UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________________ to _________________
Commission file number 0-14671
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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 (561) 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 "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, 1997, was approximately $46,000,000. The
number of shares outstanding of the Registrant's $.01 par value Common Stock as
of March 8, 1997 was 7,854,982.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
<PAGE>
TABLE OF CONTENTS
Page
PART I
ITEM 1 - BUSINESS
General.............................................................1
Lending Activities of the Bank......................................1
Servicing of Mortgage Loans.........................................4
Non-Performing Assets and Allowance for Loan Losses.................5
Investment Activities...............................................7
Deposits............................................................7
Borrowings..........................................................8
Competition.........................................................9
Employees...........................................................9
REGULATION.............................................................10
ITEM 2 - PROPERTIES....................................................18
ITEM 3 - LEGAL PROCEEDINGS.............................................18
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS................................................18
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS................................18
ITEM 6 - SELECTED FINANCIAL DATA.......................................20
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Corporate Overview.................................................23
Results of Operations..............................................23
Net Interest Income................................................24
Provision for Loan Losses..........................................27
Non-Interest Income................................................28
Operating Expenses.................................................29
Income Taxes.......................................................30
Liquidity..........................................................30
Capital Compliance.................................................31
Asset/Liability Management.........................................31
Impact of Inflation................................................32
Financial Condition................................................32
Forward-Looking Statements.........................................34
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................35
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies................39
Note 2 - Mergers and Branch Acquisition............................42
Note 3 - Investments...............................................44
Note 4 - Loans Receivable - Net....................................45
Note 5 - Non-Performing Loans and Allowance for Loan Losses........46
Note 6 - Cash and Amounts Due from Depository Institutions.........46
Note 7 - Property and Equipment....................................46
Note 8 - Mortgage Banking Activities...............................47
i
<PAGE>
TABLE OF CONTENTS
(Continued)
Page
Notes to Consolidated Financial Statements (Continued)
Note 9 - Deposits.................................................48
Note 10 - Borrowed Money..........................................49
Note 11 - Shareholders' Equity....................................50
Note 12 - Capital Compliance......................................51
Note 13 - Commitments and Contingencies...........................52
Note 14 - Related Party Transactions..............................53
Note 15 - Federal Deposit Insurance Corporation Special
Savings Association Insurance Fund Assessment.........54
Note 16 - Income Taxes............................................54
Note 17 - Parent Company Financial Information....................56
Note 18 - Fair Values of Financial Instruments....................57
Note 19 - Segment Information.....................................59
Note 20 - Subsequent Event........................................60
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................61
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................62
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.................................................62
ITEM 11 - EXECUTIVE COMPENSATION, BENEFITS AND RELATED MATTERS.......63
ITEM 12 - SECURITY OWNERSHIP.........................................65
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............66
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.......................................................67
SIGNATURES............................................................69
FURTHER EXHIBITS
Exhibit 11(a) - Computation of Per Share Earnings
Exhibit 22(a) - Subsidiaries of Registrant
Exhibit 23 - Consent of Independent Certified Public Accountants
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 7, 1997, the Bank entered into a definitive agreement
whereby Family Bank, a Florida state chartered commercial bank, will merge with
Republic Security Bank. The definitive agreement provides for a fixed exchange
ratio whereby shareholders of Family Bank will receive 13 shares of Republic
Security Financial Corporation common stock for each share of Family Bank stock.
Family Bank is headquartered in Hallandale, Florida with six branch locations in
Broward County and has assets of $248 million, loans of $159 million and
deposits of $216 million at December 31, 1996.
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 loan and deposit
portfolios, the acquisition provides Republic with a geographic presence in
South Palm Beach County. The acquisition was accounted for as a purchase and
resulted in the Bank acquiring assets of $61.7 million and liabilities of $57.0
million.
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 loans, commercial real estate loans and
consumer loans. During 1996 and 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,
1996 1995 1995 1994 1993
Type of loan Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ------------------------------------- --------- -------------------------------------- --------- -----------------------------------
(in thousands)
- ------------------------------------- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
* Residential property $102,266 40% $116,328 50% $124,750 49% $105,752 59% $79,236 54%
* Construction loans 27,569 11 33,990 15 45,511 18 49,280 27 43,177 29
* Commercial real estate 58,842 23 25,884 11 26,910 11 12,446 7 13,498 9
* Residential lot 2,224 1 2,873 1 2,989 1 1,972 2 3,115 2
- ------------------------------------- --------- -------------------------------------- --------- -----------------------------------
Total real estate loans 190,901 75 179,075 77 200,160 79 169,450 95 139,026 94
- ------------------------------------- --------- -------------------------------------- --------- -----------------------------------
Consumer Loans:
* Home equity lines of credit 3,869 1 2,918 1 2,852 1 2,192 1 2,150 2
* Personal and Other 7,841 3 3,712 2 2,587 1 1,271 1 2,343 2
* Automobile 31,653 12 30,797 14 30,134 12 3,763 2 221 *
* Savings accounts 398 * 557 * 712 * 415 * 586 *
- ------------------------------------- --------- -------------------------------------- --------- -----------------------------------
Total consumer loans 43,761 16 37,984 17 36,285 14 7,641 4 5,300 4
- ------------------------------------- --------- -------------------------------------- --------- -----------------------------------
Commercial business loans: 23,844 9 14,868 6 16,484 7 2,356 1 2,528 2
- ------------------------------------- --------- -------------------------------------- --------- -----------------------------------
TOTAL LOANS 258,506 100% 231,927 100% 252,929 100% 179,447 100% 146,854 100%
- ------------------------------------- --------- =======--------------=======------------=======------------ =======--------- --=====
Less:
Loans in process 12,913 12,104 21,460 22,876 19,290
Discounts, premiums and deferred loan fees 98 636 1,022 206 307
Allowance for losses 2,273 2,431 2,507 1,071 1,247
- ------------------------------------- --------- -------------------------------------- --------- -----------------------------------
TOTAL $243,222 $216,756 $227,940 $155,294 $126,010
===================================== ========= ====================================== ========= ===================================
<FN>
* Less than one percent
</FN>
</TABLE>
1
<PAGE>
The following table sets forth at December 31, 1996, the principal
amounts of the Bank's loans with contractual maturities during the periods
indicated.
<TABLE>
<CAPTION>
=============================================================== ===================================================================
December 31, 1996
Maturing
After 1 year
(in thousands) Within 1 year through 5 years After 5 years Total
- ------------------------------------------- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate:
Residential (1) $ 6,270 $14,289 $81,707 $102,266
Construction and lot(2) 12,900 3,526 454 16,880
Commercial 13,767 27,756 17,319 58,842
Commercial business 13,209 9,535 1,100 23,844
Consumer 13,957 26,045 3,759 43,761
- ------------------------------------------- ---------------------------------------------------------------------------------------
Total $60,103 $81,151 $104,339 $245,593
- ------------------------------------------- ---------------------------------------------------------------------------------------
Maturing after one year with:
Variable interest rates $38,778 $82,033
Fixed interest rates 42,373 22,306
- ------------------------------------------- ---------------------------------------------------------------------------------------
Total $81,151 $104,339
=========================================== =======================================================================================
<FN>
(1) Excludes loans held for sale
(2) Net of loans-in-process
</FN>
</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,
1996, the loan portfolio includes approximately $32.9 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 11%of the Bank's total loan portfolio as of December 31,
1996. The total construction loan portfolio of $27.6 million as of December 31,
1996, are all for one to four family residential properties.
The Bank originates one to four family residential loans to individuals
on a pre-sold basis and through developers on a pre-sold and speculative basis.
The Bank's underwriting guidelines regarding residential construction loans
require an analysis of the financial condition of the developer or the borrower,
the 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.
2
<PAGE>
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.
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, 1996, consumer loans
were approximately $43.8 million or 16% of total loans. Loans secured by
automobiles are the dominant consumer loans and represented $31.7 million or 72%
of total consumer loans as of December 31, 1996. Automobile loans are obtained
from both the retail branch network and indirectly through referrals from
automobile dealerships. 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. Management believes that the quality and risk is similar for retail and
wholesale automobile loans.
Consumer loan underwriting standards include an examination of the
applicant's payment history on other debts and an evaluation of their ability to
meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary importance, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. 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) totaled $21.7 million as of December 31, 1996. 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 1996 and 1995, the Bank expanded its commercial business
lending activities and expects to continue to pursue the commercial business
loan area.
SBA loans which totaled $2.1 million at December 31, 1996 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 loan 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.
3
<PAGE>
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>
=============================================================== ====================================================================
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
(in thousands) 1996 1995 1995
- ------------------------------------------------------------------ -----------------------------------------------------------------
<S> <C> <C> <C>
Real estate loan origination $48,420 $31,334 $90,308
Consumer and commercial loan originations 40,451 30,107 22,045
- ------------------------------------------------------------------ -----------------------------------------------------------------
o Total loan origination 88,871 61,441 112,353
Loans purchased 9,787 22,776 6,193
Loans acquired in mergers 36,078 41,682
- ------------------------------------------------------------------ -----------------------------------------------------------------
Total loan origination and purchases 134,736 84,217 160,228
- ------------------------------------------------------------------ -----------------------------------------------------------------
Less:
o Principal repayment on loans and loans held for sale 58,101 57,784 34,624
o Sale of loans and loans held for sale 42,359 47,435 53,927
- ------------------------------------------------------------------ -----------------------------------------------------------------
Total repayments and sale of loans 100,460 105,219 88,551
- ------------------------------------------------------------------ -----------------------------------------------------------------
o Total increase (decrease) in principal loan balances 34,276 (21,002) 71,677
Net decrease (increase) in deferred loan fees, premiums and discounts 614 386 (816)
Net (decrease) increase in loans in process (809) 9,356 1,416
Net decrease (increase) in allowance for loss 158 76 (1,436)
- ------------------------------------------------------------------ -----------------------------------------------------------------
o Net increase (decrease) in loans and loans held for sale $34,239 ($11,184) $70,841
================================================================== =================================================================
</TABLE>
Lending Procedures. Loan applications may be approved by the Board of
Directors, the Board 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-Retail Banking, the
Senior Vice President-Commercial Lending and the Senior 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 the Board 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,
1996, the Bank was also servicing $277
4
<PAGE>
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 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,
1996 were approximately $4.6 million, representing 1.27% of the Bank's total
assets. The following table details the Bank's non-performing assets at December
31, 1996, 1995 and for the three-year period ending March 31, 1995:
<TABLE>
<CAPTION>
=============================================================== ====================================================================
Year Ended Nine Months Ended Years Ended
December 31, December 31, March 31,
(in thousands) 1996 1995 1995 1994 1993
- ----------------------------------------------------------------------------------- ---------------------------------- ------------
<S> <C> <C> <C> <C> <C>
Loans:
Consumer $157 $303 $352 $61 $241
Commercial business 583 101 630 377 398
Residential mortgage 1,911 1,774 1,050 591 2,167
Residential construction 183 107 115 84 70
Commercial mortgage 294 162 244 317
Repossessed automobiles 196 137 118
- ----------------------------------------------------------------------------------- ---------------------------------- ------------
Total non-performing loans 3,324 2,422 2,427 1,357 3,193
- ----------------------------------------------------------------------------------- ---------------------------------- ------------
Other real estate owned:
Residential construction 107 90 26 468
Residential mortgage 898 483 219 787 306
Land for residential use 61
Land for commercial use 243 767 764 555 574
Commercial real estate 52
- ----------------------------------------------------------------------------------- ---------------------------------- ------------
Total other real estate owned 1,248 1,340 1,009 1,871 932
- ----------------------------------------------------------------------------------- ---------------------------------- ------------
Total non-performing assets $4,572 $3,762 $3,436 $3,228 $4,125
=================================================================================== ================================== ============
</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
5
<PAGE>
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.
General allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
unlike specific allowances , general allowances 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 totaled approximately $2.3 million at December 31, 1996, which is
allocated according to the following table:
<TABLE>
<CAPTION>
=============================================================== ====================================================================
December 31, December 31, March 31,
1996 1995 1995 1994 1993
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
(in thousands) loan loss(2) loans loan loss loans loan loss loans loan loss loans loan loss loans
- ------------------------------------------------------------------------------------- --------------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate construction
and lot $ 48 12% $179 16% $281 19% $212 29% $137 31%
Residential mortgage 540 41 545 50 192 49 283 59 408 54
Commercial mortgage 440 22 371 11 343 11 198 7 224 9
Commercial business 267 9 520 6 531 7 114 1 152 2
Consumer 475 16 506 17 406 14 163 4 201 4
Unallocated (1) 503 310 754 101 125
- ------------------------------------------------------------------------------------- --------------------- --------- ------------
TOTAL $2,273 100% $2,431 100% $2,507 100% $1,071 100% $1,247 100%
===================================================================================== ===================== ========= ============
<FN>
(1) The unallocated portion of the allowance for loan losses decreased from
March 31, 1995 to December 31, 1996 and 1995 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.
(2) The Bank changed the risk factors applied to the performing loan
portfolio to risk factors more similar to the Bank's actual three loss
history (see discussion below).
</FN>
</TABLE>
In evaluating the adequacy of the allowance for loan losses, management
has taken into consideration the loan portfolio, past loan loss experience,
current economic conditions, workout arrangements, pending sales, the financial
strength of the borrowers, and the appraised value of the collateral at the time
reserves were established. Although management believes the allowance for losses
is adequate, their evaluation is dependent upon future events. Management's
evaluation of losses is a continuing process which may necessitate adjustments
to the allowance in future periods.
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 in
the year ended December 31, 1996 are based on the Bank's past three year loss
history considering the current portfolio's characteristics, current economic
conditions and other relevant factors. Prior to 1996, the risk factors applied
to performing real estate loans and commercial business loans were primarily
based on industry statistics because the Bank did not have a relevant loss
history for these loans. After several years of transitioning to a commercial
bank, the Bank has established a three year loss history on commercial real
estate and commercial business loans which has been applied to the performing
loan portfolio at December 31, 1996. Management believes the revised risk
factors are more relevant to the current portfolio than the
6
<PAGE>
risk factors applied in prior years. Non-performing loans are carried at fair
value based on the most recent information available. At December 31, 1996 the
following risk factors are applied to the carrying value of each classified
loan: (I) substandard at 15%, (ii) doubtful at 50%, and (iii) loss is
charged-off 100%.
The following table details the charge-offs, recoveries, net
charge-offs and ending balance of the allowance for loan losses for the year
ended December 31, 1996, the nine months ended December 31, 1995 and the years
ended March 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
=============================================================== ====================================================================
At or for the At or for the At or for the
Year Ended, Nine Months Ended Years Ended
December 31, December 31, March 31,
(in thousands) 1996 1995 1995 1994 1993
- -------------------------------------------------------- ---------------- ------------------ -------------------------- -----------
<S> <C> <C> <C> <C> <C>
Beginning balance $2,431 $2,507 $1,071 $1,247 $775
Reserves acquired in connection with merger 374 1,399 319
Charge offs:
* Real estate mortgage 228 213 344 274 530
* Real estate construction 10 11 138
* Consumer 550 458 105 8 102
* Commercial business 76 137 158 459 226
- -------------------------------------------------------- ---------------- ------------------ -------------------------- -----------
SUBTOTAL - Charge-Offs 854 808 617 752 996
- -------------------------------------------------------- ---------------- ------------------ -------------------------- -----------
Recoveries:
* Real estate mortgage 34 26 166 235 138
* Consumer 76 57 15 8
* Commercial 57 549 273 127
- -------------------------------------------------------- ---------------- ------------------ -------------------------- -----------
SUBTOTAL - Recoveries 167 632 454 362 146
- -------------------------------------------------------- ---------------- ------------------ -------------------------- -----------
Net charge-offs 687 176 163 390 850
- -------------------------------------------------------- ---------------- ------------------ -------------------------- -----------
Provision for losses 155 100 200 214 1,003
- -------------------------------------------------------- ---------------- ------------------ -------------------------- -----------
Ending Balance $2,273 $2,431 $2,507 $1,071 $1,247
- -------------------------------------------------------- ---------------- ------------------ -------------------------- -----------
Ratio of net charge-offs during the period to average loans
outstanding during the period .26% .08% .09% .27% .75%
======================================================== ================ ================== ========================== ===========
</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, 1996 the Company had cash and cash
equivalents of $39.3 million and investments of $39.7 million representing, in
the aggregate, 22% 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, 1996, certificate accounts in the amount of $100,000
or more amounted to approximately $25.2 million representing 9% of total
deposits.
7
<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, 1996 December 31, 1995 March 31, 1995
Weighted Percent Weighted Percent Weighted Percent
Average of Total Average of Total Average of Total
(dollars in thousands) Amount Stated Rate Deposits Amount Stated Rate Deposits Amount Stated Rate Deposits
- ------------------------------------------------------------------- ----------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearings accounts $ 30,341 11% $ 23,867 11% $ 26,149 11%
NOW accounts 35,372 1.50% 13 28,202 1.50% 13 26,688 2.00% 12
Savings accounts 19,137 2.55 7 19,699 2.55 9 19,395 2.45 9
Money Market deposit accounts 39,902 3.20 15 14,536 2.88 6 14,581 2.45 6
Certificate of deposits 147,835 5.41 54 137,231 5.61 61 142,922 5.47 62
- ------------------------------------------------------------------- ----------------- ----------------------------------------------
Total Deposits $272,587 3.78% 100% $223,535 4.02% 100% $229,735 4.00% 100%
=================================================================== ================= ==============================================
</TABLE>
The following table presents, by stated interest rate ranges, the
amount of certificates of deposits outstanding (in thousands) at December 31,
1996 and the periods to maturity of the certificates of deposits by the stated
interest rate ranges at December 31, 1996:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, 1996
December 31, December 31, March 31, 0-6 7-12 13-18 19-24
1996 1995 1995 1994 1993 Months Months Months Months Thereafter
- --------------- --------------- --------- ----------- ---------- ----------- -------- ---------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Up to 4.00% $ 3,006 $ 3,490 $ 7,768 $71,641 $62,060 $ 2,834 $ 172
4.01 to 5.00% 37,671 33,810 37,616 14,415 11,404 29,121 5,846 $ 944 $1,108 $ 652
5.01 to 6.00% 91,298 55,888 48,575 4,180 9,258 41,863 33,556 9,038 4,173 2,668
6.01 to 7.00% 15,162 38,049 44,725 1,237 4,382 2,199 2,979 948 988 8,048
Over 7.01% 698 5,994 4,238 1,551 3,102 346 352
- --------------- --------------- --------- ----------- ---------- ----------- -------- ---------- -------- ------- -------------
TOTAL $147,835 $137,231 $142,922 $93,024 $90,206 $76,363 $42,553 $10,930 $6,269 $11,720
- --------------- --------------- --------- ----------- ---------- ----------- -------- ---------- -------- ------- -------------
% of Total 100% 52% 29% 7% 4% 8%
=============== =============== ========= =========== ========== =========== ======== ========== ======== ======= =============
</TABLE>
Borrowings
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. The Bank has a credit facility from the FHLB in the
amount of $39.0 million.
FHLB advances are collateralized by FHLB stock, mortgage loans and
mortgage backed securities pledged in accordance with agreements the Bank
entered into with the FHLB. In accordance with the agreements, the Bank had
pledged as collateral loans with an aggregate principal balance of approximately
$35.0 million, $42.0 million, and $44.0 million at December 31, 1996, 1995 and
March 31, 1995, respectively. At December 31, 1996, the Bank also had pledged
mortgage backed securities pledged in the amount of $25.7 million. The Bank had
$30.0 million in outstanding advances at December 31, 1996.
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
8
<PAGE>
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, 1996, the Bank had $2.1
million outstanding in repurchase agreements.
The following tables present selected information on borrowings:
<TABLE>
<CAPTION>
=============================================================== ====================================================================
Year Ended Nine Months Ended Years Ended
December 31, December 31, March 31,
- -------------------------------------------------- ---------------- --------------------- -----------------------------------------
1996 1995 1995 1994 1993
- -------------------------------------------------- ---------------- --------------------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
SHORT TERM BORROWINGS:
FHLB Advances:
Amounts outstanding at end of year $5,000 $25,000 $15,000 $20,000
Weighted average rate at end of year 6.95% 5.63% 6.15% 3.86%
Maximum amount outstanding at any month end $12,000 $25,000 $20,000 $40,000
Approximate average amount outstanding during year $1,953 $ 7,939 $ 6,000 $15,000
Approximate weighted average rate for year 5.99% 5.78% 4.71% 3.45%
- -------------------------------------------------- ---------------- --------------------- ----------- --------------- ------------
Other Borrowed Money:
Amounts outstanding at end of year $2,076 $2,350 $2,748
Weighted average rate at end of year 4.96% 5.05% 5.96%
Maximum amount outstanding at any month end $2,352 $2,651 $2,748
Approximate average outstanding during year $1,911 $2,385 $663
Approximate weighted average rate for year 4.87% 5.15% 5.60%
- -------------------------------------------------- ---------------- --------------------- ----------- --------------- ------------
LONG TERM BORROWINGS:
FHLB Advances:
Amounts outstanding at end of year $25,000
Weighted average rate at end of year 5.61%
Maximum amount outstanding at any month end $25,000
Approximate average amount outstanding during year $690
Approximate weighted average rate for year 5.61%
================================================== ================ ===================== =========== =============== ============
</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 .
Competition is significant largely due to the desire of financial institutions
to access the high proportion of retirees who live in South Florida and have
above average liquid assets. The Bank competes with other 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 150 persons as of December 31, 1996.
The Company places a high priority on staff development which involves training
in operational procedures, customer service and regulatory compliance. Extensive
incentive programs that focus on and are dependent on the achievement of certain
financial and customer service goals are in place for employees.
None of the Company's employees are subject to a collective bargaining
agreement, and the Company believes that its employee relations are good.
9
<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, such as the Company, 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 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
10
<PAGE>
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%.
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, restric tion 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.
11
<PAGE>
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
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.
Florida has responded to the enactment of the Interstate Banking Act by
enacting the Florida Interstate Branching Act (the "Florida Branching Act")
which is to become effective on May 31, 1997. The purpose of the Florida
Branching Act is to permit interstate branching, effective June 1, 1997, through
merger transactions under the Interstate Banking Act. Under the Florida
Branching Act, with the prior approval of the FDBF, a Florida bank may
establish, maintain and operate one or more branches in a state other than the
State of Florida pursuant to a merger transaction in which the Florida bank is
the resulting bank. In addition, the Florida Branching Act provides that one or
more Florida banks may enter into a merger transaction with one or more
out-of-state banks, and an out-of-state bank resulting from such transaction may
maintain and operate the branches of the Florida bank that participated in such
merger. An out-of-state bank, however, shall not be permitted to acquire a
Florida bank in a merger transaction unless the Florida bank has been in
existence and continuously operated for more than three years.
At this time, the Company is unable to predict how the Interstate
Banking Act and the Florida Branching 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").
12
<PAGE>
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 the Board of Directors determines exercises 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 condi
tions 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, 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.
Under federal law, BIF and SAIF are each statutorily required to be
recapitalized to a 1.25% of insured reserve deposits ratio. 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. The FDIC further reduce the BIF assessment schedule by an additional
four basis points for the 1996 calendar year so that most BIF members paid only
the statutory minimum semiannual assessment of $1,000. During this same period,
the FDIC retained the existing assessment rate schedule applicable to SAIF
deposits of 23 cents to 31 cents per $100 of domestic deposits, depending on the
institution's risk classification.
13
<PAGE>
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA")
was enacted and signed into law. DIFA was intended to reduce the amount of
semi-annual FDIC insurance premiums for savings association deposits acquired by
banks to the same levels assessed for deposits insured by BIF. To accomplish
this reduction, DIFA provided for a special one-time assessment imposed on
deposits insured by SAIF to recapitalize SAIF and bring it up to statutory
required levels.
This one-time assessment accrued in the third quarter of 1996. As a result,
beginning in 1997, both BIF and SAIF deposits were assessed at the same rate of
0 to 27 basis points depending on risk classification.
Effective January 1, 1997, however, DIFA also separated from the SAIF
assessments the Financing Corporation ("FICO") assessments which service the
interest on its bond obligations. According to the FDIC's risk-related
assessment rate schedules, the amount assessed on individual institutions by the
FICO will be in addition to the amount paid for deposit insurance. FICO
assessment rates for the first semiannual period of 1997 were set at 1.30 basis
points annually for BIF- assessable deposits and 6.48 basis points annually for
SAIF-assessable deposits. These rates are subject to quarterly adjustment to
reflect changes in the assessment basis for the BIF and the SAIF. By law, the
FICO rate on BIF-assessable deposits must be one-fifth the rate on
SAIF-assessable deposits until the insurance funds are merged as specified in
DIFA or until January 1, 2000, whichever occurs first.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. The
recent enactment of the Economic Growth and Regulatory Paperwork Reduction Act
of 1996 ("EGRPRA") streamlines the nonbanking activities application process for
well capitalized and well managed bank holding companies. Under EGRPRA,
qualified bank holding companies may commence a regulatory approved nonbanking
activity without prior notice to the FRB; written notice is merely required
within 10 days after commencing the activity. Also, under EGRPRA, the prior
notice period is reduced to 12 business days in the event of any nonbanking
acquisition or share purchase, assuming the size of the acquisition does not
exceed 10% of risk-weighted assets of the acquiring bank holding company and the
consideration does not exceed 15% in Tier 1 capital. This prior notice
requirement also applies to commencing a nonbanking activity de novo which has
been previously approved by order of the FRB, but not yet implemented by
regulations.
Community Reinvestment Act. The Community Reinvestment Act of 1977
("CRA") requires a financial institution to help meet the credit needs of its
entire community, including low-income and moderate-income areas. On May 3,
1995, the federal banking agencies issued final regulations which change the
manner in which the regulators measure a bank's compliance with the CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institutions's actual lending, service and
investment performance, rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. Federal banking agencies may take CRA compliance into
account when regulating and supervising bank and holding company activities; for
example, CRA performance may be considered in approving proposed bank
acquisitions.
Regulation of the 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
14
<PAGE>
holding companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Under these guidelines assets and off
balance sheet items are assigned to broad risk categories each with designated
weights. The resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
Effective December 31, 1993, the minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) for bank holding companies is 8%. "Tier I Capital,"
particularly consisting of common stockholders' equity, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock,
less certain goodwill items and other intangible assets, is required to equal at
least 4% of risk-weighted assets. The remainder ("Tier II 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, 1996, the Company exceeded minimum capital
requirements. At December 31, 1996, the Company's capital to risk-weighted
assets was 16.9% and Tier I Capital to risk-weighted assets was 15.9%. At
December 31, 1996, the Company's leverage ratio was 11.7%, 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.
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
15
<PAGE>
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. 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.
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.
16
<PAGE>
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.
17
<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 $6.2 million at December 31, 1996.
The Bank leases seven full-service branches in Palm Beach County,
Florida, of which four branches were acquired in connection with the Banyan,
Governors and Century branch acquisitions.
At December 31, 1996, a branch was under construction which is
scheduled to be completed by March 15, 1997. Total construction costs plus land
costs will be approximately $2.1 million. An existing leased branch will be
relocated to the new building.
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
No matter was submitted to a vote of security holders during the
quarter ended December 31, 1996.
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>
=============================================================== ====================================================================
BID PRICE
Year Ended
December 31, December 31,
1996 1995
- ----------------------------------------------------- ------------------------------------------ ----------------------------------
High Low High Low
<S> <C> <C> <C> <C>
Quarter ended March 31 $6 $5 1/8 $4 1/8 $3 7/8
Quarter ended June 30 $6 1/4 $5 1/2 $5 $4 1/8
Quarter ended September 30 $5 7/8 $5 1/8 $6 $4 3/4
Quarter ended December 31 $6 1/8 $5 1/4 $5 7/8 $5 1/8
===================================================== ====================== ================== ==================== =============
</TABLE>
Currently the Company has thirteen market makers in its common stock:
Allen C. Ewing & Co. Fahnestock & Co., Inc.
F. J. Morrissey & Co., Inc. Herzog, Heine, Geduld, Inc.
J. W. Charles Securities, Inc. Mayer & Schweitzer, Inc.
Nash, Weiss & Company Raymond James & Associates
Robert W. Baird & Co., Inc. Ryan Beck & Co., Inc.
Sandler O'Neill & Partners, L.P. Stearn, Agee & Leach, Inc.
William R. Hough & Co.
As of February 9, 1997, the approximate number of holders of the common
stock was 3,500.
18
<PAGE>
The Board of Directors has declared cash dividends for common
shareholders every quarter since April 1993. The Board of Directors declared
dividends in the amount of $.02 per share during the first and second quarters
ended June 30, 1995, $.025 per share during the third and fourth quarters ended
December 31, 1995, and the first quarter ended March 31, 1996 and $.03 per share
during the second, third and fourth quarters ended December 31, 1996. Dividends
of $.03 per share were also declared on February 29, 1997.
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.
19
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
CONSOLIDATED SELECTED FINANCIAL DATA
================================================================================================================================
Year Ended Nine Months Ended
December 31, December 31, Year Ended March 31,
(Amounts in thousands, except per share amounts) 1996(a) 1995 1995 1994 1993
- ---------------------------------------------------- --------------- ------------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Interest income $24,796 $16,282 $16,514 $12,638 $11,412
Interest expense 10,613 7,775 7,397 5,512 4,560
- ---------------------------------------------------- --------------- ------------------- ------------- ------------- ----------
Net interest income 14,183 8,507 9,117 7,126 6,852
Provision for loan losses 155 100 200 214 1,003
- ---------------------------------------------------- --------------- ------------------- ------------- ------------- ----------
Net interest income after provision for loan losses 14,028 8,407 8,917 6,912 5,849
Non-interest income 4,684 3,181 2,773 4,238 2,883
Operating expenses 14,601 8,442 9,860 8,739 6,932
- ---------------------------------------------------- --------------- ------------------- ------------- ------------- ----------
Income before income taxes and accounting change 4,111 3,146 1,830 2,411 1,800
Income taxes 1,711 1,169 663 818 582
- ---------------------------------------------------- --------------- ------------------- ------------- ------------- ----------
Income before accounting change 2,400 1,977 1,167 1,593 1,218
Change in method of accounting for income taxes 500
- ---------------------------------------------------- --------------- ------------------- ------------- ------------- ----------
Net income $2,400 $1,977 $1,167 $2,093 $1,218
Per Share Data:
Primary earnings per common share:
Income before change in accounting for income taxes $.20 $.32 $.23 $.42 $.50
==================================================== =============== =================== ============= ============= ==========
Net income $.20 $.32 $.23 $.55 $.50
==================================================== =============== =================== ============= ============= ==========
Fully diluted earnings per common share $.20 $.25 $.23 $.55 $.50
==================================================== =============== =================== ============= ============= ==========
Average common shares and common stock equivalents
outstanding:
Primary 7,474 5,175 4,474 3,927 2,895
Fully diluted 7,474 7,797 4,474 3,927 2,895
==================================================== =============== =================== ============= ============= ==========
Book value per common share $4.82 $4.75 $4.19 $4.08 $4.31
Dividends per common share $.115 $.07 $.07 $.04
==================================================== =============== =================== ============= ============= ==========
<FN>
(a) Includes one-time SAIF assessment of $669,000, net of tax (see Note 15 to Consolidated Financial Statements).
</FN>
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED SELECTED FINANCIAL DATA (Continued)
====================================================================================================================================
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
(Amounts in thousands, except per share data) 1996(a) 1995 1995 1994(a) 1993
- -------------------------------------------- ----------------- ------------------ --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
At period end:
Total assets $359,306 $303,661 $280,039 $206,637 $169,474
Investments 39,699 10,622 14,103 24,481 248
Loans (b) 253,268 219,187 230,447 156,365 127,257
Allowance for loan losses 2,273 2,431 2,507 1,071 1,247
Total deposits 272,587 225,059 229,735 156,651 145,911
Borrowed money 32,076 27,350 19,733 21,995 2,000
Shareholders' equity 45,573 43,834 20,446 19,648 10,793
Shares outstanding 7,855 6,588 3,653 3,610 1,942
============================================ ================= ================== =============== =============== ==============
Average Balances:
Assets $321,500 $272,270 $229,731 $185,764 $133,754
Shareholders' equity 45,000 27,280 20,446 16,574 8,358
Interest-earning assets 287,000 250,690 208,994 173,756 122,257
Interest-bearing liabilities 234,000 217,970 185,742 154,371 108,357
============================================ ================= ================== =============== =============== ==============
Other data:
Return on average assets .95% .97% .50% 1.13% .91%
Return on average shareholders' equity 6.82% 9.65% 5.82% 12.63% 14.57%
Average shareholders' equity to average total assets 14.00% 10.00% 8.60% 8.92% 6.25%
Shareholders' equity to total assets 12.68% 14.44% 7.30% 9.50% 6.40%
Net interest spread 4.12% 3.89% 3.92% 3.70% 5.13%
Net interest margin 4.95% 4.52% 4.36% 4.10% 5.60%
Non-performing loans (c) $3,129 $2,422 $2,427 $1,357 $3,193
Non-performing assets (c) $4,573 $3,762 $3,436 $3,228 $4,125
Non-performing loans to total loans and
mortgage backed securities 1.09% 1.12% 1.04% .87% 2.53%
Non-performing assets to total assets 1.27% 1.24% 1.23% 1.56% 2.43%
Allowance for loan losses to total loans .90% 1.11% 1.09% .69% .98%
Net charge-offs to average loans .26% .08% .09% .27% .75%
Efficiency ratio (d) 71% 72% 83% 77% 71%
Dividend payout ratio (e) 40% 22% 30% 7%
Number of full-service offices 10 8 7 5 5
Loan servicing portfolio (in millions) $277 $307 $323 $189 $267
============================================ ================= ================== =============== =============== ==============
<FN>
(a) Ratios for the year ended December 31, 1996 exclude a one-time SAIF
assessment expense of $669,000 net of tax, where appropriate (See Note
15 to Consolidated Financial Statements). Ratios for the year ended
March 31, 1994 include a $500,000 effect of change in accounting for
income taxes 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, other real estate owned and repossessed assets.
(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
divided by primary net income per share.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
=============================================================== ====================================================================
For the Year Ended December 31, 1996
First Second Third Fourth
(Amounts in thousands except per share data) Quarter Quarter Quarter (a) Quarter
- --------------------------------------------------------------- -------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Interest income $6,213 $6,203 $6,223 $6,157
Interest expense 2,679 2,646 2,634 2,654
- --------------------------------------------------------------- -------- --------------- ------------------- ---------------
Net interest income 3,534 3,557 3,589 3,503
Provision for loan losses 25 30 50 50
- --------------------------------------------------------------- -------- --------------- ------------------- ---------------
Net interest income after provision for loan losses 3,509 3,527 3,539 3,453
Non-interest income 906 1,107 1,280 1,391
Operating expense 3,273 3,512 4,454 3,362
- --------------------------------------------------------------- -------- --------------- ------------------- ---------------
Income before income taxes 1,142 1,122 365 1,482
Provision for income taxes 473 467 153 618
- --------------------------------------------------------------- -------- --------------- ------------------- ---------------
Net income $669 $655 $212 $864
- --------------------------------------------------------------- -------- --------------- ------------------- ---------------
PER SHARE DATA:
Net income per common share $.06 $.06 (b) $.09
Dividends per common share $.025 $.03 (b) $.03
Average common shares and common stock equivalents outstanding 7,008 7,065 7,823 7,999
=============================================================== ======== =============== =================== ======================
<FN>
(a) Includes one-time SAIF assessment expense of $669,000, net of income tax (see Note 15 to Consolidated Financial Statements)
(b) Less than $.01 per share
</FN>
</TABLE>
<TABLE>
<CAPTION>
=============================================================== ====================================================================
For the Year Ended December 31, 1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------- ------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Interest income $5,336 $5,401 $5,538 $5,344
Interest expense 2,488 2,712 2,704 2,359
- ---------------------------------------------------------------- ------------- --------------- ---------------- -----------------
Net interest income 2,848 2,689 2,834 2,985
Provision for loan losses 25 25 50 25
- ---------------------------------------------------------------- ------------- --------------- ---------------- -----------------
Net interest income after provision for loan losses 2,823 2,664 2,784 2,960
Non-interest income 717 832 1,283 1,064
Operating expense 3,104 2,678 2,896 2,867
- ---------------------------------------------------------------- ------------- --------------- ---------------- -----------------
Income before income taxes 436 818 1,171 1,157
Provision for income taxes 158 291 421 457
- ---------------------------------------------------------------- ------------- --------------- ---------------- -----------------
Net income $278 $527 $750 $700
PER SHARE DATA:
Primary earnings per common share $.05 $.10 $.15 $.09
Fully diluted earnings per common share .05 .10 .13 .08
Dividends per common share .02 .02 .025 .025
Average common shares and common stock equivalents outstanding
Primary 4,466 4,459 4,629 6,120
Fully diluted 4,466 4,459 5,610 8,731
================================================================ ============= =============== ================ =================
</TABLE>
22
<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 their 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 $61.7 million.
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 Banyan Bank since January 19, 1996 and 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 was $2.4 million for the year ended December
31, 1996 compared to $2.3 million for the year ended December 31, 1995. Net
income for the year ended December 31, 1996 was reduced by $669,000 due to a
one-time Federal Deposit Insurance Corporation ("FDIC") Savings Association
Insurance Fund ("SAIF") assessment to recapitalize the national SAIF (see Note
14 to the Consolidated Financial Statements). Net income for the year ended
December 31, 1996 increased 36% to $3.1 million, excluding the one-time FDIC
SAIF assessment, from $2.3 million for the year ended December 31, 1995. The
increase in net income is due to a $2.8 million increase in net interest income,
a $788,000 increase in non-interest income offset by increases of $1.9 million
in operating expenses, $30,000 in provision for loan losses and $384,000 in
income taxes. Net income per common share was $.29 on a primary and fully
diluted basis, excluding the one-time FDIC SAIF assessment, for the year ended
December 31, 1996 compared to $.39 on a primary basis and $.37 on a fully
diluted basis for the year ended December 31, 1995. Earnings per share decreased
for the year ended December 31, 1996 compared to the year ended December 31,
1995 due to a 2.7 million increase in the average shares outstanding during 1996
primarily as a result of the November 1995 secondary equity offering and the
conversion of the Company's Series "A" preferred stock to common stock (see Note
11 to the Consolidated Financial Statements). Reported net income per share for
the year ended December 31, 1996 was $.20. The one-time FDIC SAIF assessment
resulted in a reduction of EPS of $.09.
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
23
<PAGE>
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 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 Statement of Financial
Accounting Standards 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 primary component of earnings for most financial institutions
including the Company is net interest income. Net interest income 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 increased 25% to $14.2 million for the year ended
December 31, 1996 compared to $11.4 million for the year ended December 31,
1995. The increase in net interest income is primarily due to an increase of
$21.7 million in average net interest-earning assets as a result of a $35.1
million increase in average interest-earning assets offset by an increase of
$13.4 million in average interest-bearing liabilities. Average loans outstanding
increased $26.1 million and average investments and interest-bearing deposits in
other financial institutions increased $9.0 million while average
interest-bearing deposits increased $28.4 million and average borrowed money
outstanding decreased $15.0 million. The increases in the loan and deposit
portfolios are primarily due to the Banyan Bank acquisition. In addition, an
increase of 17 basis points in the Bank's net interest spread contributed
$485,000 to the increase in net interest income for the year ended December 31,
1996 compared to the year ended December 31, 1995. Net interest spread increased
due to a 5 basis point increase in the yield on interest earning assets and a 12
basis point decrease in the rate on interest-bearing liabilities which is a
result of the Bank's efforts to change the compositions of the loan and deposit
portfolios to that of a traditional commercial bank.
Net interest income for the nine months ended December 31, 1995
increased $2.2 million or 35% from the nine months ended December 31, 1994 due
primarily to an increase of $4.7 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 4.52% for the nine
months ended December 31, 1995 from 4.17% 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.
Interest Income
The increase of $3.2 million in interest income for the year ended
December 31, 1996 compared to the year ended December 31, 1995 is due to an
increase of $2.5 million in interest and fees on loans, a $552,000 increase in
interest on interest-bearing deposits and a $162,000 increase in interest and
dividends on investments. The increase in interest and fees on loans is
primarily due to an increase of $26.1 million in the average balance of loans
outstanding during the year ended December 31, 1996 compared to the year ended
December 31, 1995. The increase in loans outstanding is primarily a result of
the Banyan Bank acquisition.
24
<PAGE>
Interest income increased approximately $5.1 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 a $45.0
million increase in the average loan balances outstanding for the 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 Expense
The increase in interest expense of $533,000 is due to an increase in
the average balance of interest-bearing liabilities, which was partially offset
by a decrease in interest expense of $183,000 due to a decrease in the rate paid
on interest-bearing liabilities during the year ended December 31, 1996 compared
to the year ended December 31, 1995. The decrease in the rate paid on
interest-bearing liabilities of 12 basis points for the year ended December 31,
1996 compared to the year ended December 31, 1995 is primarily a result of
reducing the rate paid on certificate of deposits by approximately 10 basis
points. The Bank began lowering interest rates paid on certificates of deposits
in March 1995 to become aligned with the commercial bank market. Likewise, the
average balance of non-interest bearing deposits increased $10.2 million or 52%
for the year ended December 31, 1996 compared to the year ended December 31,
1995.
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.
25
<PAGE>
<TABLE>
<CAPTION>
NET INTEREST INCOME, AVERAGE BALANCE AND RATES:
=============================================================== ====================================================================
Year Ended December 31, Nine Months Ended
1996 1995 1995
------------------------------ ---------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------------------- --------- ---------- --------- ---------- ------------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $251,915 $22,623 8.98% $225,789 $20,160 8.93% $224,405 $15,201 9.03%
Interest-bearing deposits 19,042 974 5.12 12,806 422 3.30 12,985 339 3.48
Investments 15,615 1,199 7.68 12,889 1,037 8.05 13,300 742 7.44
- -------------------------------------------- --------- ---------- --------- ---------- ------------------ ---------- ----------
Total interest-earning assets $286,572 24,796 8.65 251,484 21,619 8.60 250,690 16,282 8.65
Other assets 34,978 22,506 21,580
- -------------------------------------------- --------- ---------- --------- ---------- ------------------ ---------- ----------
Total $321,550 $273,990 $272,270
- -------------------------------------------- --------- ---------- --------- ---------- ------------------ ---------- ----------
Liabilities and Shareholders'Equity
Interest-bearing liabilities:
NOW accounts $33,192 508 1.53 $33,453 597 1.78 $34,762 454 1.74
Money market accounts 28,250 1,127 3.99 14,214 417 2.93 12,958 312 3.20
Savings deposits 19,341 522 2.70 18,763 551 2.94 18,354 405 2.94
Certificate of deposits 148,925 8,209 5.51 134,853 7,566 5.61 133,200 5,775 5.78
Borrowed money 4,554 247 5,42 19,618 1,134 5.78 18,696 829 5.91
- -------------------------------------------- --------- ---------- --------- ---------- ------------------ ---------- ----------
Total interest-bearing liabilities 234,262 10,613 4.53 220,901 10,265 4.65 217,970 7,775 4.76
- -------------------------------------------- --------- ---------- --------- ---------- ------------------ ---------- ----------
Non-interest-bearing deposits 29,115 18,932 18,576
Other liabilities 13,173 8,597 8,444
Shareholders' equity 45,000 25,560 27,280
- -------------------------------------------- --------- ---------- --------- ---------- ------------------ ---------- ----------
Total liabilities and shareholders'
equity $321,550 $273,990 $272,270
- -------------------------------------------- --------- ---------- --------- ---------- ------------------ ---------- ----------
Net interest/income rate spread $14,183 4.12% $11,354 3.95% $8,507 3.89%
- -------------------------------------------- --------- ---------- --------- ---------- ------------------ ---------- ----------
Net average interest-earning
assets/net interest margin $52,310 4.95% $30,583 4.51% $32,720 4.52%
- -------------------------------------------- --------- ---------- --------- ---------- ------------------ ---------- ----------
Ratio of average interest-earning
assets to average
interest-bearing liabilities 1.22X 1.14X 1.15X
============================================ ========= ========== ========= ========== ================== ========== ==========
<CAPTION>
=============================================================== ====================================================================
Nine Monts Ended December 31, Year Ended March 31,
1994 1995
--------------------------------- -----------------------------------
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------- ---------- --------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $179,256 $10,522 7.83% $191,442 $15,480 8.09%
Interest-bearing deposits 14,639 379 3.45 10,743 462 4.30
Investments 6,568 277 5.62 6,809 572 8.40
- ----------------------------------- ---------- --------- ---------- ---------- ---------- ------------
Total interest-earning assets 200,463 11,178 7.43 208,994 16,514 7.90
Other assets 12,506 20,737
- ----------------------------------- ---------- --------- ---------- ---------- ---------- ------------
Total $212,969 $229,731
- ----------------------------------- ---------- --------- ---------- ---------- ---------- ------------
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
NOW accounts $26,247 278 1.41 $19,393 607 3.13
Money market accounts 12,334 308 3.30 27,794 419 1.51
Savings deposits 19,228 460 3.19 14,067 437 3.11
Certificate of deposits 96,328 3,053 4.23 105,659 4,781 4.52
Borrowed money 19,656 810 5.49 18,829 1,153 6.12
- ----------------------------------- ---------- --------- ---------- ---------- ---------- ------------
Total interest-bearing liabilities 173,793 4,909 3.77 185,742 7,397 3.98
- ----------------------------------- ---------- --------- ---------- ---------- ---------- ------------
Non-interest-bearing deposits 8,126 10,428
Other liabilities 11,087 13,115
Shareholders' equity 19,963 20,446
- ----------------------------------- ---------- --------- ---------- ---------- ---------- ------------
Total liabilities and shareholders' $229,731
equity $212,969
- ----------------------------------- ---------- --------- ---------- ---------- ---------- ------------
Net interest/income rate spread $6,269 3.66% $9,117 3.92%
- ----------------------------------- ---------- --------- ---------- ---------- ---------- ------------
Net average interest-earning
assets/net interest margin $26,670 4.17% $23,252 4.36%
- ----------------------------------- ---------- --------- ---------- ---------- ---------- ------------
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.15X 1.13X
=================================== ========== ========= ========== ========== ========== =======================================
</TABLE>
26
<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>
========================================================== =========================================================================
Year Ended Nine Months Ended
December 31, 1996 versus 1995 December 31, 1995 versus 1994
----------------------------------------- -----------------------------------------
Increase (decrease) due to change in: Increase (decrease) due to change in:
----------------------------------------- -----------------------------------------
Average Average Net Average Average Net
(dollars in thousands) Rate Volume Change Rate Volume Change
- --------------------------------------------- ------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans - net $117 $2,346 $2,463 $1,146 $3,533 $4,679
Interest-bearing deposits 233 319 552 17 (57) (40)
Investments (48) 210 162 86 379 465
- --------------------------------------------- ------------- ------------- ------------- ------------- ------------ ------------
302 2,875 3,177 1,249 3,855 5,104
- --------------------------------------------- ------------- ------------- ------------- ------------- ------------ ------------
Interest expense:
Savings deposits (45) 16 (29) (27) (28) (55)
NOW accounts (85) (4) (89) 56 120 176
Money Market accounts 150 560 710 (17) 21 4
Certificates of deposit (133) 776 643 1,164 1,558 2,722
Borrowed money (72) (815) (887) 72 (53) 19
- --------------------------------------------- ------------- ------------- ------------- ------------- ------------ ------------
(185) 533 348 1,248 1,618 2,866
- --------------------------------------------- ------------- ------------- ------------- ------------- ------------ ------------
Net interest income $487 $2,342 $2,829 $1 $2,237 $2,238
============================================= ============= ============= ============= ============= ============ =============
</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 increased $30,000 or 24% for the year
ended December 31, 1996 compared to the year ended December 31, 1995. The
allowance for loan losses as a percent of total loans is approximately .90%
which management believes to be adequate considering the Bank's loan composition
at December 31, 1996 and the Bank's historical losses. 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, in part, on the Bank's past 3 year loss
history and considers 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, 1996, 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 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,
1996 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, 1996 the Bank had $3.1 million in non-performing loans
representing 1.22% of total loans compared to $2.4 million representing 1.11% of
total loans at December 31, 1995. The increase in non-performing loans is due
partially to an increase in residential mortgage loan delinquencies and in part
to a $330,000 commercial loan.
27
<PAGE>
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.
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.
Non-Interest Income
Non-interest income increased $788,000 or 20% for the year ended
December 31, 1996 compared to the year ended December 31, 1995 primarily due to
an increase in service charges on deposit accounts, an increase in the gain on
sale of loans and an increase in the gain on sale of investments
available-for-sale offset by a decrease in mortgage trading 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.
Service Charges on Deposit Accounts
In line with the Bank's goal to increase service fee income on deposit
accounts, service charges on deposit accounts increased approximately 35% to
$1.8 million for the year ended December 31, 1996 compared to the year ended
December 31, 1995. Average transaction account balances increased approximately
$9.9 million or 19% for the year ended December 31, 1996 compared to the year
ended December 31, 1995 due to an increase in the volume of transaction
accounts. In addition, the composition of the Bank's deposit portfolio has
continued to change to reflect an increase in commercial customers which
typically require services that generate more fee income than the personal
deposit 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 $19.0 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 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.
Gain on Sales of Loans and Servicing Rights
Gain on sale of loans and servicing increased by $428,000 for the year
ended December 31, 1996 compared to the year ended December 31, 1995 primarily
due to an increase in the gains realized on the sale of loans as the volume of
loan sales in both years was relatively stable. The gain realized on the sale of
loans is dependent on market interest rates relative to the loans' interest
rates at the time of sale and whether loans are sold servicing released or
servicing retained. No purchased loan servicing rights were sold in the years
ended December 31, 1996 and 1995.
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.
28
<PAGE>
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.
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 packages for a
gain. Mortgage trading income decreased $290,000 for the year ended December 31,
1996 compared to the year ended December 31, 1995 as there was no mortgage
trading income recorded in 1996. 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, ATM fees and other
miscellaneous fee income.
Other income increased $144,000 for the year ended December 31, 1996
compared to the year ended December 31, 1995 due primarily to a $100,000
increase in other fee income related to loan accounts and other services. The
increase in other fee income associated with loans is primarily due to an
increase in the volume of commercial and consumer loan production. The increase
in fees for other services is a result of increased usage in new services such
as PC banking and merchant deposits.
Other income increased $453,000 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 approximately $100,000, 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 $847,000 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.
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.
Operating Expenses
Operating expenses, excluding the one-time FDIC SAIF assessment of $1.2
million, pretax, increased $1.9 million for the year ended December 31, 1996
compared to the year ended December 31, 1995 primarily due to increases in
employee compensation and benefits, occupancy and equipment expenses, data
processing charges and goodwill amortization. Employee compensation and benefits
increased approximately $1.0 million primarily due to an increase in the number
of employees associated with a larger banking center network and $180,000 of
non-recurring costs associated with the absorption of the Banyan Bank
acquisition. Occupancy and equipment expenses increased $428,000 for the year
ended December 31, 1996 compared to the year ended December 31, 1995 due to the
increase of two branches associated with the Banyan Bank acquisition, a new
branch which opened in June 1996 and the increased depreciation expense
associated with the $1.5 million increase in furniture and equipment.
Approximately $800,000 of computer equipment and software were purchased during
1996 for the EDP conversion and system upgrade. Data processing
29
<PAGE>
expenses increased $368,000 for the year ended December 31, 1996 compared to the
year ended December 31, 1995 primarily due to an increase in the volume of
deposit and loan accounts processed as well as an increase in the monthly data
service bureau charge since August 1996. In addition, an $80,000 non-recurring
expense was incurred associated with the conversion of data service bureaus.
Goodwill amortization increased approximately $306,000 due to the increase in
goodwill of approximately $5.0 million associated with the Banyan Bank
acquisition.
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 to 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.
Income Taxes
Income tax expense increased $384,000 for the year ended December 31,
1996 compared to the year ended December 31, 1995 due to an increase in net
income before taxes and a 5% increase in the effective tax rate to 42% in 1996.
The effective tax rate increased due to an increase in the amortization of
goodwill which results in permanent tax differences.
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.
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. The deferred tax valuation allowance was reduced by $320,000 in 1996 due
to the utilization of the Governors net operating loss carryforward.
Accordingly, goodwill was adjusted to offset the reduction of the valuation
allowance.
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 $53.9 million and $58.2 million at December 31, 1996 and
1995, respectively. 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 27% and 24% at December 31, 1996 and 1995,
respectively. 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 cash
acquired in the Banyan Bank merger as well as proceeds from maturities and calls
of investments held to maturity and sales of investments available-for-sale.
Uses of cash consist of originations of loans
30
<PAGE>
and purchases of investments available-for-sale. Primary sources of borrowings
include advances from the FHLB, borrowings under repurchase agreements and
commercial bank lines of credit.
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, 1996. See Note 12 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 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.
31
<PAGE>
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, 1996:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, 1996
---------------------------------------------------------------------------------
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 $197,020 $62,795 $19,365 $48,240 $327,420
Total interest-bearing liabilities 176,975 50,350 46,055 942 274,322
- ---------------------------------------------- --------------- ----------------- ---------------- -------------- ---------------
Interest rate sensitivity gap $20,045 $12,445 ($26,690) $47,298 $53,098
============================================== =============== ================= ================ ============== ===============
Cumulative interest rate sensitivity gap $20,045 32,490 $5,800 $53,098
============================================== =============== ================= ================ ============== ===============
Cumulative interest rate sensitivity gap as a
percent of total assets 5.6% 9.0% 1.6% 15%
============================================== =============== ================= ================ ============== ==================
</TABLE>
In preparing the table above, certain assumptions have been made with
regard to prepayments on fixed rate mortgage and consumer loans and withdrawals
of checking, NOW, Money Market and savings account deposits. These assumptions
are that the Company will experience average annual prepayments of 6% on fixed
rate mortgage loans and 10% on consumer loans. The assumptions for checking,
NOW, Money Market and savings account deposit run-offs are as follows: 54% in
one year or less, 31% in 1 to 3 years, 14% in 3 to 5 years and 1% in over 5
years. All other assets and liabilities have been repriced based on the earlier
of repricing or contractual maturity. The above assumptions are annual
percentages based on the latest available assumptions and on remaining balances
and should not be regarded as indicative of the actual prepayments 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 for 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 $22.8 million
in new loans and $12.9 million in construction loans-in-process at December 31,
1996. 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 Company's balance sheet and management uses computer
modeling in its efforts to reduce the effects that interest rate fluctuations
have on income.
Impact of Inflation
The consolidated financial statements and related consolidated
financial information presented herein have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or same magnitude as the price of
goods and services.
Financial Condition
The Company's consolidated total assets increased $55.6 million or 18%
to $359.3 million at December 31, 1996 compared to December 31, 1995. As a
result of the Banyan Bank acquisition, assets increased approximately $57.0
million, net due to acquiring $61.7 million in assets and recording $5.0 million
in goodwill offset by $9.7 million cash payment. In addition, FHLB advances
increased $5.0 million and shareholders' equity increased $1.0 million as a
result of the exercise of outstanding warrants and $0.7 million as a result of
changes in retained earnings. These increases were
32
<PAGE>
offset by $7.4 million in net run-off of certificates of deposit. The decrease
in deposits is attributable to lowering interest rates paid on certificates of
deposits since March 1995 to become aligned with the commercial bank market. The
amount of deposit run-off has significantly decreased during the year ended
December 31, 1996 compared to the run-off amount of $35.9 million in the nine
months ended December 31, 1995. Management expects deposit run-off to continue
to decrease.
Loans receivable, net and loans held for sale increased $34.2 million
primarily due to loans acquired in connection with the Banyan Bank acquisition.
Loan originations and purchases of approximately $99 million offset loan
repayments and sales during the year ended December 31, 1996. Investments
increased by $29.1 million due to the purchase of $32.9 million of
mortgage-backed securities partially funded with a $25.0 million FHLB advance
and partially funded with maturities of investments held to maturity and cash.
Cash decreased approximately $15.1 due primarily to deposit run-off, the
purchase of property and equipment and an increase in other assets. The increase
of $1.8 million in property and equipment, net relates primarily to the
acquisition of data processing equipment and software associated with the EDP
conversion, system upgrades and electronic delivery devices (e.g. voice response
system and PC banking system). The increase in other assets of approximately
$1.4 million is primarily due to a $640,000 receivable due from the SBA related
to a loan transaction and $520,000 receivable related to an OREO sale which
closed on December 31, 1996.
Consolidated total assets increased $23.6 million or 8% 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 36%
from $206.6 million at March 31, 1994 to $280.0 million at March 31, 1995.
Assets increased $64.3 million as a result of the acquisition of Governors. The
remaining increase is a direct result of increases in loan and deposit demand.
Net loans increased 46.7% from $155.3 million at March 31, 1994 to $227.9
million at March 31, 1995. Loans acquired in the acquisition of Governors
contributed $40.3 million to the net increase in loans while loan originations
was the primary contributor to the remaining increase during the year ended
March 31, 1995. Cash and cash equivalents increased from $13.1 million to $17.6
million from 1994 to 1995 as a result of the sale of $24 million of trading
investments offset by increased loan and deposit demand. Investments, including
the trading account, decreased $10.3 million from 1994 to 1995 primarily due to
an increase in loan demand and the purchase of Governors for $5.3 million.
Deposits increased $73 million or 46.6% from $156.7 million at March 31, 1994 to
$229.7 million at March 31, 1995 as a result of the merger with Governors and an
increase in deposit demand. Federal Home Loan Bank ("FHLB") advances decreased
from $20 million to $15 million from 1994 to 1995, while securities under
agreements to repurchase increased from nil to $2.7 million at March 31, 1995.
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. Commercial real
estate and commercial business loans increased $33.0 million and $8.9 million,
respectively, from December 31, 1995 to December 31, 1996. The acquisition of
Banyan Bank contributed approximately $18.0 million in commercial real estate
loans and $7.0 million in commercial business loans while the remaining
increases of $15.0 million in commercial real estate loans and $1.9 million in
commercial business loans were achieved by the Bank's business banking unit
targeting high quality commercial businesses. Consumer loans increased $5.8
million or 15% at December 31, 1996 compared to December 31, 1995 primarily due
to an increase in direct consumer loan originations. The Bank's product
developments and enhancements, such as business and consumer PC Banking and cash
management, as well as the Company's increased emphasis in sales culture have
contributed to the success of customer development. Residential real estate
loans decreased $6.0 million from December 31, 1995 to December 31, 1996 which
is in line with the Bank's strategy to change the loan portfolio composition
more similar to the composition of a traditional commercial bank.
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
33
<PAGE>
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 efforts of the Bank's business
banking unit. No significant changes in the composition of the Bank's loan
portfolio occurred from March 31, 1995 to December 31, 1995.
While the Bank's strategy is to target growth primarily in the
commercial business, commercial real estate and consumer markets, the Bank is
positioned to maintain its presence in the residential real estate market and to
emphasize residential construction lending. Continued growth in commercial and
consumer business is expected in 1997 with the anticipation of increasing the
Company's net interest margin through increases in higher interest-earning
assets and reductions in higher interest-bearing liabilities.
Forward-Looking Statements
Statements in this Annual Report on Form 10-K which express the
"belief", "anticipation", or "expectation", as well as other statements which
are not historical fact, are forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and involve risks and
uncertainties. Moreover, there are important factors which include, but are not
limited to, general and local economic conditions, competition for the Bank's
customers from other banking and financial institutions, government legislation
and regulation, changes in interest rates, the impact of rapid growth and
significant changes in the loan portfolio composition and other risks described
in Part I under the headings "Business" and "Regulation" and in Republic
Security Financial Corporation's other filings with the Securities and Exchange
Commission, all of which are difficult to predict and many of which are beyond
the control of the Company.
34
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
==============================================================================================================================
December 31, December 31,
(amounts in thousands except share and per share data) 1996 1995
- ------------------------------------------------------------------------------------ --------------------- -------------------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 4,874 $ 3,211
Interest-bearing deposits in other financial institutions 34,430 51,162
Investments available-for-sale 32,917
Investments held to maturity (Market value of $6,830 and $10,779 at
December, 31, 1996 and 1995, respectively) 6,782 10,622
Loans receivable - net 243,222 216,756
Loans held for sale (Market value of $7,850) 7,773
Property and equipment - net 9,000 7,192
Other real estate owned 1,248 1,340
Goodwill - net 7,675 2,994
Loan servicing rights, net 2,032 2,546
Accrued interest receivable 1,976 1,796
Other assets 7,377 6,042
- ------------------------------------------------------------------------------------ --------------------- -------------------
Total $359,306 $303,661
==================================================================================== ===================== ===================
Liabilities and Shareholders' Equity
Liabilities:
Deposits $272,587 $223,535
Federal Home Loan Bank advances 30,000 25,000
Securities sold under agreements to repurchase 2,076 2,350
Advances from borrowers for taxes and insurance 1,613 2,105
Bank drafts payable 3,778 3,155
Other liabilities 3,679 3,682
- ------------------------------------------------------------------------------------ --------------------- -------------------
Total liabilities 313,733 259,827
- ------------------------------------------------------------------------------------ --------------------- -------------------
Commitments and Contingencies
Shareholders' equity:
Preferred stock $10.00 stated value; 10,000,000 shares authorized:
Series "A" - 401,500 shares issued and outstanding at December 31, 1995 4,015
Series "C" - 1,035,000 shares issued and outstanding at December 31, 1996
and 1995, respectively 10,350 10,350
Common stock $.01 par value; 20,000,000 shares authorized; 7,854,982 and
6,587,653 shares issued and outstanding at
December 31, 1996 and 1995, respectively 79 66
Additional paid-in capital 31,101 26,035
Retained earnings 4,035 3,368
Unrealized gain on investments available for sale, net of taxes 8
- ------------------------------------------------------------------------------------ --------------------- -------------------
Total shareholders' equity 45,573 43,834
- ------------------------------------------------------------------------------------ --------------------- -------------------
Total $359,306 $303,661
==================================================================================== ===================== ===================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
=========================================================================== =================================== ================
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
(amounts in thousands except per share data) 1996 1995 1994 1995
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
(unaudited)
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $22,623 $15,201 $10,522 $15,480
Interest and dividends on investments 2,173 1,081 656 1,034
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
24,796 16,282 11,178 16,514
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
Interest Expense:
Interest on deposits 10,366 6,946 4,099 6,244
Interest on borrowings 247 829 810 1,153
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
10,613 7,775 4,909 7,397
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
Net interest income 14,183 8,507 6,269 9,117
Provision for loan losses 155 100 175 200
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
Net interest income after provision for loan losses 14,028 8,407 6,094 8,917
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
Non-interest Income:
Service charges on deposit accounts 1,820 1,113 524 809
Gain on sale of loans and servicing 1,053 625 749 847
Mortgage trading income 290 283 329
Gain on sale of investments available-for-sale 191
Loss on sale of investments - trading (200) (200)
Other income 1,620 1,153 700 988
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
4,684 3,181 2,056 2,773
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
Operating Expenses:
Employee compensation and benefits 6,067 3,699 3,262 4,595
Occupancy and equipment 2,478 1,498 936 1,488
Professional fees 706 599 437 652
Advertising and promotion 341 176 178 233
Communications 459 302 244 352
Data processing 707 339 209 307
Insurance 1,649 473 420 570
Other real estate owned - net 188 106 70 70
Goodwill amortization 471 165 18 73
Other 1,535 1,085 982 1,520
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
14,601 8,442 6,756 9,860
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
Income before income taxes 4,111 3,146 1,394 1,830
Income taxes 1,711 1,169 505 663
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
Net income $2,400 $1,977 $889 $1,167
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
Income applicable to common stock $1,514 $1,648 $663 $865
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
Per share data:
Primary earnings per common share $.20 $.32 $.18 $.23
Fully diluted earnings per common share $.20 $.25 $.18 $.23
Dividends $.115 $.07 $.04 $.07
- --------------------------------------------------------------------------- ---------------- ------------------ ----------------
Average common shares and common stock equivalents outstanding:
Primary 7,474 5,175 4,474 4,474
Fully diluted 7,474 7,797 4,474 4,474
=========================================================================== =================================== ================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
===================================================================================================================== ============
Unrealized
Appreciation
Additional On Investments
Preferred Common Paid-in Retained Available-for-Sale,
(amounts in thousands except share data) Stock Stock Capital Earnings Net of Taxes
- ------------------------------------------------------- ------------ --------- ----------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
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
Exercise of warrants - 268,126 shares 3 1,039
Conversion of preferred stock series "A"
into common stock - 982,995 shares (3,980) 10 3,970
Issuance of stock grants - 9,000 shares 32
Issuance of stock for Dividend Reinvestment and Optional Stock
Purchase Plan - 2,586 shares 13
Exercise of stock options - 4,622 12
Cash redemption of preferred stock series "A" (35)
Cash dividends - common stock (847)
Cash dividends - preferred stock series "A" and "C" (886)
Net income 2,400
Change in appreciation on investments available for sale,
net of taxes $8
- ------------------------------------------------------- ------------ --------- ----------- --------------- ---------------------
Balance, December 31, 1996 $10,350 $79 $31,101 $4,035 $8
============================================================================================================ =====================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
====================================================================================================================================
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
(amounts in thousands) 1996 1995 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $2,400 $1,977 $1,167
Adjustments to reconcile net income to net cash
provided by operating activities, net of effects of acquisitions:
Provision for loan losses 155 100 200
Depreciation and amortization 1,766 956 1,037
Deferred income taxes 153 182 139
Amortization of deferred loan fees and costs (182) (337) (215)
Gain on sale of loans -trading, loans and servicing (1,053) (757) (1,176)
Loan costs deferred (241) (161) (471)
Loans originated for sale (10,372) (28,280) (48,157)
Purchase of loans for sale (7,773) (8,572) (5,140)
Sale of loans and loan participation certificates 43,040 48,192 55,102
Proceeds from the sale of investments - trading 24,000
Loss on sale of investments - trading 200
Gain on sale of investments available-for-sale (191)
Other - net (1,627) (1,389) 2,339
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 26,075 11,911 29,025
- ------------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Cash and cash equivalents acquired in branch purchase, net 16,917
Cash and cash equivalents acquired in merger-net 15,235 1,819
Purchase of investments available-for-sale (42,839)
Proceeds from sale of investments available- for- sale 9,866
Maturities and calls of investments held to maturity 10,025 5,600 1,350
Purchases of investments held to maturity (5,996) (1,951)
Loans purchased for investment (2,014) (1,861) (1,053)
Loans originated for investment (78,499) (42,516) (67,990)
Principal collected on loans 57,003 56,317 35,034
Purchase of property and equipment (2,333) (1,652) (2,295)
Purchase of loan servicing rights (2,322)
Other - net 1,751 331 1,408
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (37,801) 31,185 (34,049)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase (decrease) in demand deposits, NOW accounts,
Money Market accounts and savings accounts 10,838 (1,665) (1,414)
Proceeds from sales of certificates of deposit 30,049 30,054 56,414
Payment for maturing certificates of deposits (48,274) (64,220) (40,185)
Proceeds from common and preferred stock offering - net of stock issuance costs 19,404
Increase (decrease) in FHLB advances 5,000 10,000 (5,000)
Cash dividends (1,733) (631) (519)
Other - net 777 434 475
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (3,343) (6,624) 9,771
- ------------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (15,069) 36,472 4,747
Cash and cash equivalents at beginning of period 54,373 17,901 13,154
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $39,304 $54,373 $17,901
===================================================================================================================== ==============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 ten full-service branches, nine 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 its subsidiary 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 December 31, 1996 and
March 31, 1995. 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, federal funds
sold and interest-bearing deposits in other financial institutions. The
Company paid income taxes of $1,610,000 during the year ended December
31, 1996, $970,000 during the nine months ended December 31, 1995, and
$512,000 during the year ended March 31, 1995. The Company paid
interest on deposits and other borrowings of $10,760,000 for the year
ended December 31, 1996, $7,787,000 for the nine months ended December
31, 1995 and $6,634,000 for the year ended March 31, 1995.
Approximately $976,000, $770,000 and $1,367,000 was transferred from
loans to OREO during the year ended December 31, 1996, the nine months
ended December 31, 1995 and the year ended March 31, 1995,
respectively. Assets of approximately $62,000,000 were acquired and
approximately $57,000,000 of liabilities were assumed related to the
merger of Banyan Bank during the year ended December 31, 1996 (see Note
2). 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). As a result of the redemption of the Company's 7.5%
cumulative convertible preferred stock, Series "A", 982,995 shares of
the Company's common stock were issued in exchange for 398,000 shares
of the Series "A" preferred stock in the amount of $3,980,000.
Investments-Trading
During the year ended March 31, 1995, certain investments were
held for resale in anticipation of short-term market movements. These
investments, which consisted of adjustable rate mortgage funds, were
stated at fair value and were all sold in the year ended March 31,
1995. Realized gains and losses on trading securities were included in
other non-interest income.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Securities
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. Securities classified as available- for-sale
are to be held for indefinite periods of time and may be sold in
response to movements in market interest rates, changes in the maturity
mix of bank assets and liabilities or demand on liquidity. Securities
classified as available-for-sale are carried at fair value. Unrealized
gains and losses on these securities are excluded from earnings and are
reported as a separate component of shareholders' equity net of tax.
Interest income on debt securities is included in income using
the level yield method. Gains and losses on sales of securities are
determined on a specific identification basis.
Loans Receivable-Net and Loans Held for Sale
Loans receivable-net 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. Certain loans are held for sale and are carried at the lower of
cost or market.
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 loans.
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.
Effective April 1, 1995, the Company adopted Financial
Accounting Standards Board Statement No. 114, "Accounting by Creditors
for Impairment of a Loan" (SFAS No. 114). This standard requires
impaired loans within the scope of SFAS No.114 be measured based on
discounted cash flows using the loan's effective interest rate or the
fair value of the collateral for collateral dependent loans. The
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.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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.
Other Real Estate Owned
In accordance with Statement No. 114, a loan is classified as
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 less
estimated disposal costs at the time of foreclosure. Costs related to
the development and improvement of the property are capitalized,
whereas costs related to maintaining the property, net of income
received, 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.
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 estimated disposal costs.
Provision for other real estate owned losses during the year ended
December 31, 1996, totaled $98,000, 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 and $91,000 was recorded during the year
ended March 31, 1995.
Goodwill
The Company assesses long lived assets and related goodwill
for impairment under FASB Statement No. 121. "Accounting for the
Impairment of Long lived Assets and for Long Lived Assets to be
Disposed Of". Under those rules, goodwill associated with assets
acquired in a purchase business combination is included in impairment
evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable. The Company
amortizes goodwill over 15 years using the straight-line method.
Accumulated amortization was $739,000 and $268,000 at December 31, 1996
and 1995, respectively.
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 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, if
dilutive, into 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
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 periods have been reclassified for comparative
purposes.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement
No.125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities"(SFAS No. 125), which requires an entity
to recognize the financial and servicing assets it controls and the
liabilities it has incurred and to derecognize financial assets when
control has been surrendered in accordance with the criteria provided
in the Statement. In accordance with SFAS No. 125, the Company will
apply the new rules prospectively to transactions beginning in the
first quarter of 1997. Based on current circumstances, the Company
believes the application of the new rules will not have a material
impact on the consolidated financial statements.
In October 1995, the Financial Accounting Standard Board issued
Statement No. 123, "Accounting for Stock Based Compensation" (SFAS No.
123). The effect of applying the SFAS No. 123 fair value method to the
Company's stock options issued after December 15, 1994, results in net
income and earnings per share that are not materially different from
the amounts reported.
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (SFAS No. 121), which is
effective for fiscal years beginning after December 15, 1995. 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 adopted SFAS No. 121 in the first quarter of 1996. The
adoption of this statement did not have a material impact on the
financial condition, operations or cash flows of the Company.
2. Mergers and Branch Acquisition
On January 19, 1996, the Company acquired Banyan Bank
("Banyan") for $9,701,320, plus $60,000 in merger related costs. The
purchase price, which was paid in the form of cash, was determined
based upon a multiple of Banyan's shareholders' equity balance, limited
to a specified amount, as of the last day of the month prior to
closing. Banyan was a state chartered commercial bank headquartered in
Boca Raton, Florida, with one full service branch located in Boynton
Beach, Florida.
The acquisition was accounted for as a purchase. Accordingly,
operations of Banyan Bank are included since the acquisition date.
Approximately $5,000,000 in goodwill was recorded, representing the
purchase price in excess of the fair value of the net assets acquired,
and is being amortized over 15 years using the straight-line method.
The following summarizes the fair value of the Banyan assets
acquired and liabilities assumed:
================================================================================
(in thousands)
- ------------------------------------------------------------------------------
Cash $24,936
Loans, net 35,704
Other assets 1,061
- ------------------------------------------------------------------------------
Total assets 61,701
Deposits 56,439
Other liabilities 527
- ------------------------------------------------------------------------------
Total liabilities 56,966
- ------------------------------------------------------------------------------
Net assets acquired $4,735
================================================================================
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro forma financial information for Republic Security
Financial Corporation, as if the Banyan Bank merger had taken place as
of January 1, 1995 and April 1, 1994 for income and per share data is
as follows:
<TABLE>
<CAPTION>
===================================================================================================================== =======
Nine months ended Year ended
(in thousands except per share data) December 31, 1995 March 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total interest income $19,399 $19,689
Net interest income after provision for loan losses $10,068 $10,765
Income before taxes $4,130 $2,512
Net income $2,395 $1,507
Net income per common share $0.23 $0.11
============================================================ ========================= ====================================
</TABLE>
The pro forma data is for information purposes only and may
not be indicative of the results that actually would have occurred if
the transaction had been consummated on the dates indicated and should
not be construed as being representative of future periods.
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 to the seller 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.
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 purchase price in excess of the fair value of the net
assets acquired, and 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
Other assets 1,891
- -------------------------------------------------------------------------------
Total assets 64,307
Deposits 58,140
Securities sold under repurchase agreements 2,515
Other liabilities 1,655
- -------------------------------------------------------------------------------
Total liabilities 62,310
- -------------------------------------------------------------------------------
Net assets acquired $1,997
===============================================================================
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro forma financial information for RSFC, as if the merger had
taken place as of April 1, 1994, for income and per share data is as
follows:
<TABLE>
<CAPTION>
===========================================================================================================================
Year Ended March 31,
(in thousands except per share data) 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Total interest income $19,702
===========================================================================================================================
Net interest income after provision for loan losses $10,625
===========================================================================================================================
Income before taxes and cumulative effect of accounting change $2,357
===========================================================================================================================
Net income $1,507
===========================================================================================================================
Net income per common share $.30
===========================================================================================================================
</TABLE>
3. Investments
The following is a summary of available-for-sale and held to
maturity securities at December 31, 1996:
<TABLE>
<CAPTION>
Available-For-Sale
=========================== ============== ===================== ======================= ============= =========================
Gross Gross Market
(in thousands) Amortized Cost Unrealized Gains Unrealized Losses Value Yield
- --------------------------- -------------- --------------------- ----------------------- ------------- -------------------------
<S> <C> <C> <C> <C> <C>
Mortgage backed securities $32,903 $74 $60 $32,917 7.5%
=========================== ============== ===================== ======================= ============= =========================
</TABLE>
<TABLE>
<CAPTION>
Held To Maturity
=========================== ============== ===================== ======================= ============= =========================
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value Yield
- --------------------------- -------------- --------------------- ----------------------- ------------- -------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government securities $6,707 $53 $5 $6,755 6.6%
Foreign Government securities 75 75 7.5
- --------------------------- -------------- --------------------- ----------------------- ------------- -------------------------
Total $6,782 $53 $5 $6,830 6.6%
=========================== ============== ===================== ======================= ============= =========================
</TABLE>
The amortized cost and estimated market value of debt
securities at December 31, 1996 by contractual maturity are shown
below:
<TABLE>
<CAPTION>
Held to Maturity
============================================================= ========================== ======================================
Amortized Market Weighted
(in thousands) Cost Value Average Yield
- ------------------------------------------------------------- -------------------------- ------------------ ------------------
<S> <C> <C> <C>
Due in 1 year or less $2,002 $1,997 5.3%
Due after 1 through 5 years 4,730 4,783 7.2
Due after 5 years through 10 years 50 50 7.5
- ------------------------------------------------------------- ---------------- --------- ------------------ ------------------
$6,782 $6,830 6.6%
============================================================= ================ ========= ================== ==================
</TABLE>
The anticipated maturities for mortgage-backed securities are
not readily determinable since they may be prepaid without penalty.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following is a summary of held to maturity securities at
December 31, 1995 and March 31, 1995:
<TABLE>
<CAPTION>
================================ ============= =================== ===================== ================ ======================
Gross Gross
Amortized Unrealized unrealized Market
(in thousands) Cost Gains Losses Value Yield
- -------------------------------- ------------- ------------------- --------------------- ---------------- ----------------------
December 31, 1995:
- -------------------------------- ------------- ------------------- --------------------- ---------------- ----------------------
<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 $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 $14,103 $78 $2 $14,179 7.15%
================================ ============= =================== ===================== ================ ======================
</TABLE>
No securities were classified as available-for-sale at
December 31, 1995.
At December 31, 1996 and 1995 securities with a book value of
$32,884,000 and $6,752,000, respectively, were pledged to collateralize
Federal Home Loan Bank advances, repurchase agreements, public deposits
and other items.
Realized losses on trading securities for the year ended March
31, 1995, amounted to $200,000 and is included in other non-interest
income.
4. Loans Receivable - Net
Loans receivable - net is summarized as follows:
<TABLE>
<CAPTION>
==============================================================================================================================
December 31, December 31,
(in thousands) 1996 1995
- ------------------------------------------------------------------ ----------------- ---------------------------------------
<S> <C> <C>
Residential mortgage $102,266 $116,328
Commercial mortgage 58,842 25,884
Real estate construction 29,793 36,863
Installment loans to individuals 43,760 37,984
Commercial and financial 23,845 14,868
- ------------------------------------------------------------------ ----------------- ---------------------------------------
Total loans 258,506 231,927
- ------------------------------------------------------------------ ----------------- ---------------------------------------
Deferred loan fees (98) (636)
Undisbursed portion of loans-in-process (12,913) (12,104)
Allowance for loan losses (2,273) (2,431)
- ------------------------------------------------------------------ ----------------- ---------------------------------------
Loans receivable - net $243,222 $216,756
================================================================== ================= =======================================
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Non-Performing Loans and Allowance for Loan Losses
At December 31, 1996, 1995 and March 31, 1995, the Bank had
$3,129,000, $2,422,000, and $2,427,000, respectively, in non-performing
loans. Interest income not recognized on non-performing loans was
$104,000 during the year ended December 31, 1996, $148,000 during the
nine months ended December 31, 1995 and $35,000 for the year ended
March 31, 1995, respectively.
At December 31, 1996, 1995, and March 31, 1995 the recorded
investment in loans that are considered to be impaired under SFAS No.
114 was $878,000, $101,000, and $792,000, respectively. The related
allowance for credit losses for such loans is $132,000, $15,000, and
$120,000 at December 31, 1996, 1995 and March 31, 1995, respectively.
The average recorded investment in impaired loans during the year ended
December 31, 1996 was approximately $842,000. The average recorded
investment in impaired loans for the nine months ended December 31,
1995 and year ended March 31, 1995 is $881,000 and $880,000,
respectively. For the year ended December 31, 1996, the nine months
ended December 31, 1995 and the year ended March 31, 1995, the Company
recognized $37,500, $21,600, and $54,000, 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.
An analysis of changes in the allowance for loan losses is
summarized as follows:
<TABLE>
<CAPTION>
==============================================================================================================================
Year Ended Nine Months Ended
December 31, December 31,
(in thousands) 1996 1995
- ------------------------------------------------------------- -------------------------- -------------------------------------
<S> <C> <C>
Beginning balance $2,431 $2,507
Reserves acquired in connection with merger 374
Provision for losses 155 100
Recoveries 167 632
Charge-offs (854) (808)
- ------------------------------------------------------------- -------------------------- -------------------------------------
Ending balance $2,273 $2,431
============================================================= ========================== =====================================
</TABLE>
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 $1,800,000 for the year ended
December 31, 1996.
7. Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
================================================================================================================================
December 31, December 31,
(in thousands) 1996 1995
- --------------------------------------------------------------- --------------------- ----------------------------------------
<S> <C> <C>
Land and buildings $6,580 $5,879
Furniture and equipment 3,557 2,061
Leasehold improvements 836 544
- --------------------------------------------------------------- --------------------- ----------------------------------------
Total 10,973 8,484
Less accumulated depreciation and amortization 1,973 1,292
- --------------------------------------------------------------- --------------------- ----------------------------------------
Property and equipment-net $9,000 $7,192
================================================================================================================================
</TABLE>
46
<PAGE>
Rent expense for the year ended December 31, 1996 was
$818,000. Rent expense for the nine months ended December 31, 1995 and
the year ended March 31, 1995 was $477,000 and $419,000, respectively.
8. Mortgage Banking Activities
The Bank is engaged in the business of acquiring the rights to
service mortgage loans for others. The costs incurred to acquire such
rights are capitalized and amortized in proportion to, and over the
period of, the 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 year ended December 31,
1996 and the nine months ended December 31, 1995 as mortgage banking
activities during the period were insignificant.
In determining servicing value impairment at December 31, 1996
and 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, 1996 and
1995 is $2,253,000 and $2,670,000, respectively.
At December 31, 1996 and 1995, the Bank serviced mortgage
loans for others in the amount of $277,000,000 and $307,000,000,
respectively. Accumulated amortization relating to loan servicing
rights was $5,740,000, $5,226,000, and $4,976,000 at December 31, 1996,
1995, and March 31, 1995, respectively.
The amount capitalized and amortized relating to loan
servicing rights for the year ended December 31, 1996, the nine months
ended December 31, 1995 and the year ended March 31, 1995, are shown
below:
===============================================================================
(in thousands)
- ------------------------------------------------------ ------------------------
Balance March 31, 1994 $ 775
Amount capitalized 2,322
Amortization (301)
- ------------------------------------------------------ ------------------------
Balance March 31, 1995 2,796
Amortization (250)
- ------------------------------------------------------ ------------------------
Balance December 31, 1995 2,546
Amortization (514)
- ------------------------------------------------------ ------------------------
Balance December 31, 1996 $2,032
====================================================== ========================
There were no sales of servicing during the year and nine
months ended December 31, 1996 and December 31, 1995. The amount of
aggregate gains on sales of servicing included in operations for the
year ended March 31, 1995 was $299,000.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Deposits
The weighted-average nominal rate payable on all deposits was
4.0% at December 31, 1996 and 1995. The nominal rates at which the Bank
incurred interest on deposits and related balances of such deposits are
as follows:
<TABLE>
<CAPTION>
==============================================================================================================================
December 31, December 31,
(in thousands) 1996 1995
- ---------------------------------------------------------------------- ----------------------- ------------------------------
<S> <C> <C>
Non-interest bearing accounts $ 30,341 $ 23,867
NOW accounts (1.50%) 35,372 28,202
Saving accounts (2.55%) 19,137 19,699
Money market deposits account (2.88%) 39,902 14,536
Certificate accounts:
Up to 4.0% 3,006 3,490
4.01% to 4.5% 10,395 2,530
4.51% to 5.0% 27,276 31,280
5.01% to 5.5% 44,869 32,491
5.51% to 6.0% 46,429 23,397
6.01% to 6.5% 8,718 27,453
Over 6.51% 7,142 16,590
- ---------------------------------------------------------------------- ----------------------- ------------------------------
Total certificates 147,835 137,231
- ---------------------------------------------------------------------- ----------------------- ------------------------------
Total $272,587 $223,535
====================================================================== ======================= ==============================
</TABLE>
The Bank incurred interest on deposits as follows:
<TABLE>
<CAPTION>
===============================================================================================================================
December 31, December 31, March 31,
(in thousands) 1996 1995 1995
- -------------------------------------------------- ---------------------------- -------------------- --------------------------
<S> <C> <C> <C>
Savings accounts $ 522 $ 405 $ 607
NOW accounts 507 454 419
Money market deposit accounts 1,128 312 437
Certificate accounts 8,209 5,775 4,781
- -------------------------------------------------- ---------------------------- -------------------- --------------------------
Total $10,366 $6,946 $6,244
================================================== ============================ ==================== ==========================
</TABLE>
The amounts and maturities of certificate accounts at December 31, 1996
are as follows:
================================================================================
(in thousands):
- ------------------------------------------------------------------------------
Within 12 months $118,916
12 to 24 months 17,199
24 to 36 months 3,884
36 to 48 months 6,691
Over 48 months 1,145
- ------------------------------------------------------------------------------
Total $147,835
================================================================================
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The amounts and scheduled maturities of certificate accounts
in the amount of $100,000 or more at December 31, 1996 are as follows
(in thousands):
================================================================================
Within 3 months $ 9,656
3 to 6 months 4,105
6 to 12 months 7,693
Over 12 months 3,746
- --------------------------------------------------------------------------------
Total $25,200
================================================================================
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 $35,000,000 and $42,000,000 at December 31,
1996 and 1995, respectively and mortgage-backed securities of
$25,600,000 at December 31, 1996. Based on the current pledged loan
amount, the Bank's borrowing limit is approximately $39 million with a
remaining borrowing capacity of $9,000,000 at December 31, 1996.
Outstanding advances from the Federal Home Loan Bank consisted of the
following:
<TABLE>
<CAPTION>
================================================================================================================================
December 31, December 31,
(in thousands) 1996 1995 Interest Rate
- ------------------------------------------ ------------------------ ------------------- -------------------------------------
<S> <C> <C> <C>
Mature During
1996 $25,000 5.91% variable
1997 $5,000 6.95% variable
2001 25,000 5.61% fixed
- ------------------------------------------ ------------------------ ------------------- -------------------------------------
Total $30,000 $25,000
========================================== ======================== =================== =====================================
</TABLE>
Effective December 20, 1999 and each quarter thereafter, the
FHLB has the option to convert the $25,000,000 fixed rate advance to a
three month LIBOR-based floating rate advance at the then current three
month LIBOR. If the FHLB elects to convert the advance, then the Bank
will have the option to terminate the advance without a prepayment fee.
On March 29, 1995, the Company's outstanding redeemable
subordinated debentures and cancelable mandatory stock purchase
contracts were called for redemption. Upon surrender of the Debentures,
and at the option of the Bondholder, the Bondholder received a number
of shares of the Company's Common Stock equal to the principal amount
of the Debenture divided by the adjusted per share price of $2.90 or
cash equal to 104% of the principal amount of the Debenture. As a
result of the 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, 1996 and 1995. Securities sold under
agreements to repurchase are collateralized by U.S. Government Treasury
notes and U.S. Government agency notes with an aggregate carrying value
of $3,422,000, accrued interest of $85,000, and a market value of
$3,532,000 at December 31, 1996. The aggregate carrying value of
securities pledged at December 31, 1995 was $4,024,000, accrued
interest of $15,000 with a market value of $4,103,000. All agreements
mature daily and have a weighted interest rate of 4.87% at December 31,
1996. 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
$1,911,000 during the year ended December 31, 1996 and $2,385,000
during the nine months ended December 31, 1995. The maximum amount
outstanding at any month-end during the year
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ended December 31, 1996 was $2,352,000 and the maximum outstanding at
any month-end during the nine months ended December 31, 1995 was
$2,651,000.
11. Shareholders' Equity
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, 1996,
these amounts were $5,320,000 and $9,068,000, 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 $1,610,000, and $530,000 in
dividends to the Company during the year ended December 31, 1996 and
nine months ended December 31, 1995, respectively.
The balance, activity, exercise price, and expiration dates of
the Company's options, warrants, and equity contracts for the year
ended December 31, 1996, the nine months ended December 31, 1995 and
the year ended March 31, 1995 are as follows:
<TABLE>
<CAPTION>
================================================================================================================================
Equity
Options Warrants Contracts
- ------------------------- ------------ --------------------------------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Expired (31,727)
Exercised (4,622) (268,126)
- ------------------------- ------------ ------- --------- -------- ------- --------- ---------- ---------- --------------------
Balance December 31, 1996 6,000 10,146 97,024 76,036 0 42,000 165,216 0 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 addition to the stock options listed above, options to
purchase 10,000 shares at $6.50 per share are outstanding at December
31, 1996 for which the vesting terms had not been met.
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.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. Compensation
expense, equal to the difference in the market price of the Company's
common stock and the base price of the SARs, will be recognized on the
vesting date and adjusted in subsequent periods for changes in the
market price.
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.
On June 21, 1996, the Company called the 7.5% Cumulative
Convertible Preferred Stock Series A (the "Preferred Stock") for
redemption on July 26, 1996 ("Redemption Date"). The Preferred Stock
became payable and ceased to accrue dividends on that date, and upon
surrender of the stock certificates for redemption, the holders
received the redemption price of $10 per share, or alternatively, the
holders surrendered each of their shares of Preferred Stock for
conversion into 2.47 shares of the Company's common stock. In
connection with the redemption, 982,995 shares of the Company's common
stock were issued.
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, 1996, the Shareholder
Rights Plan requires 6,587,653 shares of Common Stock.
12. Capital Compliance
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possible
additional discretionary, action by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance- sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to quantitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain minimum
amounts and ratios of total and Tier 1 capital (as defined in the
regulations) to risk- weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined). As of December 31,
1996, the Company and the Bank exceeded all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the
Federal Reserve Bank categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the following
table. There are no actual conditions or events since that notification
that management believes have changed the Bank's category.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table shows the actual capital amounts and
ratios of the Bank, minimum capital requirements and well capitalized
requirements:
<TABLE>
<CAPTION>
================================ ============ ============= ============== ============= ================ =======================
Minimum for Minimum for
Actual Capital Adequacy Well Capitalized
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------- ------------ ------------- -------------- ------------- ---------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total risk based capital $30,154 14.5% $18,440 8.0% $23,050 10.0%
Tier 1 risk based capital $27,881 13.4% $9,220 4.0% $13,830 6.0%
Leverage capital $27,881 8.9% $12,565 4.0% $15,765 5.0%
As of December 31, 1995
Total risk based capital $25,216 13.4% $15,020 8.0% $18,775 10.0%
Tier 1 risk based capital $22,854 12.1% $7,510 4.0% $11,266 6.0%
Leverage capital $22,854 8.4% $10,770 4.0% $13,465 5.0%
================================ ============ ============= ============== ============= ================ =======================
</TABLE>
The following table shows the capital amounts and ratios of
the Company:
====================================== ================== =====================
Actual
(dollars in thousands) Amount Ratio
- -------------------------------------- ------------------ ---------------------
As of December 31, 1996:
Total risk based capital $38,955 16.9%
Tier 1 risk based capital $36,685 15.9%
Leverage capital $35,685 11.7%
As of December 31, 1995
Total risk based capital $43,280 23.0%
Tier 1 risk based capital $36,310 19.3%
Leverage capital $36,310 13.5%
====================================== ================== =====================
13. Commitments and Contingencies
The Bank is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments primarily include
commitments to extend credit.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require 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, 1996, the Bank had adjustable rate commitments
to extend credit of $22,800,000, 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:
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
====================================== =========================================
(in thousands)
- ----------------------------------------------------------------------------
1997 $ 839
1998 605
1999 333
2000 159
2001 133
Thereafter 352
- ------------------------------------ -------------------- -----------------
$2,421
==================================== ==================== =====================
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 $54,000, $54,000 and $22,000
in 1997, 1998 and 1999, respectively.
The Company has a non-qualified unfunded retirement plan for
three present and one former executive of the Company. Pension costs,
consisting of service costs and interest costs, amounted to $141,000,
$90,000, and $90,000, for the year ended December 31, 1996, the nine
months ended December 31, 1995 and for the year ended March 31, 1995,
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, 1996 and 1995 was $821,000 and
$645,000, 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 year ended December 31, 1996, the nine months
ended December 31, 1995 and the year ended March 31, 1995 amounted to
$131,000, $70,000, and $95,000, respectively.
The Company has employment agreements with two executives
which provide for severance arrangements in the event of involuntary
termination from a change in control (as defined) of the Company.
In addition to the above commitments and contingencies, there
are various matters of litigation pending against the Company that
management has reviewed with legal counsel. At December 31, 1996,
$387,000 related to pending litigation was accrued and included in
other liabilities. In the opinion of management of the Company, amounts
accrued for awards of assessments in connection with these matters are
adequate and ultimate resolution of these matters will not have a
material effect on the Company's consolidated financial position,
results of operations or cash flow.
14. 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 year
ended December 31, 1996, the nine months ended December 31, 1995 and
the year ended March 31, 1995, such fees aggregated approximately
$50,000, $58,000, and $140,000, respectively.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
An analysis of the activity of the aggregate loans to officers and
directors is as follows:
====================================== ========================================
(in thousands)
- ------------------------------------------------------------------------------
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
Additions 470
Principal reductions (503)
- ---------------------------------------------------------------------- -------
Balance December 31, 1996 $864
====================================================================== =======
15. Federal Deposit Insurance Corporation Special Savings Association
Insurance Fund Assessment
On September 30, 1996, President Clinton signed into law a
bill which called for a one-time Federal Deposit Insurance Fund (FDIC)
premium for deposits insured by the Savings Association Insurance Fund.
Republic Security Bank's one-time premium expense associated with the
bill was $1,154,000, which is reflected in insurance expense in the
December 31, 1996 consolidated statement of income.
16. Income Taxes
Net deferred tax assets are included in other assets on the
consolidated balance sheets at December 31, 1996 and 1995. Significant
components of the Company's deferred tax assets and liabilities as of
December 31, 1996 and 1995 are as follows:
================================================================================
December 31, December 31,
(in thousands) 1996 1995
- --------------------------------------- -------------- -----------------------
Deferred tax assets:
Net operating loss carryforward $878 $993
Loan loss provision 467 272
Deferred compensation 165 128
Depreciation 71 100
Accrued expenses 9
Investment basis 33
OREO expenses 90 149
- --------------------------------------- -------------- -----------------------
1,671 1,684
Valuation allowance (699) (1,136)
- --------------------------------------- -------------- -----------------------
Deferred tax assets, net of allowance 972 548
Deferred tax liabilities:
Excess servicing rights 107 197
Deferred loan fees 182 129
Other 9 15
- --------------------------------------- -------------- -----------------------
Total 298 341
- --------------------------------------- -------------- -----------------------
Net deferred tax asset $674 $207
================================================================================
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Significant components of the provision for income taxes for
the year ended December 31, 1996, the nine months ended December 31,
1995 and the year ended March 31, 1995, are as follows:
<TABLE>
<CAPTION>
=======================================================================================================
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
(in thousands) 1996 1995 1995
- ------------------------ -------------- ---------------------------- --------------------------------
<S> <C> <C> <C>
Current:
Federal $1,383 $828 $480
State 175 159 44
- ------------------------ -------------- ---------------------------- --------------------------------
1,558 987 524
- ------------------------ -------------- ---------------------------- --------------------------------
Deferred (benefit):
Federal 131 171 119
State 22 11 20
- ------------------------ -------------- ---------------------------- --------------------------------
153 182 139
$1,711 $1,169 $663
======================== ============== ============================ ================================
</TABLE>
A reconciliation of income tax expense with the amount
computed by applying the statutory federal income tax rate of 34% to
income before income taxes is as follows for the year ended December
31, 1996, the nine months ended December 31, 1995 and the year ended
March 31, 1995:
<TABLE>
<CAPTION>
====================================== ============================================= ==========================================
Year Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
(in thousands) 1996 1995 1995
- ------------------------------------------------------- --------------------- ---------------------- ---------------------------
<S> <C> <C> <C>
Income taxes at federal rate $1,398 $1,070 $623
Differences resulting from:
State income taxes, net of federal tax benefit 112 103 42
Amortization of goodwill 160 56 10
Other, net 41 (60) (12)
- ------------------------------------------------------- --------------------- ---------------------- ---------------------------
Income taxes $1,711 $1,169 $663
======================================================= ===================== ====================== ===========================
</TABLE>
As of December 31, 1996, the Company had net operating loss
carryforwards, acquired in connection with mergers, of approximately
$2,334,000 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. At December 31, 1996, a valuation allowance of
approximately $699,000 is recorded 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. Goodwill was reduced $320,000 in 1996 due to the tax benefit
from the utilization of the Governors net operating loss carryforward.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Parent Company Financial Information
<TABLE>
<CAPTION>
=============================================================== =========================== ==================================
STATEMENTS OF FINANCIAL CONDITION December 31, December 31,
(in thousands) 1996 1995
- --------------------------------------------------------------- --------------------------- ----------------------------------
<S> <C> <C>
Assets:
Investments in and advances to subsidiaries $36,747 $25,713
Cash and cash equivalents 9,068 18,505
Other assets 81 45
- --------------------------------------------------------------- --------------------------- ----------------------------------
Total $45,896 $44,263
- --------------------------------------------------------------- --------------------------- ----------------------------------
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses $323 $429
Shareholders' Equity:
Preferred stock 10,350 14,365
Common stock 79 66
Additional paid-in-capital 31,101 26,035
Retained earnings 4,043 3,368
- --------------------------------------------------------------- --------------------------- ----------------------------------
Total shareholders' equity 45.573 43,834
- --------------------------------------------------------------- --------------------------- ----------------------------------
Total $45,896 $44,263
=============================================================== =========================== ==================================
</TABLE>
<TABLE>
<CAPTION>
=============================================================== =========================== ====================================
STATEMENTS OF INCOME Year Ended Nine Months Year Ended
December 31, Ended December 31, March 31,
(in thousands) 1996 1995 1995
- -------------------------------------------------- ------------------------ -------------------- -----------------------------
<S> <C> <C> <C>
Income:
Interest $447 $196 $410
Other 123 134 96
- -------------------------------------------------- ------------------------ -------------------- -----------------------------
Total 570 330 506
- -------------------------------------------------- ------------------------ -------------------- -----------------------------
Expenses:
Interest 31 240
General and administrative 293 207 278
- -------------------------------------------------- ------------------------ -------------------- -----------------------------
Total 293 238 518
Income (loss) before undistributed
earnings of subsidiaries and income tax benefit 277 92 (12)
Income tax expense (benefit) 101 33 (5)
- -------------------------------------------------- ------------------------ -------------------- -----------------------------
Income (loss) before undistributed earnings of subsidiaries 176 59 (7)
Equity in undistributed earnings of subsidiaries 2,224 1,918 1,174
- -------------------------------------------------- ------------------------ -------------------- -----------------------------
Net income $2,400 $1,977 $1,167
================================================== ======================== ==================== =============================
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
=============================================== ================== ================================= ===========================
STATEMENTS OF CASH FLOWS Year Ended Nine Months Ended Year Ended
(in thousands) December 31, 1996 December 31, 1995 March 31, 1995
- ----------------------------------------------- ------------------ --------------------------------- ---------------------------
<S> <C> <C> <C>
Operating Activities:
Net income $2,400 $1,977 $1,167
Adjustments to reconcile net income to net cash
provided by operating activities::
Dividends received from Bank 1,610 530 535
Other (2,328) (1,446) (1,430)
- ----------------------------------------------- ------------------ --------------------------------- ---------------------------
Net cash provided by operating activities 1,682 1,061 272
- ----------------------------------------------- ------------------ --------------------------------- ---------------------------
Investing Activities:
Additional investment in subsidiary (10,418) (3,000) (1,500)
Purchase of Governors Bank subsidiary (5,154)
Other, net (148)
- ----------------------------------------------- ------------------ --------------------------------- ---------------------------
Net cash used in investing activities (10,418) (3,000) (6,802)
- ----------------------------------------------- ------------------ --------------------------------- ---------------------------
Financing Activities:
Sale of common and preferred
stock, net of stock issuances costs 19,404
Cash dividends (1,733) (631) (519)
Other, net 1,032 653 113
- ----------------------------------------------- ------------------ --------------------------------- ---------------------------
Net cash provided by (used in) financing activities (701) 19,426 (406)
- ----------------------------------------------- ------------------ --------------------------------- ---------------------------
Increase (decrease) in cash and cash equivalents (9,437) 17,487 (6,936)
Cash and cash equivalents at beginning of year 18,505 1,018 7,954
- ----------------------------------------------- ------------------ --------------------------------- ---------------------------
Cash and cash equivalents at end of year $9,068 $18,505 $1,018
=============================================== ================== ================================= ===========================
</TABLE>
18. 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 available-for-sale and held to maturity: Fair value for
investments are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for certain fixed rate mortgage loans (e.g.,
one-to-four family residential), and other consumer loans are based on
quoted market prices of similar loans sold in conjunction with
securitization
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Loans held for sale: The fair value represents the anticipated
proceeds from sale of the loans.
Off-balance-sheet instruments: Fair values for the Bank's loan
commitments are based on estimated market prices of comparable
instruments taking into account the remaining terms of the agreements
and the counterparties' credit standing. The aggregate fair value of
loan commitments is not material.
Deposits: 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. 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.
Other borrowings: The fair values of FHLB advances and securities sold
under agreement to repurchase 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.
58
<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 December 31,
1996 1995
------------------------------------------ -------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ----------------------------------------- ----------------- ----------------------- ------ ------------- ----------------------
<S> <C> <C> <C> <C>
Assets
Cash and interest-bearing deposits $39,304 $39,304 $54,373 $54,373
Investments available-for-sale 32,917 32,917
Investments held for maturity 6,782 6,830 10,622 10,779
Loans receivable - net 243,222 243,733 216,756 219,823
Loans held for sale 7,773 7,850
- ----------------------------------------- ----------------- ----------------------- ------ ------------- ----------------------
Total financial assets 329,998 $330,634 281,751 $284,975
- ----------------------------------------- ----------------- ======================= ------ ------------- ======================
Non-financial assets 29,308 21,910
- ----------------------------------------- ----------------- ----------------------- ------ ------------- ----------------------
Total assets $359,306 $303,661
Liabilities
Deposits $272,587 $273,417 $223,535 $224,215
FHLB advances 30,000 30,000 25,000 25,000
Securities sold under agreements to repurchase 2,076 2,076 2,350 2,350
Bank drafts payable 3,778 3,778 3,155 3,155
- ----------------------------------------- ----------------- ----------------------- ------ ------------- ----------------------
Total financial liabilities 308,441 $309,271 254,040 $254,720
- ----------------------------------------- ----------------- ======================= ------ ------------- =======================
Non-financial liabilities 5,292 5,787
- ----------------------------------------- ----------------- ----------------------- ------ ------------- ----------------------
Total liabilities $313,733 $259,827
========================================= ================= ======================= ====== ============= ======================
</TABLE>
19. 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 year ended March 31, 1995, the Company operated in
two industry segments (as defined by Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise"). The two industry segments were banking and mortgage
banking. However, due to the significant decline in the mortgage
banking industry, the Company significantly reduced its operations in
mortgage banking activities. As a result of the Company's reduction in
mortgage banking activities, the Company no longer operates in the
mortgage banking industry segment (as defined by SFAS No. 14).
Revenues in the banking segment consisted 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 and operating income (losses) for the year ended March 31,
1995:
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
========================================= ================= ======================= ====== ============= ======================
(in thousands) Banking Mortgage Banking Consolidated
- ------------------------------------- ---------------------------- --- ------------------- --- -------------------------------
<S> <C> <C> <C>
Net interest income after
provision for loan losses $7,394 $1,297 $8,691
Non-interest income 1,211 1,211
Mortgage banking income 1,788 1,788
Depreciation 280 179 459
Non-interest expense 5,365 4,036 9,401
- ------------------------------------- ---------------------------- --- ------------------- --- -------------------------------
Income (loss) before taxes $2,960 $(1,130) $1,830
===================================== ============================ === =================== === ===============================
</TABLE>
20. Subsequent Event
On January 7 1997, the Bank entered into a definitive agreement whereby
Family Bank, a Florida state chartered, commercial bank, will merge
with Republic Security Bank. The definitive agreement provides for a
fixed exchange ratio whereby shareholders of Family Bank will receive
13 shares of Republic Security Financial Corporation common stock for
each share of Family Bank stock. The Company will issue approximately
7.7 million shares of Republic Security Financial Corporation common
stock for all outstanding shares of Family Bank stock in a tax free
exchange, accounted for as a pooling-of-interests. Family Bank is
headquartered in Hallandale, Florida with six branch locations in
Broward County and has total assets, loans and deposits of
approximately $248 million, $159 million and $216 million,
respectively, at December 31, 1996.
60
<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, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year ended December 31, 1996 , the
nine-month transition period ended December 31, 1995 and for the year 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, 1996
and 1995, and the consolidated results of their operations and their cash flows
for the year ended December 31, 1996, the nine-month transition period ended
December 31, 1995, and for year ended March 31, 1995, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
January 23, 1997
61
<PAGE>
Item 9:Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Part III
Item 10: Directors and Executive Officers
Set forth below is information regarding directors including their ages
and principal occupations or employment and business experience during the last
five years.
Rudy E. Schupp, 46, has been President and Chief Executive Officer of
the Company since 1985, and the President and Chief Executive Officer of the
Bank since its inception. From 1980 to 1984, Mr. Schupp was employed by
AmeriFirst Bank, FSB, Miami, Florida, where he held the position of Division
Vice President and, previously, was Senior Vice President and Division Manager
of the Orlando Division of AmeriFirst Bank, FSB. Mr. Schupp was Manager in
Consumer Bank Planning and Marketing at First Union National Bank, Charlotte,
North Carolina, from 1977 to 1980.
Richard J. Haskins, 47, has been Executive Vice President and Chief
Financial Officer of the Company and the Bank since 1989, Senior Vice President
of the Company and the Bank since August 1984, and a Director of the Company and
the Bank since 1986. For ten years prior to 1984, he had been an accountant with
the West Palm Beach, Florida office of Deloitte Haskins & Sells, certified
public accountants, where he held the position of Manager.
Lennart E. Lindahl, Jr., 53, has been a Director of the Company since
its inception. From 1970 through 1994, he was President of Lindahl, Browning,
Ferrari & Hellstrom, Inc., Consulting Engineers in Jupiter, Florida, and
currently serves as its Chairman of the Board. He is past chairman of the
Economic Council of Palm Beach County and past president of the Palm Beach
County Development Board. Additionally, he currently serves as a member and was
a past Chairman of the Florida Inland Navigation District.
H. Gearl Gore, 49, has been a Director and the Secretary of the Company
since its inception. He has been the President of H. Gearl Gore, Inc., a real
estate appraisal firm in Jupiter, Florida since 1983. Approximately 43% of that
firm's gross revenues were derived from appraisal services provided to the Bank.
Mr. Gore has been the President and Chief Operating Officer of Northco
Investment Properties, Inc., a real estate brokerage firm in Jupiter, Florida,
from 1981 to present. From 1975 to 1980 he was Florida state sales director for
United Sun Life Insurance Co. He served as a Councilman for the Town of Jupiter
from 1981 to 1983.
Richard C. Rathke, 65, has been a Director of the Company since its
inception. He has been the President of RCR Enterprises, Inc., a real estate
development firm in Jupiter, Florida, since 1979. From 1966 to 1979 he was the
President and owner of Trans Pacific Trading Co. of Fort Lauderdale, Florida, a
firm engaged in importing and retail sales.
Victor Siegel, M.D., 49, has been a Director of the Company since 1989.
He is a physician and surgeon specializing in Obstetrics and Gynecology and has
been practicing in Palm Beach County since January 1982. Dr. Siegel was a member
of the Florida and Palm Beach County Medical Associations and was Executive
Director of Finance for the Palm Beach County Medical Society in 1986. He has
been Chief of the Department of Obstetrics and Gynecology at Wellington Hospital
since 1993. He is also on the Board of Directors for the non profit Jupiter
Theater of the Performing Arts.
William F. Spitznagel, 70, has been a Director of the Company since its
inception through December 31, 1986 and from February 21, 1987 to present. He
was Chairman and President of Roadway Services, Inc., a motor freight company,
from 1978 until his retirement in 1981. He presently serves as a consultant to
that company.
Bruce E. Wiita, M.D., 59, has been a Director of the Company since its
inception. He is a surgeon and urologist practicing in Jupiter and Palm Beach
Gardens since 1973. He is the former Chief of Staff of the Jupiter Hospital and
Chief of Surgery of the Palm Beach Gardens Hospital and Jupiter Hospital.
Currently, he is a Director of the American Heritage Management and Development
Corporation, a real estate development company, and Chairman of the DevMed Group
Inc., a medical device manufacturing corporation.
William Wolfson, 68, has been a Director of the Company since 1993. He
has been a certified public accountant since 1960 and in 1994 retired as senior
partner in the accounting firm of Wolfson, Milowsky, Melzer, Ettinger &
Wieselthier, P.C.
Committees of the Board of Directors and Meeting Attendance
During the year ended December 31, 1996, there were 12 regular meetings
of the Board of Directors, and one
62
<PAGE>
special meeting. Each director attended at least 75% of the meetings of the
Board and of committees of the Board on which such director served.
The Board of Directors has an Audit Committee which reviews, reports to
and advises the Board with respect to various auditing and accounting matters
involving the selection of and the nature of services to be performed by the
Company's independent auditors, the performance of the auditors and the fees to
be paid to them, the scope of audit procedures and the Company's accounting
procedures and internal controls. The members of the Audit Committee are
Directors Gore, Wolfson and Rathke. Four Audit Committee meetings were held
during the year ended December 31, 1996.
The Board of Directors has a Compensation Committee which investigates
comparative compensation, reviews levels of staffing and compensation and
reports its findings and recommendations to the Board of Directors. The members
of the Compensation Committee are Directors Lindahl, Spitznagel and Wiita. Four
Compensation Committee meetings were held during the year ended December 31,
1996.
The Board of Directors has a Nominating Committee, which reviews the
qualifications of candidates for the Board and reports its findings and
recommendations to the Board. The members of the Nominating Committee are
Directors Spitznagel, Siegel, Haskins and Lindahl. One Nominating Committee
meeting was held during the year ended December 31, 1996. The Nominating
Committee will consider proposals for nominees for Director from shareholders
which are made in writing to the Secretary of the Company at 4400 Congress
Avenue, West Palm Beach, Florida, 33407-3288.
Director Compensation
Each director, excluding Messrs. Schupp and Haskins, receives a
retainer of $200 per month plus $325 for attendance at Board meetings, and $200
for each committee meeting attended.
Consent to Findings of Exchange Act Violations
On October 22, 1993, the Company and Mr. Haskins consented, without
admitting or denying the matters therein, to findings of the Securities and
Exchange Commission that he caused violations of Sections 13(a) and 13(b)(2)(A)
of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-13 promulgated
thereunder and to an order of the Commission that he cease and desist from
committing or causing future violations of such provisions. The Company's and
Mr. Haskins' consents were given in connection with a determination that the
Company failed to timely record a loss on a certain lease transaction in its
Form 10-Q for the quarter ended June 30, 1989 and that Haskins, as the Company's
chief financial officer, determined not to record the loss in such 10-Q.
Item 11: Executive Compensation, Benefits And Related Matters
The Summary Compensation Table below sets forth a summary of the
compensation paid for the year ended December 31, 1996, the nine months ended
December 31, 1995 and the year ended March 31, 1995 to each Company executive
officer, whose total salary and bonus for 1996 exceeded $100,000:
<TABLE>
<CAPTION>
============================================= ============== =================================== ================ ==================
Annual Compensation Long-Term Compensation Awards
(a) (b) (c) (d) (e)
- --------------------------------------------- -------------- ----------------------------------- ---------------- ------------------
Securities
Fiscal Restricted Stock Award(s) Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) ($) SARs (#) Compensation ($)
- --------------------------------------------- -------------- ----------------------------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Rudy E. Schupp
Chairman and Dec 31, 1996 180,760 122,910 0 0 29,770
Chief Executive Officer Dec 31, 1995 116,760 97,060 25,500 500,000 12,146
of the Company and the Bank Mar 31, 1995 148,000 78,077 16,400 0 6,965
- --------------------------------------------- -------------- ----------------------------------- ---------------- ------------------
Richard J. Haskins
Executive Vice President Dec 31, 1996 130,680 65,420 0 0 19,740
and Chief Financial Officer Dec 31, 1995 91,680 45,530 12,750 200,000 9,203
of the Company and the Bank Mar 31, 1995 115,993 39,039 8,400 0 6,784
============================================= ============== =================================== ================ ==================
<FN>
FOOTNOTES:
(a) Fiscal Year: On July 26, 1995, the Company's
Board of Directors approved a change in the
Company's fiscal year end to December 31 from
March 31. As a result, the information
presented for fiscal year 1995 is for the nine
months transition period from April 1, 1995 to
December 31, 1995.
63
<PAGE>
(b) Salary: Total base salary paid for the year ended
December 31, 1996, the nine months ended
December 31, 1995 and or the fiscal year ended
March 31, 1995 for the Company and the Bank.
(c) Bonus: Annual incentive compensation paid for
financial results achieved during the fiscal
year.
(d) Restricted Stock Awards: The amounts represent
the dollar value of Company awards on the date
of grant for stock grants. Restricted stock
awards vest after three years provided the
executive does not resign or is not terminated
for cause. Dividends are paid on restricted
stock. The aggregate number of shares and
market value of restricted stock as of December
31, 1996 held by each named executive was as
follows: Schupp 10,100 shares ($61,230);
Haskins 5,100 shares ($30,920).
(e) All Other Compensation: The amounts shown in this column comprise
matching contributions to the 401(k) plan, the
cost of term life insurance premiums for the
benefit of the executive, and automobile
allowance.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
Messrs. Schupp and Haskins have employment agreements with the Company
which provide for the payment of incentive compensation equal to 2.7% for
Schupp, and 1.5% for Haskins, of the Company's quarterly consolidated income
before taxes. These amounts are reflected in column (d) of the Summary
Compensation Table. The agreements also provide for a severance payment equal to
200% for Schupp and 150% for Haskins of base salary and incentive compensation
in the event of termination without cause and provide for benefits including the
use of an automobile and $200,000 term life insurance for the benefit of the
executive. Mr. Schupp's employment agreement is renewable annually but will
continue for two years after the date on which the agreement is not renewed. Mr.
Haskins' employment agreement is renewable annually.
If a change in control of the Company should occur and (1) the
executive's employment is involuntarily terminated or not extended (other than
for cause or physical or mental incapacity) or (2) he resigns due to his
reasonable determination that he is prevented from exercising his authority or
performing his duties and functions as an officer, then he would be entitled
under the employment agreements to receive a lump sum payment equal to three
times his annual salary. The agreements also provide for payments the executive
would have received in respect to cash incentive compensation and contemplate an
additional payment of 20% of three times his annual salary as compensation for
discounted fringe benefits, as well as for the continuation of any applicable
employee benefit plans for a thirty-six month period. A "Change of Control" is
defined in the agreements as the acquisition by any person or group of 25% or
more of the combined voting power of the Company's then outstanding securities.
Supplemental Executive Retirement Plan
In 1987 the Company initiated a non-qualified pension plan for senior
officers and division heads of the Company and the Bank. Eligibility to
participant in the plan requires that the employee be a division head with the
title of Vice President or above, have three years of consecutive service and be
approved by the Board of Directors. The number of persons eligible for this plan
in the current year is four. The expected cost of the plan for the current year
is $160,000. Those executives currently participating in the plan are Messrs.
Schupp, Haskins, one senior vice president and one former executive officer. The
retirement benefit to the employee will range between 30% to 70% of his or her
average base salary for the last three years of employment and will commence no
earlier than age 55 nor later than age 62. Participants vest 20% in the plan in
the year they enter the plan and become fully vested under various vesting
schedules depending on their retirement benefit.
Restricted Stock Awards
The Board of Directors has awarded Common Stock to senior officers of
the Company and the Bank. Under the terms of the award, the shares are forfeited
by the executive during the three year period after the effective date of the
award if the executive resigns or is terminated for cause. The awards are
administered by the Compensation Committee and the committee can select, at its
sole discretion, key executives of the Company and its subsidiary who the
committee determines are in a position to have a significant impact on the long
term profitability of the Company. In addition to the stock grants, the Company
makes a cash payment equal to 28% of the taxable value of the shares of common
stock granted in an award as of the date on which the shares are valued for
federal income tax purposes. No restricted stock awards were made in 1996.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is composed of Messrs. Lindahl, Spitznagel and
Wiita. None of the members of the committee has ever been an officer or employee
of the Company or the Bank.
64
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION /SAR VALUES
The following table summarizes the options and SARs exercised
in the last fiscal year and the value of unexercised options and SARs held at
year end by persons named in the Summary Compensation Table.
<TABLE>
<CAPTION>
====================================================================================================================================
Number of Shares Underlying Unexercised Value of Unexercised In-the-Money
Options/SARS Options/SARs
Shares Acquired on at FY-End (#) at FY-End ($)
---------------------------------- -----------------------------------
Name Exercise (#) Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------- -------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Rudy E. Schupp 4,622 $13,865 32,946 500,000 $116,330 $31,250
Richard J. Haskins 0 $0 22,800 200,000 $80,185 $15,625
====================================================================================================================================
</TABLE>
Item 12: Security Ownership
The following table sets forth, as of February 21, 1997, the number of
shares of the Company's Common Stock beneficially owned by each nominee for the
board of directors, the directors remaining in office, each person named in the
Summary Compensation Table, all directors and executive officers as a group and
each beneficial owner known to the Company of 5% or more of the Common Stock.
Except otherwise indicated, each individual named has sole investment and voting
power with respect to the shares shown.
<TABLE>
<CAPTION>
====================================================================================================================================
Amount and nature of Percent of
Title of Class Name of Beneficial Owner Beneficial Ownership Class
- ------------------------ ------------------------------------------------------ --------------------------------------- -----------
<S> <C> <C> <C> <C>
Common H. Gearl Gore 142,424 (1)(2)(3)(4) 1.8%
Common Richard J. Haskins 81,550 (2)(3) 1.0%
Common Lennart E. Lindahl 131,193 (1)(2)(3)(4)(5) 1.7%
Common Richard C. Rathke 140,599 (1)(2)(3)(4) 1.8%
Common Rudy E. Schupp 122,356 (2)(3)(5) 1.5%
Common Victor Siegel, M.D. 267,706 (1)(2) 3.4%
Common William F. Spitznagel 310,964 (1)(2)(3)(4) 3.9%
Common Bruce E. Wiita, M.D. 145,325 (1)(2)(3)(4) 1.8%
Common William Wolfson 9,247 (1) 0.1%
Common All Directors and Executive Officers as a Group (9 persons) 1,351,364 (6) 17.0%
====================================================================================================================================
<FN>
(1) Includes 5,250 shares issuable upon the exercise of options, at an exercise price of $3.33 per share.
(2) Includes 12,128 shares issuable upon exercise of options, at an exercise price of $2.48 per share.
(3) Includes 10,672 shares issuable upon exercise of options, at an exercise price of $2.62 per share.
(4) Includes 27,536 shares issuable upon exercise of warrants, at an exercise price of $5.00 per share.
(5) Includes 10,146 shares issuable upon exercise of options, at an exercise price of $2.50 per share.
(6) Includes options and warrants for 65,730 shares of Common Stock. Actual Common Stock owned is 16% of the total
outstanding.
</FN>
</TABLE>
65
<PAGE>
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Indebtedness to the Bank
<TABLE>
<CAPTION>
=========================================================== ======================== ==================== ==================
Largest amount outstanding
during the year ended Balance
Officer and/or Director Purpose December 31, 1996 December 31, 1996 Interest Rate
- ----------------------------------------------------------- ------------------------ -------------------- ------------------
<S> <C> <C> <C> <C>
H. Gearl Gore 1 $44,117 $35,657 10.25%
H. Gearl Gore 1 174,506 170,195 3.90
H. Gearl Gore 3 23,490 2,148 9.25
H. Gearl Gore 3 39,766 38,471 9.25
Gulfstream Exterminating (Gore) 3 3,000 3,000 10.25
Gulfstream Exterminating (Gore) 3 4,611 2,580 10.25
Richard J. Haskins 2 21,433 1,520 9.25
Richard J. Haskins 2 30,000 0 8.09
Lennart Lindahl 2 95,909 0 9.25
Lennart Lindahl 3 40,570 14,800 9.25
Lennart Lindahl 2 7,123 4,322 8.50
Rudy E. Schupp 1 19,999 18,685 9.25
Rudy E. Schupp 1 22,029 0 9.25
Rudy E. Schupp 1 55,000 52,062 9.25
Victor Siegel 2 144,666 134,881 9.25
Victor Siegel 2 61,172 61,172 7.75
Victor Siegel 2 4,127 0 9.50
Victor Siegel 3 12,545 0 9.25
Victor Siegel 3 34,080 27,534 7.50
Bruce Wiita 2 75,050 71,187 9.25
Bruce Wiita 3 43,160 0 10.25
Devmed Group, Inc. (Wiita) 3 200,000 0 9.25
=========================================================== ======================== ==================== ==================
<FN>
1 - Personal Residence
2 - Consumer
3 - Business
</FN>
</TABLE>
All extensions of credit to officers, directors and employees of the
Company and its subsidiaries are made based on the same underwriting guidelines
used for extensions of credit to the general public.
Certain Transactions
Mr. Gore owns a real estate appraisal firm which received fees from the
Bank for appraisals of real estate relating to loan transactions. During the
year ended December 31, 1996, the nine months ended December 31, 1995 and the
year ended March 31, 1995, such fees aggregated approximately $50,000, $44,575,
and $140,000, respectively.
66
<PAGE>
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, 1996 and 1995........................................35
Consolidated statements of income for year ended
December 31, 1996, the nine months ended December 31, 1995
and the year ended March 31, 1995....................................36
Consolidated statements of shareholders' equity for the year
ended December 31, 1996, the nine months ended December 31,
1995 and the year ended March 31, 1995...............................37
Consolidated statements of cash flows for the
years ended December 31, 1996, the nine moths ended
December 31, 1995 nd the year ended March 31, 1995...................38
Notes to consolidated financial statements...........................39
2. Financial Statement Schedules
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
Exhibits
3. a) Articles of Incorporation, as amended of Republic Security Financial
Corporation.*
b) Bylaws, as amended of Republic Security Financial Corporation.**
10. a) Employment Agreement between Republic Security Bank and R. E. Schupp,
as amended.***
b) Employment Agreement between Republic Security Bank and
Richard J. Haskins, as amended.***
c) Forms of Supplement Executive Retirement Plan Agreements.**
d) Supplemental Executive Retirement Program Agreement -
Richard J. Haskins**
e) Supplemental Executive Retirement Program Agreement - R. E. Schupp.**
f) Restricted Stock Plan.****
g) Restricted Stock Plan Agreement - Richard J. Haskins.****
h) Restricted Stock Plan Agreement - R. E. Schupp.****
i) Stock Appreciation Rights Agreement between Republic Security
Financial Corporation and Rudy E. Schupp *****
j) Stock Appreciation Rights Agreement between Republic Security
Financial Corporation and Richard J. Haskins *****
k) 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.******
23 Consent of Ernst & Young, LLP ******
67
<PAGE>
* Incorporated by reference to Registration Statement on
Form S-1, File No. 33-62847
** 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 24, 1994.
**** 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 March 28,1996
****** Filed herewith
- --------------------------------------------------------------------------------
b) Reports on Form 8-K
Not applicable
c) Exhibit Index
11.(a) Statement RE: Computation of Per Share Earnings.
21.(a) Subsidiaries.
23 Consent of Ernst & Young LLP
68
<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 Wolfson
- --------------------------------
William Wolfson, Director
69
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11(a)
STATEMENT 11. RE: Computation of Per Share Earnings
================================================================================================================================
Year Ended, Nine Months Ended, Year Ended
December 31, December 31, March 31,
1996 1995 1995
- ---------------------------------------------------------- --------------- ------------------------- -------------------------
<S> <C> <C> <C>
PRIMARY EARNINGS:
Average shares outstanding 7,334,010 4,843,166 3,631,774
Net effect of dilutive stock options,
warrants and equity contracts based on the modified
treasury stock method using average market price 139,706 331,522 841,745
- ---------------------------------------------------------- --------------- ------------------------- -------------------------
Total weighted average number of shares outstanding 7,473,719 5,174,688 4,473,519
- ---------------------------------------------------------- --------------- ------------------------- -------------------------
Net income $2,400,000 $1,977,000 $1,167,000
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
Deduct preferred dividends 886,000 329,000 302,000
- ---------------------------------------------------------- --------------- ------------------------- -------------------------
Net income available to common stockholders $1,514,000 $1,648,000 $1,023,000
========================================================== =============== ========================= =========================
Earnings per share $.20 $.32 $.23
========================================================== =============== ========================= =========================
FULLY DILUTED EARNINGS:
Average shares outstanding 4,843,166
Net effect of dilutive 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.
<PAGE>
EXHIBIT 23
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-02307) pertaining to the Employees' Stock Purchase
Plan of Republic Security Financial Corporation and to the incorporation by
reference in the Registration Statement (Form S-3 No. 333-2303) of Republic
Security Financial Corporation and in the related Propsectus of our report dated
January 23, 1997, with respect to the consolidated financial statements of
Republic Security Financial Corporation included in this Annual Report (Form
10-K) for the year ended December 31, 1996.
West Palm Beach, Florida
March 17, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Dec-31-1996
<CASH> 4,874
<INT-BEARING-DEPOSITS> 34,430
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,917
<INVESTMENTS-CARRYING> 6,782
<INVESTMENTS-MARKET> 6,830
<LOANS> 253,268
<ALLOWANCE> 2,273
<TOTAL-ASSETS> 359,306
<DEPOSITS> 272,587
<SHORT-TERM> 7,076
<LIABILITIES-OTHER> 9,070
<LONG-TERM> 25,000
0
10,350
<COMMON> 79
<OTHER-SE> 35,144
<TOTAL-LIABILITIES-AND-EQUITY> 45,573
<INTEREST-LOAN> 22,623
<INTEREST-INVEST> 2,173
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,796
<INTEREST-DEPOSIT> 10,366
<INTEREST-EXPENSE> 10,613
<INTEREST-INCOME-NET> 14,183
<LOAN-LOSSES> 155
<SECURITIES-GAINS> 191
<EXPENSE-OTHER> 14,601
<INCOME-PRETAX> 4,111
<INCOME-PRE-EXTRAORDINARY> 4,111
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,400
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 4.95
<LOANS-NON> 3,129
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,431
<CHARGE-OFFS> 854
<RECOVERIES> 167
<ALLOWANCE-CLOSE> 2,273
<ALLOWANCE-DOMESTIC> 2,273
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 503
</TABLE>
