UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
Date of Report November 30, 1994
_________________________________________________________________
REPUBLIC SECURITY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 0-14671 59-2335075
_______________________________________________________________________________
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
4400 Congress Avenue, West Palm Beach 33407
_______________________________________________________________________________
(Address of principal executive offices) (Zip Code)
(407) 840-1200
_________________
(Registrant's telephone number, including area code)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On November 30, 1994, the Company acquired Governors Bank
Corporation (Governors) for $5,154,000, plus $153,000 in merger
related costs. The purchase price was determined based upon a multiple
of Governors Bank's book value as of the last day of the month
prior to closing. The Company used proceeds from the September 1993
public offering to purchase Governors Bank. The purpose of the September
1993 offering was to increase regulatory capital and to allow for growth
through acquistions, increased lending activities, opening of new
branches and expansion of existing branches.
Governors was a state chartered commercial bank headquartered in
West Palm Beach, Florida. Governors had total assets at November
30, 1994 of approximately $64 million, total deposits of $58
million and three full service branches located 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.
The following summarizes the fair value of the Governors' assets
acquired and liabilities assumed at November 30, 1994:
(IN THOUSANDS)
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
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Pro Forma Financial Information - The following pro forma financial
information is filed herewith:
PAGE NUMBER
Pro forma Condensed Combined Statement of Income
for the year ended March 31, 1994 (unaudited) . . . . . . . 4
Pro forma Condensed Combined Balance Sheet
as of September 30, 1994 (unaudited) . . . . . . . . . . . . 6
Pro forma Condensed Combined Statement of Income
for the six months ended September 30, 1994 (unaudited) . . 7
(b) Financial Statements of Business Acquired
The following financial statements of Governors Bank Corporation are filed
herewith:
PAGE NUMBER
Condensed Consolidated Balance Sheet as of
September 30, 1994 (unaudited)............................... 10
Condensed Consolidated Statement of Operations
for the nine months ended
September 30, 1994 (unaudited)............................... 11
Condensed Consolidated Statement of Stockholders' Equity
for the nine months ended
September 30, 1994 (unaudited)............................... 12
Condensed Consolidated Statement of Cash Flows
for the nine months ended
September 30, 1994 (unaudited)............................... 13
Notes to Condensed Consolidated Financial Statements.............. 14
Independent Auditor's Report...................................... 17
Consolidated Balance Sheets as of
December 31, 1993 and 1992.................................. 19
Consolidated Statements of Operations
for the years ended
December 31, 1993, 1992 and 1991............................ 21
Consolidated Statements of Stockholders' Equity
for the years ended
December 31, 1993, 1992 and 1991............................ 22
Consolidated Statements of Cash Flows
for the years ended
December 31, 1993, 1992 and 1991............................ 23
Summary of Significant Accounting Policies........................ 24
Notes to Consolidated Financial Statements........................ 26
<PAGE>
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following pro forma condensed consolidated balance sheet as of
September 30, 1994, and the pro forma condensed consolidated statements
of income for the year ended March 31, 1994 and six months ended
September 30, 1994 give effect to the acquisition of Governors Bank.
The pro forma information is based on the historicil financial
statements of the Company and Governors Bank giving effect to the transaction
under the purchase method of accounting and the assumptions
and adjustments in the accompanying notes to the pro forma financial
statements. Purchase accounting adjustments to estimated fair values
have been made with respect to the assets and liabilities of Governors
and related income and expense accounts of Governors based upon
estimates and evaluations as of September 30, 1994.
The unaudited pro form combined condensed financial statements should be
read in conjunction with such historical financial statements and notes.
The unaudited pro forma combined condensed statements 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.
<PAGE>
<TABLE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
YEAR ENDED MARCH 31, 1994
RSFC GOVERNORS PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $11,525 $ 4,870 $16,395
Interest and dividends on investments 962 910 1,872
------ ------- ------
12,487 5,780 18,267
------ ------- ------
INTEREST EXPENSE:
Interest on deposits 4,733 2,370 7,103
Interest on short-term borrowings 559 559
Interest on long-term borrowings 220 220
----- ------- ------
5,512 2,370 7,882
----- ------- ------
Net interest income 6,975 3,410 10,385
Provision for loan losses 214 3,741 3,955
----- ------- ------
Net interest income after provision for loan losses 6,761 (331) 6,430
----- ------- ------
NON-INTEREST INCOME:
Mortgage banking income 3,654 3,654
Other income 735 814 1,549
----- ------- ------
4,389 814 5,203
----- ------- ------
OPERATING EXPENSES:
Employee compensation and benefits 4,109 1,834 (1069)(b) 4,874
Occupancy and equipment 1,201 918 (54)(c) 2,065
Professional fees 707 707
Outside services 163 163
Communications 332 332
Data processing 211 211
Insurance 556 556
Real estate owned - net 127 127
Goodwill 168(d) 168
Other 1,333 1,516 (610)(e) 2,239
----- ------- --------- ------
8,739 4,268 (1,565) 11,442
----- ------- ------
Income before income taxes and accounting change 2,411 (3,785) 191
Income taxes 818 (754)(f) 64
----- ------- ------
Income before accounting change 1,593 (3,785) 127
Change in accounting for income taxes 500 500
------ -------- ------
NET INCOME $2,093 $(3,785) $ 627
====== ======== ======
PER SHARE DATA:
Net income before cumulative effect of accounting change $ .42 $ .04
====== ======
NET INCOME $ .55 $ .17
====== ======
</TABLE>
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
MARCH 31, 1994 (UNAUDITED)
- -------------------------------------------------------------------------------
a) Governors' historical income statement is based upon audited December
31, 1993 financial statements and unaudited quarterly financial
information for the period ended March 31, 1994, excluding the
unaudited quarterly financial information for the period ended
March 31, 1993.
b) Adjustment for salaries and benefits for officers and employees who
will be redundant to the combined entity and not retained after the
acquisition:
(000's)
Officer salaries $ 810
Employee 195
Benefits 64
------
$1,069
======
c) Adjustment for subleased space at Governors Bank's main office
location pursuant to the sublease terms with an unrelated party.
d) Amortization of $2.5 million of goodwill amortized over 15 years.
Actual goodwill amounted to $3.3 million at closing which results
in increased amortization expense of $52,000 per year.
e) Adjustments for the following operating expenses, that will be
redundant to the combined entity and not incurred on an ongoing basis:
(000's)
Audit and legal fees $170
Leased equipment, net of depreciation 147
Data processing charges 80
Supplies 50
Director fees 24
Other 139
-------
$610
=======
f) Income tax effect for the following adjustments:
(000's)
Salary 1,069
Lease 54
Goodwill (168)
Operating expense 610
------
Net adjustments 1,565
Governors' loss (3,785)
------
2,220
=======
Income tax effect @ 34% 754
<PAGE>
<TABLE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION> As of September 30, 1994
RSFC GB PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 3,776 $ 5,123 $ 8,899
Interest bearing deposits in other financial institutions 20,173 3,659 $ (5,154)(b) 18,678
Held-to-maturity investments 281 10,319 10,600
Available-for-sale investments 6,052 6,052
Loans - net 168,693 43,073 211,766
Property and equipment - net 4,887 333 5,220
Real estate owned - net 2,057 2,057
Loan servicing rights - net 2,077 2,077
Goodwill 2,534 (c) 2,534
Other assets 5,091 1,586 272 (d) 6,949
-------- ------- --------- ---------
TOTAL $207,035 $70,145 $ (2,348) $274,832
-------- ------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $156,630 $63,433 $220,063
Advances from the Federal Home Loan Bank 20,000 20,000
Securities sold under agrements to repurchase 3,123 3,123
Redeemable subordinated debentures 1,985 1,985
Advances from borrowers for taxes and insurance 2,457 2,457
Bank drafts payable 3,551 3,551
Other liabilities 2,316 1,241 3,557
-------- ------- ---------
Total liabilities 186,939 67,797 254,736
-------- ------- ---------
STOCKHOLDERS' EQUITY
Preferred stock 4,025 4,025
Common stock 36 3,681 (3,681) 36
Additional paid-in capital 14,317 2,503 (2,503) 14,317
Retained earnings 1,718 (3,836) 3,836 1,718
-------- ------- --------- ---------
Total stockholders' equity 20,096 2,348 (2,348)(e) 20,096
-------- ------- ---------
TOTAL $207,035 $70,145 $274,832
======== ======= =========
</TABLE>
<PAGE>
<TABLE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION> SIX MONTHS SEPTEMBER 30, 1994
RSFC GOVERNORS PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $6,559 $2,106 $8,665
Interest and dividends on investments 426 533 959
------ ------ ------
6,985 2,639 9,624
------ ------ ------
INTEREST EXPENSE:
Interest on deposits 2,551 1,055 3,606
Interest on short-term borrowings 366 366
Interest on long-term borrowings 131 131
----- ------ ------
3,048 1,055 4,103
----- ------ ------
Net interest income 3,937 1,584 5,521
Provision for loan losses 150 14 164
----- ------ ------
Net interest income after provision for loan losses 3,787 1,570 5,357
NON-INTEREST INCOME:
Mortgage banking income 1,087 1,087
Other income 369 366 735
----- ------ ------
1,456 366 1,822
OPERATING EXPENSES:
Employee compensation and benefits 2,142 843 (655) (f) 2,330
Occupancy and equipment 583 486 (27) (g) 1,042
Professional fees 279 279
Communications 146 146
Data processing 132 132
Insurance 281 281
Goodwill amortization 84 (h) 84
Other 786 692 (280)(i) 1,198
----- ------ -------- ------
4,349 2,021 (878) 5,492
----- ------ -------- ------
Income (loss) before income taxes and accounting change 894 (85) 1,687
Income taxes 325 285 (j) 610
----- ------ ------
NET INCOME (LOSS) $ 569 $ (85) $1,077
===== ====== ======
Net income per share $0.11 $ 0.22
===== ======
</TABLE>
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED SEPTEMBER 30, 1994
- -------------------------------------------------------------------------------
a) Governors historical income statement is prepared from the addition of
it's unaudited nine months ended September 30, 1994 financial
statements less unaudited quarterly financial information from
March 31, 1994.
b) Purchase price.
c) Goodwill calculated as follows based on pro forma balance sheet at
September 30, 1994:
(000's)
Purchase Price $5,154
Net Assets 2,348
-------
2,806
Adjustment(d) 272
-------
Goodwill $2,534
=======
Actual goodwill at date of closing was $3.3 million.
d) Adjustments:
(000's)
Deferred tax asset,
net (primarily as a result
of net operating loss carryforwards) $402
Write-off other assets (130)
-----
$272
=====
e) Elimination of Governors' historical stockholders' equity
accounts.
f) Adjustment for salaries and benefits for officers and employees who are
not scheduled to continue employment at the Bank after the acquisition:
(000's)
Officers Salaries $530
Employee 95
Benefits 30
--------
$655
========
g) Adjustment for subleased space at Governors Bank's main office
location pursuant to sublease terms with an unrelated party.
<PAGE>
h) Amortization of goodwill over 15 years
i) Adjustments for the following operating expenses, that will be
redundant to the combined entity and not incurred on an ongoing basis:
(000's)
Leased equipment net of depreciation $110
Legal and Audit 90
Data Processing 40
Other 40
--------
$280
========
j) Income tax effect for the following adjstments:
(000's)
Salaries and benefits $655
Lease 27
Goodwill (84)
Other operating expenses 280
Governors' Loss (85)
-----
$793
=====
Income tax effect @36% $285
=====
<PAGE>
GOVERNORS BANK CORPORATION AND SUBSIDIARY
------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(unaudited)
As of
September 30, 1994
ASSETS
Cash and amounts due from depository institutions $ 5,123
Interest bearing deposits in other financial institutions 3,659
Held-to-maturity investments 10,319
Available-for-sale investments 6,052
Loans - net 43,073
Property and equipment - net 333
Other assets 1,586
-------
TOTAL $70,145
-------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $63,433
Securities sold under agrements to repurchase 3,123
Other liabilities 1,241
-------
Total liabilities 67,797
-------
STOCKHOLDERS' EQUITY
Common stock 3,681
Additional paid-in capital 2,503
Deficit (3,836)
-------
Total stockholders' equity 2,348
-------
TOTAL $70,145
=======
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1994
INTEREST INCOME:
Interest on loans $ 3,196
Interest and dividends on investments 789
------
3,985
------
INTEREST EXPENSE:
Interest on deposits 1,594
-----
Net interest income 2,391
Provision for loan losses 14
-----
Net interest income after provision for loan losses 2,377
NON-INTEREST INCOME:
Other income 558
-----
558
-----
OPERATING EXPENSES:
Employee compensation and benefits 1,271
Occupancy and equipment 702
Other 943
-----
2,916
-----
Income before income taxes 19
Income taxes
-----
NET INCOME $ 19
======
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (unaudited)
(DOLLARS IN THOUSANDS)
<CAPTION> Common Stock Unrealized Gain
---------------- Additional on Securities
Shares Amount Paid-in Capital Deficit Available for Sale Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 735,686 $3,678 $2,501 $(3,835) $ 77 $2,421
Sale of common shares 556 3 2 5
Change in unrealized gains
on securities available for sale (97) (97)
Net Income 19 19
- -----------------------------------------------------------------------------------------------------------------------------------
Balance September 30, 1994 736,242 $3,681 $2,503 $(3,816) $(20) $2,348
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine months ended September 30, 1994
- --------------------------------------------------------------------------------------
<S>
Cash flows from operating activities: <C>
Net income $ 19
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 14
Decrease in accrued interest receivable
and other assets 475
Increase in accrued interest payable
and other liabilities 53
Other, net 125
- --------------------------------------------------------------------------------------
Net cash provided by operating activities 686
- --------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities:
Proceeds from sales, maturities and
principal repayments 9,156
Purchases (6,353)
Net loan repayments 8,073
Other, net (98)
- --------------------------------------------------------------------------------------
Net cash required by investing activities 10,778
- --------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in transaction and savings deposits (6,800)
Decrease in time deposits (6,589)
Increase in securities sold under repurchase agreements 764
Other, net 5
-------------------------------------------------------------------------------------
Net cash required by financing activities (12,620)
- --------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,156)
Cash and cash equivalents, beginning of year 9,938
- --------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 8,782
- --------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
September 30, 1994
(unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial
statements include the accounts of Governors Bank Corporation
(the "Company") and its wholly-owned subsidiary, Governors Bank
(the "Bank"). In the opinion of the Company's management, the
financial statements contain all adjustments (consisting of
normal recurring accruals) considered necessary to present
fairly the consolidated financial position of Governors Bank
Corporation and its subsidiary as of September 30, 1994 and the
results of operations for the nine months ended September 30,
1994 and changes in cash flows for the nine months then ended.
The accompanying unaudited condensed consolidated financial
statemtns have been prepared in accordance with generally
accepted accounting principles for interim financial
information. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. For
further information, refer to the consolidated financial
statements and footnotes thereto included in this document for
the year ended December 31, 1993.
The balance sheet at September 30, 1994 has been derived from
the audited financial statements at that date but does not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements.
2. Allowances for Loan Losses
--------------------------
At September 30, 1994 loans on non accrual status (generally
loans 90 days or more past due) aggregated $1,065,000. The total
provision for loan losses for the Bank was $14,000 for the nine
months ended September 30, 1994. In evaluating possible loan
losses, management has taken into consideration pas loan loss
experience, current economic conditions, workout arrangements,
pending sales, the financial strength of the borrowers, the
appraised value of the collateral, future cash flows expected to
be received on impaired loans and other relevant factors.
Although management believes the allowance for possible losses
is adequate, their evaluation of possible losses is a continuing
process which may necessitate adjustments to the allowance in
future periods.
Changes in the allowance for loan losses are as follows:
Balance, December 31, 1993 $ 4,183
Charge-offs (2,713)
Recoveries 154
Provision for loan losses 14
--------
$ 1,638
========
<PAGE>
3. 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. These 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, 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:
Commitments to extend credit $5,624,000
Standby letters of credit $ 54,000
The Bank's exposure to credit loss in the event of nonperformace
by the other party to the financial instrument for commitments
to extend credit and standby letters of credit is represented by
the contractual 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.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
establised 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.
<PAGE>
4. Merger
------
On November 30, 1994, Governors Bank Corporation was acquired by
Republic Security Financial Corporation (RSFC). RSFC's
headquarters are in West Palm Beach, Florida. Assets and
liabilities acquired by RSFC included approximately $15 million
in investments, $40 milliuon in loans and $58 million in
deposits. The purchase price was $5,154,000.
<PAGE>
BDO
SEIDMAN
Centurion Plaza
1601 Forum Place
Suite 904
West Palm Beach, Florida 33401-2122
U.S.A.
Telephone: (407) 688-1600
Fax: (407) 688-1848
Accountants and Consultants
Independent Auditors' Report
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.
<PAGE>
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.
/s/ BDO Seidman
Certified Public Accountants
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.
<PAGE>
December 31, 1993 1992
- -------------------------------------------------------------------------------
Assets
Cash and cash equivalents
Cash and due from banks $ 3,901,777 $ 6,021,660
Federal funds sold 6,036,000 3,480,000
---------- ----------
Total cash and cash equivalents 9,937,777 9,501,660
---------- ----------
Investment securities: (Note 1)
Held-to-maturity 12,949,998 17,301,571
Available-for-sale 6,224,319
---------- ----------
Total investment securities 19,174,317 17,301,571
Loans, net (Notes 2, 7 and 13) 51,160,154 61,252,716
Bank premises and equipment, net (Note 3) 458,198 493,811
Accrued interest receivable
and other assets 2,060,612 1,317,825
---------- ----------
$ 82,791,058 $89,867,583
========== ==========
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, 1993 1992
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Demand $13,906,953 $15,530,030
Savings, NOW and money market 26,510,381 30,100,950
Time, $100,000 and over (Note 4) 533,404 2,475,734
Time, under $100,000 35,871,512 34,013,769
----------- -----------
Total deposits 76,822,250 82,120,483
Securities sold under agreements
to repurchase (Notes 1 and 5) 2,358,825 896,170
Accrued interest payable and
other liabilities 1,188,100 894,873
----------- -----------
Total liabilities $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;
735,686 and 725,408
outstanding at December 31, 1993
and 1992, respectively 3,678,430 3,627,040
Additional paid-in capital 2,501,030 2,467,421
Deficit (3,834,566) (138,404)
Unrealized gain on securities
available for sale,
net of income taxes (Note 1) 76,989
----------- -----------
Total stockholders' equity 2,421,883 5,956,057
----------- -----------
$82,791,058 $89,867,583
============ ===========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
Interest Income:
Loans, including fees $5,190,368 $5,913,945 $5,759,253
Federal funds sold 93,437 128,642 255,960
Investment securities 713,189 765,517 549,917
Other 60,052 83,167 10,332
--------- --------- ----------
Total interest income 6,057,046 6,891,271 6,575,462
--------- --------- ----------
Interest Expense:
Deposits 2,437,466 2,875,041 2,911,386
Securities sold under agreements
to repurchase 33,509 35,065 82,660
---------- ---------- ---------
Total interest expense 2,470,975 2,910,106 2,994,046
---------- ---------- ---------
Net Interest Income 3,586,071 3,981,165 3,581,416
Provision for Loan Losses (Note 2) 3,889,297 776,338 1,029,185
---------- ---------- ----------
Net interest income (expense)
after provision for loan losses (303,226) 3,204,827 2,552,231
---------- ---------- ---------
Service fees and other income 907,511 1,016,788 655,726
---------- ---------- ---------
Non-Interest Expense:
Salaries and employee benefits 1,821,928 1,661,087 1,263,851
Occupancy and equipment 924,961 922,355 913,458
Other operating 1,553,558 1,591,937 1,262,384
---------- --------- ---------
Total non-interest expense 4,300,447 4,175,379 3,439,693
---------- --------- ---------
(Loss) Income Before Income Taxes (3,696,162) 46,236 (231,736)
Income taxes (Note 6) 20,000 26,000
---------- --------- ---------
Net (Loss) Income
Cumulative Effect of a Change
in Accounting Principle (3,696,162) 26,236 (205,736)
Cumulative Effect of a Change
in Accounting for
Income Taxes (Note 6) 14,000
----------- --------- --------
Net (Loss) Income $(3,696,162) $ 12,236 $(205,736)
=========== ========= ========
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION> Unrealized
Gain on
Common Stock Additional Retained Securities
------------------- 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 8) 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
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying summary of significant accounting policies and notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 14)
<CAPTION>
Years ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S>
Cash flows from operating activities: <C> <C> <C>
Net (loss) income $(3,696,162) $ 12,236 $ (205,736)
Adjustments to reconcile net (loss) income to net cash
(used) provided by operating activities:
Depreciation and amortization 146,800 163,980 198,171
Provision for loan losses 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 (742,787) 539,842 (1,015,284)
Increase (decrease) in accrued interest payable
and other liabilities 293,227 (78,026) 318,333
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (required) by operating activities (335,905) 1,221,039 282,201
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment securities:
Proceeds from sales, maturities and
principal repayments 14,663,382 15,366,771 5,652,982
Purchases (16,232,859) (19,427,960) (12,704,305)
Net loan (originations) repayments 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 4,522,601 (9,891,205) (24,905,138)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in transaction
and savings deposits (5,213,646) 7,776,604 10,515,117
Increase (decrease) in time deposits (84,587) 2,657,831 14,111,335
Increase (decrease) in securities sold under repurchase
agreements 1,462,655 (731,134) 731
Proceeds from sale of common stock 84,999 659,360 267,337
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (required) by financing activities (3,750,579) 10,362,661 24,894,520
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 436,117 1,692,495 271,583
Cash and cash equivalents, beginning of year 9,501,660 7,809,165 7,537,582
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 9,937,777 $ 9,501,660 $ 7,809,165
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying summary of significant accounting policies and notes
to consolidated financial statements.
</TABLE>
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
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.
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 ability and intention to
hold these investment securities for the foreseeable future 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 sale. 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.
<PAGE>
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 market value. 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,
"Accounting for Income Taxes".
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Gross unrealized gains and losses 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.
<PAGE>
1. Investment Securities (Continued)
---------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------
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
subdivisions 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
- --------------------------------------------------------------------------------
Gross realized gains on sales of securities (included in other income in the
accompanying consolidated statements of operations) were as follows:
Years ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
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. Governments and agency
securities $ 3,693
- -------------------------------------------------------------------------------
<PAGE>
1. Investment Securities (Concluded)
---------------------------------
The amortized cost and estimated market values of investment securities
at December 31, 1993 are summarized by contractual maturity as follows:
Estimated
Amortized Market
Cost Value
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
At December 31, 1993, investment securities with carrying values and market
value 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:
December 31, 1993 1992
- -------------------------------------------------------------------------------
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
<PAGE>
2. Loans and Allowance for Loan Losses (Concluded)
-----------------------------------------------
Changes in the allowance for loan losses are as follows:
December 31, 1993 1992
- -------------------------------------------------------------------------------
Balance, beginning of year $ 933,244 $ 575,000
Charge-offs (730,575) (432,381)
Recoveries 90,934 14,287
Provision for loan losses 3,889,297 776,338
- -------------------------------------------------------------------------------
Balance, end of year $4,182,900 $ 933,244
- ------------------------------------------------------------------------------
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:
December 31, 1993 1992
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
<PAGE>
4. Deposits
--------
Approximate maturities of certificates of deposits issued in amounts of $100,000
or more are as follows:
December 31, 1993 1992
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
5. Short-Term Borrowings
---------------------
Securities sold under agreements to repurchase generally mature within one to
four days from the transaction date.
6. Income Taxes
------------
Income (taxes) benefits are comprised of the following:
Years ended December 31, 1993 1992 1991
- -------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------
$ 0 $ 20,000 $(26,000)
- -------------------------------------------------------------------------------
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.
<PAGE>
6. Income Taxes (Concluded)
------------------------
Management elected early adoption of the provisions of Financial Accounting
SFAS 109 for the year ended December 31, 1992 and all 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 December 31, 1993,
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:
Commitments to extend credit $6,264,000
Standby letters of credit $ 145,000
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 amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations 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 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.
<PAGE>
7. Commitments and Contingencies (Concluded)
-----------------------------------------
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 and 1992
were approximately $15,000, $15,000 and $12,000, respectively.
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 and
$556,000 and $507,00 in 1993, 1992, and 1991, respectively.
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").
<PAGE>
8. Proposed Merger (Continued)
---------------------------
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.
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.
<PAGE>
9. Litigation (Concluded)
----------------------
(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.
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.
On April 17, 1990, the Board of Directors and stockholders authorized a six for
five stock split of the common stock to be distributed on April 20, 1990. The
stock split was accounted for by transferring $500,000 from capital surplus to
common stock. No change has been made to the par value of the common stock.
All applicable share and per share data have been retroactively adjusted for the
stock split.
During 1991, the Bank sold 37,500 shares of common stock for $267,337 ($10.00
per share, net of offering costs).
(See Note 11 for discussion of the Bank's capital adequacy).
<PAGE>
10. Stockholders' Equity (Concluded)
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:
Shares
Date of Grant Granted Option Price
- -----------------------------------------------------
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
To date, no options have been exercised. As the option prices reflect the
market prices at date of grant, no expense has been recognized.
<PAGE>
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 (Memora-
ndum) representing an agreement between the Board and both the Regional Director
of the FDIC Atlanta Regional Office and the Florida State Comptroller (Regula
tors) 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:
Minimum Capital
Regulatory Capital Requirements: Required Actual Capital
- -------------------------------------------------------------------------------
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
<PAGE>
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.
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, 1992 and 1991 was
approximately $2,570,000, $3,234,000 and $4,156,000, respectively. 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).
<PAGE>
13 Related Party Transactions (Concluded)
--------------------------------------
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, respectively.
Cash paid for income taxes was approximately $468,000 and $215,000 for the
years ended December 31, 1992 and 1991, respectively. No cash was paid for
income taxes for the year ended December 31, 1993.
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).
<PAGE>
REPUBLIC SECURITY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Republic Security Financial Corporation
(Registrant)
Date: September 5, 1995 /s/ Carla H. Pollard
----------------- --------------------
Carla H. Pollard
Vice President
Controller
