UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment
FORM 10-K/A
[ 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, 1997
---------------------------------------------
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:
NONE
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 18, 1998 was approximately
$204,760,000. The number of shares outstanding of the Registrant's $.01 par
value Common Stock as of March 18, 1998 was 22,781,445.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required by Part III is incorporated by
reference to portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Shareholders which will be filed with the Securities and Exchange
Commission within 120 days after the close of the 1997 fiscal year.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
====================================================================================================================================
December 31,
(amounts in thousands except share and per share data) 1997 1996
- ---------------------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Assets (Restated)
Cash and amounts due from depository institutions $59,723 $33,259
Interest-bearing deposits in other financial institutions 66,886 34,430
Federal funds sold 7,665 32,610
- ---------------------------------------------------------------------------------- ----------------- ----------------
Cash and cash equivalents 134,274 100,299
Investments available-for-sale 116,762 106,130
Investments held to maturity (Market value of $10,305 and $46,003 at
December, 31, 1997 and 1996, respectively) 10,277 45,818
Loans receivable - net 617,392 542,867
Loans held for sale (Market value of $13,828 and $7,850
at December 31, 1997 and 1996, respectively 13,565 7,773
Property and equipment - net 21,625 18,475
Other real estate owned - net 2,519 4,837
Goodwill - net 7,110 7,675
Accrued interest receivable 4,782 5,022
Other assets 20,974 14,209
- ---------------------------------------------------------------------------------- ----------------- ----------------
Total $949,280 $853,105
================================================================================== ================= ================
Liabilities and Shareholders' Equity
Liabilities:
Deposits $742,263 $700,700
Federal Home Loan Bank advances 85,000 30,000
Securities sold under agreements to repurchase 14,443 14,613
Advances from borrowers for taxes and insurance 1,835 2,038
Bank drafts payable 5,769 4,214
Other liabilities 13,814 14,237
- ---------------------------------------------------------------------------------- ----------------- ----------------
Total liabilities 863,124 765,802
- ---------------------------------------------------------------------------------- ----------------- ----------------
Commitments and Contingencies
Shareholders' equity:
Preferred stock $10.00 stated value; 10,000,000 shares authorized: Series "C" -
948,996 and 1,035,000 shares issued and outstanding
at December 31, 1997 and 1996, respectively 9,490 10,350
Common stock $.01 par value; 100,000,000 shares authorized;
22,685,403 and 21,609,289 shares issued and outstanding at
December 31, 1997 and 1996, respectively 227 216
Additional paid-in capital 53,781 50,864
Retained earnings 22,090 25,927
Unrealized gain (loss) on investments available-for-sale, net of taxes 568 (54)
- ---------------------------------------------------------------------------------- ----------------- ----------------
Total shareholders' equity 86,156 87,303
- ---------------------------------------------------------------------------------- ----------------- ----------------
Total $949,280 $853,105
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
====================================================================================================================================
Year Ended, Nine Months Ended,
December 31, December 31,
(amounts in thousands except per share data) 1997 1996 1995
- ------------------------------------------------------------- ------------------ ---------------- -------------------
<S> <C> <C> <C>
Interest Income: (Restated) (Restated)
Interest and fees on loans $53,995 $50,643 $35,713
Interest and dividends on investments 11,672 9,566 6,177
- ------------------------------------------------------------- ------------------ ---------------- -------------------
65,667 60,209 41,890
- ------------------------------------------------------------- ------------------ ---------------- -------------------
Interest Expense:
Interest on deposits 22,477 21,079 14,873
Interest on borrowings 2,343 595 1,051
- ------------------------------------------------------------- ------------------ ---------------- -------------------
24,820 21,674 15,924
- ------------------------------------------------------------- ------------------ ---------------- -------------------
Net interest income 40,847 38,535 25,966
Provision for loan losses 1,717 379 434
- ------------------------------------------------------------- ------------------ ---------------- -------------------
Net interest income after provision for loan losses 39,130 38,156 25,532
- ------------------------------------------------------------- ------------------ ---------------- -------------------
Non-interest Income:
Service charges on deposit accounts 6,209 5,618 4,222
Gain on sale of loans 379 1,053 625
Net gain (loss) on sale of investments available-for-sale 303 168 (21)
Mortgage trading income 186 290
Other income 2,939 3,117 1,786
- ------------------------------------------------------------- ------------------ ---------------- -------------------
10,016 9,956 6,902
Operating Expenses:
Employee compensation and benefits 18,715 15,702 10,888
Occupancy and equipment 6,767 6,113 4,153
Professional fees 2,300 2,655 2,042
Advertising and promotion 620 722 450
Communications 1,160 1,067 744
Data processing 1,165 1,011 576
Insurance 425 1,966 817
Other real estate owned - net 1,241 530 623
Goodwill amortization 565 471 165
Other 3,910 3,237 2,355
Merger expenses 9,285
Litigation settlement 3,000
- ------------------------------------------------------------- ------------------ ---------------- -------------------
46,153 36,474 22,813
Income before income taxes 2,993 11,638 9,621
Income taxes 1,187 3,874 3,389
- ------------------------------------------------------------- ------------------ ---------------- -------------------
Net income $1,806 $7,764 $6,232
- ------------------------------------------------------------- ------------------ ---------------- -------------------
Income applicable to common stock $1,098 $6,878 $5,903
- ------------------------------------------------------------- ------------------ ---------------- -------------------
Per share data:
Basic earnings per common share $0.05 $0.33 $0.32
Diluted earnings per common share $0.05 $0.31 $0.30
Dividends $0.19 $0.12 $0.07
- ------------------------------------------------------------- ------------------ ---------------- -------------------
Weighted average common shares and common stock equivalents
outstanding:
Basic 22,070 21,112 18,481
Diluted 22,884 22,538 20,790
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
====================================================================================================================================
Unrealized
Gain (loss)
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, 1995, as restated $4,025 $173 $33,892 $17,813 ($137)
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 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 paid by pooled company - common stock (1,455)
Cash dividends - preferred stock series "A" and "C" (329)
Net income, for the nine months
ended December 31, 1995 6,232
Change in unrealized gain (loss)
on investments available for sale,
net of taxes 509
- ------------------------------------------------ ------------ ------------ ------------ ------------- -----------------
Balance, December 31, 1995, as restated 14,365 202 45,565 21,959 372
Exercise of warrants - 268,126 shares 3 1,039
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 - 118,799 shares 1 245
Conversion of preferred stock series "A"
into common stock
- 982,995 shares (3,980) 10 3,970
Cash redemption of preferred stock series "A" (35)
Cash dividends - common stock (847)
Cash dividends paid by pooled company - common stock (2,063)
Cash dividends - preferred stock series "A" and "C" (886)
Net income 7,764
Change in unrealized gain (loss)
on investments available for sale,
net of taxes (426)
- ------------------------------------------------ ------------ ------------ ------------ ------------- -----------------
Balance December 31, 1996, as restated 10,350 216 50,864 25,927 (54)
Exercise of stock options -924,664 shares 9 2,032
Issuance of stock grants - 3,000 shares 27
Conversion of preferred stock series "C"
into common stock - 133,306 shares (860) 2 858
Cash dividends - common stock (2,175)
Cash dividends paid by pooled companies
- common stock (2,760)
Cash dividends - preferred stock series C (708)
Net income 1,806
Change in unrealized gain (loss)
on investments available for sale,
net of taxes 622
- ------------------------------------------------ ------------ ------------ ------------ ------------- -----------------
Balance December 31, 1997 $9,490 $227 $53,781 $22,090 $568
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
====================================================================================================================================
Year ended Nine months Ended
December 31, December 31, ,
(amounts in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities: (Restated) (Restated)
Net income $1,806 $7,764 $6,232
Adjustments to reconcile net income to net cash
provided by operating activities, net of effects
of purchase acquisitions:
Provision for loan losses 1,717 379 434
Depreciation and amortization 3,340 2,832 1,860
Deferred income taxes (465) (413) 291
Amortization of deferred loan fees and costs (321) (329) (438)
Gain on sale of loans (379) (1,053) (625)
Loan costs deferred (347) (241) (161)
Loans originated for sale (17,166) (10,372) (28,280)
Purchase of loans for sale (7,975) (7,773) (8,572)
Sale of loans and loan participation certificates 42,176 43,040 48,192
Loss on sale of investments available-for-sale 176 46 21
Gain on sale of investments available-for-sale (479) (214)
Other - net (9,206) 3,422 (766)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,877 37,088 18,188
- -------------------------------------------------------------------------------------------------------------------
Investing Activities:
Cash and cash equivalents acquired in branch purchase, net 16,917
Cash and cash equivalents-net acquired in purchase business combination 15,235
Purchase of investments available-for-sale (64,543) (88,666) (11,626)
Proceeds from sale of investments available- for- sale 93,614 54,730 9,212
Maturities and calls of investments held to maturity 3,554 17,102 22,617
Purchases of investments held to maturity (7,413) (27,248) (15,244)
Loans purchased for investment (45,193) (2,014) (1,861)
Net increase in loans (52,043) (42,933) (6,957)
Purchase of property and equipment (5,916) (2,880) (2,580)
Other - net 5,090 2,477 1,943
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (72,850) (74,197) 12,421
- -------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase in demand deposits, NOW accounts,
Money Market accounts and savings accounts 45,924 42,640 5,404
Net decrease in time deposits (4,361) (8,406) (30,116)
Proceeds from common and preferred stock offering
- net of stock issuance costs 19,404
Increase in FHLB advances 55,000 5,000 10,000
Cash dividends (5,643) (3,796) (2,086)
Other - net 3,028 5,455 4,720
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 93,948 40,893 7,326
- -------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 33,975 3,784 37,935
Cash and cash equivalents at beginning of period 100,299 96,515 58,580
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $134,274 $100,299 $96,515
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Republic Security Financial Corporation (the "Company" or
"RSFC") 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 thirty-two
full-service branches, thirteen of which are located in Palm Beach
County, eleven located in Broward County and eight 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 consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, and have been retroactively
restated to include the accounts and results of operations of Family
Bank and County Financial Corporation which were acquired on June 30,
1997 and December 2, 1997, respectively, and accounted for as
poolings-of-interests (see Note 2).
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, 1997 and
1996.
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 $2,565,000 and $3,734,000 during the years
ended December 31, 1997 and 1996, respectively, and $3,403,000 during
the nine months ended December 31, 1995. The Company paid interest on
deposits and other borrowings of $24,931,000 and $21,466,000 for the
years ended December 31, 1997 and 1996, respectively, and $16,801,000
for the nine months ended December 31, 1995. Approximately $4,438,000,
$1,629,000 and $2,548,000 was transferred from loans to OREO during the
years ended December 31, 1997 and 1996, and the nine months ended
December 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 redemption of the
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 during the year ended December 31, 1996. 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).
Investments
Management determines the appropriate classification of debt
and equity 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
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
allowance is based on the Company's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and
other relevant factors. This evaluation is inherently subjective as it
requires material estimates including the amounts and timing of future
cash flows expected to be received on impaired loans that may be
susceptible to significant change.
All non-accrual loans, excluding smaller balance, homogeneous
loans (defined as consumer loans less than $100,000 and residential
mortgage loans), are considered 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. Impaired loans are measured based on discounted cash flows
using the loan's effective interest rate or the fair value of the
collateral for collateral dependent loans.
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
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 in the
consolidated statements of income.
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.
The amount the Bank will ultimately recover from other real estate
owned could differ from the amounts used in determining the carrying
value of the property due to future market factors beyond the Bank's
control. The allowance for losses on other real estate owned was
$620,000 and $283,000 at December 31, 1997 and 1996, respectively.
Provision for other real estate owned losses during the years ended
December 31, 1997 and 1996 totaled $1,114,000 and $159,200,
respectively, and $271,000 for the nine months ended December 31, 1995,
and is included in other real estate owned expense in the consolidated
statements of income.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 $1,304,000 and $739,000 at December 31,
1997 and 1996, respectively.
Income per Common Share
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share". SFAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS 128 requirements.
Basic income per common share is computed by dividing net
income, less preferred stock dividends, by the weighted average number
of shares of common stock outstanding during the period. 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 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 (see Note
17).
Stock Based Compensation
The Company grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation
expense for the stock option grants (See Note 11).
Reclassification
Certain amounts presented in the consolidated financial
statements for prior periods have been reclassified for comparative
purposes.
New Accounting Pronouncements
During 1997, the Company adopted the requirements of Statement
of Financial Accounting Standards No.125 ("SFAS No. 125"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", 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. The adoption of
SFAS No. 125 did not have a material impact on the financial condition,
operations or cash flows of the Company.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 129 "Disclosures of
Information about Capital Structure" (SFAS No. 129) which establishes
standards for disclosing information about a company's capital
structure. SFAS No. 129 is effective for financial statements for
periods ending after December 15, 1997. The adoption of SFAS No. 129
will have no effect on the Company's disclosures as the Company has
previously provided the disclosures required by SFAS No. 129 (See Note
10).
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" (SFAS No. 130) which establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires all items recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 also requires that an
enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Management cannot currently
determine the effect of the adoption of SFAS No. 130.
The Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information " (SFAS No. 131) in 1997. SFAS No.
131 establishes standards for public companies to report information
about operating segments in annual financial statements and interim
financial reports to shareholders. SFAS No. 131 also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. Management does not anticipate
the adoption of SFAS No. 131 to have a substantial impact on the
Company's disclosure requirements.
SFAS No. 131 requires public companies to report financial and
descriptive information about its reportable operating segments.
Operating segments are components of an enterprise for which separate
financial information is available and evaluated regularly by the chief
operating decision maker in determining resource allocation and in
assessing performance. Generally, financial information is required to
be reported on the basis that it is used internally for evaluating
segment performance and resource allocation.
SFAS No. 131 also requires public business companies to report
descriptive information about the way operating segments were
determined, the products and services provided by the operating
segments, differences between the measurements used in reporting
segment information and those used in the enterprise's general-purpose
financial statements, and changes in the measurement of segment amounts
from period to period.
2. Mergers and Branch Acquisition
On December 2, 1997, the Company acquired County Financial
Corporation ("CFC"), a commercial bank holding company headquartered in
North Miami Beach, Florida. CFC's wholly-owned banking subsidiary,
County National Bank of South Florida ("County") was merged into the
Bank on December 2, 1997. County had 14 branch locations in Northern
Dade, Broward and Palm Beach Counties. RSFC issued 6,170,248 shares of
its common stock in exchange for all outstanding common stock and stock
options of CFC. The business combination was accounted for as a
pooling-of-interests and resulted in the Bank acquiring assets of
$255.0 million, liabilities of $230.6 million and equity of $24.4
million. All information contained herein has been retroactively
restated to include the accounts and results of operations of CFC.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On June 30, 1997, the Company acquired Family Bank ("Family"),
a commercial bank headquartered in Hallandale, Florida, with seven
branch locations in Broward County, Florida. Family was merged into the
Bank on June 30, 1997. RSFC issued 8,289,125 shares of its common stock
in exchange for all outstanding common stock of Family. The business
combination was accounted for as a pooling-of-interests and resulted in
the Bank acquiring assets of $256.0 million, liabilities of $234.2
million and equity of $21.8 million. All information contained herein
has been retroactively restated to include the accounts and results of
operations of Family Bank.
For the year ended December 31, 1997, non-recurring merger
expenses included in operating expenses in the consolidated statements
of income of $9,285,000 consists of severance charges, charges
associated with the disposal of certain duplicate assets, professional
fees, OREO writedowns and other fees and expenses related to the
completion of the mergers with Family and CFC. In addition, merger
related provision for loan losses to conform Family and County's
accounting and credit policies regarding loan valuation to those of the
Bank amounted to $650,000.
The results of operations previously reported by the separate
companies and the combined amounts presented in the accompanying
consolidated financial statements are summarized below.
<TABLE>
<CAPTION>
====================================================================================================================================
Nine months ended Six Months Ended Year Ended Nine months ended
(in thousands) September 30, 1997 June 30, 1997 December 31, 1996 December 31, 1995
- ------------------------------- ------------------- ----------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Revenue:
RSFC $39,936 $15,351 $29,480 $19,463
Family 10,770 19,690 13,427
CFC 16,494 20,995 15,902
- ------------------------------- ------------------- ----------------- ----------------- --------------------
Combined $56,430 $26,121 $70,165 $48,792
=============================== =================== ================= ================= ====================
Net income (loss):
RSFC (1) $2,318 ($2,045) $2,400 $1,977
Family 2,541 4,440 2,897
CFC 2,992 924 1,358
- ------------------------------- ------------------- ----------------- ----------------- --------------------
Combined $5,310 $496 $7,764 $6,232
====================================================================================================================================
<FN>
(1) The six months ended June 30, 1997 includes merger expenses
of $2.5 million, net of taxes, related to Family acquisition.
</FN>
</TABLE>
Securities held by Family with a book value of approximately
$39.4 million and a market value of approximately $39.5 million at June
30, 1997, were transferred from held to maturity to available-for-sale
to maintain RSFC's existing interest rate risk position for the
combined company.
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.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
================================================================================
Pro forma financial information for Republic Security
Financial Corporation including the pre-merger results of operations of
County Financial Corporation and Family Bank for the nine months ended
December 31, 1995, as if the Banyan Bank merger had taken place as of
April 1, 1995 for income and per share data is as follows:
================================================================================
Nine months ended
(in thousands except per share data) December 31, 1995
Total interest income $45,007
Net interest income after provision for loan losses $27,193
Income before taxes $10,605
Net income $6,650
Diluted earnings per common share $0.32
================================================================================
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 date 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
being amortized over seven years using the straight-line method.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Investments
The following is a summary of available-for-sale and held to
maturity securities at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Available-For-Sale
====================================================================================================================================
Gross Gross
(in thousands) Amortized Cost Unrealized Gains Unrealized Losses Market Value
- ------------------------------- -------------- ---------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $25,697 $196 $73 $25,820
Corporate and other debt securities 28,529 483 6 29,006
Mortgage-backed securities 61,109 378 114 61,373
Equity securities 525 38 563
- ------------------------------- -------------- ---------------------- -------------------- -------------------
Total at December 31, 1997 $115,860 $1,095 $193 $116,762
- ------------------------------- -------------- ---------------------- -------------------- -------------------
U.S. Government and agency securities $43,732 $229 $134 $43,827
Corporate and other debt securities 3,120 3,120
Foreign Government securities 150 150
Mortgage-backed securities 59,213 154 334 59,033
- ------------------------------- -------------- ---------------------- -------------------- -------------------
Total at December 31, 1996, restated $106,215 $383 $468 $106,130
- ------------------------------- -------------- ---------------------- -------------------- -------------------
U.S. Government and agency securities $51,557 $597 $106 $52,048
Corporate and other debt securities 2,443 20 9 2,454
Foreign Government securities 75 75
Mortgage-backed securities 16,623 92 23 16,692
- ------------------------------- -------------- ---------------------- -------------------- -------------------
Total at December 31, 1995, restated $70,698 $709 $138 $71,269
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
====================================================================================================================================
Gross Gross
(in thousands) Amortized Cost Unrealized Gains Unrealized Losses Market Value
- ------------------------------- -------------- ---------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
U.S. Government and agency securities $9,511 $36 $8 $9,539
Foreign Government securities 725 725
Corporate and other debt securities 41 41
- ------------------------------- -------------- ---------------------- -------------------- -------------------
Total at December 31, 1997 $10,277 $36 $8 $10,305
- ------------------------------- -------------- ---------------------- -------------------- -------------------
U.S. Government and agency securities $24,901 $148 $71 $24,978
Foreign Government securities 500 500
Corporate and other debt securities 16,818 112 32 16,898
Mortgage backed securities 3,599 59 31 3,627
- ------------------------------- -------------- ---------------------- -------------------- -------------------
Total at December 31, 1996, restated $45,818 $319 $134 $46,003
- ------------------------------- -------------- ---------------------- -------------------- -------------------
U.S. Government and agency securities $19,015 $362 $15 $19,362
Foreign Government securities 500 500
Corporate and other debt securities 12,964 84 129 12,919
Mortgage backed securities 4,756 83 10 4,829
- ------------------------------- -------------- ---------------------- -------------------- -------------------
Total at December 31, 1995, restated $37,235 $529 $154 $37,610
====================================================================================================================================
</TABLE>
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The amortized cost and estimated market value of debt
securities at December 31, 1997 by contractual maturity are shown
below:
<TABLE>
<CAPTION>
Held to Maturity
====================================================================================================================================
Amortized Market
(in thousands) Cost Value
- -------------------------------------------------------------- -------------------------- -------------------
<S> <C> <C>
Due in 1 year or less $4,002 $4,015
Due after 1 through 5 years 5,825 5,840
Due after 5 years through 10 years 375 375
Due after 10 years 75 75
- -------------------------------------------------------------- ----------- ------------- -------------------
Total $10,277 $10,305
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Available-for-sale
====================================================================================================================================
Amortized Market
(in thousands) Cost Value
- -------------------------------------------------------------- ---------------------------- -----------------
<S> <C> <C>
Due in 1 year or less $6,534 $6,557
Due after 1 through 5 years 37,758 38,103
Due after 5 years through 10 years 8,165 8,376
Due after 10 years 1,769 1,790
- -------------------------------------------------------------- ------------ -------------- -----------------
54,226 54,826
- -------------------------------------------------------------- ------------ -------------- -----------------
Mortgage-backed securities 61,109 61,373
Equity securities 525 563
- -------------------------------------------------------------- ------------ -------------- -----------------
Total at December 31, 1997 $115,860 $116,762
====================================================================================================================================
</TABLE>
The anticipated maturities for mortgage-backed securities are
not readily determinable since they may be prepaid without penalty.
At December 31, 1997 and 1996 securities with a book value of
$66,400,000 and $63,417,000, respectively, were pledged to
collateralize Federal Home Loan Bank advances, repurchase agreements,
public deposits and other items.
Gross realized gains on securities available-for-sale amounted
to $479,000 and $214,000 for the years ended December 31, 1997 and
1996, respectively. Gross realized losses on securities
available-for-sale amounted to $176,000, $46,000 and $21,000 for the
years ending December 31, 1997 and 1996 and the nine months ended
December 31, 1995, respectively. There were no realized gains during
the nine months ended December 31, 1995.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Loans Receivable - Net
Loans receivable - net is summarized as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, December 31,
(in thousands) 1997 1996
- ---------------------------------------------------------- ----------------- -------------------------------
(Restated)
<S> <C> <C>
Residential mortgage $163,464 $167,345
Commercial mortgage 273,202 220,043
Real estate construction 44,339 48,409
Installment loans to individuals 91,917 70,602
Commercial and financial 73,727 63,577
- ---------------------------------------------------------- ----------------- -------------------------------
Total loans 646,649 569,976
- ---------------------------------------------------------- ----------------- -------------------------------
Deferred loan fees (1,186) (1,491)
Undisbursed portion of loans-in-process (21,408) (19,218)
Allowance for loan losses (6,663) (6,400)
- ---------------------------------------------------------- ----------------- -------------------------------
Loans receivable - net $617,392 $542,867
====================================================================================================================================
</TABLE>
5. Non-Performing Loans and Allowance for Loan Losses
At December 31, 1997 and 1996, the Bank had $5,414,000 and
$7,143,000, respectively, in non-performing loans. Interest income not
recognized on non-performing loans was $300,000 and $355,000 during the
years ended December 31, 1997 and 1996, respectively, and $257,000
during the nine months ended December 31, 1995.
At December 31, 1997 and 1996, the recorded investment in
loans that are considered to be impaired under SFAS No. 114 was
$1,239,000 and $4,670,000, respectively. The related allowance for
credit losses for such loans is $487,000 and $735,000 at December 31,
1997 and 1996, respectively. The average recorded investment in
impaired loans during the year ended December 31, 1997 was
approximately $3,626,000. The average recorded investment in impaired
loans for the year ended December 31, 1996 was $4,408,000. The average
recorded investment for the nine months ended December 31, 1995 was
$3,385,000. For the years ended December 31, 1997, and 1996 and the
nine months ended December 31, 1995, the Company recognized $301,000,
$303,500 and $220,350, 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.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
An analysis of changes in the allowance for loan losses is
summarized as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended Year Ended
December 31, December 31,
(in thousands) 1997 1996
- ---------------------------------------------------- ------------------------- ----------------------------
(Restated)
<S> <C> <C>
Beginning balance $6,400 $6,785
Reserves acquired in connection with merger 374
Provision for losses 1,717 379
Recoveries 750 518
Charge-offs (2,204) (1,656)
- ---------------------------------------------------- ------------------------- ----------------------------
Ending balance $6,663 $6,400
====================================================================================================================================
</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 $10,574,000 for the year ended
December 31, 1997. Cash in the amount of $27,000,000 was restricted at
December 31, 1997.
7. Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, December 31,
(in thousands) 1997 1996
- ------------------------------------------------------ ---------------------- -------------------------------
(Restated)
<S> <C> <C>
Land and buildings $17,809 $15,128
Furniture and equipment 11,855 11,825
Leasehold improvements 3,392 3,436
- ------------------------------------------------------ ---------------------- -------------------------------
Total 33,056 30,389
Less accumulated depreciation and amortization 11,431 11,914
- ------------------------------------------------------ ---------------------- -------------------------------
Property and equipment-net $21,625 $18,475
====================================================================================================================================
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996
was $2,280,000 and $2,072,000, respectively. Rent expense for the nine
months ended December 31, 1995 was $1,397,000. (See Note 14 for rent
expense paid to related parties).
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Deposits
Components of deposits were as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, December 31,
(in thousands) 1997 1996
- -------------------------------------------------------------- ----------------------- ---------------------
(Restated)
<S> <C> <C>
Non-interest bearing accounts $163,625 $150,439
NOW accounts 121,977 114,938
Money market accounts 103,366 83,241
Saving deposits 88,746 83,172
Time certificates less than $100,000 195,812 199,054
Time certificates $100,000 or more 68,737 69,856
- -------------------------------------------------------------- ----------------------- ---------------------
Total $742,263 $700,700
====================================================================================================================================
</TABLE>
The Bank incurred interest on deposits as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended, Year Ended Nine Months Ended
December 31, December 31, December 31,
(in thousands) 1997 1996 1995
- ------------------------------------------ ----------------------- ----------------- ------------------------
(Restated) (Restated)
<S> <C> <C> <C>
Savings accounts $2,841 $2,403 $1,215
NOW accounts 2,069 2,088 1,793
Money market deposit accounts 2,747 2,439 1,484
Certificate accounts 14,820 14,149 10,381
- ------------------------------------------ ----------------------- ----------------- ------------------------
Total $22,477 $21,079 $14,873
====================================================================================================================================
</TABLE>
The amounts and maturities of certificate accounts at December 31, 1997
are as follows:
================================================================================
(in thousands):
- ------------------------------------------------------- ----------------
Within 12 months $217,034
12 to 24 months 20,643
24 to 36 months 11,473
36 to 48 months 8,724
Over 48 months 6,675
- ------------------------------------------------------- ----------------
Total $264,549
================================================================================
16
<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, 1997 are as follows
(in thousands):
================================================================================
Within 3 months $27,914
3 to 6 months 11,009
6 to 12 months 19,328
Over 12 months 10,486
- ----------------------------------------------------- ------------------
Total $68,737
================================================================================
9. 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 $41,250,000 and $35,000,000 at December 31,
1997 and 1996, respectively and mortgage-backed securities of
$23,500,000 and $25,600,000 at December 31, 1997 and 1996,
respectively. In addition, cash in the amount of $27,000,000 was
pledged for FHLB borrowings at December 31, 1997. Based on the current
pledged amount, the Bank's borrowing limit is approximately $85,000,000
with a remaining borrowing capacity of $15,000,000 at December 31,
1997. The Bank also has the ability to draw on existing lines-of-credit
with two commercial banks for an aggregate amount of $14.0 million. No
amounts were drawn on these lines at December 31, 1997 and 1996.
Outstanding advances from the Federal Home Loan Bank consisted of the
following:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, December 31,
(in thousands) 1997 1996 Interest Rate
- --------------------------------- ------------------------- ------------------- ----------------------------
Mature During: (Restated)
<C> <C> <C> <C>
1997 $5,000 6.95% variable
1998 $60,000 6.50% variable
2001 25,000 25,000 5.61% fixed
- --------------------------------- ------------------------- ------------------- ----------------------------
Total $85,000 $30,000
====================================================================================================================================
</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.
Notes payable included in other liabilities consists of
capital notes in the amount of $380,000 at December 31, 1997 and 1996,
bearing interest at 9% per annum, payable semi-annually and a mortgage
payable of $750,000 and $850,000 at December 31, 1997 and 1996,
respectively, bearing interest at 10% per annum, principal and interest
payable quarterly. The capital notes become due and payable on January
1, 2004 and are subordinate to existing and future indebtedness of the
Bank. The mortgage is collateralized by Bank property and matures in
April 2005.
The Bank enters into sales of securities under agreements to
repurchase. Variable rate and fixed 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
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997 and 1996. 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
$24,638,000, accrued interest of $411,900, and a market value of
$24,826,000 at December 31, 1997. All agreements are short-term
obligations and have a weighted interest rate of 4.39% at December 31,
1997. 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
$11,427,000 and $8,170,000 during the years ended December 31, 1997 and
1996, respectively. The maximum amount outstanding at any month-end
during the year ended December 31, 1997 was $16,596,000 and the maximum
outstanding at any month-end during the year ended December 31, 1996
was $14,613,000.
10. 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, 1997,
these amounts were $15,586,000 and $9,407,000, 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 $5,660,000 and $3,673,000 in
dividends to the Company during the years ended December 31, 1997 and
1996, respectively.
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 any time 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
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
11. Stock Option and Other Incentive Plans
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock options as
described in Note 1. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
The Company's 1997 Performance Incentive Plan (the "Plan")
authorizes the issuance of stock options, restricted stock, stock
appreciation rights ("SARS"), performance units, performance shares,
phantom stock and dividend equivalents to all directors, officers and
employees of the Company and the Bank for up to 2,000,000 shares of the
Company's common stock. The term of any options or SARS may not exceed
ten years from the date of grant. The vesting and exercise terms will
be determined by the committee administering the Plan.
As indicated in the table below 498,000 stock options were
issued in the year ended December 31, 1997 under the Plan. The effect
of applying SFAS 123's fair value method to the Company's stock based
awards results in net income and earnings per share that are not
materially different from the amounts reported.
The balance, activity, exercise price, and expiration dates of
the Company's options for the year ended December 31, 1997 and 1996 and
the nine months ended December 31, 1995 are as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
Options
- ------------------------- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 31, 1995,
as restated 78,663 6,000 10,000 78,704 97,024 35,750 57,200
Issued
Expired
Exercised (2,668)
- ------------------------- ----------- ----------- ----------- ------------ ------------ ------------ ------------
Balance December 31, 1995,
as restated 78,663 6,000 76,036 97,024 35,750 57,200
Issued 25,957
Expired
Exercised (3,365) (7,150)
Forfeits
- ------------------------- ----------- ----------- ----------- ------------ ------------ ------------ ------------
Balance December 31, 1996,
as restated 101,255 6,000 76,036 97,024 35,750 50,050
Issued
Exercised (101,255) (6,000) (10,000) (10,672) (21,450)
Forfeited
- ------------------------- ----------- ----------- ----------- ------------ ------------ ------------ ------------
Balance December 31, 1997 65,364 97,024 35,750 28,600
========================= =========== =========== =========== ============ ============ ============ ============
Exercise Price $2.50 $5.00 $6.50 $2.62 $2.48 $1.14 $1.65
Expiration Date 01/01/99 12/5/97 12/5/97 02/24/98 9/25/01 10/24/01 03/14/03
====================================================================================================================================
</TABLE>
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
====================================================================================================================================
Options (Continued)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance March 31, 1995,
as restated 42,000 1,199,627 14,768
Issued
Expired
Exercised
- -------------------------- ------------ --------------- -------------- -------------- -------------- -------------
Balance December 31, 1995,
as restated 42,000 1,199,627 14,768
Issued 95,810
Expired
Exercised (103,662) (4,622)
Forfeits (9,880)
- -------------------------- ------------ --------------- -------------- -------------- -------------- -------------
Balance December 31, 1996,
as restated 42,000 1,086,085 95,810 10,146
Issued 340,000 158,000
Expired (2,000)
Exercised (715,650) (80,795) (2,622)
Forfeited (25,000)
- -------------------------- ------------ --------------- -------------- -------------- -------------- -------------
Balance December 31, 1997 42,000 370,435 15,015 340,000 133,000 5,524
========================== ============ =============== ============== ============== ============== =============
Exercise Price $3.33 $2.08 $2.46 $9.13 $10.38 $2.50
Expiration Date 6/1/03 04/14/04 9/26/06 8/20/07 9/15/07 *
- -------------------------- ------------ --------------- -------------- -------------- -------------- -------------
* 4,622 options expire annually
- -------------------------- ------------ --------------- -------------- -------------- -------------- -------------
====================================================================================================================================
</TABLE>
The balance, activity, exercise price, and expiration dates of
the Company's warrants, and equity contracts for the years ended
December 31, 1997 and 1996 and the nine months ended December 31, 1995
are as follows:
<TABLE>
<CAPTION>
===================================================================================================================================
Warrants Equity Contracts
- ---------------------------------------- -------------------------------------------- -----------------------------------
<S> <C> <C> <C>
Balance March 31, 1995, as restated 165,216 511,153 660,968
Issued
Exercised (211,300) (634,476)
Canceled (27,536) (26,492)
- ---------------------------------------- ---------------------- -------------------- -------------------------
Balance December 31, 1995, as restated 137,680 299,853
Issued (31,727)
Exercised (268,126)
Canceled
- ---------------------------------------- ---------------------- -------------------- -------------------------
Balance December 31, 1996, as restated 137,680
Expired
Exercised
- ---------------------------------------- ---------------------- -------------------- -------------------------
Balance December 31, 1997 137,680
======================================== ====================== ==================== =========================
Exercise Price $5.00 $3.90 $2.90
Expiration Date 11/1/00 1/22/96 5/1/96
====================================================================================================================================
</TABLE>
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 and $3.33 were exercisable from the date issued.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Options with exercise prices of $2.50 and $5.00 are exercisable at
various dates in accordance with employment contracts. Options with
exercise prices of $1.14, $1.65, $2.08 and $2.46 were exercisable one
year from the date issued. Options with exercise prices of $9.13 and
$10.38 are exercisable three years from the date issued.
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.
On December 20, 1995, the Company awarded stock appreciation
rights ("SARs") to two executives and to its non-employee directors.
The balance, activity, price and vesting/exercisable dates are as
follows:
================================================================================
Balance December 31, 1995 220,000 620,000
Balance December 31, 1996 220,000 620,000
Exercised (75,000)
- ----------------------------------------------------------------------
Balance December 31, 1997 145,000 620,000
======================================================================
Base Price $5.75 $8.00
Vesting/Exercisable Date 1/1/97 1/1/98
================================================================================
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 during
the vesting period and will be adjusted in subsequent periods for
changes in the market price. The Company recognized $1,887,000 in
compensation expense associated with SARs during the year ended
December 31, 1997. No compensation expense was recognized for SARs
during the year ended December 31, 1996 and the nine months ended
December 31, 1995.
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,
1997, the Company and the Bank exceeded all capital adequacy
requirements to which it is subject.
As of December 31, 1997, 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.
21
<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, 1997:
Total risk based $74,629 11.9% $50,242 8.0% $62,802 10.0%
capital
Tier 1 risk based $67,586 10.8% $25,121 4.0% $37,681 6.0%
capital
Leverage capital $67,586 7.8% $34,819 4.0% $43,524 5.0%
As of December 31, 1996,
as restated:
Total risk based $76,012 13.6% $44,846 8.0% $56,058 10.0%
capital
Tier 1 risk based $69,668 12.4% $22,423 4.0% $33,635 6.0%
capital
Leverage capital $69,668 8.9% $31,354 4.0% $39,192 5.0%
====================================================================================================================================
</TABLE>
The following table shows the capital amounts and ratios of
the Company:
<TABLE>
<CAPTION>
====================================================================================================================================
Actual
(dollars in thousands) Amount Ratio
- ------------------------------ --------------------------------------------- --------------------------------
<S> <C> <C>
As of December 31, 1997:
Total risk based capital $83,734 13.3%
Tier 1 risk based capital $76,691 12.2%
Leverage capital $76,691 8.8%
As of December 31, 1996, as restated:
Total risk based capital $84,813 14.6%
Tier 1 risk based capital $78,472 13.5%
Leverage capital $78,472 9.9%
====================================================================================================================================
</TABLE>
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, 1997, the Bank had adjustable rate commitments
to extend credit and
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
standby letters of credit of approximately $80,000,000, excluding the
undisbursed portion of loans-in-process. These commitments are
primarily for commercial lines-of-credit secured by commercial real
estate or other business assets and one-to-four family residential
properties.
The Company and its subsidiaries have entered into
noncancellable operating leases (See Note 14 for related party
transactions) with future minimum lease payments of the following:
================================================================================
(in thousands)
- -----------------------------------------------------------------------------
1998 $2,258
1999 1,804
2000 1,217
2001 944
2002 773
Thereafter 3,533
- ----------------------------------- ------------- ---------------------------
$10,529
================================================================================
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 $206,000, $72,000 and $4,000
in 1998, 1999 and 2000, respectively.
The Company has a non-qualified unfunded retirement plan for
three present executives and one former executive of the Company.
Pension costs, consisting of service costs and interest costs, amounted
to $148,000, $141,000 and $90,000, for the years ended December 31,
1997, 1996 and the nine months ended December 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, 1997 and 1996 was $321,000 and $821,000,
respectively.
The Company established a non-qualified unfunded retirement
plan in February 1997 for seven directors of the Company. Benefit costs
associated with the Plan amounted to $42,000 for the year ended
December 31, 1997. The annual retirement benefit for the directors will
be 75% of the final fees paid in the calendar year of the director's
termination of service for a duration of 180 months.
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 years ended December 31, 1997 and 1996 amounted
to $321,000 and $329,000, respectively. The expense under the plan for
the nine months ended December 31, 1995 amounted to $286,000.
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. In the opinion of
management of the Company, amounts accrued for awards or assessments in
connection with these matters are adequate and the ultimate resolution
of these matters will not have a material
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
effect on the Company's consolidated financial position, results
of operations or cash flows.
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 years
ended December 31, 1997, and 1996 such fees aggregated approximately
$62,000 and $50,000, respectively, and $58,000 for the nine months
ended December 31, 1995.
The Bank leases two of its branch locations from entities with
which former board members are directly affiliated. The leases have
been accounted for as operating leases. These leases provide for
agreed-upon rent increases over the lease terms, expire through 2018,
and generally contain renewal options. During the years ended December
31, 1997 and 1996, the Bank paid the related parties approximately
$221,000 and $165,000, respectively, and $115,000 during the nine
months ended December 31, 1995, under the terms of the leases.
An analysis of the activity of the aggregate loans to officers
and directors is as follows:
================================================================================
(in thousands)
- ------------------------------------------------------------------
Balance March 31, 1995, as restated $3,662
Additions 1,023
Principal reductions (716)
- ------------------------------------------------------------------
Balance December 31, 1995, as restated 3,969
Additions 947
Principal reductions (2,147)
- ------------------------------------------------------------------
Balance December 31, 1996, as restated 2,769
Additions 926
Principal reductions (1,222)
- ------------------------------------------------------------------
Balance December 31, 1997 $2,473
================================================================================
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.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Income Taxes
Net deferred tax assets are included in other assets on the
consolidated balance sheets at December 31, 1997 and 1996. Significant
components of the Company's deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, December 31,
(in thousands) 1997 1996
- -------------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
Deferred tax assets: (Restated)
Net operating loss $690 $878
Loan loss provision 1,142 594
Deferred compensation 259 165
Depreciation 17 123
Deferred loan fees 327 323
Investment basis 34 34
OREO expenses 258 194
Other 1,489
- -------------------------------------------------------------------- -------------------- -------------------
2,727 3,800
Valuation allowance (699) (1,777)
- -------------------------------------------------------------------- -------------------- -------------------
Deferred tax assets, net of allowance 2,028 2,023
Deferred tax liabilities:
Excess servicing rights 11 107
Depreciation 106
Other 1 49
- -------------------------------------------------------------------- -------------------- -------------------
Total 12 262
- -------------------------------------------------------------------- -------------------- -------------------
Net deferred tax asset $2,016 $1,761
===================================================================================================================================
</TABLE>
Significant components of the provision for income taxes for
the years ended December 31, 1997 and 1996 and the nine months ended
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended Nine Months Ended
December 31, December 31,
(in thousands) 1997 1996 1995
- -------------------------------------------- ---------------- ----------------------- ----------------------
<S> <C> <C> <C>
Current expense: (Restated) (Restated)
Federal $1,456 $3,712 $2,694
State 196 575 404
- -------------------------------------------- ---------------- ----------------------- ----------------------
1,652 4,287 3,098
- -------------------------------------------- ---------------- ----------------------- ----------------------
Deferred (benefit) expense :
Federal (420) (393) 277
State (45) (20) 14
- -------------------------------------------- ---------------- ----------------------- ----------------------
(465) (413) 291
$1,187 $3,874 $3,389
====================================================================================================================================
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of income tax expense with the amount
computed by applying the statutory federal income tax rate of 34% to
income before income taxes is as follows for the years ended December
31, 1997 and 1996 and the nine months ended December 31, 1995:
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended Nine Months Ended
December 31, December 31,
(in thousands) 1997 1996 1995
- ---------------------------------------------- ----------------------- ---------------- --------------------
(Restated) (Restated)
<S> <C> <C> <C>
Income taxes at federal rate $1,018 $3,956 $3,271
Differences resulting from:
State income taxes, net of federal tax benefit 99 360 330
Change in valuation allowance (1,078) (303)
Merger expenses 1,029
Amortization of goodwill 192 160 56
Tax exempt investment income (249) (258) (184)
Other, net 176 (41) (84)
- ---------------------------------------------- ----------------------- ---------------- --------------------
Income taxes $1,187 $3,874 $3,389
====================================================================================================================================
</TABLE>
As of December 31, 1997, the Company had net operating loss
carryforwards, acquired in connection with mergers, of approximately
$1,837,000 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, 1997, 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.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Earnings per Share
The following table sets for the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
===================================================================================================================================
Nine Months Ended
Year Ended December 31, December 31,
( in thousands except per share data) 1997 1996 1995
- ------------------------------------------------------------ -------------- -------------- -----------------
<S> <C> <C> <C>
Numerator: (Restated) (Restated)
Net income $1,806 $7,764 $6,232
Preferred stock dividends (708) (886) (329)
- ------------------------------------------------------------ -------------- -------------- -----------------
Numerator for basic earnings per share -
income available to common stock holders 1,098 6,878 5,903
Effect of dilutive securities:
Preferred stock dividends 158 329
- ------------------------------------------------------------ -------------- -------------- -----------------
Numerator for diluted earnings per share
- - income available to common
stockholders after assumed conversions $1,098 $7,036 $6,232
============================================================ ============== ============== =================
Denominator:
Denominator for basic earnings per share
- weighted-average shares 22,070 21,112 18,481
Effective of dilutive securities:
Employee stock options 814 963 1,317
Convertible preferred stock 463 992
- ------------------------------------------------------------ -------------- -------------- -----------------
Dilutive potential common shares 814 1,426 2,309
- ------------------------------------------------------------ -------------- -------------- -----------------
Denominator for diluted earnings per share
- adjusted weighted-average shares
and assumed conversions 22,884 22,538 20,790
============================================================ ============== ============== =================
Basic earnings per share $0.05 $0.33 $0.32
Diluted earnings per share $0.05 $0.31 $0.30
====================================================================================================================================
</TABLE>
At December 31, 1997, 133,000 stock options at an exercise
price of $10.38 and 948,996 shares of convertible preferred stock
convertible into 1,470,944 shares of common stock were outstanding that
could potentially dilute basic earnings per share in the future but
were not included in the computation of diluted earnings per share for
the year ended December 31, 1997 (See Note 11). The effect of these
shares is antidilutive to diluted earnings per share for the year ended
December 31, 1997. In addition, 330,500 stock options at an exercise
price of $9.00 were issued on January 28, 1998. The effect of this
issuance would be antidilutive to earnings per share for the year ended
December 31, 1997.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Parent Company Financial Information
<TABLE>
<CAPTION>
====================================================================================================================================
STATEMENTS OF FINANCIAL CONDITION December 31, December 31,
(in thousands) 1997 1996
- ------------------------------------------------------ --------------------------- --------------------------
<S> <C> <C>
Assets: (Restated)
Investments in and advances to subsidiaries $76,506 $78,443
Cash and cash equivalents 9,467 9,102
Investments available-for-sale 563
Other assets 9 81
- ------------------------------------------------------ --------------------------- --------------------------
Total $86,545 $87,626
- ------------------------------------------------------ --------------------------- --------------------------
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses $389 $323
Shareholders' Equity:
Preferred stock 9,490 10,350
Common stock 227 216
Additional paid-in-capital 53,781 50,864
Retained earnings 22,090 25,927
Unrealized gain (loss) on investments available-for-sale, net of taxes 568 (54)
- ------------------------------------------------------ --------------------------- --------------------------
Total shareholders' equity 86,156 87,303
- ------------------------------------------------------ --------------------------- --------------------------
Total $86,545 $87,626
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
STATEMENTS OF INCOME Year Ended Nine Months Ended
December 31, December 31,
(in thousands) 1997 1996 1995
- ---------------------------------------------------------- --------------- -------------- -----------------
<S> <C> <C> <C>
Income: (Restated) (Restated)
Interest $412 $447 $196
Other 96 123 134
- ---------------------------------------------------------- --------------- -------------- -----------------
Total 508 570 330
- ---------------------------------------------------------- --------------- -------------- -----------------
Expenses:
Interest 31
General and administrative 395 293 207
Merger expenses 98
- ---------------------------------------------------------- --------------- -------------- -----------------
Total 493 293 238
Income before equity in undistributed
earnings of subsidiary and income tax expense 15 277 92
Income tax expense 34 101 33
- ---------------------------------------------------------- --------------- -------------- -----------------
(Loss) income before equity in undistributed earnings of subsidiary (19) 176 59
Equity in undistributed earnings of subsidiary 1,825 7,588 6,173
- ---------------------------------------------------------- --------------- -------------- -----------------
Net income $1,806 $7,764 $6,232
====================================================================================================================================
</TABLE>
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
====================================================================================================================================
STATEMENTS OF CASH FLOWS Year Ended Nine Months Ended
(in thousands) December 31, 1997 December 31, 1996 December 31, 1995
- ------------------------------------------------- ------------------- -------------------- ------------------
<S> <C> <C> <C>
Operating Activities: (Restated) (Restated)
Net income $1,806 $7,764 $6,232
Adjustments to reconcile net income to
net cash provided by operating
activities:
Dividends received from Bank 5,660 3,673 1,985
Other 138 (416) 472
- ------------------------------------------------- ------------------- -------------------- ------------------
Net cash provided by operating activities 7,604 11,021 8,689
- ------------------------------------------------- ------------------- -------------------- ------------------
Investing Activities:
Additional investment in subsidiary (3,164) (18,006) (11,158)
Purchases of investments available-for-sale (500)
- ------------------------------------------------- ------------------- -------------------- ------------------
Net cash used in investing activities (3,664) (18,006) (11,158)
- ------------------------------------------------- ------------------- -------------------- ------------------
Financing Activities:
Sale of common and preferred
stock, net of stock issuances costs 19,404
Cash dividends (5,643) (3,796) (2,086)
Other, net 2,068 1,298 2,638
- ------------------------------------------------- ------------------- -------------------- ------------------
Net cash (used in) provided by financing activities (3,575) (2,498) 19,956
- ------------------------------------------------- ------------------- -------------------- ------------------
Increase(decrease) in cash and cash equivalents 365 (9,483) 17,487
Cash and cash equivalents at beginning of period 9,102 18,585 1,098
- ------------------------------------------------- ------------------- -------------------- ------------------
Cash and cash equivalents at end of period $9,467 $9,102 $18,585
====================================================================================================================================
</TABLE>
19. 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 Company.
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for these assets approximate their fair values.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Investments available-for-sale and held to maturity: Fair values 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 receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for certain fixed rate mortgage loans
(e.g., one-to-four family residential), and other consumer loans are
based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. The fair values for other loans (e.g., commercial real
estate and rental property mortgage loans) are estimated using
discounted cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The fair values of mortgage-backed securities are based on
quoted market prices.
Loans held for sale: The fair value represents the anticipated proceeds
from sale of the loans.
Off-balance-sheet instruments: Fair values for the Company 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 values 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 values 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, securities sold
under agreements to repurchase and notes payable are estimated using
discounted cash flow analysis, based on the Company'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.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
====================================================================================================================================
1997 1996
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ---------------------------------------- ---------------- ------------------ ------------- --------------------
<S> <C> <C> <C> <C>
Financial assets: (Restated)
Cash and cash equivalents $134,274 $134,274 $100,299 $100,299
Investments available-for-sale 116,199 116,199 106,130 106,130
Investments held to maturity 10,277 10,305 45,818 46,003
Loans receivable - net 617,392 618,578 542,867 537,036
Loans held for sale 13,565 13,828 7,773 7,850
Financial liabilities:
Deposits $742,263 $744,861 $700,700 $703,166
FHLB advances 85,000 85,000 30,000 30,000
Securities sold under agreements to repurchase 14,443 14,443 14,613 14,613
Bank drafts payable 5,769 5,769 4,214 4,214
Notes payable 1,130 1,050 1,230 1,143
====================================================================================================================================
</TABLE>
20. Subsequent Events
On March 9, 1998, the Company called the 7% Cumulative
Convertible Preferred Stock Series C for redemption on April 30, 1998
("Redemption Date"). The Series C preferred stock becomes payable and
ceases to accrue dividends on the Redemption Date. Upon surrender of
the Series C preferred stock certificate for redemption, the holder
will receive the redemption price of $10.00 per share, or
alternatively, may receive 1.55 shares of the Company's common stock
for each share of Series C preferred stock. In connection with the
redemption approximately 1,470,000 shares of the Company's common stock
may be issued for the redemption of the Series C preferred stock.
The Company and the Bank are currently negotiating a
definitive agreement with another financial institution (the
"Institution") whereby the Instituion will merge with the Bank. The
definitive agreement will provide for a conversion rate whereby
shareholders of the Institution will receive shares of the Company's
common stock. Management estimates the Company will issue approximately
1,200,000 shares of RSFC common stock for all outstanding common shares
of the Institution in a tax free exchange. Management anticipates the
transaction will be accounted for as a pooling-of-interests. The
Institution is headquartered in Florida with two branch locations, with
total assets, loans, deposits and equity of $150,000,000, $109,000,000,
$137,000,000 and $8,000,000, respectively, as of December 31, 1997. The
transaction will be subject to regulatory approvals and approval by the
Instituion's shareholders.
31
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
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, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended December 31, 1997 and
1996 , and the nine-month transition period ended December 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 did not audit the consolidated financial statements of County
Financial Corporation and subsidiaries which was acquired by Republic Security
Financial Corporation in 1997 and accounted for under the pooling-of-interests
method (see Note 2), which statements reflect total assets of $245.9 million as
of December 31, 1996, and total revenues of $21 million and $16 million for the
year ended December 31, 1996 and the nine month transition period ended December
31, 1995, respectively. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to data
included for County Financial Corporation and subsidiaries is based solely on
the report of the other auditors.
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, based on our audits and the report of other auditors, 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 and 1996, and the nine-month transition period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
West Palm Beach, Florida
February 16, 1998, except for the first and second paragraphs of Note 20 as to
which the dates are March 9, 1998 and March 19, 1998, respectively
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
County Financial Corporation:
We have audited the consolidated balance sheet of County Financial Corporation
and subsidiaries (the "Company"), as of December 31, 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year ended December 31, 1996 and for the nine months ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996,
and the results of its operations and its cash flows for the year ended December
31, 1996 and for the nine months ended December 31, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
February 21, 1997
33
<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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
/s/ George M. Apelian March 19, 1998 /s/ Lennart Lindahl March 19, 1998
- -------------------------------------- ---------------------------------
George M. Apelian, Director Lennart Lindahl, Director
/s/ Paula Berliner March 19, 1998 /s/ Mary A. McCarty March 19, 1998
- -------------------------------------- ---------------------------------
Paula Berliner, Director Mary A. McCarty, Director
/s/ Thomas F. Carney March 19, 1998 /s/ Carol R. Owen March 19, 1998
- -------------------------------------- ---------------------------------
Thomas F. Carney, Director Carol R. Owen, Director
/s/ Joseph D. Cesarotti, Sr. March 19, 1998 /s/ Richard C. Rathke March 19, 1998
- -------------------------------------- ---------------------------------
Joseph D. Cesarotti, Sr., Director Richard C. Rathke, Director
/s/ Mary Anna Fowler March 19, 1998 /s/ Rudy E. Schupp March 19, 1998
- -------------------------------------- ---------------------------------
Mary Anna Fowler, Director Rudy E. Schupp, Director
/s/ H. Gearl Gore March 19, 1998 /s/ Victor Siegel March 19, 1998
- -------------------------------------- ---------------------------------
H. Gearl Gore, Director Victor Siegel, Director
/s/ Richard J. Haskins March 19, 1998 /s/ William F. Spitznagel March 19, 1998
- -------------------------------------- ---------------------------------
Richard J. Haskins, Director William F. Spitznagel, Director
/s/ Eugene W. Hughes, Jr. March 19, 1998 /s/ Bruce E. Wiita March 19, 1998
- -------------------------------------- ---------------------------------
Eugene W. Hughes, Jr., Director Bruce E. Wiita, Director
/s/ Thomas J. Langan, Jr. March 19, 1998 /s/ William Wolfson March 19, 1998
- -------------------------------------- ---------------------------------
Thomas J. Langan, Jr, Director William Wolfson, Director
</TABLE>
<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, the Registration Statement (Form S-8 No. 333-33213) pertaining to the 1997
Performance Incentive Plan, the Registration Statement (Form S-8 No. 333-33161)
pertaining to the Director and Officer Purchase Rights Plans and the
Registration Statement (Form S-3 No. 333-02303) of Republic Security Financial
Corporation and subsidiaries and in the related Prospectus of our report dated
February 16, 1998, except for the first and second paragraphs of Note 20 as to
which the dates are March 9, 1998 and March 19, 1998, respectively, with respect
to the consolidated financial statements of Republic Security Financial
Corporation and subsidiaries included in this Annual Report (Form 10-K) for the
year ended December 31, 1997.
Ernst & Young LLP
West Palm Beach, Florida
March 19, 1998
