1995(1) 1994(1) 1995(2) 1994(3) 1993(2) 1992(3) 1991(3)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (DOLLARS IN
THOUSANDS)
Total assets.......................... $275,980 $204,524 $280,039 $206,637 $169,474 $135,330 $123,786
Investments........................... 11,358 21,333 14,153 24,481 248 248 2,447
Loans receivable - net(7)............. 229,819 165,909 227,940 155,294 126,010 98,970 78,897
Goodwill.............................. 3,173 3,229
Total deposits........................ 225,081 154,608 229,735 156,651 145,911 117,349 109,869
Borrowed money........................ 17,469 21,995 19,733 21,995 2,000 2,000 2,000
Shareholders' equity.................. 22,672 19,811 20,446 19,648 10,793 7,104 5,935
OTHER DATA
Return on average assets.............. .76% .51% .50% 1.13% .91% .81% .50%
Return on average shareholders'
equity............................... 9.78% 5.37% 5.82% 12.63% 14.57% 16.04% 11.41%
Average shareholders' equity to
average total assets................. 7.79% 9.60% 8.60% 8.92% 6.25% 5.03% 4.42%
Allowance for loan losses to
total loans.......................... 1.04% .65% .99% .60% .85% .67% .57%
Net charge-offs to average loans...... N/A(8) .03% .09% .27% .75% .55% .65%
Non-performing assets to total assets
at period end........................ 2.30% 1.35% 1.23% 1.56% 2.43% 3.99% 1.76%
Non-performing loans as a percentage
of total loans....................... 2.13% .77% 1.06% .87% 2.53% 1.64% .25%
Allowances for loan losses to
non-performing loans................. 53% 85% 103% 79% 39% 47% 301%
Net interest spread(9)................ 3.66% 3.65% 3.81% 3.62% 4.98% 3.00% 3.10%
Net interest margin(9)................ 4.12% 3.93% 4.25% 4.01% 5.46% 3.10% 2.90%
Efficiency ratio(10).................. 76% 82% 83% 77% 71% 76% 91%
Dividend payout ratio(11)............. 20% 20% 30% 7%
Number of full service offices........ 7 5 7 5 5 3 3
Loan servicing portfolio (in
millions)............................ $325 $220 $323 $189 $267 $402 $409
<FN>
(Footnotes on following page)
9
<PAGE>
- ------------------------
(1) Quarterly data is presented on an annualized basis, where appropriate.
(2) The Bank acquired Governors on November 30, 1994 and acquired Homestead on
January 22, 1993. For further details related to the acquisitions, see the
Company's Note 2 to the Consolidated Financial Statements at March 31,
1995.
(3) Ratios for the year ended March 31, 1994 include $500,000 cumulative effect
of change in accounting for income taxes where appropriate. Ratios for the
years ended March 31, 1992 and 1991 include extraordinary item benefits of
$278,000 and $205,000, respectively, where appropriate.
(4) The extraordinary items of $278,000 and $205,000 for 1992 and 1991,
respectively, result from the utilization of federal and state net
operating loss carryforwards.
(5) The Company issued 5% and 10% stock dividends on January 21, 1994 and April
1, 1993, respectively. All references to amounts per common share and to
number of common shares have been restated to give retroactive effect for
these stock dividends.
(6) Stated book value per share is calculated by dividing common shareholders'
equity plus the proceeds of the assumed conversion of the equity contracts,
and the assumed conversion of 'in the money' warrants and convertible
preferred stock by the number of shares of Common Stock outstanding plus
the equivalent common shares from the assumed conversion of the equity
contracts, and the assumed conversion of 'in the money' warrants and
convertible preferred stock. Tangible book value per share is calculated by
dividing common shareholders' equity plus the proceeds of the assumed
conversion of the equity contracts, and the assumed conversion of 'in the
money' warrants and convertible preferred stock less goodwill by the number
of shares of Common Stock outstanding plus the equivalent common shares
from the assumed conversion of the equity contracts, and the assumed
conversion of 'in the money' warrants and convertible preferred stock.
(7) Amounts reflect reclassification of in-substance foreclosures from other
real estate in accordance with SFAS No. 114.
(8) The Bank had net recoveries of $44,000 during the three months ended June
30, 1995.
(9) Net interest spread is the average yield earned during the year on
interest-earning assets less the average rate incurred on interest-bearing
liabilities. Net interest margin is the excess of interest on
interest-earning assets over interest on interest-bearing liabilities,
expressed as a percentage of total average interest-earning assets.
(10) The efficiency ratio is calculated by dividing non-interest expense by net
interest income plus non-interest income.
(11) Dividend payout ratio is calculated by dividends declared per share divided
by net income per share.
</FN>
</TABLE>
10
<PAGE>
RISK FACTORS
BEFORE INVESTING IN THE COMMON STOCK OR SERIES C PREFERRED OFFERED HEREBY,
HOLDERS AND OTHER PROSPECTIVE PURCHASERS SHOULD CONSULT CAREFULLY THE FACTORS
PRESENTED BELOW.
CHANGE IN COMPOSITION OF LOAN PORTFOLIO
Through the establishment of a commercial and consumer loan department and
the acquisition of a commercial bank, the Bank has changed the composition of
its loan portfolio in recent years. This change is consistent with the Bank's
goal to convert from a thrift to a commercial bank. The residential mortgage
loan portfolio has decreased from approximately 85% of the loan portfolio at
March 31, 1992 to 67% of the loan portfolio at June 30, 1995. At the same time,
the commercial business and consumer loan portfolio increased from 15% at March
31, 1992 to 33% at June 30, 1995. Commercial business and consumer loans are
generally considered to carry different and significantly greater risks than
single family residential mortgage loans. Commercial business and consumer loans
are generally considered to have a greater risk than single family residential
mortgage loans because the risk of borrower default is greater and their
collateral (i.e. commercial property, business receivables, equipment and
vehicles) is more likely to decline in value and may be more difficult to
liquidate than single family residences. Although the Bank's redistribution of
its loan composition is consistent with the Bank's operating strategy and will
allow the Bank to be comparable to its bank peer group, there are no assurances
that the Bank will be able to generate sufficient loan volume in the commercial
business and consumer loan area to either maintain those portfolios at their
current level or increase the portfolios. See 'Business--Lending Activities of
the Bank.'
ALLOWANCE FOR LOAN LOSSES
Industry experience indicates that a portion of the Bank's loans will
become delinquent and a portion of the loans will require partial or entire
charge off. Regardless of the underwriting criteria utilized by the Bank, losses
may be experienced as a result of various factors beyond the Bank's control,
including, among others, changes in market conditions affecting the value of
security and problems affecting the credit of the borrower. Due to the
concentration of loans in South Florida, adverse economic conditions in that
area could result in a decrease in the value of a significant portion of the
Bank's collateral. There can be no assurance that the Bank will not experience
significant losses in its loan portfolios which may require significant
additions to the loan loss reserves. See 'Business--Non-Performing Assets and
Allowance for Loan Losses.'
INTENSE COMPETITION IN THE BANK'S MARKET AREA
Vigorous competition exists in all areas where the Bank presently engages
in business. The Bank faces intense competition in its market areas from major
banking and financial institutions, including many which have substantially
greater resources, name recognition and market presence than the Bank.
Particularly intense competition exists for sources of funds, including savings
and time deposits, in the residential mortgage market and in the residential
construction lending business. Other banks, many of which have higher legal
lending limits, actively compete for loans, deposits and other services which
the Bank offers. Competitors of the Bank include commercial banks, savings
banks, savings and loan associations, insurance companies, finance companies,
credit unions and mortgage companies. Trends toward the consolidation of the
banking industry may make it more difficult for smaller banks, such as the Bank,
to compete with large national and regional banking institutions.
11
<PAGE>
EFFECT OF INTEREST RATES
The operations of the Bank, and of savings banks in general, are
significantly influenced by general economic conditions, by the related monetary
and fiscal policies of the federal government and, in particular, the Board of
Governors of the Federal Reserve System (the 'FRB'). Deposit flows and the cost
of funds are influenced by interest rates of competing investments and general
market rates of interest. Lending activities are affected by the demand for
residential mortgage financing and for other types of loans, which in turn is
affected by the interest rates at which such financing may be offered and by
other factors affecting the supply of housing and the availability of funds.
The operations of the Bank are substantially dependent on its net interest
income, which is the difference between the interest income received from its
interest-earning assets and the interest expense incurred in connection with its
interest-bearing liabilities. At June 30, 1995, those liabilities that would
reprice within the next twelve months exceeded those assets that would reprice
within the next twelve months by $8.6 million, or 3.1% of total assets. As a
result of this negative interest sensitivity gap, an increase in market interest
rates is likely to result in a reduction in net interest income for the Bank
because the level of interest paid on interest-bearing liabilities is likely to
increase more quickly than the level of interest received on interest-earning
assets. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset/Liability Management.'
Increases in the level of interest rates may reduce loan demand, and
thereby the amount of loans that can be originated by the Bank and, similarly,
the amount of loan and commitment fees, as well as the value of the Bank's
investment securities and other interest-earning assets. Moreover, volatility in
interest rates can result in disintermediation, which is the flow of funds away
from savings institutions into direct investments, such as corporate securities
and other investment vehicles which, because of the absence of federal deposit
insurance, generally pay higher rates of return than savings institutions or
banks, or the transfer of funds within a bank from a lower yielding savings
accounts to higher yielding certificates of deposit.
DEPOSIT INSURANCE PREMIUMS; POTENTIAL ASSESSMENT
The Bank, as a federal stock savings bank, pays deposit insurance premiums
primarily to the Savings Association Insurance Fund (the 'SAIF'). As part of the
acquisition of Governors in November 1994, the Bank assumed over $58 million in
deposits insured by the Bank Insurance Fund (the 'BIF') and, therefore, the Bank
also pays insurance premiums on a portion of its deposits at the BIF assessment
rate. As of March 31, 1995, the most recent date of assessment, approximately
70% of the Bank's deposits were treated as SAIF insured deposits for assessment
purposes, with the remaining 30% of deposits being assessed at the BIF rate. In
the event both the Century acquisition and Banyan acquisition are consummated,
this relative ratio of SAIF-and BIF-assessed deposits is expected to change to
62% and 38%, respectively, and is expected to remain at such ratio subsequent to
the conversion to a commercial bank.
Both SAIF and BIF are required to be recapitalized to 1.25% of insured
reserve deposits. While the BIF has reached the required reserve ratio, the SAIF
is not expected to be recapitalized until at least the year 2002. The Resolution
Trust Corporation Completion Act (the 'RTC Completion Act') authorized $8
billion in funding for the SAIF, however, such funds only become available to
the SAIF if the FDIC determines that the funds are needed to cover losses of the
SAIF and several other stringent criteria are met.
BIF members are currently paying premiums based upon a newly reduced
assessment rate schedule of 4 to 31 basis points ($0.04 to $0.31 for every $100
of assessable deposits), which new rate schedule is retroactive to May 1995.
Members of SAIF are currently paying average deposit insurance premiums of
between 24 and 25 basis points ($0.24 to $0.25 for every $100 of assessable
deposits). Under the new
12
<PAGE>
assessment rate schedule, approximately 92% of BIF members will pay the lowest
assessment rate of 4 basis points; SAIF members would retain the existing
assessment rate schedule of 23 to 31 basis points. In announcing this proposed
rule, the FDIC noted that the premium differential may have adverse consequences
for SAIF members with regard to pricing of loans and deposits and could impair
the ability to raise funds in capital markets. Deposit insurance premiums are
one of the larger components of a financial institution's non-interest expense.
This disparity in insurance premiums between those required for financial
institutions with all or primarily SAIF insured deposits and those with all or
primarily BIF deposits (such as commercial banks) will allow BIF members to
attract and retain deposits at a lower effective cost. The resultant competitive
disadvantage could also result in the Bank having to raise its deposit rates to
remain competitive or losing deposits to BIF members who may decide to pay
higher rates of interest on deposits because of the lower deposit insurance
premiums. Although the Bank has other sources of funds, these other sources may
have higher costs than those of deposits.
Several alternatives to mitigate the effect of the BIF/SAIF premium
disparity have been suggested by the Administration, by members of Congress and
by industry groups. In July 1995, the Chairman of the FDIC announced in
testimony before the Congress a proposal to recapitalize the SAIF by a one-time
charge to SAIF members of approximately $6.6 billion, or approximately 85 basis
points ($.85 for every $100) of assessable deposits on March 31, 1995 and an
eventual merger of the SAIF with the BIF. The Company is unable to predict the
likelihood of legislation effecting these changes, although a consensus among
regulators, legislators and bankers appears to be developing in this regard.
If the proposed assessment of $.85 to $.90 per $100 of assessable deposits
was effected based on deposits as of March 31, 1995, as proposed, the Bank's pro
rata share would amount to approximately $960,000 to $990,000 after taxes,
respectively. Such an assessment, as currently proposed, would not be affected
by the conversion of the Bank to a commercial bank and would have a material
adverse effect on the Company's earnings and results of operations. Accordingly,
there can be no assurance that the reduction in BIF insurance premium rates by
the FDIC will not have an adverse impact on the Bank's operations, earnings,
and/or its competitive position in those markets where it operates, nor can
there be any assurance that action would be taken to address the resulting
disparity. If the Bank's premiums were to be reduced to 4 basis points as a
result of paying this assessment, the Bank's net income, based on deposits as of
March 31, 1995, would increase by approximately $200,000 after tax per year.
ABILITY TO MAKE DIVIDEND PAYMENTS
The Company is a legal entity separate and distinct from the Bank. Because
the Company's principal business activity is limited to owning the Bank, the
Company's payments of dividends on the Common Stock, Series A Preferred and
Series C Preferred will generally be funded from dividends received by the
Company from the Bank. Federal regulations limit the aggregate amount of cash
dividends that the Bank may pay to the Company, its sole shareholder. The Bank's
ability to make dividend payments to the Company is subject to the Bank's
continuing profitable operations and there can be no assurance that future
earnings of the Bank will support sufficient dividend payments to the Company.
DEPENDENCE ON KEY PERSONNEL
The Bank's success depends to a significant extent upon the performance of
its Chairman of the Board and President and its Executive Vice President and
Chief Financial Officer, the loss of either of whom could have a materially
adverse effect on the Bank. The Bank believes that its future success will
depend in large part upon its ability to retain such personnel. There can be no
assurance that the Bank will be successful in retaining such personnel.
13
<PAGE>
CONTROL BY MANAGEMENT
The executive officers and directors of the Company own approximately 23%
of the Company's outstanding shares of Common Stock, excluding currently
exercisable options and warrants. Such persons would own 28% of the Company's
outstanding shares of Common Stock if all outstanding options, whether or not
currently exercisable, were exercised. After the completion of the Offerings
(assuming no exercise of the over-allotment option), the executive officers and
directors are expected to own approximately 16% of the Company's outstanding
shares of Common Stock, excluding all options. Therefore, management is likely,
by virtue of this concentration of stock ownership, to significantly influence
the election of the Company's directors and to significantly influence the
outcome of actions requiring shareholder approval.
FINANCIAL INSTITUTIONS LEGISLATION AND OTHER REGULATORY ISSUES
During 1989 and 1991, Congress passed two major pieces of banking
legislation: the Financial Institutions Reform, Recovery and Enforcement Act of
1989 (the 'FIRREA') and the Federal Deposit Insurance Corporation Improvement
Act of 1991 (the 'FDICIA'). The FIRREA and the FDICIA have significantly changed
the thrift and commercial banking industries in order to protect the deposit
insurance funds and depositors through, among other things, revising and
limiting the types and amounts of investment authority, significantly increasing
minimum regulatory capital requirements and broadening the scope and power of
federal bank and thrift regulators over financial institutions and affiliated
persons. These laws, and the resulting implementing regulations, have subjected
the industry to extensive regulation, supervision and examination by the OTS and
the FDIC. This has resulted in increased deposit insurance premiums and
increased administrative, professional and compensation expenses in complying
with an unprecedented number of new regulations and policies. The regulatory
structure created gives the regulatory authorities extensive authority in
connection with their supervisory and enforcement activities and examination
policies. Further, Congress could enact future legislation that could
significantly affect the powers, authority and operations of the Bank and have a
material adverse effect on the Company's business. See 'Regulatory Matters.'
NO PRIOR MARKET FOR THE SERIES C PREFERRED
Unlike the Common Stock, the Series C Preferred is a new issue of
securities, therefore, prior to the Offerings, there has been no market for the
Series C Preferred. Ryan, Beck has indicated its intention to be a market maker
in the Series C Preferred as long as the volume of trading and other market
making considerations justify such an undertaking. However, a public market
having depth, liquidity and orderliness depends on the presence in the
marketplace of a sufficient number of buyers and sellers at any given time, over
which neither the Company nor its market makers have control. There can be no
assurance that a liquid market for the Series C Preferred will develop. If an
active trading market does develop, there can be no assurance that such trading
market will continue. Additionally, since the prices of securities generally
fluctuate, there can be no assurance that purchasers in the Offerings will be
able to sell securities at or above the purchase price.
14
<PAGE>
THE COMPANY AND THE BANK
Republic Security Financial Corporation (the 'Company'), headquartered in
West Palm Beach, Florida, is a savings bank holding company. Its principal
business is the operation of Republic Security Bank, Federal Savings Bank, a
federal stock savings bank (the 'Bank'). As of June 30, 1995, the Company had
consolidated assets of $276 million, deposits of $225 million and shareholders'
equity of $22.7 million.
The Bank commenced operations on November 19, 1984 as a stock savings bank.
It is a member of the Federal Home Loan Bank (the 'FHLB') System, and its
deposits are insured by the Federal Deposit Insurance Corporation (the 'FDIC')
up to applicable limits. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision (the 'OTS') and the FDIC.
The Bank has seven full-service branches, six of which are located in Palm
Beach County and one in Dade County, Florida. The Bank's main business
activities are attracting deposits, originating loans, making investments and
servicing loans for the Bank and for others. Earnings depend primarily upon the
difference between interest received on loans and investments and interest paid
on the Bank's deposit base and borrowings.
Historically, the Bank's operating strategy was to originate long-term
residential mortgage loans and short-term construction loans on residential
properties. Recently, management began to shift the Bank's business from
traditional thrift activities to those more closely related to commercial
banking, with emphasis placed on originating consumer and commercial loans. The
Bank's current business strategy includes (i) concentration on consumer and
commercial lending, (ii) emphasis on transaction accounts, particularly business
and personal checking accounts, (iii) focus on non-interest income from loan and
deposit service fees and new products and services, (iv) achievement of a higher
profile through additional strategically located banking offices, (v) continued
emphasis on residential construction lending, (vi) maintenance of a presence in
the residential mortgage market and (vii) growth through a combination of bank
and branch acquisitions, as well as de novo expansion of the branch network.
On April 17, 1995, the Bank filed an application to convert its charter
from a federal savings bank to a State of Florida commercial bank, and at the
same time the Company applied with the Federal Reserve Board to become a bank
holding company. The Bank and the Company have received all necessary federal
and state regulatory approvals and anticipate the conversions to be completed on
or before November 15, 1995. The charter conversion reflects the Bank's desire
to overcome the limitations on commercial and consumer loan generations imposed
under its thrift charter and is consistent with the Bank's shift in focus from
traditional thrift business activities to commercial banking activities. As a
consequence of the Bank's application for a commercial bank charter, on July 26,
1995 the Company changed its fiscal year-end from March 31 to December 31.
15
<PAGE>
RECENT DEVELOPMENTS
QUARTER ENDED SEPTEMBER 30, 1995
The following tables set forth selected consolidated financial condition
data for the Company at September 30, 1995, June 30, 1995, and March 31, 1995,
and selected operating results for the Company for the three months and six
months ended September 30, 1995 and 1994. The selected consolidated financial
and operating data and financial ratios at and for the three and six months
ended September 30, 1995 and 1994 are derived from the unaudited financial
statements of the Company, which in the opinion of management, reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation. The selected results of operations presented below are not
necessarily indicative of the results that may be expected for any other period.
This information should be read in conjunction with the Consolidated Financial
Statements of the Company presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT AT AT
SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995
------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................................................... $ 273,901 $275,980 $ 280,039
Investments........................................................ 11,437 11,358 14,153
Loans receivable - net............................................. 207,928 229,819 227,940
Loans held for sale................................................ 7,478
Goodwill........................................................... 3,118 3,173 3,229
Total deposits..................................................... 210,803 225,081 229,735
Borrowed money..................................................... 29,091 17,469 19,733
Shareholders' equity............................................... 23,610 22,672 20,446
Non-performing assets.............................................. 5,010 6,345 3,436
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- --------------------
1995 1994 1995 1994
------ ------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Interest income............................................. $5,454 $3,624 $10,774 $6,985
Interest expense............................................ 2,704 1,539 5,416 3,048
------ ------ ------- ------
Net interest income......................................... 2,750 2,085 5,358 3,937
Provision for loan losses................................... 50 75 75 150
------ ------ ------- ------
Net interest income after provision for loan losses......... 2,700 2,010 5,283 3,787
Non-interest income......................................... 1,367 602 2,281 1,456
Operating expenses.......................................... 2,896 2,138 5,575 4,349
------ ------ ------- ------
Income before income tax.................................... 1,171 474 1,989 894
Income taxes................................................ 421 170 712 325
------ ------ ------- ------
Net income.................................................. $ 750 $ 304 $ 1,277 $ 569
------ ------ ------- ------
------ ------ ------- ------
PER SHARE DATA
Primary earnings per share.................................. $ .15 $ .06 $ .25 $ .11
Fully diluted earnings per share............................ $ .13 $ .06 $ .23 $ .11
Stated book value........................................... $ 4.35 $ 4.13 $ 4.35 $ 4.13
Tangible book value......................................... $ 3.83 $ 4.13 $ 3.83 $ 4.13
Average common shares and common stock equivalents
outstanding (in thousands)................................ 4,629 4,489 4,544 4,478
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1995(1) 1994(1) 1995(1) 1994(1)
------- ------- ------- -------
<S> <C> <C> <C> <C>
OTHER DATA:
Return on average assets......................................... 1.09% .59% .93% .55%
Return on average shareholders' equity........................... 12.96% 6.09% 11.28% 5.72%
Average shareholders' equity to average total assets............. 8.43% 9.70% 8.25% 9.69%
Allowance for loan losses to total loans......................... 1.13% .69% 1.13% .69%
Net charge-offs to average loans................................. * * * .04%
Non-performing assets to total assets at period end.............. 1.83% 1.18% 1.83% 1.18%
Non-performing loans as a percentage of total loans.............. 1.59% .63% 1.59% .63%
Allowances for loan losses to non-performing loans............... 71% 107% 71% 107%
Tangible capital ratio(2)........................................ 7.25% 6.05% 7.25% 6.05%
Core capital ratio(2)............................................ 7.25% 6.05% 7.25% 6.05%
Risk-based capital ratio(2)...................................... 11.90% 12.41% 11.90% 12.41%
Net interest margin.............................................. 4.31% 4.40% 4.21% 4.16%
Net interest spread.............................................. 3.75% 4.17% 3.71% 3.96%
Efficiency ratio................................................. 70% 80% 73% 81%
Number of full service offices................................... 7 5 7 5
Loan servicing portfolio (in millions)........................... $325 $250 $325 $250
<FN>
- ------------------------
* Less than .01%
(1) Data is presented on an annualized basis, where appropriate.
(2) Ratios presented are for the Bank only. Upon conversion of the Bank to a
commercial bank and the Company becoming a bank holding company, the Company
will be subject to capital requirements applied on a consolidated basis in a
form substantially similar to those currently required of the Bank. Capital
ratios as if the Bank was converted to a commercial bank at September 30,
1995 would be:
Leverage capital ratio 7.20%
Tier I risk-based capital ratio 11.50%
Total risk-based capital ratio 11.90%
</FN>
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Total assets decreased $2.1 million to $273.9 million at September 30, 1995
from $276 million at June 30, 1995. The decrease in total assets is attributable
to $14.3 million decrease in deposits offset by an increase of $11.6 million in
Federal Home Loan Bank advances which will be partially repaid with the proceeds
of loans held for sale of $7.5 million at September 30, 1995. The Bank sells
mortgage loans in the normal course of business. At September 30, 1995, loans
under commitment which did not close before quarter-end are classified as loans
held for sale. The decrease in deposits was attributable to lowering interest
rates paid on certificates of deposits since March 1995 to become aligned with
the commercial bank market. Management believes most of the deposit run-off as a
result of lowering interest rates paid on deposits has already occurred and
anticipates deposit run-off to significantly decrease.
Shareholders' equity increased approximately $1.0 mllion at September 30,
1995 from June 30, 1995. The increase in stockholders' equity is attributable to
continued net income and an increase of $367,000 due to the exercise of warrants
offset by $187,000 in common and preferred dividends paid during the quarter.
Net income for the quarter ended September 30, 1995 increased $446,000 to
$750,000 from $304,000 for the quarter ended September 30, 1994. The increase is
due to an increase in net interest income of $665,000 and an increase in other
income of $765,000 partially offset by an increase of $758,000 in
17
<PAGE>
operating expenses. Net interest income increased due to an increase in average
loans outstanding of approximately $45.0 million and an increase in the average
investment balance of approximately $11.0 million. The increases in the loan and
investment balances is largely attributable to the acquisition of Governors in
November 1994.
The increase in non-interest income for the quarter ended September 30,
1995 compared to the quarter ended September 30, 1994 is attributable to a
$360,000 increase in fee income, a $215,000 increase in gain on sales of loans,
a $105,000 increase in net loan servicing income and a $85,000 increase in loan
trading gains. The amount of fee income related to deposit and loan accounts has
more than doubled since the quarter ended September 30, 1994 primarily due to an
increase in the volume of deposit and loan accounts and, to a lesser extent, an
increase in fee charges. Net loan servicing income has increased due to an
increase in the amount of loans serviced for others and a decrease in the
amortization of loan servicing rights. Loan trading department brokers loan
packages for a fee and also acts as a principal in buying and reselling the same
loan package for a gain.
Operating expenses for the quarter ended September 30, 1995 increased
$758,000 to approximately $2.9 million from $2.1 million for the quarter ended
September 30, 1994 as a result of increases in employee compensation, occupancy
expense, data processing expense and insurance expense. These increases are due
to increases in the number of employees, the number of branch locations and
departments and an increase in loan and deposit volumes, primarily as a result
of the acquisition of Governors.
Net income for the six months ended September 30, 1995 was $1.3 million
compared to $569,000 for the six months ended September 30, 1994. The increase
is attributable to an increase in net interest income of $1.4 million, an
increase in other income of $825,000, partially offset by an increase in
operating expenses of $1.2 million. Other income increased due to a $211,000
increase in gain on sale of loans, a $115,000 increase in loan servicing fees
attributable to an increase in the amount of loans serviced for others and an
increase of $606,000 in service fee income due to an increase in the volume of
deposit and loan accounts. In addition, the six months ended September 30, 1994
included a $307,000 gain on the sale of loan servicing rights and a $200,000
loss on the sale of trading investments.
The provision for loan losses decreased $75,000 for the six months ended
September 30, 1995 compared to the six months ended September 30, 1994 primarily
due to a decrease in net loan charge-offs. However, the allowance for loan
losses as a percent of total loans increased from .69% at September 30, 1994 to
1.13% at September 30, 1995. This increase is a result of the allowance acquired
from Governors and a decrease in net loan charge-offs during fiscal 1995 and the
six months ended September 30, 1995. In management's opinion, the credit quality
of the Bank's loan portfolio exclusive of loans acquired from Governors has not
declined from Septembre 30, 1994. In addition, management believes the allowance
for loan losses acquired were adequate for the loan portfolio acquired. The
amount of provision for loan losses is a function of management's ongoing
evaluation of the allowance for loan losses which considers the characteristics
of the loan portfolio, past loan loss experience, economic conditions and other
relevant factors.
In accordance with the Bank's asset classification policy, non-performing
loans are recorded at the lesser of the loan balance or estimated fair value of
the collateral underlying the loan for collateral dependent loans, or the net
present value of estimated future cash flows discounted at the loan's original
effective interest rate. As a result, any expected losses from loans identified
at September 30, 1995 as non-performing have been recognized by the Bank and
should not have a future impact on the allowance for loan losses unless the
condition of the loan further deteriorates.
Operating expenses increased primarily due to increases in employee
compensation, occupancy expense and data processing expenses related to the
Bank's growth as a result of the Governor's acquisition.
18
<PAGE>
PROPOSED ACQUISITION OF WEST PALM BEACH BRANCH OF CENTURY BANK
On October 3, 1995, the Bank entered into an agreement with Century, an
unaffiliated thrift, to purchase one branch office located in West Palm Beach,
Florida. The operations of this branch have consisted of accepting deposits
and withdrawals from savings, checking, money-market and certificate of deposit
accounts. The branch has not originated loans or engaged in any other revenue-
producing activities. The acquisition is expected to be consummated in
December 1995. This will not increase the Bank's branch office network
because the Bank expects to integrate this branch within the Bank's existing
branch network by combining this new office with an existing office in the
vicinity.
The amount to be paid by the Bank to the seller for the transfer of such
assets and liabilities of the branch shall be equal to $1,125,000, to be
amortized over seven years on a straight line basis. The acquisition cost in
excess of the fair market value of tangible assets acquired will be recorded as
an intangible asset. In connection with the acquisition, the Bank will assume
approximately $32.6 million of deposit liabilities, which are SAIF insured,
$31.5 million of assets, including $12.5 million of adjustable rate
single-family residential loans with an 8.25% yield, and $19 million in cash.
USE OF PROCEEDS
The Company expects to receive, after deduction of commissions and
estimated expenses, net proceeds of approximately $16,916,000 in the Offerings
(assuming that the Underwriter does not exercise the over-allotment option and
estimated expenses equal $355,000).
The Company intends to use approximately $9.5 million of the net proceeds
to fund the purchase of Banyan, in the event such acquisition is consummated.
See 'Proposed Acquisition of Banyan Bank.' Further, the Bank intends to use
approximately $3.3 million of the net proceeds to increase its leverage capital
ratio to a target level of at least 7% subsequent to the Bank's conversion to a
commercial bank and the acquisitions of Banyan and the Century Branch. The
balance of the net proceeds is expected to be utilized to increase the Bank's
regulatory capital in order to permit growth in the Bank's asset size. The Bank
intends to grow in asset size through additional deposit and lending activities,
the opening of new branches and an increase in size of its existing branches.
The Company intends to consider other acquisitions of existing banks or branches
located in the State of Florida. Other than the Company's agreement to acquire
Banyan and the Bank's agreement to acquire the Century Branch, there is no
current agreement or understanding to make any acquisition and there is no
assurance that any acquisition will be available on terms and conditions
acceptable to the Company. The Company expects that any new branches would be
located in Palm Beach County and its adjoining counties, including Martin and
Broward counties.
In order to effect such growth in the Bank's asset size, the Company
intends to invest available net proceeds in the capital of the Bank as needed,
either all in the form of capital contributions or a combination of capital
contributions and the purchase of preferred stock of the Bank. Pending any such
investments in the Bank, the Company intends to invest the net proceeds in
short-term interest-bearing securities and to use the proceeds for general
corporate purposes.
19
<PAGE>
MARKET PRICE AND DIVIDEND DATA
The Common Stock is traded on NASDAQ under the symbol 'RSFC.' As of
November 6, 1995, the closing price of the Common Stock, as quoted on NASDAQ,
was $5.375. At September 30, 1995, there were approximately 1,500 record holders
of Common Stock and 4,413,563 shares of Common Stock issued and outstanding. The
Series C Preferred is a new issuance of securities. The Series C Preferred will
be listed on NASDAQ under the symbol 'RSFCO.' There can be no assurance that an
active or liquid market will develop. Ryan, Beck has been a market maker in the
Common Stock and Series A Preferred and, upon completion of the Offerings,
expects to be a market maker in the Series C Preferred.
Making a market involves maintaining bid and ask quotations and being able,
as principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
The development of a liquid public market depends on the existence of willing
buyers and sellers, the presence of which is not within the control of the
Company, or any market maker. There can be no assurance that an active and
liquid trading market for the Series C Preferred will develop or that, if
developed, it will continue. There is no assurance that persons purchasing
shares in the Offerings will be able to sell them at or above the purchase
price.
It is the present intention of the Company's Board of Directors to continue
to pay regular quarterly cash dividends; however, the declaration and payment of
future dividends is at the sole discretion of the Board of Directors and the
amount, if any, depends upon the earnings, financial condition and capital needs
of the Company and the Bank and other factors, including restrictions arising
from Federal banking laws and regulations to which the Company and the Bank are
subject. In addition, the holders of Series C Preferred will have a right prior
to the holders of Common Stock and on a parity with the holders of the Series A
Preferred to receive the payment of dividends. See 'Description of
Securities--Common Stock' and 'Preferred Stock--Series C Preferred.'
The following table sets forth the range of high and low sales prices of
and cash dividends paid on the Common Stock during the periods indicated, as
reported by NASDAQ.
<TABLE>
<CAPTION>
PRICE DIVIDEND
------------------------ PER SHARE OF
HIGH LOW COMMON STOCK
--------- --------- -------------
<S> <C> <C> <C>
YEAR ENDED MARCH 31, 1994
First Quarter..................................................... $ 4 $ 3 $.0095
Second Quarter.................................................... 3 1/2 2 7/8 $.0095
Third Quarter..................................................... 4 1/4 3 1/2 $.0095
Fourth Quarter.................................................... 4 1/2 3 5/8 $.01
YEAR ENDED MARCH 31, 1995
First Quarter..................................................... 4 1/4 3 3/8 $.01
Second Quarter.................................................... 4 1/2 3 3/4 $.02
Third Quarter..................................................... 4 3/8 3 1/4 $.02
Fourth Quarter.................................................... 4 3/8 3 3/4 $.02
PERIOD ENDING DECEMBER 31, 1995
Quarter ended June 30, 1995....................................... 5 3/8 4 1/8 $.02
Second Quarter ended September 30, 1995........................... 6 1/4 4 3/4 $.025
Third Quarter through November 6, 1995............................ 5 7/8 5 1/8 $.025
</TABLE>
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 thereto, and elsewhere in this Prospectus, to amounts per common share
and to number of common shares have been restated to give retroactive effect for
these stock dividends.
20
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at June 30, 1995, and the pro forma consolidated capitalization of the
Company at such date after giving effect to the Company's receipt of the
estimated net proceeds from the Offerings based on the assumptions set forth in
the notes below. See also 'Pro Forma Combined Condensed Financial Information.'
<TABLE>
<CAPTION>
JUNE 30, 1995
-----------------------------
ACTUAL AS ADJUSTED(1)(2)
-------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Deposits........................................................................... $225,081 $ 225,081
Short-term borrowings.............................................................. 17,469 17,469
-------- -----------------
Total deposits and borrowings...................................................... $242,550 $ 242,550
-------- -----------------
-------- -----------------
Shareholders' equity:
Preferred Stock (authorized: 10,000,000 shares, stated value $10.00; issued
and outstanding at June 30, 1995: 402,500 and 1,302,500,
as adjusted)................................................................ $ 4,025 $ 13,025
Common Stock (authorized: 20,000,000 shares, par value $.01;
issued and outstanding at June 30, 1995: 4,313,060 and 6,113,060,
as adjusted)................................................................ 43 61
Additional-paid-in-capital.................................................... 16,211 24,109
Retained earnings............................................................. 2,393 2,393
-------- -----------------
Total shareholders' equity......................................................... $ 22,672 $ 39,588
-------- -----------------
-------- -----------------
<FN>
- ------------------------
(1) Assumes that the Underwriter will not exercise their option to acquire
135,000 additional shares of Series C Preferred or 270,000 additional shares
of Common Stock.
(2) In the event the Underwriter exercises its options the estimated net
proceeds to be received by the Company, less estimated expenses and
underwriting fees of the Offerings of $1,710,850, is $19,506,650.
</FN>
</TABLE>
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for each of the three years in the
period ended March 31, 1995 and the balance sheet data at March 31, 1995 and
1994 are derived from consolidated financial statements of the Company,
contained elsewhere herein, which have been audited by Ernst & Young LLP,
independent auditors. The selected financial data for the years ended March 31,
1992 and 1991 and the balance sheet data at March 31, 1993, 1992 and 1991 have
been derived from audited consolidated financial statements not contained
herein. The summary of operating results for the three months ended June 30,
1995 and 1994 and the balance sheet data at June 30, 1995 and 1994 are derived
from unaudited interim consolidated financial statements contained elsewhere
herein. The unaudited interim consolidated financial statements include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the information contained
therein. The results for the interim periods presented herein are not
necessarily indicative of the results to be expected for any other period or for
the entire fiscal year. The financial data reflects the results of Governors
since November 30, 1994 and Homestead since January 22, 1993, the respective
acquisition dates of these companies. Governors and Homestead were acquired in
separate transactions accounted for using the purchase method of accounting. THE
DATA CONTAINED BELOW SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO CONTAINED ELSEWHERE
IN THIS PROSPECTUS. SEE ALSO 'PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION.'
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30, YEAR ENDED MARCH 31,
------------------ ---------------------------------------------------
1995(1) 1994(1) 1995(2) 1994(3) 1993(2) 1992(3) 1991(3)
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS
Interest income................................... $ 5,320 $ 3,361 $16,288 $12,487 $11,237 $11,366 $12,016
Interest expense.................................. 2,712 1,509 7,397 5,512 4,560 6,950 8,821
------- ------- ------- ------- ------- ------- -------
Net interest income............................... 2,608 1,852 8,891 6,975 6,677 4,416 3,195
Provision for loan losses......................... 25 75 200 214 1,003 704 616
------- ------- ------- ------- ------- ------- -------
Net interest income after provision for loan
losses........................................... 2,583 1,777 8,691 6,761 5,674 3,712 2,579
Non-interest income............................... 914 854 2,999 4,389 3,058 3,812 3,335
Operating expenses................................ 2,679 2,211 9,860 8,739 6,932 6,266 5,274
------- ------- ------- ------- ------- ------- -------
Income before income tax, extraordinary item and
accounting change(4)............................. 818 420 1,830 2,411 1,800 1,258 640
Income taxes...................................... 291 155 663 818 582 466 205
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item and
accounting change................................ 527 265 1,167 1,593 1,218 792 435
Extraordinary item................................ 278 205
Change in accounting for income taxes............. 500
------- ------- ------- ------- ------- ------- -------
Net income........................................ $ 527 $ 265 $ 1,167 $ 2,093 $ 1,218 $ 1,070 $ 640
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
PER SHARE DATA(5)
Income before extraordinary item and accounting
change........................................... $.10 $.05 $.23 $.42 $.50 $.42 $.27
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Net income........................................ $.10 $.05 $.23 $.55 $.50 $.55 $.39
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Average common shares and common stock equivalents
outstanding (in thousands)....................... 4,459 4,480 4,474 3,927 2,895 2,389 1,643
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Dividends per share of common stock............... $.02 $.01 $.07 $.04
------- ------- ------- -------
------- ------- ------- -------
Stated book value(6).............................. $4.26 $4.11 $4.19 $4.08 $4.31 $3.85 $3.40
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Tangible book value(6)............................ $3.73 $4.11 $3.63 $4.08 $4.31 $3.85 $3.40
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30, YEAR ENDED MARCH 31,
-------------------- --------------------------------------------------------
1995(1) 1994(1) 1995(2) 1994(3) 1993(2) 1992(3) 1991(3)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (DOLLARS IN THOUSANDS)
Total assets.............................. $275,980 $204,524 $280,039 $206,637 $169,474 $135,330 $123,786
Investments............................... 11,358 21,333 14,185 24,481 248 248 2,447
Loans receivable - net(7)................. 229,819 165,909 227,940 155,294 126,010 98,970 78,897
Goodwill.................................. 3,173 3,229
Total deposits............................ 225,081 154,608 229,735 156,651 145,911 117,349 109,869
Borrowed money............................ 17,469 21,995 19,733 21,995 2,000 2,000 2,000
Shareholders' equity...................... 22,672 19,811 20,446 19,648 10,793 7,104 5,935
OTHER DATA
Return on average assets.................. .76% .51% .50% 1.13% .91% .81% .50%
Return on average shareholders' equity.... 9.78% 5.37% 5.82% 12.63% 14.57% 16.04% 11.41%
Net interest spread(8).................... 3.66% 3.65% 3.81% 3.62% 4.98% 3.00% 3.10%
Net interest margin(8).................... 4.12% 3.93% 4.25% 4.01% 5.46% 3.10% 2.90%
Allowance for loan losses to total
loans.................................... 1.04% .65% .99% .60% .85% .67% .57%
Net charge-offs to average loans.......... N/A(9) .03% .09% .27% .75% .55% .65%
Non-performing assets to total assets
at period end............................ 2.30% 1.35% 1.23% 1.56% 2.43% 3.99% 1.76%
Non-performing loans as a percentage
of total loans........................... 2.13% .77% 1.06% .87% 2.53% 1.64% .25%
Allowance for loan losses to
non-performing loans..................... 53% 85% 103% 79% 39% 47% 301%
Tangible capital ratio.................... 6.8% 6.1% 6.0% 6.0% 6.1% 4.8% 4.5%
Core capital ratio........................ 6.8% 6.1% 6.0% 6.0% 6.1% 4.8% 4.5%
Risk-basked capital ratio................. 11.0% 12.5% 11.0% 13.2% 13.6% 8.6% 8.6%
Earnings to fixed charges:(10)
Excluding interest on deposits.......... 2.53x 1.73x 1.77x 2.83x 5.97x 3.11x 1.71x
Including interest on deposits.......... 1.24x 1.18x 1.17x 1.36x 1.38x 1.18x 1.07x
Efficiency ratio(11)...................... 76% 82% 83% 77% 71% 76% 91%
Dividend payout ratio(12)................. 20% 20% 30% 7%
Number of full service offices............ 7 5 7 5 5 3 3
Loan servicing portfolio (in millions).... $325 $220 $323 $189 $267 $402 $409
<FN>
- ------------------------
(1) Quarterly data is presented on an annualized basis, where appropriate.
(2) The Bank acquired Governors on November 30, 1994 and acquired Homestead on
January 22, 1993. For further details related to the acquisitions, see the
Company's Note 2 to the Consolidated Financial Statements at March 31,
1995.
(3) Ratios for the year ended March 31, 1994 include $500,000 cumulative effect
of change in accounting for income taxes where appropriate. Ratios for the
years ended March 31, 1992 and 1991 include extraordinary item benefits of
$278,000 and $205,000, respectively, where appropriate.
(4) The extraordinary items of $278,000 and $205,000 for 1992 and 1991,
respectively, result from the utilization of federal and state net
operating loss carryforwards.
(5) The Company issued 5% and 10% stock dividends on January 21, 1994 and April
1, 1993, respectively. All references to amounts per common share and
number of common shares have been restated to give retroactive effect for
these stock dividends.
(6) Stated book value per share is calculated by dividing common shareholders'
equity plus the proceeds of the assumed conversion of the equity contracts,
and the assumed conversion of 'in the money' warrants and convertible
preferred stock by the number of shares of Common Stock outstanding plus
the equivalent common shares from the assumed conversion of the equity
contracts, and the assumed conversion of 'in the money' warrants and
convertible preferred stock. Tangible book value per share is calculated by
dividing common shareholders' equity plus the proceeds of the assumed
conversion of the equity contracts, and the assumed conversion of 'in the
money' warrants and convertible preferred stock less goodwill by the number
of shares of Common Stock outstanding plus the equivalent common shares
from the assumed conversion of the equity contracts, and the assumed
conversion of 'in the money' warrants and convertible preferred stock.
(7) Amounts reflect reclassification of in-substance foreclosures from other
real estate in accordance with SFAS No. 114.
(8) Net interest spread is the average yield earned during the year on
interest-earning assets less the average rate incurred on interest-bearing
liabilities. Net interest margin is the excess of interest on
interest-earning assets over interest on interest-bearing liabilities,
expressed as a percentage of total average interest-earning assets.
(9) The Bank had net recoveries of $44,000 during the three months ended June
30, 1995.
(10) The ratio of earnings to fixed charges is computed by dividing the sum of
income before income tax, extraordinary item and accounting change and
fixed charges by fixed charges. Fixed charges represent interest expense,
amortization of debt issue costs, the interest portion of rental expense
and preferred stock dividend requirements.
(11) The efficiency ratio is calculated by dividing non-interest expense by net
interest income plus non-interest income.
(12) Dividend payout ratio is calculated by dividends declared per share divided
by net income per share.
</FN>
</TABLE>
23
<PAGE>
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1995
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<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
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<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
------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<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 loan losses............... 1,390 1,552 1,005 1,727
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>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASIS OF PREPARATION
The following discussion and analysis is intended to provide an
understanding of the significant factors that influenced the Company's financial
condition at June 30, 1995 as compared to March 31, 1995, March 31, 1995 as
compared to March 31, 1994, and March 31, 1994 as compared to March 31, 1993, as
well as the results of operations for the three months ended June 30, 1995 as
compared to the three months ended June 30, 1994, and for the year ended March
31, 1995 as compared to March 31, 1994, and March 31, 1994 as compared to March
31, 1993. The Company's operating results include the results of Governors since
November 30, 1994 and the results of Homestead since January 22, 1993. The
discussion and analysis should be read in conjunction with the Company's
consolidated financial statements and corresponding notes included elsewhere in
this Prospectus.
In fiscal 1995, management continued its efforts in shifting the Bank's
business from traditional thrift activities to those more closely related to
commercial banking. The new business strategy includes concentration on consumer
and commercial lending, maintenance of a residential mortgage banking presence,
continued emphasis on construction lending, emphasis on business and personal
transaction accounts and concentration on non-interest income from loan and
deposit service fees and new product and services. On November 30, 1994 the Bank
acquired Governors, a commercial bank with a concentration of the types of loans
now targeted by the Bank.
In connection with its application for conversion to a commercial bank
charter, on July 26, 1995, the Company changed its fiscal year-end from March 31
to December 31. A transition report on Form 10-K will be filed for the nine
months ending December 31, 1995.
RESULTS OF OPERATIONS
The Company had net income of $527,000 or $.10 per common share for the
three months ended June 30, 1995, compared to net income of $265,000 or $.05 per
common share for the three months ended June 30, 1994. The 99% increase in net
income is primarily due to an increase in net interest income, which is a result
of re-engineering the Bank's operations during fiscal 1995 and the effects of
the acquisition of Governors which took place on November 30, 1994.
The Company's net income decreased by $926,000 from $2.1 million in 1994 to
$1.2 million in 1995. Earnings per share declined to $0.23 in 1995 from $0.42 in
1994 (before the cumulative effect of a change in accounting principle). Net
income for the period ended 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 of $426,000, excluding the cumulative effect of a
change in accounting principle, is due to increases of $1.92 million in net
interest income and $476,000 in other non-interest income which were more than
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.
The Company's net income increased $875,000 to $2.1 million in 1994 from
$1.2 million in 1993. The 1994 results included a $500,000 cumulative effect of
a change in accounting principle related to the adoption of SFAS No. 109.
Earnings per share, however, declined to $0.42 in 1994 (excluding the $0.13 gain
from the cumulative effect of a change in accounting principle) from $0.50 in
1993. The decline in net income per share is the result of an increase in shares
outstanding as a result of the Company's offering of 1,150,000 shares of Common
Stock and 402,500 shares of Series A Preferred which was completed in September,
1993.
25
<PAGE>
As a result of the downsizing of the mortgage banking operations, which
contribute to non-interest income, the Company's future results of operations
will be more dependent on the level of its net interest income, which is the
difference between the interest income it receives on its interest-earning
assets and the interest expense it pays on its interest-bearing liabilities. Net
interest income is determined primarily by interest rate spread and the relative
amounts of interest-earning assets and interest-bearing liabilities. See Note 17
of Notes to Consolidated Financial Statements.
If the proposed one-time assessment to recapitalize the SAIF is effected,
the Company's net income, based on deposit balances at March 31, 1995, will
decrease by approximately $980,000, net of taxes, in the period in which the
charge is assessed. Under the current proposal, in addition to the one-time
assessment to SAIF members, a merger of the SAIF and BIF would also occur which
would lower the Bank's insurance premiums to 4 basis points and result in an
increase in the Company's net income of approximately $200,000, net of tax, per
year based on the deposit balances at March 31, 1995. See 'Risk Factors--
Deposit Insurance Premiums; Potential Assessment.'
NET INTEREST INCOME
Net interest income for the quarter ended June 30, 1995 increased $756,000
or 41% from the same period in 1994. The quarter ended June 30, 1995 reflects an
increase in interest-earning assets and interest-bearing liabilities as well as
an increase in net yield on interest-earning assets as compared to the quarter
ended June 30, 1994. The acquisition of Governors is the primary contributor to
the increase in interest-earning assets and interest-bearing liabilities. In
addition, market rates increased and the composition of the Bank's loan
portfolio changed since June 30, 1994 to reflect an increase in consumer,
commercial business and commercial real estate loans which generally are higher
yielding than residential mortgage loans. The Bank's deposit portfolio has
changed since June 30, 1994 to reflect an increase in business and personal
transaction deposit accounts, which generally have a lower cost of funds than
certificates of deposit.
Net interest income increased by 27% to $8.9 million in fiscal 1995
compared to $7.0 million in fiscal 1994. This increase was primarily due to
increased interest income on loans of $3.7 million, due to an increase in loan
volume during 1995, partially offset by an increase in interest expenses of $1.9
million due to an increase in the rate and volume of interest-bearing
liabilities. The increase in loan volume for the period ended March 31, 1995
compared to the year ended March 31, 1994 is attributable to an increase in
commercial and consumer loan originations as well as the Governors acquisition
on November 30, 1994. Net interest income remained relatively flat from 1993 to
1994 as the increase in loan and deposit volumes were offset by the decrease in
interest rates during the period.
Interest Income
The increase in interest income of $1.9 million to $5.3 million for the
quarter ended June 30, 1995 from $3.4 million for the quarter ended June 30,
1994 was primarily related to loan income. The increase in interest income on
loans is attributable to an increase in average loans outstanding to $228.6
million from $164.7 million, which resulted in a $1.20 million increase in
interest income, and an increase in the average rate earned on loans resulted in
a $713,000 increase in interest income. The increase in loan volume is largely
attributable to the acquisition of Governors which accounted for $40.3 million
of the total $63.9 million increase in average loan balances for the period
ended June 30, 1995 compared to the period ending June 30, 1994.
The Bank's loan portfolio yield increased in the quarter ended June 30,
1995, primarily due to an increase in higher yielding loans. Commercial real
estate, commercial and consumer loans comprise 33% of the portfolio at June 30,
1995 compared to 15% at June 30, 1994. These shifts in the loan portfolio are in
26
<PAGE>
line with the Company's strategic objective and a result of the Bank targeting
commercial and non-residential consumer markets as well as the acquisition of
Governors.
Of the $3.8 million increase in interest income from fiscal 1994 to 1995,
$2.9 million was attributable to an increase in interest-earning asset volume,
and the remainder was due to an increase in average yield. The average yield on
interest-earning assets increased from 7.19% in 1994 to 7.79% in 1995 primarily
as a result of a larger portion of interest-earnings assets being in loans
rather than lower yielding investments.
Interest income increased approximately 10% or $1.2 million for the year
ended March 31, 1994 compared to the year ended March 31, 1993. The increase is
attributable to a $52 million increase in average interest-earning assets from
$122 million at March 31, 1993 to $174 million at March 31, 1994. Average
interest-earning assets increased as a result of purchases of loans held for
investment of $26 million and adjustable rate mortgage fund investments of $24
million. The increase in interest income resulting from increased volume was
partially offset by a decrease in market interest rates during 1994.
Interest Expense
In line with management's goals, the Bank experienced a significant
increase in the average balance of non-interest-bearing deposits during the
quarter ended June 30, 1995 as compared to the prior year's quarter. The largest
increase in volume, however, was in certificates of deposits. The $1.20 million
increase in interest expense in the 1995 quarter over the 1994 quarter is
largely due to a 58% increase in the average volume of certificates to $143.2
million in the 1995 quarter from $90.8 million in the 1994 quarter and an
increase in the average rate paid on certificates to 5.63% in 1995 from 4.03% in
1994. The increase in certificate volume contributed $524,000 to the total
increase in interest expense, and $578,000 of the total increase was a result of
the increased average rate on certificates of deposit. A significant portion of
the increase in the average balance of deposits was due to the acquisition of
Governors. The increase in the average rate paid on certificates of deposit
during the quarter ended June 30, 1995 compared to the quarter ended June 30,
1994 is due to an overall increase in market interest rates during fiscal 1995.
Of the $1.89 million increase in interest expense in fiscal 1995, $1.1
million was a result of increased average volume of interest-bearing liabilities
to $185.7 million in 1995 from $154.4 million in 1994 and $757,000 was due to an
increase in the average rate on interest-bearing liabilities to 3.98% in 1995
from 3.57% in 1994. The primary contributor to these rate and volume increases
was certificates of deposit. The $16.2 million increase in the average balance
of certificates of deposit during fiscal 1995 compared to fiscal 1994 is
primarily a result of the Governors acquisition in November 1994 and the
increase in the average rate paid on certificate of deposit to 4.52% in fiscal
1995 from 3.90% in fiscal 1994 is due to an overall increase in market rates.
Of the $0.9 million increase in interest expense in fiscal 1994, $2.9
million was as a result of increased average volume of interest-bearing
liabilities to $154.4 million in 1994 from $108.4 million in 1993, offset in
part by $2.0 million pertaining to a decreased average rate on interest-bearing
liabilities to 3.57% in 1994 from 4.21% in 1993. The decrease in the average
rate paid on certificates of deposit during fiscal 1994 compared to fiscal 1993
is due to an overall decrease in market interest rates during fiscal 1994. The
increase in the average balance of certificates of deposit during fiscal 1994
compared to fiscal 1993 is a result of the Homestead acquisition in January
1993. Another factor responsible for the rate and volume changes is borrowed
money. The outstanding balance of borrowed money increased in fiscal 1994 as the
Bank used FHLB advances to meet loan demand. The average rate on borrowed money
decreased contributing to the decrease in the average rate on interest bearing
liabilities.
27
<PAGE>
The following table summarizes net interest income for the three months
ended June 30, 1995 and 1994 and the years ended March 31, 1995, 1994 and 1993:
NET INTEREST INCOME, AVERAGE BALANCE AND RATES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, YEAR ENDED MARCH 31,
------------------------------------------------------------ ----------------------------
1995 1994 1995
---------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Loans-net*................... $228,597 $ 4,979 8.71% $164,682 $ 3,093 7.51% $191,442 $ 15,254 7.97%
Interest-bearing deposits.... 11,348 91 3.21 12,596 120 3.81 10,743 462 4.30
Investments.................. 13,408 250 7.46 11,246 148 5.26 6,809 572 8.40
-------- -------- -------- -------- -------- --------
Total interest-earning
assets..................... 253,353 5,320 8.40 188,524 3,361 7.13 208,994 16,288 7.79
Other assets................. 23,000 18,500 20,737
-------- -------- --------
Total........................ $276,353 $207,024 $229,731
-------- -------- --------
-------- -------- --------
LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Savings deposits............. $ 19,132 $ 144 3.01% $ 17,500 $ 86 1.97% $ 19,393 $ 607 3.13%
NOW.......................... 34,907 157 1.80 25,800 101 1.57 27,794 419 1.51
Money market................. 14,427 113 3.13 19,506 143 2.93 14,067 437 3.11
Certificates of deposit...... 143,282 2,018 5.63 90,840 916 4.03 105,659 4,781 4.52
Borrowed money............... 17,107 280 6.55 19,903 263 5.29 18,829 1,153 6.12
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities................ 228,855 2,712 4.74 173,549 1,509 3.48 185,742 7,397 3.98
-------- -------- ------ -------- -------- ------ -------- -------- ------
Non-interest-bearing
deposits................... 17,432 7,468 10,428
Other liabilities............ 8,507 6,278 13,115
Shareholders' equity......... 21,559 19,729 20,446
-------- -------- --------
Total liabilities and
shareholders' equity....... $276,353 $207,024 $229,731
-------- -------- --------
-------- -------- --------
Net interest income/rate
spread..................... $ 2,608 3.66% $ 1,852 3.65% $ 8,891 3.81%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Net average interest-earning
assets/net interest
margin..................... $ 24,498 4.12% $ 14,975 3.93% $ 23,252 4.25%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................ 1.11x 1.09x 1.13x
------ ------ ------
------ ------ ------
<CAPTION>
1994 1993
---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Loans-net*................... $144,359 $ 11,525 7.98% $112,854 $ 10,774 9.55%
Interest-bearing deposits.... 14,113 300 2.13 8,156 385 4.72
Investments.................. 15,284 662 4.33 1,247 78 6.26
-------- -------- -------- --------
Total interest-earning
assets..................... 173,756 12,487 7.19 122,257 11,237 9.19
Other assets................. 12,008 11,497
-------- --------
Total........................ $185,764 $133,754
-------- --------
-------- --------
LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Savings deposits............. $ 19,168 $ 545 2.84% $ 13,504 $ 385 2.85%
NOW.......................... 20,439 326 1.59 12,892 255 1.98
Money market................. 7,825 368 4.70 7,365 234 3.18
Certificate of deposits...... 89,494 3,494 3.90 72,572 3,445 4.75
Borrowed money............... 17,445 779 4.47 2,024 241 11.91
-------- -------- -------- --------
Total interest-bearing
liabilities................ 154,371 5,512 3.57 108,357 4,560 4.21
-------- -------- ------ -------- -------- ------
Non-interest-bearing
deposits..................... 8,243 8,724
Other liabilities............ 6,576 8,315
Shareholders' equity......... 16,574 8,358
-------- --------
Total liabilities and
shareholders' equity....... $185,764 $133,754
-------- --------
-------- --------
Net interest income/rate
spread..................... $ 6,975 3.62% $ 6,677 4.98%
-------- ------ -------- ------
-------- ------ -------- ------
Net average interest-earning
assets/net interest
margin..................... $ 19,385 4.01% $ 13,900 5.46%
-------- ------ -------- ------
-------- ------ -------- ------
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................ 1.13x 1.13x
------ ------
------ ------
<FN>
- ------------------------
* Includes non-accrual loans, which are not significant.
</FN>
</TABLE>
28
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED MARCH 31,
---------------------------- ------------------------------------------------------------
JUNE 30, 1995 VERSUS 1994 1995 VERSUS 1994 1994 VERSUS 1993
---------------------------- ---------------------------- ----------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN: DUE TO CHANGE IN:
------------------ ------------------ ------------------
AVERAGE AVERAGE NET AVERAGE AVERAGE NET AVERAGE AVERAGE NET
RATE VOLUME CHANGE RATE VOLUME CHANGE RATE VOLUME CHANGE
------- ------- ------ ------- ------- ------ ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans - net............... $ 713 $ 1,198 $ 1,911 $ (23) $ 3,752 $ 3,729 $ (2,257) $ 3,008 $ 751
Interest-bearing deposits. (7) (47) (54) 307 (145) 162 (366) 281 (85)
Investments............... (13) 115 102 622 (712) (90) (294) 878 584
------- ------- ------ ------- ------- ------ ------- ------- ------
693 1,266 1,959 906 2,895 3,801 (2,917) 4,167 1,250
------- ------- ------ ------- ------- ------ ------- ------- ------
INTEREST EXPENSE:
Savings deposits.......... 50 8 58 55 7 62 (1) 161 160
NOW accounts.............. 22 34 56 (18) 111 93 (78) 149 71
Money Market.............. 8 (38) (30) (125) 194 69 119 15 134
Certificates of Deposit... 578 524 1,102 556 731 1,287 (754) 803 49
Borrowed money............ 52 (35) 17 289 85 374 (1,298) 1,836 538
------- ------- ------ ------- ------- ------ ------- ------- ------
710 493 1,203 757 1,128 1,885 (2,012) 2,964 952
------- ------- ------ ------- ------- ------ ------- ------- ------
Net interest income........ $ (17) $ 773 $ 756 $ 149 $ 1,767 $ 1,916 $ (905) $ 1,203 $ 298
------- ------- ------ ------- ------- ------ ------- ------- ------
------- ------- ------ ------- ------- ------ ------- ------- ------
</TABLE>
PROVISION FOR LOAN LOSSES
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 decreased $50,000 for the three months ended
June 30, 1995 compared to the three months ended June 30, 1994 primarily due to
a decrease in net loan charge-offs. However, the allowance for loan losses as a
percent of total loans increased from .65% at June 30, 1994 to 1.04% at June 30,
1995. This increase is a result of the allowance acquired from Governors and a
decrease in net loan charge-offs during fiscal 1995 and the three months ended
June 30, 1995. Management's evaluation of the allowance for loan losses includes
applying relevant risk factors to the entire loan portfolio including non-
performing loans. Risk factors applied to the performing loan portfolio are
based on the Bank's past 3 year loss history considering the current portfolio's
characteristics, current economic conditions and other relevant factors.
Non-performing loans are carried at fair value based on the most recent
information available. The following risk factors are applied to the carrying
value of each classified loan: (i) substandard at 15%, (ii) doubtful at 50%, and
(iii) loss is charged-off 100%. The amount of provision for loan losses is a
function of management's evaluation of the allowance for loan losses. Based on
the analysis of the allowance for loan losses at June 30, 1995, management
believes the allowance balance is adequate.
Although the percent of non-performing loans to total loans increased from
.87% at March 31, 1994 to 1.06% at March 31, 1995, the provision for loan losses
remained relatively stable for the periods. The increase in non-performing loans
was primarily a result of the Governor's loan portfolio acquired. Likewise,
29
<PAGE>
an allowance for loan losses was acquired. In addition, net charge-offs have
decreased each year since fiscal 1993 which decreases the depletion of the
allowance for loan losses due to charge-offs.
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.
NON-INTEREST INCOME
Gain on sales of loans and servicing rights and loan servicing income and
amortization of loan servicing rights are included in mortgage banking income.
Gain on Sales of Loans and Servicing Rights
Gain on the sale of loans decreased $101,000 for the quarter ended June 30,
1995 as compared to the quarter ended June 30, 1994 due to the reductions in
mortgage banking operations in late fiscal 1995. In addition, the quarter ended
June 30, 1994 included $366,000 gain on sale of servicing rights. No gain on
sale of servicing rights was recognized for the quarter ended June 30, 1995.
Due to a decrease in loan production volume, gain on sales of loans and
servicing rights decreased $2.48 million in 1995 to $1.18 million compared to
$3.66 million in 1994. The decrease in mortgage banking activities is
attributable to the increase in interest rates which decreased the volume of
loan originations and refinancings and an intensely competitive residential
construction loan market. 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. In addition, during 1995, the Bank reduced mortgage
banking operations to a level where income from mortgage banking activities is
less significant to the overall earnings of the Bank than in prior years while
increasing non-interest income from 'core' banking operations. Gain on sales of
loans and servicing rights remained relatively flat from 1993 to 1994.
Loan Servicing Income and Amortization of Loan Servicing Rights
Net loan servicing income comprised of loan servicing income and
amortization of loan servicing rights increased approximately $56,000 for the
quarter ended June 30, 1995 compared with the quarter ended June 30, 1994
primarily due to a $105 million increase in the amount of loans serviced for
others.
Net loan servicing income increased $793,000 in 1995 to $608,000 compared
to a loss of $185,000 in 1994 due to an increase in the amount of loans serviced
and a decrease in the amortization of loan servicing rights. 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. 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. 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.
30
<PAGE>
Other Income
Service charges on deposit accounts increased $168,000 for the quarter
ended June 30, 1995 compared to the quarter ended June 30, 1994 due to an
increase in the volume of loan and deposit accounts and an increase in the fee
for service charges on deposit accounts. Other income increased $103,000 for the
quarter ended June 30, 1995 compared to the quarter ended June 30, 1994
primarily due to the increase in loan late charges, extension fees and other
loan related fees as a result of an increase in the volume of loans since June
30, 1994. In addition, the Company recognized a $200,000 loss on
investments-trading during the quarter ended June 30, 1994.
Service charges on deposit accounts increased $369,000 in 1995 compared to
1994 as a result of transaction accounts increasing from $63.6 million in 1994
to $86.8 million in 1995. This increase was due to the acquisition of Governors
as well as the Bank's initiatives to attract transaction type deposit accounts.
Other income increased $128,000 in 1995 compared to 1994 primarily as a result
of an increase in loan fee income due to an increase of approximately $70.8
million in the loan portfolio.
Service charges on deposit accounts and other income increased $482,000
from 1993 to 1994. This increase was primarily due to management's instituting
fees similar to those charged by commercial banks as well as an increase in loan
and deposit accounts due to the Homestead merger.
OPERATING EXPENSES
Operating expenses increased 21% for the quarter ended June 30, 1995
compared to the same quarter in the prior year primarily as a result of the
acquisition of Governors. This acquisition resulted in an increase in the
banking center network from five to seven full service banking centers.
Operating expenses as a percent of average assets decreased to 3.9% for the
quarter ending June 30, 1995 from 4.3% for the quarter ending June 30, 1994.
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 employee severance costs associated with
reducing staffing levels in the mortgage banking operations. Growth in 1995
included expansion of the banking center network from five branches in 1994 to
seven branches in November 1994 and the addition at that time 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, have improved over the three year
period, 4.3%, 4.7%, and 5.2% for the years ended March 31, 1995, 1994, and 1993,
respectively.
INCOME TAXES
Income tax expense increased $136,000 for the three months ended June 30,
1995 compared to the quarter ended June 30, 1994 due to an increase in net
income before taxes. Income tax expense decreased for the year ended March 31,
1995 compared to the year ended March 31, 1994 due to a decrease in net income
before taxes offset by an increase in the effective tax rate from 34% to 36%.
The increase in the effective tax rate in 1995 as compared to 1994 is primarily
the result of the Company reducing its deferred
31
<PAGE>
tax valuation allowance by approximately $297,000 in fiscal 1994. The valuation
allowance was reduced in 1994 as the Company determined the utilization of the
Bank's net operating loss carryforward was more likely than not based on the
Company's projected future earnings. Income tax expense increased for the year
ended March 31, 1994 compared to the year ended March 31, 1993 due to an
increase in net income before taxes and an increase in the effective tax rate.
The effective tax rate in 1993 was lower than the rate in 1994 primarily due to
the amortization of a purchase accounting adjustment in 1993.
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.
A deferred tax valuation allowance in the amount of $1.1 million was
recorded in 1995 primarily to offset the deferred tax assets relating to net
operating loss carryforwards resulting from the Governors merger. The
utilization of these net operating loss carryforwards is limited annually to
specified amounts determined in accordance with the Internal Revenue Code.
LIQUIDITY
Liquidity is defined as cash and certain marketable securities which are
not committed or pledged. The liquidity portfolio of the Company totaled
approximately $17.5 million at June 30, 1995 and $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 June 30,
1995, average short-term liquidity ratio of the Bank was 7.6%.
Banking regulations under the supervision of the State of Florida and the
FRB require different measurements of liquidity than OTS regulations. The Bank
would be in compliance with liquidity requirements of the State and FRB at June
30, 1995.
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 residential mortgage loans. However, currently, uses of
cash consist of originations of commercial business, commercial real estate,
consumer and residential loans. 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 FRB.
Access to funds from depositors is affected by the rate the Bank pays on
certificates of deposit and convenience and service provided to 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.
At June 30, 1995, approximately $120 million of certificates of deposit
mature within 12 months. Management expects a significant amount of these
deposits to be renewed at maturity. For the past several years the Bank has
experienced certificate of deposit customers investing in relatively short-term
deposits and renewing at maturity. Management does not expect any significant
change in this trend.
32
<PAGE>
As noted in Note 9 to the Governors Bank Consolidated Financial Statements,
the outstanding litigation at the time of the Governors acquisition was
subsequently settled. There were no effects on the results of operations of
Republic as a result of the settlement of these suits as each case was
adequately reserved for by Governors. The settlement amounts had no material
effect on the Bank's liquidity.
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 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 June
30, 1995, the Bank had core capital of 6.8% of adjusted total assets, tangible
capital of 6.8% of adjusted total assets and risk-based capital of 11% 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.
Upon consummation of the Bank's proposed conversion to a Florida chartered
commercial bank, the Bank will be subject to the capital requirements of the
FDIC and the Company, as a bank holding company, will be subject to the capital
requirements of the FRB. Under FRB guidelines, bank holding companies such as
the Company are required to maintain capital based on risk-adjusted assets.
Under risk based capital guidelines, categories of assets with potentially
higher credit risk require more capital than assets with lower risk. In addition
to balance sheet assets, bank holding companies are required to maintain
capital, on a risk adjusted basis, to support certain off-balance sheet
activities such as loan commitments. The FRB standards classify capital into two
tiers, Tier I and Total. Tier I risk based capital consists of common
stockholders' equity, noncumulative and cumulative (bank holding companies only)
perpetual preferred stock, and minority interests, less goodwill. Total risk
based capital consists of Tier I capital plus a portion of the general allowance
for loan losses, hybrid capital instruments, term subordinated debt and
intermediate preferred stock. In addition to risk-based capital requirement, the
FRB requires bank holding companies to maintain a minimum leverage capital ratio
of Tier I capital to total assets. Total assets for this purpose do not include
goodwill and any other intangible assets and investments that the FRB determines
should be deducted from Tier I capital. The FRB requires banks and bank holding
companies to maintain Tier I and Total risk-based capital ratios of 4.0% and
8.0%, respectively, and a Tier I leverage capital ratio of 4.0%. The FDIC has
promulgated similar regulations and guidelines regarding capital adequacy of
state-chartered banks which are not members of the Federal Reserve System, which
would apply to the Bank. If the Bank converts to a commercial bank, it is
anticipated that the Company and the Bank would exceed all of these capital
requirements and continue to be deemed a well capitalized institution under
applicable regulations.
33
<PAGE>
ASSET/LIABILITY MANAGEMENT
Management of interest rate sensitivity involves matching the maturity and
repricing dates of interest-earning assets with those of interest-bearing
liabilities in an effort to manage the impact of fluctuating interest rates on
net interest margins.
The Company's Asset/Liability Committee (the 'Committee') meets at least
quarterly to establish, communicate, coordinate and control asset/liability
management procedures. The purpose of the Committee is to monitor the volume and
mix of the Company's interest sensitive assets and liabilities consistent with
the Company's overall liquidity, capital, growth, risk and profitability goals.
Interest rate sensitivity is measured as the difference between the
percentage of assets and liabilities in the Company's existing portfolio that
are subject to repricing within specific time periods. These differences, known
as interest sensitivity gaps, are usually calculated cumulatively for blocks of
time.
Companies that are asset-sensitive (a positive gap) have more assets than
liabilities maturing or repricing within specific time periods and these
companies are likely to benefit in periods of rising interest rates, but suffer
as rates decrease. Companies that are liability-sensitive (a negative gap) are
likely to benefit in periods of declining rates, but experience a negative
impact on net interest income as market rates increase. See 'Risk
Factors--Effect of Interest Rates.'
The Bank manages its interest rate risk exposure by limiting the amount of
long-term fixed rate loans it holds for investment, increasing emphasis on
shorter-term, higher yield loans for portfolio, increasing or decreasing the
relative amounts of long-term and short-term borrowings and deposits and/or
purchasing commitments to sell loans. The following table presents the Bank's
exposure to interest rate risk at June 30, 1995:
<TABLE>
<CAPTION>
JUNE 30, 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..................... $160,814 $34,078 $33,794 $27,196 $255,882
Total interest-bearing liabilities................ 169,385 34,223 12,852 586 217,046
-------- ------- ------- ------- --------
Interest rate sensitivity gap..................... $ (8,571) $ (145) $20,942 $26,610 $ 38,836
-------- ------- ------- ------- --------
-------- ------- ------- ------- --------
Cumulative interest rate sensitivity gap.......... $ (8,571) $(8,716) $12,226 $38,836
-------- ------- ------- -------
-------- ------- ------- -------
Cumulative interest rate sensitivity gap as a
percent of total assets......................... (3.1)% (3.2)% 4.4% 14.1%
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
In preparing the table above, certain assumptions have been made with
regard to prepayments on fixed rate mortgage and consumer loans and withdrawals
of checking, NOW, Money Market and savings account deposits. These assumptions
are that the Company will experience average annual prepayments of 6% on fixed
rate mortgage loans and 10% on consumer loans. The assumptions for checking,
NOW, Money Market and savings account deposit run-offs are as follows: 54% in
one year or less, 31% in 1 to 3 years, 14% in 3 to 5 years and 1% in over 5
years. All other assets and liabilities have been repriced based on the earlier
of repricing or contractual maturity. The above assumptions are annual
percentages based on the latest available OTS assumptions and on remaining
balances and should not be regarded as indicative of the actual prepayment and
withdrawals that may be experienced by the Company. Moreover, certain
shortcomings are inherent in the analysis presented by the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes to market
interest rates. Also, interest rates on certain types of assets and liabilities
may fluctuate
34
<PAGE>
in advance of or lag behind changes in market interest rates. Additionally,
certain assets, such as ARM loans, have features that restrict changes in
interest rates on a short-term basis and over the life of the assets. Moreover,
in the event of a change in interest rates, prepayment and early withdrawal
levels would likely deviate significantly from those assumed in calculating the
table. For information regarding the contractual maturities of the Company's
loans, investments, and deposits, see 'Business--Lending Activities,'
'--Investment Activities,' '--Deposits' and '--Borrowing' and the Notes to
Consolidated Financial Statements.
In addition to the above, the Bank is committed to fund $6.80 million in
new loans and $14.60 million in construction loans-in-process at June 30, 1995.
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.
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial
information presented herein 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.
FINANCIAL CONDITION
The Company's consolidated total assets decreased slightly from
approximately $280 million at March 31, 1995 to approximately $276 million at
June 30, 1995 due to funding of deposit run-off. Certificate of deposit balances
decreased approximately $1.9 million from March 31, 1995 to June 30, 1995. The
Company's redeemable subordinated debentures were called for redemption
effective May 31, 1995. As a result of the redemption, 634,476 shares of common
stock were issued, and shareholders' equity increased by approximately $1.7
million. The Company's consolidated total assets increased $73.4 million or
35.5% from $206.6 million at March 31, 1994 to $280.0 million at March 31, 1995.
Assets increased $64.3 million as a result of the acquisition of Governors. The
remaining increase is a direct result of increases in loan and deposit demand.
Net loans increased 46.7% from $155.3 million at March 31, 1994 to $227.9
million at March 31, 1995. Loans acquired in the acquisition of Governors
contributed $40.3 million 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 $24 million of trading
investments offset by increased loan and deposit demand. Investments, including
the trading account, 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 $156.7 million at March 31, 1994 to
$229.7 million at March 31, 1995 as a result of the merger with Governors 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.
The Company'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 $29.3 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
35
<PAGE>
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 which increased shareholders' equity.
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
business, and commercial real estate loans. Consumer loans increased $28.6
million and commercial real estate and commercial business loans increased $29.0
million during the year ended March 31, 1995. The acquisition of Governors
contributed $13 million in consumer loans and $19 million in commercial business
and commercial real estate loans. The remaining increase of $15.6 million and
$10 million in consumer and commercial loans, respectively, were achieved
through the Bank's commercial lending unit targeting individual consumers and
high quality commercial businesses.
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 continue to emphasize
residential construction lending.
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.
Although management expects that net income, based on deposit balances at
March 31, 1995, will decrease by approximately $980,000, net of taxes,
management does not anticipate any significant impact in the Company's financial
condition or liquidity as a result of effecting the proposed one-time assessment
to SAIF members to recapitalize the SAIF. See 'Risk Factors--Deposit Insurance
Premiums; Potential Assessment.'
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of' (SFAS No. 121), which is effective for fiscal years
beginning after December 15, 1995. The adoption of SFAS No. 121 will not have a
material impact on the financial condition of the Company.
On May 12, 1995, the Financial Accounting Standards Board issued Statement
No. 122 'Accounting for Mortgage Servicing Rights', an amendment to Statement
No. 65. The Company elected to adopt this standard for financial statement
reporting for the quarter ended June 30, 1995. Statement No. 122 prohibits
retroactive application to prior years.
Statement No. 122 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing right based on its fair
value relative to the loan as a whole. To determine the fair value of servicing
rights created after the adoption of Statement No. 122, the Company will use a
valuation model that calculates the present value of estimated future cash
flows. This valuation method incorporates assumptions determined by the Company
about the discount rate, prepayment speeds, default and interest rates. No
servicing rights were recorded during the quarter ended June 30, 1995 as
mortgage banking activities during the period were insignificant.
36
<PAGE>
BUSINESS
The Company, incorporated in Florida in 1983, is a savings bank holding
company, the principal business of which is the operation of a savings bank
business through the Bank, its wholly owned subsidiary, a federally chartered
savings bank. The Bank commenced operations on November 19, 1984, and is a
member of the FHLB System. Its deposits are insured by the FDIC up to applicable
limits. On April 17, 1995, the Bank filed an application to convert from a
federal savings bank to a State of Florida commercial bank charter and, at the
same time, the Company filed an application to become a bank holding company.
The Company and the Bank have received all necessary federal and state
regulatory approvals and anticipate the conversions to be completed on or before
November 15, 1995.
The Company's primary market area is Palm Beach County, Florida, which is
the nation's third fastest growing metropolitan statistical area. Census data
shows a 50% growth rate for Palm Beach County in the period from 1980 to 1990,
and per capita income in Palm Beach County as the highest among all Florida
counties. Real estate values have been relatively stable or slightly rising in
recent years. Unemployment in the county was reported at 7.4% in July 1995, as
compared to 9% in July 1994, with continuing gains in employment being projected
in the service, transportation and automobile sectors. Corporate relocations to
Palm Beach County have been strong in the past year, resulting in a net
immigration of corporate relocations and an increasing shortage of commercial
office and industrial space.
LENDING ACTIVITIES
General. Under applicable regulations, the Bank originates, purchases and
sells loans, or participating interests in loans. See 'Regulatory
Matters--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 business, commercial real estate loans and
consumer loans. During fiscal 1995 the level of commercial business, commercial
real estate, and consumer loan originations increased from prior years.
Approximately 95% of the Bank's mortgage loans are secured by property located
in Florida.
The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the periods indicated:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, --------------------------------------------------------------------------
1995 1995 1994 1993 1992
----------------- ----------------- ----------------- ----------------- -----------------
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.......... $122,184 49% $124,750 49% $105,752 59% $ 79,236 54% $ 61,439 53%
Construction loans............ 41,101 17 45,511 18 49,280 27 43,177 29 31,089 27
Commercial real estate........ 26,827 11 26,910 11 11,996 7 13,498 9 12,727 11
Residential lot............... 3,195 1 2,989 1 2,422 2 3,115 2 4,056 4
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total Real Estate Loans........ 193,307 78 200,160 79 169,450 95 139,026 94 109,311 95
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
CONSUMER LOANS:
Home equity lines
of credit.................... 2,838 1 2,852 1 2,192 1 2,150 2 2,401 2
Personal and Other............ 2,832 1 2,587 1 1,271 1 2,343 2 1,624 1
Automobile.................... 31,733 13 30,134 12 3,763 2 221 * 285 1
Savings accounts.............. 836 * 712 * 415 * 586 * 185 *
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total consumer loans........... 38,239 15 36,285 14 7,641 4 5,300 4 4,495 4
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Commercial business loans:..... 16,276 7 16,484 7 2,356 1 2,528 2 1,423 1
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
TOTAL LOANS.................... 247,822 100% 252,929 100% 179,447 100% 146,854 100% 115,229 100%
Less:
Loans in process.............. 14,553 21,460 22,876 19,290 14,339
Discounts, premiums and
deferred loan fees............ 874 1,022 206 307 1,145
Allowance for losses........... 2,576 2,507 1,071 1,247 775
-------- -------- -------- -------- --------
LOANS, NET..................... $229,819 $227,940 $155,294 $126,010 $ 98,970
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<CAPTION>
1991
----------------
TYPE OF LOAN AMOUNT PERCENT
- ------------------------------- ------- -------
<S> <C> <C>
REAL ESTATE LOANS:
Residential property.......... $ 40,043 45%
Construction loans............ 26,127 29
Commercial real estate........ 12,987 14
Residential lot............... 5,436 6
------- -------
Total Real Estate Loans........ 84,593 94
------- -------
CONSUMER LOANS:
Home equity lines
of credit.................... 2,032 2
Personal and Other............ 1,497 2
Automobile.................... 141 *
Savings accounts.............. 96 *
------- -------
Total consumer loans........... 3,766 4
------- -------
Commercial business loans:..... 1,303 2
------- -------
TOTAL LOANS.................... 89,662 100%
Less:
Loans in process.............. 8,624
Discounts, premiums and
deferred loan fees............ 1,629
Allowance for losses........... 512
-------
LOANS, NET..................... $ 78,897
-------
-------
<FN>
- ------------------------
* Less than one percent
</FN>
</TABLE>
37
<PAGE>
The following table sets forth at June 30, 1995 the principal amounts of
the Bank's loan portfolio with contractual maturities during the periods
indicated.
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------------------------------------------
MATURING
-------------------------------------------------------------
AFTER 1 YEAR
WITHIN 1 YEAR THROUGH 5 YEARS AFTER 5 YEARS TOTAL
------------- --------------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real Estate:
Residential and commercial......................... $ 8,440 $ 20,053 $ 120,518 $149,011
Construction and lot(1)............................ 25,050 4,196 497 29,743
Commercial business.................................. 6,082 7,842 2,352 16,276
Consumer............................................. 2,679 31,855 3,705 38,239
------------- --------------- ------------- --------
Total................................................ $ 42,251 $ 63,946 $ 127,072 $233,269
------------- --------------- ------------- --------
------------- --------------- ------------- --------
Maturing after one year with:
Variable interest rates.............................. $ 29,527 $ 98,922
Fixed interest rates................................. 34,419 28,150
--------------- -------------
Total................................................ $ 63,946 $ 127,072
--------------- -------------
--------------- -------------
<FN>
- ------------------------
(1) Net of loans-in-process.
</FN>
</TABLE>
The Bank provides residential real estate construction and mortgage loans,
consumer loans to individuals and commercial business 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
30 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 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. As of June 30, 1995, the loan
portfolio includes approximately $12.8 million of residential loans which have
loan to value ratios of greater than 80%, when originated, and have no private
mortgage insurance. The Company believes that these loans, which the Company
makes in the normal course of business from time to time, have not resulted in a
significantly greater loss experience than the aggregate residential mortgage
portfolio and these loans have higher yields.
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. Residential real estate construction loans comprised
approximately 17% of the Bank's total loan portfolio as of June 30, 1995. Of the
total construction loan portfolio of $41.1 million as of June 30, 1995, all are
for one-to four-family residential properties.
The Bank originates one-to four-family residential loans to individuals on
a pre-sold basis and through developers 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
38
<PAGE>
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 12 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. The loan agreements generally require the
Bank to advance funds for fees. The amount of the loan generally provides
borrowers with sufficient funds to pay the interest on the loan during
construction since interest is considered part of the total cost of the
property.
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 credit risks associated
with construction lending. Historically, the Bank has obtained its construction
loans through its retail loan officer network and also through the wholesale
broker network. These loans are generally made to the homeowner and may or may
not involve an end loan commitment. More recently, because of the reduction in
the Bank's retail residential loan officer network, the Bank has become more
dependent upon the wholesale broker network for its construction loans. In
addition, the Bank has entered into an agreement with another financial
institution to do the construction phase of their borrowers' residential
construction to permanent loan program. The Bank intends to seek similar
relationships with other financial entities.
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 completed 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.
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. As of June 30, 1995, consumer loans were
$38.2 million or 15% of total loans. Loans secured by automobiles are the
dominant consumer loans and represented $31.7 million or 83% of total consumer
loans as of June 30, 1995. Automobile loans are obtained from both the retail
branch network and indirectly through referrals from automobile dealerships.
Currently, the indirect automobile loans are the dominant portion of the
automobile loan portfolio, accounting for 80% of automobile loans at June 30,
1995. Primarily all of the indirect automobile loans are obtained from
dealerships within the Bank's market area and are underwritten to the same
standards as those automobile loans acquired through a retail banking network.
Although the volume of indirect automobile loans may decrease in the future due
to increased competition, management believes that the quality and risk is
similar for retail and wholesale automobile loans.
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.
39
<PAGE>
Commercial business and consumer loans are generally considered to have a
greater risk than single family residential mortgage loans because the risk of
borrower default is greater and their collateral (i.e. commercial property,
business receivables, equipment and vehicles) is more likely to decline in value
and may be more difficult to liquidate than single family residences. 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, or at adjustable rates, and are helpful in
maintaining a profitable spread between the Bank's loan yield and its cost of
funds.
Commercial Business Loans. Commercial business loans (excluding SBA loans)
totalled $14.9 million as of June 30, 1995 representing 6% of total loans.
Commercial business loan underwriting practices assess the borrower's
creditworthiness 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 because the risk of borrower
default is greater and the collateral may be more difficult to liquidate and
more likely to decline in the value. In 1995, the Bank expanded its commercial
business lending activities and expects to continue to pursue the commercial
business 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 the loan balance with the remaining portion
unguaranteed. The SBA-guaranteed portion of the loans is then salable in
secondary markets, with the Bank retaining the portion that is not guaranteed.
SBA loans are similar to commercial business loans in yield and credit risk. The
SBA loans shown in the Company's financial statements reflect only the
unguaranteed portion of such loans. The SBA loans totalled $1.4 million or .6%
of the total portfolio at June 30, 1995.
Other Lending Activities. The Bank may also extend loans for other
purposes from time to time, including land, acquisition and development and
residential lot loans.
The following table sets forth total loans and loans held for sale that
were originated, purchased, sold and repaid during the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30, YEARS ENDED MARCH 31,
------------------ --------------------------------
1995 1994 1995 1994 1993
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate loan originations........................ $18,489 $24,034 $ 90,308 $149,568 $154,213
Consumer and other loan originations................. 14,141 5,280 22,045 8,936 2,216
------- ------- -------- -------- --------
Total loan origination.......................... 32,630 29,314 112,353 158,504 156,429
Loans purchased...................................... 700 6,193 47,209 1,704
Loans acquired in mergers............................ 41,682 28,919
------- ------- -------- -------- --------
Total loan originations and purchases................ 32,630 30,014 160,228 205,713 187,052
------- ------- -------- -------- --------
LESS:
Principal repayment on loans and loans held for
sale.......................................... 26,276 3,081 34,624 37,384 36,573
Sale of loans and loans held for sale........... 11,461 18,810 53,927 138,617 129,145
------- ------- -------- -------- --------
Total repayments and sale of loans................... 37,737 21,891 88,551 176,001 165,718
------- ------- -------- -------- --------
Total increase (decrease) in principal
loan balances................................. (5,107) 8,123 71,677 29,712 21,334
Net (increase) decrease in deferred loan fees,
premiums and discounts............................. 148 636 (816) 101 838
Net decrease (increase) in loans in process.......... 6,907 141 1,416 (3,586) (4,951)
Net (increase) decrease in allowance for loss........ (69) (20) (1,436) 176 (472)
------- ------- -------- -------- --------
Net increase in loans and loans held
for sale...................................... $ 1,879 $ 8,880 $ 70,841 $ 26,403 $ 16,749
------- ------- -------- -------- --------
------- ------- -------- -------- --------
</TABLE>
40
<PAGE>
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
documentation 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.
SERVICING OF MORTGAGE LOANS
The Bank services virtually all of its loan portfolio. As of June 30, 1995,
the Bank was also servicing $325 million in loans and loan participations for
other lenders. The Bank services both loans and loan participations it has sold
to others, as well as loans pursuant to the purchase of servicing rights.
The Bank has placed emphasis on the development of a mortgage loan
servicing portfolio to effectively utilize excess servicing capacity to generate
servicing fee income. The Bank has such excess servicing capacity due to its
regular needs for a minimum level of personnel and facilities to service the
Bank's own portfolio. Management believes that it is cost effective to use its
personnel base to service loans for others and generate fee income.
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. The Bank sells loans on a non-recourse
basis through its mortgage banking in the secondary market, and generally
continues to service such loans.
41
<PAGE>
With regard to purchased servicing rights, such rights are typically
purchased from other thrift 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. See Note 8 of Notes to Consolidated
Financial Statements. The Bank seeks to mitigate such risks by diversifying the
servicing portfolio between fixed-rate and adjustable-rate mortgage loans and
among various states, including Florida, California, Iowa and Illinois.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The Bank's non-performing assets consist of real estate acquired through
foreclosures ('real estate owned') and loans which are 60 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. Non-performing assets as of June 30, 1995 were $6.3 million,
representing 2.3% of the Bank's total assets. There are no loans which are
troubled debt restructuring under SFAS No. 15 which are not currently accounted
for on a non-accrual basis. The following table details the Bank's
non-performing assets at June 30, 1995 and for the five-year period ending March
31, 1995:
<TABLE>
<CAPTION>
QUARTER ENDED YEARS ENDED MARCH 31,
JUNE 30, ----------------------------------------------
1995 1995 1994 1993 1992 1991
------------- ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
LOANS:
Consumer....................................... $ 446 $ 352 $ 61 $ 241 $ 99 $ 60
Commercial business............................ 922 630 377 398 70 140
Residential mortgage........................... 2,580 1,050 591 2,167 908
Residential construction....................... 340 115 84 70
Commercial mortgage............................ 450 162 244 317 550
Repossessed automobiles........................ 162 118
------------- ------ ------ ------ ------ ------
TOTAL NON-PERFORMING LOANS:............... 4,900 2,427 1,357 3,193 1,627 200
------------- ------ ------ ------ ------ ------
REAL ESTATE OWNED:
Residential construction....................... 143 26 468 402
Residential.................................... 294 219 787 306 2,641 1,337
Land for residential use....................... 59 61 330
Land for commercial use........................ 764 764 555 574 280 344
Commercial real estate......................... 185 52 115 292
------------- ------ ------ ------ ------ ------
TOTAL REAL ESTATE OWNED:.................. 1,445 1,009 1,871 932 3,768 1,973
------------- ------ ------ ------ ------ ------
Total non-performing assets.................. $ 6,345 $3,436 $3,228 $4,125 $5,395 $2,173
------------- ------ ------ ------ ------ ------
------------- ------ ------ ------ ------ ------
Real estate owned and non-performing loans to
total assets................................. 2.30% 1.23% 1.56% 2.43% 3.99% 1.76%
------------- ------ ------ ------ ------ ------
------------- ------ ------ ------ ------ ------
</TABLE>
42
<PAGE>
The table above reflects reclassifications of in-substance foreclosures
from real estate owned to non-performing loans in accordance with SFAS No. 114
for all periods presented. The adoption of SFAS No. 114 had no material impact
on the operations of the Company or the comparability of the tables presented.
During the three months ended June 30, 1995 no interest income was recorded
on non-accrual loans. The additional income that would have been recorded during
the three months ended June 30, 1995 had these loans been performing was
approximately $49,000. During the year ended March 31, 1995 approximately
$31,000 of interest income was recorded on non-accrual loans. Interest income
was recognized during the year when these loans were current. The additional
income that would have been recorded during the year ended March 31, 1995 had
these loans been performing for the entire period was approximately $35,000.
There were no restructured loans during fiscal 1995.
The increase in non-performing assets from March 31, 1995 to June 30, 1995
was primarily due to two factors: (1) certain loans in the aggregate amount of
$1.2 million acquired in connection with the acquisition of Governors, which had
been identified at the time of acquisition and classified by the Bank but
remained performing until the quarter ended June 30, 1995, and (2) a number of
residential mortgage loans in the aggregate amount of $1.3 million that became
delinquent during the period due to personnel vacancies in key loan collection
positions, which vacancies were subsequently filled.
The increase in non-performing assets from March 31, 1994 to March 31, 1995
is primarily related to the loan portfolio acquired from Governors in November
1994. The decrease in non performing assets from March 31, 1993 to March 31,
1994 is primarily due to the decrease in the amount of non performing
residential mortgage loans. The increase in non-performing loans from March 31,
1992 to March 31, 1993 is primarily related to the loans acquired in the
Homestead acquisition. Non performing assets increased from March 31, 1991 to
March 31, 1992 due to the foreclosure on two multifamily residential properties
in 1992. In addition, a large commercial mortgage loan was non performing at
March 31, 1992.
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 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 that 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 will charge off 100%
of the assets classified as 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.
43
<PAGE>
In the normal course of business, the Bank has recognized and will continue
to recognize losses resulting from the inability of certain borrowers to repay
loans and the insufficient realizable value of collateral securing such loans.
Accordingly, management has established an allowance for loan losses, which
totalled approximately $2.58 million at June 30, 1995 and $2.51 million as of
March 31, 1995, which is allocated according to the following table:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
JUNE 30, ------------------------------------------------------------------------------------------
1995 1995 1994 1993 1992
--------------------- --------------------- --------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL
LOAN LOSSES LOANS LOAN LOSSES LOANS LOAN LOSSES LOANS LOAN LOSSES LOANS LOAN LOSSES LOANS
----------- -------- ----------- -------- ----------- -------- ----------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
construction
and lot........ $ 357 18% $ 281 19% $ 212 29% $ 137 31% $ 174 31%
Real estate
residential and
commercial..... 951 60 535 60 481 66 632 63 440 64
Commercial
business....... 531 7 531 7 114 1 152 2 70 1
Consumer......... 496 15 406 14 163 4 201 4 91 4
Unallocated(1)... 60 754 101 125
----------- -------- ----------- -------- ----------- -------- ----------- -------- ----------- --------
TOTAL............ $ 2,576 100% $ 2,507 100% $ 1,071 100% $ 1,247 100% $ 775 100%
----------- -------- ----------- -------- ----------- -------- ----------- -------- ----------- --------
----------- -------- ----------- -------- ----------- -------- ----------- -------- ----------- --------
<CAPTION>
1991
---------------------
PERCENT
ALLOWANCE OF LOANS
FOR TO TOTAL
LOAN LOSSES LOANS
----------- --------
<S> <C> <C>
Real estate
construction
and lot........ $ 146 35%
Real estate
residential and
commercial..... 290 59
Commercial
business....... 62 2
Consumer......... 14 4
Unallocated(1)...
----------- --------
TOTAL............ $ 512 100%
----------- --------
----------- --------
<FN>
- ------------------------
(1) The unallocated portion of the allowance for loan losses decreased from
March 31, 1995 to June 30, 1995 primarily due to the Bank increasing its
reserve percentage from 10% to 15% of loans classified substandard. The
unallocated balance at March 31, 1995, assuming a 15% reserve for loans
classified substandard, would decrease to $439,000.
</FN>
</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.
The provision for loan losses decreased $50,000 for the three months ended
June 30, 1995 compared to the three months ended June 30, 1994 primarily due to
a decrease in net loan charge-offs. However, the allowance for loan losses as a
percent of total loans increased from .65% at June 30, 1994 to 1.04% at June 30,
1995. This increase is a result of the allowance acquired from Governors and a
decrease in net loan charge-offs during fiscal 1995 and the three months ended
June 30, 1995. Management's evaluation of the allowance for loan losses includes
applying relevant risk factors to the entire loan portfolio including
non-performing loans. Risk factors applied to the performing loan portfolio are
based on the Bank's past 3 year loss history considering the current portfolio's
characteristics, current economic conditions and other relevant factors. Non-
performing loans are carried at fair value based on the most recent information
available. The following risk factors are applied to the carrying value of each
classified loan: (i) substandard at 15%, (ii) doubtful at 50%, and (iii) loss is
charged-off 100%. The amount of provision for loan losses is a function of
management's evaluation of the allowance for loan losses. Based on the analysis
of the allowance for loan losses at June 30, 1995, management believes the
allowance balance is adequate.
Although the percent of non-performing loans to total loans increased from
.87% at March 31, 1994 to 1.06% at March 31, 1995, the provision for loan losses
remained relatively stable for the periods. The increase in non-performing loans
was primarily a result of the Governor's loan portfolio acquired. Likewise, an
allowance for loan losses was acquired. In addition, net charge-offs have
decreased each year since fiscal 1993 which decreases the depletion of the
allowance for loan losses due to charge-offs.
The provision for loan losses decreased $789,000 for the year ended March
31, 1994 compared to the year ended March 31, 1993 due to a $1.8 million
decrease in non-performing loans and a decrease in net charge-offs for the year.
The decrease in non-performing loans and net charge-offs was a result of
improved economic conditions in the South Florida area during 1993 from the
conditions experienced in 1992.
44
<PAGE>
The provision for loan losses increased $299,000 for the year ended March
31, 1993 compared to the year ended March 31, 1992 due to an increase in loan
charge-offs primarily related to commercial, consumer and construction loans. In
addition, the amount of non-performing loans increased approximately $1.6
million from March 31, 1992 to March 31, 1993. Poor economic conditions in the
South Florida area during 1992 is the primary factor for the increase in
non-performing loans and loan charge-offs.
The provision for loan losses increased approximately $88,000 for the year
ended March 31, 1992 compared to the year ended March 31, 1991. The provision
increased primarily due to an increase in non-performing loans at March 31, 1992
compared to March 31, 1991.
The following table details the charge-offs, recoveries, net charge-offs
and ending balance of the allowance for loan losses for the quarter ended June
30, 1995 and the years ended March 31, 1995, 1994, 1993, 1992 and 1991:
<TABLE>
<CAPTION>
AT OR FOR THE
QUARTER ENDED AT OR FOR THE YEAR ENDED MARCH 31,
JUNE 30, --------------------------------------------
1995 1995 1994 1993 1992 1991
------------- ------ ------ ------ ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance................................ $ 2,507 $1,071 $1,247 $ 775 $ 512 $ 504
Reserves acquired in connection
with merger.................................... 1,399 319
CHARGE-OFFS:
Real estate mortgage........................... 50 344 274 530 427 618
Real estate construction....................... 10 11 138 43
Consumer....................................... 135 105 8 102 6
Commercial business............................ 23 158 459 226
------------- ------ ------ ------ ----- -----
SUBTOTAL - charge-offs........................... 208 617 752 996 476 618
------------- ------ ------ ------ ----- -----
RECOVERIES:
Real estate mortgage........................... 25 166 235 138 35 10
Consumer....................................... 25 15 8
Commercial business............................ 202 273 127
------------- ------ ------ ------ ----- -----
SUBTOTAL - Recoveries............................ 252 454 362 146 35 10
------------- ------ ------ ------ ----- -----
Net (charge-offs) recovery....................... 44 (163) (390) (850) (441) (608)
Provision for losses............................. 25 200 214 1,003 704 616
------------- ------ ------ ------ ----- -----
Ending balance................................... $ 2,576 $2,507 $1,071 $1,247 $ 775 $ 512
------------- ------ ------ ------ ----- -----
------------- ------ ------ ------ ----- -----
Ratio of net charge-offs during the period to
average loans outstanding during the period.... 0% .09% .27% .75% .55% .65%
------------- ------ ------ ------ ----- -----
------------- ------ ------ ------ ----- -----
</TABLE>
INVESTMENT ACTIVITIES
The Bank is required by federal regulations to maintain minimum levels of
liquid assets. See 'Regulatory Matters--Federal Regulation' and 'Management'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. As of June 30, 1995 the Company had
cash and cash equivalents of $15 million and investments of $11 million
representing, in the aggregate, 10% of its total assets. See Note 3 of Notes to
Consolidated Financial Statements.
DEPOSITS
The Bank offers a variety of deposit programs, including NOW accounts,
money market deposit accounts, statement savings accounts, and variable-or
fixed-rate certificates of deposit with maturities ranging from 30 days to five
years. The principal difference among certificate accounts relate to minimum
balance, term, interest rate, and method of compounding. The Bank does not
accept brokered deposits.
As of June 30, 1995, certificate accounts in the amount of $100,000 or more
amounted to approximately $15.4 million representing 6.8% of total deposits.
This amount has slightly increased from $14.7 million at March 31, 1995, and
remained relatively flat as a percent of total deposits.
45
<PAGE>
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:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
---------------------------- ----------------------------------------------------------------------
1995 1995 1994 1993
---------------------------- ---------------------------- ---------------------------- --------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE PERCENT AVERAGE PERCENT AVERAGE PERCENT
STATED OF TOTAL STATED OF TOTAL STATED OF TOTAL
AMOUNT RATE DEPOSITS AMOUNT RATE DEPOSITS AMOUNT RATE DEPOSITS AMOUNT
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and Statement
Accounts............... $ 19,052 2.45% 8.46% $ 19,395 2.45% 8.44% $ 19,885 2.40% 12.69% $ 19,945
Commercial Checking
Accounts............... 25,504 11.33 26,149 11.38 6,027 3.85 6,408
Money Market Deposit
Accounts............... 13,179 2.45 5.86 14,581 2.45 6.35 12,217 2.40 7.80 10,052
NOW Accounts............. 26,368 2.00 11.71 26,688 2.00 11.62 25,498 2.00 16.28 19,300
30-90 day Certificates
of Deposit............. 2,216 4.07 .98 2,974 4.13 1.30 3,201 2.85 2.04 3,406
6-9 month Certificates
of Deposit............. 41,047 5.86 18.24 42,011 5.75 18.28 26,041 3.34 16.62 29,571
12-18 month Certificate
of Deposit............. 70,324 5.67 31.24 74,090 5.43 32.25 46,023 3.79 29.38 39,739
2-year Certificates
of Deposit............. 7,086 4.80 3.15 7,464 4.48 3.25 9,482 4.44 6.05 9,890
3-year Certificates
of Deposit............. 2,175 5.01 .97 1,656 4.99 .72 1,309 4.79 .84 1,446
5-year Certificates
of Deposit............. 13,179 5.90 5.86 13,597 5.76 5.92 6,075 6.10 3.88 4,612
Jumbo Certificates
(varying maturities)... 4,951 6.94 2.20 1,130 5.58 .49 893 4.54 .57 1,542
-------- -------- -------- -------- -------- -------- --------
TOTAL DEPOSITS........... $225,081 4.00% 100.00% $229,735 4.00% 100.00% $156,651 3.11% 100.00% $145,911
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
<CAPTION>
WEIGHTED
AVERAGE PERCENT
STATED OF TOTAL
RATE DEPOSITS
-------- --------
<S> <C> <C>
Passbook and Statement
Accounts............... 2.85% 13.67%
Commercial Checking
Accounts............... 4.39
Money Market Deposit
Accounts............... 3.00 6.89
NOW Accounts............. 2.80 13.23
30-90 day Certificates
of Deposit............. 3.02 2.33
6-9 month Certificates
of Deposit............. 3.36 20.27
12-18 month Certificate
of Deposit............. 3.99 27.23
2-year Certificates
of Deposit............. 5.50 6.78
3-year Certificates
of Deposit............. 7.63 .99
5-year Certificates
of Deposit............. 6.77 3.16
Jumbo Certificates
(varying maturities)... 4.40 1.06
--------
TOTAL DEPOSITS........... 3.51% 100.00%
--------
--------
</TABLE>
The following table sets forth the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JUNE 30, YEAR ENDED MARCH 31,
----------------- ----------------------------------------------
1995 1994 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
DEPOSIT ACTIVITY
Net deposits (withdrawals)(1).......................... $(4,987) $(2,171) $68,303 $ 7,097 $24,212 $ 956 $(6,291)
Interest credited(2)................................... 333 128 4,781 3,643 4,350 6,524 7,220
------- ------- ------- ------- ------- ------ -------
Net (decrease) increase in deposits.................... $(4,654) $(2,043) $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.
</FN>
</TABLE>
46
<PAGE>
The following table presents, by stated interest rate ranges, the amount of
certificates of deposits outstanding (in thousands) at June 30, 1995 and the
periods to maturity of the certificates of deposits by the stated interest rate
ranges at June 30, 1995:
<TABLE>
<CAPTION>
JUNE 30, 1995
JUNE 30, MARCH 31, -----------------------------------
-------- ------------------------------------------------ 0-6 7-12 13-18 19-24
1995 1995 1994 1993 1992 1991 MONTHS MONTHS MONTHS MONTHS
-------- -------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Up to 3.00%........... $ 3,124 $ 1,307
3.01 to 4.00%......... $ 1,833 $ 7,768 68,517 60,753 $ 3,188 $ 1,197 $ 633 $ 3
4.01 to 5.00%......... 25,626 37,616 14,415 11,404 30,466 20,909 3,347 541 $ 196
5.01 to 6.00%......... 58,106 48,575 4,180 9,258 22,998 35,695 11,487 1,388 729
6.01 to 7.00%......... 46,958 44,725 1,237 4,382 14,144 $13,243 18,264 23,598 3,045 1,448
Over 7.01%............ 8,455 4,238 1,551 3,102 3,277 73,230 1,133 3,736 3,123 196
-------- -------- ------- ------- ------- ------- ------- ------- ------ ------
TOTAL............... $140,978 $142,922 $93,024 $90,206 $74,073 $86,473 $ 77,198 $ 42,801 $ 8,100 $ 2,569
-------- -------- ------- ------- ------- ------- ------- ------- ------ ------
-------- -------- ------- ------- ------- ------- ------- ------- ------ ------
Percent of total...... 55% 30% 6% 2%
------- ------- ------ ------
------- ------- ------ ------
<CAPTION>
THEREAFTER
----------
<S> <C>
Up to 3.00%...........
3.01 to 4.00%.........
4.01 to 5.00%......... $ 634
5.01 to 6.00%......... 8,809
6.01 to 7.00%......... 600
Over 7.01%............ 267
----------
TOTAL............... $ 10,310
----------
----------
Percent of total...... 7%
----------
----------
</TABLE>
BORROWINGS
The Bank generally may borrow from the FHLB upon the security of the
capital stock of the 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 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 FHLB. Rates offered for variable interest FHLB borrowings
are set from time to time by the FHLB. FHLB policy prescribes the acceptable use
to which the proceeds of such borrowings may be used. As of June 30, 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 million, $44 million, $48
million and $21 million at June 30, 1995 and March 31, 1995, 1994 and 1993,
respectively.
From time to time the Bank enters into repurchase agreements with
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 June 30 1995, the Bank had
$2,469,000 outstanding in repurchase agreements.
47
<PAGE>
The following table presents selected information on borrowings:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------- ---------------------------------------------------
1995 1995 1994 1993 1992 1991
-------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SHORT TERM BORROWINGS:
FHLB Advances:
Amounts outstanding at end
of period............................... $ 15,000 $15,000 $20,000
Weighted average rate at end
of period............................... 6.20% 6.15% 3.86%
Maximum amount outstanding at any month
end..................................... $ 15,000 $20,000 $40,000 $13,000 $14,800
Approximate average amount outstanding
during period........................... 13,000 16,000 15,000 3,331 5,045
Approximate weighted average rate for
period.................................. 6.20% 4.71% 3.45% 8.25% 8.60%
OTHER BORROWED MONEY:
Amounts outstanding at end
of period............................... $ 2,469 $ 2,748 $ 37
Weighted average rate at end
of period............................... 5.81% 5.96% 11.00%
Maximum amount outstanding at any month
end..................................... $ 4,251 $ 2,748 $ 37
Approximate average outstanding during
period.................................. 4,154 663 127
Approximate weighted average rate for
period.................................. 5.80% 5.60% 8.42%
</TABLE>
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 who live in South Florida and have above average
liquid assets. 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, variety and
quality of services, convenience of branches and advertising and promotions. The
Bank competes for loans through interest rates, loan fees and efficient, quality
service provided to customers.
EMPLOYEES
The Company employed approximately 145 persons as of September 30, 1995.
None of the Company's employees are subject to a collective bargaining
agreement, and the Company believes that its employee relations are good.
48
<PAGE>
FACILITIES
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.
LEGAL PROCEEDINGS
In the ordinary course of business, the Company or the Bank may be involved
in litigation from time to time. As of the date of this Prospectus, neither the
Company nor the Bank is a party to any pending material legal proceedings, nor
is management aware of any such material actions threatened against the Company
or the Bank.
PROPOSED ACQUISITION OF BANYAN BANK
GENERAL
On September 7, 1995, the Company and the Bank entered into a Stock
Purchase Agreement (the 'Purchase Agreement') with the shareholders of Banyan,
which provides for the acquisition of all of the outstanding capital stock of
Banyan (the 'Acquisition'). Under the terms of the Purchase Agreement, the
Company will purchase the shares of stock and will subsequently merge Banyan
into the Bank, with the Bank being the surviving entity in the merger (the
'Merger').
The Acquisition is subject to receipt of various regulatory approvals and
consents of shareholders and boards of directors, the closing of the Offerings
and certain other conditions, and is not expected to close until early 1996. The
following is a summary of the material terms of the Acquisition. For a more
complete description, reference is made to the Purchase Agreement, which was
filed as an exhibit to the Registration Statement.
BUSINESS OF BANYAN
Banyan was formed in 1984 to operate as a community bank in Boca Raton,
which is located in South Palm Beach County, Florida. Banyan is a closely held
bank with the majority of its common stock held by one family. At June 30, 1995,
Banyan had total assets of $47.9 million, total deposits of $43.2 million and
stockholders' equity of $4.4 million. Assets consist primarily of $36 million in
loans, $8 million in cash and due from banks and $2.6 million in investments.
Loans are primarily commercial purpose and commercial real estate. Banyan is a
state commercial bank chartered in Florida and a member of the Federal Reserve
Bank. Currently, Banyan is operating from two banking centers, one in Boca Raton
and one in the neighboring town of Boynton Beach. Banyan offers a broad range of
banking services, including interest-bearing deposits in the form of NOW, money
market, savings and time accounts, certificates of deposit and real estate,
construction, commercial and consumer loans. Banyan's principal business is
attracting retail deposits from the general public and lending or investing
those deposits, together with borrowed funds, in the loan products described
above, as well as in investment securities.
49
<PAGE>
Banyan was targeted by the Company for two primary strategic reasons: (i)
Banyan's two banking center locations in South Palm Beach County, and (ii)
Banyan's commercial loan portfolio, which when combined with the Bank's
portfolio will increase the percentage of commercial business loans in the
overall portfolio as well as the Bank's customer base in South Palm Beach
County.
Based on discussions with Banyan's management and the Company's review of
Banyan's financial information, the Company believes that the change in Banyan's
operating results for the six months ended June 30, 1995 as compared to the same
period in the prior year is primarily attributable to the following factors. Net
income before income taxes increased $137,000 or 65% for the six months ended
June 30, 1995 compared to the six months ended June 30, 1994 due to an increase
of $244,000 in net interest income and a $126,000 increase in other income
offset by an increase in operating expenses of $233,000. Net interest income
increased due to an increase in the net interest spread from approximately 3.90%
for the six months ended June 30, 1994 to approximately 4.95% for the six months
ended June 30, 1995. Net interest spread increased primarily as a result of an
increase in the average yield on loans, which is a function of the increase in
the prime rate as the majority of the loan portfolio adjusts with changes in the
prime rate. The increase in other income is attributable to a $14,000 increase
in service charges and fees due to an increase in the volume of deposit accounts
and a $40,000 increase due to income recognized on the extension of a real
estate sales contract on other real estate owned property. In addition, Banyan
recognized a $12,000 gain on sales of securities available-for-sale and $59,600
gain on the sale of real estate owned in the six months ended June 30, 1995.
Operating expenses increased primarily due to an increase in salary and employee
benefit expenses. Employees were hired to staff an additional branch, which
opened in July 1994, and the mortgage lending business.
PURCHASE PRICE
The purchase price to be paid pursuant to the Purchase Agreement shall be
equal to 207% of the first $4,600,000 of the Tangible Equity (as defined in the
Purchase Agreement) of Banyan, plus 100% of any Tangible Equity in excess of
$4,600,000, as of the calendar month ended immediately prior to the closing of
the transaction.
CONDITIONS TO ACQUISITION
Consummation of the Acquisition by the Bank and the shareholders of Banyan
is subject to the fulfillment of certain conditions, including, but not limited
to, the following: (a) the receipt and effectiveness of all government approvals
required to be received to consummate the Acquisition and the Merger, without
the imposition of conditions that would, in the reasonable determination of the
Bank, (i) have a material adverse effect on the financial condition, properties,
business or operations of the Bank upon completion of the Merger, or (ii)
otherwise impair the value of Banyan to the Bank; and all applicable statutory
waiting or notice periods with respect to such government approvals shall have
expired and all conditions and requirements prescribed by law or by such
government approvals shall have been satisfied; and (b) no order, judgment or
decree shall be outstanding against any party to the Purchase Agreement or a
third party that would have the effect of preventing consummation of the
Acquisition or the Merger; no suit, action or other proceeding shall be pending
or, to the knowledge of any party, threatened by any governmental body in which
it is sought to restrain or prohibit the Purchase and the Merger; and no suit,
action or other proceeding shall be pending before any court or governmental
agency in which it is sought to restrain or prohibit the Acquisition and the
Merger or obtain other substantial monetary or other relief against one or more
of the parties to the Purchase Agreement and which the parties determine in good
faith, based upon the advice of their respective counsel, makes it inadvisable
to proceed with the Acquisition and the Merger.
In addition to the foregoing conditions, the Bank's obligations under the
Purchase Agreement are conditioned on the following: (a) the obligations of
Banyan and its shareholders pursuant to the terms of the Purchase Agreement
shall have been duly performed and complied with in all material respects and
the
50
<PAGE>
representations and warranties contained in the Purchase Agreement shall be true
and correct in all material respects; (b) there shall not have occurred a
material adverse change in Banyan, its business, financial condition or
prospects since December 31, 1994; (c) the interim consolidated balance sheet of
Banyan for the calendar month end immediately prior to the Closing (as defined
below), and as of the Closing, shall reflect total assets of not less than
$45,000,000, classified assets of not more than $900,000, allowance for loan
losses of not less than 1% of total assets and non-performing assets of not more
than 1% of total assets; (d) all, and not less than all, of the shares of Banyan
shall be tendered for purchase by the Bank; (e) the Offerings shall have closed
and net proceeds thereof shall be not less than $10,000,000; and (f) certain
other usual and customary conditions to closing.
CONDUCT OF BANYAN'S BUSINESS PENDING THE ACQUISITION
The Purchase Agreement requires the shareholders of Banyan to cause Banyan
to (i) maintain its existence and good standing under the laws of its
organization, and (ii) conduct its business and engage in transactions only in
the ordinary course and consistent with its past prudent banking practices. In
addition, the shareholders agree to cause Banyan, except as otherwise permitted
or required by the Purchase Agreement, not to take any action that would result
in any of the representations or warranties contained in the Purchase Agreement
not being true and correct in any material respect at the closing.
The shareholders further agree to cause Banyan to confer with the Bank upon
the Bank's request and advise the Bank regarding all material (as defined in the
Purchase Agreement) adverse developments, transactions and proposals relating to
its financial condition, properties, business or operations, and cause its
directors, officers, employees, agents and other representatives to disclose to
the Bank any and all material changes in, or events which materially and
adversely affect, its financial condition, properties, business or operations.
Under the Purchase Agreement, except and only to the extent required by
fiduciary obligations, the shareholders of Banyan shall not, nor shall they
permit any of the directors, officers, employees, representatives, agents or
other persons controlled by Banyan to, directly or indirectly, encourage or
solicit or hold discussions or negotiations with, or provide any information to,
any person, entity or group (other than the Bank) concerning any merger, sale of
substantial assets, sale of shares of capital stock or similar transactions
involving Banyan.
CLOSING
The closing of the transactions (the 'Closing') shall take place on the
date determined by the Bank after January 1, 1996, not more than 30 days after
the calendar month end first occurring after the later of (a) the date of the
letter of preliminary approval of the applicable regulatory authority approving
the Merger, (b) the date of the closing of the Offerings or (c) such later date
on which all conditions precedent to such Closing contained in the Purchase
Agreement are satisfied or duly waived; or at such other date, time and place as
the parties shall agree, but in no event later than February 29, 1996. In the
event the Closing fails to take place prior to March 1, 1996 solely because of a
failure to obtain regulatory approval of the Merger, the parties agree that the
Purchase Agreement is not terminable until after midnight April 30, 1996.
TERMINATION
The Purchase Agreement may be terminated at any time prior to the Closing
by mutual written consent of the parties.
In addition, the Purchase Agreement may be terminated on behalf of the
Banyan shareholders at any time prior to the Closing if (a) a material condition
to closing cannot be fulfilled (other than by reason of the
51
<PAGE>
shareholders' failure to comply with their obligations) and nonfulfillment is
not waived; or (b) there shall have been a material default under or a material
breach of the Bank's covenants; or (c) after 12:00 midnight, local time,
February 29, 1996 (except as otherwise provided in the Purchase Agreement), if
all the conditions precedent to the shareholders' obligations to effect the
Acquisition shall not have been fulfilled by reason other than their failure to
comply with their obligations and the Closing shall not have been effected on or
prior to such date.
The Bank may also terminate the Purchase Agreement at any time prior to
October 15, 1995, if as a result of the review by the Bank of Banyan's loan
portfolio, assets, liabilities, books, records, business and prospects, the
Bank, in its sole discretion, determines that the Acquisition is not desirable
or in the best interests of the Bank's shareholders. In addition, the Bank may
terminate the Purchase Agreement if (a) any condition to closing which must be
fulfilled before the Bank is obligated to consummate the Closing cannot be
fulfilled (other than by reason of the Bank's failure to comply with its
obligations hereunder) and nonfulfillment is not waived; or (b) there shall have
been a material default under or a material breach of the shareholders'
covenants; or (c) any representation or warranty of the shareholders shall no
longer be true and correct as of any date and remains not true and correct 15
days after notice thereof is given. The Bank may also terminate the Purchase
Agreement at any time after 12:00 midnight, local time, February 29, 1996
(except as otherwise provided in the Purchase Agreement), if all the conditions
precedent to their obligations to effect the Closing shall not have been
fulfilled by reason other than the Bank's failure to comply with its obligations
and the Closing shall not have been effected on or prior to such date.
If the Purchase Agreement is terminated, it shall no longer be of any force
or effect and there shall be no liability on the part of any party or its
directors, officers or shareholders; provided that (a) if such termination
results from breaches by the shareholders of Banyan of any representation,
warranty or covenant hereunder, then certain of the shareholders shall pay the
Bank liquidated damages in the amount of $100,000 and (b) if such termination
results from breaches by the Bank of any representation or warranty or covenant
hereunder, then the Company and/or the Bank shall pay the shareholders, pro
rata, liquidated damages in the amount of $100,000. The parties further agreed
that the failure of the Company to consummate the Offerings shall be deemed
sufficient cause for the shareholders to terminate the Purchase Agreement, but
shall not be deemed a breach resulting in liquidated damages being payable to
them.
At any time prior to the Closing, either of the parties may (a) extend the
time for the performance of any of the obligations or other acts of the other
parties, (b) waive any inaccuracies in the representations and warranties of the
other party, or (c) waive compliance with any of the agreements or conditions of
the other parties.
52
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Condensed Statement of Financial
Condition of the Company and Banyan as of June 30, 1995 give effect to the
acquisition of Banyan as if the acquisition had been consummated on that date.
The following Unaudited Combined Condensed Statement of Operations for the year
ended March 31, 1995 and the three months ended June 30, 1995 gives effect to
the acquisitions of Banyan and Governors as if the acquisitions were consummated
on April 1, 1994. The acquisition of Governors was consummated on November 30,
1994. Therefore, the effects of the Governors' acquisition are included in the
Company's historical statement of financial condition as of June 30, 1995,
statement of operations for the three months ended June 30, 1995 and four months
of the effects are included in the Company's historical statement of operations
for the year ended March 31, 1995. The unaudited pro forma combined financial
information also gives effect to proceeds from the Offerings.
The unaudited pro forma combined condensed financial information is based
on the historical financial statements of the Company, Banyan and Governors
after giving effect to the transactions under the purchase method of accounting
and the assumptions and adjustments in the accompanying notes to unaudited pro
forma combined condensed financial statements. The unaudited pro forma combined
condensed statement of operations data for the year ended March 31, 1995
includes the operations of Governors for the eight months ended November 30,
1994. Purchase accounting adjustments to estimated fair values have been made
with respect to the assets and liabilities of Banyan and related income and
expense accounts of Banyan based upon preliminary estimates and assumptions as
of June 30, 1995. Such preliminary estimates and assumptions are subject to
change as additional information is obtained. The allocation of the purchase
price is subject to final determination, based upon estimates and other
evaluations of fair value, as of the actual date of consummation.
The unaudited pro forma combined condensed financial information has been
prepared by the Company's management based upon the historical unaudited
quarterly financial statements of Banyan and Governors and audited financial
statements and related notes thereto of Banyan, Governors and the Company
included elsewhere in this Prospectus. The unaudited pro forma combined
condensed financial statements should be read in conjunction with such audited
financial statements and notes. The unaudited pro forma combined condensed
financial statements are for information purposes only and may not be indicative
of the results that actually would have occurred if the transactions had been
consummated on the dates indicated and should not be construed as being
representative of future periods.
53
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF FINANCIAL CONDITION
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
AT JUNE 30, 1995
<TABLE>
<CAPTION>
REPUBLIC SECURITY
FINANCIAL CORP. BANYAN BANK PRO FORMA COMBINED
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
----------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks............................ $ 3,777 $ 8,278 $ 12,055
Interest-bearing deposits in other financial
institutions..................................... 11,254 $ (9,100)(a) 19,070
8,633 (b)
8,283 (b)
Investments held to maturity....................... 11,358 11,358
Investments available for sale..................... 2,570 2,570
Loans, net......................................... 229,819 35,953 265,772
Property and equipment, net........................ 6,038 274 6,312
Real estate owned.................................. 1,445 491 1,936
Goodwill........................................... 3,173 4,671 (a) 7,834
Other assets....................................... 9,116 351 9,477
----------------- ----------- ----------- ---------
Total assets......................................... $ 275,980 $ 47,917 $ 12,487 $ 336,384
----------------- ----------- ----------- ---------
----------------- ----------- ----------- ---------
LIABILITIES
Deposits........................................... $ 225,081 $ 43,216 $ 268,297
Securities sold under agreements to repurchase..... 2,469 2,469
Federal Home Loan Bank advances.................... 15,000 15,000
Other liabilities.................................. 10,758 272 11,030
----------------- ----------- ----------- ---------
Total liabilities.................................... 253,308 43,488 296,796
----------------- ----------- ----------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock.................................... 4,025 9,000 (b) 13,025
Common stock....................................... 43 2,657 (2,657)(a) 61
(b)
Additional paid in capital......................... 16,211 1,061 (1,061)(a) 24,109
7,898 (b)
Retained earnings.................................. 2,393 696 (696)(a) 2,393
Net unrealized gain on available
for sale securities............................. 15 (15)(a)
----------------- ----------- ----------- ---------
Total shareholders' equity........................... 22,672 4,429 12,487 39,588
----------------- ----------- ----------- ---------
Total liabilities and shareholders' equity........... $ 275,980 $ 47,917 $ 12,487 $ 336,384
----------------- ----------- ----------- ---------
----------------- ----------- ----------- ---------
Stated book value per share(j)....................... $4.26 $4.29
----------------- ---------
----------------- ---------
Tangible book value per share(j)..................... $3.73 $3.28
----------------- ---------
----------------- ---------
Tangible capital ratio*.............................. 6.80% 7.50%
----------------- ---------
----------------- ---------
Core capital ratio*.................................. 6.80% 7.50%
----------------- ---------
----------------- ---------
Risk-based capital ratio*............................ 11.00% 11.80%
----------------- ---------
----------------- ---------
<FN>
- ------------------------
* Bank only
</FN>
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
54
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
REPUBLIC SECURITY
FINANCIAL CORP. BANYAN BANK PRO FORMA COMBINED
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
----------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Interest Income:
Interest on loans.................................. $ 4,979 $ 944 $ 5,923
Interest on investments............................ 341 143 484
----------------- ----------- ---------
Total interest income................................ 5,320 1,087 6,407
----------------- ----------- ---------
Interest Expense:
Interest on deposits............................... 2,432 458 2,890
Interest on short term borrowings.................. 249 249
Interest on long term borrowings................... 31 31
----------------- ----------- ---------
Total interest expense............................... 2,712 458 3,170
----------------- ----------- ---------
Net interest income.................................. 2,608 629 3,237
Provision for loan losses............................ 25 0 25
----------------- ----------- ---------
Net interest income after provision for
loan losses..................................... 2,583 629 3,212
----------------- ----------- ---------
Non-interest Income:
Other income....................................... 914 58 972
----------------- ----------- ---------
Total non-interest income............................ 914 58 972
----------------- ----------- ---------
Operating Expenses:
Employee compensation and benefits................. 1,215 237 $ (125)(c) 1,327
Occupancy and equipment............................ 489 80 569
Professional fees.................................. 199 199
Advertising and promotion.......................... 60 60
Outside services................................... 35 35
Communications..................................... 106 106
Data processing.................................... 111 111
Insurance.......................................... 153 153
Real estate owned, net............................. 3 3
Amortization of goodwill........................... 55 78 (d) 133
Other.............................................. 253 153 (20)(e) 386
----------------- ----------- ----------- ---------
Total operating expenses............................. 2,679 470 (67) 3,082
----------------- ----------- ----------- ---------
Income before income taxes........................... 818 217 1,102
Income taxes......................................... 291 77 112 (f) 480
----------------- ----------- ----------- ---------
Net income........................................... $ 527 $ 140 $ (45) $ 622
----------------- ----------- ----------- ---------
----------------- ----------- ----------- ---------
Earnings per common share............................ $ 0.10 $ 0.06
----------------- ---------
----------------- ---------
Average common shares and common stock equivalents
outstanding........................................ 4,459 6,259
----------------- ---------
----------------- ---------
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
55
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
REPUBLIC
SECURITY GOVERNORS BANYAN
FINANCIAL (HISTORICAL) (HISTORICAL)
CORP. (4/1/94 TO PRO FORMA COMBINED (4/1/94 TO PRO FORMA COMBINED
(HISTORICAL) 11/30/94) ADJUSTMENTS PRO FORMA 3/31/95) ADJUSTMENTS PRO FORMA
------------ ------------ ----------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest on loans............... $ 15,254 $ 3,833 $ 19,087 $ 2,934 $ 22,021
Interest on investments......... 1,034 955 1,989 467 2,456
------------ ------------ --------- ------------ ---------
Total interest income............. 16,288 4,788 21,076 3,401 24,477
------------ ------------ --------- ------------ ---------
Interest on Deposits:
Interest on deposits............ 6,244 1,838 8,082 1,241 9,323
Interest on short term
borrowings.................... 935 79 1,014 1,014
Interest on long term
borrowings.................... 218 218 218
------------ ------------ --------- ------------ ---------
Total interest expense............ 7,397 1,917 9,314 1,241 10,555
------------ ------------ --------- ------------ ---------
Net interest income............... 8,891 2,871 11,762 2,160 13,922
Provision for loan losses......... 200 140 340 86 426
------------ ------------ --------- ------------ ---------
Net interest income
after provision............... 8,691 2,731 11,422 2,074 13,496
------------ ------------ --------- ------------ ---------
Non-interest Income:
Mortgage banking income......... 1,788 1,788 1,788
Other income.................... 1,211 679 1,890 110 2,000
------------ ------------ --------- ------------ ---------
Total non-interest income......... 2,999 679 3,678 110 3,788
------------ ------------ --------- ------------ ---------
Operating Expenses:
Employee compensation
and benefits.................. 4,595 1,611 $ (870)(c) 5,336 856 $ (500)(c) 5,692
Occupancy and equipment......... 1,488 854 (134)(g) 2,208 289 2,497
Professional fees............... 652 536 (120)(e) 1,068 1,068
Advertising and promotion....... 233 233 233
Outside services................ 232 232 232
Communications.................. 352 352 352
Data processing................. 307 220 (50)(e) 477 477
Insurance....................... 570 290 860 860
Real estate owned, net.......... 70 6 76 76
Amortization of goodwill........ 73 165 (h) 238 310 (d) 548
Other........................... 1,288 373 (50)(e) 1,611 607 (60)(e) 2,158
------------ ------------ ----------- --------- ------------ ----------- ---------
Total............................. 9,860 3,890 (1,059) 12,691 1,752 (250) 14,193
------------ ------------ ----------- --------- ------------ ----------- ---------
Income (loss) before income
taxes........................... 1,830 (480) 1,059 2,409 432 3,091
Income taxes...................... 663 465 (i) 1,128 163 69 (i) 1,360
------------ ------------ ----------- --------- ------------ ----------- ---------
Net income (loss)................. $ 1,167 $ (480) $ 594 $ 1,281 $ 269 $ (181) $ 1,731
------------ ------------ ----------- --------- ------------ ----------- ---------
------------ ------------ ----------- --------- ------------ ----------- ---------
Earnings per common share......... $ 0.23 $ 0.15
------------ ---------
------------ ---------
Average common shares and common
stock equivalents outstanding... 4,474 5,916
------------ ---------
------------ ---------
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
56
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) To reflect the excess purchase price over the estimated fair value of the
net assets acquired and to eliminate Banyan's historical equity accounts.
Purchase price (cash)(1).................................... $9,100
Fair value of net assets(2)................................. 4,429
------
Goodwill as of 6/30/95...................................... $4,671
------
------
(1) Purchase price is calculated as a multiple of Banyan's equity balance
at June 30, 1995. The actual purchase price will be a multiple of
Banyan's equity balance, limited to a specified amount as of the
last day of the month prior to closing pursuant to the Definitive
Agreement. If the equity balance on such date exceeds the specified
amounts Banyan will receive additional cash equal to the excess
amount. The purchase price assumed above is calculated as follows:
Equity balance.......................................... $ 4,414
Multiple................................................ X 2.07
-------
Purchase Price (rounded)................................ $ 9,100
(2) No significant fair value adjustments are deemed necessary at June 30,
1995 since book values approximate market values at such date.
(b) (1) To record issuance of additional common shares of the Company pursuant
to the Offerings and issuance costs.
Shares offered.............................................. 1,800
Per share offering price.................................... $ 5.25
------
Gross proceeds.............................................. $9,450
------
Issuance costs.............................................. $ 817
------
Net proceeds................................................ $8,633
------
------
(2) To record issuance of Series C Preferred shares pursuant to the
Offerings.
Shares offered.............................................. 900
Per share offering price.................................... $10.00
------
Gross proceeds.............................................. $9,000
------
Issuance costs.............................................. $ 717
------
Net proceeds................................................ $8,283
------
------
Earnings on issuance proceeds are estimated as follows:
Issuance proceeds.............................................. $16,916
Proceeds used in acquisition................................... (9,100)
-------
Unused net proceeds............................................ $ 7,816
-------
-------
Annual earnings = unused net proceeds 2 T-Bill rate
$7,816 X5.25% =$410
Quarterly earnings = (unused net proceeds 2 T-Bill rate)/4
($7,816 X5.25% )/4=$102
(c) Adjustment for salaries and benefits for officers and employees which will
be redundant to the combined entity and not retained after the
acquisition.
(d) Amortization of goodwill as follows:
Goodwill recorded........................................... $4,671
Annual amortization based on 15 year period................. $ 310
Amortization for 3 months................................... $ 78
57
<PAGE>
(e) Adjustment for operating expenses, such as audit, legal, EDP and directors
fees, that will be redundant to the combined entity and not incurred on an
ongoing basis.
(f) To reflect pro forma tax expense at the effective rate of 44% as follows:
<TABLE>
<S> <C>
Pro forma adjustments $67 X 44% = $29
Historical income adjusted for pro forma tax rate ($818+$217) X (44%-36%) = 83
----
112
----
----
</TABLE>
(g) To adjust for leased equipment subsequently purchased and office space
subleased.
Leased equipment, net of depreciation....................... $ 80
Sublease space.............................................. 54
----
$134
----
----
(h) Amortization of goodwill of $3.3 million related to the Governors
acquisition, less $73,000 already included in the Company's historical
operating results.
(i) To reflect pro forma tax expense at the effective rate of 44%.
(j) Stated book value per share is calculated by dividing common shareholders'
equity plus the proceeds of the assumed conversion of the equity
contracts, and the assumed conversion of 'in the money' warrants and
convertible preferred stock by the number of shares of Common Stock
outstanding plus the equivalent common shares from the assumed conversion
of the equity contracts, and the assumed conversion of 'in the money'
warrants and convertible preferred stock. Tangible book value per share is
calculated by dividing common shareholders' equity plus the proceeds of
the assumed conversion of the equity contracts, and the assumed conversion
of 'in the money' warrants and convertible preferred stock less goodwill
by the number of shares of Common Stock outstanding plus the equivalent
common shares from the assumed conversion of the equity contracts, and the
assumed conversion of 'in the money' warrants and convertible preferred
stock.
58
<PAGE>
REGULATION
PROPOSED CONVERSION TO COMMERCIAL BANK AND BANK HOLDING COMPANY
In April 1995, the Bank filed an application with the Florida Department of
Banking and Finance ('FDBF') 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
FRB for approval to become a bank holding company under the Bank Holding Company
Act of 1956, as amended ('BHCA'). The Bank and the Company have received all
necessary federal and state regulatory approvals and anticipate the conversions
to be completed on or before November 15, 1995. Prior to conversion of the Bank,
the Company and the Bank continue to be subject to primary regulation by the
Office of Thrift Supervision ('OTS') and the Federal Deposit Insurance
Corporation ('FDIC'). In anticipation of the proposed conversion of the Bank to
a commercial bank, in July 1995, the Company changed its fiscal year-end from
March 31 to December 31. Upon conversion of the Bank to a commercial bank and
the Company becoming a bank holding company, subject to regulation under the
BHCA, the Bank will be subject to primary regulation by the State of Florida and
the FRB, and the Company will be subject to regulation by the FRB.
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.
Set forth below is a summary of the laws, rules and regulations to which
the Company and the Bank are currently subject, and those to which they will be
subject after conversion of the Bank to a Florida commercial bank. Subsequent to
the conversion, with few exceptions, none of the laws, rules or regulations
described below under the heading 'Regulation of Savings and Loan Holding
Company and Savings Bank' will apply to the Company or the Bank.
RECENT LEGISLATION AND REGULATIONS OF GENERAL APPLICABILITY
A number of pieces of legislation have recently been enacted, and
implementing regulations adopted, which affect the Company and the Bank
currently and will continue to affect them subsequent to the conversion of the
Bank to a Florida commercial bank.
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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
financial institutions 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 of Savings and Loan Holding Company
and Savings Bank--Regulation of Bank--Capital Requirements') 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 federal bank regulators 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. 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 federal bank
regulators have 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. 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 circumstances, public disclosure of final enforcement
actions by the OTS.
FIRREA also expanded the grounds for appointment of a conservator or
receiver for a financial institution 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.
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 federal banking agencies have adopted rules to implement Section 914 of
FIRREA with respect to savings associations and savings and loan holding
companies. The rules broadly define '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 financial institution means
an institution: (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
federal
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<PAGE>
banking agency relating to safety or soundness or financial viability; or (iii)
that is informed in writing by such agency 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.
The Federal Deposit Insurance Corporation Improvement Act of 1991.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ('FDICIA'),
which recapitalizes the 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 of Savings and Loan Holding Company and Savings Bank--Regulation of
the Bank--Qualified Thrift Lender Test.' FDICIA also required the establishment
of a risk-based deposit insurance assessment system. See 'Insurance of Accounts
and Other Assessments' below.
The FDICIA authorizes and, under certain circumstances, requires the
federal banking agencies to take certain actions against institutions that fail
to meet certain capital-based requirements. Under the FDICIA, the federal
banking agencies, including the OTS and the FRB, 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).
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<PAGE>
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.
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 federal bank regulators and the conservators and
receivers of financial institutions 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.
Inasmuch as the Bank exceeds the fully phased-in capital requirements of
the OTS and FRB, management of the Company does not believe that the provisions
of the FDICIA imposing restrictions on undercapitalized institutions will impact
the Bank.
Pursuant to FDICIA, the FRB and the other federal banking agencies adopted
real estate lending guidelines pursuant to which each insured depository
institution is required to adopt and maintain written real estate lending
policies in conformity with the prescribed guidelines. Under these guidelines,
each institution is expected to set loan to value ratios not exceeding the
supervisory limits set forth in the guidelines. A loan to value ratio is
generally defined as the total loan amount divided by the appraised value of the
property at the time the loan is originated. The guidelines require that the
institution's real estate
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policy also require proper loan documentation, and that it establish prudent
underwriting standards. These guidelines became effective on March 19, 1993.
The FDICIA also contains the Truth in Savings Act. The FRB adopted
Regulation DD under the Truth in Savings Act that was effective on June 21,
1993. The purpose of the Truth in Savings Act is to require the clear and
uniform disclosure of the rates of interest which are payable on deposit
accounts by depository institutions and the fees that are assessable against
deposit accounts, so that consumers can make a meaningful comparison between the
competing claims of financial institutions with regard to deposit accounts and
products.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. 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 eliminates 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 FRA. Therefore, the Bank will continue
to be subject to these restrictions subsequent to conversion to a commercial
bank.
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 federal banking agencies
may further restrict such transactions with affiliates in the interest of safety
and soundness.
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Section 23A of the FRA limits Covered Transactions with any one affiliate
to 10% of an institution'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.
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) of
the FRA 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.
Insurance of Accounts. 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 federal banking agencies require an annual audit by independent accountants
of the Bank and make their own periodic examinations of the Bank. They 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 federal banking agencies may prohibit
any FDIC-insured institution from engaging in any activity they determine 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.
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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 adopted an amendment to the BIF risk-based assessment
schedule which lowers 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 amendment, the assessment
rates for BIF-insured institutions 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 amendment authorizes 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. The FDIC amendment became effective after the BIF achieved its designated
reserve ratio May 31, 1995. The FDIC amendment caused a substantial disparity in
the deposit insurance premiums paid by BIF and SAIF members and has placed
SAIF-insured savings associations such as the Bank at a significant competitive
disadvantage to BIF-insured institutions. See 'Risk Factors--Deposit Insurance
Premiums; Potential Assessment.'
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.
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:
<TABLE>
<CAPTION>
SUPERVISORY SUBGROUP
-------------------------
A B C
--- --- ---
<S> <C> <C> <C>
MEETS NUMERICAL STANDARDS FOR:
Well capitalized...................................................................... 23 26 29
Adequately capitalized................................................................ 25 29 30
Undercapitalized...................................................................... 29 30 31
</TABLE>
The Bank's consolidated insurance assessment for the nine months ending
December 31, 1995, will be $397,000.
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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.
Federal Reserve Board. The FRB requires all depository institutions 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. The Bank was in compliance with the
reserve requirements at June 30, 1995.
Institutions are authorized to borrow from the Federal Reserve Bank
'discount window,' but FRB regulations require institutions to exhaust other
reasonable alternative sources of funds, including FHLB advances, before
borrowing from the Federal Reserve Bank.
REGULATION OF SAVINGS AND LOAN HOLDING COMPANY AND SAVINGS BANK
Federally chartered savings banks, which the Bank is presently, are subject
to extensive regulation by the OTS and 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 FRB. This supervision
and regulation is intended primarily for the protection of depositors.
Regulation of the Company
Activities Restrictions. The Company presently operates as a unitary
savings and loan holding company. Unlike a bank 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 (as
hereinafter defined), 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' below.
If a unitary holding company were to acquire control of another savings
institution, other than through merger or other business combination with its
subsidiary savings association, the holding 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
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meets the QTL test, the activities of the holding company and any of its
subsidiaries (other than the 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 a unitary holding company to engage
in certain activities that are currently permitted to it may be restricted. In
addition, such legislation would preclude companies that are engaged in
activities not permitted to multiple holding companies from acquiring control of
a multiple holding 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).
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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.
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.
Nationwide Branching. 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. Upon
conversion to a commercial bank, the ability of the Bank to branch outside of
Florida will be governed by the Interstate Act and state laws adopted in
response to the Interstate Act.
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
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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 and at June 30, 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
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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.
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 June 30, 1995, the Bank had an amortized carrying value of purchased
mortgage servicing rights of $2.7 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.
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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 June 30, 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 $14.8 million or 8.0% of risk-weighted assets. The Bank's
tangible capital of $18.4 million or 6.75% of adjusted total assets, core
capital of $18.4 million or 6.75% of adjusted total assets and risk-based
capital of $20.1 million or 11.0% of risk-weighted assets exceeded the
requirements by $14.3 million, $10.2 million and $5.3 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 'Capital Distributions' below. 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.
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.
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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.
Assessments. 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 $60,000 in the aggregate during the fiscal
year ended March 31, 1995.
Community Reinvestment Act. Under the CRA, as implemented by FDIC
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of a savings institution, to assess the institution's
record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. As of the
date of its most recent regulatory examination, the Bank was rated outstanding
with respect to its CRA compliance.
In May 1995, the FDIC and other Federal banking agencies promulgated final
revisions to their regulations concerning the CRA. The revised regulations
generally are intended to provide clearer guidance to financial institutions on
the nature and extent of their obligations under the CRA and the methods by
which the obligations will be assessed and enforced. Among other things, the
revised regulations substitute for the current process-based assessment factors
a new evaluation system that would rate institutions based on their actual
performance in meeting community credit needs. In particular, the revised system
will evaluate the degree to which an institution is performing under tests and
standards judged in the context of information about the institution, its
community, its competitors and its peers with respect to (i) lending, (ii)
service delivery systems and (iii) community development. The revised
regulations also specify that an institution's CRA performance will be
considered in an institution's expansion (e.g., branching) proposals and may be
the basis for approving, denying or conditioning the approval of an application.
Management of the Bank currently is unable to predict the effects of the revised
regulations under the CRA as recently adopted.
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BANK HOLDING COMPANY AND BANK REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and the prospects of the Company and the Bank.
Upon conversion of the Bank to a commercial bank and the Company becoming a
bank holding company subject to regulation under the BHCA, many 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. 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 above. 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.
Regulation of Bank Holding Company. As a result of its ownership of the
Bank, at the time the Bank converts to a commercial bank, the Company will be
registered as a bank holding company, and will be regulated by the FRB under the
BHCA. The Company will be required to file with the FRB annual reports and other
information regarding its business operations and those of its subsidiary. The
FRB will exercise this regulation of the Company through authority delegated to
the Federal Reserve Bank of Atlanta.
The BHCA requires, among other things, the prior approval of the FRB in any
case where a bank holding company proposes to (i) acquire all or substantially
all of the assets of a bank, (ii) acquire direct or indirect ownership or
control of more than 5% of the outstanding voting stock of any bank (unless it
owns a majority of such bank's voting shares) or (iii) merge or consolidate with
any other bank holding company.
Additionally, the BHCA prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any company which
is not a bank or bank holding company, or (ii) engaging directly or indirectly
in activities other than those of banking, managing or controlling banks, or
performing services for its subsidiaries unless such non-banking business is
determined by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
FRB policy has required a bank holding company to act as a source of
financial strength and to take measures to preserve and protect its bank
subsidiary.
Capital Adequacy Guidelines. The FRB has adopted capital adequacy
guidelines for bank holding companies and their subsidiary state-chartered banks
that are members of the Federal Reserve System, as the Bank shall become upon
conversion. Bank holding companies and their subsidiary state-chartered member
banks are required to comply with FRB's risk-based capital guidelines. The
risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Under these guidelines assets and off
balance sheet items are assigned to broad risk categories each with designated
weights. The resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
Effective December 31, 1993, the minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) for bank holding companies is 8%. 'Tier I Capital,'
particularly consisting of common stockholders' equity, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock,
less certain goodwill items and other intangible assets, is required to equal at
least 4% of risk-weighted assets. The remainder ('Tier II
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Capital') may consist of (a) an allowance for loan losses of up to 1.25% of
risk-weighted assets, (b) excess of qualifying perpetual preferred stock, (c)
hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible
securities, and (f) subordinated debt and intermediate-term preferred stock up
to 50% of Tier I Capital. Total capital is the sum of Tier I and Tier II Capital
less reciprocal holdings of other banking organizations' capital instruments,
investments in unconsolidated subsidiaries and any other deductions as
determined by the FRB (determined on a case by case basis or as a matter of
policy after formal rule making).
In computing total risk-weighted assets, bank holding company assets are
given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance
sheet items are given similar credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. Most loans
will be assigned to the 100% risk category, except for performing first mortgage
loans fully secured by residential property, which carry a 50% risk rating. Most
investment securities (including, primarily, general obligation claims on states
or other political subdivisions of the United States) will be assigned to the
20% category, except for municipal or state revenue bonds, which have a 50%
risk-weight, and direct obligations of the U.S. treasury or obligations backed
by the full faith and credit of the U.S. Government, which have a 0%
risk-weight. In covering off-balance sheet items, direct credit substitutes,
including general guarantees and standby letters of credit backing financial
obligations, are given a 100% conversion factor. Transaction-related
contingencies such as bid bonds, standby letters of credit backing non-financial
obligations, and undrawn commitments (including commercial credit lines with an
initial maturity of more than one year) have a 50% conversion factor. Short-term
commercial letters of credit are converted at 20% and certain short-term
unconditionally cancelable commitments have a 0% factor.
The FRB has also adopted regulations which supplement the risk-based
guidelines and require bank holding companies to maintain a minimum leverage
ratio of 3% Tier I Capital to total assets less goodwill (the 'leverage ratio').
The FRB emphasized that the 3% leverage ratio constitutes a minimum requirement
for well-run banking organizations having diversified risk, including no undue
interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and a composite regulatory rating of 1 under the regulatory rating
system for banks. Banking organizations experiencing or anticipating significant
growth, as well as those organizations which do not satisfy the criteria
described above, will be required to maintain a minimum leverage ratio ranging
generally from 4% to 5%. The FRB also continues to consider a 'tangible Tier I
leverage ratio' in evaluating proposals for expansion or new activities. The
tangible Tier I leverage ratio is the ratio of a banking organization's Tier I
Capital, less deductions for intangibles otherwise includable in Tier I Capital,
to total tangible assets.
A bank which fails to meet minimum capital requirements may be subject to a
capital directive which is enforceable in the same manner and to the same extent
as a final cease and desist order, and must submit a capital plan within 60 days
to the FDIC. If the leverage ratio falls to 2% or less, the bank may be deemed
to be operating in an unsafe or unsound condition, allowing the FDIC to take
various enforcement actions, including possible termination of insurance or
placing the institution into receivership or conservatorship.
It should be noted that the minimum ratios referred to above are merely
guidelines and the FRB possesses the discretionary authority to require higher
ratios with respect to bank holding companies and state-member banks.
At June 30, 1995, the Company exceeded FRB's minimum capital requirements
had such requirements been applicable to it at such time. At June 30, 1995, the
Company's capital to risk-weighted assets was 11.03% and Tier I Capital to
risk-weighted assets was 9.96%. At June 30, 1995, the Company's leverage ratio
was 7.75%, which also exceeded the minimum requirements. The Company currently
exceeds the requirements contained in FRB regulations, policies and directives
pertaining to capital adequacy, and management of the Company is unaware of any
violation or alleged violation of these regulations, policies or directives.
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FDICIA requires the federal banking agencies, including the FRB and the
FDIC, to revise existing risk-based capital standards to take adequate account
of interest rate risk. The FRB, the FDIC and the United States Office of the
Comptroller of the Currency have issued a joint notice of proposed rule making
which would revise the interest-based capital standards to ensure that banks
measure and monitor their interest rate risk and maintain adequate capital for
that risk.
Regulation of the Bank
The Bank is a banking institution which will be chartered by, and operated
in the state of Florida; as such, it is subject to supervision and regulation by
the FDBF. The Bank will be a member bank of the Federal Reserve System and its
operations will also be subject to broad federal regulation and oversight by the
FRB. The deposit accounts of the Bank will be insured by the FDIC which will
give the FDIC certain enforcement powers over the Bank. Various consumer laws
and regulations will also affect the operations of the Bank including state
usury laws, laws relating to fiduciaries, consumer credit and equal credit laws,
and fair credit reporting.
The FDBF will supervise and regulate all areas of the Bank's operations
including, without limitation, making of loans, the issuance of securities, the
conduct of the Bank's corporate affairs, capital adequacy requirements, the
payment of dividends and the establishment or closing of branches.
As a state-chartered banking institution in the state of Florida, the Bank
will be empowered by statute, subject to the limitations contained in those
statutes, to take savings and time deposits and pay interest on them, to accept
checking accounts, to make loans on residential and other real estate, to make
consumer and commercial loans, to invest, with certain limitations, in equity
securities and in debt obligations of banks and corporations and to provide
various other banking services on behalf of the Bank's customers.
In addition, FDICIA prohibits insured state-chartered institutions from
conducting activities as principal that are not permitted for national banks. A
bank may, however, engage in an otherwise prohibited activity if it meets its
minimum capital requirements and the FDIC determines that the activity does not
present a significant risk to the deposit insurance funds.
MONETARY POLICY AND ECONOMIC CONTROL
The commercial banking business in which the Bank will engage is affected
not only by general economic conditions, but also by the monetary policies of
the FRB. Changes in the discount rate on member bank borrowing, availability of
borrowing at the 'discount window,' open market operations, the imposition of
changes in reserve requirements against member banks' deposits and assets of
foreign branches and the imposition of and changes in reserve requirements
against certain borrowings by banks and their affiliates are some of the
instruments of monetary policy available to the FRB. These monetary policies are
used in varying combinations to influence overall growth and distributions of
bank loans, investments and deposits, and this use may affect interest rates
charged on loans or paid on deposits. The monetary policies of the FRB have had
a significant effect on the operating results of commercial banks and are
expected to do so in the future. The monetary policies of the FRB are influenced
by various factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and in the fiscal policies of the
U.S. Government. Future monetary policies and the effect of such policies on the
future business and earnings of the Bank cannot be predicted.
DIVIDENDS
The Bank will be subject to legal limitations on the frequency and amount
of dividends that can be paid to the Company. The FRB may restrict the ability
of a bank to pay dividends if such payments would constitute an unsafe or
unsound banking practice. These regulations and restrictions may limit the
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Company's ability to obtain funds from the Bank, for its cash needs, including
funds for acquisitions and the payment of dividends, interest and operating
expenses.
In addition, Florida law also places certain restrictions on the
declaration of dividends from state chartered banks to their holding companies.
Pursuant to Section 658.37 of the Florida Banking Code, the Board of Directors
of state chartered banks, after charging off bad debts, depreciation, and other
worthless assets, if any, and making provisions for reasonably anticipated
future losses on loans and other assets, may quarterly, semi-annually or
annually declare a dividend of up to the aggregate net profits of that period
combined with the bank's retained net profits for the preceding two years and,
with the approval of the FDBF, declare a dividend from retained net profits
which accrued prior to the preceding two years. Before declaring such dividends,
20% of the net profits for the preceding period as is covered by the dividend
must be transferred to the surplus fund of the bank until this fund becomes
equal to the amount of the bank's common stock then issued and outstanding. A
state-chartered bank may not declare any dividend if (i) its net income from the
current year combined with the retained net income for the preceding two years
is a loss; or (ii) the payment of such dividend would cause the capital account
of the bank to fall below the minimum amount required by law, regulation, order,
or any written agreement with the FDBF or a federal regulatory agency.
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 and banks 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
76
<PAGE>
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.
77
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION
- ---- --- --------
Rudy E. Schupp 44 Chairman of the Board and President of the
Company and the Bank and Director
Richard J. Haskins(3) 46 Executive Vice President of the Company
and the Bank, Chief Financial Officer of
the Company and Director
Lennart E. Lindahl, Jr.(2)(3) 51 Vice Chairman of the Board of the Company
and the Bank and Director
H. Gearl Gore(1) 47 Director
Richard C. Rathke(1) 63 Director
Victor H. Siegel(3) 48 Director
William F. Spitznagel(2)(3) 68 Director
Bruce E. Wiita(2) 58 Director
William Wolfson(1) 66 Director
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
Mr. Schupp has been President and Chief Executive Officer of the Company
since April 8, 1985, and the President and Chief Executive Officer of the Bank
since its inception. From 1980 to 1984, Mr. Schupp was employed by AmeriFirst
Bank, FSB, Miami, Florida, where he held the position of Division Vice President
and, before that, was Senior Vice President and Division Manager of the Orlando
Division of AmeriFirst Bank, FSB. Mr. Schupp was Manager in Consumer Bank
Planning and Marketing with First Union National Bank, Charlotte, North
Carolina, from 1977 to 1980.
Mr. Haskins has been Senior Vice President and Chief Financial Officer of
the Company since April 8, 1985 and a Director of the Company since December
1986. From 1985 to 1989, he was Senior Vice President of the Company and the
Bank. In 1989, he was appointed Executive Vice President of the Company and the
Bank. For the ten years prior to joining the Company he had been an accountant
with the West Palm Beach, Florida office of Deloitte Haskins & Sells, certified
public accountants, where he held the position of Manager. On October 22, 1993,
Mr. Haskins consented, without admitting or denying the matters therein, to
findings of the Securities and Exchange Commission that he caused violations of
Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules
12b-20 and 13a-13 promulgated thereunder. See 'Management--Consent to Findings
of Exchange Act Violations.'
Mr. Lindahl has been a Director of the Company since its inception. Since
1970, he has been President of Lindahl, Browning, Ferrari & Hellstrom, Inc.,
Consulting Engineers in Jupiter, Florida. Mr. Lindahl is also current Chairman
of the Economic Council of Palm Beach County and Past President of the Palm
Beach County Development Board.
Mr. Gore has been a Director and the Secretary of the Company since its
inception. He has been the President of H. Gearl Gore, Inc., a real estate
appraisal firm in Jupiter, Florida since 1983. Mr. Gore was the President and
Chief Operating Officer of Northco Investment Properties, Inc., a real estate
brokerage firm in Jupiter, Florida, from 1981 to present. He served as a
Councilman for the Town of Jupiter from 1981 to 1983.
78
<PAGE>
Mr. Rathke has been a Director of the Company since its inception. He has
been the President of RCR Enterprises, Inc., a real estate development firm in
Jupiter, Florida, since 1979. From 1966 to 1979 he was the President and owner
of Trans Pacific Trading Co. of Fort Lauderdale, Florida, a firm engaged in
importing and retail sales.
Dr. Siegel is a physician and surgeon specializing in obstetrics and
gynecology and has been practicing in Palm Beach County since January 1978. Dr.
Siegel is a member of the Florida and Palm Beach County Medical Associations and
held the position of Executive Director of the Palm Beach County Medical Society
in 1986 and 1986.
Mr. Spitznagel has been a Director of the Company from its inception
through December 31, 1986 and from February 21, 1987 to present. He was Chairman
and President of Roadway Services, Inc., a motor freight company, from 1978
until his retirement in 1981. He presently serves as a consultant to that
company and has been a director since 1982 of Gen Corp, Inc., Akron, Ohio, a New
York Stock Exchange listed company, a diversified industrial manufacturing firm.
Dr. Wiita has been a Director of the Company since its inception. He is a
surgeon and urologist practicing in Jupiter and Palm Beach Gardens, Florida,
since July 1973.
Mr. Wolfson is a certified public accountant since 1960 and the senior
partner in the accounting firm of Wolfson, Kapit, Melzer, Milowshy, Ettinger and
is presently practicing in New York.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth, for the last three
completed fiscal years, the cash and certain other compensation paid by the
Company to the Company's Chief Executive Officer and such other executive
officers of the Company whose total annual salary and bonus for the fiscal year
ended March 31, 1995 exceeded $100,000 (collectively, the 'Named Executive
Officers'):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------- ----------------
(A) (B) (C) (D) (E) (F)
--- ------------------------------- ---------------- ---------------
FISCAL RESTRICTED STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARD(S)($) COMPENSATION($)
- --------------------------- ------ --------- -------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Rudy E. Schupp 1995 148,000 78,077 16,400 6,965
Chairman and Chief Executive Officer 1994 141,350 100,612 13,750 4,327
of the Company and the Bank 1993 130,875 97,761 27,720 4,963
Richard J. Haskins 1995 115,993 39,039 8,400 6,784
Executive Vice President of the Company 1994 110,140 46,566 7,150 3,243
and the Bank, Chief Financial Officer 1993 103,870 41,189 18,523 4,436
of the Company
Gregory S. Bills(g) 1995 60,103 0 0 83,175
Senior Vice President, 1994 99,200 7,326 11,582 2,092
Lending for the Bank 1993 91,250 11,122 6,065 2,047
79
<PAGE>
<FN>
FOOTNOTES:
(c) Salary: Total base salary paid for fiscal years 1995, 1994 and 1993 for the Company
and the Bank.
(d) Bonus: Annual incentive compensation paid for financial results achieved during the
fiscal year.
(e) Restricted Stock Awards: The amounts represent the dollar value of Company awards on the date of grant
for stock grants under the Company's Restricted Stock Plan. Restricted stock
awards vest after three years provided the executive does not resign or is not
terminated for cause. Dividends are paid on restricted stock. The aggregate
number of shares and market value of restricted stock as of the end of fiscal
year 1995 held by each named executive was as follows: Schupp 27,383 shares
($116,378); Haskins 18,154 shares ($77,154).
(f) All Other Compensation: The amounts shown in this column comprise matching contributions to the 401(k)
plan, the cost of term life insurance premiums for the benefit of the
executive, and automobile allowance. In addition, Bills was paid $75,000 in
fiscal year 1995 for the purchase of his rights under the supplemental
Executive Retirement Plan Agreement.
(g) Mr. Bills resigned his position of Senior Vice President in October 1994.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
Mr. Schupp and Mr. Haskins have employment agreements with the Company,
renewable each year, which provide for the payment of incentive compensation
equal to 4% for Schupp, and 2% for Haskins, of the Company's quarterly
consolidated income before taxes. The agreements also provide for a severance
payment equal to 150% of base salary and incentive compensation in the event of
termination without cause and provide for benefits including the use of an
automobile and $200,000 term life insurance for the benefit of the executive.
If a change in control of the Company should occur and (1) the executive's
employment is involuntarily terminated or not extended (other than for cause or
physical or mental incapacity) or (2) he resigns due to his reasonable
determination that he is prevented from exercising his authority or performing
his duties and functions as an officer, then he would be entitled under the
employment agreements to receive a lump sum payment equal to three times his
annual salary. The agreements also provide for payments the executive would have
received in respect to cash incentive compensation and contemplate an additional
payment of 20% of three times his annual salary as compensation for discounted
fringe benefits, as well as for the continuation of any applicable employee
benefit plans for a thirty-six month period. A 'Change of Control' is defined in
the agreements as the acquisition by any person or group of 25% or more of the
combined voting power of the Company's then outstanding securities.
OPTIONS GRANTED IN LAST FISCAL YEAR
No options were granted in fiscal year 1995.
80
<PAGE>
FISCAL YEAR-END STOCK OPTION VALUES
The following table summarizes the number and value of option exercises and
exercisable and unexercisable options held at March 31, 1995 by each of the
Named Executive Officers:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END OPTIONS AT FY-END
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rudy E. Schupp..................... 1,000 $ 1,000 22,880 10,000 $ 39,000 $ 17,500
Richard J. Haskins................. 0 $ 0 22,800 0 $ 39,000 0
</TABLE>
DIRECTOR COMPENSATION
During the fiscal year ended March 31, 1995, each director, other than Mr.
Schupp and Mr. Haskins who do not receive compensation for their service as
directors, received a retainer of $200 per month plus $300 for attendance at
Board meetings, and $100 for each committee meeting attended.
CONSENT TO FINDINGS OF EXCHANGE ACT VIOLATIONS
On October 22, 1993, the Company and Mr. Haskins consented, without
admitting or denying the matters therein, to findings of the Securities and
Exchange Commission that he caused violations of Sections 13(a) and 13(b)(2)(A)
of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-13 promulgated
thereunder and to an order of the Commission that he cease and desist from
committing or causing future violations of such provisions. The Company's and
Mr. Haskins' consents were given in connection with a determination that the
Company failed to timely record a loss on a certain lease transaction in its
Form 10-Q for the quarter ended June 30, 1989 and that Mr. Haskins, as the
Company's chief financial officer, determined not to record the loss in such
10-Q.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In 1987 the Company initiated a non-qualified pension plan for senior
officers and division heads of the Company and its subsidiaries. Eligibility to
participate in the plan requires that the employee be a division head with the
title of Vice President or above, have three years of consecutive service and be
approved by the Board of Directors. The number of persons eligible for this plan
in the current year is four. The expected cost of the plan for the current year
is $120,000. Those executives currently participating in the plan are Messrs.
Schupp, Haskins, one other executive officer, and one former executive officer.
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. Participants vest 20% in the plan
in the year they enter the plan and become fully vested under various vesting
schedules depending on their retirement benefit.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 30, 1995, certain
information regarding beneficial ownership of the Company's Common Stock, and as
adjusted to reflect the sale of 1,800,000 shares offered hereby, by (i) each
director of the Company, (ii) each of the Named Executive Officers, (iii) each
of the shareholders known to the Company to own more than 5% of the Company's
outstanding Common Stock and (iv) all directors and executive officers as a
group. Except otherwise indicated, each individual named has sole investment and
voting power with respect to the shares shown.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERINGS AFTER THE OFFERINGS
--------------------------------------------- --------------------
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS PERCENT OF CLASS
- ------------------------ ---------------- ---------------- --------------------
<S> <C> <C> <C>
Gregory S. Bills............................... 2,809 * *
H. Gearl Gore.................................. 142,424(2)(3)(4)(5) 3.3% 2.3%
Richard J. Haskins............................. 73,289(3)(4) 1.7% 1.2%
Lennart E. Lindahl............................. 126,092(2)(3)(4)(5) 2.9% 2.1%
Richard C. Rathke.............................. 140,599(2)(3)(4)(5) 3.2% 2.3%
Rudy E. Schupp................................. 114,285(3)(4)(6) 2.7% 1.9%
Victor Siegel, M.D............................. 272,909(1)(2)(3) 6.3% 4.5%
210 Jupiter Lakes Blvd., Suite 300
Jupiter, FL 33458
William F. Spitznagel.......................... 293,650(1)(2)(3)(4)(5) 6.8% 4.8%
4400 Congress Avenue
West Palm Beach, FL 33407
Bruce E. Wiita, M.D............................ 137,325(2)(3)(4)(5) 3.2% 2.2%
William Wolfson................................ 9,184(1)(2)(7) * *
All Directors and Executive Officers as a group
(11 persons)................................... 1,314,540(8) 28% 20%
<FN>
- ------------------------
* Less than one percent.
(1) Includes 3,703, 2,468 and 659 shares issuable upon conversion of the Company's Series A Convertible
Preferred Stock, at an conversion price of $4.05, for Siegel, Spitznagel and Wolfson, respectively.
(2) Includes 5,250 shares issuable upon the exercise of options, at an exercise price of $3.33 per share.
(3) Includes 12,128 shares issuable upon exercise of options, at an exercise price of $2.48 per share.
(4) Includes 10,672 shares issuable upon exercise of options, at an exercise price of $2.62 per share.
(5) Includes 27,536 shares issuable upon exercise of warrants, at an exercise price of $5.00 per share.
(6) Includes 14,768 shares issuable upon exercise of options, at an exercise price of $2.50 per share.
(7) Includes 1,278 shares issuable upon exercise of warrants, at a price of $3.90 per share.
(8) Includes Convertible Preferred Stock, options and warrants for 366,366 shares of Common Stock. Actual Common
Stock owned is 22.9% of the total outstanding.
</FN>
</TABLE>
82
<PAGE>
CERTAIN TRANSACTIONS
Mr. Gore owns a real estate appraisal firm which received fees from the
Bank for appraisals of real estate relating to loan transactions. During the
years ended March 31, 1995, 1994, and 1993, such fees aggregated approximately
$140,000, $241,000, and $281,000, respectively. The Company believes that these
transactions with Mr. Gore are on substantially the same terms as would have
been negotiated with an outside party.
The following chart sets forth indebtedness to the Bank of management
during the last completed fiscal year:
<TABLE>
<CAPTION>
LARGEST AMOUNT
OUTSTANDING DURING
THE YEAR ENDED BALANCE
OFFICER AND/OR DIRECTOR PURPOSE MARCH 31, 1995 MARCH 31, 1995 INTEREST RATE
- ----------------------- ------- ------------------ -------------- -------------
<S> <C> <C> <C> <C>
H. Gearl Gore........................................ 1 $ 183,531 $ 178,651 03.250%
H. Gearl Gore........................................ 1 48,873 42,421 11.000%
H. Gearl Gore........................................ 2 25,807 24,687 10.000%
Gulfstream Exterminating (Gore)...................... 3 6,722 3,992 11.000%
Gulfstream Exterminating (Gore)...................... 3 9,833 7,000 11.000%
Richard J. Haskins................................... 2 22,931 22,243 10.000%
Richard J. Haskins................................... 2 28,000 28,000 08.750%
Lennart Lindahl...................................... 2 79,273 33,840 10.000%
Rudy E. Schupp....................................... 1 26,046 22,151 10.000%
Rudy E. Schupp....................................... 2 45,049 44,651 11.000%
Victor Siegel........................................ 2 129,987 129,988 10.000%
Victor Siegel........................................ 2 11,546 9,758 07.750%
Victor Siegel........................................ 2 60,864 59,964 10.000%
Bruce Wiita.......................................... 2 77,583 55,827 11.000%
Devmed Group, Inc. (Wiita)........................... 3 60,731 60,731 10.000%
<FN>
- ------------------------
1 - Personal Residence
2 - Consumer
3 - Business
</FN>
</TABLE>
All extensions of credit to officers, directors and employees of the
Company and its subsidiaries are made based on the same underwriting guidelines
used for extensions of credit to the general public.
DESCRIPTION OF SECURITIES
Set forth below is a description of the Company's securities which are
currently outstanding or proposed to be issued in the Offerings.
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock, par
value $.01 per share, of which 4,413,563 shares were issued and outstanding as
of September 30, 1995. The remaining shares are available for issuance when
and as the Board of Directors of the Company determines it to be advisable,
83
<PAGE>
without obtaining the prior approval of its shareholders. Holders of the
Company's Common Stock do not have preemptive rights with respect to the
issuance of additional shares of the Common Stock.
Dividend Rights. Holders of the Company's Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. Funds for the payment of dividends of the
Company are primarily obtained from dividends paid by the Bank. See 'Regulatory
Matters--Federal Regulation--Capital Requirements.'
Voting Rights. Holders of the Common Stock are entitled to one vote for
each share held and do not have cumulative voting rights in the election of
directors.
Appraisal Rights. Under Florida law, dissenters' rights of appraisal are
available to shareholders in the case of certain mergers or consolidations.
Shareholders have to follow a detailed set of steps as set forth in the statute,
in order to perfect their dissenters' rights of appraisal.
Liquidation Rights. In the event of liquidation, holders of Common Stock
are entitled to receive, pro rata, all assets available for distribution after
the payment of all obligations of the Company, including any indebtedness of the
Company and the distribution of all preferential amounts due to the holders of
serial preferred stock.
Transfer Agent. The Company's transfer agent is American Stock Transfer &
Trust Company.
Stock Options. Non-qualified options to purchase an aggregate of 952,496
shares of Common Stock were outstanding at September 30, 1995. All of the
options were issued to Company and Bank officers and directors as part of
their compensation.
WARRANTS
In connection with the merger of Homestead Bank in 1993 the Company issued
warrants to acquire 511,153 shares of Common Stock at an adjusted price of $3.90
per share. The warrants expire on January 21, 1996. As of September 30, 1995,
108,710 of the warrants had been exercised.
In addition, warrants to purchase an aggregate of 165,216 shares at $5.00
per share on or prior to November 1, 2000 are outstanding. These warrants were
issued in 1985 to directors in lieu of cash compensation for their services.
PREFERRED STOCK
General. Under the Company's Articles of Incorporation, the Board of
Directors of the Company has the authority to divide the 10,000,000 authorized
shares of preferred stock, $.01 par value, into series and to fix the rights and
preferences of any series so established. Variations between different series
may be created by the Board of Directors with respect to such matters as voting
rights, if any; the rate of dividend, the priority of payment thereof, and the
right to accumulation thereof, if any; redemption terms and conditions; and the
right of conversion, if any. The holders of preferred stock have no preemptive
right to subscribe to any additional securities which may be issued by the
Company.
Series C Preferred. The rights of the holders of shares of Series C
Preferred are subordinate to the rights of general creditors and there is no
sinking fund with respect to the Series C Preferred. The $10.00 liquidation
preference per share is not indicative of the price at which the Series C
Preferred may actually trade.
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<PAGE>
Rank. The Series C Preferred, with respect to dividend rights and rights
upon liquidation, dissolution or winding up of the Company, rank senior to the
Common Stock and to all other classes and series of equity securities of the
Company, other than the Series A Preferred Stock and Series B Preferred Stock or
any other classes or series of equity securities of the Company subsequently
issued ranking on a parity with the Series C Preferred, as to dividend rights
and rights upon liquidation, dissolution or winding up of the Company. No class
or series of equity securities may rank senior to the Series C Preferred as to
the payment of dividends or upon liquidation. The Series C Preferred is junior
to indebtedness issued from time to time, including debentures.
Dividends. Holders of shares of Series C Preferred are entitled to
receive, if, when and as declared by the Board of Directors of the Company out
of assets of the Company legally available for payment, cumulative cash
dividends, payable quarterly, at the rate of 7% per annum, or $0.70 per share
per annum, from the date of issuance and for each quarterly dividend period
thereafter. Dividends on the Series C Preferred are payable quarterly in arrears
to holders of record on the last day of March, June, September and December of
each year with the first dividend payment on December 31, 1995, prorated from
the date of issuance. Each such dividend is payable to holders of record as they
appear on the books of the Company on such record dates, not exceeding 30 days
preceding the payment dates thereof, as shall be fixed by the Board of Directors
of the Company or a duly authorized committee thereof. Dividends on the Series C
Preferred are cumulative and accrue on a daily basis from the date of original
issuance of the shares.
The Company shall not declare or pay or set apart for payment any dividends
on any series of its preferred stock, or any other class of capital stock of the
Company, ranking, as to dividends or upon liquidation, on a parity with or
junior to the Series C Preferred for any period (other than dividends payable in
Common Stock or another stock ranking junior to the Series C Preferred as to
dividends and upon liquidation), nor shall the Company make any other
distribution on the Common Stock of the Company or any other stock of the
Company ranking junior to or on a parity with the Series C Preferred as to
dividends or upon liquidation, unless full cumulative dividends have been paid
or declared and a sum sufficient for payment thereof is set apart for payment
for all dividends on the Series C Preferred. When dividends are not paid in full
upon the Series C Preferred and any other series of preferred stock ranking on a
parity as to dividends with the Series C Preferred, all dividends declared upon
shares of Series C Preferred and any other series of preferred stock ranking on
a parity therewith as to dividends shall be declared pro rata so that the amount
of dividends declared per share on the Series C Preferred and such other series
of preferred stock ranking on a parity therewith shall in all cases bear to each
other the same ratio that the accrued dividends per share of the shares of
Series C Preferred and such other series of preferred stock bear to each other.
No interest shall be payable in respect of any dividend payment on the Series C
Preferred in arrears. Unless full cumulative dividends on the Series C Preferred
have been paid for all past dividend payment periods or declared and set apart
for payment, no Common Stock or any other stock of the Company ranking junior to
or on a parity with the Series C Preferred can be redeemed, purchased or retired
by the Company, except by conversion into or exchange for stock of the Company
or such entity ranking junior to the Series C Preferred as to dividends and upon
liquidation.
The ability of the Company to pay dividends on the Series C Preferred may
be limited by the general corporation law of the State of Florida and may depend
on the Company's ability to obtain funds for such purpose from the Bank and
other direct or indirect subsidiaries of the Company.
Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of shares of
Series C Preferred are entitled to receive out of assets of the Company
available for distribution to shareholders, before any payment or distribution
of assets is made to holders of Common Stock or any other class or series of
stock ranking junior to the Series C Preferred, upon liquidation, liquidating
distributions in the amount of $10.00 per share plus accrued and unpaid
dividends to the date fixed for such liquidation, dissolution or winding up. If
upon any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the amounts payable with respect to the Series C
85
<PAGE>
Preferred and any other shares of stock of the Company ranking as to any such
distribution on a parity with the Series C Preferred are not paid in full, the
holders of the Series C Preferred and of such other shares will share ratably in
any such distribution of assets of the Company in proportion to the full
respective preferential amounts to which they are entitled, the holders of
shares of Series C Preferred will not be entitled to any further participation
in any distribution of assets by the Company.
Optional Redemption. The Series C Preferred is not redeemable prior to
November 30, 1999 unless the Common Stock shall have a closing bid price which
is at least 140% of the Conversion Price for 20 consecutive trading days prior
to redemption. In the event the Series C Preferred becomes redeemable prior to
November 30, 1999, the Series C Preferred may be redeemed, in whole or in part,
at the Company's option, at a price of $10.00 per share, plus accrued and unpaid
dividends to the date fixed for redemption. The Series C Preferred will be
redeemable, in whole or in part, at the option of the Company, at any time on or
after November 30, 1999, at the following per-share prices during the 12-month
period beginning November 30:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
1999................................ $ 10.42
2000................................ 10.35
2001................................ 10.28
2002................................ 10.21
2003................................ 10.14
2004................................ 10.07
2005 and thereafter................. 10.00
</TABLE>
together, in each case, with an amount equal to accrued plus unpaid dividends
(whether or not earned or declared) to the date fixed for redemption.
From and after the date fixed for redemption, dividends shall cease to
accrue on the shares of the Series C Preferred called for redemption, all rights
of the holders thereof (except the right to receive the redemption price plus
accrued and unpaid dividends) shall cease with respect to such shares and such
shares of Series C Preferred shall no longer be deemed to be outstanding.
In the event that full dividends on the Series C Preferred have not been
paid or declared and set apart for payment for all past dividend periods, the
Series C Preferred may not be redeemed by the Company.
If a notice of redemption is given and any holder of Series C Preferred,
prior to the close of business on the business day prior to the date fixed for
redemption, gives written notice to the Company of the conversion of the Series
C Preferred held by such holder, then the redemption shall not become effective
as to such shares and the conversion shall become effective.
Voting Rights. Except as indicated below, or except as expressly required
by applicable law, the holders of the Series C Preferred will not be entitled to
vote.
So long as any shares of Series C Preferred are outstanding, if the Company
shall have failed to pay full dividends on the Series C Preferred or any other
series of preferred stock ranking on a parity with the Series C Preferred as to
dividends or upon liquidation for six full quarterly dividend payment periods,
whether or not consecutive, the number of directors of the Company shall
automatically be increased by two and the holders of Series C Preferred will be
entitled to elect (at a special meeting of the holders of the Series C
Preferred, called by the Secretary of the Company at the request of the holders
of record of at least 10% of the outstanding shares of Series C Preferred, or at
any annual meeting of shareholders of the Company) two directors. All rights of
the holders of the Series C Preferred to elect such directors shall continue in
effect until the Company is no longer in arrears or in default with respect to
the payment of
86
<PAGE>
dividends on the preferred stock, including the Series C Preferred. At such time
as all cumulative dividends have been paid in full, the voting right of the
holders of the Series C Preferred shall, without further action, terminate,
subject to revesting in the event of each and every subsequent failure of the
Company to pay such dividends for the requisite number of periods described
above.
Unless the vote or consent of the holders of a greater number of shares
shall be required by law, the affirmative vote or consent of the holders of at
least two-thirds of the outstanding shares of the Series C Preferred, voting as
a class, will be required for any amendment to the Company's Articles of
Incorporation which will adversely affect the powers, preferences, privileges or
rights of the Series C Preferred, except that the Company may authorize or issue
additional shares of Common Stock or preferred stock ranking junior to the
Series C Preferred without obtaining the approval of holders of the Series C
Preferred. No class or series of equity securities may rank senior to the Series
C Preferred as to the payment of dividends or upon liquidation without such
consent of the Series C Preferred.
Conversion Rights. The Series C Preferred will be convertible at the
option of the holder at any time into a number of shares of Common Stock equal
to the aggregate liquidation preference of the shares surrendered for conversion
divided by the conversion price (with any fractional shares of Common Stock
resulting from such conversion paid in cash).
The initial conversion price set forth on the cover page of this Prospectus
is subject to adjustment upon the occurrence of a dividend or distribution on
the Common Stock or if the Company issues rights or warrants to all holders of
Common Stock entitling them to subscribe for or purchase Common Stock at less
than the current market price. No adjustment in the conversion price will be
required for three years unless the adjustments would require a change of at
least 1% in the conversion price then in effect; provided that any adjustment
that would otherwise be required to be made will be carried forward and taken
into account in any subsequent adjustment.
In case of any reclassification or similar change of outstanding shares of
Common Stock (with certain exceptions) or the Company's consolidation with, or
merger with or into, any other entity that results in a reclassification,
change, exchange, or cancellation of outstanding shares of Common Stock (with
certain exceptions) or any sale or transfer of all or substantially all of the
assets of the Company, all holders of Series C Preferred after the
reclassification, change, consolidation, merger, sale or transfer will have the
right to convert their shares of Series C Preferred into the kind and amount of
securities, cash and other property which the holders would have been entitled
to receive upon the reclassification, change, consolidation, merger, sale or
transfer if the holders had held the number of shares of Common Stock issuable
upon conversion of their shares of Series C Preferred immediately prior to the
reclassification, change, consolidation, merger, sale or transfer.
No fractional shares or securities representing fractional shares of Common
Stock will be issued upon conversion. Any fractional shares resulting from
conversion will be paid in cash based on the current market price of the Common
Stock at the close of business on the business day preceding the date of
conversion.
The holder of record of a share of Series C Preferred on a record date with
respect to the payment of a dividend on the Series C Preferred will be entitled
to receive the dividend on that share of Series C Preferred on the corresponding
dividend due date notwithstanding the conversion of the share after the record
date or any default by the Company in the payment of the dividend payable on
that dividend due date. Notwithstanding the foregoing, a share of Series C
Preferred surrendered for conversion during the period from the close of
business on any record date for the payment of a dividend on the Series C
Preferred to the opening of business on the corresponding dividend due date
(except a share of Series C Preferred called for redemption on a redemption date
during such period) must be accompanied by payment of an amount equal to the
dividend payable on such dividend due date. The dividend with respect to a share
of Series C Preferred called for redemption on a redemption date during the
period from the close of business
87
<PAGE>
on a record date with respect to the payment of a dividend on the Series C
Preferred to the opening of business on the corresponding dividend due date will
be payable on that dividend due date, and the holder converting such share of
Series C Preferred need not include a payment of such dividend amount upon
surrender of such shares of Series C Preferred for conversion. Holders of record
of shares of Series C Preferred on a record date with respect to the payment of
a dividend on the Series C Preferred who convert their shares on or after the
corresponding dividend due date will receive the dividend payable by the Company
on that date and need not include payment in the amount of the dividend upon
surrender of such shares of conversion. Except as described above, no payment or
adjustment is to be made on conversion for dividends accrued on the shares of
Series C Preferred or for dividends on the Common Stock issued on conversion.
Preemptive Rights. The holders of shares of Series C Preferred shall not
have any preemptive right to acquire any unissued shares of any stock of the
Company, now or hereafter authorized, or any other securities of the Company.
Series A Preferred. The rights of the holders of the Series A Preferred
are similar in many respects to the rights of the holders of the Series C
Preferred. The Series A Preferred ranks on a parity with the Series C Preferred
with respect to the payment of dividends and liquidation rights. The following
is a summary of the material differences in the rights of the holders of the
Series A Preferred as compared to the rights of the holders of the Series C
Preferred.
Dividends. Holders of shares of Series A Preferred are entitled to
receive, if, when and as declared by the Board of Directors of the Company out
of assets of the Company legally available for payment, cumulative cash
dividends, payable quarterly, at the rate of 7.5% per annum, or $.75 per share
per annum, from the date of issuance and for each quarterly dividend period
thereafter.
Optional Redemption. The Series A Preferred is not redeemable prior to
June 30, 1998 unless the Common Stock shall have a closing bid price which is at
least 140% of the Conversion Price for 20 consecutive trading days prior to
redemption. In the event the Series A Preferred becomes redeemable prior to June
30, 1998, the Series A Preferred may be redeemed, in whole or in part, at the
Company's option, at a price of $10.00 per share, plus accrued and unpaid
dividends to the date fixed for redemption. The Series A Preferred will be
redeemable, in whole or in part, at the option of the Company, at any time on or
after June 30, 1998 at the following per-share prices during the 12-month period
beginning June 30:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
1998................................ $ 10.40
1999................................ 10.32
2000................................ 10.24
2001................................ 10.16
2002................................ 10.08
2003 and thereafter................. 10.00
</TABLE>
together, in each case, with an amount equal to accrued plus unpaid dividends
(whether or not earned or declared) to the date fixed for redemption.
Rights to Purchase Series B Preferred. See 'Certain Anti-Takeover
Provisions--Rights Plan.'
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Rights Plan and Articles of
Incorporation and of Florida law could have the effect of deterring takeovers.
In addition, federal law provides for OTS approval of changes in control of
savings bank holding companies.
88
<PAGE>
Rights Plan. On March 29, 1995, the Board of Directors of the Company
declared a dividend on the Common Stock of one Right for each outstanding share
of Common Stock of the Company to shareholders of record at the close of
business on April 14, 1995. Each Right entitles the registered holder to
purchase from the Company a unit consisting of one one-hundredth of a share (a
'Unit') of the Company's Series B Junior Participating Preferred Stock (the
'Series B Preferred'), or a combination of securities and assets of equivalent
value, at a purchase price of $18 per Unit, subject to adjustment. Each
fractional share of Series B Preferred is designed to be equivalent in voting
and dividend rights to one share of Common Stock. A full description and terms
of the Rights are set forth in the Rights Agreement (the 'Rights Agreement'),
dated as of April 14, 1995, between the Company and IBJ Schroder Bank & Trust
Company, as Rights Agent.
The Rights Agreement is designed to protect shareholder interests in the
event that the Company is confronted with coercive or unfair takeover tactics,
including offers that do not treat all shareholder interests fairly or do not
maximize the value of the Company. Acquisition offers that reflect the Company's
fair value and that are made to all shareholders would not be affected by the
Rights Agreement.
Initially, ownership of the Rights are evidenced only by the Common Stock
certificates. The Rights will separate from the Common Stock and a Distribution
Date will occur upon the earlier of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an 'Acquiring
Person') has acquired, or obtained the right to acquire, beneficial ownership of
20% or more of the outstanding Common Stock (the 'Stock Acquisition Date'), or
(ii) the close of business on such date as may be fixed by the Board of
Directors, which date shall not be more than 65 days following the commencement
of a tender offer or exchange offer that would result in a person or group
beneficially owning 30% or more of the outstanding Common Stock.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on April 14, 2005, unless earlier redeemed by the
Company or unless certain events have occurred.
Except in the circumstances described below, after the Distribution Date
each Right will be exercisable into one one-hundredth of a Preferred Share (a
'Preferred Share Fraction'). Each Preferred Share Fraction carries voting and
dividend rights that are intended to produce the equivalent of one Common Stock.
The voting and dividend rights of the Preferred Shares are subject to adjustment
in the event of dividends, subdivisions and combinations with respect to the
Common Stock of the Company.
In the event that at any time following the Stock Acquisition Date, (i) the
Company is the surviving corporation in a merger with an Acquiring Person and
its Common Stock remain outstanding, (ii) a Person becomes the beneficial owner
of more than 25% of the then outstanding Common Stock other than pursuant to a
tender offer that provides fair value to all shareholders, (iii) an Acquiring
Person engages in one or more 'self-dealing' transactions as set forth in the
Rights Agreement, or (iv) during such time as there is an Acquiring Person an
event occurs that results in such Acquiring Person's ownership interest being
increased by more than 1% (e.g., a reverse stock split), each holder of a Right
will thereafter have the right to receive, upon exercise, Common Stock (or, in
certain circumstances, cash, property or other securities of the Company) having
a value equal to two times the exercise price of the Right. Notwithstanding any
of the foregoing, following the occurrence of any of the events set forth in
clauses (i), (ii), (iii) or (iv) of this paragraph, all Rights that are, or
(under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person who was involved in the transaction
giving rise to any such event will be null and void. However, Rights are not
exercisable following the occurrence of any of the events set forth above until
such time as the Rights are no longer redeemable by the Company as set forth
below.
In the event that, at any time following the Stock Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation
89
<PAGE>
(other than a merger that is described in, or that follows a tender offer or
exchange offer described in, the second preceding paragraph), or (ii) 50% or
more of the Company's assets or earning power is sold or transferred, each
holder of a Right (except Rights that previously have been voided as set forth
above) shall thereafter have the right to receive, upon exercise, common shares
of the acquiring company having a value equal to two times the exercise price of
the Right. The events set forth in this paragraph and in the second preceding
paragraph are referred to as the 'Triggering Events.'
The purchase price payable, and the number of Units of Preferred Shares or
other securities or property issuable upon exercise of the Rights, are subject
to adjustment from time to time under certain circumstances to prevent dilution.
At any time until ten days following the Stock Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.01 per
Right. That ten day redemption period may be extended by the Board of Directors
so long as the Rights are still redeemable. Under certain circumstances set
forth in the Rights Agreement, the decision to redeem will require the
concurrence of a majority of the Continuing Directors. Immediately upon the
action of the Board of Directors ordering redemption of the Rights, with, where
required, the concurrence of the Continuing Directors, the Rights will terminate
and the only right of the holders of Rights will be to receive the $.01
redemption price.
The term 'Continuing Directors' means any member of the Board of Directors
of the Company who was a member of the Board prior to the date of the Rights
Agreement, and any person who is subsequently elected to the Board if such
person is recommended or approved by a majority of the Continuing Directors, but
shall not include an Acquiring Person, or an affiliate or associate of an
Acquiring Person, or any representative of the foregoing entities.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended by the
Board of Directors of the Company prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board (in certain circumstances, with the concurrence of the Continuing
Directors) in order to cure any ambiguity, to make changes that do not adversely
affect the interests of holders of Rights (excluding the interests of any
Acquiring Person), or to shorten or lengthen any time period under the Rights
Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. The adoption of the Rights Agreement does not
affect the financial strength of the Company or interfere in any way with its
business strategy or plans. The distribution alone of the rights has no dilutive
effect. It will not affect earnings per share or dividends per share, nor change
the method in which shareholders trade the Company's Common Stock.
Articles of Incorporation. The Articles of Incorporation divide the Board
of Directors into three classes, with one class elected annually to serve
three-year terms. Directors may only be removed from office by the affirmative
vote of the holders of 80% of the outstanding shares of Common Stock. In
addition, the Articles of Incorporation prohibit actions by shareholders by
written consent without a meeting.
Florida Law. The Company is subject to the 'Control Share' and 'Fair
Price' provisions of the Florida Business Corporation Act. The Control Share
provisions prohibit a shareholder voting shares of Common Stock acquired in
excess of 20% (and 33% and 50%) of the outstanding voting shares unless the
remaining uninterested shareholders approve voting rights for such shares by
majority vote at a special meeting called for that purpose. The Fair Price
provisions require that, in any merger of the Company with a
90
<PAGE>
corporation affiliated with a 10% or greater shareholder (the 'Interested
Shareholder'), shareholders receive the higher of the highest price paid by the
Interested Shareholder for shares of Common Stock during the preceding two years
or the fair market value of the Common Stock, unless the merger is approved by a
majority of the directors not affiliated with the Interested Shareholder or the
holders of two-thirds of the Common Stock not affiliated with the Interested
Shareholder.
Federal Law. Federal law and regulations require that any person seeking
to acquire control of the Company give the OTS notice at least 60 days in
advance. 'Control' means the power to vote 25% or more of the Common Stock or
otherwise direct the management of the Company. In addition, 'control' is
presumed, subject to rebuttal, if a person acquires 10% of the Common Stock and
is subject to one of eight control factors specified in the regulations. The OTS
has the power to disapprove the acquisition of control if it finds that the
acquisition would substantially lessen competition, the financial condition of
the acquiror is inadequate or the competency, experience or integrity of the
acquiror is inadequate. See 'Regulatory Matters--Federal
Regulation--Restrictions on Acquisitions.'
91
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
the Company and Ryan, Beck, all of the shares offered hereby will be purchased
by Ryan, Beck for resale to the public. In addition, the Company has granted to
Ryan, Beck options, exercisable not later than 30 days after the date of this
Prospectus, to purchase an additional 270,000 shares of Common Stock and 135,000
shares of Series C Preferred at the applicable Price to Public set forth on the
cover page of this Prospectus, less the Underwriting Discount. Ryan, Beck may
exercise such options to purchase solely for the purpose of covering
over-allotments, if any, incurred in the sale of the shares offered hereby.
The Company has been advised by Ryan, Beck that Ryan, Beck proposes to
offer the Common Stock and Series C Preferred to the public at the applicable
Price to Public set forth on the cover page of this Prospectus and at such price
less a concession of not more than $0.21 and $0.36 per share of Common Stock and
Series C Preferred, respectively, to certain dealers, and such dealers may
reallow discounts not in excess of $0.05 and $0.10 per share, respectively, on
sales to certain other dealers. After the Offerings, the price to public and
other selling terms may be changed.
The Company, its executive officers and directors, and the affiliates of
each have agreed not to sell, contract to sell or otherwise dispose of any
equity securities of the Company (or any securities exercisable for or
convertible into such equity securities), other than the shares offered hereby,
for a period of 90 days after the consummation of the Offerings without the
prior written consent of Ryan, Beck.
Ryan, Beck currently makes a market in the Common Stock and Series A
Preferred and intends to make a market in the Series C Preferred, as permitted
by applicable laws and regulations. Ryan, Beck, however, is not obligated to
make a market in such shares and any such market making may be discontinued at
any time at the sole discretion of Ryan, Beck. Prior to the Offerings, there has
been no public market for the Series C Preferred. The Offerings price of the
Series C Preferred will be determined by negotiations between the Company and
Ryan, Beck based upon market conditions, the Company's financial performance and
other relevant factors.
Ryan, Beck's obligation to purchase the shares of Common Stock and Series C
Preferred is subject to certain conditions contained in the Underwriting
Agreement. Ryan, Beck may elect to waive any condition and purchase the shares
of Common Stock and Series C Preferred as it specifies by notice to the Company.
The Company has agreed in the Underwriting Agreement to reimburse Ryan,
Beck for its reasonable out-of-pocket expenses and legal fees related to the
sale of Common Stock and Series C Preferred offered hereby; provided, however,
that such legal fees shall not exceed $45,000 without the consent of the
Company. The Company has also agreed in the Underwriting Agreement to indemnify
Ryan, Beck against liabilities and expenses (including legal fees) incurred in
connection with certain claims or litigation arising out of or based upon untrue
statements or omissions contained in the Offerings materials for the Common
Stock and the Series C Preferred, including but not limited to liabilities under
the Securities Act and under the Exchange Act.
LEGAL MATTERS
The validity of the shares of the Common Stock and Series C Preferred being
offered hereby will be passed upon for the Company by Morgan, Lewis & Bockius
LLP, Miami, Florida. Certain legal matters are being passed upon for Ryan, Beck
by Elias, Matz, Tiernan & Herrick, L.L.P., Washington, D.C., special counsel to
Ryan, Beck.
92
<PAGE>
EXPERTS
The consolidated financial statements of Republic Security Financial
Corporation at March 31, 1995 and 1994 and for each of the three years in the
period ended March 31, 1995, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Banyan at December 31, 1994 and
1993 and for each of the two years in the period ended December 31, 1994,
appearing in this Prospectus and Registration Statement have been audited by
McGladrey & Pullen, LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Governors at December 31, 1993 and
1992 and for each of the three years in the period ended December 31, 1993,
appearing in this Prospectus and Registration Statement have been audited by BDO
Seidman, LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein. The report on these consolidated financial
statements contains explanatory paragraphs regarding uncertainties as to
Governors' ability to continue as a going concern and as to the outcome of
certain litigation. These consolidated financial statements are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended (the 'Exchange Act'), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the 'Commission'). Such reports, proxy
statements and other information may be inspected and copied at the Commission's
public reference room located at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the public reference facilities in the Commission's regional
offices at Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661 and Room 1228, 75 Park Place, New York, New York 10007.
Copies of such material may also be obtained at prescribed rates by writing the
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. The Common Stock is listed on NASDAQ and such reports, proxy statements
and other information may be inspected and copied at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 (File No. 33-62847) (the 'Registration Statement') under the Securities Act
of 1933, as amended ('Securities Act'), with respect to the Common Stock and the
Series C Preferred offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement. For further information
with respect to the Company, the Common Stock and the Series C Preferred offered
hereby, reference is made to the Registration Statement. Statements contained in
this Prospectus concerning the provisions of certain documents are not
necessarily complete and, in each instance, reference is made to the copy of the
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. Copies of all or any part of
the Registration Statement, including exhibits thereto, may be obtained, upon
payment of the prescribed fees, at the offices of the Commission as set forth
above.
93
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPUBLIC SECURITY FINANCIAL CORPORATION
Report of Independent Certified Public Accountants......................................................... F-3
Consolidated Statements of Financial Condition at June 30, 1995 (unaudited), March 31, 1995 and March 31,
1994..................................................................................................... F-4
Consolidated Statements of Income for the three months ended June 30, 1995 and 1994 (unaudited) and for the
years ended March 31, 1995, 1994 and 1993................................................................ F-5
Consolidated Statements of Shareholders' Equity for the three months ended June 30, 1995 (unaudited) and
for the years ended March 31, 1995, 1994 and 1993........................................................ F-6
Consolidated Statements of Cash Flows for the three months ended June 30, 1995 and 1994 (unaudited) and for
the years ended March 31, 1995, 1994 and 1993............................................................ F-7
Notes to Consolidated Financial Statements................................................................. F-8
BANYAN BANK
Independent Auditor's Report............................................................................... F-39
Balance Sheets at June 30, 1995 (unaudited), December 31, 1994 and December 31, 1993....................... F-40
Statements of Income for the six months ended June 30, 1995 (unaudited) and for
the years ended December 31, 1994 and 1993............................................................... F-41
Statements of Stockholders' Equity for the six months ended June 30, 1995 (unaudited) and for the years
ended December 31, 1994 and 1993......................................................................... F-42
Statements of Cash Flows for the six months ended June 30, 1995 (unaudited) and for
the years ended December 31, 1994 and 1993............................................................... F-43
Notes to Financial Statements.............................................................................. F-44
GOVERNORS BANK CORPORATION AND SUBSIDIARY
Report of Independent Certified Public Accountants......................................................... F-58
Consolidated Balance Sheet at September 30, 1994 (unaudited)
December 31, 1993 and 1992............................................................................... F-59
Consolidated Statements of Operations for the nine months ended September 30, 1994 (unaudited) and the
years ended December 31, 1993, 1992 and 1991............................................................. F-60
Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 1994 (unaudited)
and the years ended December 31, 1993, 1992 and 1991..................................................... F-61
Consolidated Statements of Cash Flows for the nine months ended September 30, 1994 (unaudited) and the
years ended December 31, 1993, 1992 and 1991............................................................. F-62
Summary of Significant Accounting Policies................................................................. F-63
Notes to Consolidated Financial Statements................................................................. F-65
</TABLE>
F-1
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
AUDITED FINANCIAL STATEMENTS AS OF MARCH 31, 1995, 1994 AND 1993
AND UNAUDITED AS OF JUNE 30, 1995 AND 1994
TOGETHER WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
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, the 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.
ERNST & YOUNG LLP
West Palm Beach, Florida
May 10, 1995
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, --------------------
1995 1995 1994
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and amounts due from depository institutions............................ $ 3,777 $ 3,566 $ 3,408
Interest-bearing deposits in other financial institutions.................... 11,254 14,050 9,746
Investments held to maturity (market value of $11,590 at
June 30, 1995 and $14,229 and $257 at March 31, 1995 and
1994, respectively)........................................................ 11,358 14,153 249
Investments - trading........................................................ 24,232
Real estate mortgages-held for sale (market value of $1,819)................. 1,805
Loans receivable - net....................................................... 229,819 227,940 155,294
Property and equipment - net................................................. 6,038 6,103 4,016
Real estate owned............................................................ 1,445 1,009 1,871
Goodwill - net............................................................... 3,173 3,227
Loan servicing rights........................................................ 2,703 2,796 775
Accrued interest receivable.................................................. 1,806 2,041 985
Other assets................................................................. 4,607 5,154 4,256
----------- -------- --------
TOTAL........................................................................ $ 275,980 $280,039 $206,637
----------- -------- --------
----------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits..................................................................... $ 225,081 $229,735 $156,651
Federal Home Loan Bank advances.............................................. 15,000 15,000 20,000
Securities sold under agreements to repurchase............................... 2,469 2,748
Redeemable subordinated debentures........................................... 1,985 1,995
Advances from borrowers for taxes and insurance.............................. 2,107 1,598 1,445
Bank drafts payable.......................................................... 3,914 4,148 4,425
Other liabilities............................................................ 4,737 4,379 2,473
----------- -------- --------
Total liabilities............................................................ 253,308 259,593 186,989
Commitments and contingencies
Shareholders' equity:
Preferred stock $10.00 stated value; 10,000,000 shares authorized; 402,500
shares issued and outstanding at June 30, 1995 and March 31, 1995 and
1994....................................................................... 4,025 4,025 4,025
Common stock $.01 par value; 20,000,000 shares authorized; 4,313,060,
3,652,743 and 3,609,979 shares issued and outstanding at June 30, 1995,
March 31, 1995 and 1994, respectively...................................... 43 36 36
Additional paid-in capital................................................... 16,211 14,363 14,213
Retained earnings............................................................ 2,393 2,022 1,374
----------- -------- --------
Total shareholders' equity................................................... 22,672 20,446 19,648
----------- -------- --------
Total........................................................................ $ 275,980 $280,039 $206,637
----------- -------- --------
----------- -------- --------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, YEAR ENDED MARCH 31,
-------------------------- -----------------------------
1995 1994 1995 1994 1993
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans...................................... $ 4,979 $ 3,093 $15,254 $11,525 $10,774
Interest and dividends on investments.................. 341 268 1,034 962 463
----------- ----------- ------- ------- -------
5,320 3,361 16,288 12,487 11,237
----------- ----------- ------- ------- -------
INTEREST EXPENSE:
Interest on deposits................................... 2,432 1,246 6,244 4,733 4,319
Interest on short-term borrowings...................... 249 203 935 559 1
Interest on long-term borrowings....................... 31 60 218 220 240
----------- ----------- ------- ------- -------
2,712 1,509 7,397 5,512 4,560
----------- ----------- ------- ------- -------
Net interest income.................................... 2,608 1,852 8,891 6,975 6,677
Provision for loan losses.............................. 25 75 200 214 1,003
----------- ----------- ------- ------- -------
Net interest income after provision for
loan losses.......................................... 2,583 1,777 8,691 6,761 5,674
----------- ----------- ------- ------- -------
NON-INTEREST INCOME:
Mortgage banking income................................ 769 1,788 3,475 2,626
Service charges on deposit accounts.................... 358 147 809 440 244
Loss on investments-trading............................ (200) (200)
Other income........................................... 241 138 602 474 188
----------- ----------- ------- ------- -------
914 854 2,999 4,389 3,058
----------- ----------- ------- ------- -------
OPERATING EXPENSES:
Employee compensation and benefits..................... 1,215 1,087 4,595 4,109 3,167
Occupancy and equipment................................ 489 289 1,488 1,201 803
Professional fees...................................... 199 148 652 707 653
Advertising and promotion.............................. 60 51 233 268 233
Outside services....................................... 35 36 232 163 177
Communications......................................... 106 78 352 332 285
Data processing........................................ 111 66 307 211 130
Insurance.............................................. 153 136 570 556 413
Real estate owned - net................................ 3 44 70 127 199
Other.................................................. 308 276 1,361 1,065 872
----------- ----------- ------- ------- -------
2,679 2,211 9,860 8,739 6,932
----------- ----------- ------- ------- -------
Income before income taxes and
accounting change.................................... 818 420 1,830 2,411 1,800
Income taxes........................................... 291 155 663 818 582
----------- ----------- ------- ------- -------
Income before accounting change........................ 527 265 1,167 1,593 1,218
Change in accounting for income taxes.................. 500
----------- ----------- ------- ------- -------
NET INCOME............................................. $ 527 $ 265 $ 1,167 $ 2,093 $ 1,218
----------- ----------- ------- ------- -------
----------- ----------- ------- ------- -------
Income per common share:
Income before accounting change........................ $ .10 $ .05 $ .23 $ .42 $ .50
Change in accounting for income taxes.................. .13
----------- ----------- ------- ------- -------
Net income............................................. $ .10 $ .05 $ .23 $ .55 $ .50
----------- ----------- ------- ------- -------
----------- ----------- ------- ------- -------
Average common shares and common stock equivalents
outstanding (in thousands)........................... 4,459 4,480 4,474 3,927 2,895
----------- ----------- ------- ------- -------
----------- ----------- ------- ------- -------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<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 and warrants 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
Exercise of equity contracts - 634,476 shares (unaudited).............. 7 1,744
Exercise of warrants - 13,344 shares (unaudited)....................... 52
Stock grants - 10,500 shares (unaudited)............................... 44
401(k) plan - 1,997 shares (unaudited)................................. 8
Cash dividends - common stock (unaudited).............................. (81)
Cash dividends - preferred stock (unaudited)........................... (75)
Net income for three months ended June 30, 1995
(unaudited).......................................................... 527
--------- ------ ---------- --------
BALANCE, JUNE 30, 1995 (UNAUDITED)..................................... $ 4,025 $ 43 $ 16,211 $ 2,393
--------- ------ ---------- --------
--------- ------ ---------- --------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, YEAR ENDED MARCH 31,
-------------------------- ----------------------------------
1995 1994 1995 1994 1993
----------- ----------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................. $ 527 $ 265 $ 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.............. 25 75 291 300 1,194
Provision for depreciation............................. 152 98 459 410 274
Deferred income taxes.................................. 139 100 518
Amortization of loan servicing rights and premium on
sale of loans........................................ 135 116 505 1,218 2,922
Amortization of deferred loan fees and costs........... (126) (40) (215) (439) (764)
Amortization of goodwill............................... 55 73
Gain on sale of loans and servicing.................... (183) (650) (1,175) (3,657) (3,844)
Loan costs deferred.................................... (59) (174) (471) (894) (955)
Loans originated for sale.............................. (11,461) (17,005) (48,157) (139,393) (122,272)
Purchase of loans for sale............................. (700) (5,140) (20,759) (1,704)
Sale of loans and loan participation certificates...... 11,644 17,353 55,102 142,274 132,988
Proceeds from the sale of investments - trading........ 24,000 24,000
Purchase of investments held for trading............... (24,233)
Loss on investments trading............................ 200 200
Other - net............................................ 590 384 1,962 440 103
----------- ----------- -------- --------- ---------
Net cash provided by (used in) operating activities.... 1,299 23,922 28,740 (42,540) 9,678
----------- ----------- -------- --------- ---------
INVESTING ACTIVITIES:
Cash and cash equivalents acquired in mergers-net...... 1,819 12,589
Maturities of investments.............................. 2,850 1,350
Loans purchased for investment......................... (1,053) (26,450)
Loans originated for investment........................ (21,927) (12,309) (67,990) (13,950) (27,671)
Principal collected on loans........................... 19,391 3,081 35,034 37,313 34,933
Purchase of property and equipment..................... 87 (300) (2,295) (1,745) (2,253)
Purchase of loan servicing rights...................... (2,322)
Other - net............................................ 220 (4) 1,408 74 1,333
----------- ----------- -------- --------- ---------
Net cash provided by (used in) investing activities.... (1,379) (9,532) (34,049) (4,758) 18,931
----------- ----------- -------- --------- ---------
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposit, NOW
accounts, Money Market accounts and savings
accounts............................................. (2,708) (2,553) (1,414) 7,922 10,425
Proceeds from sales of certificates of deposit......... 11,672 8,485 56,414 39,402 30,838
Payment for maturing certificates of deposits.......... (13,618) (7,975) (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..... (279) 233 (35)
(Decrease) increase in FHLB advances................... (5,000) 20,000
Cash dividends......................................... (156) (36) (519) (280)
Other - net............................................ (174) 10 242 (2,776) 216
----------- ----------- -------- --------- ---------
Net cash provided by (used in) financing activities.... (5,263) (2,069) 9,771 34,633 (13,023)
----------- ----------- -------- --------- ---------
Increase (decrease) in cash and cash equivalents....... (2,585) 12,321 4,462 (12,665) 15,586
Cash and cash equivalents at beginning of year......... 17,616 13,154 13,154 25,819 10,233
----------- ----------- -------- --------- ---------
Cash and cash equivalents at end of period............. $ 15,031 $ 25,475 $ 17,616 $ 13,154 $ 25,819
----------- ----------- -------- --------- ---------
----------- ----------- -------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
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. In the opinion of management, unaudited information pertaining to
the three months ended June 30, 1995 and 1994 reflects all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation.
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
$125,000 and $75,000 of income tax payments during the three months ended June
30, 1995 and 1994, respectively. 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. During the periods ended June 30, 1995 and 1994, the Company
paid $2,634,000 and $1,546,000, respectively, in interest on deposits and other
borrowings. 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. During the three months ended June 30, 1995 and 1994,
$408,000 and $448,000, respectively, of loans were transferred to REO.
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 gains and losses on trading securities
are included in other non-interest income. Unrealized gains and losses and
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.
F-8
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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. The Bank does not
have any recourse obligations associated with its sale of real estate mortgages.
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 calculated using
the interest method and are recognized as adjustments to interest income over
the lives of the related loans. 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.
Non-accrual 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. Interest income, at the effective rate of the loan, is
recognized when cash is received on impaired loans.
Allowance for loan losses--
The allowance for loan losses is established by provision for loan losses
charged against earnings. Loans deemed to be uncollectible are charged against
the allowance for loan losses and subsequent recoveries, if any, are credited to
the allowance.
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. Effective April 1, 1995, the
Company adopted Financial Accounting Standards Board Statement No. 114,
'Accounting by Creditors for Impairment of a Loan.' Under the new standard, the
1995 allowance for credit losses related to loans that are identified for
evaluation in accordance with Statement No. 114 is based on discounted cash
flows using the loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. Prior to 1995, the allowance
for credit losses related to these loans was based on undiscounted cash flows or
the fair value of the collateral for collateral dependent loans. The adoption of
this statement did not have a material impact on the operations of the Company.
F-9
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The allowance for credit losses is maintained at a level believed adequate
by management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
All non-accrual loans, excluding smaller balance, homogeneous loans defined
as consumer loans less than $100,000 and residential mortgage loans, are
considered impaired. In addition, management may determine a performing loan to
be impaired if, based on current information and events, it is probable that the
Bank will be unable to collect all amounts due according to the contractual
terms of the loan agreement.
In accordance with the Bank's classification policy, impaired loan amounts
in excess of the fair market value of the underlying collateral for collateral
dependent loans or the net present value of future cash flows are charged off
against the allowance for loan losses.
REAL ESTATE OWNED
In accordance with Statement No. 114, a loan is classified as in-substance
foreclosure when the Company has taken possession of the collateral regardless
of whether formal foreclosure proceedings take place. Property acquired by
foreclosure, or deed in lieu of foreclosure, is 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. Loans previously classified as in-substance
foreclosure but for which the Company had not taken possession of the collateral
which totalled $1,329,000 and $919,000 at March 31, 1995 and 1994, respectively
have been reclassified to loans.
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.
F-10
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 presented in the consolidated financial statements for
prior years have been reclassified for comparative purposes.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of' (SFAS No. 121), which is effective for fiscal years
beginning after December 15, 1995. The adoption of SFAS No. 121 will not have a
material impact on the financial condition of the Company.
On May 12, 1995, the Financial Accounting Standards Board issued Statement
No. 122 'Accounting for Mortgage Servicing Rights', an amendment to Statement
No. 65. The Company elected to adopt this standard for financial statement
reporting for the quarter ended June 30, 1995. Statement No. 122 prohibits
retroactive application to prior years.
Statement No. 122 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing right based on its fair
value relative to the loan as a whole. To determine the fair value of servicing
rights created after the adoption of Statement No. 122, the Company will use a
valuation model that calculates the present value of estimated future cash
flows. This valuation method incorporates assumptions determined by the Company
about the discount rate, prepayment speeds, default and interest rates. No
servicing rights were recorded during the quarter ended June 30, 1995 as
mortgage banking activities during the period were insignificant.
F-11
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
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.
The following summarizes the fair value of the Governors' assets acquired
and liabilities assumed:
<TABLE>
<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>
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:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1995 1994
------- -------
(IN THOUSANDS)
<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
F-12
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
2. MERGER--(CONTINUED)
common stock valued at $2,014,000 and 442,558 warrants valued at $404,000 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.
The Company recorded the Merger as a purchase. The purchase price equals
the fair value of Homestead's net assets acquired plus the direct costs of
acquisition less stock issuance costs and the reserve consideration subject to
the Merger agreement. No goodwill was recorded in connection with the Merger.
The following summarizes the allocation of the net purchase price to the net
assets of Homestead:
<TABLE>
<CAPTION>
<S> <C>
Cash................................................................ $ 12,589,000
Investment securities............................................... 2,741,000
Net loans........................................................... 28,919,000
Other assets........................................................ 1,221,000
Total deposits...................................................... (41,774,000)
Other liabilities................................................... (1,278,000)
------------
Net purchase price.................................................. $ 2,418,000
------------
------------
</TABLE>
Pro forma supplemental financial information for the Company as if the
merger had taken place as of April 1, 1992 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1992
-----------
<S> <C>
Total interest income.................................................................... $15,466,000
Net interest income after provision for loan losses...................................... 5,001,000
Income before income taxes and extraordinary item........................................ 1,750,000
Net income before extraordinary item..................................................... 1,102,000
Net income before extraordinary item per common share.................................... .44
</TABLE>
F-13
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
3. INVESTMENTS
The Company adopted Statement of Financial Accounting Standards No. 115,
'Accounting for Certain Investments in Debt and Equity Securities,' on April 1,
1994. Application of the new rules did not have a material affect on the
financial condition of the Company.
The following is a summary of held to maturity securities at June 30, 1995
(unaudited):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE YIELD
--------- ---------- ---------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Government securities........................ $10,733 $ 232 $10,965 7.20%
Foreign Government securities..................... 75 75 7.50
Other debt securities............................. 550 550 5.70
--------- ---------- -------
Total Debt Securities............................. $11,358 $ 232 $11,590 7.15%
--------- ---------- -------
--------- ---------- -------
</TABLE>
At June 30, 1995 securities with a book value of $8,912,000 were pledged to
collateralize repurchase agreements, public deposits and other items.
The amortized cost and estimated market value of debt securities at June
30, 1995 by contractual maturity are shown below (unaudited):
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE YIELD
--------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Due in 1 year or less..................................................... $ 5,479 $ 5,509 7.05%
Due after 1 through 5 years............................................... 5,754 5,956 7.30
Due after 5 years through 10 years........................................ 125 125 6.50
--------- -------
$ 11,358 $11,590 7.15%
--------- -------
--------- -------
</TABLE>
The following is a summary of held to maturity securities at March 31:
<TABLE>
<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>
F-14
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
3. INVESTMENTS--(CONTINUED)
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.
The amortized cost and estimated market value of debt securities at March
31, 1995 by contractual maturity are shown below:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- -------
(IN THOUSANDS)
<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
Loans receivable - net is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, --------------------
1995 1995 1994
----------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate mortgage............................................... $ 149,011 $151,660 $118,442
Real estate construction........................................... 44,296 48,500 51,008
Installment loans to individuals................................... 38,239 36,285 7,641
Commercial and financial........................................... 16,276 16,484 2,356
----------- -------- --------
Total loans................................................... 247,822 252,929 179,447
----------- -------- --------
Deferred loan fees................................................. (778) (921) (740)
Discount on loans purchased........................................ (622) (656) (258)
Premium on loans purchased......................................... 526 555 792
Undisbursed portion of loans-in-process............................ (14,553) (21,460) (22,876)
Allowance for loan losses.......................................... (2,576) (2,507) (1,071)
----------- -------- --------
Loans receivable - net............................................. $ 229,819 $227,940 $155,294
----------- -------- --------
----------- -------- --------
</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. At
June 30, 1995, the Bank had $6,345,000 in non-
F-15
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
5. NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES--(CONTINUED)
performing assets of which $1,445,000 was real estate owned and $4,738,000 was
loans 60 days or more past due. Non-performing assets as of March 31, 1995 and
1994 were $3,436,000 and $3,228,000, respectively, of which $1,009,000 and
$1,871,000, respectively, was real estate owned and $2,310,000 and $1,357,000,
respectively was loans 60 days or more past due. Interest income not recognized
on such loans was $49,000 during the three months ended June 30, 1995 and
$35,000 and $20,000 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.
At June 30, 1995, the recorded investment in loans that are considered to
be impaired under Statement 114 was $1,372,000. The related allowance for credit
losses for such loans is $206,000. The average recorded investment in impaired
loans during the three months ended June 30, 1995 was approximately $1,150,000.
For the three months ended June 30, 1995, the Company recognized no interest
income on impaired loans.
An analysis of changes in the allowance for loan losses is summarized (in
thousands) as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
JUNE 30, MARCH 31,
---------------- --------------------------
1995 1994 1995 1994 1993
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Beginning balance..................................... $2,507 $1,071 $1,071 $1,247 $ 775
Reserves acquired during merger....................... 1,399 319
Provision for losses.................................. 25 75 200 214 1,003
Recoveries............................................ 252 97 454 362 146
Charge-offs........................................... (208) (153) (617) (752) (996)
------ ------ ------ ------ ------
Ending balance........................................ $2,576 $1,090 $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. There were no provisions for real estate losses during the three
months ended June 30, 1995 and $44,000 during the three months ended June 30,
1994. 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.
F-16
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
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. The required reserve balance was $1.5 million, $1.8
million and $829,000 at June 30, 1995, March 31, 1995 and 1994, respectively.
7. PROPERTY AND EQUIPMENT
Property and equipment is summarized (in thousands) as follows:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, ----------------
1995 1995 1994
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Office building......................................................... $ 4,738 $4,707 $2,961
Leasehold improvements.................................................. 437 410 305
Furniture & equipment................................................... 2,635 2,607 1,950
----------- ------ ------
Total................................................................... 7,810 7,724 5,216
Less accumulated depreciation........................................... 1,772 1,621 1,200
----------- ------ ------
Property and equipment-net.............................................. $ 6,038 $6,103 $4,016
----------- ------ ------
----------- ------ ------
</TABLE>
Rent expense for the three months ended June 30, 1995 and 1994 was $156,000
and $65,000, respectively. 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 June 30, 1995, March 31, 1995, 1994, and 1993, the Bank serviced
mortgage loans for others in the amount of $325 million, $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.
F-17
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
8. MORTGAGE BANKING ACTIVITIES--(CONTINUED)
The amount amortized relating to premiums on sale of loans and loan
servicing rights for the three months ended June 30, 1995 (in thousands) is as
follows:
<TABLE>
<CAPTION>
PREMIUM LOAN
ON SALE SERVICING
OF LOANS RIGHTS TOTAL
-------- --------- ------
(UNAUDITED)
<S> <C> <C> <C>
Balance March 31, 1995.................................................... $ 485 $ 2,796 $3,281
Amortization.............................................................. (42) (93) (135)
-------- --------- ------
Balance June 30, 1995..................................................... $ 443 $ 2,703 $3,146
-------- --------- ------
-------- --------- ------
</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 (in
thousands) are included in the table below:
<TABLE>
<CAPTION>
PREMIUM
ON SALE LOAN
OF SERVICING
LOANS RIGHTS TOTAL
------- --------- -------
<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. Gains
on sales of servicing for the three months ended June 30, 1995 and 1994 was nil
and $366,000, respectively.
F-18
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
9. DEPOSITS
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 (in
thousands) are as follows:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, --------------------
1995 1995 1994
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Non-interest bearing accounts...................................... $ 25,504 $ 26,149 $ 6,027
NOW accounts (2.0%)................................................ 26,368 26,688 25,498
Saving accounts (2.85%)............................................ 19,052 19,395 19,885
Money market deposits account (2.88%).............................. 13,179 14,581 12,217
Certificate accounts:
Up to 3.0%......................................................... 3,124
3.01% to 3.5%...................................................... 537 884 24,666
3.51% to 4.0%...................................................... 1,296 6,884 43,851
4.01% to 4.5%...................................................... 9,730 14,590 11,161
4.51% to 5.0%...................................................... 15,896 23,026 3,254
5.01% to 5.5%...................................................... 21,476 20,988 3,180
5.51% to 6.0%...................................................... 36,630 27,587 1,000
6.01% to 6.5%...................................................... 39,885 38,440 165
6.51% to 7.0%...................................................... 7,073 6,285 1,072
Over 7.0%.......................................................... 8,455 4,238 1,551
----------- -------- --------
Total certificates................................................. 140,978 142,922 93,024
----------- -------- --------
Total.............................................................. $ 225,081 $229,735 $156,651
----------- -------- --------
----------- -------- --------
</TABLE>
The Bank incurred interest on deposits (in thousands) as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
1995 1994
-------- --------
(UNAUDITED)
<S> <C> <C>
Savings account........................................................... $ 144 $ 144
NOW accounts.............................................................. 147 101
Money market deposit accounts............................................. 99 86
Certificate accounts...................................................... 2,042 915
-------- --------
$ 2,432 $ 1,246
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
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>
F-19
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
9. DEPOSITS--(CONTINUED)
The amounts and maturities of certificate accounts at June 30, 1995 (in
thousands) are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Within 12 months............................................. $ 120,272
12 to 24 months.............................................. 10,399
24 to 36 months.............................................. 5,658
36 to 48 months.............................................. 4,018
Over 48 months............................................... 631
-----------
Total........................................................ $ 140,978
-----------
-----------
</TABLE>
The amounts and scheduled maturities of certificate accounts in the amount
of $100,000 or more at June 30, 1995 (in thousands) are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Within 3 months.............................................. $ 5,668
3 to 6 months................................................ 2,968
6 to 12 months............................................... 4,087
Over 12 months............................................... 2,685
-----------
Total........................................................ $ 15,408
-----------
-----------
</TABLE>
The amounts and scheduled maturities of certificate accounts at March 31,
1995 (in thousands) are as follows:
Within 12 months............................................. $121,184
12 to 24 months.............................................. 10,835
24 to 36 months.............................................. 4,468
36 to 48 months.............................................. 5,949
Over 48 months............................................... 486
--------
Total........................................................ $142,922
--------
--------
The amounts and scheduled maturities of certificate accounts in the amount
of $100,000 or more at March 31, 1995 (in thousands) are as follows:
Within 3 months............................................... $ 2,876
3 to 6 months................................................. 5,067
6 to 12 months................................................ 4,233
Over 12 months................................................ 2,496
-------
Total......................................................... $14,672
-------
-------
F-20
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
10. BORROWED MONEY
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
$44,000,000, $44,435,000 and $48,000,000 at June 30, 1995, March 31, 1995 and
1994, respectively. Outstanding advances from the Federal Home Loan Bank
consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, ------------------
MATURE DURING 1995 1995 1994 INTEREST RATE
- ------------- ----------- ------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
1995............................................. $10,000 3.84%
1996............................................. $ 15,000 $15,000 10,000 6.01% to 6.75%
----------- ------- -------
$ 15,000 $15,000 $20,000
----------- ------- -------
----------- ------- -------
</TABLE>
At March 31, 1995, the Company had 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 was payable quarterly on the 15th day of
January, April, July, and October, and commenced on July 15, 1989. Each
Debenture bore 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 were 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 for the years ended March 31, 1995 and
1994.
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 received 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. As a result of the redemption, 634,476 shares of common stock were
issued, and shareholders' equity increased by $1,751,000.
The Bank enters 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 June 30, 1995 and 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 $4,128,000, accrued interest of $40,000, and a market value of
$4,203,000 at June 30, 1995. The aggregate carrying value of securities pledged
at March 31, 1995 was $3,963,000, accrued interest of $51,000 with a market
value of $4,002,000. All agreements mature daily and have a weighted interest
rate of 5.82% and 5.96% at June 30, 1995 and March 31, 1995, respectively. 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
F-21
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
10. BORROWED MONEY--(CONTINUED)
repurchase averaged $4,154,000 during the period ended June 30, 1995 and
$623,000 during the year ended March 31, 1995. The maximum amount outstanding at
any month-end during the quarter ended June 30, 1995 was $4,250,000. The maximum
amount outstanding at any month-end during fiscal 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.
The following table shows the capital amounts and ratios of the Bank as
compared to regulatory requirements:
<TABLE>
<CAPTION>
THE BANK
---------------------------------------------------------- REGULATORY
AT JUNE 30, 1995 AT MARCH 31, 1995 AT MARCH 31, 1994 REQUIREMENT
CAPITAL REQUIREMENTS ---------------- ----------------- ----------------- -----------
- -------------------- (UNAUDITED)
<S> <C> <C> <C> <C>
Core............................. 6.8% 6.0% 6.0% 3.0%
Tangible......................... 6.8% 6.0% 6.0% 1.5%
Risk-based capital............... 11.0% 11.0% 13.0% 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.
F-22
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
11. SHAREHOLDERS' EQUITY--(CONTINUED)
The balance, activity, exercise price, and expiration dates of the
Company's options, warrants, and equity contracts for the quarter ended June 30,
1995 the years ended March 31, 1995, 1994, and 1993 are as follows:
<TABLE>
<CAPTION>
EQUITY
OPTIONS WARRANTS CONTRACTS
---------------------------------------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
March 31, 1992.............................. 28,014 97,024 80,707 1,334 165,216 674,754
Issued........................................ 408,924
Expired....................................... (4,002)
------ ------- ------- ------- ------- ------- ---------
Balance
March 31, 1993.............................. 24,012 97,024 80,707 1,334 165,216 408,924 674,754
Issued........................................ 42,000 102,229
Expired....................................... (4,622)
------ ------- ------- ------- ------- ------- ------- ---------
Balance
March 31, 1994.............................. 19,390 97,024 80,707 1,334 42,000 165,216 511,153 674,754
Expired....................................... (3,622)
Exercised..................................... (1,000) (2,003) (1,334) (13,786)
------ ------- ------- ------- ------- ------- ------- ---------
Balance
March 31, 1995.............................. 14,768 97,024 78,704 0 42,000 165,216 511,153 660,968
Exercised (unaudited)......................... (13,344) (634,476)
Cancelled (unaudited)......................... (26,492)
------ ------- ------- ------- ------- ------- ------- ---------
Balance
June 30, 1995 (unaudited)................... 14,768 97,024 78,704 0 42,000 165,216 497,809 0
------ ------- ------- ------- ------- ------- ------- ---------
------ ------- ------- ------- ------- ------- ------- ---------
Exercise Price................................ $2.50 $2.48 $2.62 $2.08 $3.33 $5.00 $3.90 $2.90
Expiration Date............................... * 9/25/01 2/24/98 2/24/98 6/1/03 11/1/00 1/22/96 5/1/96
<FN>
- ------------------------
* 4,622 options expire annually.
</FN>
</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.
All the warrants and equity contracts listed in the table above were
exercisable from the date issued. The $2.48, $2.62, $2.08 and $3.33 options were
exercisable from the date issued. The $2.50 options are exercisable at various
dates in accordance with an employment contract.
Each exercisable option, warrant and equity contract is exercisable for 1
share of common stock at June 30, 1995, March 31, 1995 and 1994.
The price of all options, warrants and equity contracts issued is based on
the market value of the stock at the time of issuance.
F-23
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
11. SHAREHOLDERS' EQUITY--(CONTINUED)
No compensation expense was recognized during the three months ended June
30, 1995, or the years ended March 31, 1995, 1994 and 1993 in connection with
the issuance of any stock options, warrants or equity contracts as the exercise
prices are at or above the market value of the common stock at the date of
issuance.
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. Stock granted under the restricted stock plan restricts the
delivery of the certificates to the grantee, and the grantee's ability to sell,
transfer, pledge, exchange or otherwise dispose of the shares for 3 years from
the date of grant. Grantee has the right to vote and receive dividends from the
date of grant.
No compensation expense was incurred for stock grant awards during the
three months ended June 30, 1995. Compensation expense of $10,000, $10,000,
$76,000, $38,000 and $38,000 was incurred during the quarters ended June 30,
1995 and 1994 and the years ended March 31, 1995, 1994 and 1993, respectively.
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 stated
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 the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of shares of Series A Preferred are
entitled to receive out of assets of the Company available for distribution to
shareholders, before any payment or distribution of assets is made to holders of
Common Stock or any other class or series of stock ranking junior to the Series
A Preferred upon liquidation, liquidating distributions in the amount of $10.00
per share plus accrued and unpaid dividends to the date fixed for such
liquidation, dissolution or winding up. If upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the amounts payable with
respect to the Series A Preferred and any other shares of stock of the Company
ranking as to any such distribution on a parity with the Series A Preferred are
not paid in full, the holders of the Series A Preferred and of such other shares
will share ratably in any such distribution of assets of the Company in
proportion to the full respective preferential amounts to which they are
entitled, the holders of shares of Series A Preferred will not be entitled to
any further participation in any distribution of assets by the Company.
F-24
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
11. SHAREHOLDERS' EQUITY--(CONTINUED)
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. As of
June 30, 1995, the Shareholder Rights Plan requires 3,680,331 shares of Common
Stock.
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 June 30, 1995, the Bank had adjustable rate commitments to extend credit
of $6,830,000 excluding the undisbursed portion of loans in process. These
commitments are primarily for one-to-four family residential properties.
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.
F-25
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
12. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company and its subsidiaries have entered into noncancellable operating
leases with future minimum lease payments of the following:
<TABLE>
<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. 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. Service costs amounted to
$36,900, $56,800 and $57,600 and interest costs amounted to $53,100, $72,200 and
$73,400 in the years ended March 31, 1995, 1994 and 1993, respectively. 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. Employer contributions
to the 401(K) plan, which are made in the form of the Company's Common Stock, 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.
F-26
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
13. RELATED PARTY TRANSACTIONS--(CONTINUED)
An analysis of the activity of the aggregate loans to officers and
directors is as follows:
<TABLE>
<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
Additions (unaudited).................................... 45
Principal Reductions (unaudited)......................... (142)
--------------
Balance June 30, 1995 (unaudited)........................ $ 896
--------------
--------------
</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.
F-27
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
14. INCOME TAXES--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of March 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------- ----
(IN THOUSANDS)
<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>
Significant components of the provision for income tax expenses for the
years ended March 31, 1995, 1994, and 1993 are as follows:
<TABLE>
<CAPTION>
LIABILITY DEFERRED
METHOD METHOD
-------------- --------
1995 1994 1993
---- ---- --------
(IN THOUSANDS)
<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>
F-28
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
14. INCOME TAXES--(CONTINUED)
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:
<TABLE>
<CAPTION>
1993
--------------
(IN THOUSANDS)
<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>
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:
<TABLE>
<CAPTION>
1995 1994 1993
---- ----- -----
(IN THOUSANDS)
<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.
F-29
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
15. PARENT COMPANY FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, ------------------
1995 1995 1994
----------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Investments in and advances to subsidiaries......................... $ 21,662 $21,940 $14,500
Cash and cash equivalents........................................... 1,146 1,018 7,954
Other assets........................................................ 137 87 138
----------- ------- -------
Total............................................................... $ 22,945 $23,045 $22,592
----------- ------- -------
----------- ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses............................... $ 273 $ 614 $ 949
Redeemable subordinated debentures.................................. 1,985 1,995
----------- ------- -------
Total Liabilities................................................... 273 2,599 2,944
----------- ------- -------
SHAREHOLDERS' EQUITY
Preferred stock..................................................... 4,025 4,025 4,025
Common stock........................................................ 43 36 36
Additional paid-in-capital.......................................... 16,211 14,363 14,213
Retained earnings................................................... 2,393 2,022 1,374
----------- ------- -------
Total shareholders' equity.......................................... 22,672 20,446 19,648
----------- ------- -------
Total............................................................... $ 22,945 $23,045 $22,592
----------- ------- -------
----------- ------- -------
</TABLE>
F-30
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
15. PARENT COMPANY FINANCIAL INFORMATION--(CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
JUNE 30, MARCH 31,
-------------------------- --------------------------
1995 1994 1995 1994 1993
----------- ----------- ------ ------ ------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME:
Interest....................................... $ 42 $ 112 $ 410 $ 285 $ 218
Other.......................................... 24 24 96 96 96
----------- ----------- ------ ------ ------
Total.......................................... 66 136 506 381 314
----------- ----------- ------ ------ ------
EXPENSES:
Interest....................................... 31 60 240 220 240
General and administrative..................... 77 52 278 136 216
----------- ----------- ------ ------ ------
Total.......................................... 108 112 518 356 456
----------- ----------- ------ ------ ------
(Loss) income before undistributed earnings of
subsidiaries and income tax benefit.......... (42) 24 (12) 25 (142)
Income tax (benefit) expense................... (15) 8 (5) 89 (52)
----------- ----------- ------ ------ ------
Loss before undistributed earnings
of subsidiaries.............................. (27) 16 (7) (64) (90)
Equity in undistributed earnings
of subsidiaries.............................. 554 249 1,174 2,157 1,308
----------- ----------- ------ ------ ------
Net income..................................... $ 527 $ 265 $1,167 $2,093 $1,218
----------- ----------- ------ ------ ------
----------- ----------- ------ ------ ------
</TABLE>
F-31
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
15. PARENT COMPANY FINANCIAL INFORMATION--(CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
JUNE 30, MARCH 31,
-------------------------- ----------------------------
1995 1994 1995 1994 1993
----------- ----------- ------ ------ --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................... $ 527 $ 265 $ 1,167 $ 2,093 $ 1,218
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities................................. (202) (319) (895) (1,750) (502)
----------- ----------- ------- ------- -------
Net cash (used in) provided by operating
activities................................. 325 (54) 272 343 716
----------- ----------- ------- ------- -------
INVESTING ACTIVITIES:
Additional investment in subsidiary.......... (1,500)
Purchase of Governors Bank Corporation....... (5,154)
Other, net................................... (148)
Net cash (used in) provided by investing
activities................................. (6,802) (144) 26
----------- ----------- ------- ------- -------
FINANCING ACTIVITIES:
Sale of common and preferred stock, net of
stock issuance costs....................... 6,949
Repayment of redeemable subordinated
debentures................................. (145)
Cash dividends............................... (156) (112) (519) (280)
Other, net................................... 104 10 113 (45) 53
----------- ----------- ------- ------- -------
Net cash provided by (used in) financing
activities................................. (197) (102) (406) 6,624 53
----------- ----------- ------- ------- -------
Increase (decrease) in cash and cash
equivalents................................ 128 (156) (6,936) 7,111 795
Cash and cash equivalents at beginning of
year....................................... 1,018 7,954 7,954 843 48
----------- ----------- ------- ------- -------
Cash and cash equivalents at end of year..... $ 1,146 $ 7,798 $ 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
F-32
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
16. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)
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.
F-33
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
16. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)
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.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
AT MARCH 31,
AT JUNE 30, --------------------------------------------
1995 1995 1994
-------------------- -------------------- --------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and interest-bearing
deposits........................... $ 15,031 $ 15,031 $ 17,616 $ 17,616 $ 13,154 $ 13,154
Investments.......................... 11,358 11,590 14,185 14,229 24,481 24,491
Loans receivable - net and loans held
for sale........................... 229,819 230,421 227,940 228,537 157,099 157,619
Premium on sale of loans............. 443 500 485 550 689 694
Accrued interest receivable.......... 1,806 1,806 2,041 2,041 985 985
-------- -------- -------- -------- -------- --------
Total financial assets.......... 258,457 $259,348 $262,267 $262,973 196,408 $196,943
Non-financial assets................. 17,523 -------- 17,772 -------- 10,229 --------
-------- -------- -------- -------- -------- --------
Total assets......................... $275,980 $280,039 $206,637
-------- -------- --------
-------- -------- --------
LIABILITIES
Deposits............................. $225,081 $225,463 $229,735 $229,877 $156,651 $156,991
FHLB advances........................ 15,000 15,000 15,000 14,976 20,000 19,997
Securities sold under agreements to
repurchase......................... 2,469 2,469 2,748 2,748
Redeemable subordinated debentures... 1,985 1,985 1,995 2,205
Bank drafts payable.................. 3,914 3,914 4,148 4,148 4,425 4,425
-------- -------- -------- -------- -------- --------
Total financial liabilities..... 246,464 $246,846 253,616 $253,734 183,071 $183,616
Non-financial liabilities............ 6,844 -------- 5,977 -------- 3,918 --------
-------- -------- -------- -------- -------- --------
Total liabilities.................... $253,308 $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.
F-34
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
16. FAIR VALUES OF FINANCIAL INSTRUMENTS--(CONTINUED)
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 $6,830,000, $18,627,000 and $7,040,000 at June 30, 1995, March 31,
1995 and 1994, respectively.
17. SEGMENT INFORMATION
Currently the majority of mortgage banking related activities are
incidental to the Bank's strategic plan and are performed in order to
accommodate banking customer and market needs and, as such, are included in
non-interest income for the periods ending June 30, 1995 and 1994.
The Company 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.
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
F-35
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
17. SEGMENT INFORMATION--(CONTINUED)
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:
<TABLE>
<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
-------- -------- -------- ------- ------ ------ ------ ------ ------
-------- -------- -------- ------- ------ ------ ------ ------ ------
</TABLE>
<TABLE>
<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 EVENTS
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.
On July 26, 1995, the Company changed its fiscal year-end from March 31, to
December 31. A transition report will be filed on Form 10-K for the nine months
ending December 31, 1995.
In July 1995, the Chairman of the Federal Deposit Insurance Corporation
('FDIC') announced in testimony before the Congress a proposal to recapitalize
the Savings Association Insurance Fund ('SAIF') by a one-time charge to SAIF
members of approximately $6.6 billion, or approximately 85 basis points ($.85
for every $100) of assessable deposits on March 31, 1995 and an eventual merger
of the SAIF with the Bank Insurance Fund ('BIF'). The Company is unable to
predict the likelihood of legislation effecting these changes, although a
consensus among regulators, legislators and bankers appears to be developing in
this regard.
If the proposed assessment of $.85 per $100 of assessable deposits was
effected based on deposits as of March 31, 1995, as proposed, the Bank's pro
rata share would amount to approximately $960,000, net of
F-36
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
IS UNAUDITED)
18. SUBSEQUENT EVENTS--(CONTINUED)
taxes, respectively. Such an assessment, as currently proposed, would not be
affected by the conversion of the Bank to a commercial bank and would have a
material adverse effect on the Company's earnings and results of operations.
On September 7, 1995, the Company signed an agreement to acquire all of the
outstanding capital stock of Banyan Bank, a Florida chartered bank ('Banyan')
which is headquartered in Boca Raton, Florida. At June 30, 1995, Banyan had
approximately $47.9 million, $43.2 million and $4.4 million of total assets,
deposits and capital, respectively. Under the terms of the agreement, the
Company will pay 207% of the first $4,600,000 of the Tangible Equity (as defined
in the agreement) of Banyan, plus 100% of any Tangible Equity in excess of
$4,600,000, as of the calendar month ended immediately prior to the closing of
the transaction. This acquisition, which will be accounted for as a purchase
under generally accepted accounting principles, is subject to fulfillment of a
number of conditions including regulatory approval.
In addition, the Bank's obligations under the agreement are conditioned on
the following: (a) the obligations of Banyan and its shareholders pursuant to
the terms of the agreement shall have been duly performed and complied with in
all material respects and the representations and warranties contained in the
agreement shall be true and correct in all material respects; (b) there shall
not have occurred a material adverse change in Banyan, its business, financial
condition or prospects since December 31, 1994; (c) the interim consolidated
balance sheet of Banyan for the calendar month end immediately prior to the
closing, and as of the closing, shall reflect total assets of not less than
$45,000,000, classified assets of not more than $900,000, allowance for loan
losses of not less than 1% of total assets and non-performing assets of not more
than 1% of total assets; (d) all, and not less than all, of the shares of Banyan
shall be tendered for purchase by the Bank; (e) the Offerings shall have closed
and net proceeds thereof shall be not less than $10,000,000; and (f) certain
other usual and customary conditions to closing.
The Company filed a Registration Statement on Form S-1 on September 27,
1995 for the registration of 1,800,000 shares of common stock and 900,000 shares
of preferred stock.
F-37
<PAGE>
BANYAN BANK
AUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994 AND 1993
AND UNAUDITED AS OF JUNE 30, 1995 AND 1994
TOGETHER WITH INDEPENDENT AUDITOR'S REPORT
F-38
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Banyan Bank
Boca Raton, Florida
We have audited the accompanying balance sheets of Banyan Bank as of
December 31, 1994 and 1993, and the related statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Bank'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, the financial statements referred to above present fairly,
in all material respects, the financial position of Banyan Bank as of December
31, 1994 and 1993, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
As described in Note 4 to the financial statements, the Bank changed its
method of accounting for investments in debt and marketable equity securities to
adopt FASB Statement No. 115 as of January 1, 1994.
McGladrey & Pullen, LLP
St. Paul, Minnesota
March 3, 1995
F-39
<PAGE>
BANYAN BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1995 1994 1993
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents (Note 2).................................. $ 8,278,000 $ 3,726,008 $ 1,287,701
Available-for-sale securities (Note 3).............................. 2,570,000 5,479,537 --
Securities held for investment (Note 4)............................. -- -- 8,486,888
Federal funds sold.................................................. -- 5,000 4,673,000
Loans, net (Notes 5, 10 and 11)..................................... 35,953,000 31,191,333 27,893,618
Loans held for sale (Note 6)........................................ -- 255,700 246,800
Premises and equipment, net (Note 7)................................ 274,000 287,348 217,507
Other real estate owned............................................. 491,000 1,035,578 928,299
Accrued interest receivable and other assets (Note 9)............... 351,000 331,368 397,922
----------- ----------- -----------
$47,917,000 $42,311,872 $44,131,735
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Notes 8 and 11):
Noninterest-bearing............................................ $ 4,629,000 $ 4,698,739 $ 5,475,805
Interest-bearing............................................... 38,587,000 33,393,125 34,555,094
----------- ----------- -----------
Total deposits............................................ 43,216,000 38,091,864 40,030,899
Accrued interest payable and other liabilities.................... 272,000 171,474 215,460
----------- ----------- -----------
Total liabilities......................................... 43,488,000 38,263,338 40,246,359
----------- ----------- -----------
Commitments, Contingencies and Credit Risk (Note 10)
Stockholders' Equity (Note 12)
Common stock, par value $6 per share; authorized 600,000 shares;
issued and outstanding 442,883 shares............................. 2,657,000 2,657,298 2,657,298
Additional paid-in capital........................................ 1,061,000 1,061,032 1,061,032
Retained earnings................................................. 696,000 474,228 221,296
Net unrealized loss on marketable equity securities held for
investment (Note 3)............................................ -- -- (54,250)
Net unrealized gain (loss) on available-for-sale securities (Note
3)........................................................... 15,000 (144,024) --
----------- ----------- -----------
Total stockholders' equity................................ 4,429,000 4,048,534 3,885,376
----------- ----------- -----------
$47,917,000 $42,311,872 $44,131,735
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to financial statements.
F-40
<PAGE>
BANYAN BANK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------ ------------------------
1995 1994 1994 1993
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest Income
Loans................................................... $1,745,000 $1,241,000 $2,702,791 $2,372,553
Securities.............................................. 270,000 182,000 398,336 354,476
Federal funds sold and cash equivalents................. -- 41,000 61,426 165,970
---------- ---------- ---------- ----------
2,015,000 1,464,000 3,162,553 2,892,999
Interest Expense on Deposits.............................. 838,000 535,000 1,123,648 1,148,233
---------- ---------- ---------- ----------
Net interest income............................. 1,177,000 929,000 2,038,905 1,744,766
Provision for Loan Losses (Note 6)........................ 59,654 56,000 93,750 76,800
---------- ---------- ---------- ----------
Net interest income after provision for loan
losses....................................... 1,117,346 873,000 1,945,155 1,667,966
---------- ---------- ---------- ----------
Other Income
Service charges and other fees.......................... 43,000 29,000 51,075 51,085
Securities gains (losses), net (Notes 3 and 4).......... 12,000 -- 375 65,288
Gain on sale of other real estate owned................. 59,654 -- -- --
Other income............................................ 51,000 11,000 32,670 9,781
---------- ---------- ---------- ----------
165,654 40,000 84,120 125,154
---------- ---------- ---------- ----------
Other Expenses
Salaries and employee benefits.......................... 482,000 321,000 760,757 526,889
Occupancy expenses...................................... 158,000 131,000 276,454 217,980
Other expenses (Note 14)................................ 295,000 250,000 586,853 665,323
---------- ---------- ---------- ----------
935,000 702,000 1,624,064 1,410,192
---------- ---------- ---------- ----------
Income before income taxes and cumulative effect
of change in accounting principle.......... 348,000 211,000 405,211 382,928
Income Tax Expense (Note 9)............................... 126,000 80,000 152,279 155,659
---------- ---------- ---------- ----------
Income before cumulative effect
of change in accounting principle............ 222,000 131,000 252,932 227,269
Cumulative Effect of Change in Accounting
for Income Taxes........................................ -- -- -- 227,453
---------- ---------- ---------- ----------
Net income...................................... $ 222,000 $ 131,000 $ 252,932 $ 454,722
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income per common share:
Income before cumulative effect of change in accounting
principal............................................ $ .49 $ .29 $ .57 $ .51
Cumulative effect of change in accounting for income
taxes.............................................. -- -- -- .51
---------- ---------- ---------- ----------
Net income.............................................. $ .49 $ .29 $ .57 $ 1.02
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common and
common equivalent shares outstanding.................... 448,961 447,266 446,501 444,508
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-41
<PAGE>
BANYAN BANK
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1994 AND 1993 (DEFICIT)
- -------------------------------------- --------------------- UNREALIZED
PREFERRED STOCK COMMON STOCK ADDITIONAL LOSS ON
------------------- --------------------- ADDITIONAL PAID-IN RETAINED MARKETABLE
PAR PAR PAID-IN CAPITAL EARNINGS EQUITY
SHARES VALUE SHARES VALUE CAPITAL ALLOCATED (DEFICIT) SECURITIES
------- -------- ------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1992......... 90,000 $ 90,000 314,645 $1,887,870 $ 1,740,460 $ 2,000 $(235,426) $ (66,500)
Net income................ -- -- -- -- -- -- 454,722 --
Recovery of unrealized
loss on marketable
equity securities held
for investment.......... -- -- -- -- -- -- -- 12,250
Conversion of preferred
stock to common stock
(Note 12)...............(90,000) (90,000) 128,238 769,428 (679,428) -- -- --
Transfer.................. -- -- -- -- -- (2,000) 2,000 --
------- -------- ------- ---------- ----------- ---------- --------- ----------
BALANCE,
DECEMBER 31, 1993......... -- -- 442,883 2,657,298 1,061,032 -- 221,296 (54,250)
Net income................ -- -- -- -- -- -- 252,932 --
Net change in unrealized
gain (loss) on
available-for-sale
securities (Note 3)..... -- -- -- -- -- -- -- 54,250
------- -------- ------- ---------- ----------- ---------- --------- ----------
BALANCE,
DECEMBER 31, 1994......... -- -- 442,883 2,657,298 1,061,032 -- 474,228 --
Net income (unaudited).... -- -- -- -- -- -- 222,000 --
Net change in unrealized
gain (loss) on
available-for-sale
securities (Note 3)
(unaudited)............. -- -- -- -- -- -- -- --
Other (unaudited)......... -- -- -- (298) (32) -- (228) --
------- -------- ------- ---------- ----------- ---------- --------- ----------
BALANCE, JUNE 30, 1995
(unaudited)............... -- -- 442,883 $2,657,000 $ 1,061,000 -- $ 696,000 $ --
------- -------- ------- ---------- ----------- ---------- --------- ----------
------- -------- ------- ---------- ----------- ---------- --------- ----------
<CAPTION>
YEARS ENDED DECEMBER 31, 1994 AND 1993
- --------------------------------------
UNREALIZED
GAIN (LOSS)
ON AVAILABLE-
FOR-SALE
SECURITIES TOTAL
------------- ----------
<S> <C> <C>
BALANCE,
DECEMBER 31, 1992......... $ -- $3,418,404
Net income................ -- 454,722
Recovery of unrealized
loss on marketable
equity securities held
for investment.......... -- 12,250
Conversion of preferred
stock to common stock
(Note 12)............... -- --
Transfer.................. -- --
------------- ----------
BALANCE,
DECEMBER 31, 1993......... -- 3,885,376
Net income................ -- 252,932
Net change in unrealized
gain (loss) on
available-for-sale
securities (Note 3)..... (144,024) (89,774)
------------- ----------
BALANCE,
DECEMBER 31, 1994......... (144,024) 4,048,534
Net income (unaudited).... -- 222,000
Net change in unrealized
gain (loss) on
available-for-sale
securities (Note 3)
(unaudited)............. 159,024 159,024
Other (unaudited)......... -- (558)
------------- ----------
BALANCE, JUNE 30, 1995
(unaudited)............... $ 15,000 $4,429,000
------------- ----------
------------- ----------
</TABLE>
F-42
<PAGE>
BANYAN BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------
1995 1994 1994 1993
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income......................................... $ 222,000 $ 131,000 $ 252,932 $ 454,722
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Securities (gains) losses....................... (12,000) -- (375) (65,288)
Gain on sale of other real estate owned......... (59,654) -- -- --
Net amortization and accretion of premiums and
discounts..................................... 32,000 131,000 221,077 124,756
Provision for loan losses....................... 59,654 56,000 93,750 76,800
Loans held for sale (Note 6).................... 256,000 247,000 (8,900) 411,413
Depreciation.................................... 25,000 20,000 48,834 22,285
Other........................................... (51,000) (20,000) 109,463 (64,806)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. 472,000 565,000 716,781 959,882
----------- ----------- ----------- -----------
Cash Flows From Investing Activities
Cash flows from securities (Note 13)............... 3,133,000 805,000 2,609,981 (1,816,697)
Net decrease in federal funds sold................. 5,000 4,673,000 4,668,000 2,667,000
Net increase in loans.............................. (4,762,000) (3,693,000) (3,774,881) (3,416,584)
Purchases of premises and equipment................ (12,000) (9,000) (118,675) (98,843)
Proceeds from sales of other
real estate owned............................... 592,000 -- 276,136 298,345
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities............................ (1,044,000) 1,776,000 3,660,561 (2,366,779)
----------- ----------- ----------- -----------
Cash Flows From Financing Activities
Net increase (decrease) in deposits................ 5,124,000 (1,288,000) (1,939,035) 897,625
Other, net......................................... -- (365,000) -- --
----------- ----------- ----------- -----------
Net cash provided by (used) in
financing activities.......................... 5,124,000 (1,653,000) (1,939,035) 897,625
----------- ----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents........................ 4,552,000 688,000 2,438,307 (509,272)
Cash and Cash Equivalents
Beginning.......................................... 3,726,000 1,288,000 1,287,701 1,796,973
----------- ----------- ----------- -----------
Ending............................................. $ 8,278,000 $ 1,976,000 $ 3,726,008 $ 1,287,701
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements (additional cash flow information - Note 13).
F-43
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and
cash equivalents includes cash on hand and amounts due from banks. Cash flows
from loans, loans held for sale, federal funds sold, and deposits are reported
net.
The Bank maintains amounts due from banks which, at times, may exceed
federally insured limits. The Bank has not experienced any losses in such
accounts.
INVESTMENT IN DEBT AND MARKETABLE EQUITY SECURITIES: The Bank accounts for
debt and equity securities in accordance with FASB Statement No. 115. This
statement requires that management determine the appropriate classification of
securities at the date of adoption and thereafter as each individual security is
acquired. In addition, the appropriateness of such classification is reassessed
at each balance sheet date. The classifications and related accounting policies
under FASB Statement No. 115 are as follows:
HELD-TO-MATURITY SECURITIES: Securities classified as held-to-maturity are
those debt securities the Bank has both the intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost adjusted
for amortization of premium and accretion of discount, computed by the interest
method over their contractual lives.
The sale of a security within three months of its maturity date or after at
least 85 percent of the principal outstanding has been collected is considered a
maturity for purposes of classification and disclosure.
AVAILABLE-FOR-SALE SECURITIES: Securities classified as available-for-sale
are those debt securities that the Bank intends to hold for an indefinite period
of time but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Bank's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities available for sale are
carried at fair value. Unrealized gains or losses, net of the related deferred
tax effect are reported as increases or decreases in stockholders' equity.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
TRADING SECURITIES: Trading securities, which are generally held for the
short term in anticipation of market gains, are carried at fair value. Realized
and unrealized gains and losses on trading account assets are included in
interest income on trading account securities.
TRANSFERS: Transfers of debt securities into the held-to-maturity
classification from the available-for-sale classification are made at fair value
on the date of transfer. The unrealized holding gain or loss on the date of
transfer is retained as a separate component of stockholders' equity and in the
carrying value of the held-to-maturity securities. Such amounts are amortized
over the remaining contractual lives of the securities by the interest method.
Prior to the accounting change discussed in Note 4, the classification of
securities and the related accounting policies were as follows:
F-44
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
INVESTMENT SECURITIES: Securities held for investment were those debt
securities that the Bank had both the ability to hold to maturity and the intent
to hold for the foreseeable future. Debt securities were stated at cost,
adjusted for amortization of premiums and accretion of discounts. Other
investments were stated at cost, which approximated market value. Gains or
losses on disposition were based on the net proceeds and the carrying amount of
the securities sold, using the specific-identification method.
LOANS AND ALLOWANCES FOR LOAN LOSSES: Loans are stated at the amount of
unpaid principal, reduced by an allowance for loan losses.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans that may become uncollectible,
based on evaluation of the collectibility of loans and prior loan loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, losses on impaired loans, and current
economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions. Interest on loans is recognized over the terms of the
loans and is calculated using the simple-interest method on principal amounts
outstanding. Accrual of interest is generally stopped when a loan is greater
than three months past due, whether impaired or not. Interest on these loans is
recognized only when actually paid by the borrower if collection of the
principal is likely to occur. Accrual of interest is generally resumed when the
customer is current on all principal and interest payments and has been paying
on a timely basis for a period of time.
Bank management periodically evaluates all loans for impairment, other than
residential real estate and consumer loans which are considered smaller-balance,
homogeneous loans. A loan is considered impaired when it is probable the Bank
will be unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Loans are evaluated individually and some of the factors
that influence management's judgement in determining when a loan is impaired
include the magnitude of the delay or shortfall in the amount of payments and
any prior experience with the borrower. Interest income on impaired loans is
recognized when actually paid by the borrower.
LOANS HELD FOR SALE: Loans held for sale are carried at the lower of
aggregate cost or market value. The market value calculation includes
consideration of all open positions. The Bank generally locks into an interest
rate when these loans are originated, thus no gains or losses are recognized on
sales. All sales are made without recourse.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is provided principally by the
straight-line method over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED: Other real estate owned (OREO) represents
properties acquired through foreclosure or other proceedings. OREO is recorded
at the lower of the carrying amounts of the related loans or fair value of the
properties less cost to sell. Any write-down to fair value less cost to sell at
the time
F-45
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
of transfer to OREO is charged to the allowance for loan and lease losses.
Subsequent write-downs are charged to other expense. Property is evaluated
regularly to ensure that the recorded amount is supported by its current fair
market.
INCOME TAXES: Deferred taxes are provided using an asset and liability
method whereby deferred tax assets are recognized for deductible temporary
differences, and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities recorded for
income tax and financial reporting purposes. Deferred tax assets are reduced by
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
INCOME PER COMMON SHARE: Income per common share is computed by dividing
net income by the weighted average number of shares of common and common
equivalent shares outstanding during the period. Common equivalent shares
include the stock options discussed in Note 12. There is no difference between
primary and fully diluted income per share.
EMERGING ACCOUNTING STANDARDS:
FAIR VALUE OF FINANCIAL INSTRUMENTS: Financial Accounting Standards Board
(FSAB) Statement No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized on the balance sheet, for which it is practicable to
estimate that value. Statement No. 107 excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. This
statement is effective for the Bank's year ending December 31, 1995.
IMPAIRMENT OF LOANS: The FASB has issued Statement No. 114, Accounting by
Creditors for Impairment of a Loan and Statement No. 118, Accounting for
Creditors for Impairment of a Loan-Income Recognition and Disclosure. These
statements require that impaired loans that are within the scope of these
statements be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. A loan is impaired when it is probable the
creditor will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement. These
statements were effective January 1, 1995. The application of these statements
has no significant impact to the financial statements.
LONG-LIVED ASSETS: FASB Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, establishes
new accounting standards for the impairment of long-lived assets, certain
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identified intangibles to be disposed of. This
statement is effective for the Bank's year ending December 31, 1996. In
management's opinion, the adoption of this statement will not have a material
effect on the Bank's financial statements.
MORTGAGE SERVICING RIGHTS: FASB Statement No. 122, Accounting for Mortgage
Servicing Rights, establishes a new standard for capitalizing mortgage servicing
rights. This standard would require the Bank to record an asset for mortgage
servicing rights if it sells mortgages and retains the servicing, and then
F-46
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
amortize this asset over the period during which servicing income is expected to
be received. This statement is effective for the Bank's year ending December 31,
1996. Since the Bank does not retain the servicing rights on loans sold, in
management's opinion, this statement will have no impact on the Bank's financial
statements.
INTERIM FINANCIAL INFORMATION (UNAUDITED): The financial statements and
notes related thereto as of June 30, 1995 and for the six-month periods ended
June 30, 1994 and 1995 are unaudited, but, in the opinion of management, reflect
all adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the Bank's financial position and results of operations.
The operating results for the interim periods are not necessarily indicative of
the operating results to be expected for a full fiscal year.
NOTE 2. RESTRICTIONS ON CASH AND CASH EQUIVALENTS
The Bank is required to maintain reserve balances, in cash or on deposit
with the Federal Reserve Bank, based upon a percentage of deposits. The total
required reserve balances as of December 31, 1994 and 1993 and June 30, 1995,
were approximately $276,000, $206,000 and $125,000, respectively.
NOTE 3. AVAILABLE-FOR-SALE SECURITIES
SUMMARY OF SECURITIES:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
JUNE 30, 1995 (UNAUDITED)
U.S. Government corporations
and agencies..................................... $1,541,000 $ 3,000 $ 8,000 $1,536,000
Mortgage-backed securities......................... 732,000 30,000 762,000
Other.............................................. 272,000 -- -- 272,000
---------- ---------- ---------- ----------
$2,545,000 $ 33,000 $ 8,000 $2,570,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DECEMBER 31, 1994
U.S. Government corporations
and agencies..................................... $4,492,855 $ -- $ 177,641 $4,315,214
Marketable equity securities....................... 167,250 -- 20,250 147,000
Mortgage-backed securities......................... 757,700 -- 33,027 724,673
Other.............................................. 292,650 -- -- 292,650
---------- ---------- ---------- ----------
$5,710,455 $ -- $ 230,918 $5,479,537
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
CONTRACTUAL MATURITIES:
U.S. Government corporations and agency securities have maturities ranging
between one and five years. The anticipated maturities for mortgage-backed
securities are not readily determinable since they may be prepaid without
penalty. Marketable equity and other securities have no specified maturity date.
F-47
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 3. AVAILABLE-FOR-SALE SECURITIES--(CONTINUED)
REALIZED GAINS AND LOSSES: Gross gains of $12,000 and $375 were realized
on sales of securities available-for-sale during the six months ended June 30,
1995 and the year ended December 31, 1994, respectively.
CHANGES IN THE UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES:
<TABLE>
<S> <C>
Balance, January 1, 1994.................................................................... $ --
Initial unrealized gain (loss) on date of adoption of Statement No. 115, net of related
deferred tax effect.................................................................... 26,197
Transfer of unrealized loss on marketable equity securities on date of adoption of
Statement No. 115...................................................................... (54,250)
Unrealized gain (loss) during the year.................................................... (220,331)
Deferred tax effect on unrealized loss.................................................... 104,360
---------
Balance, December 31, 1994.................................................................. (144,024)
Unrealized gain during six months (unaudited)............................................. 254,474
Deferred tax effect (unaudited)........................................................... (95,450)
---------
BALANCE, JUNE 30, 1995 (UNAUDITED).......................................................... $ 15,000
---------
---------
</TABLE>
NOTE 4. SECURITIES HELD FOR INVESTMENT AND ACCOUNTING CHANGE
As of January 1, 1994, the Bank changed its method of accounting for debt
and equity securities in accordance with FASB Statement No. 115. As provided by
this Statement, the 1993 comparative financial statements have not been restated
for the change in accounting principle. The January 1, 1994, balance of
stockholders' equity was increased by $26,197, net of the $17,465 related
deferred tax effect, to recognize the net unrealized holding gain on securities
at that date.
The disclosures related to securities classified as investment securities
are as follows:
SUMMARY OF SECURITIES HELD FOR INVESTMENT:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies..................................... $7,394,263 $ 2,538 $ 16,801 $7,380,000
Marketable equity securities....................... 113,000 -- -- 113,000
Mortgage-backed securities......................... 868,075 57,925 -- 926,000
Other.............................................. 111,550 -- -- 111,550
---------- ---------- ---------- ----------
$8,486,888 $ 60,463 $ 16,801 $8,530,550
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The amortized cost of marketable equity securities above is net of an
allowance of $54,250 at December 31, 1993. This allowance reduces the carrying
amount from original cost of $167,250, to
F-48
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 4. SECURITIES HELD FOR INVESTMENT AND ACCOUNTING CHANGE--(CONTINUED)
approximate market value and was reflected as a reduction of stockholders'
equity since the Bank considered the decline in market value to be temporary.
REALIZED GAINS AND LOSSES: Gross gains of $65,288 were realized on sales
of securities held for investment in 1993.
NOTE 5. LOANS
COMPOSITION OF LOANS:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1995 1994 1993
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Residential real estate.................................. $13,778,000 $11,315,436 $10,004,214
Commercial real estate................................... 8,907,000 7,504,285 7,734,801
Commercial............................................... 6,613,000 7,533,359 7,469,947
Construction and land development........................ 6,424,000 4,677,731 2,336,389
Consumer................................................. 662,000 544,466 700,461
----------- ----------- -----------
36,384,000 31,575,277 28,245,812
Less allowance for loan losses........................... 431,000 383,944 352,194
----------- ----------- -----------
Loans, net............................................... $35,953,000 $31,191,333 $27,893,618
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
ALLOWANCE FOR LOAN LOSSES:
<TABLE>
<CAPTION>
YEARS ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, ---------------------
1995 1994 1993
---------------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning.......................................... $ 383,944 $352,194 $ 345,701
Provision charged to operations........................... 59,654 93,750 76,800
Loans charged-off......................................... (13,000) (82,000) (103,199)
Recoveries................................................ 402 20,000 32,892
---------------- -------- ---------
Balance, ending............................................. $ 431,000 $383,944 $ 352,194
---------------- -------- ---------
---------------- -------- ---------
</TABLE>
NON-ACCRUAL LOANS: Non-accrual loans totaled $18,000, $28,334 and $217,959
at June 30, 1995, December 31, 1994 and 1993, respectively. If income on these
loans had been accrued, interest income would have increased by approximately
$1,700 for the six months ended June 30, 1995, and $11,100 and $8,400 during
1994 and 1993, respectively. Interest actually received on these loans and
recognized as income during the first six months ended June 30, 1995 and years
ended 1994 and 1993, was not significant to the results of operations.
IMPAIRED LOANS: There were no loans considered to be impaired during the
six months ended June 30, 1995.
F-49
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 6. LOANS HELD FOR SALE
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------
1995 1994 1993
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning......................................... $ 255,700 $ 246,800 $ 658,213
Loans originated......................................... -- 3,837,700 15,087,587
Loans sold............................................... (255,700) (3,828,800) (15,499,000)
----------- ----------- ------------
Balance, ending............................................ $ -- $ 255,700 $ 246,800
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
NOTE 7. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1995 1994 1993
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements............................................. $ 192,553 $192,553 $165,910
Equipment.......................................................... 274,189 262,436 173,537
----------- -------- --------
466,742 454,989 339,447
Less accumulated depreciation...................................... 192,742 167,641 121,940
----------- -------- --------
$ 274,000 $287,348 $217,507
----------- -------- --------
----------- -------- --------
</TABLE>
NOTE 8. DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1995 1994 1993
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Demand deposits.......................................... $ 4,629,000 $ 4,698,739 $ 5,475,805
NOW and money market accounts............................ 9,609,000 13,998,705 18,370,999
Savings deposits......................................... 857,000 1,024,544 902,525
Time certificates, $100,000 or more...................... 4,604,000 3,585,846 3,982,416
Other time deposits...................................... 23,517,000 14,784,030 11,299,154
----------- ----------- -----------
Total............................................... $43,216,000 $38,091,864 $40,030,899
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 9. INCOME TAXES
The provision for income taxes charged to operations consists of the
following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1994 1993
-------- --------
<S> <C> <C>
Current tax expense............................................................. $ 99,364 $ 3,206
Deferred tax expense............................................................ 52,915 152,453
-------- --------
Total expense.............................................................. $152,279 $155,659
-------- --------
-------- --------
</TABLE>
F-50
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 9. INCOME TAXES--(CONTINUED)
The cumulative tax effects of the primary temporary differences are shown
in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
-------- -------
<S> <C> <C>
Deferred tax assets:
Loan loss allowances........................................................... $ 62,120 $61,160
Net operating loss carryover................................................... -- 22,080
Unrealized loss on securities available-for-sale............................... 86,895 --
Other............................................................................ 13,964 9,395
-------- -------
Total deferred tax assets........................................................ 162,979 92,635
-------- -------
Deferred tax liabilities:
Cash basis adjustments......................................................... 51,754 17,635
Other.......................................................................... 2,245 --
-------- -------
Total deferred tax liabilities................................................... 53,999 17,635
-------- -------
Net deferred tax assets.......................................................... $108,980 $75,000
-------- -------
-------- -------
</TABLE>
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1994 1993
-------- --------
<S> <C> <C>
Computed 'expected' federal tax expense......................................... $141,824 $130,195
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit................................ 14,709 13,900
Other......................................................................... (4,254) 11,564
-------- --------
Tax expense..................................................................... $152,279 $155,659
-------- --------
-------- --------
</TABLE>
Effective January 1, 1993, the Bank adopted FASB Statement No. 109,
Accounting for Income Taxes. The effect of adopting Statement No. 109 was to
increase the net deferred tax assets on the January 1, 1993 balance sheet by
$227,453. This amount is reported as the effect of a change in accounting
principle on the accompanying 1993 income statement.
NOTE 10. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: The Bank is 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 include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit risk in excess
of the amounts recognized on the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other parties to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual
F-51
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 10. COMMITMENTS, CONTINGENCIES AND CREDIT RISK--(CONTINUED)
amounts of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on balance sheet
instruments. The commitments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1995 1994 1993
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Commitments to extend credit................................ $10,868,000 $6,706,976 $6,854,102
Standby letters of credit................................... 441,000 508,882 560,014
----------- ---------- ----------
$11,309,000 $7,215,858 $7,414,116
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
COMMITMENTS TO EXTEND CREDIT: 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. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. If deemed necessary upon extension of
credit, the amount of collateral obtained is based on management's credit
evaluation of the party. Collateral held varies, but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties.
STANDBY LETTERS OF CREDIT: Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Collateral held varies as specified above and is required in instances which the
Bank deems necessary. The average amount of these commitments that are
collateralized is approximately 58 percent.
LEASE COMMITMENTS: The Bank leases bank premises and equipment. These
agreements extend through 2001, whereby the Bank is to pay a specified base
rent. The following is a schedule of future minimum lease payments under these
leases.
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1995.................................................................... $116,726
1996.................................................................... 54,320
1997.................................................................... 34,200
1998.................................................................... 35,077
1999.................................................................... 35,989
After................................................................... 37,152
--------
$313,464
--------
--------
</TABLE>
Total rent expense under these leases for the years ended December 31, 1994
and 1993 and the six months ended June 30, 1995 and 1994, was approximately
$156,000, $146,000, $66,000 and $46,000, respectively.
F-52
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 10. COMMITMENTS, CONTINGENCIES AND CREDIT RISK--(CONTINUED)
CONTINGENCIES: In the normal course of business, the Bank is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Bank's
financial statements.
FINANCIAL INSTRUMENTS WITH CONCENTRATION ON CREDIT RISK:
CONCENTRATION BY GEOGRAPHIC LOCATION: The Bank makes commercial, real
estate and consumer loans to customers principally in Palm Beach County,
Florida. Although the Bank has a diversified portfolio, a substantial portion of
its customers' abilities to honor their contracts is dependent upon the local
economy.
CONCENTRATION BY INDUSTRY: The Bank's loan portfolio is concentrated in
loans to residential real estate builders. The loss the Bank would incur if all
of these loans failed to perform and the collateral proved to be of no value
approximated $3.2 million at June 30, 1995. The Bank's policy is to require
collateral supported by current documentation of fair value on all of these
loans.
NOTE 11. LOANS AND OTHER TRANSACTIONS WITH RELATED PARTIES
Shareholders of the Bank, and officers and directors, including their
families and companies of which they are principal owners, are considered to be
related parties. These related parties were loan customers of, and had other
transactions with the Bank in the ordinary course of business. In management's
opinion, these loans and transactions are on the same terms as those for
comparable loans and transactions with nonrelated parties.
At June 30, 1995, December 31, 1994 and 1993, the approximate balances of
loans to and deposits from related parties were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1995 1994 1993
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Balance, beginning........................................... $ 2,179,533 $1,776,349 $ 704,000
New loans.................................................... 506,200 846,184 1,212,000
Repayments................................................... 645,215 443,000 139,651
----------- ---------- ----------
Balance, ending.............................................. $ 2,040,518 $2,179,533 $1,776,349
Deposits..................................................... 7,464,000 3,435,938 9,391,968
</TABLE>
NOTE 12. STOCKHOLDERS' EQUITY
REGULATORY CAPITAL REQUIREMENTS: The Federal Reserve Board and other bank
regulatory agencies have adopted risk-based capital guidelines for banks and
bank holding companies. The main objectives of the risk-based capital framework
are to provide a more consistent system for comparing capital positions of
banking organizations and to take into account the different risks among banking
organizations' assets and off-balance sheet items. Bank regulatory agencies have
supplemented the risk-based capital standard with a leverage ratio for Tier 1
capital to total reported assets. The minimum leverage ratio standard is 3
percent. Depending upon the judgment of the various regulatory agencies, a
greater leverage ratio may be required based upon the relative risk of the
organization.
F-53
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 12. STOCKHOLDERS' EQUITY--(CONTINUED)
Below is a comparison of the Bank's June 30, 1995 (unaudited) and December
31, 1994 actual and the minimum requirements for a well-capitalized and
adequately capitalized banks, as defined by the Federal regulatory agencies'
Prompt Corrective Action Rules:
<TABLE>
<CAPTION>
MINIMUM REQUIREMENTS
JUNE 30, DECEMBER --------------------------
1995 1994 WELL ADEQUATELY
ACTUAL ACTUAL CAPITALIZED CAPITALIZED
----------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Tier 1 risk-based capital.............................. 9.1% 10.1% 6% 4%
Total risk-based capital............................... 10.0% 11.0% 10% 8%
Leverage ratio......................................... 7.4% 8.1% 5% 4%
</TABLE>
PREFERRED STOCK: During 1993, all 90,000 shares of the Series A preferred
stock were converted into common stock. The Bank has also authorized 60,000
shares of Series B nonvoting, $1 par value, cumulative, convertible preferred
stock, of which no shares have been issued.
DIVIDEND RESTRICTIONS: Banking regulations restrict the amount of
dividends that may be paid by the Bank to an amount not to exceed net income for
the current year combined with net income not paid as dividends in the preceding
two years without prior approval of Bank supervisory authorities. In addition,
dividends are not permitted to cause the capital of the Bank to fall below the
minimum regulatory capital requirements.
STOCK OPTIONS: The Bank has reserved shares of common stock for grants of
nonqualified stock options to certain key officers and directors. The options
may be exercised within five years from the date of grant. During 1994 and 1993,
no options were exercised or terminated. During 1994, 3,500 options were granted
at $10.00 per share. During 1993, 8,500 options were granted at $8.75 per share.
The exercise price on options granted is the estimated market value of the
shares on the date of grant as determined by management. In determining market
value management considers the book value and earnings trends of the Bank. No
compensation is recognized in connection with the grant of stock options since
they are granted at the estimated market value of the shares at the date of
grant.
At December 31, 1994 and June 30, 1995, the following stock options were
outstanding and exercisable:
<TABLE>
<CAPTION>
STOCK YEAR OF EXERCISE PRICE
OPTIONS EXPIRATION PER SHARE
------- ---------- --------------
<S> <C> <C>
10,000 1995 $ 10.50
7,000 1996 10.00
6,446 1997 6.00
8,500 1998 8.75
3,500 1999 10.00
</TABLE>
F-54
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 13. ADDITIONAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
------------------------- --------------------------
1995 1994 1994 1993
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM SECURITIES
Available-for-sale securities:
Maturities............................. $2,946,000 $ 2,626,000 $ 3,811,323 $ --
Sales.................................. 167,000 -- 800,375 --
Purchases.............................. -- (1,821,000) (2,001,717) --
Securities held for investment:
Maturities............................. -- -- -- 1,821,276
Sales.................................. -- -- -- 5,080,000
Purchases.............................. -- -- -- (8,717,973)
---------- ----------- ----------- -----------
$3,133,000 $ 805,000 $ 2,609,981 $(1,816,697)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
---------------------- ------------------------
1995 1994 1994 1993
-------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash payments for interest.................... $811,000 $ 539,000 $1,112,399 $1,172,100
Cash payments for income taxes................ -- -- 27,376 25,833
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Securities held for investment reclassified to
available-for-sale securities............... $ -- $8,487,000 $8,486,888 $ --
Other real estate acquired in settlement of
loans....................................... -- 152,000 383,416 152,810
Net change in unrealized gain (loss) on
securities available-for-sale (Note 3)...... 159,024 (168,000) (144,024) --
Change in unrealized loss on marketable equity
securities (Note 3)......................... -- -- 54,250 12,250
</TABLE>
F-55
<PAGE>
BANYAN BANK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1994 AND 1995 IS UNAUDITED)
NOTE 14. OTHER EXPENSES
A summary of other expenses is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Professional fees..................................... $ 41,339 $ 18,838 $ 67,913 $109,616
Advertising and promotion............................. 31,944 25,796 51,592 16,341
Data processing....................................... 35,713 30,634 62,333 59,621
Insurance............................................. 59,714 60,186 119,349 118,534
Outside services...................................... 18,235 12,530 38,656 47,742
Other real estate owned............................... 13,342 38,282 76,563 160,623
Communication......................................... 26,502 19,611 41,785 37,987
Other expenses........................................ 68,211 44,124 128,662 114,859
-------- -------- -------- --------
Total............................................ $295,000 $250,000 $586,853 $665,323
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
NOTE 15. SUBSEQUENT EVENT TO AUDITOR'S REPORT (UNAUDITED)
On September 7, 1995, the shareholders of the Bank agreed to sell all of
their shares to Republic Security Financial Corporation (RSFC). This sale is
contingent on several conditions including obtaining all regulatory approvals
and RSFC obtaining not less than $10,000,000 in net proceeds from a public
offering.
F-56
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
AUDITED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1993, 1992 AND 1991
AND UNAUDITED AS OF SEPTEMBER 30, 1994
TOGETHER WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
F-57
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Governors Bank Corporation and Subsidiary
West Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of Governors
Bank Corporation and Subsidiary (the 'Company') as of December 31, 1993 and
1992, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1993. These consolidated financial statements are the responsibility of
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Governors
Bank Corporation and Subsidiary as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Governors Bank Corporation and Subsidiary will continue as a going
concern. As discussed in Note 11 to the consolidated financial statements, the
Bank subsidiary did not meet minimum regulatory capital requirements as of
December 31, 1993. Failure to comply with these requirements could result in
further regulatory intervention including seizure of the Bank. The Bank also
suffered a significant loss from operations in 1993. These matters raise
substantial doubt about the ability of the Company to continue as a going
concern. The ability of the Company to continue as a going concern is dependent
on many factors including regulatory action and raising sufficient additional
equity capital. Management's plans in regard to these matters are described in
Note 12 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 9(a) to the consolidated financial statements, the
Company is a party to a class action lawsuit that seeks to enjoin the pending
merger of the Company and Republic Security Financial Corporation and to recover
money damages of unspecified amounts against certain members of the Board of
Directors. The Company has a Director and Officer Liability Insurance Policy
('Policy') in the amount of $2,000,000. The Policy calls for the Company to pay
the related legal costs until the settlement of this matter at which time the
Company will be reimbursed for its legal expenses. At December 31, 1993 the
Company does not have sufficient cash reserves or available lines of credit to
fund its necessary legal defense. Further the insurer has raised questions as to
whether potential losses caused by the lawsuit are covered by the Policy. The
Company has indemnified all of its officers and directors from any losses that
they may incur as a result of their good faith actions in fulfilling their
responsibilities as officers and directors. Finally, as discussed in Note 9(c)
to the consolidated financial statements, a former officer of the Bank has filed
a lawsuit for wrongful termination. The effect of insufficient funds for a legal
defense and the ultimate outcome of the lawsuits cannot be presently determined.
Accordingly, no provision for any liability that may result upon adjudication or
from any loss resulting from any shortfall in insurance coverage has been made
in the accompanying consolidated financial statements.
BDO Seidman, LLP
West Palm Beach, Florida
April 12, 1994, except for
Note 8(b) which is as of June 23, 1994,
Note 9(a)(ii) which is as of May 3, 1994
and Note 9(c) which is as of June 17, 1994
F-58
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1994 1993 1992
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks........................................... $ 5,123,000 $ 3,901,777 $ 6,021,660
Federal funds sold................................................ 3,659,000 6,036,000 3,480,000
------------- ----------- -----------
Total cash and cash equivalents..................................... 8,782,000 9,937,777 9,501,660
------------- ----------- -----------
Investment securities: (Note 1)
Held-to-maturity.................................................. 10,319,000 12,949,998 17,301,571
Available-for-sale................................................ 6,052,000 6,224,319 --
------------- ----------- -----------
Total investment securities......................................... 16,371,000 19,174,317 17,301,571
Loans, net (Notes 2, 7 and 13)...................................... 43,073,000 51,160,154 61,252,716
Bank premises and equipment, net (Note 3)........................... 333,000 458,198 493,811
Accrued interest receivable and other assets........................ 1,586,000 2,060,612 1,317,825
------------- ----------- -----------
$ 70,145,000 $82,791,058 $89,867,583
------------- ----------- -----------
------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand......................................................... $ 12,322,000 $13,906,953 $15,530,030
Savings, NOW and money market.................................. 21,295,000 26,510,381 30,100,950
Time, $100,000 and over (Note 4)............................... 552,000 533,404 2,475,734
Time, under $100,000........................................... 29,264,000 35,871,512 34,013,769
------------- ----------- -----------
Total deposits.................................................... 63,433,000 76,822,250 82,120,483
Securities sold under agreements to repurchase
(Notes 1 and 5)................................................ 3,123,000 2,358,825 896,170
Accrued interest payable and other liabilities.................... 1,241,000 1,188,100 894,873
------------- ----------- -----------
Total liabilities................................................... 67,797,000 80,369,175 83,911,526
------------- ----------- -----------
Commitments and contingencies (Notes 7,8,9,11 and 12)
Stockholders' Equity (Note 10)
Common stock, $5 par value - 7,500,000 shares
authorized; 736,242, 735,686 and 725,408 outstanding........... 3,681,000 3,678,430 3,627,040
Additional paid-in capital........................................ 2,503,000 2,501,030 2,467,421
Deficit........................................................... (3,816,000) (3,834,566) (138,404)
Unrealized (loss) gain on securities available for sale, net of
income taxes (Note 1)............................................. (20,000) 76,989 --
------------- ----------- -----------
Total stockholders' equity.......................................... 2,348,000 2,421,883 5,956,057
------------- ----------- -----------
$ 70,145,000 $82,791,058 $89,867,583
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-59
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------------------------
1994 1993 1992 1991
----------------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees........................... $ 3,196,000 $ 5,190,368 $5,913,945 $5,759,253
Federal funds sold.............................. 81,000 93,437 128,642 255,960
Investment securities........................... 699,000 713,189 765,517 549,917
Other........................................... 9,000 60,052 83,167 10,332
----------------- ----------- ---------- ----------
Total interest income............................. 3,985,000 6,057,046 6,891,271 6,575,462
----------------- ----------- ---------- ----------
INTEREST EXPENSE:
Deposits........................................ 1,594,000 2,437,466 2,875,041 2,911,386
Securities sold under agreements to
repurchase................................... -- 33,509 35,065 82,660
----------------- ----------- ---------- ----------
Total interest expense............................ 1,594,000 2,470,975 2,910,106 2,994,046
----------------- ----------- ---------- ----------
Net Interest Income............................... 2,391,000 3,586,071 3,981,165 3,581,416
Provision for Loan Losses (Note 2)................ 14,000 3,889,297 776,338 1,029,185
----------------- ----------- ---------- ----------
Net interest income (expense) after provision for
loan losses.................................. 2,377,000 (303,226) 3,204,827 2,552,231
----------------- ----------- ---------- ----------
OTHER INCOME:
Service charges and other fees.................. 439,000 773,003 745,488 587,246
Security gains (losses) (Note 1)................ (5,000) 111,268 220,478 42,468
Other........................................... 124,000 23,240 50,822 26,012
----------------- ----------- ---------- ----------
Total other income................................ 558,000 907,511 1,016,788 655,726
----------------- ----------- ---------- ----------
Non-interest Expense: (Note 7)
Salaries and employee benefits.................. 1,271,000 1,821,928 1,661,087 1,263,851
Occupancy and equipment......................... 702,000 924,961 922,355 913,458
Other operating (Note 16)....................... 943,000 1,553,558 1,591,937 1,262,384
----------------- ----------- ---------- ----------
Total non-interest expense........................ 2,916,000 4,300,447 4,175,379 3,439,693
----------------- ----------- ---------- ----------
Income (Loss) Before Income Taxes................. 19,000 (3,696,162) 46,236 (231,736)
Income taxes (benefit) (Note 6)................... -- -- 20,000 (26,000)
----------------- ----------- ---------- ----------
Net Income (Loss) Before Cumulative Effect of a
Change in Accounting Principle............... 19,000 (3,696,162) 26,236 (205,736)
Cumulative Effect of a Change in Accounting for
Income Taxes (Note 6)........................ -- -- 14,000 --
----------------- ----------- ---------- ----------
Net Income (Loss)................................. $ 19,000 $(3,696,162) $ 12,236 $ (205,736)
----------------- ----------- ---------- ----------
----------------- ----------- ---------- ----------
Income (loss) per common share:
Income (loss) before cumulative effect of change
in accounting principle.................... $ .03 $ (5.04) $ .04 $ (.34)
Cumulative effect of change in accounting for
income taxes............................... -- -- .02 --
----------------- ----------- ---------- ----------
Net income (loss)............................... $ .03 $ (5.04) $ .02 $ (.34)
----------------- ----------- ---------- ----------
----------------- ----------- ---------- ----------
Weighted average common and
common equivalent shares outstanding............ 736,219 732,912 650,485 606,250
----------------- ----------- ---------- ----------
----------------- ----------- ---------- ----------
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-60
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
COMMON STOCK ADDITIONAL RETAINED SECURITIES TOTAL
-------------------- PAID-IN EARNINGS AVAILABLE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) FOR SALE EQUITY
------- ---------- ---------- ----------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990.................... 600,000 $3,000,000 $2,100,000 $ 110,841 $ -- $ 5,210,841
Net loss...................................... -- -- -- (205,736) -- (205,736)
Sale of common stock (Note 10)................ 37,500 187,500 79,837 -- -- 267,337
------- ---------- ---------- ----------- ---------- ------------------
Balance, December 31, 1991, as previously
reported.................................... 637,500 3,187,500 2,179,837 (94,895) -- 5,272,442
Prior period adjustment (Note 15)............. -- -- -- (55,745) -- (55,745)
------- ---------- ---------- ----------- ---------- ------------------
Balance, December 31, 1991, as restated....... 637,500 3,187,500 2,179,837 (150,640) -- 5,216,697
Sale of common stock (Note 10)................ 87,908 439,540 287,584 -- -- 727,124
Net income.................................... -- -- -- 12,236 -- 12,236
------- ---------- ---------- ----------- ---------- ------------------
Balance, December 31, 1992.................... 725,408 3,627,040 2,467,421 (138,404) -- 5,956,057
Sale of common stock (Note 10)................ 10,278 51,390 33,609 -- -- 84,999
Unrealized gains on securities available for
sale, net of income taxes (Note 1).......... -- -- -- -- 76,989 76,989
Net loss...................................... -- -- -- (3,696,162) -- (3,696,162)
------- ---------- ---------- ----------- ---------- ------------------
Balance, December 31, 1993.................... 735,686 3,678,430 2,501,030 (3,834,566) 76,989 2,421,883
Sale of common stock (unaudited).............. 556 3,000 2,000 -- -- 5,000
Change in unrealized gains (losses) on
securities available for sale (unaudited)... -- -- -- -- (97,000) (97,000)
Net income (unaudited)........................ -- -- -- 19,000 -- 19,000
Other (unaudited)............................. -- (430) (30) (434) 11 (883)
------- ---------- ---------- ----------- ---------- ------------------
Balance, September 30, 1994 (unaudited)....... 736,242 $3,681,000 $2,503,000 $(3,816,000) $ (20,000) $ 2,348,000
------- ---------- ---------- ----------- ---------- ------------------
------- ---------- ---------- ----------- ---------- ------------------
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-61
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 14)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------------------
1994 1993 1992 1991
----------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $ 19,000 $ (3,696,162) $ 12,236 $ (205,736)
Adjustments to reconcile net income (loss) to
net cash (required) provided by
operating activities:
Depreciation and amortization........... 125,000 146,800 163,980 198,171
Provision for loan losses............... 14,000 3,889,297 776,338 1,029,185
Net investment securities gains......... -- (155,505) (220,478) (42,468)
Net premium amortization and discount
accretion............................ -- (70,775) (40,617) --
Common stock issued for legal
services............................. -- -- 67,764 --
Decrease (increase) in accrued interest
receivable and other assets........ 475,000 (742,787) 539,842 (1,015,284)
Increase (decrease) in accrued interest
payable and other liabilities...... 53,000 293,227 (78,026) 318,333
----------------- ------------ ------------ ------------
Net cash provided (required) by
operating activities......................... 686,000 (335,905) 1,221,039 282,201
----------------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash flows from investment securities (Note
14)....................................... 2,705,223 (1,569,477) (4,061,189) (7,051,323)
Net loan (originations) repayments........... 8,073,000 6,203,265 (5,749,316) (17,718,099)
Purchase of equipment, net................... -- (111,187) (80,700) (135,716)
----------------- ------------ ------------ ------------
Net cash provided (required) by
investing activities......................... 10,778,223 4,522,601 (9,891,205) (24,905,138)
----------------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in transaction and
savings deposits.......................... (6,800,000) (5,213,646) 7,776,604 10,515,117
Increase (decrease) in time deposits......... (6,589,000) (84,587) 2,657,831 14,111,335
Increase (decrease) in securities sold under
repurchase agreements..................... 764,000 1,462,655 (731,134) 731
Proceeds from sale of common stock........... 5,000 84,999 659,360 267,337
----------------- ------------ ------------ ------------
Net cash provided (required) by
financing activities......................... (12,620,000) (3,750,579) 10,362,661 24,894,520
----------------- ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents............................. (1,155,777) 436,117 1,692,495 271,583
Cash and cash equivalents,
beginning of period.......................... 9,937,777 9,501,660 7,809,165 7,537,582
----------------- ------------ ------------ ------------
Cash and cash equivalents,
end of period................................ $ 8,782,000 $ 9,937,777 $ 9,501,660 $ 7,809,165
----------------- ------------ ------------ ------------
----------------- ------------ ------------ ------------
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-62
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
GENERAL
Governors Bank Corporation (the 'Company') is a bank holding company
incorporated in the state of Florida. The consolidated financial statements
include the accounts of Governors Bank Corporation and its wholly-owned
subsidiary, Governors Bank, a state chartered independent community bank,
collectively (the 'Bank'). All significant intercompany balances and
transactions have been eliminated in consolidation.
The interim financial statements as of and for the nine months ended
September 30, 1994 are unaudited. In the opinion of management, such statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair representation of the results of the interim period. The
results of operations for the nine months ended September 30, 1994 are not
necessarily indicative of the results that can be expected for the entire year.
INVESTMENT SECURITIES
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 ('SFAS 115') 'Accounting for Certain
Investments in Debt and Equity Securities'. The Bank has elected to adopt SFAS
115 at December 31, 1993.
Investment securities held-to-maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts, using methods that
approximate the interest method. The Bank has the positive intent and ability to
hold these investment securities to maturity and, accordingly, they are not
adjusted for temporary declines in their market value.
Investment securities available for sale are carried at estimated market
value. Unrealized gains and losses on these securities are recorded, net of
income tax, as a component of stockholders' equity until sold. Gains and losses
realized from the sale of investment securities are computed by the
specific-identification method.
LOANS
Loans are stated at the amount of unpaid principal net of unearned interest
income and the allowance for loan losses. Interest on loans is generally accrued
daily based on the principal balance outstanding. The accrual of interest income
is generally discontinued when a loan becomes ninety days past due as to
principal or interest. When interest accruals are discontinued, uncollected
interest credited to income in the current year is reversed and interest accrued
in the prior year is charged to the allowance for loan losses.
Loan origination and commitment fees, net of costs, are deferred and
amortized as an adjustment of the related loan's yield. The Bank is amortizing
these amounts over the expected life of the related loans using methods that
approximate the interest method. Commitment fees based on a percentage of a
customer's unused line of credit and fees related to standby letters of credit
are recognized over the commitment period.
F-63
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONCLUDED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate
to provide for potential loan losses inherent in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio and other
relevant factors.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets.
OTHER REAL ESTATE
Other real estate, included in other assets in the accompanying
consolidated balance sheets, consists of property acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. Such property is
carried at the lower of the basis in the loan at the time of settlement or fair
value less selling costs. Loan losses arising from the acquisition of such
property are charged against the allowance for loan losses upon acquisition.
Losses arising from dispositions and revaluations of such property are charged
to expense as incurred.
INCOME TAXES
Deferred income taxes are provided for timing differences, principally the
provision for loan losses and depreciation, that are accounted for in different
periods for financial reporting and income tax purposes.
The Financial Accounting Standards Board has adopted Statement No. 109,
'Accounting for Income Taxes' ('SFAS 109'), which significantly changes existing
practice by requiring, among other things, a liability approach to calculating
deferred income taxes. Provisions for income taxes are based on amounts reported
in the consolidated statements of operations (after exclusion of nontaxable
income items such as interest on state and municipal securities) and include
deferred taxes on temporary differences in the recognition of income and expense
for tax and financial statement purposes. Deferred taxes are computed on the
liability method as prescribed in SFAS 109.
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. Generally, federal
funds are sold for one day periods.
F-64
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
1. INVESTMENT SECURITIES
The carrying amounts of investment securities as shown in the accompanying
consolidated balance sheets and their approximate market values are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................. $11,675,134 $ 22,831 $ (35,979) $11,661,986
Obligations of states and political
sub-divisions............................ 500,000 8,005 -- 508,005
Interest bearing deposits with
other banks.............................. 200,320 -- -- 200,320
Other securities........................... 574,544 10,191 -- 584,735
----------- ---------- ---------- -----------
12,949,998 41,027 (35,979) 12,955,046
----------- ---------- ---------- -----------
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................. 6,103,874 120,445 -- 6,224,319
----------- ---------- ---------- -----------
6,103,874 120,445 -- 6,224,319
----------- ---------- ---------- -----------
$19,053,872 $ 161,472 $ (35,979) $19,179,365
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
Gross unrealized gains of $120,445 on securities available for sale at
December 31, 1993 are shown net of income tax of $43,456 in the accompanying
consolidated financial statements.
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1992
Held-to-maturity:
U.S. Treasury securities and obligations of
U.S. government corporations and
agencies................................. $12,168,573 $ 142,785 $ (3,548) $12,307,810
Obligations of states and political
sub-divisions............................ 2,004,736 43,238 (1,181) 2,046,793
Interest bearing deposits with
other banks.............................. 1,903,496 -- -- 1,903,496
Other securities........................... 1,224,766 2,296 -- 1,227,062
----------- ---------- ---------- -----------
$17,301,571 $ 188,319 $ (4,729) $17,485,161
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
F-65
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
1. INVESTMENT SECURITIES--(CONCLUDED)
Gross realized gains and losses on sales of securities (included in other
income in the accompanying consolidated statements of operations) were as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1992 1991
-------- -------- -------
<S> <C> <C> <C>
Gross realized gains:
U.S. government and agency securities....................... $ -- $174,818 $46,161
Obligations of states and political subdivisions............ 108,768 -- --
Other....................................................... 2,500 45,660 --
-------- -------- -------
$111,268 $220,478 $46,161
-------- -------- -------
-------- -------- -------
Gross realized losses:
U.S. government and agency securities....................... $ -- $ -- $ 3,693
-------- -------- -------
-------- -------- -------
</TABLE>
The amortized cost and estimated market values of investment securities at
December 31, 1993 are summarized by contractual maturity as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less............................................... $ 9,115,736 $ 9,148,251
Due after one year through five years................................. 9,863,136 9,956,114
Due after five years through ten years................................ 75,000 75,000
----------- -----------
$19,053,872 $19,179,365
----------- -----------
----------- -----------
</TABLE>
At December 31, 1993, investment securities with carrying values and market
values of approximately $3,952,000 and $4,031,000, respectively, were pledged to
collateralize repurchase agreements, public fund deposits and for other purposes
required or permitted by law.
2. LOANS AND ALLOWANCE FOR LOAN LOSSES
An analysis of loans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1993 1992
----------- -----------
<S> <C> <C>
Real estate, construction............................................. $ 848,550 $ 606,202
Real estate, mortgage................................................. 20,782,297 25,073,875
Commercial and industrial............................................. 17,653,500 17,998,131
Installment........................................................... 15,240,521 16,353,498
Credit cards.......................................................... 468,377 486,639
Other................................................................. 349,809 1,667,615
----------- -----------
55,343,054 62,185,960
Less allowance for loan losses........................................ 4,182,900 933,244
----------- -----------
$51,160,154 $61,252,716
----------- -----------
----------- -----------
</TABLE>
F-66
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
2. LOANS AND ALLOWANCE FOR LOAN LOSSES--(CONCLUDED)
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------------
1994 1993 1992 1991
----------------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of year................ $ 4,182,900 $ 933,244 $ 575,000 $ 370,000
Charge-offs............................... (2,713,000) (730,575) (432,381) (826,519)
Recoveries................................ 154,000 90,934 14,287 2,334
Provision for loan losses................. 14,000 3,889,297 776,338 1,029,185
----------------- ---------- ---------- ---------
Balance, end of year...................... $ 1,637,900 $4,182,900 $ 933,244 $ 575,000
----------------- ---------- ---------- ---------
----------------- ---------- ---------- ---------
</TABLE>
Loans on non-accrual status aggregated $1,335,000 and $482,000 as of
December 31, 1993 and 1992, respectively.
3. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1993 1992
---------- ----------
<S> <C> <C>
Leasehold improvements................................................... $ 602,922 $ 580,189
Furniture, fixtures and equipment........................................ 572,087 605,481
Computer software........................................................ 34,171 28,433
---------- ----------
1,209,180 1,214,103
Less accumulated depreciation and amortization........................... 750,982 720,292
---------- ----------
$ 458,198 $ 493,811
---------- ----------
---------- ----------
</TABLE>
4. DEPOSITS
Approximate maturities of certificates of deposit issued in amounts of
$100,000 or more are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1992
-------- ----------
<S> <C> <C>
Less than three months..................................................... $200,000 $1,339,000
Over three months but less than twelve months.............................. -- 896,000
Twelve months or more...................................................... 333,000 241,000
-------- ----------
$533,000 $2,476,000
-------- ----------
-------- ----------
</TABLE>
5. SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase generally mature within one
to four days from the transaction date.
F-67
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
6. INCOME TAXES
Income taxes (benefits) are comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
--------- --------- --------
<S> <C> <C> <C>
Current:
Federal................................................... $(144,000) $ 173,000 $(26,000)
State..................................................... -- 20,000 4,355
--------- --------- --------
(144,000) 193,000 (21,645)
--------- --------- --------
Deferred:
Federal................................................... 144,000 (173,000) --
State..................................................... -- -- (4,355)
--------- --------- --------
144,000 (173,000) (4,355)
--------- --------- --------
$ -- $ 20,000 $(26,000)
--------- --------- --------
--------- --------- --------
</TABLE>
At December 31, 1993, the Bank had deferred tax assets of approximately
$1,574,000 that related primarily to the allowance for loan losses and
depreciation of which approximately $1,465,000 were fully reserved at that date.
Management elected early adoption of the provisions of SFAS 109 for the
year ended December 31, 1992 and all 1993 and 1992 disclosures are in accordance
with the new standard. Under the provisions of SFAS 109 the Company elected not
to restate prior years' consolidated financial statements. The cumulative effect
of the initial adoption of SFAS 109 is shown separately in the consolidated
statements of operations.
7. COMMITMENTS AND CONTINGENCIES
In the normal course of business the Bank is a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The contract amounts of those instruments outstanding at
September 30, 1994, December 31, 1993, 1992 and 1991, reflect the extent of
involvement the Bank has in particular classes of financial instruments and are
summarized as follows:
Financial instruments whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------------------
1994 1993 1992 1991
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commitments to extend credit.................. $ 5,264,000 $6,264,000 $6,470,000 $8,383,000
Standby letters of credit..................... 54,000 145,000 142,000 331,000
</TABLE>
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual
F-68
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES--(CONCLUDED)
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for 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 Bank evaluates each customer's
creditworthiness 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. Collateral held varies but may include
single family residences, other residential property, commercial property and
land.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
All of the Bank's loans, commitments and standby letters of credit have
been granted to customers in the Bank's market area. The concentrations of
credit by type of loan are set forth in Note 2.
The Bank has a Salary Savings Plan which provides for the Bank to make
contributions pursuant to applicable salary savings elections and discretionary
sponsor contributions as may be determined by the Board of Directors. The
sponsor contributions for each of the years ended December 31, 1993, 1992 and
1991 were approximately $15,000, $15,000 and $12,000.
The Company utilizes certain office facilities and equipment under
operating leases expiring through 1996. Total rent expense under such operating
leases, included in occupancy and equipment expense, was approximately $583,000,
$556,000 and $507,000 in 1993, 1992 and 1991.
Future minimum net operating lease payments are as follows: 1994 -
$545,000; 1995 - $377,000; 1996 - $317,000; 1997 - $317,000; 1998 - $205,000.
8. PROPOSED MERGER
(a) The Company is a party to a merger agreement with Republic Security
Financial Corporation (RSFC). Under the terms of the merger agreement, RSFC
would pay total consideration in cash equal to 125 percent of the book value of
the Company as of December 31, 1993, adjusted for the consolidated net income or
loss occurring between December 31, 1993 through the month end prior to the
closing date (the 'Purchase Price').
Under the merger agreement the amount to be paid per common share (the
'Share Purchase Price') would be calculated as the Purchase Price plus the
aggregate exercise price of all options outstanding at the effective time (as
defined), divided by the number of shares of the Company's common stock
outstanding (including any such shares owned by RSFC), plus the number of shares
of the Company's common stock which could be acquired if all such outstanding
options were exercised. Any options which have an exercise price greater than
the Share Purchase Price shall be excluded from the determination thereof.
F-69
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
8. PROPOSED MERGER--(CONCLUDED)
The merger agreement provides that should the Share Purchase Price be less
than $8.50, then the Company has the option to abandon the merger upon payment
of a $100,000 break-up fee to RSFC.
(b) As of June 23, 1994 it is Management's opinion that the Share Purchase
Price will be less than $8.50 and that the merger will not be consummated at
such price.
9. LITIGATION
(a)(i) The Company is a defendant to a class action lawsuit that seeks to
enjoin the pending merger of the Company and Republic Security Financial
Corporation and to recover money damages of unspecified amounts against certain
members of the Board of Directors. The Company has a Director and Officer
Liability Insurance Policy ('Policy') in the amount of $2,000,000. Under the
terms of the Policy, the Company is required to pay the related legal costs
until settlement of this matter, at which time, the Company will be reimbursed
for its legal expenses. At December 31, 1993 the Company does not have
sufficient cash reserves or available lines of credit to fund its necessary
legal defense.
(a)(ii) Further, on May 3, 1994 the Insurer raised questions as to whether
any losses caused by the lawsuit are covered by the Policy. The Company has
indemnified all of its officers and directors from any losses that they may
incur as a result of their good faith actions in fulfilling their
responsibilities as officers and directors.
(a)(iii) The effect of the lack of funds to pay for the legal defense of
the Company and the ultimate outcome of the litigation cannot be presently
determined. Accordingly, no provision for any liability that may result upon
adjudication or from any loss resulting from a shortfall in insurance coverage
has been made in the accompanying consolidated financial statements.
(b) During December, 1993 the Company was named as defendant by an
individual claiming an option to purchase 362,757 shares of the Company's common
stock. During January, 1994 a corporation filed a motion to intervene in this
case claiming it had obtained a judgement against the plaintiff. Management and
the Company's attorney believe the potential effect of this lawsuit on the
future operations of the Company to be insignificant.
(c) On June 17, 1994, the Company was advised that a former officer of the
Bank had filed a suit for wrongful termination. The amount of damages that have
been claimed are estimated to be in excess of $15,000. The ultimate outcome
cannot be presently determined. Accordingly, no provision for any liability that
may result upon adjudication has been made in the accompanying consolidated
financial statements.
(d) The Company is a party to litigation arising in the normal course of
operations. Management believes that any liabilities arising from such
litigation will not materially effect future operations.
(e) Litigation update (unaudited) -- As of September 21, 1995 the lawsuits
mentioned in (a)(i), (b) and (c) above had been settled for approximately
$224,000, plus legal fees of approximately $110,000.
F-70
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY
The Company's principal asset is its investment in its wholly-owned
subsidiary. Regulatory approval is required to pay dividends in excess of
earnings retained in the current year plus retained net profits for the
preceding two years. At December 31, 1993, none of the Bank's net assets were
available for dividends without prior regulatory approval. The Bank is also
required to maintain minimum amounts of capital to total 'risk weighted' assets,
as defined by regulatory authorities. (See Note 11 for discussion of the Bank's
capital adequacy).
During 1991, the Bank sold 37,500 shares of common stock for $267,337
($10.00 per share, net of offering costs).
During 1992, the Company sold 79,614 shares of common stock for $658,360
($8.27 per share, net of offering costs) and 100 shares of common stock for
$1,000 ($10.00 per share). The Company also issued a total of 8,194 shares of
stock for legal services valued at $67,764 ($8.27 per share).
During 1993, the Company sold 10,278 shares of common stock for $84,999
($8.27 per share).
The Company has a non-statutory stock option plan. These options allow for
the purchase of 90,000 shares of common stock at an option price of $8.33 per
share. The options expire on July 1, 1997. As the option price reflected the
market price at date of grant, no expense was recognized.
The Company also has an incentive stock option plan for employees of the
Company and its directors. These options allow for the purchase of 30,000 shares
of common stock at a price to be determined each July 1 beginning July 1, 1989
for service during the previous year. The options expire if not exercised within
five years from date of grant or upon termination of service.
The following options have been granted under the plan:
<TABLE>
<CAPTION>
SHARES
DATE OF GRANT GRANTED OPTION PRICE
- ------------- -------------- ------------
<S> <C> <C>
July 1, 1989............................................................ 3,300 $ 8.45
July 1, 1990............................................................ 3,270 $ 8.45
July 1, 1991............................................................ 3,150 $ 10.00
July 1, 1992............................................................ 3,240 $ 8.27
July 1, 1993............................................................ 2,250 $ 8.27
</TABLE>
To date, no options have been exercised. As the option prices reflect the
market prices at date of grant, no expense has been recognized.
11. REGULATORY MATTERS
On May 7, 1993, as a result of unsatisfactory conditions noted by the
Federal Deposit Insurance Corporation ('FDIC'), a Memorandum of Understanding
('Memorandum') representing an agreement between the Board and both the Regional
Director of the FDIC Atlanta Regional Office and the Florida
F-71
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
11. REGULATORY MATTERS--(CONCLUDED)
State Comptroller ('Regulators') was issued. The Memorandum sets forth a program
of corrective action which, among other things, requires the establishment of
certain committees, the establishment of certain policies, programs, financial
plans, and procedures for enforcement of such, and the establishment of certain
management, dividend, transactional and capital restrictions. One such
restriction is that the Bank maintain a minimum Tier 1 leverage ratio (as
defined) of 6.5 percent. If such ratio falls below this percentage, the Board of
Directors is required within sixty days from the date of that determination to
increase Tier 1 capital by an amount sufficient to cover the shortfall. At
December 31, 1993 the Bank's actual Tier 1 leverage ratio was 2.61 percent.
Further, the Bank has not complied with certain other of the requirements
of the Memorandum including, but not limited to, the employment of a Chief
Executive Officer and a Senior Lending Officer, the maintaining of a loan review
and grading system and an adequate allowance for loan losses.
At December 31, 1993, the minimum regulatory capital requirements and the
Bank's actual capital amounts and percentages were as follows:
<TABLE>
<CAPTION>
MINIMUM CAPITAL
REGULATORY CAPITAL REQUIREMENTS: REQUIRED ACTUAL CAPITAL
- -------------------------------- --------------- --------------
<S> <C> <C>
Total risk-based capital percentage.................................... 8.0% 5.05%
Total risk-based capital............................................... $ 4,740,000 $ 2,991,376
Tier 1 risk-based capital percentage................................... 4.0% 3.80%
Tier 1 risk-based capital.............................................. $ 2,370,000 $ 2,250,738
Tier 1 leverage (per order) percentage................................. 6.5% 2.61%
Tier 1 leverage (per order)............................................ $ 5,595,590 $ 2,250,738
</TABLE>
12. GOING CONCERN
The Bank's consolidated financial statements have been presented on the
basis of a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Bank sustained
a net loss of $3,696,162 for the year ended December 31, 1993. Further, the Bank
is not in compliance with the minimum regulatory capital requirements as well as
other requirements of a Memorandum of Understanding as more fully described in
Note 11. As a result of the net loss in 1993 the Bank will require an infusion
of equity capital. These conditions raise substantial doubt about the Bank's
ability to continue as a going concern. Management's plans to bring the Bank
into compliance with regulatory capital requirements are as follows:
As discussed in Note 8 to the consolidated financial statements the Company
is a party to a proposed merger with another financial institution.
Additionally, Management is in the process of preparing a capital plan as an
alternative to the merger. This plan may include, but is not limited to, a
rights offering to all stockholders and the sale of additional shares to certain
stockholders of common shares for total consideration of $3,000,000 to
$5,000,000.
F-72
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
12. GOING CONCERN--(CONCLUDED)
Should the planned capital infusion be achieved, the ability of the Company
and the Bank to maintain required regulatory capital levels is dependent upon,
among other factors, the Bank's attaining profitable operations, the future
levels of nonperforming assets and the condition of the economy in which it
operates.
13. RELATED PARTY TRANSACTIONS
Directors and executive officers of the Bank, including companies in which
they are officers or have significant ownership interests, were customers of and
had other transactions with the Bank in the ordinary course of business. The
total amount of loans to these related parties at December 31, 1993 and 1992 was
approximately $2,570,000 and $3,234,000. Activity with respect to loans to
related parties for the year ended December 31, 1993 included additions of
approximately $164,000 and principal repayments of approximately $828,000. Of
the amounts outstanding at December 31, 1993, $876,036 were criticized as
'substandard' (loans inadequately protected by the current sound worth and
paying capacity of the obligor or by pledged collateral) and $165,041 as 'other
loans especially mentioned' (loans that are currently protected but that exhibit
potential unwarranted credit risks).
During 1992, a total of 8,194 shares of the Company's common stock valued
at $67,764 were issued for legal services to an officer and to a director, and a
law firm of the director.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $2,368,000, $3,003,000 and
$2,617,000 for the years ended December 31, 1993, 1992 and 1991.
Cash paid for income taxes was approximately $468,000 and $215,000 for the
years ended December 31, 1992 and 1991. No cash was paid for income taxes for
the year ended December 31, 1993.
F-73
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
14. SUPPLEMENTAL CASH FLOW INFORMATION--(CONCLUDED)
During 1992, a total of 8,194 shares of the Company's common stock was
issued for legal services valued at $67,764. During 1993, approximately
$6,224,000 of investment securities held-to-maturity were reclassified to
available-for-sale.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------------------
1994 1993 1992 1991
----------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM SECURITIES
Available-for-sale securities:
Maturities........................ $ 1,487,000 $ -- $ -- $ --
Sales............................. 502,000 -- -- --
Purchases......................... (977,000) -- -- --
Securities held-to-maturity:
Maturities........................ 4,719,000 12,032,252 7,817,314 1,757,998
Sales............................. -- 2,631,130 7,549,457 3,894,984
Purchases......................... (3,025,777) (16,232,859) (19,427,960) (12,704,305)
----------------- ------------ ------------ ------------
$ 2,705,223 $ (1,569,477) $ (4,061,189) $ (7,051,323)
----------------- ------------ ------------ ------------
----------------- ------------ ------------ ------------
</TABLE>
Prior to the adoption of SFAS No. 115 at December 31, 1993, all securities
were classified as held for investment.
15. PRIOR PERIOD ADJUSTMENT
The consolidated financial statements for the year ended December 31, 1991
have been restated to correct an error in the Bank's method of recognizing loan
origination fees. The effect of this adjustment is to increase the net loss, as
previously reported, by $55,745 (net of a $31,435 income tax benefit).
F-74
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 IS UNAUDITED)
16. OTHER OPERATING EXPENSE
Other operating expense is comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------------
1994 1993 1992 1991
----------------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Legal and professional fees............ $ 342,000 $ 601,181 $ 548,679 $ 206,543
Data processing........................ 109,000 169,373 191,274 170,855
FDIC insurance......................... 159,000 210,893 164,182 109,505
Printing and supplies.................. 55,000 102,015 103,756 102,792
Travel and entertainment............... 22,000 48,695 100,046 98,813
General insurance...................... 61,000 71,408 74,392 79,267
Other.................................. 195,000 349,993 409,608 494,609
----------------- ---------- ---------- ----------
$ 943,000 $1,553,558 $1,591,937 $1,262,384
----------------- ---------- ---------- ----------
----------------- ---------- ---------- ----------
</TABLE>
F-75
<PAGE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE
OFFERINGS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR RYAN, BECK. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SHARES OF COMMON STOCK AND SERIES C PREFERRED STOCK TO WHICH IT RELATES, OR
AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................ 3
Risk Factors...................................... 11
The Company and the Bank.......................... 15
Recent Developments............................... 16
Use of Proceeds................................... 19
Market Price and Dividend Data.................... 20
Capitalization.................................... 21
Selected Consolidated Financial Data.............. 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................... 25
Business.......................................... 37
Proposed Acquisition of Banyan Bank............... 49
Pro Forma Combined Condensed
Financial Information........................... 53
Regulation........................................ 59
Management........................................ 78
Principal Shareholders............................ 82
Description of Securities......................... 83
Underwriting...................................... 92
Legal Matters..................................... 92
Experts........................................... 93
Available Information............................. 93
Index to Financial Statements..................... F-1
</TABLE>
1,800,000 SHARES
OF COMMON STOCK
900,000 SHARES
OF 7% CUMULATIVE
CONVERTIBLE PREFERRED STOCK,
SERIES C
[REPUBLIC LOGO]
-------------------
PROSPECTUS
-------------------
[RYAN, BECK & CO. LOGO]
November 6, 1995
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