UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from April 1, 1995 to December 31, 1995
Commission file number 0-14671
REPUBLIC SECURITY FINANCIAL CORPORATION
Exact name of registrant as specified in its charter)
FLORIDA 59-2335075
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4400 Congress Avenue, West Palm Beach, FL 33407
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (407)
840-1200 Securities registered pursuant to Section
12(b) of the Act:
Name of each exchange on
Title of each class which registered
- - - ---------------------------------- -----------------------------------
- - - ---------------------------------- -----------------------------------
Securities registered pursuant to Section 12(g) of
the Act:
(Title of Class)
Common Stock, $.01 Par Value Per Share
(Title of Class)
Preferred Stock - Series "A", $10.00 Par Value Per Share
(Title of Class)
Preferred Stock - Series "C", $10.00 Par Value Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 12, 1996, was approximately $35,292,000. The
number of shares outstanding of the Registrant's $.01 par value Common Stock as
of March 8, 1996 was 6,873,173.
DOCUMENTS INCORPORATED BY REFERENCE:
The Proxy Statement for the Registrant's 1995 Annual Meeting of Shareholders
(Exhibit 23a hereto) is incorporated by reference into Parts III & IV of this
Form 10-K.
<PAGE>
TABLE OF CONTENTS
Page
PART I
ITEM 1 - BUSINESS
General................................................................1
Lending Activities of the Bank.........................................1
Servicing of Mortgage Loans............................................5
Non-Performing Assets and Allowance for Loan Losses....................6
Investment Activities..................................................8
Deposits...............................................................8
Borrowings............................................................10
Competition...........................................................11
Employees.............................................................11
REGULATION................................................................12
ITEM 2 - PROPERTIES.......................................................21
ITEM 3 - LEGAL PROCEEDINGS................................................21
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS...................................................21
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS...................................21
ITEM 6 - SELECTED FINANCIAL DATA..........................................23
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Corporate Overview....................................................26
Results of Operations.................................................26
Net Interest Income...................................................27
Provision for Loan Losses.............................................30
Non-Interest Income...................................................31
Operating Expenses....................................................33
Liquidity.............................................................34
Capital Compliance....................................................34
Asset/Liability Management............................................35
Impact of Inflation...................................................36
Financial Condition...................................................36
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................38
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies...................42
Note 2 - Branch Acquisition and Merger................................45
Note 3 - Investments..................................................47
Note 4 - Loans Receivable - Net.......................................48
Note 5 - Non-Performing Loans and Allowance for Loan Losses...........48
Note 6 - Cash and Amounts Due from Depository Institutions............49
Note 7 - Property and Equipment.......................................49
Note 8 - Mortgage Banking Activities..................................49
i
<PAGE>
TABLE OF CONTENTS
(Continued)
Page
Notes to Consolidated Financial Statements (Continued)
Note 9 - Deposits.....................................................51
Note 10 - Borrowed Money..............................................52
Note 11 - Shareholder's Equity........................................53
Note 12 - Commitments and Contingencies...............................55
Note 13 - Related Party Transactions..................................57
Note 14 - Income Taxes................................................57
Note 15 - Parent Company Financial Information........................60
Note 16 - Fair Values of Financial Instruments........................61
Note 17 - Segment Information.........................................63
Note 18 - Subsequent Event............................................64
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........................66
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..............................67
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.....................................................67
ITEM 11 - EXECUTIVE COMPENSATION..........................................67
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................................67
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................67
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K...........................................................67
SIGNATURES................................................................70
FURTHER EXHIBITS
Exhibit 22(a) - Subsidiaries of Registrant
Exhibit 11(a) - Computation of Per Share Earnings
ii
<PAGE>
PART I
Item 1. BUSINESS
Republic Security Financial Corporation ("the Company"), incorporated
in Florida in 1983, is a commercial bank holding company, the principal business
of which is the operation of a commercial bank business through the Republic
Security Bank ("the Bank"), its wholly owned subsidiary, a state chartered
commercial 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. In November 1995, the Company and the Bank received all necessary
federal and state regulatory approvals and converted from a thrift charter to a
commercial bank holding company and a State of Florida chartered commercial
bank.
On January 19, 1996, the Bank acquired Banyan Bank, a commercial bank
headquartered in Boca Raton, Florida, with one branch office located in Boynton
Beach, Florida. In addition to acquiring commercial bank loans and deposit
portfolios, the acquisition provides Republic with a geographic presence in
South Palm Beach County. Total assets acquired in connection with the merger was
approximately $54.0 million. The results of the Banyan acquisition are not
included in the Company's Consolidated Financial Statements as the acquisition
date was subsequent to the Company's year end.
On November 30, 1994, the Bank acquired Governor's Bank ("Governors"),
a commercial bank headquartered in West Palm Beach. The acquisition was
accounted for as a purchase and resulted in Republic Security Bank acquiring
assets of $64.3 million, liabilities of $62.3 million and 2 additional branch
locations.
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 1995 the level of commercial business, commercial real
estate, and consumer loan originations increased from prior years. Approximately
95% percent of the Bank's mortgage loans are secured by property located in
Florida.
The following tables set forth the composition of the Bank's loan
portfolio by type of loan at the periods indicated:
<TABLE>
<CAPTION>
==========================================================================================================================
December 31, March 31,
1995 1995 1994 1993 1992
Type of loan Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- - - --------------------------------------------------------------------------------------------------------------------------
(in thousands)
- - - --------------------------------------------------------------------------------------------------------------------------
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
* Residential property $116,328 50% $124,750 49% $105,752 59% $79,236 54% $61,439 53%
* Construction loans 33,990 15 45,511 18 49,280 27 43,177 29 31,089 27
* Commercial real estate 25,678 11 26,910 11 11,996 7 13,498 9 12,727 11
* Residential lot 2,873 1 2,989 1 1,972 2 3,115 2 3,206 3
* Land, acquisition and development 206 * 450 * 850 1
- - - --------------------------------------------------------------------------------------------------------------------------
Total Real Estate Loans 179,075 77 200,160 79 169,450 95 139,026 94 109,311 95
- - - --------------------------------------------------------------------------------------------------------------------------
Consumer Loans:
* Home equity lines of credit 2,918 1 2,852 1 2,192 1 2,150 2 2,401 2
* Personal and Other 3,712 2 2,587 1 1,271 1 2,343 2 1,624 1
* Automobile 30,797 14 30,134 12 3,763 2 221 * 285 1
* Savings accounts 557 * 712 * 415 * 586 * 185 *
- - - --------------------------------------------------------------------------------------------------------------------------
Total consumer loans 37,984 17 36,285 14 7,641 4 5,300 4 4,495 4
- - - --------------------------------------------------------------------------------------------------------------------------
Commercial business loans: 14,868 6 16,484 7 2,356 1 2,528 2 1,423 1
- - - --------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 231,927 100% 252,929 100% 179,447 100% 146,854 100% 115,229 100%
=========== ========= ======== ======== =========
- - - --------------------------------------------------------------------------------------------------------------------------
Less:
Loans in process 12,104 21,460 22,876 19,290 14,339
Discounts, premiums and
deferred loan fees 636 1,022 206 307 1,145
Allowance for losses 2,431 2,507 1,071 1,247 775
- - - --------------------------------------------------------------------------------------------------------------------------
TOTAL $216,756 $227,940 $155,294 $126,010 $98,970
- - - --------------------------------------------------------------------------------------------------------------------------
<FN>
* Less than one percent
</TABLE>
1
<PAGE>
The following table sets forth at December 31, 1995, the principal
amounts of the Bank's construction and commercial non-mortgage loans with
contractual maturities during the periods indicated.
<TABLE>
<CAPTION>
=====================================================================================================================
December 31, 1995
Maturing
After 1 year
(in thousands) Within 1 year through 5 years After 5 years Total
- - - ---------------------------------------------------------------------------------------------------------------------
Real Estate:
<S> <C> <C> <C> <C>
Residential and commercial $14,010 $24,503 $103,699 $142,212
Construction and lot(1) 18,242 4,728 1,789 24,759
Commercial Business 10,851 3,919 98 14,868
Consumer 2,942 32,773 2,269 37,984
- - - ---------------------------------------------------------------------------------------------------------------------
Total $46,045 $65,923 $107,855 $219,823
- - - ---------------------------------------------------------------------------------------------------------------------
Maturing after one year with:
Variable interest rates $14,400 $86,406
Fixed interest rates 51,523 21,449
- - - ---------------------------------------------------------------------------------------------------------------------
Total $65,923 $107,855
- - - ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Net of loans-in-process
</TABLE>
The Bank provides residential real estate construction and mortgage
loans, consumer loans 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 December 31,
1995, the loan portfolio includes approximately $11.2 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 five to ten 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 1.25 to 1.
Construction Loans. Residential real estate construction loans
comprised approximately 15% of the Bank's total loan portfolio as of December
31, 1995. Of the total construction loan portfolio of $34.0 million as of
December 31 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
2
<PAGE>
residential construction loans require an analysis of the financial condition of
the developer or the borrower, the appraised value of the property, and the
marketability of the proposed residence, including location and overall
portfolio concentrations. Limitations are imposed by the Bank on the amount of
loans for the purpose of construction of residences that have not been pre-sold.
Construction loans generally have terms of between six and 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 lend funds during 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 December 31, 1995, consumer loans
were $38.0 million or 17% of total loans. Loans secured by automobiles are the
dominant consumer loans and represented $30.8 million or 81% of total consumer
loans as of December 31, 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
December 31, 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.
3
<PAGE>
Consumer loan underwriting standards include an examination of the
applicant's payment history on other debts and an evaluation of their ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary importance, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. While consumer loans generally involve a
higher element of credit risk than one-to four-family residential loans,
consumer loans are typically made at higher interest rates and for shorter
terms, 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 $13.7 million as of December 31, 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. 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 $1.2 million or .5%
of the total portfolio at December 31, 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>
======================================================================================================================
Nine Months Ended December 31,Years Ended March 31,
1995 1995 1994
- - - ----------------------------------------------------------------------------------------------------------------------
(in thousands)
- - - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate loan origination $31,334 $90,308 $149,568
Consumer and commercial loan originations 30,107 22,045 8,936
- - - ----------------------------------------------------------------------------------------------------------------------
o Total loan origination 61,441 112,353 158,504
Loans purchased 22,776 6,193 47,209
Loans acquired in mergers 41,682
- - - ----------------------------------------------------------------------------------------------------------------------
Total loan origination and purchases 84,217 160,228 205,713
- - - ----------------------------------------------------------------------------------------------------------------------
Less:
o Principal repayment on loans and loans held for sale 57,784 34,624 37,384
o Sale of loans and loans held for sale 47,435 53,927 138,617
- - - ----------------------------------------------------------------------------------------------------------------------
Total repayments and sale of loans 105,219 88,551 176,001
- - - ----------------------------------------------------------------------------------------------------------------------
o Total (decrease) increase in principal loan balances (21,002) 71,677 29,712
Net decrease (increase) in deferred loan fees, premiums and discounts 386 (816) 101
Net decrease (increase) in loans in process 9,356 1,416 (3,586)
Net decrease (increase) in allowance for loss 76 (1,436) 176
- - - ----------------------------------------------------------------------------------------------------------------------
o Net (decrease) increase in loans and loans held for sale $11,184 $78,841 $26,403
- - - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
Lending Procedures. Loan applications may be approved by the Board of
Directors, its Loan Committee, the Management Loan Committee, or the Loan
Officer if the loan is within delegated authority limits. 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, and residential loans which are pre-approved for sale to a mortgage
conduit, up to $1,000,000. 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 Loan 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 December
31, 1995, the Bank was also servicing $307 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.
From time to time, the Bank purchases mortgage loan servicing to
generate servicing income and to effectively utilize excess servicing capacity.
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
servicing loans for others and generate fee income.
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.
With regard to purchased servicing rights, such rights are typically
purchased from 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
5
<PAGE>
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 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 ("other real estate owned") and loans which are 90 days or
more past due. Generally, accrued interest on loans which are more than 90 days
past due is excluded from income and any previously accrued and unpaid interest
is reversed through interest income. Non-performing assets as of December 31,
1995 were $3.8 million, representing 1.2% of the Bank's total assets. The
following table details the Bank's non-performing assets at December 31, 1995
and for the four-year period ending March 31:
<TABLE>
<CAPTION>
========================================================================================================================
December 31, March 31,
1995 1995 1994 1993 1992
- - - ------------------------------------------------------------------------------------------------------------------------
(in thousands)
- - - ------------------------------------------------------------------------------------------------------------------------
Loans:
<S> <C> <C> <C> <C> <C>
Consumer $303 $352 $61 $241 $99
Commercial business 101 630 377 398 70
Residential mortgage 1,774 1,050 591 2,167 908
Residential construction 107 115 84 70
Commercial mortgage 162 244 317 550
Repossessed automobiles 137 118
- - - ------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 2,422 2,427 1,357 3,193 1,627
- - - ------------------------------------------------------------------------------------------------------------------------
Other real estate owned:
Residential construction 90 26 468 402
Residential mortgage 483 219 787 306 2,641
Land for residential use 61 330
Land for commercial use 767 764 555 574 280
Commercial real estate 52 115
- - - ------------------------------------------------------------------------------------------------------------------------
Total other real estate owned 1,340 1,009 1,871 932 3,768
- - - ------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $3,762 $3,436 $3,228 $4,125 $5,395
- - - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The table above reflects reclassifications of in-substance foreclosures
from other 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.
The Bank's non-residential portfolios in excess of $100,000 are
reviewed annually by a committee comprised of three members of the Bank's
management (the "Committee") for the purpose of determining a loan's
classification as special mention substandard, doubtful, or loss, as
appropriate. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or the
collateral pledged. "Substandard" assets include those characterized by the
distinct possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses present make collection or liquidation in
full on the basis of currently existing facts, conditions, and values, highly
questionable and improbable.
6
<PAGE>
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 its 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 FRB and the Florida Department of Banking and Finance,
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 banks, 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.
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 $2.4 million at December 31, 1995, which is allocated according
to the following table:
<TABLE>
<CAPTION>
==========================================================================================================================
December 31, March 31,
1995 1995 1994 1993 1992
Allow % of loans Allow % of loans Allow % of loans Allow % of loans Allow %of loans
for to total for to total for to total for to total for to total
loan loss loans loan loss loans loan loss loans loan loss loans loan loss loans
- - - --------------------------------------------------------------------------------------------------------------------------
(in thousands)
- - - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate construction and lot $179 16% $281 19% $212 29% $137 31% $174 31%
Real estate residential
and commercial 916 61 535 60 481 66 632 63 440 64
Commercial business 520 6 531 7 114 1 152 2 70 1
Consumer 506 17 406 14 163 4 201 4 91 4
Unallocated (1) 310 754 101 125
- - - --------------------------------------------------------------------------------------------------------------------------
TOTAL $2,431 100% $2,507 100% $1,071 100% $1,247 100% $775 100%
- - - --------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The unallocated portion of the allowance for loan losses decreased from
March 31, 1995 to December 31, 1995 primarily due to the Bank
increasing its required 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.
</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.
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 three 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. At December 31, 1995 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%.
7
<PAGE>
The following table details the charge-offs, recoveries, net
charge-offs and ending balance of the allowance for loan losses for the nine
months ended December 31, 1995 and the years ended March 31, 1995, 1994, 1993,
and 1992:
<TABLE>
<CAPTION>
=======================================================================================================================
At or for the At or for the
Nine Months Ended, Years Ended
December 31, March 31,
1995 1995 1994 1993 1992
- - - -----------------------------------------------------------------------------------------------------------------------
(in thousands)
- - - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $2,507 $1,071 $1,247 $775 $512
Reserves acquired in connection with merger 1,399 319
Charge offs:
* Real estate mortgage 213 344 274 530 427
* Real estate construction 10 11 138 43
* Consumer 458 105 8 102 6
* Commercial business 137 158 459 226
- - - -----------------------------------------------------------------------------------------------------------------------
SUBTOTAL - Charge-Offs 808 617 752 996 476
- - - -----------------------------------------------------------------------------------------------------------------------
Recoveries:
* Real estate mortgage 26 166 235 138 35
* Consumer 57 15 8
* Commercial 549 273 127
- - - -----------------------------------------------------------------------------------------------------------------------
SUBTOTAL - Recoveries 632 454 362 146 35
- - - -----------------------------------------------------------------------------------------------------------------------
Net charge-offs 176 163 390 850 441
- - - -----------------------------------------------------------------------------------------------------------------------
Provision for losses 100 200 214 1,003 704
- - - -----------------------------------------------------------------------------------------------------------------------
Ending Balance $2,431 $2,507 $1,071 $1,247 $775
- - - -----------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to average loans
outstanding during the period .08% .09% .27% .75% .55%
- - - -----------------------------------------------------------------------------------------------------------------------
</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 December 31, 1995 the Company had cash and cash
equivalents of $54.4 million and investments of $10.6 million representing, in
the aggregate, 21% 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.
As of December 31, 1995, certificate accounts in the amount of $100,000
or more amounted to approximately $15.2 million representing 6.8% of total
deposits. This amount slightly increased from $14.7 million at March 31, 1995,
but remains flat as a percent of total deposits.
8
<PAGE>
The following tables set 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>
==========================================================================================================================
December 31, March 31,
1995 1995 1994
Weighted Percent Weighted Percent Weighted Percent
Average Of Total Average Of Total Average Of Total
Amount Stated Rate Deposits Amount Stated RateDeposits Amount Stated RateDeposits
- - - --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and statement accounts $19,699 2.55% 8.75% $19,395 2.45% 8.44% $19,885 2.40% 12.69%
Commercial checking accounts 25,391 11.28 26,149 11.38 6,027 3.85
Money Market deposit accounts 14,536 2.88 6.46 14,581 2.45 6.35 12,217 2.40 7.80
NOW accounts 28,202 1.50 12.53 26,688 2.00 11.62 25,498 2.00 16.28
30-90 day Certificates of deposit 2,145 3.71 .95 2,974 4.13 1.30 3,201 2.85 2.04
6-9 month Certificates of deposit 27,465 4.91 12.20 42,011 5.75 18.28 26,041 3.34 16.62
12-18 month Certificates
of deposit 79,618 5.79 35.38 74,090 5.43 32.25 46,023 3.79 29.38
2-year Certificates of deposit 5,471 5.18 2.43 7,464 4.48 3.25 9,482 4.44 6.05
3-year Certificates of deposit 2,794 5.77 1.24 1,656 4.99 .72 1,309 4.79 .84
5-year Certificates of deposit 13,065 5.89 5.81 13,597 5.76 5.92 6,075 6.10 3.88
Jumbo certificates
(varying maturities) 6,673 6.63 2.97 1,130 5.58 .49 893 4.54 .57
- - - --------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $225,059 4.02% 100.00% $229,735 4.00% 100.00% $156,651 3.11% 100.00%
- - - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------------------------
Nine Months Ended, Years Ended
December 31, March 31,
1995 1995 1994 1993 1992
- - - -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - - -----------------------------------------------------------------------------------------------------------------------
Deposit Activity
<S> <C> <C> <C> <C> <C>
Net (withdrawals) deposits (1) $(5,521) $68,303 $7,097 $24,212 $956
Interest credited (2) 845 4,781 3,643 4,350 6,524
- - - -----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in deposits $(4,676) $73,084 $10,740 $28,562 $7,480
- - - -----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes $30.3 million of deposits acquired in connection with a branch
purchase and $58.1 million and $41.8 million of deposits acquired in
connection with mergers in years ended March 31, 1995 and 1993,
respectively.
(2) Excludes interest paid directly to account holders.
</TABLE>
9
<PAGE>
The following table presents, by stated interest rate ranges, the
amount of certificates of deposits outstanding (in thousands) at December 31,
1995 and the periods to maturity of the certificates of deposits by the stated
interest rate ranges at December 31, 1995:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, 1995
December 31, March 31, 0-6 7-12 13-18 19-24
1995 1995 1994 1993 1992 Months Months Months Months Thereafter
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Up to 4.00% $3,490 $7,768 $71,641 $62,060 $3,188 $1,743 $1,747
4.01 to 5.00% 33,810 37,616 14,415 11,404 30,466 24,015 $7,959 $590 $445 801
5.01 to 6.00% 55,888 48,575 4,180 9,258 22,998 25,633 17,297 3,131 4,455 5,372
6.01 to 7.00% 38,049 44,725 1,237 4,382 14,144 28,821 3,904 1,735 176 3,413
Over 7.01% 5,994 4,238 1,551 3,102 3,277 2,620 3,025 252 97
- - - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $137,231 $142,922 $93,024 $90,206 $74,073 $82,832 $32,185 $5,708 $5,076 $11,430
- - - ------------------------------------------------------------------------------------------------------------------------------------
% of Total 100% 60% 23% 4% 4% 9%
- - - ------------------------------------------------------------------------------------------------------------------------------------
</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 December 31, 1995,
the Bank had $25 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 $42 million, $44 million and $48
million at December 31, 1995 and March 31, 1995, and 1994, respectively.
From time to time the Bank enters into repurchase agreements with
customers, securities dealers and commercial banks. A repurchase agreement is a
form of securities borrowing which involves the sale and delivery of securities
by the Bank to an independent safekeeping agent, 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 customer, broker or dealer a variable 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 December 31, 1995, the Bank had $2.4 million outstanding in
repurchase agreements.
10
<PAGE>
The following tables present selected information on borrowings:
<TABLE>
<CAPTION>
===================================================================================================================================
Nine Months Ended, Years Ended,
December 31, March 31,
- - - -----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM BORROWINGS: 1995 1995 1994 1993 1992
- - - -----------------------------------------------------------------------------------------------------------------------------------
FHLB Advances:
<S> <C> <C> <C> <C> <C>
Amounts outstanding at end of year $25,000 $15,000 $20,000
Weighted average rate at end of year 5.63% 6.15% 3.86%
Maximum amount outstanding at any month end 25,000 20,000 40,000 $13,000
Approximate average amount outstanding during 7,939 16,000 15,000 3,331
year
Approximate weighted average rate for year 5.78% 4.71% 3.45% 8.25%
- - - -----------------------------------------------------------------------------------------------------------------------------------
OTHER BORROWED MONEY:
Amounts outstanding at end of year $2,350 $2,748
Weighted average rate at end of year 5.05% 5.96%
Maximum amount outstanding at any month end 2,651 2,748
Approximate average outstanding during year 2,385 663
Approximate weighted average rate for year 5.15% 5.60%
- - - -----------------------------------------------------------------------------------------------------------------------------------
</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 commercial banks, savings and loan associations,
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 average liquid
assets . The Bank competes with other commercial banks, savings and loan
associations, 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 December 31, 1995.
None of the Company's employees are subject to a collective bargaining
agreement, and the Company believes that its employee relations are good.
11
<PAGE>
REGULATION
The Bank converted its charter during November 1995 from a federal
savings bank to that of a commercial bank organized under the laws of the State
of Florida and became a member of the Federal Reserve Bank of Atlanta.
Contemporaneously, the Company become a bank holding company under the Bank
Holding Company Act of 1956, as amended ("BHCA") subsequent to the approval of
the Board of Governors of the Federal Reserve System ("FRB"). 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 became subject to
regulation by the State of Florida and the FRB, and the Company became subject
to regulation by the FRB.
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. 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. The Company is also
subject to capital requirements applied on a consolidated basis in a form
substantially similar to those previously required of the Bank as a federal
savings bank. 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.
Subsequent to the conversion of the Bank to a commercial bank and the
Company becoming a bank holding company subject to regulation under the BHCA,
most of the regulations to which the Bank was subject as a federal savings bank
remained materially unchanged, such as capital requirements, transactions with
affiliates and insurance of accounts and other assessments. The Bank continues
to be eligible for Federal Home Loan Bank ("FHLB") advances, which eligibility
varies based on FHLB requirements. The Bank is permitted to originate and invest
in commercial and consumer loans without limitation as to percentage of assets,
and has liquidity requirements which are greater than those which were
applicable to it as a federal savings bank.
Recent Legislation
A number of pieces of legislation have recently been enacted, and
implementing regulations adopted, which affect the Company and the Bank.
The Financial Institutions Reform, Recovery and Enforcement Act of
1989. The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") was enacted in August 1989. FIRREA contains major regulatory reforms
which include stronger civil and criminal enforcement provisions applicable to
all financial institutions. FIRREA allows the acquisition of healthy and failed
savings and loans by bank holding companies, and removes all interstate barriers
on such bank holding company acquisitions. With certain qualifications, FIRREA
also allows bank holding companies to merge acquired savings and loans into
their existing commercial bank subsidiaries.
FRB policy requires a bank holding company to act as a source of
financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not otherwise be warranted. Under FIRREA, if a bank holding company has more
than one bank or thrift subsidiary, each of the bank holding company's
subsidiary depository institutions are responsible for any losses to the FDIC
as a result of an affiliated depository institution's failure. As a result,
a bank holding company may be required to loan money to its subsidiaries in the
form of capital notes or other instruments which qualify as capital under
regulatory rules. Any loans from the holding company to such subsidiary banks
would likely be unsecured and subordinated to such bank's depositors, and
perhaps to other creditors of the bank.
The FRB, the Florida Department of Banking and Finance ("FDBF") and the
FDIC collectively have extensive enforcement authority over depository
institutions and their holding companies, and this authority has been enhanced
substantially by FIRREA. This enforcement authority includes, among
12
<PAGE>
other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders, to initiate injunctive actions, and, in
extreme cases, to terminate deposit insurance. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
federal banking agencies. FIRREA significantly increased the amount of and
grounds for civil money penalties and generally requires public disclosure of
final enforcement actions.
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 Deposit Insurance Corporation Improvement Act of 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which
recapitalized the Bank Insurance Fund ("BIF") of the FDIC and imposed 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 required the establishment of a
risk-based deposit insurance assessment system.
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 are required to establish five levels of insured depository
institutions based on leverage limit and risk-based capital requirements
established for institutions subject to their jurisdiction, plus, in their
discretion, individual additional capital requirements for such institutions.
Under the final rules that have been adopted by each of the federal
banking agencies, an institution will be designated well-capitalized if the
institution has a total risk-based capital ratio of 10% or greater, a core
risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and the institution is not subject to an order, written agreement,
capital directive, or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure.
An institution will be designated adequately capitalized if the
institution has a total risk-based capital ratio of 8% or greater, a core
risk-based capital ratio of 4% or greater, and a leverage ratio of 4% or greater
(or a leverage ratio of 3% or greater if the institution is rated composite 1 in
its most recent report of examination). An institution will be designated
undercapitalized if the institution has a total risk-based capital ratio that is
less than 8%, a core risk-based capital ratio that is less than 4%, or a
leverage ratio that is less than 4% (or a leverage ratio that is less than 3% if
the institution is rated composite 1 in its most recent report of examination).
An institution will be designated significantly under-capitalized if the
institution has a total risk-based capital ratio that is less than 6%, a core
risk- based capital ratio that is less than 3%, or a leverage ratio that is less
than 3%. An institution will be designated critically under-capitalized if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%.
13
<PAGE>
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. FDICIA
generally requires the appointment of a conservator or receiver within 90 days
after an institution became critically undercapitalized.
The federal banking agencies have adopted uniform procedures for the
issuance of directives by the appropriate federal banking agency. Under these
procedures, an institution will generally be provided advance notice when the
appropriate federal banking agency proposes to impose one or more of the
sanctions set forth above. These procedures provide an opportunity for the
institution to respond to the proposed agency action or, where circumstances
warrant immediate agency action, an opportunity for administrative review of the
agency's action.
Inasmuch as the Bank exceeds the fully phased-in capital requirements
of the 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 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.
The BHCA was amended in September 1994 by the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking Act"). The Interstate
Banking Act provides that, effective September 29, 1995, adequately capitalized
and managed bank holding companies are permitted to acquire banks in any state.
State laws prohibiting interstate banking or discriminating against out-of-state
banks are preempted as of the effective date. States cannot enact laws opting
out of this provision; however, states may adopt a minimum age restriction
requiring that target banks located within the state be in existence for a
period of years, up to a maximum of five years, before such bank may be subject
to the Interstate Banking Act. The Interstate Banking Act establishes deposit
caps which prohibit acquisitions that result in the acquiring company
controlling 30 percent or more of the deposits of insured banks and thrift
institutions held in the state in which the target maintains a branch or 10
percent or more of the deposits nationwide. States have the authority to waive
the 30 percent deposit cap. State-level deposit caps are not preempted as long
as they do not discriminate against out-of-state companies, and the federal
deposit caps apply only to initial entry acquisitions.
In addition, the Interstate Banking Act provides that as of June 1,
1997, adequately capitalized and managed banks will be able to engage in
interstate branching by merging with banks in different states. States may enact
legislation authorizing interstate mergers earlier than June 1, 1997, or, unlike
14
<PAGE>
the interstate banking provision discussed above, states may opt out of the
application of the interstate merger provision by enacting specific legislation
before June 1, 1997.
The Interstate Banking Act also expands former exemptions from the
requirement that banks be examined on a 12-month cycle. Exempted banks will be
examined every 18 months. Other provisions of the Interstate Banking Act address
paper work reduction and regulatory improvements, small business and commercial
real estate loan securitization, truth-in-lending amendments on high cost
mortgages, strengthening of the independence of certain financial regulatory
agencies, money laundering, flood insurance reform and extension of certain
statutes of limitation.
Prior to the enactment of the Interstate Banking Act, Florida enacted
the Florida Reciprocal Banking Act (the "Florida Act") which took effect on May
1, 1995. Under the Florida Act, only banks that have been in existence for two
years or more may be acquired by out-of-state bank holding companies pursuant to
the Interstate Banking Act and interstate branching is expressly prohibited. The
Interstate Banking Act, however, will negate Florida's prohibition on branching
unless Florida expressly opts out of the Interstate Banking Act's branching
provisions. Legislation is currently pending in the Florida legislature which
would provide for Florida to opt in to such branching provisions.
At this time, the Company is unable to predict how the Interstate
Banking Act and the Florida Act may affect its operations.
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. Commercial banks, 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 Sections 23A and 23B of the Federal Reserve
Act ("FRA"), member banks are subject to restrictions regarding transactions
with affiliates ("Covered Transactions").
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.
Section 23A of the FRA limits Covered Transactions with any one
affiliate to 10% of an association's capital stock and surplus and limits
aggregate affiliate transactions to 20% of the Bank's capital stock and surplus.
Sections 23A and 23B of the FRA provide that a loan transaction with an
affiliate generally must be collateralized (but may not be collateralized by a
low quality asset or securities issued by an affiliate) and that all Covered
Transactions, as well as the sale of assets, the payment of money or the
provision of services by the Bank to an affiliate, must be on terms and
conditions that are substantially the same, or at least as favorable to the
Bank, as those prevailing for comparable nonaffiliated transactions. A Covered
Transaction generally is defined as a loan to an affiliate, the purchase of
securities issued by an affiliate, the purchase of assets from an affiliate, the
acceptance of securities issued by an affiliate as collateral for a loan, or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. In addition, the Bank generally may not purchase securities issued or
underwritten by an affiliate.
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 a bank ("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,
15
<PAGE>
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 and Other Assessments. The Bank's deposit
accounts are insured by both the Savings Association Insurance Fund ("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.
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 several amendments to the BIF risk-based
assessment schedule which lowers the deposit insurance assessment for most
commercial banks and other depository institutions with deposits insured by the
BIF. 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. The situation is primarily due to the statutory requirement that SAIF
members make payments on bonds issued in the late 1980's by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio during 1995, the FDIC
reduced the assessments for most banks by adopting a new assessment rate
schedule of 4 to 31 basis points for BIF deposits. In the second half of 1995,
the FDIC voted to further reduce the BIF assessment schedule to eliminate
assessments on most BIF deposits as of January 1, 1996 so that most BIF members
will pay the statutory minimum semiannual assessment of $1,000. With respect to
SAIF deposits, the FDIC adopted a final rule retaining the existing assessment
rate schedule applicable to SAIF deposits of 23 to 31 basis points. As of
December 31, 1995, 77% of the deposits of the Bank were insured by the SAIF, and
the remaining 23% were insured by the BIF. As long as the premium differential
continues, it may have adverse consequences for the Bank, since its deposit base
is primarily SAIF-insured. Such
16
<PAGE>
consequences may include reduced earnings and an increase in the cost of raising
funds in the capital markets. In addition, SAIF members, such as the Bank, could
be placed at a substantial competitive disadvantage to BIF members with respect
to pricing of loans and deposits and the ability to achieve lower operating
costs.
Legislation is pending in the United States Congress to mitigate the
effect of the BIF/SAIF premium disparity. Under the legislation, a special
assessment would be imposed on the amount of SAIF deposits held by institutions,
including the Bank, to recapitalize the SAIF fund. The amount of the special
assessment would be left to the discretion of the FDIC but is generally
estimated at approximately 85 basis points of insured deposits as of a certain
date. The legislation would also require that the BIF and the SAIF be merged by
January 1, 1998, provided that subsequent legislation is enacted requiring
savings associations to become banks, and that the FICO payments be spread
across all BIF and SAIF members. The payment of the special assessment would
have the effect of immediately reducing the capital of SAIF-member institutions,
net of any tax effect; however, it would not affect the Bank's compliance with
its regulatory capital requirements. Management cannot predict whether
legislation imposing such a fee will be enacted, or if enacted, the amount of
any special assessment or when and whether ongoing SAIF premiums will be reduced
to a level equal to that of BIF premiums. Management can also not predict
whether or when the BIF and SAIF will merge.
A significant increase in SAIF insurance premiums or a significant
special assessment to recapitalize the SAIF would likely have an adverse effect
on the operating expenses and results of operations of the Bank. If a special
assessment of 85 basis points were imposed on the Bank's SAIF deposits as of
December 31, 1995, the Bank's earnings would be reduced by approximately
$936,000, net of taxes, which would be accrued during the period final
legislation was passed.
Regulation of Bank Holding Company
As a result of its ownership of the Bank, the Company is registered as
a bank holding company and is regulated by the FRB under the BHCA. The Company
is required to file with the FRB annual reports and other information regarding
its business operations and those of its subsidiary. The FRB exercises 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.
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. 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.
17
<PAGE>
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 Capital") may consist
of (i) an allowance for loan losses of up to 1.25% of risk-weighted assets, (ii)
excess of qualifying perpetual preferred stock, (iii) hybrid capital
instruments, (iv) perpetual debt, (v) mandatory convertible securities, and (vi)
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 December 31, 1995, the Company exceeded minimum capital
requirements. At December 31, 1995, the Company's capital to risk-weighted
assets was 23.0% and Tier I Capital to risk-weighted assets was 19.3%. At
December 31, 1995, the Company's leverage ratio was 13.5%, 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.
18
<PAGE>
Because of concerns relating to competitiveness and the safety and
soundness of the industry, Congress is considering a number of wide-ranging
proposals for altering the structure, regulation and competitive relationships
of the nation's financial institutions. Among such bills are proposals to
prohibit banks and bank holding companies from conducting certain types of
activities, to subject banks to increased disclosure and reporting requirements,
to alter the statutory separation of commercial and investment banking and to
further expand the powers of banks, bank holding companies and competitors of
banks. It cannot be predicted whether or in what form any of these proposals
will be adopted or the extent to which the business of the Company may be
affected thereby.
Regulation of the Bank
The Bank is a banking institution which is chartered by and operated in
the State of Florida, and it is subject to supervision and regulation by the
FDBF. The Bank is a member bank of the Federal Reserve System and its operations
are also subject to broad federal regulation and oversight by the FRB. The
deposit accounts of the Bank are insured by the FDIC which gives the FDIC
certain enforcement powers over the Bank. Various consumer laws and regulations
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 supervises and regulates 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 is 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.
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.
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.
The Bank is member of the FHLB system, which consists of twelve
regional FHLBs, each subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"), an agency created by FIRREA. The FHLB provides a
central credit facility primarily for member thrift institutions as well as
other entities involved in home mortgage lending. The Bank, as a member of the
Atlanta-FHLB, is required to purchase and hold shares of the capital stock in
that FHLB in an amount at least equal to the greater of (i) 1% of the aggregate
principal amount of its unpaid mortgage loans, home purchase contracts and
similar obligations at the beginning of each year; (ii) 0.3% of its assets or
(iii) 5% (or such greater fraction as established by the FHLB) of its advances
from the FHLB. The Bank is in compliance with this requirement.
19
<PAGE>
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.
The commercial banking business in which the Bank engages 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.
The Bank is 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 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.
20
<PAGE>
Item 2. Properties
The Bank operates ten full-service branches of which three of the
facilities are owned and seven 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. Net book value for office buildings and
land was approximately $5.6 million at December 31, 1995.
The Bank leases seven full-service branches in Palm Beach County,
Florida, of which four branches were acquired in connection with the Banyan and
Governors mergers.
Item 3. Legal Proceedings
In the ordinary course of business, the Company or the Bank may be
involved in litigation from time to time. At present, 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.
Item 4. Submission of Matters to a Vote of Security Holders
During the third quarter of the nine months ended December 31, 1995,
the Company did not submit any matter to a vote of security holders.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
MARKET PRICE AND DIVIDENDS
The Common Stock of the Company, par value $.01 per share, is traded on
the over-the-counter market and is listed on NASDAQ under the symbol RSFC. The
table sets forth the high and low sales prices for the common stock as reported
by NASDAQ.
<TABLE>
<CAPTION>
SALES PRICE
================================================================================================================================
NINE MONTHS ENDED DECEMBER 31, YEAR ENDED MARCH 31,
1995 1995
- - - --------------------------------------------------------------------------------------------------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First quarter ended June 30 $5 3/8 $4 1/8 $4 1/4 $3 3/8
Second quarter ended September 30 $6 1/4 $4 3/4 $4 1/2 $3 3/4
Third quarter ended December 31 $6 1/8 $5 1/8 $4 3/8 $3 1/4
Fourth quarter ended March 31 $4 3/8 $3 3/4
- - - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of February 9, 1996 the number of record holders of the common
stock was approximately 2,500.
Currently the Company has fourteen market makers in its common stock:
Advest, Inc. Allen C. Ewing & Co.
Fuhnestock & Co., Inc. F. J. Morrissey & Co., Inc.
Herzog, Heine, Geduld, Inc. J. W. Charles Securities, Inc.
Jameson DeWitt & Associates Mayer & Schweitzer, Inc.
Nash, Weiss & Company Robert W. Baird & Co., Inc.
Ryan Beck & Co., Inc. Sherwood Securities Corp.
Sterne, Agee & Leach, Inc. William R. Hough & Co.
21
<PAGE>
The Board of Directors has declared cash dividends for shareholders for
twelve consecutive quarters as follows:
================================================================================
Declaration Record Per Share
Date Date Dividend
- - - --------------------------------------------------------------------------------
April 21, 1993 May 15, 1993 $.01
July 21, 1993 August 2, 1993 .01
October 20, 1993 November 1, 1993 .01
January 26, 1994 February 15, 1994 .01
April 27, 1994 May 20, 1994 .01
July 27, 1994 August 19, 1994 .01
October 26, 1994 November 10, 1994 .02
February 3, 1995 February 16, 1995 .02
April 26, 1995 May 15, 1995 .02
July 26, 1995 August 14, 1995 .025
November 6, 1995 November 17, 1995 .025
February 20, 1996 March 4, 1996 .025
- - - --------------------------------------------------------------------------------
On August 12, 1991, January 27, 1992, April 1, 1993, and January 21,
1994, the Company issued a common stock dividend of 10%, 5%, 10% and 5%,
respectively.
Future payment of dividends will be subject to determination and
declaration by the Board of Directors. See Note 11 to the audited consolidated
financial statements for discussion of restrictions on dividend payments.
22
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
CONSOLIDATED SELECTED FINANCIAL DATA
===============================================================================================================================
NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED MARCH 31,
(Amounts in thousands, except per share amounts) 1995 1995 1994 1993 1992
- - - -------------------------------------------------------------------------------------------------------------------------------
Summary of Operating Results:
<S> <C> <C> <C> <C> <C>
Interest income $16,035 $16,288 $12,487 $11,237 $11,366
Interest expense 7,775 7,397 5,512 4,560 6,950
- - - -------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,260 8,891 6,975 6,677 4,416
Provision for loan losses 100 200 214 1,003 704
- - - -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,160 8,691 6,761 5,674 3,712
Non-interest income 3,428 2,999 4,389 3,058 3,812
Operating expenses 8,442 9,860 8,739 6,932 6,266
- - - -------------------------------------------------------------------------------------------------------------------------------
Income before income tax,
extraordinary item and accounting change 3,146 1,830 2,411 1,800 1,258
Income taxes 1,169 663 818 582 466
- - - -------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and accounting change 1,977 1,167 1,593 1,218 792
Extraordinary item 278
Change in accounting for income taxes 500
- - - -------------------------------------------------------------------------------------------------------------------------------
Net income $1,977 $1,167 $2,093 $1,218 $1,070
- - - -------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Primary earnings per common share:
Income before extraordinary item
and change in accounting for income taxes $.32 $.23 $.42 $.50 $.42
===============================================================================================================================
Net income $.32 $.23 $.55 $.50 $.55
===============================================================================================================================
Fully diluted earnings per common share $.25 $.23 $.55 $.50 $.55
===============================================================================================================================
Average common shares and common stock
equivalents outstanding:
Primary 5,175 4,474 3,927 2,895 2,389
Fully diluted 7,797 5,470 4,424 2,895 2,389
===============================================================================================================================
Book value per common share $4.75 $4.19 $4.08 $4.31 $3.85
Dividends per common share $.07 $.07 $.04
- - - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED SELECTED FINANCIAL DATA (Continued)
====================================================================================================================================
AT OR FOR THE AT OR FOR THE
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
(Amounts in thousands, except per share data) 1995 1995 1994 (a) 1993 1992 (a)
- - - ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
At period end:
<S> <C> <C> <C> <C> <C>
Total assets $303,661 $280,039 $206,637 $169,474 $135,330
Investments 10,622 14,103 24,481 248 248
Loans (b) 219,187 230,447 156,365 127,257 99,745
Allowance for loan losses 2,431 2,507 1,071 1,247 775
Total deposits 225,059 229,735 156,651 145,911 117,349
Borrowed money 27,350 19,733 21,995 2,000 2,000
Shareholders' equity 43,834 20,446 19,648 10,793 7,104
Shares outstanding 6,588 3,653 3,610 1,942 1,455
- - - ------------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Assets $272,270 $229,731 $185,764 $133,754 $132,571
Stockholders' equity 27,280 20,446 16,574 8,358 6,670
Interest-earning assets 250,690 208,994 173,756 122,257 120,101
Interest-bearing liabilities 217,970 185,742 154,371 108,357 107,532
- - - ------------------------------------------------------------------------------------------------------------------------------------
Other data:
Return on average assets .97% .50% 1.13% .91% .81%
Return on average shareholders' equity 9.65% 5.82% 12.63% 14.57% 16.04%
Average shareholders' equity to average total assets 10.00% 8.60% 8.92% 6.25% 5.03%
Shareholders' equity to total assets 14.44% 7.30% 9.50% 6.40% 5.25%
Net interest spread 3.77% 4.00% 3.60% 5.00% 3.00%
Net interest margin 3.39% 4.25% 4.01% 5.50% 3.10%
Non-performing loans (c) $2,422 $2,427 $1,357 $3,193 $1,627
Non-performing assets (c) $3,762 $3,436 $3,228 $4,125 $5,395
Non-performing loans to total loans 1.12% 1.04% .87% 2.53% 1.64%
Non-performing assets to total assets 1.24% 1.23% 1.56% 2.43% 3.99%
Allowance for loan losses to total loans 1.11% 1.09% .69% .98% .78%
Net charge-offs to average loans .08% .09% .27% .75% .55%
Efficiency ratio (d) 72% 83% 77% 71% 76%
Dividend payout ratio (e) 22% 30% 7%
Number of full-service offices 8 7 5 5 3
Loan servicing portfolio (in millions) $307 $323 $189 $267 $402
- - - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Ratios for the year ended March 31, 1994 include a $500,000 cumulative effect of change in accounting for income taxes
where appropriate. Ratios for the year ended March 31, 1992 include an extraordinary item benefit of $278,000 where
appropriate.
(b) Net of deferred loan fees, purchased loan discounts and premiums and undisbursed loans-in-process.
(c) Non-performing loans are loans contractually past due 90 days or more placed on non-accrual. Non-performing assets include
non-performing loans and other real estate owned.
(d) The efficiency ratio is calculated by dividing non-interest expense by net interest income plus non-interest income.
(e) Dividend payout ratio is calculated by dividends declared per share dividend by net income per share.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
=============================================================================================================================
For the Nine Months Ended December 31, 1995
First Second Third
(Amounts in thousands except per share data) Quarter Quarter Quarter
- - - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $5,320 $5,454 $5,261
Interest expense 2,712 2,704 2,359
- - - -----------------------------------------------------------------------------------------------------------------------------
Net interest income 2,608 2,750 2,902
Provision for loan losses 25 50 25
- - - -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,583 2,700 2,877
Non-interest income 914 1,367 1,147
Operating expense 2,679 2,896 2,867
- - - -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 818 1,171 1,157
Provision for income taxes 291 421 457
- - - -----------------------------------------------------------------------------------------------------------------------------
Net income $527 $750 $700
- - - -----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Primary earnings per common share $.10 $.15 $.09
Fully diluted earnings per common share .10 .13 .08
Dividends per common share .02 .025 .025
Average common shares and common stock equivalents outstanding
Primary 4,459 4,629 6,120
Fully diluted 5,452 5,610 8,731
- - - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================================================================
For the Year Ended March 31, 1995
First Second Third Fourth
(Amounts in thousands except per share data) Quarter Quarter Quarter Quarter
- - - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $3,361 $3,624 $4,051 $5,252
Interest expense 1,509 1,539 1,861 2,488
- - - --------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,852 2,085 2,190 2,764
Provision for loan losses 75 75 25 25
- - - --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,777 2,010 2,165 2,739
Non-interest income 854 602 742 801
Operating expense 2,211 2,138 2,407 3,104
- - - --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 420 474 500 436
Provision for income taxes 155 170 180 158
- - - --------------------------------------------------------------------------------------------------------------------------------
Net income $265 $304 $320 $278
- - - --------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net income per common share $.05 $.06 $.06 $.05
Average common shares and common stock equivalents outstanding 4,480 4,489 4,466 4,485
- - - --------------------------------------------------------------------------------------------------------------------------------
25
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Corporate Overview
Republic Security Financial Corporation is a commercial bank holding
company headquartered in West Palm Beach, Florida. The Company's principal
business is the operation of Republic Security Bank, a state chartered
commercial bank. With nine full-service branches located in Palm Beach County,
Florida and one full-service branch in Dade County, Florida, the Bank serves
primarily Palm Beach County.
Over the past several years, the Bank has transitioned its business
from traditional thrift activities to those of a commercial bank. The new
business strategy included a concentration on commercial, consumer and
construction lending while maintaining a residential mortgage banking presence
and a concentration on business and personal transaction accounts and increased
non interest income from loan and deposit service fees. On November 30, 1994,
the Bank acquired Governors Bank, a commercial bank headquartered in West Palm
Beach with a concentration on the types of loans and deposits targeted by the
Bank. Total assets acquired in connection with the merger was approximately
$64.31 million.
Consistent with the Bank's shift in business focus, on November 6,
1995, the Company and the Bank received all necessary federal and state
regulatory approvals and converted to a commercial bank holding company and a
State of Florida chartered commercial bank. On July 26, 1995, as a consequence
of the Bank's charter conversion, the Company and the Bank changed its fiscal
year ends from March 31 to December 31.
On December 15, 1995 the Bank purchased the West Palm Beach office of
Century Bank, a thrift chartered bank, which provided a larger customer base
when combined with the existing Republic Bank branch in the same vicinity and
other key economic benefits to the Bank. On January 19, 1996, the Bank acquired
Banyan Bank, a commercial bank headquartered in Boca Raton, Florida, with one
branch office located in Boynton Beach, Florida. In addition to acquiring
commercial bank loans and deposit portfolios, the acquisition provides Republic
with a geographic presence in South Palm Beach County. Total assets acquired in
connection with the merger was approximately $54.0 million. The results of the
Banyan acquisition are not included in the Company's Consolidated Financial
Statements as the acquisition date was subsequent to the Company's year end.
Looking forward, the Bank's business strategy is to continue its (i)
focus in commercial and consumer lending while maintaining a presence in the
residential mortgage market, (ii) emphasis on residential construction lending,
(iii) emphasis on business and personal transaction accounts, (iv) focus on
non-interest income from loan and deposit service fees, (v) development and
implementation of new products and services, and (vi) growth through a
combination of bank and branch acquisitions, as well as de novo expansion of the
branch network and to achieve a higher profile through additional strategically
located banking offices and increased marketing efforts.
Results of Operations
The following is a discussion and analysis of the Company's
consolidated results of operations. The Company's operating results include the
results of Governors Bank since November 30, 1994. The discussion and analysis
should be read in conjunction with the Company's consolidated financial
statements and corresponding notes included elsewhere in this report.
The Company's net income for the nine months ended December 31, 1995
was $1,977,000 compared with net income of $889,000 for the nine months ended
December 31, 1994. Net income per common share was $.32 on a primary basis and
$.25 on a fully diluted basis for the nine months ended December 31, 1995
compared to $.18 per common share on both primary and fully diluted basis for
the nine months ended December 31, 1994. The increase in net income for the nine
months ended December 31, 1995 compared to the nine months ended December 31,
1994 is primarily due to increases of approximately $2.1 million in net interest
income and $1.2 million in non-interest income
26
<PAGE>
offset by increases of approximately $1.7 million in non-interest expense and
$664,000 in income tax expense.
The Company's net income decreased by $926,000 from $2.1 million for
the year ended March 31, 1994 to $1.2 million for the year ended March 31, 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 year
ended March 31, 1994 included a $500,000 ($.13 per share) 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 primarily due to increases of $1.92 million
in net interest income and $1.30 million in other non-interest income and
service charges on deposit accounts which were more than offset by a decrease of
$2.48 million in gain on sale of loans and servicing and mortgage trading
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 for the
year ended March 31, 1994 from $1.2 million for the year ended March 31, 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 per share 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 Stock which was completed in
September 1993.
As a result of the downsizing of the mortgage banking operations in
January 1995, the Company's future results of operations will depend to a
significant extent on the level of its net interest income, which is the
difference between the interest income received on its interest-earning assets
and the interest paid 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.
Net Interest Income
Net interest income for the nine months ended December 31, 1995
increased $2.1 million or 35% from the nine months ended December 31, 1994 due
primarily to an increase of $4.6 million in interest income on loans, offset by
an increase of $2.7 million in interest expense on certificates of deposit. The
average interest-earning assets and average interest-bearing liabilities
increased during the nine months ended December 31, 1995 compared with the nine
months ended December 31, 1994 primarily due to the acquisition of Governors
Bank. In addition the Bank's net interest margin increased to 4.39% for the nine
months ended December 31, 1995 from 4.07% for the nine months ended December 31,
1994, primarily as a result of a change in the composition of the Bank's loan
portfolio. The composition of the Bank's loan portfolio changed as a result of
the Governors merger to reflect an increase in consumer, commercial business and
commercial real estate loans which generally are higher yielding than
residential mortgage loans.
Net interest income increased by 27% to $8.9 million for the year ended
March 31, 1995 compared to $7.0 million for the year ended March 31, 1994
primarily due to an increase in interest income on loans of $3.7 million as a
result of 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 year
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 for the year
ended March 31, 1994 remained relatively flat compared with the year ended March
31, 1993 as the increase in loan and deposit volumes were offset by the decrease
in interest rates during the period.
Interest Income
Interest income increased approximately $5.0 million for the nine
months ended December 31, 1995 compared to the nine months ended December 31,
1994. The primary contributor to the increase in interest income is due to a
$45.0 million increase in the average loan balances outstanding for the
27
<PAGE>
nine months ended December 31, 1995 compared to the nine months ended December
31, 1994 which resulted in an increase in interest income of $3.5 million.
Approximately $1.1 million of the increase in interest income for the nine
months ended December 31, 1995 compared to the nine months ended December 31,
1994 resulted from an increase in the average rate earned on loans. The average
investment balance increased approximately $6.7 million as a result of the
Governors acquisition which was the primary reason for the increase in interest
income on investments of $465,000 for the nine months ended December 31, 1995
compared to the nine months ended December 31, 1994.
The increases in loan volume and loan portfolio yield are the result of
increased consumer and commercial loans due to the acquisition of Governors as
well as an increase in these types of loan originations. Thirty six percent of
the Bank's loan portfolio is comprised of consumer, commercial, and commercial
real estate loans at December 31, 1995.
Of the $3.8 million increase in interest income for the year ending
March 31, 1995 compared to the year ending March 31, 1994, $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 7.2% in 1994 to 7.8% in 1995 primarily as a result of a
larger portion of interest-earnings assets representing 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 was offset by a decrease in market
interest rates during 1994.
Interest Expense
In line with management's goals the average balance of
non-interest-bearing deposits increased $10.5 million to $18.6 for the nine
months ended December 31, 1995 from $8.1 million for the nine months ended
December 31, 1994. However, increases in the volume of certificates of deposits
and the average rate paid on certificates of deposits contributed to the $2.9
million increase in interest expense for the nine months ended December 31, 1995
compared to the nine months ended December 31, 1994. An increase of $36.9
million in the average balance of certificates of deposits resulted in an
increase of $1.6 million in interest expense while an increase in the rate paid
on certificates of deposits increased interest expense $1.2 million for the nine
months ended December 31, 1995 compared to the nine months ended December 31,
1994. The Governors acquisition resulted in an increase in average certificate
of deposits of approximately $28.0 million.
Of the $1.89 million increase in interest expense for the year ended
March 31, 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 rates and volume increases was certificates of deposit.
Of the $0.9 million increase in interest expense for the year ended
March 31, 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 and a negative $2.0 million was due to a decreased average rate on
interest-bearing liabilities to 3.57% in 1994 from 4.21% in 1993. The primary
factor in these rates and volume increases was certificates of deposit.
28
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST INCOME, AVERAGE BALANCE AND RATES:
====================================================================================================================================
Nine Months Ended December 31, Year Ended March 31,
-------------------------------------------------------------------------------------------------------
1995 1994 1995 1994
-------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/ Average Yield
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
- - - ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $224,405 14,954 8.89% $179,256 10,380 7.72% $191,442 $15,254 7.97% $144,359 $11,525 7.98%
Interest-bearing deposits 12,985 339 3.48 14,639 379 3.45 10,743 462 4.30 14,113 300 2.13
Investments 13,300 742 7.44 6,568 277 5.62 6,809 572 8.40 15,284 662 4.33
- - - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 250,690 16,035 8.53 200,463 11,036 7.34 208,994 16,288 7.79 173,756 12,487 7.19
Other assets 21,580 12,506 20,737 12,008
- - - ------------------------------------------------------------------------------------------------------------------------------------
Total $272,270 $212,969 $229,731 $185,764
- - - ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and
Shareholders' Equity:
Interest-bearing liabilities:
Savings deposits $ 18,354 405 2.94% $ 19,228 460 3.19% $ 19,393 $ 607 3.13% $ 19,168 $ 545 2.84%
NOW accounts 34,762 454 1.74 26,247 278 1.41 27,794 419 1.51 20,439 326 1.59
Money market accounts 12,958 312 3.20 12,334 308 3.30 14,067 437 3.11 7,825 368 4.70
Certificate of deposits 133,200 5,775 5.78 96,328 3,053 4.23 105,659 4,781 4.52 89,494 3,494 3.90
Borrowed money 18,696 829 5.91 19,656 810 5.49 18,829 1,153 6.12 17,445 779 4.47
- - - ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 217,970 7,775 4.76 173,793 4,909 3.77 185,742 7,397 3.98 154,371 5,512 3.57
- - - ------------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing deposits 18,576 8,126 10,428 8,243
Other liabilities 8,444 11,087 13,115 6,576
Shareholders' equity 27,280 19,963 20,446 16,574
- - - ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $272,270 $212,969 $229,731 $185,764
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net interest/income
rate spread $8,260 3.77% $6,127 3.57% $8,891 3.81% $6,975 3.62%
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net average interest-earning
assets/net interest margin $ 32,720 4.39% $ 26,670 4.07% $ 23,252 4.25% $ 19,385 4.01%
- - - ------------------------------------------------------------------------------------------------------------------------------------
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.15X 1.15X 1.13X 1.13X
- - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<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>
=============================================================================================================================
NINE MONTHS ENDED YEAR ENDED MARCH 31,
December 31, 1995 versus 1994 1995 versus 1994
------------------------------------------- -------------------------------------------
Increase (decrease) due to change in: Increase (decrease) due to change in:
------------------------------------------- -------------------------------------------
Average Average Net Average Average Net
Rate Volume Change Rate Volume Change
- - - -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - - -----------------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans - net $1,088 $3,486 $4,574 $(23) $3,752 $3,729
Interest-bearing deposits 17 (57) (40) 307 (145) 162
Investments 86 379 465 622 (712) (90)
- - - -----------------------------------------------------------------------------------------------------------------------------
1,191 3,808 4,999 906 2,895 3,801
- - - -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits (27) (28) (55) 55 7 62
NOW accounts 56 120 176 (18) 111 93
Money Market accounts (17) 21 4 (125) 194 69
Certificates of Deposit 1,164 1,558 2,722 556 731 1,287
Borrowed money 72 (53) 19 289 85 374
- - - -----------------------------------------------------------------------------------------------------------------------------
1,248 1,618 2,866 757 1,128 1,885
- - - -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income $(57) $2,190 $2,133 $149 $1,767 $1,916
- - - -----------------------------------------------------------------------------------------------------------------------------
</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 $75,000 for the nine months
ended December 31, 1995 compared to the nine months ended December 31, 1994.
However, the allowance for loan losses as a percent of total loans remained
relatively stable at 1.11% at December 31, 1995 compared to 1.12% at December
31, 1994. In addition, the amount of non-performing loans has decreased
approximately $770,000 at December 31, 1995 compared to December 31, 1994.
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 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 December 31, 1995, management believes the
allowance is adequate.
In accordance with the Bank's asset classification policy,
non-performing loans (loans contractually past-due 90 days or more) are recorded
at the lesser of the loan balance or estimated fair
30
<PAGE>
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 December 31, 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.
At December 31, 1995 the Bank had $2.42 million in non-performing loans
representing 1.12% of total loans compared to $3.19 million representing 1.04%
of total loans at December 31, 1994. The decrease in non-performing loans is
primarily related to two commercial business loans acquired from Governors in
December 1994 in which one of the loans was paid in full and the other loan is
currently performing as agreed. The increase in non-performing loans to total
loans is due to a decrease in total loans from December 31, 1994 to December 31,
1995.
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 was significantly higher in 1993 than in
1994 due to poor economic conditions in South Florida during 1991, 1992, and
1993.
Non-Interest Income
Non-interest income increased approximately 56% to $3.43 million for
the nine months ended December 31, 1995 compared to the nine months ended
December 31, 1994 primarily as a result of increases in service charges on
deposit accounts and other income. In addition, the nine months ended December
31, 1994 included a $200,000 loss on the sale of trading investments.
Non-interest income significantly decreased from $4.39 million for the
year ended March 31, 1994 to $3.00 million for the year ended March 31, 1995 due
to the reduction in mortgage banking activities which resulted in a decrease in
the amount of gain on the sale of loans and servicing.
Non-interest income increased for the year ended March 31, 1994
compared to the year ended March 31, 1993 primarily due to a reduction in the
amortization of purchased loan servicing rights and an increase in service fees
charged on deposit accounts.
Service Charges on Deposit Accounts
In line with the Bank's goal to increase service fee income on deposit
and loan accounts, service charges on deposit accounts more than doubled for the
nine months ended December 31, 1995 compared to the nine months ended December
31, 1994. The increase in service charges on deposit accounts is due to an
increase in the average number of transaction accounts serviced during the nine
months ended December 31,1995 compared to the nine months ended December 31,
1994 as well as an overall increase in fee charges. Average transaction account
balances increased approximately $18.72 million for the nine months ended
December 31,1995 compared to the nine months ended December 31, 1994. In
addition, the composition of the Bank's deposit portfolio has changed to reflect
an increase in commercial customers which typically require services that
generate more fee income than the traditional personal deposit accounts.
Service charges on deposit accounts increased 84% for the year ended
March 31, 1995 compared to the year ended March 31, 1994 primarily as a result
of average transaction accounts increasing from $55.68 million to $71.68
million. The increase in the number of commercial accounts was due to the
acquisition of Governors as well as the Bank's initiatives to attract
transaction type deposit accounts.
Service charges on deposit accounts increased $196,000 for the year
ended March 31, 1994 compared to the year ended March 31, 1993 primarily due to
the Bank instituting a fee structure similar
31
<PAGE>
to those charged by commercial banks as well as an increase in deposit accounts
due to the Homestead merger.
Gain on Sales of Loans and Servicing Rights
Gain on the sale of loans increased $175,000 for the nine months ended
December 31, 1995 compared to the nine months ended December 31, 1994 primarily
due to an increase in the amount of gain realized on the sale of loans as a
result of a decrease in market interest rates during the nine months ended
December 31,1995. Gain on the sale of servicing decreased $299,000 as no loan
servicing rights were sold during the nine months ended December 31, 1995.
Due to a decrease in loan production volume, gain on sales of loans and
servicing rights decreased $2.12 million for the year ended March 31, 1995 to
$847,000 compared to $2.97 million for the year ended March 31, 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% during
the year ended March 31, 1995. These decreases are attributable to the decline
in loan refinancing. Similar declines were experienced in the mortgage banking
industry as a whole. In addition, during 1995, the Bank reduced it's 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 the year ended March
31, 1993 to the year ended March 31, 1994.
Mortgage Trading Income
The Bank's 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. Mortgage trading income was stable for the nine months ended December 31,
1995 and 1994. Mortgage trading income decreased $357,000 for the year ended
March 31, 1995 compared to the year ended March 31, 1994 primarily due to an
overall decrease in loan activity.
Other Income
Other income consists of loan servicing income net of the amortization
of loan servicing rights, loan fees, rental income and other miscellaneous fee
income.
Other income increased $558,000 for the nine months ended December 31,
1995 compared to the nine months ended December 31, 1994 primarily due to
increases in loan late fees and other loan fees of $160,000, and net loan
servicing income of $115,000. Loan fees increased primarily as a result of an
increase in volume. Net loan servicing income increased due to an increase in
loan servicing income, as a result of an increase in the average loan servicing
portfolio, and a decrease in the amortization of loan servicing rights due to a
decrease in loan prepayment speeds. Other fee income increased due to an overall
increase in loan and deposit account volumes as well as new services offered
during the nine months ended December 31, 1995 particularly to better serve
commercial services.
Other income increased $922,000 for the year ended March 31, 1995
compared to the year ended March 31, 1994 primarily due to an increase in net
loan servicing income. Net loan servicing income increased $793,000 for the year
ended March 31, 1995 to $608,000 compared to a loss of $185,000 for the year
ended March 31, 1994. Loan servicing income for the year ended March 31,1995
remained relatively flat in comparison to the year ended March 31, 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 the year ended March 31, 1995. The decrease in amortization
of loan servicing rights in the year ended March 31, 1995 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
32
<PAGE>
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.
Other income increased approximately $1.33 million for the year ended
March 31, 1994 compared to the year ended March 31, 1993 due to an increase in
net loan servicing income of $1.21 million.
Operating Expenses
Operating expenses increased $1.69 million for the nine months ended
December 31, 1995 compared to the nine months ended December 31, 1994 as a
result of increases in employee compensation, occupancy and equipment expenses,
data processing expenses, professional fees and other operating expenses which
includes the amortization of goodwill. Increases in compensation, occupancy and
equipment and data processing expenses are a result of the acquisition of
Governors and the Bank's overall growth which resulted in an increase of three
branches and additional departments as well as an increase in the volume of loan
and deposit transactions. Other operating expenses increased $165,000 as a
result of goodwill amortization associated with the Governors acquisition.
Additional increases in other operating expenses are a result of the Bank's
growth. Professional fees increased $162,000 primarily as a result of legal fees
associated with corporate matters and problem loans. Overall, operating expenses
as a percent of average assets slightly decreased to 4.1% for the nine months
ended December 31, 1995 compared 4.2% for the nine months ended December 31,
1994.
Operating expenses increased from $8.74 million for the year ended
March 31, 1994 to $9.86 million for the year ended March 31, 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 1995
and the addition of item processing and proof-of-deposit departments as well as
growth in the commercial/consumer loan and loan servicing departments. Other
causes of the increase are higher volumes of deposit transaction accounts and
additional expenses associated with operations acquired as a result of the
merger.
Operating expenses increased from $6.93 million in 1993 to $8.74
million in 1994. The majority of the increase was the result of additional loan
production activity during 1994. Occupancy and equipment and data processing
expenses also contributed to the increase. These increases were the result of
increased volume in deposit and loan accounts as well as overall growth.
Operating expenses however, as a percent of average total assets, has remained
relatively stable over the three year period at 4.3%, 4.7%, and 5.2% for the
years ended March 31, 1995, 1994, and 1993, respectively.
Income Taxes
Income tax expense increased $664,000 for the nine months ended
December 31, 1995 compared to the nine months ended December 31, 1994 due to an
increase in net income before taxes and an approximate 1% increase in the
effective tax rate to 37%. 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 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.
33
<PAGE>
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 the year ended March 31, 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 the ability to meet current and future
obligations of a short-term nature. The liquidity portfolio of the Company
totaled approximately $58.2 million at December 31, 1995 and $22.7 million at
March 31, 1995. The Bank's liquidity position is strong with a regulatory
liquidity ratio (cash, short-term and marketable assets to net deposits and
short term liabilities) of 24% at December 31, 1995 compared to 12% at March 31,
1995. The Bank's liquid assets consist primarily of interest-bearing deposits in
the FHLB and marketable securities.
The Company's cash inflows consist primarily of amounts generated from
the sale of loans, the collection of loan principal payments, deposits and
proceeds from the sale of Common and Preferred Stock. 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.
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
The Bank and the Company are in compliance with regulatory capital
requirements at December 31, 1995. See Note 11 to Consolidated Financial
Statements.
The Bank and the Company, as a bank holding company, are 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
34
<PAGE>
capital into two tiers, Tier I and Total. Tier I risk based capital consists of
common stockholder's 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.
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.
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 December 31, 1995:
<TABLE>
<CAPTION>
===================================================================================================================================
December 31, 1995
------------------------------------------------------------------------------------------
One Year 1 to 3 3 to 5 Over 5
or Less Years Years Years TOTAL
- - - -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
- - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest-earning assets $194,660 $21,470 $41,060 $24,417 $281,607
Total interest-bearing liabilities 176,083 37,248 13,062 625 227,018
- - - -----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $18,577 $(15,778) $27,998 $23,792 $54,589
===================================================================================================================================
Cumulative interest rate
sensitivity gap $18,577 $2,799 $30,797 $54,589
===================================================================================================================================
Cumulative interest rate
sensitivity gap as a
percent of total assets 6.1% .9% 10.1% 18.0%
- - - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
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 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 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.
In addition to the above, the Bank is committed to fund $14.0 million
in new loans and $12.1 million in construction loans-in-process at December 31,
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
Consolidated total assets increased $23.6 million to $303.7 million at
December 31, 1995 from $280.0 million at March 31, 1995, primarily due to the
acquisition of the West Palm Beach, Century Bank branch purchase, net proceeds
of $19.4 million from the sale of Common and Preferred Stock (see Note 11 to
Consolidated Financial Statements) and a $10.0 million increase in FHLB
advances, offset by $35.9 million in net deposit run-off. Interest bearing
deposits in other financial institutions increased $37.1 million primarily as a
result of net proceeds from the sale of Common and Preferred Stock and $16.9
million received in connection with the branch acquisition. Investments
decreased $3.5 million due to maturity and calls. The net decrease of $11.2
million in loans receivable is primarily a result of loan repayments and sales
offset by $12.3 million of loans received in connection with the branch
purchase. Increased deposit run-off is attributable to lowering interest rates
paid on certificates of deposits since March 1995 to become aligned with the
commercial bank market. The decrease in deposits as a result of run-off is
offset by $30.3 million of deposits assumed in connection with the Century Bank
branch purchase. 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 $1.8 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
36
<PAGE>
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 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 shareholder's 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 since March 31, 1994. 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. No significant changes in the
composition of the Bank's loan portfolio occurred from March 31, 1995 to
December 31, 1995.
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. Growth in commercial and consumer
business is expected in 1996 with the anticipation of increasing the Company's
net interest margin through increases in higher interest-earning assets and
reduction of higher interest-bearing liabilities.
37
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
==========================================================================================================================
DECEMBER 31 MARCH 31,
(amounts in thousands except share and per share data) 1995 1995
- - - --------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and amounts due from depository institutions $ 3,211 $ 3,851
Interest-bearing deposits in other financial institutions 51,162 14,050
Investments held to maturity (market value of $10,779 at
December, 31, 1995 and $14,179 at March 31, 1995 10,622 14,103
Loans receivable - net 216,756 227,940
Property and equipment - net 7,192 6,103
Other real estate owned 1,340 1,009
Goodwill - net 2,994 3,227
Loan servicing rights 2,546 2,796
Accrued interest receivable 1,796 2,041
Other assets 6,042 4,919
- - - --------------------------------------------------------------------------------------------------------------------------
Total $303,661 $280,039
- - - --------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Liabilities:
Deposits $225,059 $229,735
Federal Home Loan Bank advances 25,000 15,000
Securities sold under agreements to repurchase 2,350 2,748
Redeemable subordinated debentures 1,985
Advances from borrowers for taxes and insurance 581 1,598
Bank drafts payable 3,155 4,148
Other liabilities 3,682 4,379
- - - --------------------------------------------------------------------------------------------------------------------------
Total liabilities 259,827 259,593
- - - --------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' equity:
Preferred stock $10.00 stated value; 10,000,000 shares authorized:
Series "A" - 401,500 and 402,500 shares issued and outstanding at December 31, 1995
and March 31, 1995, respectively. 4,015 4,025
Series "C" - 1,035,000 shares issued and outstanding at December 31, 1995 10,350
Common stock $.01 par value; 20,000,000 shares authorized;
6,587,653 and 3,652,743 shares issued and outstanding at
December 31, 1995 and March 31, 1995, respectively 66 37
Additional paid-in capital 26,035 14,362
Retained earnings 3,368 2,022
- - - --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 43,834 20,446
- - - --------------------------------------------------------------------------------------------------------------------------
Total $303,661 $280,039
- - - --------------------------------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
================================================================================================================================
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31 MARCH 31,
(amounts in thousands except per share data) 1995 1994 1995 1994
- - - --------------------------------------------------------------------------------------------------------------------------------
(unaudited)
- - - --------------------------------------------------------------------------------------------------------------------------------
Interest Income:
<S> <C> <C> <C> <C>
Interest on loans $14,954 $10,380 $15,254 $11,525
Interest and dividends on investments 1,081 656 1,034 962
- - - --------------------------------------------------------------------------------------------------------------------------------
16,035 11,036 16,288 12,487
- - - --------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on deposits 6,946 4,099 6,244 4,733
Interest on borrowings 829 810 1,153 779
- - - --------------------------------------------------------------------------------------------------------------------------------
7,775 4,909 7,397 5,512
- - - --------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,260 6,127 8,891 6,975
Provision for loan losses 100 175 200 214
- - - --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,160 5,952 8,691 6,761
- - - --------------------------------------------------------------------------------------------------------------------------------
Non-interest Income:
Service charges on deposit accounts 1,113 524 809 440
Gain on sale of loans and servicing 625 749 847 2,971
Mortgage trading income 290 283 329 686
Loss on sale of investments - trading (200) (200)
Other income 1,400 842 1,214 292
- - - --------------------------------------------------------------------------------------------------------------------------------
3,428 2,198 2,999 4,389
- - - --------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Employee compensation and benefits 3,699 3,262 4,595 4,109
Occupancy and equipment 1,498 936 1,488 1,201
Professional fees 599 437 652 707
Advertising and promotion 176 178 233 268
Outside services 97 160 232 163
Communications 302 244 352 332
Data processing 339 209 307 211
Insurance 473 420 570 556
Other real estate owned - net 106 70 70 127
Other 1,153 840 1,361 1,065
- - - --------------------------------------------------------------------------------------------------------------------------------
8,442 6,756 9,860 8,739
- - - --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and accounting change 3,146 1,394 1,830 2,411
Income taxes 1,169 505 663 818
- - - --------------------------------------------------------------------------------------------------------------------------------
Income before accounting change 1,977 889 1,167 1,593
Change in accounting for income taxes 500
- - - --------------------------------------------------------------------------------------------------------------------------------
Net income $1,977 $889 $1,167 $2,093
- - - --------------------------------------------------------------------------------------------------------------------------------
Income applicable to common stock $1,648 $663 $865 $1,929
- - - --------------------------------------------------------------------------------------------------------------------------------
Per share data:
Primary earnings per common share:
Income before accounting change $.32 $.18 $.23 $.42
Change in accounting for income taxes .13
- - - --------------------------------------------------------------------------------------------------------------------------------
Net income $.32 $.18 $.23 $.55
- - - --------------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per common share $.25 $.18 $.23 $.55
- - - --------------------------------------------------------------------------------------------------------------------------------
Average common shares and common stock equivalents outstanding:
Primary 5,175 4,474 4,474 3,927
Fully diluted 7,797 5,468 5,470 4,424
- - - --------------------------------------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(amounts in thousands except share data)
================================================================================================================================
Additional Retained
Preferred Common Paid-in Earnings
Stock Stock Capital (Deficit)
- - - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Exercise of equity contracts - 6,557 shares 21
Issuance of series "A" preferred stock - 402,500 shares $4,025 (550)
Issuance of common stock - 1,150,000 shares 12 3,462
401(k) plan - 14,582 shares 50
Cash dividends - common stock (116)
Cash dividends - preferred stock (164)
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 1 39
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 37 14,362 2,022
Exercise of equity contracts - 634,476 shares 6 1,745
Exercise of warrants - 211,300 shares 2 818
Exercise of stock options - 2,668 shares 7
Issuance of stock grants - 12,000 shares 52
Conversion of preferred stock into common stock -
2,469 shares (10) 10
401(k) plan - 1,997 shares 8
Issuance of series "C" preferred stock -
1,035,000 shares 10,350 (850)
Issuance of common stock - 2,070,000 shares 21 9,883
Cash dividends - common stock (302)
Cash dividends - preferred stock series "A" and "C" (329)
Net income for nine months ended
December 31, 1995 1,977
- - - --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $14,365 $66 $26,035 $3,368
- - - --------------------------------------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
===========================================================================================================================
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31, MARCH 31,
1995 1995 1994
- - - ---------------------------------------------------------------------------------------------------------------------------
Operating Activities:
<S> <C> <C> <C>
Net income $1,977 $1,167 $2,093
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 100 200 214
Provision for depreciation 457 459 410
Deferred income taxes 182 139 100
Amortization of loan servicing rights
and premium on sale of loans 334 505 1,218
Amortization of deferred loan fees and costs (337) (215) (439)
Amortization of goodwill 165 73
Gain on sale of loans -trading, loans and servicing (757) (1,175) (3,657)
Loan costs deferred (161) (471) (894)
Loans originated for sale (28,280) (48,157) (139,393)
Purchase of loans for sale (8,572) (5,140) (20,759)
Sale of loans and loan participation certificates 48,192 55,102 142,274
Proceeds from the sale of investments - trading 24,000
Loss on sale of investments - trading 200
Purchase of investments held for trading (24,233)
Other - net (1,389) 2,338 526
- - - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 11,911 29,025 (42,540)
- - - ---------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Cash and cash equivalents acquired in branch purchase, net 16,917
Cash and cash equivalents acquired in merger-net 1,819
Maturities of investments 5,600 1,350
Purchases of investments held-to-maturity (1,951)
Loans purchased for investment (1,861) (1,053) (26,450)
Loans originated for investment (42,516) (67,990) (13,950)
Principal collected on loans 56,317 35,034 37,313
Purchase of property and equipment (1,652) (2,295) (1,745)
Purchase of loan servicing rights (2,322)
Other - net 331 1,408 74
- - - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 31,185 (34,049) (4,758)
- - - ---------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net (decrease) increase in demand deposits, NOW accounts,
Money Market accounts and savings accounts (1,665) (1,414) 7,922
Proceeds from sales of certificates of deposit 30,054 56,414 39,402
Payment for maturing certificates of deposits (64,220) (40,185) (36,584)
Sale of common and preferred stock -
net of stock issuance costs 19,404 6,949
Increase (decrease) in FHLB advances 10,000 (5,000) 20,000
Cash dividends (631) (519) (280)
Other - net 434 475 (2,776)
- - - ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (6,624) 9,771 34,633
- - - ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 36,472 4,747 (12,665)
Cash and cash equivalents at beginning of year 17,901 13,154 25,819
- - - ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $54,373 $17,901 $13,154
- - - ---------------------------------------------------------------------------------------------------------------------------
<FN>
See notes to consolidated financial statements.
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company is a commercial bank holding company, the
principal business of which is the operation of a commercial bank
business through Republic Security Bank (the "Bank"), its wholly owned
subsidiary, a State chartered commercial bank. The Bank is a member of
the Federal Reserve Bank and the Federal Home Loan Bank System
("FHLB"). Its deposits are insured by the FDIC up to applicable limits.
The Bank has eight full-service branches, seven 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.
The accounting and reporting policies of Republic Security
Financial Corporation and subsidiaries conform to generally accepted
accounting principles. In preparing the consolidated financial
statements, management is required to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The following is a summary of the significant accounting
policies.
Change in Fiscal Year
During 1995, the Company changed its fiscal year end from
March 31 to December 31. Accordingly, the accompanying consolidated
financial statements present the audited consolidated statements of
income and cash flows for the nine month transition period ended
December 31, 1995, as well as for the years ended March 31, 1995 and
1994. The unaudited consolidated statement of income for the nine month
period ended December 31, 1994 is included for comparative purposes
only.
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 $970,000 of income tax payments during the
nine months ended December 31, 1995. The Company paid $512,000 and
$180,000 of income tax payments during the years ended March 31, 1995
and 1994, respectively. During the nine months ended December 31, 1995,
the Company paid $7,787,000 in interest on deposits and other
borrowings. The Company paid $6,634,000 and $5,471,000 of interest on
deposits and other borrowings during the years ended March 31, 1995 and
1994, respectively. During the nine months ended December 31, 1995,
$770,000 of loans were transferred to OREO. Approximately $1,367,000
and $2,258,000 was transferred from loans to OREO during 1995 and 1994,
respectively. As a result of the conversion of the redeemable
subordinated debentures, equity increased $1,751,000 in the nine months
ended December 31, 1995. During the nine months ended December 31,
1995, the Bank received $12,300,000 in loans and assumed $30,300,000 in
deposits related to the Century Bank branch purchase (see Note 2). In
addition, assets of $64,307,000 were acquired and $62,310,000
liabilities assumed related to the merger of Governors Bank during the
year ended March 31, 1995 (see Note 2).
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. 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.
Loans Receivable - Net
Loans receivable are stated at the principal amount
outstanding and are net of unearned purchased premiums or discounts,
deferred loan origination fees and costs, and the allowance for loan
losses. Interest on loans is accrued as earned. Amortization of
premiums and accretion of discounts are recognized as adjustments to
interest income over the lives of the related loans. 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
Generally, loans contractually past due 90 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. In
addition, accrual of interest on loans less than 90 days past due 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.
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.
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.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 December 31, 1995
allowance for credit losses related to loans that are identified for
evaluation in accordance with SFAS 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 April 1, 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.
All non-accrual loans, excluding smaller balance, homogeneous
loans (defined as consumer loans less than $100,000 and residential
mortgage loans), are considered to be 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.
Other 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 other real estate owned
expense. In addition, any subsequent reductions in the valuation of the
property is included in other real estate owned expense. Loans
previously classified as in-substance foreclosure but for which the
Company had not taken possession of the collateral totalled $1,329,000
at March 31, 1995 and have been reclassified to loans.
The Bank follows the practice of reducing the carrying value
of individual properties in other real estate owned for any amounts in
excess of the fair value of properties less costs to dispose. Provision
for other real estate owned losses during the years ended March 31,
1995 and 1994, totaled $91,000 and $86,000, respectively, and is
included in other real estate owned expense in the consolidated
statement of income. No provisions for other real estate owned was
recorded during the nine months ended December 31, 1995.
Property and Equipment
Property and equipment is carried at cost less accumulated
depreciation. Depreciation is computed using 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 remaining lease term or the estimated useful lives of the
assets. Repairs and maintenance are charged to expense and gains or
losses on disposals are credited or charged to earnings.
Goodwill
The Company, at each balance sheet date, evaluates the
recovery of the carrying amount of goodwill by determining if any
impairment indicators are present. These indicators include duplication
of resources resulting from acquisitions, income derived from
businesses acquired and other factors. If this review indicates that
goodwill not be recoverable, as principally determined based on the
estimated undiscounted cash flows of the acquired entity
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
over the remaining amortization period, the Company's carrying value of
the goodwill is reduced by the estimated shortfall of future cash
flows. Goodwill is amortized over 15 years using the straight-line
method. Accumulated amortization is $238,500 at December 31, 1995.
Income per Common Share
Primary 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. Fully diluted net income per common share is calculated by
dividing net income by the average number of common stock and common
stock equivalents outstanding during the year, plus the assumed
conversion of all outstanding convertible preferred shares to common
shares. Common stock equivalents for both primary and fully diluted net
income per share include stock options, warrants, and equity contracts
and are included in the computation of earnings per share using the
treasury stock method. Convertible preferred stock is computed using
the "if converted" method, which assumes the conversion of all
outstanding convertible preferred shares into common shares.
Income Taxes
Income taxes have been provided using the liability method in
accordance with FASB Statement No. 109, "Accounting for Income Taxes".
Stock Based Compensation
The Company grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation
expense for the stock option grants.
Reclassification
Certain amounts presented in the consolidated financial
statements for prior years have been reclassified for comparative
purposes.
New Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
for Long-Lived Assets to be Disposed Of" (SFAS No. 121), which is
effective for fiscal years beginning after December 15, 1995. SFAS No.
121 requires losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the asset's carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of.
The Company will adopt SFAS No. 121 in the first quarter of 1996 and,
based on current circumstances, the Statement will not have a material
impact on the financial condition, operations or cash flows of the
Company.
2. Branch Acquisition and Merger
In December, 1995 the Bank acquired the West Palm Beach branch
office of Century Bank, an unaffiliated thrift. In connection with the
acquisition, the Bank assumed approximately $30,300,000 of deposit
liabilities and acquired $29,200,000 of assets, including $12,300,000
of adjustable rate single family residential loans and $16,900,000 in
cash, net of $1,125,000 paid to the seller for the transfer of such
assets and liabilities to the Bank. The amount paid is included in
other assets in the consolidated statement of financial condition at
December 31, 1995 and is being amortized over seven years using the
straight-line method.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On November 30, 1994, the Bank 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 $3,300,000 in goodwill was recorded
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:
===============================================================================
(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
- - - -------------------------------------------------------------------------------
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>
==============================================================================================================
(in thousands except per share data) Year Ended March 31,
- - - --------------------------------------------------------------------------------------------------------------
1995 1994
- - - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total interest income $19,702 $18,268
- - - --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses $10,625 $6,431
- - - --------------------------------------------------------------------------------------------------------------
Income before taxes and cumulative effect of accounting change $2,357 $191
- - - --------------------------------------------------------------------------------------------------------------
Net income $1,507 $507
- - - --------------------------------------------------------------------------------------------------------------
Net income per common share $.30 $.14
- - - --------------------------------------------------------------------------------------------------------------
</TABLE>
The year ended March 31, 1994 includes a $3.2 million
provision for loan losses attributable to the Governors' loan portfolio
while the year ended March 31, 1995 includes a $102,000 provision
related to the Governors' loan portfolio.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments
The following is a summary of held to maturity securities at:
<TABLE>
<CAPTION>
============================================================================================================================
Gross
Gross Unrealized Market
(in thousands) Amortized Cost Unrealized Gains Losses Value Yield
- - - ----------------------------------------------------------------------------------------------------------------------------
December 31, 1995 (in thousands)
- - - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government securities $10,547 $164 $7 $10,704 7.15%
Foreign Government securities 75 75 7.50
- - - ----------------------------------------------------------------------------------------------------------------------------
Total Debt Securities $10,622 $164 $7 $10,779 7.16
- - - ----------------------------------------------------------------------------------------------------------------------------
March 31, 1995
- - - ----------------------------------------------------------------------------------------------------------------------------
U.S. Government securities $13,528 $78 $13,606 7.20%
Foreign Government securities 75 75 7.50
Other debt securities 500 $2 498 5.70
- - - ----------------------------------------------------------------------------------------------------------------------------
Total Debt Securities $14,103 $78 $2 $14,179 7.15%
- - - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995 and March 31, 1995 securities with a book
value of $6,752,000 and $5,409,000, respectively, were pledged to
collateralize repurchase agreements, public deposits and other items.
The amortized cost and estimated market value of debt
securities at December 31, 1995 by contractual maturity are shown
below:
================================================================================
Amortized Market
(in thousands) Cost Value
- - - --------------------------------------------------------------------------------
Due in 1 year or less $6,693 $6,725
Due after 1 through 5 years 2,879 3,010
Due after 5 years through 10 years 1,050 1,044
- - - --------------------------------------------------------------------------------
$10,622 $10,779
- - - --------------------------------------------------------------------------------
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.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Loans Receivable - Net
Loans receivable - net is summarized as follows:
================================================================================
December 31, March 31,
(in thousands) 1995 1995
- - - --------------------------------------------------------------------------------
Residential mortgage $116,328 $124,913
Commercial mortgage 25,884 26,747
Real estate construction 36,863 48,500
Installment loans to individuals 37,984 36,285
Commercial and financial 14,868 16,484
- - - --------------------------------------------------------------------------------
Total loans 231,927 252,929
- - - --------------------------------------------------------------------------------
Deferred loan fees (482) (921)
Discount on loans purchased (575) (656)
Premium on loans purchased 421 555
Undisbursed portion of loans-in-process (12,104) (21,460)
Allowance for loan losses (2,431) (2,507)
- - - --------------------------------------------------------------------------------
Loans receivable - net $216,756 $227,940
- - - --------------------------------------------------------------------------------
5. Non-Performing Loans and Allowance for Loan Losses
At December 31, 1995, March 31, 1995 and 1994, the Bank had
$2,422,000, $2,427,000 and $1,357,000, respectively, in non-performing
loans. Prior to April 1, 1995, the Company generally placed loans
contractually past due 60 days or more on non-accrual. The amount of
loans 61-89 days past due and included in non-performing loans at March
31, 1995 and 1994 is $360,000, and $152,000, respectively. Interest
income not recognized on non-performing loans was $148,000 during the
nine months ended December 31, 1995 and $35,000 and $20,000 for the
years ended March 31, 1995 and 1994, respectively.
At December 31, 1995, March 31, 1995 and 1994 the recorded
investment in loans that are considered to be impaired under SFAS No.
114 was $101,000, $792,000 and $438,000, respectively. The related
allowance for credit losses for such loans is $15,000, $120,000 and
$65,000 at December 31, 1995 and March 31, 1995 and 1994, respectively.
The average recorded investment in impaired loans during the nine
months ended December 31, 1995 was approximately $881,000. The average
recorded investment in impaired loans for the years ended March 31,
1995 and 1994 is $880,000 and $450,000, respectively. For the nine
months ended December 31, 1995 and the years ended March 31, 1995 and
1994, the Company recognized $21,600, $54,000 and $50,000,
respectively, in interest income on impaired loans.
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.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
An analysis of changes in the allowance for loan losses is
summarized as follows:
================================================================================
Nine Months Ended Year Ended
December 31, March 31,
(in thousands) 1995 1995 1994
- - - --------------------------------------------------------------------------------
Beginning balance $2,507 $1,071 $1,247
Reserves acquired during merger 1,399
Provision for losses 100 200 214
Recoveries 632 454 362
Charge-offs (808) (617) (752)
- - - --------------------------------------------------------------------------------
Ending balance $2,431 $2,507 $1,071
- - - --------------------------------------------------------------------------------
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 requirement was approximately $1,600,000 for the nine months
ended December 31, 1995.
7. Property and Equipment
Property and equipment is summarized as follows:
- - - --------------------------------------------------------------------------------
December 31, March 31,
(in thousands) 1995 1995
- - - --------------------------------------------------------------------------------
Land and buildings $5,879 $4,707
Furniture and equipment 2,061 2,607
Leasehold improvements 544 410
- - - --------------------------------------------------------------------------------
Total 8,484 7,724
- - - --------------------------------------------------------------------------------
Less accumulated depreciation 1,292 1,621
- - - --------------------------------------------------------------------------------
Property and equipment-net $7,192 $6,103
- - - --------------------------------------------------------------------------------
Rent expense for the nine months ended December 31, 1995 was
$477,000. Rent expense for the years ended March 31, 1995 and 1994 was
$419,000 and $418,000, respectively.
8. Mortgage Banking Activities
The Bank purchases and sells whole and participating interests
in loans. 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. Certain mortgage loans are sold at a net yield rate
to the investor which differs from the loans' average contractual
interest rate adjusted for guarantee fees and normal servicing fees.
The present value of that differential projected over the estimated
life of the loans is recognized at the time of sale as a component of
the realized gain or loss. 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
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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 as of April 1, 1995, for
the nine months ended December 31, 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 used 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 nine months ended December
31, 1995 as mortgage banking activities during the period were
insignificant.
In determining servicing value impairment at December 31,
1995, the mortgage servicing rights were disaggregated into predominant
risk characteristics. The company has determined those risk
characteristics to be loan interest rate, loan type and investor type.
These segments of the portfolio were then valued using a valuation
model that calculates the present value of future cash flows to
determine the fair value of the servicing rights using current
assumptions. The calculated value was then compared with the book value
of each segment to determine if a reserve for impairment was required.
The fair value of mortgage servicing rights at December 31, 1995 is
$2,670,000.
At December 31, 1995 and March 31, 1995, the Bank serviced
mortgage loans for others in the amount of $307,000,000 and
$323,000,000, respectively. Accumulated amortization relating to
premiums on sale of loans was $4,901,000, $4,817,000 and $4,613,000 at
December 31, 1995, March 31, 1995 and 1994, respectively. Accumulated
amortization relating to loan servicing rights was $5,226,000,
$4,976,000 and $4,675,000 at December 31, 1995, March 31, 1995 and
1994, respectively.
The amount capitalized and amortized relating to premiums on
sale of loans and loan servicing rights for the nine months ended
December 31, 1995 and for the years ended March 31, 1995, and 1994 are
included in the table below:
================================================================================
(in thousands) Premium on Sale of Loans Loan Servicing Rights Total
- - - --------------------------------------------------------------------------------
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
Amortization (84) (250) (334)
- - - --------------------------------------------------------------------------------
Balance December 31, 1995 $401 $2,546 $2,947
- - - --------------------------------------------------------------------------------
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The amount of aggregate gains on sales of servicing included
in operations for the years ended March 31, 1995 and 1994 was $299,000
and $708,000, respectively. No servicing sales were made during the
nine months ended December 31, 1995.
9. Deposits
The weighted-average nominal rate payable on all deposits was
4.0% at December 31, 1995 and March 31, 1995. The nominal rates at
which the Bank incurred interest on deposits and related balances of
such deposits are as follows:
================================================================================
DECEMBER 31 MARCH 31,
1995 1995
- - - --------------------------------------------------------------------------------
Non-interest bearing accounts $25,391 $26,149
NOW accounts (1.50%) 28,202 26,688
Saving accounts (2.55%) 19,699 19,395
Money market deposits account (2.88%) 14,536 14,581
Certificate accounts:
Up to 4.0% 3,490 7,768
4.01% to 4.5% 2,530 14,590
4.51% to 5.0% 31,280 23,026
5.01% to 5.5% 32,491 20,988
5.51% to 6.0% 23,397 27,587
6.01% to 6.5% 27,453 38,440
Over 6.51% 16,590 10,523
- - - --------------------------------------------------------------------------------
Total certificates 137,231 142,922
- - - --------------------------------------------------------------------------------
Total $225,059 $229,735
- - - --------------------------------------------------------------------------------
The bank incurred interest on deposits as follows:
================================================================================
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------------
1995 1995 1994
- - - --------------------------------------------------------------------------------
(in thousands)
- - - --------------------------------------------------------------------------------
Savings accounts $405 $607 $545
NOW accounts 454 419 326
Money market deposit accounts 312 437 368
Certificate accounts 5,775 4,781 3,494
- - - --------------------------------------------------------------------------------
Total $6,946 $6,244 $4,733
- - - --------------------------------------------------------------------------------
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The amounts and maturities of certificate accounts at December 31, 1995
are as follows:
================================================================================
(in thousands):
- - - --------------------------------------------------------------------------------
Within 12 months $115,017
12 to 24 months 10,784
24 to 36 months 7,109
36 to 48 months 2,526
Over 48 months 1,795
- - - --------------------------------------------------------------------------------
Total $137,231
- - - --------------------------------------------------------------------------------
The amounts and scheduled maturities of certificate accounts
in the amount of $100,000 or more at December 31, 1995 are as follows
(in thousands):
================================================================================
Within 3 months $7,770
3 to 6 months 1,955
6 to 12 months 3,810
Over 12 months 1,627
- - - --------------------------------------------------------------------------------
Total $15,162
- - - --------------------------------------------------------------------------------
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 $42,000,000 and $44,435,000 at December 31,
1995 and March 31, 1995, respectively. Based on the current pledged
loan amount, the Bank's borrowing limit is approximately $27 million
with a remaining borrowing capacity of $2 million at December 31, 1995.
Outstanding advances from the Federal Home Loan Bank consisted of the
following:
================================================================================
December 31, March 31,
(in thousands) 1995 1995 Interest Rate
- - - --------------------------------------------------------------------------------
Mature During
1996 $25,000 $15,000 5.91% to 6.10%
- - - --------------------------------------------------------------------------------
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.
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
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 conversion, 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 December 31, 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 $4,024,000, accrued interest of $15,000, and a market
value of $4,103,000 at December 31, 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 5.05% at December 31,
1995. All securities underlying agreements are held by an independent
safekeeping agent and all agreements are to repurchase the same
securities. Securities sold under agreements to repurchase averaged
$2,385,000 during the period ended December 31, 1995 and $623,000
during the year ended March 31, 1995. The maximum amount outstanding at
any month-end during the nine months ended December 31, 1995 was
$2,651,000. The maximum amount outstanding at any month-end during
fiscal 1995 was $2,748,000.
11. Shareholders' Equity
Regulations require the Company and the Bank to maintain
risk-based capital ratios of capital to risk-weighted assets. A minimum
of 8% of total risk-based capital ratio must be maintained and at least
half must be Tier 1 Capital. The Company and the Bank exceeded all
regulatory capital requirements at December 31, 1995.
The following table shows the capital amounts and ratios of
the Company at December 31, 1995:
================================================================================
Tier 1 risk adjusted capital ratio 19.32%
Total risk adjusted capital ratio 23.00%
Leverage ratio 13.49%
- - - --------------------------------------------------------------------------------
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 December 31, 1995,
these amounts were $5,490,000 and $18,505,000, 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 net
profits for the preceding two years. With the approval of the Florida
Department of Banking and Finance (the "Department"), the Bank may
declare a dividend from retained net profits which accrued prior to the
preceding two years, but, first, 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 the fund at least equals the amount
of the Bank's Common Stock then issued and outstanding. In addition the
Bank shall not declare any dividend if its net income from the current
year, combined with the retained net income for the preceding two
years, is a loss or if the 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 Department or a federal
regulatory agency. The bank paid $530,000 and $536,000 in dividends to
the Company during the nine months ended December 31, 1995 and the year
ended March 31, 1995, respectively.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The balance, activity, exercise price, and expiration dates of
the Company's options, warrants, and equity contracts for the nine
months ended December 31, 1995 and the years ended March 31, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
===================================================================================================================================
Equity
Options Warrants Contracts
- - - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Issued 6,000
Expired (3,622)
Exercised (1,000) (2,003) (1,334) (13,786)
- - - -----------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1995 6,000 14,768 97,024 78,704 0 42,000 165,216 511,153 660,968
Issued
Exercised (2,668) (211,300) (634,476)
Canceled (26,492)
- - - ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 6,000 14,768 97,024 76,036 0 42,000 165,216 299,853 0
- - - ------------------------------------------------------------------------------------------------------------------------------------
Exercise Price $5.00 $2.50 $2.48 $2.62 $2.08 $3.33 $5.00 $3.90 $2.90
Expiration Date 12/31/97 * 9/25/01 2/24/98 2/24/98 6/1/03 11/1/00 1/22/96 5/1/96
- - - ------------------------------------------------------------------------------------------------------------------------------------
* 4,622 options expire annually
- - - ------------------------------------------------------------------------------------------------------------------------------------
</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 vesting
terms to purchase 4,000 shares at an exercise price of $4.50 per share
was met during the nine months ended December 31, 1995 and the Company
paid $5,000 to cancel the options. As of December 31, 1995 options to
purchase 6,000 shares at an exercise price of $5.00 per share were
vested and are included in the table above. The vesting terms for the
remaining 10,000 shares had not been met as of December 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. Options with exercise
prices of $2.48, $2.62, $2.08 and $3.33 were exercisable from the date
issued. Options with an exercise price of $2.50 options are exercisable
at various dates in accordance with an employment contract.
The price of all options, warrants and equity contracts issued
was equal to the market value of the stock at the time of issuance.
Accordingly, no compensation expense was recognized.
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.
The Company granted 12,000, 9,196 and 6,352 shares of Common
Stock to key executive officers during the nine months ended December
31, 1995, and the years ended March 31, 1995 and 1994, respectively.
The stocks were granted under restricted terms which restricts the
delivery of the certificates to the grantee, and the grantee's ability
to sell, transfer,
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Compensation expense of $70,000, and $130,000 was incurred
during the years ended March 31, 1995 and 1994, respectively. No
compensation expense was incurred during the nine months ended December
31, 1995. All stock grants by the Company have been at the fair market
value of the stock on the date of grant.
As of December 20, 1995 the Company awarded stock appreciation
rights ("SARs") to two executives and to its non-employee directors.
The SARs vest and become exercisable as follows:
================================================================================
Date SARS Base Price
- - - --------------------------------------------------------------------------------
January 1, 1997 220,000 $5.75
January 1, 1998 620,000 $8.00
- - - --------------------------------------------------------------------------------
All unexercised SARs expire on January 1, 2006.
In November 1995, the Company issued 2,070,000 and 1,035,000
shares of Common and non-voting Series C Preferred Stock, respectively.
Each share of Series C Preferred Stock can be converted at any time, at
the option of the holder, into 1.55 shares of the Company's Common
Stock at a conversion price of $6.45 per common share. The Series C
Preferred Stock bears a dividend rate of 7.0% on its stated value of
$10.00 per share. The Series C Preferred Stock can be redeemed at the
Company's option anytime after November 30, 1999 at a redemption price
ranging from $10.00 per share to $10.42 per share, subject to certain
events. The Series C Preferred Stock can also be redeemed by the
Company prior to November 30, 1999 if 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.
During September, 1993, the Company issued 1,150,000 and
402,500 shares of Common and cumulative and non-voting Series A
Preferred Stock, respectively. Each share of Series A Preferred Stock
can be convertible at any time, at the option of the holder, into 2.47
shares of Common Stock at a conversion price of $4.05 per common share.
The preferred stock bears a dividend rate of 7.5% on its face value of
$10.00 per share. The preferred stock can be redeemed at the option of
the Company at any time on or after June 30, 1998, at a redemption
price ranging from $10.00 per share to $10.40 per share, subject to
certain events.
In the year ended March 31, 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. Each right will entitle the
holder to buy 1/100th of a share of Series B Junior Participating
Preferred Stock 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 December 31, 1995, the Shareholder
Rights Plan requires 6,587,653 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.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the 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 December 31, 1995, the Bank had adjustable rate commitments
to extend credit of $14,000,000 excluding the undisbursed portion of
loans-in-process. These commitments are primarily for one-to-four
family residential properties and commercial lines of credit secured by
commercial real estate or other business assets.
The Company and its subsidiaries have entered into
noncancellable operating leases with future minimum lease payments of
the following:
================================================================================
(in thousands)
- - - --------------------------------------------------------------------------------
1996 $650
1997 650
1998 425
1999 190
2000 60
Thereafter 110
- - - --------------------------------------------------------------------------------
$2,085
- - - --------------------------------------------------------------------------------
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 $74,000, $74,000, and $18,000
in 1996, 1997, and 1998, respectively.
The Company has a non-qualified unfunded retirement plan for
two present and one former executive of the Company. Pension costs,
consisting of service costs and interest costs, amounted to $90,000,
$90,000, and $129,000, for the nine months ended December 31, 1995 and
for the years ended March 31, 1995, and 1994, respectively. The
retirement benefit to the employee will range between 30% to 70% of his
or her average base salary for the last three years of employment and
will commence no earlier than age 55 nor later than age 62. A discount
rate of 7% and a rate of compensation increase of 4% is used to measure
the projected benefit obligation. The net pension liability (all
vested) at December 31, 1995 and March 31, 1995 was $645,000 and
$578,000, respectively.
In October 1991, the Company established a 401(k) plan
covering substantially all employees. The employer contribution to the
401(k) plan is determined annually by the Board of Directors. Expense
under the plan for the nine months ended December 31, 1995 and the
years ended March 31, 1995 and 1994 amounted to $70,000, $95,000 and
$59,000, respectively.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
The United States House and Senate have passed legislation
which provides for a charge to members of the Savings Association
Insurance Fund (the "SAIF") in order to bring the SAIF to the
regulatory mandated level and for the eventual merger of the SAIF with
the Bank Insurance Fund. This legislation is part of the overall budget
reconciliation bill which has not yet received presidential approval.
The amount that the Bank will be assessed if the legislation is enacted
as currently drafted is estimated to be approximately $960,000, net of
an assumed tax effect at 37%.
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 nine
months ended December 31, 1995 and the years ended March 31, 1995, and
1994, such fees aggregated approximately $58,000, $140,000 and
$241,000, respectively.
An analysis of the activity of the aggregate loans to officers and
directors is as follows:
================================================================================
(in thousands)
- - - --------------------------------------------------------------------------------
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 296
Principal Reductions (392)
- - - --------------------------------------------------------------------------------
Balance December 31, 1995 897
- - - --------------------------------------------------------------------------------
14. Income Taxes
Effective April 1, 1993, the Company adopted Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" (SFAS
No. 109).
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.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Significant components of the Company's deferred tax assets
and liabilities as of December 31, 1995 and March 31, 1995 are as
follows:
================================================================================
December 31, March 31,
1995 1995
- - - --------------------------------------------------------------------------------
(in thousands)
- - - --------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforward $993 $1,138
Tax credits 178
Loan loss provision 272 271
Deferred compensation 128 114
Depreciation 100 90
Accrued expenses 9 73
Investment basis 33 81
OREO expenses 149
- - - --------------------------------------------------------------------------------
1,684 1,945
Valuation allowance (1,136) (1,136)
- - - --------------------------------------------------------------------------------
Deferred tax assets, net of allowance 548 809
- - - --------------------------------------------------------------------------------
Deferred tax liabilities:
Excess servicing rights 197 171
Deferred loan fees 129 217
Other 15 21
- - - --------------------------------------------------------------------------------
Total 341 409
- - - --------------------------------------------------------------------------------
Net deferred tax asset $207 $400
- - - --------------------------------------------------------------------------------
Significant components of the provision for income tax
expenses for the nine months ended December 31, 1995 and the years
ended March 31, 1995 and 1994, are as follows:
================================================================================
Nine Months Ended, Years Ended
December 31, March 31,
1995 1995 1994
- - - --------------------------------------------------------------------------------
(in thousands)
- - - --------------------------------------------------------------------------------
Current:
Federal $828 $480 $605
State 159 44 113
- - - --------------------------------------------------------------------------------
987 524 718
- - - --------------------------------------------------------------------------------
Deferred (benefit):
Federal 171 119 102
State 11 20 (2)
- - - --------------------------------------------------------------------------------
182 139 100
- - - --------------------------------------------------------------------------------
$1,169 $663 $818
- - - --------------------------------------------------------------------------------
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 nine months ended
December 31, 1995 and the years ended March 31, 1995 and 1994:
<TABLE>
<CAPTION>
====================================================================================================
Nine Months Ended, Years Ended,
December 31, March 31,
------------------------------------
1995 1995 1994
- - - ----------------------------------------------------------------------------------------------------
(in thousands)
- - - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at federal rate $1,070 $623 $820
Differences resulting from:
State income taxes, net of federal tax benefit 103 42 73
Amortization of purchase accounting adjustment 56 10 229
Reduction in valuation allowance (297)
Other, net (60) (12) (7)
- - - ----------------------------------------------------------------------------------------------------
Income taxes $1,169 $663 $818
- - - ----------------------------------------------------------------------------------------------------
</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 December 31, 1995, the Company had net operating loss
carryforwards, acquired in connection with the Homestead and Governors
mergers, of approximately $2,640,000 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.
If realized, the tax benefit for these operating loss carryforwards
will be applied to reduce goodwill related to this merger.
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Parent Company Financial Information
<TABLE>
<CAPTION>
===================================================================================================================
STATEMENTS OF FINANCIAL CONDITION December 31, March 31,
- - - -------------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1995
- - - -------------------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C>
Investments in and advances to subsidiaries $25,713 $21,940
Cash and cash equivalents 18,505 1,018
Other assets 45 87
- - - -------------------------------------------------------------------------------------------------------------------
Total $44,263 $23,045
- - - -------------------------------------------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses $429 $614
Redeemable subordinated debentures 1,985
- - - -------------------------------------------------------------------------------------------------------------------
Total Liabilities 429 2,599
- - - -------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock 14,365 4,025
Common stock 66 37
Additional paid-in-capital 26,035 14,362
Retained earnings 3,368 2,022
- - - -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 43,834 20,446
- - - -------------------------------------------------------------------------------------------------------------------
Total $44,263 $23,045
- - - -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
========================================================================================================================
Nine Months
STATEMENTS OF INCOME Ended December 31, Year Ended March 31,
- - - ------------------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994 1995 1994
- - - ------------------------------------------------------------------------------------------------------------------------
(unaudited)
- - - ------------------------------------------------------------------------------------------------------------------------
Income:
<S> <C> <C> <C> <C>
Interest $196 $336 $410 $285
Other 134 72 96 96
- - - ------------------------------------------------------------------------------------------------------------------------
Total 330 408 506 381
- - - ------------------------------------------------------------------------------------------------------------------------
Expenses:
Interest 31 180 240 220
General and administrative 207 171 278 136
- - - ------------------------------------------------------------------------------------------------------------------------
Total 238 351 518 356
- - - ------------------------------------------------------------------------------------------------------------------------
Income (loss) before undistributed
earnings of subsidiaries and income tax benefit 92 57 (12) 25
Income tax expense (benefit) 33 19 (5) 89
- - - ------------------------------------------------------------------------------------------------------------------------
Income (loss) before undistributed earnings of subsidiaries 59 38 (7) (64)
Equity in undistributed earnings of subsidiaries 1,918 851 1,174 2,157
- - - ------------------------------------------------------------------------------------------------------------------------
Net income $1,977 $889 $1,167 $2,093
- - - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
========================================================================================================================
Nine Months Ended,
STATEMENTS OF CASH FLOWS December 31, 1995 Year Ended March 31,
- - - ------------------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1995 1994
- - - ------------------------------------------------------------------------------------------------------------------------
Operating Activities:
<S> <C> <C> <C>
Net income $1,977 $1,167 $2,093
Adjustments to reconcile net income to net cash
provided by operating activities (916) (895) (1,462)
- - - ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,061 272 631
- - - ------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Additional investment in subsidiary (3,000) (1,500)
Purchase of Governors Bank subsidiary (5,154)
Other, net (148) (144)
- - - ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,000) (6,802) (144)
- - - ------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Sale of common and preferred
stock, net of stock issuances costs 19,404 6,949
Cash dividends (631) (519) (280)
Other, net 653 113 (45)
- - - ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 19,426 (406) 6,624
- - - ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 17,487 (6,936) 7,111
Cash and cash equivalents at beginning of year 1,018 7,954 843
- - - ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $18,505 $1,018 $7,954
- - - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
16. Fair Values of Financial Instruments
The following is a disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet
for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. Certain financial
instruments and all non-financial instruments are excluded from its
disclosure requirements. Accordingly, the aggregate fair value amount
presented does not represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
Cash and interest-bearing deposits in other financial institutions: The
carrying amounts reported in the balance sheet for these assets
approximate their fair values.
Investments: Fair value for investments are based on quoted market
prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable
instruments.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 to the carrying value due to its
short maturity.
Off-balance-sheet instruments: Fair values for the Bank's lending
commitments are based on estimated market prices of comparable
instruments taking into account the remaining terms of the agreements
and the counterparties' credit standing.
Deposit liabilities: The fair value disclosed for demand deposits
(e.g., interest and non-interest checking, statement savings, and
certain types of money market accounts) are, by definition, equal to
the amount payable on demand at the reporting date (e.g., their
carrying amounts). The carrying amounts for variable- rate, fixed-term
money market accounts and certificates of deposits approximate their
fair values at the reporting date. Fair value for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual monthly maturities
on time deposits.
Other borrowings: The fair values of FHLB advances, securities sold
under agreement to repurchase, and redeemable subordinated debentures
are estimated using discounted cash flow analysis, based on the Bank's
current incremental borrowing rates for similar types of borrowing
arrangements.
Bank drafts payable: The fair value of Bank drafts payable is assumed
to equal its carrying value due to its short maturity.
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
===========================================================================================================================
At December 31, At March 31,
--------------------------- -------------------------------
1995 1995
--------------------------- -------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- - - ---------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and interest-bearing deposits $54,373 $54,373 $17,901 $17,901
Investments 10,622 10,779 14,103 14,179
Loans receivable - net 216,756 219,823 227,940 228,537
Premium on sale of loans 401 460 485 550
Accrued interest receivable 1,796 1,796 2,041 2,041
- - - ---------------------------------------------------------------------------------------------------------------------------
Total financial assets 283,948 $287,231 262,470 $263,208
==============
- - - -----------------------------------------------------------------------------------------------------------================
Non-financial assets 19,713 17,569
- - - ---------------------------------------------------------------------------------------------------------------------------
Total assets $303,661 $280,039
- - - ---------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits $225,059 $225,059 $229,735 $229,877
FHLB advances 25,000 25,000 15,000 14,976
Securities sold under agreements to repurchase 2,350 2,350 2,748 2,748
Redeemable subordinated debentures 1,985 1,985
Bank drafts payable 3,155 3,155 4,148 4,148
- - - ---------------------------------------------------------------------------------------------------------------------------
Total financial liabilities 255,564 $255,564 253,616 $253,734
- - - ----------------------------------------------------------------------=============------------------------================
Non-financial liabilities 4,263 5,977
- - - ---------------------------------------------------------------------------------------------------------------------------
Total liabilities $259,827 $259,593
- - - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of demand deposits is the amount payable on
demand, without adjusting for any value derived from retaining those
deposits for an expected future period of time. That component,
commonly referred to as a deposit base intangible, is not considered in
the above fair value amount nor is it recorded as an intangible asset
in the balance sheet.
The Bank's commitments to extend credit are either extensions
to fund variable rate loans or fixed rate loans. The fair value of
commitments to extend credit is $14,500, $20,000 and $9,000 at December
31, 1995, March 31, 1995 and 1994, respectively.
17. Segment Information
As of April 1, 1995 all mortgage banking activities were
included as part of banking activities. Mortgage banking related
activities are considered incidental to the Bank's strategic plan and
are performed in order to accommodate banking customer and market
needs.
During the years ended March 31, 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
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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).
Revenues in the banking segment consist primarily of interest
on mortgage loans and investment securities. Mortgage banking
activities derive revenues primarily from interest on loans held for
sale, sales of loans in the secondary mortgage market, sale of loan
servicing rights, and fees on loans serviced. Intercompany transactions
have been eliminated from the industry segments and consolidated
financial data presented below. The following is a presentation of the
revenues, operating profits (losses), assets, and capital expenditures
for the years ended March 31, 1995 and 1994:
<TABLE>
<CAPTION>
====================================================================================================================================
Banking Mortgage Banking Consolidated
Year ended March 31, Year ended March 31, Year ended March 31,
------------------------------ ---------------------------- ----------------------------
1995 1994 1995 1994 1995 1994
- - - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision for loan losses $7,394 $5,756 $1,297 $1,005 $8,691 $6,761
Non-interest income 1,211 735 1,211 735
Mortgage banking income 1,788 3,654 1,788 3,654
Depreciation 280 308 179 101 459 409
Non-interest expense 5,365 4,169 4,036 4,161 9,401 8,330
- - - ------------------------------------------------------------------------------------------------------------------------------------
Income before taxes $2,960 $2,014 $(1,130) $397 $1,830 $2,411
- - - ------------------------------------------------------------------------------------------------------------------------------------
March 31,
1995
- - - ------------------------------------------------------------------------------------------------------------------------------------
Assets
Banking $275,374
Mortgage banking 4,665
- - - ------------------------------------------------------------------------------------------------------------------------------------
$280,039
- - - ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures, net:
Banking $2,275
Mortgage banking 349
- - - ------------------------------------------------------------------------------------------------------------------------------------
$2,624
- - - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18. Subsequent Event
On January 19, 1996, the Company acquired Banyan Bank
("Banyan") for $9,701,320, plus $60,000 in merger related costs. The
purchase price was determined based upon a multiple of Banyan's equity
balance, limited to a specified amount, as of the last day of the month
prior to closing. The Company used proceeds from the November 1995
public offering to purchase Banyan.
Banyan was a state chartered commercial bank headquartered in
Boca Raton, Florida. Banyan had total assets at December 31, 1995 of
approximately $54,000,000, total deposits
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
of $49,000,000 and two full service branches located in Boca Raton, and
Boynton Beach, Florida.
The acquisition was accounted for as a purchase and
approximately $5,000,000 in goodwill was recognized representing the
purchase price in excess of the fair value of the net assets acquired.
Goodwill will be amortized over 15 years using the straight-line
method.
65
<PAGE>
Report of Independent
Certified Public Accountants
The Shareholders and
the Board of Directors
of Republic Security
Financial Corporation
We have audited the accompanying consolidated statements of financial
condition of Republic Security Financial Corporation and subsidiaries as of
December 31, 1995 and March 31, 1995, and the related consolidated statements of
income, shareholders' equity, and cash flows for the nine-month transition
period ended December 31, 1995 and for each of the two 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 December 31, 1995
and March 31, 1995, and the consolidated results of their operations and their
cash flows for the nine-month transition period ended December 31, 1995, and for
each of the two 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
/S/ Ernst & Young LLP
West Palm Beach, Florida
January 19, 1996
66
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is set forth in the
Registrant's "Notice of Annual Meeting of Shareholders to be Held on April 24,
1996" (Proxy Statement) on page 2 through 3 and such information is incorporated
herein by reference.
Item 11. Executive Compensation
The information required by this Item 11 is set forth in Registrant's
"Notice of Annual Meeting of Shareholders to be Held on April 24, 1996" (Proxy
Statement) on page 4 and such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is set forth in Registrant's
"Notice of Annual Meeting of Shareholders to be Held on April 24, 1996" (Proxy
Statement) on page 1 and such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is set forth in Registrant's
"Notice of Annual Meeting of Shareholders to be Held on April 24, 1996" (Proxy
Statement) on pages 3 and 9 and such information is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Schedules and Exhibits:
1. Financial Statements Page
Consolidated statements of financial condition at December 31, 1995 and
March 31, 1995...........................................................38
Consolidated statements of income for nine months ended December 31, 1995
and years ended March 31, 1995 and 1994..................................39
Consolidated statements of shareholders' equity for nine months ended
December 31, 1995 and years ended March 31, 1995, and 1994...............40
Consolidated statements of cash flows for nine months ended
December 31, 1995 and years ended March 31, 1995 and 1994................41
Notes to consolidated financial statements................................42
2. Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
67
<PAGE>
Exhibits
2. a) Agreement and plan of merger by and among Republic Security
Financial Corporation, Republic Security Bank, a Federal Savings Bank,
Governors Bank Corporation and Governors Bank.*****
b) Stock, Purchase Agreement by and among Republic Security Financial
Corporation, Republic Security Bank, FSB and all the Shareholders of
Banyan Bank. *********
3. a) Articles of Incorporation, as amended of Republic Security Financial
Corporation.*
b) Bylaws, as amended of Republic Security Financial Corporation.*
c) Articles of Incorporation, as amended of Republic Security Financial
Corporation.*****
d) Articles of Incorporation, as amended, of Republic Security Financial
Corporation.*****
e) Articles of Amendment to Articles of Incorporation of Republic Security
Financial Corporation.
4. a) Form of Indenture to be entered into between Republic Security Financial
Corporation and Mellon Bank, N.A.*
b) Form of Equity Contract Agency Agreement to be entered into between
Republic Security Financial Corporation and Mellon Bank, N.A.*
c) Debentures (contained in Sections 202 and 204 of Exhibit 4(a)).*
d) Mandatory Stock Purchase Contracts (contained in Exhibits A and B to
Exhibit 4(b)).*
e) Rights Agreement by and between Republic Security Financial Corporation
and IBJ Schroder Bank and Trust Company *******
10. a) Officers and Directors Liability Insurance Policy.*
b) Savings and Loan Blanket Bond Policy.*
c) Employment Agreement between Registrant and R.E. Schupp, as amended.*
d) Employment Agreement between Republic Security Bank and R. E. Schupp,
as amended.*
e) Employment Agreement between Registrant and Richard J. Haskins.*
f) Employment Agreement between Republic Security Bank and
Richard J. Haskins, as amended.**
g) Employment Agreement between Republic Security Bank and Ronald N. Long.*
h) Description of Employment Arrangement for Philip A. Cody.*
i) Lease Agreement dated February 28, 1985 between Registrant and
First American Bank and Trust, for executive offices at
675 West Indiantown Road.*
j) Lease Agreement dated February 6, 1984, as amended, between Republic
Security Bank and Guy W. Held, as Trustee, for the branch at 851 West
Indiantown Road.*
k) Lease Agreement dated as of March 1, 1985, between Republic Security Bank
and K&R Associates, for the branch in Delray Beach.*
l) Agreement dated as of June 13, 1985, between Data Systems Leasing, Inc.,
Registrant and Bank of New England, N.A.*
m) Forms of Supplement Executive Retirement Plan Agreements.*
n) Supplemental Executive Retirement Program Agreement -
Richard J. Haskins**
o) Supplemental Executive Retirement Program Agreement -
R. E. Schupp.**
p) Restricted Stock Plan.**
q) Restricted Stock Plan Agreement - Richard J. Haskins.**
r) Restricted Stock Plan Agreement - R. E. Schupp.**
s) Employment Agreement between Republic Security Bank and R. E. Schupp, as
amended.***
t) Employment Agreement between Republic Security Bank and
Richard J. Haskins, as amended. ***
u) Employment Agreement between Republic Security Bank and R. E. Schupp, as
amended.*****
v) Employment Agreement between Republic Security Bank and
Richard J. Haskins, as amended. *****
w) Employment Agreement between Republic Security Bank and R. E. Schupp, as
amended.*****
x) Employment Agreement between Republic Security Bank and
Richard J. Haskins, as amended. *****
y) Stock Appreciation Rights Agreement between Republic Security Financial
Corporation and Rudy E. Schupp ********
z) Stock Appreciation Rights Agreement between Republic Security Financial
Corporation and Richard J. Haskins ********
aa) Form of Stock Appreciation Rights Agreement between Republic Security
Financial Corporation and non employee directors ********
11. a) Statement RE: Computation of Per Share Earnings ********
21. a) Subsidiaries.********
68
<PAGE>
22. a) 1995 Proxy Statement. **********
* Incorporated by reference to Registration Statement on
Form S-1, File No. 2-99505.
** Incorporated by reference to Form 10-K as filed with the
Securities and Exchange Commission on June 28, 1990.
*** Incorporated by reference to Form 10-K as filed with the
Securities and Exchange Commission on June 26, 1992.
**** Incorporated by reference to Form 10-K, as filed with the
Securities and Exchange Commission on June 26, 1993.
***** Incorporated by reference to Form 10-K as filed with the
Securities and Exchange Commission on June 24, 1994
******* Incorporated by reference to Registration Statement in Form
8-A as filed with the Securities and Exchange Commission on
April 27, 1995.
******** Filed herewith
********* Incorporated by reference to Registration Statement on Form S-1,
File No. 33-62847
**********Incorporated by reference to the Proxy Statement for
registrants's Annual Meeting of Shareholders filed with the
Securities and Exchange Commission on March 28, 1996.
- - - --------------------------------------------------------------------------------
b) Reports on Form 8-K
Not applicable
c) Exhibit Index
10.(y) Stock Appreciation Rights Agreement between Republic Security
Financial Corporation and Rudy E. Schupp
(z) Stock Appreciation Rights Agreement between Republic Security
Financial Corporation and Richard J. Haskins
(aa) Form of Stock Appreciation Rights Agreement between Republic
Security Financial Corporation and non employee directors
11.(a) Statement RE: Computation of Per Share Earnings.
21.(a) Subsidiaries.
69
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
REPUBLIC SECURITY FINANCIAL CORPORATION
BY: /S/ Rudy E. Schupp
-------------------------------------------------------
Rudy E. Schupp
Chairman of the Board
Chief Executive Officer
BY: /S/ Richard J. Haskins
-------------------------------------------------------
Richard J. Haskins
Executive Vice President
Chief Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ H. Gearl Gore /s/ Victor Siegel
- - - --------------------------------- --------------------------------------------
H. Gearl Gore, Director Victor Siegel, Director
/s/ Richard J. Haskins /s/ William F. Spitznagel
- - - --------------------------------- --------------------------------------------
Richard J. Haskins, Director William F. Spitznagel, Director
/s/ Lennart Lindahl /s/ Bruce E. Wiita
- - - --------------------------------- --------------------------------------------
Lennart Lindahl, Director Bruce E. Wiita, Director
/s/ Richard C. Rathke /s/ Rudy E. Schupp
- - - --------------------------------- --------------------------------------------
Richard C. Rathke, Director Rudy E. Schupp, Director
/s/ William F. Wolfson
- - - ---------------------------------
William F. Wolfson, Director
70
<PAGE>
Exhibit 10 (y)
REPUBLIC SECURITY FINANCIAL CORPORATION
STOCK APPRECIATION RIGHTS AGREEMENT
This Agreement is made and entered into as of December 20,
1995 by and between RUDY E. SCHUPP ("Schupp") and REPUBLIC SECURITY FINANCIAL
CORPORATION, a Florida corporation (the "Corporation").
WHEREAS, the Board of Directors desires to provide Schupp
additional compensation in the form of long-term incentives so that he will be
motivated to remain in the long-term employ of the Corporation; and
WHEREAS, the Board of Directors desires that such incentives
be directly related to the performance of the Corporation's common stock and the
interests of its shareholders;
NOW, THEREFORE, in consideration of the premises, the parties
hereto hereby agree as follows:
1. Awards. As of December 20, 1995 (the "Effective Date"), the
Corporation hereby awards Schupp 500,000 stock appreciation rights ("SARs") in
two parts as follows: Part A -- 100,000 SARs and Part B -- 400,000 SARs.
2. Vesting. The SARs shall, except as provided herein, vest
and become immediately exercisable as follows: Part A shall vest on January 1,
1997 and Part B shall vest on January 1, 1998. Notwithstanding the foregoing,
all SARs shall vest and become immediately exercisable upon the occurrence of
any one of the following events: (a) Schupp's death or termination of employment
due to permanent disablement or (b) the occurrence of a change of control of the
Corporation. For purposes of this Agreement, the following terms shall have the
following meanings: The term "permanent disablement" shall mean Schupp's
inability to engage in any substantial gainful activity by reason of a medically
determinable physical or mental impairment and which has lasted or can be
expected to last for a continuous period of not less than twelve months. A
"change of control" shall be deemed to have occurred when any "person" (as used
in Section 13(d) of the Securities Exchange Act of 1934), directly or
indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), of 50% or more of the Corporation's common
stock then outstanding.
3. SAR Term. All of the unexercised SARs shall expire on
January 1, 2006. In no event shall any of the SARs awarded herein be exercisable
after January 1, 2006.
4. Base Value. The SARs shall have the following Base
Values: Part A SARs at $5.75 per SAR and Part B SARs at $8.00 per SAR.
5. Termination of Employment. If Schupp voluntarily terminates
his employment with the Corporation or is terminated for cause, any SARs which,
on the date of such termination, are not vested, or which are vested and shall
not have been exercised, shall automatically terminate and be forfeited to the
Corporation. If Schupp is terminated by the Corporation for any reason other
than for cause, Schupp shall, on the date of such termination, forfeit all SARs
which are not then vested and all SARs which are vested shall thereupon
automatically be exercised.
6. Death or Disability. If, while employed by the Corporation,
Schupp dies or suffers permanent disablement, all SARs shall immediately vest
and be exercised.
<PAGE>
7. Exercise. SARs, once vested, may be exercised by Schupp by
giving written notice of such exercise to the Corporation, at its principal
executive offices, attention: Secretary. Such notice shall specify the SARs to
be exercised. Upon exercise, the Corporation shall pay Schupp in cash the Net
Appreciation (defined below) within 60 days of exercise, less the amount equal
to the federal, state, local and other taxes required to be withheld by the
Corporation with respect thereto. The date of exercise shall be the date on
which such notice is actually received by the Corporation.
"Net Appreciation" for each SAR shall mean the Market Price of
the common stock of the Corporation on the date of exercise less the Base Value.
"Market Price" shall mean the closing price as reported in The Wall Street
Journal for the common stock for the trading day immediately preceding the date
of exercise.
8. Additional Provisions.
(a) Neither the SARs nor any of Schupp's rights or interests
therein shall be assignable or transferable by Schupp other than by will, the
laws of descent and distribution or a transfer to a trust approved by the Board
of Directors in its discretion. Except as expressly provided herein, SARs shall
be exercisable only by Schupp. No SARs may be pledged or encumbered in any way.
SARs shall immediately expire and terminate if they become transferred due to
execution, attachment or similar legal process.
(b) Nothing contained herein shall be construed as giving
Schupp any right to be retained in the employ of the Corporation, or interfere
in any way with the right of the Corporation to terminate the employment of
Schupp.
(c) In the event of any change in the outstanding number of
shares of common stock of the Corporation by reason of any stock dividend,
recapitalization, reorganization, merger, consolidation, split-up, combination
or exchange of shares, or any rights to purchase shares at a price substantially
below fair market value, or any similar change affecting the shares, the number
of SARs awarded hereunder and their Base Value shall be appropriately adjusted
consistent with such change to prevent dilution or enlargement of the rights of
the Schupp. In the event of a dispute as to any such adjustment, the
determination thereof by the Compensation Committee of the Board of Directors of
the Corporation shall be final and binding on the parties hereto.
(d) Schupp shall have no rights as a shareholder of the
Corporation with respect to any unexercised SARs.
(e) This Agreement shall be governed and interpreted in
accordance with the laws of the State of Florida and may be amended only by the
written agreement of both of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have entered into this
agreement as of the date first above written.
REPUBLIC SECURITY FINANCIAL
CORPORATION
_______________________________ By: ___________________________
Rudy E. Schupp Lennart E. Lindahl, Jr.,
Vice Chairman
<PAGE>
Exhibit 10 (z)
REPUBLIC SECURITY FINANCIAL CORPORATION
STOCK APPRECIATION RIGHTS AGREEMENT
This Agreement is made and entered into as of December 20,
1995 by and between RICHARD J. HASKINS ("Haskins") and REPUBLIC SECURITY
FINANCIAL CORPORATION, a Florida corporation (the "Corporation").
WHEREAS, the Board of Directors desires to provide Haskins
additional compensation in the form of long-term incentives so that he will be
motivated to remain in the long-term employ of the Corporation; and
WHEREAS, the Board of Directors desires that such incentives
be directly related to the performance of the Corporation's common stock and the
interests of its shareholders;
NOW, THEREFORE, in consideration of the premises, the parties
hereto hereby agree as follows:
1. Awards. As of December 20, 1995 (the "Effective Date"),
the Corporation hereby awards Haskins 200,000 stock appreciation rights ("SARs")
in two parts as follows: Part A -- 50,000 SARs and Part B -- 150,000 SARs.
2. Vesting. The SARs shall, except as provided herein, vest
and become immediately exercisable as follows: Part A shall vest on January 1,
1997 and Part B shall vest on January 1, 1998. Notwithstanding the foregoing,
all SARs shall vest and become immediately exercisable upon the occurrence of
any one of the following events: (a) Haskins's death or termination of
employment due to permanent disablement or (b) the occurrence of a change of
control of the Corporation. For purposes of this Agreement, the following terms
shall have the following meanings: The term "permanent disablement" shall mean
Haskins's inability to engage in any substantial gainful activity by reason of a
medically determinable physical or mental impairment and which has lasted or can
be expected to last for a continuous period of not less than twelve months. A
"change of control" shall be deemed to have occurred when any "person" (as used
in Section 13(d) of the Securities Exchange Act of 1934), directly or
indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), of 50% or more of the Corporation's common
stock then outstanding.
3. SAR Term. All of the unexercised SARs shall expire on
January 1, 2006. In no event shall any of the SARs awarded herein be exercisable
after January 1, 2006.
4. Base Value. The SARs shall have the following Base
Values: Part A SARs at $5.75 per SAR and Part B SARs at $8.00 per SAR.
5. Termination of Employment. If Haskins voluntarily
terminates his employment with the Corporation or is terminated for cause, any
SARs which, on the date of such termination, are not vested, or which are vested
and shall not have been exercised, shall automatically terminate and be
forfeited to the Corporation. If Haskins is terminated by the Corporation for
any reason other than for cause, Haskins shall, on the date of such termination,
forfeit all SARs which are not then vested and all SARs which are vested shall
thereupon automatically be exercised.
6. Death or Disability. If, while employed by the Corporation,
Haskins dies or suffers permanent disablement, all SARs shall immediately vest
and be exercised.
<PAGE>
7. Exercise. SARs, once vested, may be exercised by Haskins by
giving written notice of such exercise to the Corporation, at its principal
executive offices, attention: Secretary. Such notice shall specify the SARs to
be exercised. Upon exercise, the Corporation shall pay Haskins in cash the Net
Appreciation (defined below) within 60 days of exercise, less the amount equal
to the federal, state, local and other taxes required to be withheld by the
Corporation with respect thereto. The date of exercise shall be the date on
which such notice is actually received by the Corporation.
"Net Appreciation" for each SAR shall mean the Market Price of
the common stock of the Corporation on the date of exercise less the Base Value.
"Market Price" shall mean the closing price as reported in The Wall Street
Journal for the common stock for the trading day immediately preceding the date
of exercise.
8. Additional Provisions.
(a) Neither the SARs nor any of Haskins's rights or interests
therein shall be assignable or transferable by Haskins other than by will, the
laws of descent and distribution or a transfer to a trust approved by the Board
of Directors in its discretion. Except as expressly provided herein, SARs shall
be exercisable only by Haskins. No SARs may be pledged or encumbered in any way.
SARs shall immediately expire and terminate if they become transferred due to
execution, attachment or similar legal process.
(b) Nothing contained herein shall be construed as giving
Haskins any right to be retained in the employ of the Corporation, or interfere
in any way with the right of the Corporation to terminate the employment of
Haskins.
(c) In the event of any change in the outstanding number of
shares of common stock of the Corporation by reason of any stock dividend,
recapitalization, reorganization, merger, consolidation, split-up, combination
or exchange of shares, or any rights to purchase shares at a price substantially
below fair market value, or any similar change affecting the shares, the number
of SARs awarded hereunder and their Base Value shall be appropriately adjusted
consistent with such change to prevent dilution or enlargement of the rights of
the Haskins. In the event of a dispute as to any such adjustment, the
determination thereof by the Compensation Committee of the Board of Directors of
the Corporation shall be final and binding on the parties hereto.
(d) Haskins shall have no rights as a shareholder of the
Corporation with respect to any unexercised SARs.
(e) This Agreement shall be governed and interpreted in
accordance with the laws of the State of Florida and may be amended only by the
written agreement of both of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have entered into this
agreement as of the date first above written.
REPUBLIC SECURITY FINANCIAL
CORPORATION
___________________________ By: __________________________
Richard J. Haskins Lennart E. Lindahl, Jr.,
Vice Chairman
<PAGE>
Exhibit 10 (aa)
REPUBLIC SECURITY FINANCIAL CORPORATION
STOCK APPRECIATION RIGHTS AGREEMENT
This Agreement is made and entered into as of December 20,
1995 by and between [name of grantee] ("Grantee") and REPUBLIC SECURITY
FINANCIAL CORPORATION, a Florida corporation (the "Corporation").
WHEREAS, the Board of Directors has determined to compensate
the non-employee directors, in part, with long-term incentive compensation in
recognition of the directors' policy to manage the business and affairs of the
Corporation in the long-term interests of the shareholders; and
WHEREAS, in accordance therewith, the Board of Directors
desires that such compensation be directly related to the performance of the
Corporation's common stock;
NOW, THEREFORE, in consideration of the premises, the parties
hereto hereby agree as follows:
1. Awards. As of December 20, 1995 (the "Effective Date"),
the Corporation hereby awards Grantee 20,000 stock appreciation rights ("SARs")
in two parts as follows: Part A -- 10,000 SARs and Part B -- 10,000 SARs.
2. Vesting. The SARs shall, except as provided herein,
vest and become immediately exercisable as follows: Part A shall vest on January
1, 1997 and Part B shall vest on January 1, 1998.
3. SAR Term. All of the unexercised SARs shall expire on
January 1, 2006. In no event shall any of the SARs awarded herein be exercisable
after January 1, 2006.
4. Base Value. The SARs shall have the following Base
Values: Part A SARs at $5.75 per SAR and Part B SARs at $8.00 per SAR.
5. Termination of Term as Director. If Grantee's term as a
director of the Corporation ends due to resignation, removal or failure to be
re-elected, any SARs which, on the date of the end of Grantee's term as a
director, are not vested, or which are vested and shall not have been exercised,
shall automatically terminate and be forfeited to the Corporation.
6. Death or Disability. If, while serving as a director of the
Corporation, Grantee dies or suffers permanent disablement, all SARs shall
immediately vest and be exercised. For purposes of this Agreement, the term
"permanent disablement" shall mean Grantee's inability to engage in any
substantial gainful activity by reason of a medically determinable physical or
mental impairment and which has lasted or can be expected to last for a
continuous period of not less than twelve months.
7. Exercise. SARs, once vested, may be exercised by Grantee by
giving written notice of such exercise to the Corporation, at its principal
executive offices, attention: Secretary. Such notice shall specify the SARs to
be exercised. Upon exercise, the Corporation shall pay Grantee in cash the Net
Appreciation (defined below) within 60 days of exercise, less the amount equal
to the federal, state, local and other taxes required to be withheld by the
Corporation with respect thereto. The date of exercise shall be the date on
which such notice is actually received by the Corporation.
"Net Appreciation" for each SAR shall mean the Market Price of
the common stock of the Corporation on the date of exercise less the Base Value.
"Market Price" shall mean the closing price as reported in The Wall Street
<PAGE>
Journal for the common stock for the trading day immediately preceding the
date of exercise.
8. Additional Provisions.
(a) Neither the SARs nor any of Grantee's rights or interests
therein shall be assignable or transferable by Grantee other than by will, the
laws of descent and distribution or a transfer to a trust approved by the Board
of Directors in its discretion. Except as expressly provided herein, SARs shall
be exercisable only by Grantee. No SARs may be pledged or encumbered in any way.
SARs shall immediately expire and terminate if they become transferred due to
execution, attachment or similar legal process.
(b) In the event of any change in the outstanding number of
shares of common stock of the Corporation by reason of any stock dividend,
recapitalization, reorganization, merger, consolidation, split-up, combination
or exchange of shares, or any rights to purchase shares at a price substantially
below fair market value, or any similar change affecting the shares, the number
of SARs awarded hereunder and their Base Value shall be appropriately adjusted
consistent with such change to prevent dilution or enlargement of the rights of
the Grantee. In the event of a dispute as to any such adjustment, the
determination thereof by the Compensation Committee of the Board of Directors of
the Corporation shall be final and binding on the parties hereto.
(c) Grantee shall have no rights as a shareholder of the
Corporation with respect to any unexercised SARs.
(d) This Agreement shall be governed and interpreted in
accordance with the laws of the State of Florida and may be amended only by the
written agreement of both of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have entered into this
agreement as of the date first above written.
REPUBLIC SECURITY FINANCIAL
CORPORATION
___________________________ By: __________________________
[name of grantee] Rudy E. Schupp,
Chairman of the Board
<PAGE>
EXHIBIT 11(a)
<TABLE>
<CAPTION>
STATEMENT 11. RE: Computation of Per Share Earnings
=============================================================================================================================
Nine Months Ended, Years Ended
December 31, March 31,
1995 1995 1994
- - - -----------------------------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS:
<S> <C> <C> <C>
Average shares outstanding 4,843,166 3,631,774 2,919,744
Net effect of dilutive stock options,
warrants and equity contracts based on the modified
treasury stock method using average market price 331,522 841,745 1,006,916
- - - -----------------------------------------------------------------------------------------------------------------------------
Total weighted average number of shares outstanding 5,174,688 4,473,519 3,926,660
- - - -----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and
accounting change $1,977,000 $1,167,000 $1,593,000
Add income effect of utilizing net proceeds from
conversion of options, warrants and equity
contracts to reduce debt and invest excess in
government bonds - net of income tax effect 158,000 212,000
Deduct preferred dividends 329,000 302,000 165,000
- - - -----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and accounting
change available to common stockholders $1,648,000 $1,023,000 $1,640,000
- - - -----------------------------------------------------------------------------------------------------------------------------
Earnings per share before extraordinary item
and accounting change $.32 $.23 $.42
- - - -----------------------------------------------------------------------------------------------------------------------------
Net income $1,977,000 $1,167,000 $2,093,000
Add income effect of utilizing net proceeds from
conversion of options, warrants and equity
contracts to reduce debt and invest excess in
government bonds - net of income tax effect 158,000 212,000
Deduct preferred stock dividends 329,000 302,000 165,000
- - - -----------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $1,648,000 $1,023,000 $2,140,000
- - - -----------------------------------------------------------------------------------------------------------------------------
Earnings per share $.32 $.23 $.55
- - - -----------------------------------------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS:
Average shares outstanding 4,843,166
Net effect of diluitive stock options,
warrants and equity contracts based on the modified
treasury stock method using average market price 2,954,184
- - - -----------------------------------------------------------------------------------------------------------------------------
Total weighted average number of shares outstanding 7,797,350
- - - -----------------------------------------------------------------------------------------------------------------------------
Net Income $1,977,000
- - - -----------------------------------------------------------------------------------------------------------------------------
Earnings per share $.25
- - - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 21(a)
SUBSIDIARIES OF REGISTRANT
1. Republic Security Bank, a State Chartered Commercial Bank.
2. Republic Brokerage Corporation, a Florida corporation.
4. Governors Bank Corporation, a Florida corporation.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
The schedule contains summary financial information extracted from Form
10-K Annual Report as of December 31, 1995 and is qualified in its entirety
by reference to such financial statments.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Apr-1-1995
<PERIOD-END> Dec-31-1995
<CASH> 3211
<INT-BEARING-DEPOSITS> 51162
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 10622
<INVESTMENTS-MARKET> 10779
<LOANS> 219187
<ALLOWANCE> 2431
<TOTAL-ASSETS> 303661
<DEPOSITS> 225029
<SHORT-TERM> 27350
<LIABILITIES-OTHER> 7418
<LONG-TERM> 0
0
14365
<COMMON> 66
<OTHER-SE> 29403
<TOTAL-LIABILITIES-AND-EQUITY> 303661
<INTEREST-LOAN> 14954
<INTEREST-INVEST> 1081
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16035
<INTEREST-DEPOSIT> 6946
<INTEREST-EXPENSE> 7775
<INTEREST-INCOME-NET> 8260
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8442
<INCOME-PRETAX> 3146
<INCOME-PRE-EXTRAORDINARY> 3146
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1977
<EPS-PRIMARY> .32
<EPS-DILUTED> .25
<YIELD-ACTUAL> 4.39
<LOANS-NON> 2422
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2507
<CHARGE-OFFS> 808
<RECOVERIES> 632
<ALLOWANCE-CLOSE> 2431
<ALLOWANCE-DOMESTIC> 2431
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 310
</TABLE>
