UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 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
-------
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>
TABLE OF CONTENTS
Page
PART I
ITEM 1 - BUSINESS
General....................................................................1
Lending Activities of the Bank.............................................1
Servicing of Mortgage Loans................................................5
Non-Performing Assets and Allowance for Loan Losses........................6
Investment Activities......................................................8
Deposits...................................................................8
Borrowings.................................................................9
Competition...............................................................10
Employees.................................................................11
REGULATION....................................................................12
ITEM 2 - PROPERTIES...........................................................20
ITEM 3 - LEGAL PROCEEDINGS....................................................20
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.......................................................20
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS.......................................21
ITEM 6 - SELECTED FINANCIAL DATA..............................................22
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Corporate Overview........................................................25
Results of Operations.....................................................26
Net Interest Income.......................................................27
Interest Income...........................................................28
Interest Expense..........................................................29
Provision for Loan Losses.................................................31
Non-Interest Income.......................................................32
Operating Expenses........................................................34
Income Taxes..............................................................35
Liquidity.................................................................36
Interest Rate Risk Management.............................................37
Impact of Inflation.......................................................39
Financial Condition.......................................................39
Year 2000 Matters.........................................................40
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................42
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies.......................46
Note 2 - Mergers and Branch Acquisition...................................50
Note 3 - Investments......................................................53
Note 4 - Loans Receivable - Net...........................................55
Note 5 - Non-Performing Loans and Allowance for Loan Losses...............55
Note 6 - Cash and Amounts Due from Depository Institutions................56
Note 7 - Property and Equipment...........................................56
Note 8 - Deposits.........................................................57
i
<PAGE>
TABLE OF CONTENTS
(Continued)
Page
Notes to Consolidated Financial Statements (Continued)
Note 9 - Borrowed Money.............................................58
Note 10 - Shareholders' Equity......................................59
Note 11 - Stock Option and Other Incentive Plans....................60
Note 12 - Capital Compliance .......................................62
Note 13 - Commitments and Contingencies.............................63
Note 14 - Related Party Transactions................................65
Note 15 - Federal Deposit Insurance Corporation Special Savings
Association Insurance Fund Assessment................65
Note 16 - Income Taxes..............................................66
Note 17 - Earnings Per Share........................................68
Note 18 - Parent Company Financial Information......................69
Note 19 - Fair Values of Financial Instruments......................70
Note 20 - Subsequent Event..........................................72
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......................73
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................75
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT...................................................75
ITEM 11, 12 and 13
- EXECUTIVE COMPENSATION, BENEFITS
AND RELATED MATTERS............................................77
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.........................................................77
SIGNATURES
FURTHER EXHIBITS
Exhibit 21 - Subsidiaries of Registrant
Exhibit 23 - Consent of Independent Certified Public Accountants
Exhibit 27 - Financial Data Schedule
ii
<PAGE>
PART 1
ITEM 1: BUSINESS
Republic Security Financial Corporation (the "Company"), incorporated
in Florida in 1983, is a commercial bank holding company, the principal business
of which is the operation of a commercial bank business through Republic
Security Bank (the "Bank"), its wholly owned subsidiary, a state chartered
commercial bank. The Bank commenced operations on November 19, 1984, and is a
member of the Federal Home Loan Bank ("FHLB") System. Its deposits are insured
by the Federal Deposit Insurance Corporation (the "FDIC") up to applicable
limits. In November 1995, the Company and the Bank received all necessary
federal and state regulatory approvals and converted from a thrift charter to a
commercial bank holding company and a State of Florida chartered commercial
bank.
The Bank is currently one of the top 10 largest independent commercial
banks headquartered in Florida with operations in Florida's three largest
banking markets. The Bank has 13 banking facilities in Palm Beach County, 11 in
Broward County and 8 in Dade County. Palm Beach County is the third largest
banking market in Florida and has the third largest population base, Broward
County is the State's second largest banking market and has the second largest
population base and Dade County is the largest banking market in Florida with
the State's largest population base.
On December 2, 1997, the Company acquired County National Bank of South
Florida, a commercial bank headquartered in North Miami Beach, Florida, with 14
branch locations in Dade, Broward and Palm Beach counties. County National Bank
was merged into the Bank on December 2, 1997. The acquisition 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. In addition,
the County National Bank merger gave the Bank a strong entry into Dade County
and expanded its presence in Palm Beach and Broward counties. All information
contained herein has been retroactively restated to include the accounts and
results of operations of County National Bank.
On June 30, 1997, the Company acquired Family Bank, a commercial bank
headquartered in Hallandale, Florida, with six branch locations in Broward
County, Florida. Family Bank was merged into the Bank on June 30, 1997. The
acquisition 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. The acquisition of Family Bank allowed the Bank to have a
meaningful presence in Broward County. All information contained herein has been
retroactively restated to include the accounts and results of operations of
Family Bank.
In 1997, the Bank organized a trust and investment services division.
The trust and investment division provides retail and institutional asset
management and trust in Palm Beach, Broward and Dade counties. In addition the
new division offers brokerage services through a third-party vendor.
Lending Activities
General. Under applicable regulations, the Bank originates, purchases
and sells loans or participating interests in loans. See "Regulatory Matters" -
Federal Regulation for a description of applicable regulations which limit
lending in relation to assets or net worth. The Bank originates, purchases and
participates in loans for its own portfolio and for sale in the secondary
market. Lending activities include the origination and purchase of long-term
adjustable-rate, and to a lesser extent, fixed-rate commercial and residential
mortgage loans, construction loans, commercial business loans and consumer
loans. Approximately 95% of the Bank's mortgage loans are secured by property
located in Florida.
1
<PAGE>
The following tables set forth the composition of the Bank's loan
portfolio by type of loan (excluding loans held for sale) at the periods
indicated:
<TABLE>
<CAPTION>
================================================================================= ==================================================
December 31, March 31,
1997 1996 1995 1995 1994
Type of loan Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- -------------------------------------------------------- ------- ---------------- ------------------------------------
(in thousands)
- --------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
* Commercial real estate $273,202 42%$220,043 39% $160,834 31% $154,857 29% $131,571 30%
* Residential property 163,464 25 167,345 29 185,345 35 193,090 37 171,377 39
* Residential lot 1,947 1 2,224 2,873 1 2,989 1 1,972 1
* Construction loans 42,392 7 46,185 8 50,915 9 58,747 11 58,358 13
- -------------------------------------------------------- ------- ---------------- ------------------------------------
Total real estate loans 481,005 75 435,797 76 399,967 76 409,683 76 363,278 83
- -------------------------------------------------------- ------- ---------------- ------------------------------------
Consumer Loans:
* Home equity lines of credit 10,594 2 10,040 2 8,237 2 8,265 2 6,386 1
* Personal and Other 15,761 2 18,059 3 15,729 3 11,019 2 6,731 2
* Automobile 62,702 10 37,822 7 36,963 7 36,625 7 10,950 3
* Savings accounts 2,860 4,681 1 4,763 1 3,767 5,273 1
- -------------------------------------------------------- ------- ---------------- ------------------------------------
Total consumer loans 91,917 14 70,602 13 65,692 13 59,676 11 29,340 7
- -------------------------------------------------------- ------- ---------------- ------------------------------------
Commercial business loans 73,727 11 63,577 11 57,211 11 56,134 11 45,431 10
- -------------------------------------------------------- ------- ---------------- ------------------------------------
TOTAL LOANS 646,649 100% 569,976 100% 522,870 100% 525,493 100% 438,049 100%
- -------------------------------------------------------- ------- ---------------- ------------------------------------
Less:
Loans in process 21,408 19,218 17,332 26,098 23,247
Discounts, premiums and deferred
loan fees 1,186 1,491 1,960 2,195 2,619
Allowance for loan losses 6,663 6,400 6,785 6,757 5,075
- -------------------------------------------------------- ------- ---------------- ------------------------------------
TOTAL $617,392 $542,867 $496,793 $490,443 $407,108
================================================================================= ==================================================
</TABLE>
The following table sets forth at December 31, 1997, the principal amounts
of the Bank's loans with contractual maturities during the periods indicated.
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, 1997
Maturing
After 1 year
Within 1 year through 5 years After 5 years Total
(in thousands)
- --------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate:
Residential (1) $67,741 $63,110 $31,427 $162,278
Construction and lot(2) 8,909 12,415 1,607 22,931
Commercial 122,088 98,736 52,378 273,202
Commercial business 55,174 17,358 1,195 73,727
Consumer 21,617 61,467 8,833 91,917
- --------------------------------------------------------- ----------------------------------------------------------
Total $275,529 $253,086 $95,440 $624,055
========================================================= ==========================================================
Maturing after one year with:
Variable interest rates $147,172 $76,105
Fixed interest rates 105,914 19,335
- --------------------------------------------------------- ----------------------------------------------------------
Total(l) $253,086 $95,440
====================================================================================================================================
<FN>
(1) Excludes loans held for sale
(2) Net of loans-in-process
</FN>
</TABLE>
The Bank provides commercial and residential real estate loans,
construction loans, commercial business loans and consumer loans. Loans secured
by real estate generally include commercial and residential real estate,
construction loans, loans to refinance or purchase existing properties, home
equity loans and land acquisition and development loans.
2
<PAGE>
Real Estate Mortgage Loans. The Bank's real estate mortgage loans
consist of commercial and residential mortgage loans, which are secured by
existing properties. Loans secured by commercial properties generally have terms
ranging from fifteen to twenty years and interest rate adjustment periods
ranging from monthly to five years. Amortization periods for commercial mortgage
loans generally do not exceed 25 years. Commercial real estate loans originated
by the Bank are primarily secured by income-producing properties such as office
buildings, warehouse buildings and retail space. Generally, in underwriting
commercial real estate loans, the Bank requires the personal guaranty of
borrowers, a maximum loan to value ratio of 80%, and a cash flow to debt service
ratio of 1.25 to 1.
The Bank's residential mortgage loans have terms which do not exceed
30 years and are secured by one-to-four family residences. The majority of
residential mortgages which the Bank holds in its portfolio provides for
interest rate adjustments every year and such adjustments are limited to 5% to
6% over the term of the loan. Loans made for 80% to 95% of the appraised value
of the financed residences are primarily originated with private mortgage
insurance, which essentially insures that portion of the loan which is in excess
of 80% of the appraised value of the financed residences. As of December 31,
1997, the loan portfolio includes approximately $9.5 million of residential
loans which have loan to value ratios of greater than 80%, when originated, and
have no private mortgage insurance. The Bank believes that these loans, which
are made in the normal course of business from time to time, have not resulted
in a significantly greater loss experience than the aggregate residential
mortgage portfolio and these loans generally have higher yields.
Residential mortgage loans generally are underwritten by the Bank in
accordance with guidelines of the Federal Home Loan Mortgage Corporation (the
"FHLMC"). The Bank is an approved seller/servicer for the Federal National
Mortgage Association (the "FNMA") and the FHLMC.
Construction Loans. Residential real estate construction loans
comprised approximately 7% of the Bank's total loan portfolio as of December 31,
1997. The total construction loan portfolio of approximately $42.4 million as of
December 31, 1997, are primarily for one- to- four family residential
properties.
The Bank originates one-to-four family residential loans to
individuals on a pre-sold basis and through developers on a pre-sold and
speculative basis. The Bank's underwriting guidelines regarding residential
construction loans require an analysis of the financial condition of the
developer or the borrower, the appraised value of the property, and the
marketability of the proposed residence, including location, and overall
portfolio concentrations. Limitations are imposed by the Bank on the amount of
loans for the purpose of construction of residences that have not been pre-sold.
Construction loans generally have terms of between 6 and 12 months and
interest rates which adjust monthly based upon a designated prime rate. Loan
proceeds are advanced as construction progresses and inspections warrant.
Construction loans are structured either to be converted to permanent loans at
the end of the construction phase, or to be paid off upon receipt of financing
from another lender.
The Bank's construction loans are secured by first mortgages on the
underlying real estate and have loan-to-value ratios which generally do not
exceed 80%. All such loans provide for recourse to the borrower or a related
individual in the event of a default. The loan agreements generally require the
Bank to advance funds for fees. The amount of the loan generally provides
borrowers with sufficient funds to pay the interest on the loan during
construction since interest is considered part of the total cost of the
property.
Construction loans afford the Bank the opportunity to increase the
interest rate sensitivity of its loan portfolio and to receive yields higher
than those obtainable on adjustable-rate mortgage loans secured by existing
residential properties. These higher yields correspond to the higher credit
risks associated with construction lending. Historically, the Bank has obtained
its construction loans through its retail loan officer, branch network and also
through the wholesale broker network. These loans are generally made to the
homeowner and may or may not involve an end loan commitment.
3
<PAGE>
Construction loans involve additional risks attributable to the fact
that loan funds are advanced upon the security of a project under construction,
which security is of uncertain value prior to its completion. Because of the
uncertainties inherent in estimating construction costs, as well as the market
value of the completed project (which is often beyond the control of the
borrower), and the effects of governmental regulation on real property, it is
relatively difficult to evaluate accurately the total funds required to complete
a project and the related loan-to-value ratio. As a result of the foregoing,
construction lending often involves the disbursement of substantial funds with
repayment dependent, in part, on the success of the ultimate project rather than
on the ability of the borrower or guarantor to repay principal and interest. If
the Bank is forced to foreclose on a project prior to or at completion due to a
default, there can be no assurance that the Bank will be able to recover all of
the unpaid balance of, and accrued interest on, the loan as well as the related
foreclosure and holding costs. In addition, the Bank may be required to fund
additional amounts to complete a project and may have to hold the property for
an indeterminable period of time. The Bank has underwriting procedures designed
to identify what it believes to be acceptable levels of risk.
Consumer Loans. Consumer loans are extended for a variety of purposes
including the purchase of automobiles, home improvement, lines of credit,
unsecured personal loans and education. As of December 31, 1997, consumer loans
were approximately $91.9 million or 14% of total loans. Loans secured by
automobiles are the dominant consumer loans and represented $72.5 million or 79%
of total consumer loans as of December 31, 1997. Automobile loans are obtained
from both the retail branch network and indirectly through referrals from
automobile dealerships. Primarily all of the indirect automobile loans are
obtained from dealerships within the Bank's market area and are underwritten to
the same standards as those automobile loans acquired through a retail banking
network. Management believes that the quality and risk are similar for retail
and wholesale automobile loans.
Consumer loan underwriting standards include an examination of the
applicant's payment history on other debts and an evaluation of the applicant's
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary importance, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount. While consumer loans generally involve a
higher element of credit risk than one-to-four family residential loans,
consumer loans are typically made at higher interest rates and for shorter
terms, or at adjustable rates, and are helpful in maintaining a profitable
spread between the Bank's loan yield and its cost of funds.
Commercial Business Loans. Commercial business loans (excluding Small
Business Administration ("SBA") loans) totaled $70.6 million as of December 31,
1997. Commercial business loan underwriting practices assess the borrower's
creditworthiness and ability to repay, including an evaluation of the value of
any collateral securing the proposed loan. While commercial business loans
generally are made for shorter terms and at a higher yields than one-to-four
family residential loans, such loans generally involve a higher level of risk
than one-to-four family residential loans.
SBA loans which totaled $3.1 million at December 31, 1997 are
underwritten in accordance with the guidelines of the SBA. These loans are made
to small businesses and usually require that significant collateral be assigned
to the Bank from the borrower. Typically, the SBA guarantees 70% to 90% of the
loan balance with the remaining portion unguaranteed. Although the Bank is
permitted to sell the SBA-guaranteed portion of the loan in secondary markets,
with the Bank retaining the portion that is not guaranteed, the Bank does not
typically sell such portions in secondary markets. SBA loans are similar to
commercial business loans in yield and credit risk.
Other Lending Activities. The Bank may also extend loans for other
purposes from time to time, including land acquisition and development and
residential lot loans.
Lending Procedures. Loan applications may be approved by the Board of
Directors, the Board Loan Committee, the Management Loan Committee or the Loan
Officer if the loan is within delegated authority limits. The review of each
loan application includes the applicant's credit history, debt service ability,
4
<PAGE>
financial condition, and the value of any collateral to secure the loan (which,
in the case of real estate loans, utilizes a review of an appraisal report
prepared by an independent appraiser). In the case of major real estate loans,
the loan underwriting process typically involves an analysis of the economic
feasibility of the proposed project as well as an analysis of any and all
guarantors.
The Management Loan Committee is currently comprised of the President,
Executive Vice President-Finance, the Executive Vice President-Broward County,
the Executive Vice President-Dade County, the Senior Vice President-Retail
Banking, the Senior Vice President-Commercial Lending, the Senior Vice
President-Commercial Lending-Dade County, the Senior Vice President-Loan
Administration and the Chairman of the Board-Broward County. The Management Loan
Committee is authorized to approve residential and commercial mortgage loans up
to $1,000,000 and commercial non-mortgage loans up to $500,000. The committee is
also authorized to approve consumer loan applications up to $150,000. All other
loan applications are subject to the approval of the Board of Directors or the
Board Loan Committee.
With respect to any approved real estate loan, the Bank issues a
written commitment to the applicant, setting forth the terms under which the
loan will be extended. A title insurance commitment for the mortgaged property
is obtained from an approved title company prior to the closing. Fire, casualty,
and flood insurance (where applicable) are obtained, naming the Bank as a
mortgagee.
In accordance with the Bank's policies and applicable law, the
documentation of each real estate loan includes: an application signed by the
applicant, disclosing the purpose for which the loan is sought and the identity
of the property; one or more written appraisal reports disclosing the fair
market value of the security offered by the applicant; a signed financial
statement of the applicant and/or a written credit report prepared by the Bank
or by others at its request; documentation showing the date, amounts, purpose,
and recipient of every disbursement of loan proceeds; an opinion of the Bank's
attorney; a title insurance policy or other documentary evidence customarily
used in the appropriate jurisdiction, affirming the quality and validity of the
Bank's lien on the relevant real estate; documentation covering all
modifications of the original mortgage contract showing appropriate approval for
each such modification; and documentation covering all releases of any portion
of the collateral supporting the loan.
Servicing of Mortgage Loans
The Bank services virtually all of its loan portfolio. As of December
31, 1997, the Bank was also servicing $237 million in mortgage loans and
mortgage loan participations for other lenders. The Bank services both loans and
loan participations it has sold to others, as well as loans pursuant to the
purchase of servicing rights.
Mortgage loan servicing involves collecting principal, interest and
escrow funds for taxes and insurance from mortgage loan borrowers, paying
principal and interest to mortgage loan investors, paying property taxes and
insurance premiums on mortgaged property, supervising foreclosures in the event
of unremedied defaults, and performing all related accounting and reporting
activities.
With regard to purchased servicing rights, such rights are typically
purchased from thrift institutions and mortgage banking companies. In purchasing
servicing rights, a valuation of the servicing rights and an assessment of the
portfolio is conducted by the Bank. A computer model is utilized in the
evaluation process which assesses prepayment expectations, costs to establish
servicing files, the on-going costs of servicing, the mortgage loan coupon range
and concentrations, servicing margin, payment remittance cycles and utilization
of escrow funds.
Although the originator or its assignee retains title and reimburses
the servicer for the majority of expenses should foreclosure be required, the
purchase of servicing rights involves risks to the servicer, particularly should
the underlying loans be prepaid faster than that assumed in the servicing rights
valuation process. Should loan prepayments be accelerated, the amortization of
the amount paid for servicing rights (which amount is amortized over the
estimated life of the underlying loan utilizing the interest method) must
5
<PAGE>
also be accelerated thereby reducing income. The Bank seeks to mitigate such
risks by diversifying the servicing portfolio between fixed-rate and
adjustable-rate mortgage loans and among various states, including Florida,
California, Iowa and Illinois.
Non-Performing Assets and Allowance for Loan Losses
The Bank's non-performing assets consist of real estate acquired
through foreclosures (other real estate owned) and loans which are 90 days or
more past due. Generally, accrued interest on loans which are more than 90 days
past due is excluded from income and any previously accrued and unpaid interest
is reversed through interest income. Non-performing assets as of December 31,
1997 were approximately $8.1 million, representing .86% of the Company's total
assets.
The following table details the Bank's non-performing assets at
December 31, 1997, 1996 and 1995, and March 31, 1995 and 1994:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, March 31,
(dollars in thousands) 1997 1996 1995 1995 1994
- ------------------------------------------------------------------------ ----------------------------- -------------
<S> <C> <C> <C> <C> <C>
Loans:
Consumer $326 $157 $303 $362 $236
Commercial business 1,008 683 1,050 1,895 392
Residential mortgage 3,892 2,169 2,846 1,463 951
Residential construction 572 107 115 84
Commercial mortgage 188 3,562 1,668 297 1,646
Repossessed automobiles 198 196 195 118
- ------------------------------------------------------------------------ ----------------------------- -------------
Total non-performing loans 5,612 7,339 6,169 4,250 3,309
- ------------------------------------------------------------------------ ----------------------------- -------------
Other real estate owned:
Residential construction 106 268 26 2,619
Residential mortgage 2,331 2,010 2,068 1,993 2,683
Land for residential use 1,329 1,051 1,329 61
Land for commercial use 188 243 857 1,109 1,705
Commercial real estate 1,149 821 1,083 3,210
- ------------------------------------------------------------------------ ----------------------------- -------------
Total other real estate owned 2,519 4,837 5,065 5,540 10,278
- ------------------------------------------------------------------------ ----------------------------- -------------
Total non-performing assets $8,131 $12,176 $11,234 $9,790 $13,587
====================================================================================================================================
</TABLE>
The table above reflects reclassifications of in-substance foreclosures
from other real estate owned to non- performing loans in accordance with SFAS
No.114 for all periods presented. The adoption of SFAS No.114 had no material
impact on the operations of the Bank or the comparability of the tables
presented.
The Bank's non-residential portfolios in excess of $100,000 are
reviewed annually by a committee comprised of three members of the Bank's
management (the "Committee") for the purpose of determining a loan's
classification as special mention, substandard, doubtful, or loss, as
appropriate. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or the
collateral pledged. "Substandard" assets include those characterized by the
distinct possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses present make collection or liquidation in
full on the basis of currently existing facts, conditions, and values, highly
questionable and improbable.
General allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities.
Unlike specific allowances, general allowances have not been allocated to a
particular problem asset. Assets classified as loss are those considered
uncollectible and of such little value that its continuance as assets is not
warranted. The Bank will charge off 100% of the assets classified as loss. The
Bank's determination as to the classification of its assets and the amount of
its valuation allowances is subject to review by the FRB and the Florida Banking
Department, which can order the establishment of additional general or specific
loss allowances.
6
<PAGE>
Although the Bank uses its best judgment in underwriting each loan,
industry experience indicates that a portion of the Bank's loans will become
delinquent. Regardless of the underwriting criteria utilized by banks, losses
may be experienced as a result of many factors beyond their control including,
among other things, changes in market conditions affecting the value of security
and unrelated problems affecting the credit of the borrower. Due to the
concentration of loans in South Florida, adverse economic conditions in this
area could result in a decrease in the value of a significant portion of the
Bank's collateral.
In the normal course of business, the Bank has recognized and will
continue to recognize losses resulting from the inability of certain borrowers
to repay loans and the insufficient realizable value of collateral securing such
loans. Accordingly, management has established an allowance for loan losses,
which totaled approximately $6.7 million at December 31, 1997, which is
allocated according to the following table:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, March 31,
1997 1996 1995 1995 1994
Allowance %of loans Allowance % of loans Allowance % of loans Allowance % of loans Allowance % of loans
for to total for to total for to total for to total for to total
(in thousands) loan loss loans loan loss loans loan loss loans loan loss loans loan loss loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate construction
and lot loans $110 8% $247 8% $229 10% $491 12% $321 14%
Residential mortgage 1,061 25% 861 29% 921 35% 498 37% 735 39%
Commercial mortgage 1,829 42% 1,381 39% 1,446 31% 843 29% 617 30%
Commercial business 1,323 11% 491 11% 837 11% 737 11% 186 10%
Consumer 933 14% 551 13% 574 13% 484 11% 225 7%
Unallocated (1) 1,407 2,869 2,778 3,704 2,991
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $6,663 100% $6,400 100% $6,785 100% $6,757 100% $5,075 100%
====================================================================================================================================
<FN>
(1) The unallocated portion of the allowance for loan losses
decreased from March 31, 1995 to December 31, 1997, 1996 and 1995
due to the Bank increasing its required reserve percentage from
10% to 15% of loans classified substandard. The unallocated
balance at March 31, 1995, assuming a 15% reserve for loans
classified substandard, would decrease to $415,000.
</FN>
</TABLE>
In evaluating the adequacy of the allowance for loan losses, management
has taken into consideration the loan portfolio, past loan loss experience,
current economic conditions, workout arrangements, pending sales, the financial
strength of the borrowers, and the appraised value of the collateral at the time
reserves were established. Although management believes the allowance for loan
losses is adequate, their evaluation is dependent upon future events.
Management's evaluation of losses is a continuing process which may necessitate
adjustments to the allowance in future periods.
Management's evaluation of the allowance for loan losses includes
applying relevant risk factors to the entire loan portfolio, including
non-performing loans. Risk factors applied to the performing loan portfolio are
based on the Bank's past three year loss history considering the current
portfolio's characteristics, current economic conditions and other relevant
factors. Non-performing loans are carried at fair value based on the most recent
information available. At December 31, 1997 the following risk factors are
applied to the carrying value of each classified loan: (I) substandard at 15%,
(ii) doubtful at 50%, and (iii) loss charged-off at 100%.
7
<PAGE>
The following table details the charge-offs, recoveries, net
charge-offs and ending balance of the allowance for loan losses for the years
ended December 31, 1997 and 1996, the nine months ended December 31, 1995 and
the years ended March 31, 1995, and 1994:
<TABLE>
<CAPTION>
====================================================================================================================================
At or for the
At or for the Nine Months At or for the
Year Ended Ended Year Ended
December 31, December 31, March 31,
(dollars in thousands) 1997 1996 1995 1995 1994
- --------------------------------------- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning Balance $6,400 $6,785 $6,757 $5,075 $5,870
Reserves acquired in connection with merger 374 1,399
Charge-offs:
* Real estate mortgage 679 441 435 526 611
* Real estate construction 19 2 75 10 11
* Consumer 616 570 460 134 27
* Commercial business 890 643 205 229 1,751
- --------------------------------------- ----------------------------------------------------------------------------
SUBTOTAL - Charge-offs 2,204 1,656 1,175 899 2,400
- --------------------------------------- ----------------------------------------------------------------------------
Recoveries:
* Real estate mortgage 27 113 39 182 331
* Real estate construction
* Consumer 77 83 63 56 41
* Commercial 646 322 667 556 519
- --------------------------------------- ----------------------------------------------------------------------------
SUBTOTAL - Recoveries 750 518 769 794 891
- --------------------------------------- ----------------------------------------------------------------------------
Net charge-offs 1,454 1,138 406 105 1,509
Provision for loan losses 1,717 379 434 388 714
- --------------------------------------- ----------------------------------------------------------------------------
Ending Balance $6,663 $6,400 $6,785 $6,757 $5,075
======================================= ============================================================================
Ratio of net charge-offs
during the period to average
loans outstanding during that period 0.25% 0.21% 0.08% 0.02% 0.39%
====================================================================================================================================
</TABLE>
Investment Activities
The Bank is required by federal regulations to maintain minimum levels
of liquid assets. See "--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity." The Bank considers such factors
as liquidity, yields, interest rate exposure and general economic conditions in
determining the composition of its investments portfolio. As of December 31,
1997, the Company had cash and cash equivalents of $134.3 million and
investments of $127.0 million representing, in the aggregate, 27% of its total
assets. See Note 3 of Notes to Consolidated Financial Statements.
Deposits
The Bank offers a variety of deposit programs, including non-interest
bearing accounts, NOW accounts, money market deposit accounts, statement savings
accounts, and variable- or fixed-rate certificates of deposit with maturities
ranging from 30 days to five years. The principal differences among certificate
accounts relate to minimum balance, term, interest rate, and method of
compounding.
8
<PAGE>
As of December 31, 1997, certificate accounts in the amount of $100,000
or more amounted to approximately $68.7 million, representing 9% of total
deposits.
The following tables set forth the amounts and the weighted-average
interest rate on each category of the Bank's deposit accounts as of the dates
indicated:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, 1997 December 31, 1996 December 31, 1995
Weighted Percent Weighted Percent Weighted Percent
Average of Total Average of Total Average of Total
(dollars in thousands) Amount Stated RateDeposits Amount Stated RateDeposits Amount Stated Rate Deposits
- -------------------------- ----------------------------- ---------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest
bearing accounts $163,625 22% $150,439 21% $128,727 21%
NOW accounts 121,977 1.92% 16% 114,938 1.94% 16% 107,625 2.24% 18%
Savings accounts 88,746 3.28% 12% 78,130 3.06% 11% 66,004 3.02% 11%
Money market accounts 103,366 3.26% 14% 88,283 2.74% 13% 61,195 2.83% 10%
Certificates of deposit 264,549 5.51% 36% 268,910 5.41% 38% 248,487 5.47% 40%
- -------------------------- ----------------------------- ---------------------------- --------------------------------
Total Deposits $742,263 3.13% 100% $700,700 3.08% 100% $612,038 3.22% 100%
======== ==== ======== ==== ======== ====
====================================================================================================================================
</TABLE>
Borrowings
Several credit options are made available to banks from time to time by
the FHLB to meet seasonal or other withdrawals of deposits and to permit the
expansion of lending activities. Each credit option has specified maturity and
either a fixed or a variable interest rate determined by the FHLB. Rates offered
for variable interest FHLB borrowings are set from time to time by the FHLB.
FHLB policy prescribes the acceptable use for which the proceeds of such
borrowings may be used. The Bank has a credit facility from the FHLB in the
amount of $100.0 million. The Bank also has the ability to draw on existing line
of credit with two commercial banks for an aggregate amount of $14.0 million. No
amounts were drawn on the commercial bank lines at December 31, 1997, 1996 and
1995.
FHLB advances are collateralized by FHLB stock, mortgage loans and
mortgage backed securities pledged in accordance with agreements the Bank
entered into with the FHLB. In accordance with the agreements, the Bank had
pledged as collateral loans with an aggregate principal balance of approximately
$41.2 million and $35.0 million at December 31, 1997 and 1996, respectively. At
December 31, 1997 and 1996, the Bank also had pledged mortgage backed securities
in the amount of $23.5 million and $25.6 million, respectively. The Bank had $85
million in outstanding advances at December 31, 1997.
From time to time the Bank enters into repurchase agreements with
customers, securities dealers and commercial banks. A repurchase agreement is a
form of securities borrowing which involves the sale and delivery of securities
by the Bank to an independent safekeeping agent, securities broker or dealer in
an amount equal to a percentage of the fair market value of the securities,
coupled with the Bank's agreement to repurchase the securities at a later date.
The Bank pays the customer, broker or dealer a variable or fixed rate of
interest for the use of the funds for the period involved which ranges from
overnight to two years. At maturity, the loans are repaid and the securities are
returned to the Bank. The amounts of securities sold under such agreements vary
widely and depend on many factors which include the terms available for such
transactions, the ability of the Bank to apply the proceeds to investments
having higher returns, the demand for such transactions, and management's
perception of trends in short-term interest rates. The Bank, in each such
transaction, requires the broker or dealer to adhere to procedures for the
safekeeping of the Bank's securities. As of December 31, 1997, the Bank had
$14.4 million outstanding in repurchase agreements.
9
<PAGE>
The following table presents selected information on borrowings:
<TABLE>
<CAPTION>
====================================================================================================================================
Nine Months
Year Ended Ended Years Ended
December 31, December 31, March 31,
(dollars in thousands) 1997 1996 1995 1995 1994
- --------------------------------------------------- ------------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SHORT TERM BORROWINGS:
FHLB Advances/Federal funds purchased
Amounts outstanding at end of year $60,000 $5,000 $25,000 $15,000 $20,000
Weighted average rate at end of year 6.50% 6.95% 5.63% 5.91% 3.86%
Maximum amount outstanding at any month end $60,000 $12,000 $25,000 $21,735 $40,000
Approximate average amount outstanding
during year $4,808 $1,953 $7,939 $6,053 $15,000
Approximate weighted average rate for year 6.01% 5.99% 5.78% 5.19% 3.45%
Securities Sold Under Agreement to Repurchase:
Amounts outstanding at end of year $14,443 $14,613 $9,233 $5,293 $3,402
Weighted average rate at end of year 4.39% 4.00% 4.57% 4.48% 1.87%
Maximum amount outstanding at any month end $16,596 $14,613 $10,367 $5,401 $7,733
Approximate average outstanding during year $11,427 $8,170 $6,198 $3,589 $3,060
Approximate weighted average rate for year 4.87% 3.84% 4.39% 3.71% 1.77%
LONG TERM BORROWINGS:
FHLB Advances:
Amounts outstanding at end of year $25,000 $25,000
Weighted average rate at end of year 5.61% 5.61%
Maximum amount outstanding at any month end $25,000 $25,000
Approximate average amount outstanding during year $25,000 $690
Approximate weighted average rate for year 5.61% 5.61%
====================================================================================================================================
</TABLE>
Competition
The Bank experiences strong competition both in attracting deposits and
originating loans in its South Florida market area. Direct competition for
deposits comes from other commercial banks, savings and loan associations,
credit unions, money market funds and other providers of financial services.
Competition is significant largely due to the desire of financial institutions
to access the high proportion of retirees who live in South Florida and have
above average liquid assets. The Bank competes with other commercial banks,
savings and loan associations, and credit unions for loans. In addition,
mortgage banking companies are competitors for residential real estate loans.
Many of these competitors have greater financial resources, larger branch
networks, better name recognition, greater economies of scale, less regulatory
burdens, less capital requirements and larger employee bases than the Bank. The
primary methods used to attract deposit accounts include interest rates, variety
and quality of services, convenience of branches and advertising and promotions.
The Bank competes for loans through interest rates, loan fees and efficient,
quality service provided to customers.
10
<PAGE>
Employees
The Company employed approximately 440 persons as of December 31, 1997.
The Company places a high priority on staff development which involves training
in operational procedures, customer service and regulatory compliance. Extensive
incentive programs that focus on and are dependent on the achievement of certain
financial and customer service goals are in place for employees.
None of the Company's employees are subject to a collective bargaining
agreement, and the Company believes that its employee relations are good.
11
<PAGE>
REGULATION
When the Bank converted its charter from a federal savings bank to that
of a commercial bank organized under the laws of the State of Florida, it became
a member of the Federal Reserve Bank of Atlanta ("FRB"). Contemporaneously, the
Company became a bank holding company under the Bank Holding Company Act of
1956, as amended ("BHCA"). Upon conversion of the Bank to a Florida chartered
commercial bank and the Company becoming a registered bank holding company, the
Bank became subject to regulation by the Florida Department of Banking and
Finance (the "FDBF") and the Board of Governors of the Federal Reserve System
("FRB"), and the Company became subject to regulation by the FRB.
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements and restrictions, and provide
for general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. The operations of the Company and the Bank may be affected by
legislative changes and the policies of various regulatory authorities. The
Company is unable to predict the nature or the extent of the effect on its
business and earnings that fiscal or monetary policies, economic control, or new
federal or state legislation may have in the future.
The Company
General. As a result of its ownership of the Bank, the Company is
registered as a bank holding company under the BHCA and is regulated by the FRB.
The Bank Holding Company Act of 1956. Under the BHCA, the Company will
be subject to periodic examination by the FRB and will be required to file
periodic reports of its operations and such additional information as the FRB
may require. The Company's activities are limited to managing or controlling
banks, furnishing services to or performing services for its subsidiaries, and
engaging in other activities that the FRB determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
In addition, and subject to certain exceptions, the BHCA and the Change
in Bank Control Act, together with regulations thereunder, require FRB approval
(or, depending on the circumstances, no notice of disapproval) prior to any
person or company acquiring "control" of a bank holding company, such as the
Company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Control is rebuttably presumed to exist if a person acquires 10% or
more but less than 25% of any class of voting securities and either the Company
has registered securities under Section 12 of the Exchange Act or no other
person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
The BHCA requires, among other things, the prior approval of the FRB in
any case where a bank holding company proposes to (i) acquire all or
substantially all of the assets of a bank, (ii) acquire direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any bank
(unless it owns a majority of such bank's voting shares), or (iii) merge or
consolidate with any other bank holding company. Additionally, the BHCA
prohibits a bank holding company, with certain limited exceptions, from (i)
acquiring or retaining direct or indirect ownership or control of more than 5%
of the outstanding voting stock of any company which is not a bank or bank
holding company, or (ii) engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or performing services for
its subsidiaries unless such non-banking business is determined by the FRB to be
so closely related to banking or managing or controlling banks as to be a proper
incident thereto.
12
<PAGE>
The FRB imposes certain capital requirements on the Company under the
BHCA, including a minimum leverage ratio and a minimum ratio of "qualifying"
capital to risk-weighted assets. These requirements are described below under
"Capital Regulations." Subject to its capital requirements and certain other
restrictions, the Company is able to borrow money to make a capital contribution
to the Bank, and such loans may be repaid from dividends paid from the Bank to
the Company (although the ability of the Bank to pay dividends will be subject
to regulatory restrictions as described below under "The Bank - Dividends"). The
Company is also able to raise capital for contribution to the Bank by issuing
securities without having to receive regulatory approval, subject to compliance
with federal and state securities laws.
In accordance with FRB policy, the Company is expected to act as a
source of financial strength to the Bank and to commit resources to support the
Bank in circumstances in which the Company might not otherwise do so. Under the
BHCA, the FRB may require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the FRB's determination that such activity or control constitutes a
serious risk to the financial soundness or stability of any subsidiary
depository institution of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition.
The Financial Institutions Reform, Recovery and Enforcement Act of
1989. The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") was enacted in August 1989. FIRREA contains major regulatory reforms
which include stronger civil and criminal enforcement provisions applicable to
all financial institutions. FIRREA allows the acquisition of healthy and failed
savings and loans by bank holding companies, and removes all interstate barriers
on such bank holding company acquisitions. With certain qualifications, FIRREA
also allows bank holding companies to merge acquired savings and loans into
their existing commercial bank subsidiaries.
The FRB, the FDBF and the Federal Deposit Insurance Corporation
("FDIC") collectively have extensive enforcement authority over depository
institutions and their holding companies, and this authority has been enhanced
substantially by FIRREA. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders, to initiate injunctive actions, and, in extreme cases, to
terminate deposit insurance. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the federal banking
agencies. FIRREA significantly increased the amount of and grounds for civil
money penalties and generally requires public disclosure of final enforcement
actions.
FIRREA further requires a depository institution or holding company
thereof to give 30 days' prior written notice to its primary federal regulator
of any proposed director or senior executive officer if the institution (i) has
been chartered less than two years; (ii) has undergone a change in control
within the preceding two years; or (iii) is not in compliance with the minimum
capital requirements or otherwise is in a "troubled condition." The regulator
would have the opportunity to disapprove any such appointment.
Economic Growth and Regulatory Paperwork Reduction Act of 1996. The
enactment of the Economic Growth and Regulatory Paperwork Reduction Act of 1996
("EGRPRA") streamlined the nonbanking activities application process for well
capitalized and well managed bank holding companies. Under EGRPRA, qualified
bank holding companies may commence a regulatory approved nonbanking activity
without prior notice to the FRB; written notice is merely required within 10
days after commencing the activity. Also, under EGRPRA, the prior notice period
is reduced to 12 business days in the event of any nonbanking acquisition or
share purchase, assuming the size of the acquisition does not exceed 10% of
risk-weighted assets of the acquiring bank holding company and the consideration
does not exceed 15% in Tier 1 capital. This prior notice requirement also
applies to commencing a nonbanking activity de novo which has been previously
approved by order of the FRB, but not yet implemented by regulations.
13
<PAGE>
The Bank
General. The Bank is a banking institution which is chartered by and
operated in the State of Florida, and it is subject to supervision and
regulation by the FDBF. The Bank is a member bank of the Federal Reserve System
and its operations are also subject to broad federal regulation and oversight by
the FRB. The deposit accounts of the Bank are insured by the FDIC which gives
the FDIC certain enforcement powers over the Bank. Various consumer laws and
regulations also affect the operations of the Bank including state usury laws,
laws relating to fiduciaries, consumer credit and equal credit laws, and fair
credit reporting.
The FDBF supervises and regulates all areas of the Bank's operations
including, without limitation, making of loans, the issuance of securities, the
conduct of the Bank's corporate affairs, capital adequacy requirements, the
payment of dividends and the establishment or closing of branches.
In addition, the Federal Deposit Insurance Corporation Improvement Act
of 1991 prohibits insured state chartered institutions from conducting
activities as principal that are not permitted for national banks. A bank may,
however, engage in an otherwise prohibited activity if it meets its minimum
capital requirements and the FDIC determines that the activity does not present
a significant risk to the deposit insurance funds.
As a state chartered banking institution in the State of Florida, the
Bank is empowered by statute, subject to the limitations contained in those
statutes, to take savings and time deposits and pay interest on them, to accept
checking accounts, to make loans on residential and other real estate, to make
consumer and commercial loans, to invest, with certain limitations, in equity
securities and in debt obligations of banks and corporations and to provide
various other banking services on behalf of the Bank's customers.
The FRB requires all depository institutions to maintain reserves
against their transaction accounts (primarily NOW and Super NOW checking
accounts) and non-personal time deposits. The balances maintained to meet the
reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements.
Institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require institutions to exhaust other
reasonable alternative sources of funds, including Federal Home Loan Bank
("FHLB") advances, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank. The Bank is member of the FHLB system, which
consists of twelve regional FHLBs, each subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"), an agency created by FIRREA. The
FHLB provides a central credit facility primarily for member thrift institutions
as well as other entities involved in home mortgage lending. The Bank, as a
member of the Atlanta-FHLB, is required to purchase and hold shares of the
capital stock in that FHLB in an amount at least equal to the greater of (i) 1%
of the aggregate principal amount of its unpaid mortgage loans, home purchase
contracts and similar obligations at the beginning of each year; (ii) 0.3% of
its assets or (iii) 5% (or such greater fraction as established by the FHLB) of
its advances from the FHLB. The Bank is in compliance with this requirement.
Each FHLB bank serves as a reserve or central bank for its home
financing members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLBs. It
makes loans to members (i.e., advances) in accordance with policies and
procedures, including, collateral requirements, established by the respective
boards of directors of the FHLBs. These policies and procedures are subject to
the regulation and oversight of the FHFB. All long-term advances are required to
provide funds for residential home financing. The FHFB has also established
standards of community or investment service that members must meet to maintain
access to such long-term advances.
Dividends. The Bank is subject to legal limitations on the frequency
and amount of dividends that can be paid to the Company. The FRB may restrict
the ability of a bank to pay dividends if such payments
14
<PAGE>
would constitute an unsafe or unsound banking practice. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for acquisitions and the payment of dividends,
interest and operating expenses.
In addition, Florida law also places certain restrictions on the
declaration of dividends from state chartered banks to their holding companies.
Pursuant to Section 658.37 of the Florida Banking Code, the board of directors
of state chartered banks, after charging off bad debts, depreciation and other
worthless assets, if any, and making provisions for reasonably anticipated
future losses on loans and other assets, may quarterly, semi-annually or
annually declare a dividend of up to the aggregate net profits of that period
combined with the bank's retained net profits for the preceding two years and,
with the approval of the FDBF, declare a dividend from retained net profits
which accrued prior to the preceding two years. Before declaring such dividends,
20% of the net profits for the preceding period as is covered by the dividend
must be transferred to the surplus fund of the bank until this fund becomes
equal to the amount of the bank's common stock then issued and outstanding. A
state chartered bank may not declare any dividend if (i) its net income from the
current year combined with the retained net income for the preceding two years
is a loss or (ii) the payment of such dividend would cause the capital account
of the bank to fall below the minimum amount required by law, regulation, order
or any written agreement with the FDBF or a federal regulatory agency.
Insurance of Accounts and Other Assessments. The Bank's deposit
accounts are insured by both the Savings Association Insurance Fund ("SAIF") and
the Bank Insurance Fund ("BIF") of the FDIC to a maximum of $100,000 for each
insured depositor. The federal banking agencies require an annual audit by
independent accountants of the Bank and make their own periodic examinations of
the Bank. They may revalue assets of an insured institution based upon
appraisals, and require establishment of specific reserves in amounts equal to
the difference between such revaluation and the book value of the assets, as
well as require specific charge-offs relating to such assets. The federal
banking agencies may prohibit any FDIC-insured institution from engaging in any
activity they determine by regulation or order poses a serious threat to the
insurance fund.
FIRREA established certain premium assessment rates for SAIF deposit
insurance as well as a designated reserve ratio for the fund of 1.25%, or such
higher rate (not to exceed 1.5%) determined by the FDIC to be justified by
circumstances that raise a significant risk of substantial future losses to the
SAIF. The Omnibus Reconciliation Act of 1990 (the "Reconciliation Act") removed
the ceiling on the designated reserve ratio, and provided that the assessment
rates set forth in FIRREA established minimum rates which the FDIC could impose.
Provisions in FIRREA limiting the maximum assessment and the percent of increase
in the assessment that would be permissible in any one year were repealed by the
Reconciliation Act.
Under federal law, BIF and SAIF are each statutorily required to be
recapitalized to a 1.25% of insured reserve deposits ratio. In view of the BIF's
achieving the 1.25% ratio during 1995, the FDIC reduced the assessments for most
banks by adopting a new assessment rate schedule of 4 to 31 basis points for BIF
deposits. The FDIC further reduced the BIF assessment schedule by an additional
four basis points for the 1996 calendar year so that most BIF members paid only
the statutory minimum semiannual assessment of $1,000. During this same period,
the FDIC retained the existing assessment rate schedule applicable to SAIF
deposits of 23 cents to 31 cents per $100 of domestic deposits, depending on the
institution's risk classification.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA")
was enacted and signed into law. DIFA was intended to reduce the amount of
semi-annual FDIC insurance premiums for savings association deposits acquired by
banks to the same levels assessed for deposits insured by BIF. To accomplish
this reduction, DIFA provided for a special one-time assessment imposed on
deposits insured by SAIF to recapitalize SAIF and bring it up to statutory
required levels. This one-time assessment accrued in the third quarter of 1996.
As a result, beginning in 1997 and continuing through the year, both BIF and
SAIF deposits were assessed at the same rate of 0 to 27 basis points depending
on risk classification.
15
<PAGE>
Effective January 1, 1997, however, DIFA also separated from the SAIF
assessments the Financing Corporation ("FICO") assessments which service the
interest on its bond obligations. According to the FDIC's risk-related
assessment rate schedules, the amount assessed on individual institutions by the
FICO will be in addition to the amount paid for deposit insurance. By law, the
FICO rate on BIF-assessable deposits must be one-fifth the rate on
SAIF-assessable deposits until the insurance funds are merged as specified in
DIFA or until January 1, 2000, whichever occurs first.
Transactions With Affiliates. The authority of the Bank to engage in
transactions with related parties or "affiliates" or to make loans to insiders
is limited by certain provisions of law and regulations. Commercial banks, such
as the Bank, are prohibited from making extensions of credit to any affiliate
that engages in an activity not permissible under the regulations of the FRB for
a bank holding company. Pursuant to Sections 23A and 23B of the Federal Reserve
Act ("FRA"), member banks are subject to restrictions regarding transactions
with affiliates ("Covered Transactions").
With respect to any Covered Transaction, the term "affiliate" includes
any company that controls or is controlled by a company that controls the Bank,
a bank or savings association subsidiary of the Bank, any persons who own,
control or vote more than 25% of any class of stock of the Bank or the Company
and any persons who the Board of Directors determines exercises a controlling
influence over the management of the Bank or the Company. The term "affiliate"
also includes any company controlled by controlling stockholders of the Bank or
the Company and any company sponsored and advised on a contractual basis by the
Bank or any subsidiary or affiliate of the Bank. Such transactions between the
Bank and its respective affiliates are subject to certain requirements and
limitations, including limitations on the amounts of such Covered Transactions
that may be undertaken with any one affiliate and with all affiliates in the
aggregate. The federal banking agencies may further restrict such transactions
with affiliates in the interest of safety and soundness.
Section 23A of the FRA limits Covered Transactions with any one
affiliate to 10% of an institution's capital stock and surplus and limits
aggregate affiliate transactions to 20% of the Bank's capital stock and surplus.
Sections 23A and 23B of the FRA provide that a loan transaction with an
affiliate generally must be collateralized (but may not be collateralized by a
low quality asset or securities issued by an affiliate) and that all Covered
Transactions, as well as the sale of assets, the payment of money or the
provision of services by the Bank to an affiliate, must be on terms and
conditions that are substantially the same, or at least as favorable to the
Bank, as those prevailing for comparable nonaffiliated transactions. A Covered
Transaction generally is defined as a loan to an affiliate, the purchase of
securities issued by an affiliate, the purchase of assets from an affiliate, the
acceptance of securities issued by an affiliate as collateral for a loan, or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. In addition, the Bank generally may not purchase securities issued or
underwritten by an affiliate.
Loans to executive officers, directors or to any person who directly or
indirectly, or acting through or in concert with one or more persons, owns,
controls or has the power to vote more than 10% of any class of voting
securities of a bank ("Principal Shareholders") and their related interests
(i.e., any company controlled by such executive officer, director, or Principal
Shareholders), or to any political or campaign committee the funds or services
of which will benefit such executive officers, directors, or Principal
Shareholders or which is controlled by such executive officers, directors or
Principal Shareholders, are subject to Sections 22(g) and 22(h) of the FRA and
the regulations promulgated thereunder (Regulation O).
Among other things, these loans must be made on terms substantially the
same as those prevailing on transactions made to unaffiliated individuals and
certain extensions of credit to such persons must first be approved in advance
by a disinterested majority of the entire board of directors. Section 22(h) of
the FRA prohibits loans to any such individuals where the aggregate amount
exceeds an amount equal to 15% of an institution's unimpaired capital and
surplus plus an additional 10% of unimpaired capital and surplus in the case of
loans that are fully secured by readily marketable collateral, or when the
aggregate amount on all such extensions of credit outstanding to all such
persons would exceed the Bank's unimpaired capital and unimpaired surplus.
Section 22(g) identifies limited circumstances in which the Bank is permitted to
extend credit to executive officers.
16
<PAGE>
Community Reinvestment Act. The Community Reinvestment Act of 1977
("CRA") requires a financial institution to help meet the credit needs of its
entire community, including low-income and moderate-income areas. On May 3,
1995, the federal banking agencies issued final regulations which change the
manner in which the regulators measure a bank's compliance with the CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institutions's actual lending, service and
investment performance, rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements. Federal banking agencies may take CRA compliance into
account when regulating and supervising bank and holding company activities; for
example, CRA performance may be considered in approving proposed bank
acquisitions.
Capital Regulations
The FRB has adopted capital adequacy guidelines for bank holding
companies and their subsidiary state-chartered banks that are members of the
Federal Reserve System. Bank holding companies and their subsidiary
state-chartered member banks are required to comply with FRB's risk-based
capital guidelines. The risk-based capital guidelines are designed to make
regulatory capital requirements more sensitive to differences in risk profiles
among banks and bank holding companies, to account for off-balance sheet
exposure, and to minimize disincentives for holding liquid assets. Under these
guidelines assets and off balance sheet items are assigned to broad risk
categories each with designated weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance sheet
items.
The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier 1 Capital. Tier I Capital, which
includes common stockholders' equity, noncumulative perpetual preferred stock,
and a limited amount of cumulative perpetual preferred stock, less certain
goodwill items and other intangible assets, is required to equal at least 4% of
risk-weighted assets. The remainder ("Tier II Capital") may consist of (i) an
allowance for loan losses of up to 1.25% of risk-weighted assets, (ii) excess of
qualifying perpetual preferred stock, (iii) hybrid capital instruments, (iv)
perpetual debt, (v) mandatory convertible securities, and (vi) subordinated debt
and intermediate-term preferred stock up to 50% of Tier I Capital. Total capital
is the sum of Tier I and Tier II Capital less reciprocal holdings of other
banking organizations' capital instruments, investments in unconsolidated
subsidiaries and any other deductions as determined by the FRB (determined on a
case by case basis or as a matter of policy after formal rule making).
In computing total risk-weighted assets, bank and bank holding company
assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain
off-balance sheet items are given similar credit conversion factors to convert
them to asset equivalent amounts to which an appropriate risk-weight will apply.
Most loans will be assigned to the 100% risk category, except for performing
first mortgage loans fully secured by residential property, which carry a 50%
risk rating. Most investment securities (including, primarily, general
obligation claims on states or other political subdivisions of the United
States) will be assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S.
Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In covering off-balance sheet items,
direct credit substitutes, including general guarantees and standby letters of
credit backing financial obligations, are given a 100% conversion factor.
Transaction-related contingencies such as bid bonds, standby letters of credit
backing non-financial obligations, and undrawn commitments (including commercial
credit lines with an initial maturity of more than one year) have a 50%
conversion factor. Short-term commercial letters of credit are converted at 20%
and certain short-term unconditionally cancelable commitments have a 0% factor.
The federal bank regulatory authorities have also adopted regulations
which supplement the risk-based guidelines and require banks and bank holding
companies to maintain a minimum level of Tier I Capital to total assets less
goodwill of 3% (the "leverage ratio"). The FRB emphasized that the 3% leverage
ratio constitutes a minimum requirement for well-run banking organizations
having diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and a composite
17
<PAGE>
regulatory rating of 1 under the regulatory rating system for banks. Banking
organizations experiencing or anticipating significant growth, as well as those
organizations which do not satisfy the criteria described above, will be
required to maintain a minimum leverage ratio ranging generally from 4% to 5%.
The FRB also continues to consider a "tangible Tier I leverage ratio" in
evaluating proposals for expansion or new activities. The tangible Tier I
leverage ratio is the ratio of a banking organization's Tier I Capital, less
deductions for intangibles otherwise includable in Tier I Capital, to total
tangible assets.
Federal law and regulations establish a capital-based regulatory scheme
designed to promote early intervention for troubled banks and require the FDIC
to choose the least expensive resolution of bank failures. The capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level.
Under the regulations, the applicable agency can treat an institution
as if it were in the next lower category if the agency determines (after notice
and an opportunity for hearing) that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The degree of
regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates, and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or a part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
It should be noted that the minimum ratios referred to above are merely
guidelines and the FRB possesses the discretionary authority to require higher
ratios with respect to bank holding companies and state-member banks.
The Company and the Bank currently exceed the requirements contained in
FRB regulations, policies and directives pertaining to capital adequacy, and
management of the Company and the Bank is unaware of any violation or alleged
violation of these regulations, policies or directives.
Interstate Banking and Branching
The BHCA was amended in September 1994 by the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"). The
Interstate Banking Act provides that, effective September 29, 1995, adequately
capitalized and managed bank holding companies were permitted to acquire banks
in any state. State laws prohibiting interstate banking or discriminating
against out-of-state banks are preempted as of the effective date. States were
not permitted to enact laws opting out of this provision; however, states were
allowed to adopt a minimum age restriction requiring that target banks located
within the state be in existence for a period of years, up to a maximum of five
years, before such bank may be subject to the Interstate Banking Act. The
Interstate Banking Act establishes deposit caps which prohibit acquisitions that
result in the acquiring company controlling 30 percent or more of the deposits
of insured banks and thrift institutions held in the state in which the target
maintains a branch or 10 percent or more of the deposits nationwide. States have
the authority to waive the 30 percent deposit cap. State-level deposit caps are
not preempted as long as they do not discriminate against out-of-state
companies, and the federal deposit caps apply only to initial entry
acquisitions.
The Interstate Banking Act also provides that as of June 1, 1997,
adequately capitalized and managed banks will be able to engage in interstate
branching by merging with banks in different states. States were permitted to
enact legislation authorizing interstate mergers earlier than June 1, 1997, or,
unlike the interstate
18
<PAGE>
banking provision discussed above, states were permitted to opt out of the
application of the interstate merger provision by enacting specific legislation
before June 1, 1997.
Florida has responded to the enactment of the Interstate Banking Act by
enacting the Florida Interstate Branching Act (the "Florida Branching Act")
which became effective on May 31, 1997. The purpose of the Florida Branching Act
was to permit interstate branching, effective June 1, 1997, through merger
transactions under the Interstate Banking Act. Under the Florida Branching Act,
with the prior approval of the FDBF, a Florida bank may establish, maintain and
operate one or more branches in a state other than the State of Florida pursuant
to a merger transaction in which the Florida bank is the resulting bank. In
addition, the Florida Branching Act provides that one or more Florida banks may
enter into a merger transaction with one or more out-of-state banks, and an
out-of-state bank resulting from such transaction may maintain and operate the
branches of the Florida bank that participated in such merger. An out-of-state
bank, however, is not permitted to acquire a Florida bank in a merger
transaction unless the Florida bank has been in existence and continuously
operated for more than three years.
Future Legislative Developments
Because of concerns relating to competitiveness and the safety and
soundness of the industry, Congress is considering a number of wide-ranging
proposals for altering the structure, regulation and competitive relationships
of the nation's financial institutions. Among such bills are proposals to
prohibit banks and bank holding companies from conducting certain types of
activities, to subject banks to increased disclosure and reporting requirements,
to alter the statutory separation of commercial and investment banking and to
further expand the powers of banks, bank holding companies and competitors of
banks. It cannot be predicted whether or in what form any of these proposals
will be adopted or the extent to which the business of the Company may be
affected thereby.
Effect of Governmental Monetary Policies
The commercial banking business in which the Bank engages is affected
not only by general economic conditions, but also by the monetary policies of
the FRB. Changes in the discount rate on member bank borrowing, availability of
borrowing at the "discount window," open market operations, the imposition of
changes in reserve requirements against member banks' deposits and assets of
foreign branches and the imposition of and changes in reserve requirements
against certain borrowings by banks and their affiliates are some of the
instruments of monetary policy available to the FRB. These monetary policies are
used in varying combinations to influence overall growth and distributions of
bank loans, investments and deposits, and this use may affect interest rates
charged on loans or paid on deposits. The monetary policies of the FRB have had
a significant effect on the operating results of commercial banks and are
expected to do so in the future. The monetary policies of the FRB are influenced
by various factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and in the fiscal policies of the
U.S. Government. Future monetary policies and the effect of such policies on the
future business and earnings of the Bank cannot be predicted.
19
<PAGE>
ITEM 2: PROPERTIES
The Bank operates thirty-two full-service branches of which eleven of
the facilities are owned and twenty-one are leased. The Bank owns an office
building in West Palm Beach, Florida which houses its corporate office
headquarters and a full-service branch. Two-thirds of the building serves as the
Company's corporate headquarters which includes the Bank's loan servicing,
finance and administration departments as well as loan production and branch
depository facility. The remaining office space is fully leased to unaffiliated
parties. Net book value for office buildings and land was approximately $15.0
million at December 31, 1997.
In Palm Beach county the Bank leases nine full-service branches and
owns four including the branch located at Corporate, in Broward county the Bank
leases six full-service branches and owns five, and in Dade county the Bank
leases six full-service branches and owns two. In addition, the Bank leases
office space for its trust and investments division.
At December 31, 1997 a branch was under construction which is scheduled
to be completed in 1998. The book value of the land at December 31, 1997 was
$1.1 million.
ITEM 3: LEGAL PROCEEDINGS
In the ordinary course of business, the Company or the Bank may be
involved in litigation from time to time. At present, neither the Company nor
the Bank is a party to any pending material legal proceedings, nor is management
aware of any such material actions threatened against the Company or the Bank.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on December 1, 1997
for the purpose of voting on the approval of the Agreement and Plan of Merger,
dated August 8, 1997 by and among Republic Security Financial Corporation,
Republic Security Bank, County Financial Corporation and County National Bank of
South Florida, providing for the merger of County Financial Corporation with and
into Republic Security Financial Corporation and the subsequent merger of County
National Bank with and into Republic Security Bank. A detailed description of
the matter was provided to shareholders in a joint proxy statement and
prospectus filed with the Commission on October 23, 1997 (File No. 333-36717)
and incorporated by reference herein.
At such meeting, the following votes were cast:
For Against Withheld Abstain Broker Non-Votes
10,169,498 28,175 0 25,775 0
20
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKET PRICE AND DIVIDENDS
The Common Stock of the Company, par value $.01 per share, is traded on
the over-the-counter market and is listed on NASDAQ under the symbol RSFC. The
table sets forth the high and low bid prices for the common stock as reported by
NASDAQ.
<TABLE>
<CAPTION>
====================================================================================================================================
BID PRICE
Year Ended
December 31, December 31,
1997 1996
- ---------------------------------------------- ------------------------------------- -----------------------------------
High Low High Low
<S> <C> <C> <C> <C>
Quarter ended March 31 $ 8 $5 7/8 $6 $5 1/8
Quarter ended June 30 $ 9 5/8 $6 7/8 $6 1/4 $5 1/2
Quarter ended September 30 $11 1/2 $8 1/16 $5 7/8 $5 1/8
Quarter ended December 31 $10 5/8 $8 3/8 $6 1/8 $5 1/4
====================================================================================================================================
</TABLE>
Currently the Company has eighteen market makers in its common stock:
Advest, Inc. Allen C. Ewing & Co.
Fahnestock & Co., Inc. F. J. Morrissey & Co., Inc.
Gruntal & Co., Inc. Herzog, Heine, Geduld, Inc.
J. W. Charles Securities, Inc. Mayer & Schweitzer, Inc.
Nash, Weiss & Company National Securities Co.
Raymond James & Associates Robert W. Baird & Co., Inc.
Ryan Beck & Co., Inc. Sandler O'Neill & Partners, L.P.
SBC Warburg, Inc. Southeast Research Partners
Sterne, Agee & Leach, Inc. William R. Hough & Co.
As of February 17, 1998, there were approximately 1,300 shareholders of
record of the Company's common stock.
The Board of Directors has declared cash dividends for common
shareholders every quarter since April 1993. The Board of Directors declared
dividends in the amount of $.025 per share during the first quarter ended March
31, 1996 and $.03 per share during the second, third and fourth quarters ended
December 31, 1996. Dividends of $.04 per share were declared in the first
quarter ended March 31, 1997 and $.05 per share for the quarters ended June 30,
1997, September 30, 1997 and December 31, 1997.
On August 12, 1991, January 27, 1992, April 1, 1993, and January 21,
1994, the Company issued a common stock dividend of 10%, 5%, 10% and 5%,
respectively.
Future payment of dividends will be subject to determination and
declaration by the Board of Directors. See Note 10 to the audited consolidated
financial statements for discussion of restrictions on dividend payments.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
====================================================================================================================================
SELECTED CONSOLIDATED FINANCIAL DATA
Nine Months
Years Ended Ended Years Ended
December 31, December 31, March 31,
(Amounts in thousands, except per share amounts) 1997(a) 1996(b) 1995 1995 1994
- ------------------------------------------------- -------------- ------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Summary of Operating Results:
Interest income $65,667 $60,209 $41,890 $45,074 $38,387
Interest expense 24,820 21,674 15,924 15,879 12,900
- ------------------------------------------------- -------------- ------------- ---------------- ----------- -------------
Net interest income 40,847 38,535 25,966 29,195 25,487
Provision for loan losses 1,717 379 434 319 867
- ------------------------------------------------- -------------- ------------- ---------------- ----------- -------------
Net interest income after provision for loan losses 39,130 38,156 25,532 28,876 24,620
Non-interest income 10,016 9,956 6,902 7,946 10,406
Operating expenses 46,153 36,474 22,813 27,657 25,708
- ------------------------------------------------- -------------- ------------- ---------------- ----------- -------------
Income before income taxes and accounting change 2,993 11,638 9,621 9,165 9,318
Provision for income taxes 1,187 3,874 3,389 3,305 3,282
- ------------------------------------------------- -------------- ------------- ---------------- ----------- -------------
Income before accounting change 1,806 7,764 6,232 5,860 6,036
Change in method of accounting for income taxes 500
- ------------------------------------------------- -------------- ------------- ---------------- ----------- -------------
Net income $1,806 $7,764 $6,232 $5,860 $6,536
================================================= ============== ============= ================ =========== =============
Per Share Data:
Basic earnings per common share:
Income before change in accounting for income taxes $0.05 $0.33 $0.32 $0.32 $0.37
Net income $0.05 $0.33 $0.32 $0.32 $0.40
Diluted earnings per common share:
Income before change in accounting for income taxes $0.05 $0.31 $0.30 $0.31 $0.36
Net income $0.05 $0.31 $0.30 $0.31 $0.39
Weighted average common shares and
common stock equivalents outstanding:
Basic 22,070 21,112 18,481 17,275 15,831
Diluted 22,884 22,538 20,790 19,005 16,810
Book value per common share (c) $3.62 $3.48 $3.28 $2.93 $2.93
Dividends per common share $0.19 $0.12 $0.07 $0.04 $0.03
====================================================================================================================================
<FN>
a) Includes pretax merger related expenses of $11.0 million of which $10.4
million is included in operating expenses and $0.6 million is included in
provision for loan losses.
b) Includes pretax litigation settlement of $3.0 million which is included in operating expenses..
c) Book value per share is calculated by dividing common shareholders' equity
plus the proceeds of the assumed conversion of "in the money" options, warrants
and convertible preferred stock by the number of common stock outstanding and
conversion of all "in the money" options, warrants and convertible preferred
stock.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
SELECTED CONSOLIDATED FINANCIAL DATA (Continued)
Nine Months
Years Ended Ended Years Ended
December 31, December 31, March 31,
(Amounts in thousands, except per share data) 1997 1996 1995 1995 1994
- ---------------------------------------- ---------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
At period end:
Total assets $949,280 $853,105 $743,184 $701,931 $636,347
Investments 127,039 151,948 108,504 112,937 137,835
Loans (d) 637,620 557,040 503,578 497,200 412,183
Allowance for loan losses 6,663 6,400 6,785 6,757 5,075
Total deposits 742,263 700,700 612,038 607,250 544,882
Borrowed money 100,573 45,843 35,007 21,347 24,611
Shareholders' equity 86,156 87,303 82,463 55,766 50,586
Shares outstanding 22,685 21,609 20,232 17,285 16,423
- ---------------------------------------- ---------------- --------------- --------------- --------------- ----------------
Average Balances:
Assets $853,700 $775,600 $694,485 $648,258 $611,098
Stockholders' equity 89,300 86,000 63,663 52,104 44,459
Interest-earning assets 770,400 705,700 638,249 584,898 548,456
Interest-bearing liabilities 591,000 534,000 502,554 459,484 429,925
- ---------------------------------------- ---------------- --------------- --------------- --------------- ----------------
Other Data:
Return on average assets (e) 1.04% 1.35% 0.90% 0.90% 1.08%
Return on average shareholders' equity (e) 9.97% 12.17% 9.79% 11.20% 14.80%
Average shareholders'
equity to average total assets 10.46% 11.09% 9.17% 8.04% 7.28%
Shareholders' equity to total assets 9.08% 10.23% 11.10% 7.93% 7.95%
Net interest spread 4.32% 4.47% 3.39% 4.25% 4.00%
Net interest margin 5.30% 5.46% 4.07% 4.99% 4.65%
Non-performing loans (f) $5,414 $7,143 $5,974 $4,132 $3,309
Non-performing assets (f) $8,131 $12,176 $11,234 $9,790 $13,587
Non-performing loans to total loans 0.85% 1.28% 1.19% 0.83% 0.80%
Non-performing assets to total assets 0.86% 1.43% 1.51% 1.39% 2.14%
Allowance for loan losses to total loans 1.04% 1.15% 1.35% 1.36% 1.23%
Net charge-offs to average loans 0.25% 0.21% 0.08% 0.02% 0.39%
Efficiency ratio (g) 72% 69% 69% 74% 72%
Dividend payout ratio (h) 51% 36% 28% 13% 8%
Number of full-service offices 32 30 27 25 21
Loan servicing portfolio (in millions) $237 $277 $307 $323 $189
====================================================================================================================================
<FN>
(d) Net of deferred loan fees, purchased loan discounts and premiums and
undisbursed loans-in-process. Includes loans held for sale.
(e) Excludes merger related expenses of $8.2 million, net of taxes, and the
effect of the reduction of the allowance for deferred tax assets of
$1.1 million for the year ended December 31, 1997. Excludes a
litigation settlement and FDIC assessment of $2.7 million, net of
taxes, for the year ended December 31, 1996.
(f) Non-performing loans are loans contractually past due 90 days or more
placed on non-accrual. Non-performing assets include non-performing
loans, other real estate owned and repossessed assets.
(g) The efficiency ratio is calculated by dividing non-interest expense by
net interest income plus non-interest income excluding realized
securities gains/losses and non recurring expenses.
(h) Dividend payout ratio is calculated by dividing dividends declared per
share by basic earnings per share. Amount for the year ended
December 31, 1997 is adjusted to exclude merger related expenses
(see note (e)).
- ---------------------------------------- ---------------- --------------- --------------- --------------- ----------------
</FN>
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
QUARTERLY FINANCIAL DATA
For the Year Ended December 31, 1997
First Second Third Fourth
(Amounts in thousands except per share data) Quarter Quarter (a) Quarter Quarter (a)
- ----------------------------------------------------------- -------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Interest income $15,675 $16,231 $16,766 $16,995
Interest expense 5,858 6,149 6,398 6,415
- ----------------------------------------------------------- -------------- ------------- ---------------- -------------
Net interest income 9,817 10,082 10,368 10,580
Provision for loan losses 31 806 31 849
- ----------------------------------------------------------- -------------- ------------- ---------------- -------------
Net interest income after provision for loan losses 9,786 9,276 10,337 9,731
Non-interest income 2,468 2,478 2,817 2,253
Operating expense 8,055 13,262 9,173 15,663
- ----------------------------------------------------------- -------------- ------------- ---------------- -------------
Income (loss) before income taxes 4,199 (1,508) 3,981 (3,679)
Provision (benefit) for income taxes 1,115 (818) 1,065 (175)
- ----------------------------------------------------------- -------------- ------------- ---------------- -------------
Net income (loss) $3,084 ($690) $2,916 ($3,504)
- ----------------------------------------------------------- -------------- ------------- ---------------- -------------
PER SHARE DATA:
Basic earnings (loss) per common share $0.13 ($0.04) $0.12 ($0.16)
Diluted earnings (loss) per common share $0.13 ($0.04) $0.12 ($0.16)
Dividends per common share $0.04 $0.05 $0.05 $0.05
Weighted average common shares and
common stock equivalents outstanding 22,766 22,849 23,164 23,242
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
For the year ended December 31, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter (b)
- ----------------------------------------------------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income $14,647 $14,973 $15,299 $15,290
Interest expense 5,353 5,289 5,448 5,584
- ----------------------------------------------------------- -------------- ------------- -------------- --------------
Net interest income 9,294 9,684 9,851 9,706
Provision for loan losses 81 86 106 106
- ----------------------------------------------------------- -------------- ------------- -------------- --------------
Net interest income after provision for loan losses 9,213 9,598 9,745 9,600
Non-interest income 2,145 2,418 2,610 2,783
Operating expense 7,965 8,517 9,104 10,888
- ----------------------------------------------------------- -------------- ------------- -------------- --------------
Income before income taxes 3,393 3,499 3,251 1,495
Provision for income taxes 915 975 785 1,199
- ----------------------------------------------------------- -------------- ------------- -------------- --------------
Net income $2,478 $2,524 $2,466 $296
PER SHARE DATA:
Basic earnings (loss) per common share $0.11 $0.11 $0.11 $0.01
Diluted earnings (loss) per common share $0.10 $0.10 $0.10 $0.01
Dividends per common share $0.03 $0.03 $0.03 $0.03
Weighted average common shares and
common stock equivalents outstanding 21,594 21,662 22,410 22,613
====================================================================================================================================
<FN>
a) Includes merger related expenses of $5.4 million and $2.8 million, net of
taxes, for the three months ended December 31, 1997 and June 30, 1997,
respectively.
b) Includes pre-tax litigation settlement of $3.0 million.
</FN>
</TABLE>
24
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements in this Annual report on Form 10-K which express the
"belief", "anticipation", or "expectation", as well as other statements which
are not historical fact, are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and involve risks and
uncertainties. These forward-looking statements include, among others,
statements concerning the Bank's future business strategy, anticipated growth,
the effect of interest rate changes on the Company's net interest income, the
effect of the trust and investment initiative on the Company's financial
condition, operations and cash flow, the impact of the Year 2000 on the
Company's financial condition, operations and cash flows and other statements of
belief, anticipation expectation, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts. The forward-looking statements in this Annual Report are
subject to risks and uncertainties that could cause the assumptions underlying
such forward-looking statements and the actual results to differ materially from
those expressed in or implied by the statements.
The most significant factors that could cause the assumptions
underlying the forward-looking statements and the actual results of the Company
to differ materially from those expressed in or implied by those forward-looking
statements include, but are not limited to the following:
|X| adverse general economic conditions and/or adverse economic conditions in
Palm Beach, Broward and/or Dade counties;
|X| intense competition for depositors and borrowers from financial institutions
with much greater resource than the Bank;
|X| rapid changes in interest rate and
|X| adverse changes in law and regulations.
These and other risks and uncertainties affecting the Company, all of
which are difficult to predict and many of which are beyond the control of the
Company, are discussed in greater detail in this report and in other filings by
the Company with the Securities and Exchange Commission.
Corporate Overview
Republic Security Financial Corporation is a commercial bank holding
company headquartered in West Palm Beach, Florida. The Company's principal
business is the operation of Republic Security Bank, a state chartered
commercial bank with thirty-two full service branches. With thirteen
full-service branches located in Palm Beach County, Florida, eleven full-service
branches located in Broward County, Florida, and eight full-service branches in
Dade County, Florida, Republic Security Bank primarily serves the Southeast
Florida market.
Republic Security Bank is a community bank which offers a full range of
commercial and personal banking services and products. The Bank has targeted
business lending relationships while maintaining its presence in residential
mortgage, construction and consumer lending. In conjunction with targeted
business relationships, the Bank has concentrated on business and personal
transaction accounts by committing resources to new forms of electronic banking
methods, diversified products and quality customer service. The Bank's
progressive approach to product development and service delivery has positioned
the Bank to be competitive with larger financial institutions in the areas of
electronic banking and high quality financial products and services for business
and consumer customers.
In late 1997, the Bank organized a trust and investment services
division. The new division offers asset management, trust and brokerage services
to individuals and businesses in Palm Beach, Broward and Dade counties.
Management does not anticipate the new trust and investment initiative will have
a significant effect on the Company's operations or cash flows for several years
but several opportunities in 1997 led to the organization of the new division.
25
<PAGE>
Business Combinations Over the past several years, the Bank has completed
several bank acquisitions.
On November 30, 1994, the Bank purchased Governors Bank, a commercial
bank headquartered in West Palm Beach. Total assets acquired in connection with
the merger was approximately $64.3 million.
On December 15, 1995, the Bank purchased the West Palm Beach office of
Century Bank, a thrift chartered bank. In connection with the acquisition, the
Bank assumed approximately $30.3 million of deposit liabilities and acquired
$29.2 million of assets. The acquisition provided a larger customer base when
combined with the existing Bank branch in the same vicinity and other key
economic benefits to the Bank.
On January 19, 1996, the Bank acquired Banyan Bank, a commercial bank
headquartered in Boca Raton, Florida, with one branch office located in Boynton
Beach, Florida. In addition to acquiring commercial bank loans and deposit
portfolios, the acquisition increased the Bank's presence in South Palm Beach
County. Total assets acquired in connection with the merger was approximately
$61.7 million.
On June 30, 1997, the Bank acquired Family Bank, a commercial bank
headquartered in Hallandale, Florida, with seven branch locations in Broward
County, Florida. Family Bank was merged into the Bank on June 30, 1997. The
acquisition 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.
On December 2, 1997, the Bank acquired County National Bank of South
Florida, a commercial bank headquartered in North Miami Beach, Florida, with 14
branch locations in Dade, Broward and Palm Beach counties. County National Bank
was merged into the Bank on December 2, 1997. The acquisition 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 County National Bank.
Looking forward, the Bank's business strategy is to continue its (i)
focus in commercial relationship lending and consumer lending while maintaining
a presence in the residential mortgage market, (ii) emphasis on residential
construction lending, (iii) emphasis on business and personal transaction
accounts, (iv) focus on non-interest income, (v) development and implementation
of new products and services, and (vi) growth through a combination of bank and
branch acquisitions, as well as de novo expansion of the branch network and to
achieve a higher profile through additional strategically located banking
offices and increased marketing efforts.
Comparison of the Years Ended December 31, 1997, 1996 and 1995
and the Nine Months Ended December 31, 1995 and 1994
Results of Operations
The following is a discussion and analysis of the Company's
consolidated results of operations. All information has been retroactively
restated to include the accounts and results of operations of County Financial
Corporation and Family Bank. In addition, the Company's operating results
include the results of Banyan Bank since January 19, 1996 and Governors Bank
since November 30, 1994. The discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and
corresponding notes included elsewhere in this report.
The Company's net income was $1.8 million for the year ended December
31, 1997 compared to $7.8 million for the year ended December 31, 1996. Basic
and diluted earnings per share was $0.05 for the year ended December 31, 1997.
Net income for the year ended December 31, 1997 includes merger related expenses
of $7.1 million, net of taxes. Merger related expenses associated with the
acquisitions of County Financial Corporation and Family Bank consisted of
approximately $6.3 million, net of taxes, related to
26
<PAGE>
employee severance, professional fees and fixed asset write-offs, approximately
$400,000, net of taxes, for additional merger related loan loss provision and
$400,000, net of taxes, for additional OREO write-downs. Net income, excluding
merger related expenses, was $8.9 million or $0.37 and $0.36, respectively,
basic and diluted earnings per common share. Net income for the year ended
December 31, 1996 was $7.8 million or $0.33 and $0.31, respectively, basic and
diluted earnings per share which includes a $2.0 million, net of taxes, non
recurring litigation settlement and a $773,000, net of taxes, one-time Federal
Deposit Insurance Corporation ("FDIC) Savings Association Insurance Fund
("SAIF") assessment to recapitalize the national SAIF (see Note 15). Net income
excluding the non recurring items was approximately $10.5 million or $0.46 and
$0.47, respectively, basic and diluted earnings per common share for the year
ended December 31, 1996. Net income, excluding merger related expenses, for the
year ended December 31, 1997 decreased approximately $1.6 million compared to
the year ended December 31, 1996, excluding litigation and FDIC expenses,
primarily due to a 6% increase in net interest income offset by increases in the
provision for loan losses, employee compensation and benefits and occupancy and
equipment expenses.
Net income, excluding litigation expense of $2.0 million, net of taxes,
and FDIC SAIF assessment of $773,000, net of taxes, for the year ended December
31, 1996 increased 35% to $10.5 million from $7.8 million for the year ended
December 31, 1995. The increase in net income is due primarily to a $4.4 million
increase in net interest income, a $1.0 million increase in non-interest income
partially offset by an increase of $1.7 million in operating expenses. Basic and
diluted net income per common share was $0.46 and $0.43, respectively, excluding
the litigation and one-time FDIC SAIF assessment, for the year ended December
31, 1996 compared to basic and diluted net income per share of $0.40 for the
year ended December 31, 1995. Earnings per share for the year ended December 31,
1996 were impacted by a 2.6 million increase in the average shares outstanding
during 1996 primarily as a result of the November 1995 secondary equity offering
and the conversion of the Company's Series "A" preferred stock to common stock
(see Note 10 to the Consolidated Financial Statements). Reported net income for
the year ended December 31, 1996 was $7.8 million or basic and diluted earnings
per share of $0.33 and $0.31, respectively.
The Company's net income for the nine months ended December 31, 1995
was $6.2 million compared with net income of $4.5 million for the nine months
ended December 31, 1994. Basic earnings per common share was $0.32 and diluted
earnings per common share was $0.30 for the nine months ended December 31, 1995
compared to $0.25 basic earnings per common share and $0.24 diluted earnings per
common share for the nine months ended December 31, 1994. The increase in net
income for the nine months ended December 31, 1995 compared to the nine months
ended December 31, 1994 is primarily a result of an increase in net interest
income of approximately $4.6 million and an increase of $1.2 million in non
interest income offset by an increase in operating expenses of approximately
$3.1 million and an increase in income taxes of $856,000.
The primary component of earnings for most financial institutions
including the Company is net interest income. Net interest income is the
difference between the interest income received on its interest-earning assets
and the interest paid on its interest-bearing liabilities. Net interest income
is determined primarily by interest rate spread and the relative amounts of
interest-earning assets and interest-bearing liabilities.
Net Interest Income
Net interest income increased $2.3 million to $40.8 million for the
year ended December 31, 1997 from $38.5 million for the year ended December 31,
1996. Interest income increased approximately $5.4 million offset by a rise of
$3.1 million in interest expense. The increase in interest income is primarily
due to an increase in the average balance of loans for the year ended December
31, 1997 compared to the year ended December 31, 1996. The increase in the
average balance of borrowed money is the primary contributor to the increase in
interest expense for the year ended December 31, 1997. The Company's net
interest margin for the year ended December 31, 1997 was 5.34% which, while
competitive with the Bank's peer group, is a decrease from 5.50% for the year
ended December 31, 1996. The decrease is due to an
27
<PAGE>
increase in the cost of borrowed money as the Bank's total cost of deposits was
3.20% for the years ended December 31, 1997 and 1996. Borrowed money increased
primarily as a result of funding a $25.0 million investment purchase in December
1996. While strategies such as the $25 million transaction negatively impact net
interest margin because the spread on such a transaction is less than the Bank's
overall spread, the effect on net interest income is positive and the
transaction provides a means of capital leverage to the Company.
Net interest income increased approximately 13% to $38.8 million for
the year ended December 31, 1996 compared to $34.4 million for the year ended
December 31, 1995. The increase in net interest income is primarily due to an
increase of $65.6 million in average interest-earning assets while average
interest-bearing liabilities increased $28.8 million. The increase in average
interest-earning assets was partially funded by increases in average equity of
$24.1 million and average non-interest bearing deposits of $19.0 million which
contributed to the increase in net interest income for the year ended December
31, 1996 compared to the year ended December 31, 1995. The increase of $24.1
million in average equity for the year ended December 31, 1996 compared to the
year ended December 31, 1995 is primarily due to the issuance of additional
common and preferred stock in November 1995 (see Note 10 to Consolidated
Financial Statements).
Net interest income for the nine months ended December 31, 1995
increased approximately $4.6 million or 21% from the nine months ended December
31, 1994 due primarily to an increase of $9.5 million in interest income on
loans and investments, partially offset by an increase of $4.8 million in
interest expense on deposits. The average interest-earning assets and average
interest-bearing liabilities increased during the nine months ended December 31,
1995 compared with the nine months ended December 31, 1994 primarily due to the
acquisition of Governors Bank and internal growth as a result of successfully
attracting new customers.
Interest Income
Interest income increased approximately $5.5 million for the year ended
December 31, 1997 compared to the year ended December 31, 1996 due to an
increase in interest and fees on loans of $3.4 million and a $2.0 million
increase in interest on investments offset by a decrease in interest on
interest-bearing deposits and Federal Funds sold. Interest and fees on loans
increased due to an increase of $37.8 million in the average balance of loans
outstanding for the year ended December 31, 1997 compared to the year ended
December 31, 1996. Increases in commercial real estate, commercial business and
consumer loans are the primary contributors to the increase in loans
outstanding. The increase in the commercial areas is a result of the Company's
increased resources and new direct calling programs in the business banking and
retail banking groups. Average investments increased $31.1 million primarily due
to a $25.0 million investment purchase in December 1996 which was funded with a
$25.0 million FHLB advance. The yield on interest-earning assets for the year
ended December 31, 1997 of 8.56% was not significantly different from 8.58% for
the year ended December 31, 1996.
The increase of $5.2 million in interest income for the year ended
December 31, 1996 compared to the year ended December 31, 1995 is due to an
increase of $3.6 million in interest and fees on loans, a $728,000 increase in
interest on interest-bearing deposits in other financial institutions and Fed
Funds sold and a $832,000 increase in interest and dividends on investments. The
increase in interest and fees on loans is primarily due to an increase of $43.5
million in the average balance of loans outstanding during the year ended
December 31, 1996 compared to the year ended December 31, 1995. Loans increased
approximately $35.7 million as a result of the Banyan Bank acquisition. The
remaining increase is due to the Bank's success in attracting customers through
advertising and referrals and continued improvement in business conditions
during 1996.
Interest income increased approximately $9.5 million for the nine
months ended December 31, 1995 compared to the nine months ended December 31,
1994. The increase in interest income is due to an
28
<PAGE>
increase in the average loan and investment balances outstanding for the nine
months ended December 31, 1995 compared to the nine months ended December 31,
1994 as a result of the Governors acquisition as well as internal growth. In
addition, the average rate earned on loans increased approximately 133 basis
points due to an increase in the prime rate from 6% at the beginning of 1994 to
8.5% at December 31, 1995.
Interest Expense
Interest expense increased approximately $3.1 million for the year
ended December 31, 1997 compared to the year ended December 31, 1996 primarily
due to an increase of $57.4 million in interest-bearing liabilities. Interest
expense on borrowed money increased $1.7 million for the year ended December 31,
1997 compared to the year ended December 31, 1996 due to an increase of
approximately $30.7 million in the average balance of borrowed money
outstanding. The funding of a $25.0 million investment purchase in December 1996
is the primary contributor to the increase in borrowed money for the year ended
December 31, 1997. The remaining increase in interest expense of approximately
$1.4 million is due primarily to an increase in the average interest-bearing
deposits outstanding of $26.7 million or 5% for the year ended December 31, 1997
compared to the year ended December 31, 1996. Likewise, average non-interest
bearing deposits increased approximately $18.2 million or 13% for the year ended
December 31, 1997 compared to the year ended December 31, 1996. The rate on
interest-bearing liabilities increased from 4.06% for the year ended December
31, 1996 to 4.20% for the year ended December 31, 1997 primarily due to an
increase in the rate paid on borrowed money, savings accounts and certificates
of deposits.
The increase in interest expense of $776,000 is due to an increase in
the average balance of interest-bearing liabilities during the year ended
December 31, 1996 compared to the year ended December 31, 1995 offset by a
decrease in the rate paid on interest-bearing liabilities of 7 basis points. The
increase in interest-bearing liabilities is due primarily to increases in
certificates of deposits, savings accounts and Money Market accounts of $33.5
million offset by a decrease in borrowed money of $13.0 million. The increase in
savings accounts is primarily a result of the introduction of a high-yield
savings product in 1996 in Broward County. The increase in the average balance
of certificates of deposit is due to the Banyan Bank acquisition in January
1996. Borrowed money decreased in 1996 as a result of the issuance of additional
common and preferred stock in November 1995 (see Note 10 to Consolidated
Financial Statements). The rate paid on interest-bearing liabilities decreased 7
basis points for the year ended December 31, 1996 compared to the year ended
December 31, 1995 primarily due to reducing the rates paid on NOW accounts and a
decrease in the rate paid on borrowed money offset by increases in rates paid on
Money Market and savings accounts. In addition, the average balance of
non-interest bearing deposits increased $19.0 million or 16% for the year ended
December 31, 1996 compared to the year ended December 31, 1995.
Increases in the volume of certificates of deposit and the average rate
paid on certificates of deposit were the primary contributors to the $4.9
million increase in interest expense for the nine months ended December 31, 1995
compared to the nine months ended December 31, 1994. The Governors acquisition
resulted in an increase in average certificates of deposit of approximately
$28.0 million. The remaining increase in average certificates of deposit was due
to internal growth as a result of special pricing and effective advertising. The
increase in the rate paid on deposits was primarily a result of an increase in
market interest rate in 1995 compared to 1994.
29
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
NET INTEREST INCOME, AVERAGE BALANCE AND RATES:
Year Ended December 31,
1997 1996 1995
Average Yield/ Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------- --------- ---------- --------- --------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans $580,465 $53,995 9.30% $542,654 $50,643 9.33% $499,112 $47,015 9.42%
Interest-bearing deposits
and Fed Funds sold 37,136 2,286 6.16 40,466 2,111 5.22 29,143 1,383 4.75
Taxable investments 133,541 8,525 6.38 105,988 6,747 6.37 99,176 6,149 6.20
Non-taxable investments ** 19,201 1,145 5.96 15,630 943 6.03 11,744 709 6.04
- --------------------------- --------- ---------- --------- --------- --------- ---------- ---------- --------- ---------
Total interest-earning assets 770,343 65,951 8.56 704,738 60,444 8.58 639,175 55,256 8.64
Other assets 103,047 70,989 57,196
- --------------------------- --------- ---------- --------- --------- --------- ---------- ---------- --------- ---------
Total $873,390 $775,727 $696,371
- --------------------------- --------- ---------- --------- --------- --------- ---------- ---------- --------- ---------
Liabilities and
Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts $106,548 2,069 1.94 $109,149 2,088 1.91 $108,646 2,403 2.21
Money Market accounts 89,504 2,747 3.07 76,894 2,438 3.17 69,177 1,995 2.88
Savings deposits 85,141 2,841 3.34 76,010 2,403 3.16 56,665 1,635 2.89
Certificate of deposits 268,164 14,820 5.53 260,616 14,149 5.43 246,418 13,443 5.46
Borrowed money 42,285 2,343 5.54 11,604 596 5.14 24,564 1,422 5.79
- --------------------------- --------- ---------- --------- --------- --------- ---------- ---------- --------- ---------
Total interest-bearing
liabilities 591,642 24,820 4.20 534,273 21,674 4.06 505,470 20,898 4.13
- --------------------------- --------- ---------- --------- --------- --------- ---------- ---------- --------- ---------
Non-interest-bearing deposits 154,078 135,882 116,901
Other liabilities 38,370 19,602 12,100
Shareholders' equity 89,300 85,970 61,900
- --------------------------- --------- ---------- --------- --------- --------- ---------- ---------- --------- ---------
Total liabilities and
shareholders' equity $873,390 $775,727 $696,371
- --------------------------- --------- ---------- --------- --------- --------- ---------- ---------- --------- ---------
Net interest income/
Net interest rate spread $41,131 4.36% $38,770 4.52% $34,358 4.51%
- --------------------------- --------- ---------- --------- --------- --------- ---------- ---------- --------- ---------
Net average interest-earning
assets/Net interest margin $178,701 5.34% $170,465 5.50% $133,705 5.38%
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.30x 1.32x 1.26x
====================================================================================================================================
<CAPTION>
====================================================================================================================================
NET INTEREST INCOME, AVERAGE BALANCE AND RATES (Continued):
Nine Months Ended,
1995
Average Yield/
(dollars in thousands) Balance Interest Rate
- --------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Assets
Interest-earning assets:
Loans $497,728 $35,713 9.57%
Interest-bearing deposits
and Fed Funds sold 29,322 1,103 5.02
Taxable investments 99,587 4,674 6.26
Non-taxable investments ** 11,744 556 6.31
- --------------------------- --------- ---------- ----------
Total interest-earning assets 638,381 42,046 8.78
Other assets 56,270
- --------------------------- --------- ---------- ----------
Total $694,651
- --------------------------- --------- ---------- ----------
Liabilities and
Shareholders' Equity:
Interest-bearing liabilities:
NOW accounts $109,955 1,794 2.18
Money Market accounts 67,921 1,483 2.91
Savings deposits 56,256 1,215 2.88
Certificate of deposits 244,765 10,381 5.65
Borrowed money 23,642 1,051 5.93
- --------------------------- --------- ---------- ----------
Total interest-bearing
liabilities 502,539 15,924 4.22
- --------------------------- --------- ---------- ----------
Non-interest-bearing deposits 116,545
Other liabilities 11,947
Shareholders' equity 63,620
- --------------------------- --------- ---------- ----------
Total liabilities and
shareholders' equity $694,651
- --------------------------- --------- ---------- ----------
Net interest income/
Net interest rate spread $26,122 4.56%
- --------------------------- --------- ---------- ----------
Net average interest-earning
assets/Net interest margin $135,842 5.46%
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.27x
====================================================================================================================================
<FN>
** Tax equivalent basis based on 34% effective tax rate.
</FN>
</TABLE>
30
<PAGE>
Net interest income before provision for losses can be analyzed in
terms of the impact of changing rates and changing volumes of interest-earning
assets and interest-bearing liabilities. The following table sets forth certain
information regarding changes in net interest income due to changes in the
average balance of interest-earning assets and interest-bearing liabilities and
due to changes in average rates for the periods indicated. For purposes of this
table, rate/volume changes have been allocated solely to rate changes and
non-accrual loans are included in average balances.
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended Year Ended
December 31, 1997 versus 1996 December 31, 1996 versus 1995
------------------------------------------------- ---------------------------------------------
Increase (decrease) due to change in: Increase (decrease) due to change in:
------------------------------------------------- ---------------------------------------------
(dollars in thousands) Average Rate Average Volume Net Change Average Rate Average Volume Net Change
- ------------------------ -------------- ----------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans - net ($176) $3,528 $3,352 ($474) $4,102 $3,628
Interest-bearing deposits and
Federal Funds sold 349 (174) 175 190 538 728
Taxable investments 23 1,755 1,778 176 422 598
Non-taxable investments (13) 215 202 (1) 235 234
- ------------------------ -------------- ----------------- ---------------- --- -------------- --------------- --------------
183 5,324 5,507 (109) 5,297 5,188
- ------------------------ -------------- ----------------- ---------------- --- -------------- --------------- --------------
Interest expense:
NOW accounts 31 (50) (19) (304) (11) (315)
Money Market accounts (91) 400 309 221 222 443
Savings deposits 149 289 438 209 559 768
Certificates of deposit 261 410 671 (69) 775 706
Borrowed money 171 1,576 1,747 (76) (750) (826)
- ------------------------ -------------- ----------------- ---------------- --- -------------- --------------- --------------
521 2,625 3,146 (19) 795 776
- ------------------------ -------------- ----------------- ---------------- --- -------------- --------------- --------------
Net interest income ($338) $2,699 $2,361 ($90) $4,502 $4,412
====================================================================================================================================
</TABLE>
Provision for Loan Losses
The provision for loan losses reflects management's assessment of the
adequacy of the allowance for loan losses. The provision for loan losses
increased $1.3 million for the year ended December 31, 1997 compared to the year
ended December 31, 1996 partially due to the two bank mergers in 1997 and partly
as a result of $75.0 million of loan growth from December 31, 1996 to December
31, 1997. Merger related provision for loan losses to conform Family Bank and
County National Bank's accounting and credit policies regarding loan valuation
to those of the Bank amounted to $650,000. The increase in the provision for
loan losses in the year ended December 31, 1997 compared to the year ended
December 31, 1996 is not related to asset quality issues. Non-performing loans
to total loans and non-performing assets to total assets decreased from 1.28%
and 1.43%, respectively, at December 31, 1996 to 0.85% and 0.86%, respectively,
at December 31, 1997. The amount of future provisions is a function of the
ongoing evaluation of the allowance for loan losses which considers the
characteristics of the loan portfolio, economic conditions and other relevant
factors. Management's evaluation of the allowance for loan losses includes
applying relevant risk factors to the entire loan portfolio including
non-performing loans. Risk factors applied to the performing loan portfolio are
based, in part, on the Bank's past 3 year loss history and consider the current
portfolio's characteristics, current economic conditions and other relevant
factors. Non-performing loans are carried at fair value based on the most recent
information available.
31
<PAGE>
The allowance for loan losses as a percent of total loans is
approximately 1.04% which management believes to be adequate considering the
Bank's loan composition at December 31, 1997 and the Bank's historical losses.
In addition to the risk factors applied to the performing loan portfolio, risk
factors as prescribed in the loan policy are applied to the remaining book
balance of classified loans in evaluating the adequacy of the allowance for loan
losses. An evaluation of the adequacy of the overall allowance for loan losses,
including the adequacy of the unallocated portion of the allowance, is
determined by management considering factors such as current and anticipated
future economic conditions, loan concentrations, portfolio mix and other
relevant factors.
The allowance for loan losses as a percent of total loans decreased
from 1.15% at December 31, 1996 to 1.04% at December 31, 1997. The allowance for
loan losses to non-performing loans increased from 90% at December 31, 1996 to
approximately 123% at December 31, 1997. The systematic method prescribed in the
Bank's loan policy which includes procedures for early detection of potential
problem loans is consistently used to determine the adequacy of the allowance
for loan losses and also considers the characteristics of the loan portfolio,
historical charge-off history, current and anticipated future economic
conditions, as well as other relevant factors. Based on the analysis of the
allowance for loan losses at December 31, 1997, management believes the
allowance is adequate.
In accordance with the Bank's asset classification policy,
non-performing loans (loans contractually past-due 90 days or more) are recorded
at the lesser of the loan balance or estimated fair value of the collateral
underlying the loan, for collateral dependent loans, or the net present value of
estimated future cash flows discounted at the loan's original effective interest
rate. As a result, any expected losses from loans identified at December 31,
1997 as non-performing have been recognized by the Bank and should not have a
future impact on the allowance for loan losses unless the condition of the loan
further deteriorates.
The provision for loan losses decreased $100,000 for the year ended
December 31, 1996 compared to the year ended December 31, 1995. At December 31,
1996 the Bank had $7.1 million in non-performing loans compared to $5.9 million
at December 31, 1995. The increase in non-performing loans is due partially to
an increase in residential mortgage loan delinquencies and in part to one
$330,000 commercial loan.
The provision for loan losses increased $174,000 for the nine months
ended December 31, 1995 compared to the nine months ended December 31, 1994.
However, the allowance for loan losses as a percent of total loans remained
relatively stable at 1.35% at December 31, 1995 compared to 1.36% at March 31,
1995.
Non-Interest Income
Non-interest income increased $60,000 for the year ended December 31,
1997 compared to the year ended December 31, 1996 due to an increase in service
charges on deposit accounts of $591,000 and increases in mortgage trading income
and gain on sale of investments available-for sale of $186,000 and $135,000,
respectively, offset by decreases of $674,000 and $178,000 in gain on sale of
loans and other income, respectively.
Non-interest income increased approximately $1.0 million or 11% for the
year ended December 31, 1996 compared to the year ended December 31, 1995
primarily due to an increase in service charges on deposit accounts, an increase
in the gain on sale of loans and an increase in the gain on sale of investments
available-for-sale offset by a decrease in mortgage trading income.
Non-interest income increased approximately 1.2 million for the nine
months ended December 31, 1995 compared to the nine months ended December 31,
1994 primarily as a result of increases in service charges on deposit accounts
and other income. In addition, the nine months ended December 31, 1994 included
a $200,000 loss on the sale of trading investments.
32
<PAGE>
Service Charges on Deposit Accounts. Service charges on deposit
accounts increased $591,000 or 11% for the year ended December 31, 1997 compared
to the year ended December 31, 1996 primarily as a result of increased volume in
commercial deposit accounts. Non-interest bearing average account balances
increased approximately 13% for the year ended December 31, 1997 compared to the
year ended December 31, 1996. No significant changes in fees charged were made
during the year ended December 31, 1997.
In line with the Bank's goal to increase service fee income on deposit
accounts, service charges on deposit accounts increased approximately $749,000
or 14% for the year ended December 31, 1996 compared to the year ended December
31, 1995. Average transaction account balances increased approximately $19.5
million or 9% for the year ended December 31, 1996 compared to the year ended
December 31, 1995 due to an increase in the volume of transaction accounts. The
increase in the number of transaction accounts in 1996 compared to 1995 is due
to the Banyan Bank acquisition as well as internal growth. In addition, the
composition of the Bank's deposit portfolio has continued to change to reflect
an increase in non-interest bearing commercial accounts which typically require
services that generate more fee income than the personal deposit accounts.
Service charges on deposit accounts increased by approximately 17% for
the nine months ended December 31, 1995 compared to the nine months ended
December 31, 1994. The increase in service charges on deposit accounts was due
to an increase in the average number of transaction accounts serviced during the
nine months ended December 31, 1995 compared to the nine months ended December
31, 1994 as well as an overall increase in fee charges. The increase in
transaction accounts is due to the Governors acquisition as well as internal
growth.
Gain on Sales of Loans. Gain on sale of loans decreased $674,000 for
the year ended December 31, 1997 compared to the year ended December 31, 1996
due to a decrease in the gain earned on loans sold. The gain realized on the
sale of loans is dependent on market interest rates relative to the loans'
interest rates at the time of sale and whether the loans are sold servicing
released or servicing retained. Gain on sale of loans increased by $428,000 for
the year ended December 31, 1996 compared to the year ended December 31, 1995
primarily due to an increase in the gains realized on the sale of loans as the
volume of loan sales in both years was relatively stable. Gain on the sale of
loans increased $175,000 for the nine months ended December 31, 1995 compared to
the nine months ended December 31, 1994 primarily due to an increase in the
amount of gain realized on the sale of loans as a result of a decrease in market
interest rates during the nine months ended December 31,1995. However, gain on
the sale of servicing decreased $299,000 as no loan servicing rights were sold
during the nine months ended December 31, 1995.
Mortgage Trading Income. The Bank's loan trading department brokers
loan packages for a fee and also acts as a principal in buying and reselling the
same loan packages for a gain. Mortgage trading income increased $186,000 for
the year ended December 31, 1997 compared to the year ended December 31, 1996 as
there were no trades during 1996. Mortgage trading income decreased $290,000 for
the year ended December 31, 1996 compared to the year ended December 31, 1995 as
there was no mortgage trading income recorded in 1996. Mortgage trading income
was stable for the nine months ended December 31, 1995 and 1994.
Other Income. Other income consists of loan servicing income net of the
amortization of loan servicing rights, loan fees, accretion of discounts on
purchased accounts receivable, rental income, ATM fees and other miscellaneous
fee income.
Other income decreased $178,000 or 6% for the year ended December 31,
1997 compared to the year ended December 31, 1996. The decrease in other income
is due to a decrease in loan servicing income and loan application fees of
approximately $300,000 offset by an increase in income related to purchased
accounts receivable. Loan servicing income decreased as a result of a decrease
in the amount of loans serviced for others due to loan paydowns. Income related
to purchased accounts receivables increased for the year ended December 31, 1997
compared to the year ended December 31, 1996 due to an increase in the average
amount of purchased accounts receivable outstanding to $2.2 million from
approximately $400,000.
33
<PAGE>
Other income increased $203,000 for the year ended December 31, 1996
compared to the year ended December 31, 1995 due primarily to a $100,000
increase in other fee income related to loan accounts and other services and an
$84,000 increase in gains on the sale of other real estate owned. The increase
in other fee income associated with loans is primarily due to an increase in the
volume of commercial and consumer loan production. The increase in fees for
other services is a result of increased usage in new services such as PC banking
and merchant deposits.
Other income increased approximately $540,000 for the nine months ended
December 31, 1995 compared to the nine months ended December 31, 1994 primarily
due to increases in loan late fees and other loan fees of approximately
$100,000, and net loan servicing income of $115,000. Loan fees increased
primarily as a result of an increase in volume. Net loan servicing income
increased due to an increase in loan servicing income, as a result of an
increase in the average loan servicing portfolio, and a decrease in the
amortization of loan servicing rights due to a decrease in loan prepayment
speeds. Other fee income increased due to an overall increase in loan and
deposit account volumes as well as new products and services introduced during
the nine months ended December 31, 1995.
Operating Expenses
Operating expenses, excluding merger related expenses, was $35.7
million for the year ended December 31, 1997. Operating expenses, excluding
one-time litigation settlement expense of $3.0 million and one-time FDIC SAIF
assessment of approximately $1.2 million, was $32.3 million for the year ended
December 31, 1996. Operating expenses, excluding merger related expenses in the
year ended December 31, 1997 and the one-time charges for the year ended
December 31, 1996, increased approximately $3.4 million for the year ended
December 31, 1997 compared to the year ended December 31, 1996. The increase is
primarily due to increases in employee compensation and benefits, occupancy and
equipment expenses and other operating expenses offset by a decrease in
professional fees.
Employee compensation and benefits increased $2.7 million, excluding
$300,000 of merger related expenses, for the year ended December 31, 1997
compared to the year ended December 31, 1996 due to an increase of $1.8 million
related to the accrual associated with Company's Stock Appreciation Rights
("SARs") plan and an increase of approximately $900,000 related to the added
personnel associated with expanded credit and training departments, three
additional branches and the new trust and investment services. In connection
with the increased size of the Company after the mergers with Family Bank and
County National Bank in 1997, the credit and training departments were expanded
to maintain the Company's previous level of safety and soundness. The
outstanding SARs became "in-the-money" at the end of the first quarter in 1997.
As a result, the year ended December 31, 1997 is the first year the Company has
recognized expense associated with the SARs plan even though the SARs were
issued in December 1995. All SARs were vested as of January 1, 1998 and accrued
based on the closing price of the Company's common stock at December 31, 1997.
Any subsequent income statement impacts will be recognized based on changes in
the Company's common stock price from $9.81, the closing price at December 31,
1997. See Note 11 to the Consolidated Financial Statements for terms and
conditions of the Company's SARs plan.
Occupancy and equipment expenses increased $654,000 for the year ended
December 31, 1997 compared to the year ended December 31, 1996 due to increased
rent expense, maintenance expense and furniture and equipment depreciation
associated with the three new branches and trust and investment services
division, increased depreciation expense associated with the $800,000 capital
expenditures for the EDP conversion and system upgrade which occurred in late
1998 as well as the additional expense associated with the capital additions in
1998.
Other operating expenses increased $673,000 for the year ended December
31, 1997 compared to the year ended December 31, 1996 due to one-time charges of
$100,000 associated with the organization of the trust and investment services
division and the fixed asset write-off of $150,000 associated with the
relocation of a branch as well as an overall increase in certain other expenses
related to an increase in size.
34
<PAGE>
Operating expenses, excluding the litigation expenses of $3.0 million
and the one-time FDIC SAIF assessment of $1.2 million increased $1.7 million for
the year ended December 31, 1996 compared to the year ended December 31, 1995
primarily due to increases in employee compensation and benefits, occupancy and
equipment expenses, data processing charges and goodwill amortization. Employee
compensation and benefits increased approximately $1.1 million primarily due to
an increase in the number of employees associated with a larger banking center
network and $180,000 of non-recurring costs associated with the absorption of
the Banyan Bank acquisition. Occupancy and equipment expenses increased
approximately $138,000 for the year ended December 31, 1996 compared to the year
ended December 31, 1995 due to the increase of two branches associated with the
Banyan Bank acquisition, new branches which opened in June 1996 and late 1995
and the increased depreciation expense associated with the $1.5 million increase
in furniture and equipment. Approximately $800,000 of computer equipment and
software were purchased during 1996 for the EDP conversion and system upgrade.
Data processing expenses increased $166,000 for the year ended December 31, 1996
compared to the year ended December 31, 1995 primarily due to an increase in the
volume of deposit and loan accounts processed as well as an increase in the
monthly data service bureau charge since August 1996. In addition, an $80,000
non-recurring expense was incurred associated with the conversion of data
service bureaus. Goodwill amortization increased approximately $306,000 due to
the increase in goodwill of approximately $5.0 million associated with the
Banyan Bank acquisition.
Operating expenses for the year ended December 31, 1996 included a $3.0
million litigation settlement expense associated with a lawsuit against County
National Bank. In October 1996, County National Bank reached a settlement in the
case and agreed to pay $3.0 million without any admission of fault.
Payment of the settlement was made in January 1997.
Operating expenses increased $3.1 million for the nine months ended
December 31, 1995 compared to the nine months ended December 31, 1994 as a
result of increases in employee compensation, occupancy and equipment expenses,
data processing expenses, professional fees and other operating expenses which
include the amortization of goodwill offset by a decrease in insurance expenses.
Increases in compensation, occupancy and equipment and data processing expenses
are a result of the acquisition of Governors and the Bank's overall growth,
which resulted in an increase of three branches and additional departments as
well as an increase in the volume of loan and deposit transactions. Other
operating expenses increased $195,000 as a result of goodwill amortization
associated with the Governors acquisition. Additional increases in other
operating expenses are a result of the Bank's growth. Professional fees
increased primarily as a result of legal fees associated with certain
litigation, corporate matters and problem loans.
Income Taxes
Income tax expense decreased $2.7 million for the year ended December
31, 1997 compared to the year ended December 31, 1996 due to a decrease in
income before income taxes of $8.6 million primarily as a result of merger
related charges. The decrease in income tax expenses related to the decrease in
income before income taxes was offset by an increase in the effective tax rate
for the year ended December 31, 1997 compared to the year ended December 31,
1996 due to non deductible merger related expenses which results in permanent
tax differences. The tax impact of the non deductible merger related expenses
was partially offset by a reduction of $1.1 million in the valuation allowance
for deferred tax assets associated with County National Bank. The effective tax
rate was 40% for the year ended December 31, 1997 compared to 33% for the year
ended December 31, 1996. The effective tax rate is estimated to be 37% for the
year ended December 31, 1998.
Income tax expense decreased approximately $306,000 for the year ended
December 31, 1996 compared to the year ended December 31, 1995 due to a decrease
in income before income taxes of $387,000 and a decrease of 2% in the effective
tax rate for the year ended December 31, 1996 compared to the year ended
December 31, 1995. The effective tax rate decreased due to a decrease in the
valuation allowance for deferred tax assets of $303,000 related to County
National Bank's utilization of net operating losses.
35
<PAGE>
Income tax expense increased $856,000 for the nine months ended
December 31, 1995 compared to the nine months ended December 31, 1994 due to an
increase in net income before taxes.
A deferred tax valuation allowance in the amount of $1.1 million was
recorded in the year ended March 31, 1995 primarily to offset the deferred tax
assets relating to net operating loss carryforwards resulting from the Governors
merger. The utilization of these net operating loss carryforwards is limited
annually to specified amounts determined in accordance with the Internal Revenue
Code. The deferred tax valuation allowance was reduced by $320,000 in 1996 due
to the utilization of the Governors net operating loss carryforward.
Accordingly, goodwill was adjusted to offset the reduction of the valuation
allowance.
Liquidity
The Company's liquid assets consist primarily of interest bearing
deposits in the FHLB, Fed Funds sold and marketable securities. Considerations
in managing the Company's liquidity position include scheduled cash flows from
existing assets, contingencies and liabilities, as well as projected liquidity
needs arising from approved extensions of credit. Furthermore, liquidity
position is monitored daily by management to maintain a level of liquidity
conducive to efficient operations and is continuously evaluated as part of the
asset/liability management process.
The Company's cash inflows for the year ended December 31, 1997 consist
primarily of amounts generated from the sale of loans and investments
available-for-sale, the collection of loan principal payments, deposits and
increases in FHLB advances. Uses of cash consist of originations of loans and
purchases of investments available-for-sale. Primary sources of borrowings
include advances from the FHLB and borrowings under repurchase agreements.
Access to funds from depositors is affected by the rate the Bank pays
on certificates of deposit and convenience and service provided to transaction
based account holders. The rate the Bank pays on certificates of deposit is
dependent on rates paid by other financial institutions within the Bank's area.
The Bank manages the cash inflows and outflows from certificates of deposit by
increasing or decreasing the rates offered in its market area.
The Company's sources of liquidity are impacted by various matters
beyond the control of the Company. Scheduled loan payments are a relatively
stable source of funds while loan prepayments and deposit flows vary widely in
reaction to market conditions, primarily prevailing interest rates. Asset sales
are influenced by the availability of loans for sale, general market demand and
other unforeseen market conditions. The Company's ability to borrow at
attractive rates is affected by its credit ratings and other market conditions.
In order to manage the uncertainty inherent in its sources of funds,
the Company continually evaluates alternate sources of funds and maintains and
develops diversity and flexibility in the number of such sources. The effect of
a decline in any one source of funds generally can be offset by use of an
alternative source although potentially at a different cost to the Company.
Capital Compliance
The Bank and the Company are in compliance with regulatory capital
requirements at December 31, 1997 (see Note 12 to Consolidated Financial
Statements).
The Bank and the Company, as a bank holding company, are subject to the
capital requirements of the FRB. Under FRB guidelines, bank holding companies
such as the Company are required to maintain capital based on risk-adjusted
assets. Under risk-based capital guidelines, categories of assets with
potentially higher credit risk require more capital than assets with lower risk.
In addition to balance sheet assets, bank holding companies are required to
maintain capital, on a risk-adjusted basis, to support certain off-balance
36
<PAGE>
sheet activities such as loan commitments. The FRB standards classify capital
into two tiers, Tier I and Total. Tier I risk-based capital consists of common
stockholders' equity, noncumulative and cumulative (bank holding companies only)
perpetual preferred stock, and minority interests, less goodwill. Total risk
based capital consists of Tier I capital plus a portion of the general allowance
for loan losses, hybrid capital instruments, term subordinated debt and
intermediate preferred stock. In addition to risk-based capital requirement, the
FRB requires bank holding companies to maintain a minimum leverage capital ratio
of Tier I capital to total assets. Total assets for this purpose do not include
goodwill and any other intangible assets and investments that the FRB determines
should be deducted from Tier I capital. The FRB requires banks and bank holding
companies to maintain Tier I and Total risk-based capital ratios of 4.0% and
8.0%, respectively, and a Tier I leverage capital ratio of 4.0%. The FDIC has
promulgated similar regulations and guidelines regarding capital adequacy of
state-chartered banks which are not members of the Federal Reserve System, which
would apply to the Bank.
Interest Rate Risk Management
The operations of the Bank are subject to risk resulting from interest
rate fluctuations to the extent that there is a difference between the amount of
the Company's interest-earning assets and the amount of interest-bearing
liabilities that are prepaid/withdrawn, mature or reprice in specified periods.
Management of interest rate sensitivity involves matching the maturity and
repricing dates of interest-earning assets with those of interest-bearing
liabilities in an effort to manage the impact of fluctuating interest rates on
net interest margins. The Asset Liability Committee (ALCO) has the
responsibility for the management of interest rate risk. Operating within risk
tolerance levels approved by the Board of Directors, ALCO meets at least
quarterly to establish, communicate, coordinate and control asset/liability
management procedures. The purpose of ALCO is to monitor the volume and mix of
the Bank's interest sensitive assets and liabilities consistent with the
Company's overall liquidity, capital, growth, risk and profitability goals.
The Bank utilizes an interest rate sensitivity model as the primary
quantitative tool in measuring the amount of interest rate risk that is present.
Interest rate sensitivity is measured as the difference between the percentage
of financial assets and liabilities in the Company's existing portfolio that are
subject to repricing within specific time periods. In addition, the Bank
measures interest rate sensitivity of its budgeted growth in financial assets
and liabilities. These differences, known as interest sensitivity gaps, are
usually calculated cumulatively for blocks of time. The model quantifies the
potential changes in future earnings which is measured by the effects of various
interest rate changes in net income over the ensuing one and two year periods.
37
<PAGE>
The Company manages its interest rate risk exposure by limiting the
amount of long-term fixed rate loans it holds for investment, increasing
emphasis on shorter-term loans for portfolio, increasing or decreasing the
relative amounts of long-term and short-term borrowings and deposits and/or
purchasing commitments to sell loans. The following table presents the Company's
exposure to interest rate risk at December 31, 1997:
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, 1997
----------------------------------------------------------------------
One Year 1 to 3 3 to 5 Over 5
or Less Years Years Years TOTAL
- -------------------------------------------------- -------------- --------------- ------------- ------------ -----------
(dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest-earning assets 361,508 150,151 148,178 167,506 827,343
Total interest-bearing liabilities 607,430 33,877 37,881 679,188
- -------------------------------------------------- -------------- --------------- ------------- ------------ -----------
Interest rate sensitivity gap (245,922) 116,274 110,297 167,506 148,155
================================================== ============== =============== ============= ============ ===========
Cumulative interest rate sensitivity gap (245,922) (129,648) (19,351) 148,155
================================================== ============== =============== ============= ============ ===========
Cumulative interest rate sensitivity gap
as a percent of total assets (25.9)% (13.7)% (2.0)% 15.6%
====================================================================================================================================
<FN>
In preparing the table above, certain assumptions have been made with regard to
loan prepayments and withdrawals of NOW, Money Market and savings account
deposits. Loan prepayment rates are based upon market consensus estimates for
similar securities. NOW, Money Market and savings account balances are assumed
to reprice immediately and are included in one year or less. All other assets
and liabilities have been repriced based on the earlier of repricing or
contractual maturity. The above assumptions are annual percentages based on the
latest available assumptions and on remaining balances and should not be
regarded as indicative of the actual prepayments and withdrawals that may be
experienced by the Company. Moreover, certain shortcomings are inherent in the
analysis presented by the foregoing table. For example, although certain assets
and liabilities may have similar maturities or periods for repricing, they may
react in different degrees to changes in market interest rates. Also, interest
rates on certain types of assets and liabilities may fluctuate in advance of or
lag behind changes in market interest rates. Additionally, certain assets, such
as ARM loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the assets.
</FN>
</TABLE>
In addition to the above, the Bank is committed to fund $80.0 million
in new loans and $21.4 million in construction loans-in-process at December 31,
1997. These loans and commitments are largely protected from interest rate
fluctuations because they are either adjustable rate loans or are fixed rate
loans which the Bank has obtained commitments to sell in the secondary market.
This relationship is not linear or consistent with other interest rate assets
and liabilities on the Company's balance sheet and management uses computer
modeling in its efforts to reduce the effects that interest rate fluctuations
have on income.
38
<PAGE>
The current potential changes in future earnings relating to financial
assets and liabilities as of December 31, 1997 are as follows:
================================================================================
Potential Change in Future Earnings
1998 1999
- --------------------------------------------------------------------------------
Interest Rate Change in Basis Points:
+ 100 (9.80)% (4.20)%
- - 100 1.00% 3.40%
================================================================================
The most significant assumptions used in this simulation relate
primarily to the repricing rates of demand and other nonmaturity
deposits and loan prepayment rates. Demand and nonmaturity deposits are
assumed to reprice immediately. Loan prepayment rates are based upon
market consensus estimates for similar securities. Certain shortcomings
are inherent in the simulation presented by the above table. For
example, certain financial assets and liabilities may have similar
maturities or periods for repricing, that may react in different
degrees to changes in market interest rates.
The potential changes in future earnings shown above are within the
Bank's interest rate risk policy limits.
Impact of Inflation
The consolidated financial statements and related consolidated
financial information presented herein have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or same magnitude as the price of
goods and services.
Financial Condition
Consolidated total assets increased approximately $96.2 million or 11%
to $949.3 million at December 31, 1997 compared to $853.1 million at December
31, 1996. The increase in assets is a result of an increase of $44.5 million in
deposits (excluding time deposits) and an increase of $55.0 million in FHLB
advances. Loans-net and loans held for sale increased $80.3 million, cash and
cash equivalents increased $34.0 million and other assets increased
approximately $6.8 million at December 31, 1997 compared to December 31, 1996
which were funded by increases in deposits and FHLB advances and a $24.9 million
decrease in investments. The increased cash at December 31, 1997 was used to
fund a $21.0 million residential loan purchase in January 1998. The increase in
other assets is the result of purchasing $2.6 million in life insurance policies
associated with the new Director Retirement Plan (see Note 13 to Consolidated
Financial Statements) and an increase in FRB stock.
The Company's consolidated total assets increased $109.9 million or 15%
to $853.1 million at December 31, 1996 compared to December 31, 1995. As a
result of the Banyan Bank acquisition, assets increased approximately $57.0
million, net, due to acquiring $61.7 million in assets and recording $5.0
million in goodwill offset by $9.7 million cash payment. In addition, deposits
(excluding certificates of deposits) increased $42.6 million, FHLB advances and
securities under agreement to repurchase increased $10.5 million and
shareholders' equity increased $1.0 million as a result of the exercise of
outstanding warrants, $4 million as a result of changes in retained earnings and
$.2 million due to the exercise of stock options. These increases were offset by
$8.4 million in net run-off of certificates of deposit. The decrease in deposits
is attributable to lowering interest rates paid on certificates of deposit
primarily in Palm Beach
39
<PAGE>
County since March 1995. The amount of deposit run-off significantly decreased
during the year ended December 31, 1996 compared to the run-off amount of $30.1
million in the nine months ended December 31, 1995. Loans receivable, net and
loans held for sale increased $53.8 million primarily due to the acquisition of
approximately $35.7 million in connection with the Banyan Bank acquisition and
approximately $18.1 million in internal growth. Investments increased by $43.4
million due to the purchase of $115.9 million of securities funded partially
with a $25.0 million FHLB advance and partially funded with maturities and sales
of investments and cash.
In line with the Company's strategic objective to penetrate the
commercial business and non-residential consumer markets, the composition of the
Bank's loan portfolio reflects significant increases in commercial real estate,
consumer and commercial business loans since March 31, 1994. Commercial real
estate and commercial business loans increased $53.2 million and $10.1 million,
respectively, from December 31, 1996 to December 31, 1997. The increase in the
commercial business market was achieved by the Bank's business banking and
retail banking units' increased direct calling programs as well as targeting
high quality commercial businesses. Consumer loans increased $21.3 million or
30% at December 31, 1997 compared to December 31, 1996 primarily due to an
increase in direct consumer loan originations. The Bank's product developments
and enhancements, such as business and consumer PC Banking and cash management,
as well as the Company's increased emphasis in sales culture have contributed to
the success of customer development. Residential real estate loans decreased
$4.2 million from December 31, 1996 to December 31, 1997.
While the Bank's strategy is to target growth primarily in the
commercial business, commercial real estate and consumer markets, the Bank is
positioned to maintain its presence in the residential real estate market and to
emphasize residential construction lending. Continued growth in commercial and
consumer business is expected in 1998 with the anticipation of maintaining the
Company's net interest margin through increases in higher interest-earning
assets and maintaining a large percent of non interest-bearing and lower
interest-bearing deposits. With thirty two branch offices in the South Florida
market , 4 new branch locations scheduled to open in 1998 and a competitive
array of financial products and services, the Bank is positioned to sustain
continued growth. In addition, Management believes the mergers of several
Florida based banks by out-of-state financial institutions provide unique
opportunities for the Bank in the areas of customer development and human
resources.
Year 2000 Matters
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or computer programs of the Company's third-party
vendors that have time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in other normal
business activities.
The Company has identified and initiated formal communications with all
of its significant vendors to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remedy their
own Year 2000 issue. At this time, the Company has indications that it's two
critical systems serviced by outside vendors will be Year 2000 compliant by the
end of 1998. However, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be timely
converted and would not have an adverse effect on the Company's operations. The
Company has also initiated formal communications with all its significant loan
customers to assess the impact of the Year 2000 issue on the borrowers ability
to repay and to determine the borrowers' ability and readiness to become Year
2000 compliant.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the
40
<PAGE>
software and third-party vendor programs for Year 2000 compliance. The Company
anticipates completing the Year 2000 project within one year but not later than
October 31, 1999, which is prior to any anticipated impact on its operating
systems. The cost of the Year 2000 project will be funded through operating cash
flows. While Management does not anticipate the cost of the Year 2000 project to
have a material impact on the Company's financial condition, operations or cash
flows, the Project is currently substantially incomplete in the areas of testing
the computer systems and assessing the impact of the Year 2000 issue on
borrowers.
The anticipated costs of the project and the date on which the Company
believes it will complete the Year 2000 project is based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
41
<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>
42
<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>
43
<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>
44
<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 98,948 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>
45
<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
46
<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
47
<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.
48
<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.
49
<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.
50
<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.
51
<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.
52
<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>
53
<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.
54
<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.
55
<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).
56
<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
================================================================================
57
<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
58
<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
59
<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>
60
<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.
61
<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.
62
<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
63
<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
64
<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.
65
<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>
66
<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.
67
<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.
68
<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>
69
<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.
70
<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.
71
<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.
72
<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
73
<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
74
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
Directors
George M. Apelian, 66, has been a Director of the
Company since December 1997 when the Company acquired County
Financial Corporation ("CFC"). Mr. Apelian served as President
and director of CFC since 1984 and as President, Chief
Executive Officer and director of County National Bank of
South Florida ("County") since 1984. Mr. Apelian has been in
the banking industry since 1958.
Paula Berliner, 54, has been a Director of the
Company since June 1997, when the Company acquired Family Bank
and was a Director of Family Bank since its inception in 1986.
Ms. Berliner has been Vice President and Director of Acorn
Venture Capital Corporation, a public venture capital company
traded on the Nasdaq Small-Cap Market, since June 1992.
Dr. Thomas F. Carney, 71, has been a Director of the
Company since December 1997, when the Company acquired CFC.
He served as a member of the Board of Directors of County
since 1962 and as Chairman of the Board of County since
1967. Dr. Carney served as a member of the Board of
Directors of CFC since 1984.
Joseph D. Cesarotti, 69, has been a Director of the
Company since June 1997, when the Company acquired Family Bank
and was a Director of Family Bank since its inception in 1986.
Mr. Cesarotti has been retired since June 1992. Prior to his
retirement and from 1956, Mr. Cesarotti served as President
and Chief Executive Officer of Sungraf Inc., a sign
manufacturing company.
Mary Anna Fowler, 70, has been a Director of the
Company since June 1997, when the Company acquired Family Bank
and was a Director of Family Bank since its inception in 1986.
Since 1991, Ms. Fowler has been Vice President of Exotic
Gardens, Inc., a florist company.
H. Gearl Gore, 50, has been a Director and the
Secretary of the Company since its inception. He has been the
President of H. Gearl Gore, Inc., a real estate appraisal firm
in Jupiter, Florida since 1983. Mr. Gore has been the
President and Chief Operating Officer of Northco Investment
Properties, Inc., a real estate brokerage firm in Jupiter,
Florida, from 1981 to present.
Richard J. Haskins, 48, has been Executive Vice
President and Chief Financial Officer of the Company and the
Bank since 1989, Senior Vice President of the Company and the
Bank since August 1984, and a Director of the Company and the
Bank since 1986. For ten years prior to 1984, he had been an
accountant with the West Palm Beach, Florida office of
Deloitte Haskins & Sells, certified public accountants, where
he held the position of Manager.
Eugene W. Hughes, Jr., 65, has been a Director of the
Company since June 1997, when the Company acquired Family
Bank and was a Director of Family Bank since its inception
in 1986. Mr. Hughes served as Vice President and Chief
Financial Officer of Family Bank from August 1988 to
December 31, 1994. Mr. Hughes is currently retired.
75
<PAGE>
Thomas J. Langan, Jr., 77, has been a Director of the
Company since December 1997, when the Company acquired CFC. He
served as a Director of Carney Bank from 1991 until the merger
with County in 1996 when he became a director of CFC and
County. Mr. Langan was in the banking profession from 1949 to
1983.
Lennart E. Lindahl, Jr., 54, has been a Director of
the Company since its inception. From 1970 through 1994, he
was President of Lindahl, Browning, Ferrari & Hellstrom, Inc.,
Consulting Engineers in Jupiter, Florida, and currently serves
as Chairman of the Board. He is past chairman of the Economic
Council of Palm Beach County and past president of the Palm
Beach County Development Board. Additionally, he currently
serves as a member and past Chairman of the Florida Inland
Navigation District.
Mary McCarty, 43, has been a Director of the Company
since December 1997 when the Company acquired CFC. Ms. McCarty
served as a Director of CFC and County since May 1997. She was
elected to District IV Palm Beach County Commission in
November 1990 and continues to serve in such position. She was
voted Chair of the Palm Beach Commission in November of 1992.
Carol R. Owen, 62, has been a Director of the Company
since June 1997, when the Company acquired Family Bank and was
a Director, Chief Executive Officer and President of Family
Bank since its inception in 1986.
Richard C. Rathke, 66, has been a Director of the
Company since its inception. He has been the President of RCR
Enterprises, Inc., a real estate development firm in Jupiter,
Florida, since 1979.
Rudy E. Schupp, 47, has been President and Chief
Executive Officer of the Company since 1985, and the President
and Chief Executive Officer of the Bank since its inception.
From 1980 to 1984, Mr. Schupp was employed by AmeriFirst Bank,
FSB, Miami, Florida, where he held the position of Division
Vice President and, previously, was Senior Vice President and
Division Manager of the Orlando Division of AmeriFirst Bank,
FSB.
Victor Siegel, M.D., 50, has been a Director of the
Company since 1989. He is a physician and surgeon specializing
in Obstetrics and Gynecology and has been practicing in Palm
Beach County since January 1982. He has been Chief of the
Department of Obstetrics and Gynecology at Wellington Hospital
since 1993. He is also on the Board of Directors for the non
profit Jupiter Theater of the Performing Arts.
William F. Spitznagel, 71, has been a Director of the
Company since its inception through December 31, 1986 and from
February 21, 1987 to present. He was Chairman and President of
Roadway Services, Inc., a motor freight company, from 1978
until his retirement in 1981.
Bruce E. Wiita, M.D., 60, has been a Director of the
Company since its inception. He is a surgeon and urologist
practicing in Jupiter and Palm Beach Gardens since 1973. He is
the former Chief of Staff of the Jupiter Hospital and Chief of
Surgery of the Palm Beach Gardens Hospital and Jupiter
Hospital. Currently, he is a Director of the American Heritage
Management and Development Corporation, a real estate
development company, and Chairman of the DevMed Group Inc., a
medical device manufacturing corporation.
William Wolfson, 69, has been a Director of the
Company since 1993. He has been a certified public accountant
since 1960 and in 1995 retired as senior partner in the
accounting firm of Wolfson, Milowsky, Melzer, Ettinger &
Wieselthier, P.C.
76
<PAGE>
Executive Officers
Bruce Keir, 45, has been Executive Vice President,
Broward County, of the Company since June 1997, when the
Company acquired Family Bank. Prior to the acquisition he was
the Executive Vice President of Family Bank for 6 years.
Andy Kirkman, 42, has been Senior Vice President,
Personal Banking, of the Company since August 1995. Prior to
joining the Company he was Vice President and Hub Manager with
First Union Bank for 10 years.
Nancy Nadeau, 47, has been Vice President, Facilities
and Systems Operations Administration, of the Company since
September 1994. Prior to joining the Company she was Vice
President, Branch Manager with Sun Bank.
Carla H. Pollard, 32, has been Vice President,
Controller of the Company since June 1994. Prior to joining
the Company she was with the accounting firm KPMG Peat Marwick
for 4 years.
Rogar Savage, 51, has been Senior Vice President,
Business Banking, of the Company since September 1992. Prior
to joining the Company he was President and Chief Executive
Officer of First National Bank of Lake Park for 5 years.
Joan Schimelman, 38, has been Senior Vice President,
Director of Human Resources and Training, of the Company since
May 1993. Prior to joining the Company she was Vice President,
Human Resources with Flagler National Bank.
Tom Tribby, 54, has been Division President, Trust
and Investment Services, of the Company since July 1997. Prior
to joining the Company he was Trust Consultant for the states
of Arizona and Utah with Banc One Trust Company of Ohio in
Phoenix, Arizona.
Jon Williams, 46, has been Senior Vice President,
Loan Administration, of the Company since June 1992. Prior to
joining the Company he was Vice President, Portfolio Manager,
for Security First Federal Savings Bank in Daytona Beach for 7
years.
ITEMS 11, 12, and 13: EXECUTIVE COMPENSATION, BENEFITS AND RELATED MATTERS
The information required under these items is
contained in the Company's 1998 Proxy Statement which will be
filed with the Securities and Exchange Commission within 120
days after the close of the Company's fiscal year end. This
information is incorporated herein by reference.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) Documents files as a part of the Report:
1) Financial Statements:
The financial statements required by
this item are included in Part II,
Item 8 of this Report.
2) Financial Statement Schedules:
The financial statement shedules
required by this item are included
in Part II, Item 8 of this Report.
77
<PAGE>
3) Exhibits:
The following is a list of all exhibits filed as a part of this Report:
Exhibit Description of Document
3(a) Articles of Incorporation, as amended of Republic
Security Financial Corporation (1)
(b) Bylaws, as amended, of Republic Security Financial
Corporation (1)
4(a) Form of Common Stock Certificate of Republic
Security Financial Corporation (1)
(b) Form of Series C Preferred Stock Certificate and
Designations, Relative Rights, Preferences and
Limitations (2)
(c) Rights Agreement by and between Republic
Security Financial Corporation and IBJ Schroder
Bank and Trust Company (3)
10 (a) Employment Agreement between Republic
Security Financial Corporation and R.E. Schupp, as
amended (4)
(b) Employment Agreement between Republic
Security Financial Corporation and Richard J.
Haskins, as amended (4)
(c) Forms of Supplemental Executive Retirement Plan
Agreements (1)
(d) Supplemental Executive Reirement Program
Agreement - Richard J. Haskins (1)
(e) Supplemental Executive Reirement Program
Agreement - R.E. Schupp (1)
(f) Restricted Stock Plan (5)
(g) Restricted Stock Plan Agreement - Richard J.
Haskins (5)
(h) Restricted Stock Plan Agreement - R.E. Schupp (5)
(i) Stock Appreciation Rights Agreement between
Republic Security Financial Corporation and Rudy
E. Schupp (6)
(j) Stock Appreciation Rights Agreement between
Republic Security Financial Corporation and
Richard J. Haskins (6)
(k) Stock Appreciation Rights Agreement between
Republic Security Financial Corporation and non-
employee directors (6)
(l) Republic Security Financial Corporation 1997
Performance Incentive Plan (7)
(m) Employment Agreement with Carol Owen (7)
(n) Employment Agreement with Bruce Keir (7)
(o) Employment Agreement with George Apelian (8)
(p) Employment Agreement with Richard Kuci (8)
21 Subsidiaries of Republic Security Financial
Corporation
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
All other Exhibits are omitted because they are not applicable
(1) Incorporated by reference to Registration
Statement on Form S-1, File No. 2-99505
(2) Incorporated by reference to Registration
Statement on Form S-1, File No. 33-62847
(3) Incorporated by reference to
Form 8-K, as filed with the Securities
and Exchange Commission on April 27, 1995
78
<PAGE>
(4) Incorporated by reference to Form 10-K as filed
with the Securities and Exchange Commission on
June 24, 1994
(5) Incorporated by reference to Form 10-K as filed
with the Securities and Exchange Commission on
June 28, 1990
(6) Incorporated by reference to Form 10-K as filed
with the Securities and Exchange Commission on
March 28, 1996
(7) Incorporated by reference to Registration
Statement on Form S-4, File No. 333-24821
(8) Incorporated by reference to Registration
Statement on Form S-4, File No. 333-36717
b) Reports on Form 8-K
During the last quarter of the period ending December
31, 1997, the Company filed one Form 8-K. The Form 8-K
filing, which was dated December 8, 1997, reported the
acquisition of County Financial Corporation and County
National Bank of South Florida in a stock-for-stock
transaction.
79
<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 21
SUBSIDIARIES OF REGISTRANT
1. Republic Security Bank, a State Chartered Commercial Bank.
2. Republic Brokerage Corporation, a Florida corporation.
<PAGE>
EXHIBIT 23
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-02307) pertaining to the Employees' Stock Purchase
Plan of Republic Security Financial Corporation and to the incorporation by
reference in the Registration Statement (Form S-3 No. 333-2303) of Republic
Security Financial Corporation and in the related Prospectus to the Registration
Statement (Form S-8 No. 333-33213) pertaining to the 1997 Performance Incentive
Plan and to the Registration Statement (Form S-8 No. 333- 33161) pertaining to
the Director and Officer Purchase Rights Plans of our report dated February 16,
1998, with respect to the consolidated financial statements of Republic Security
Financial Corporation included in this Annual Report (Form 10-K) for the year
ended December 31, 1997.
West Palm Beach, Florida
March 19, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> Dec-31-1997 Dec-31-1996 Dec-31-1995
<PERIOD-START> Jan-1-1997 Jan-1-1996 Jan-1-1995
<PERIOD-END> Dec-31-1997 Dec-31-1996 Dec-31-1995
<CASH> 59,723 33,259 27,167
<INT-BEARING-DEPOSITS> 66,886 34,430 51,162
<FED-FUNDS-SOLD> 7,665 32,610 18,186
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 116,762 106,130 71,269
<INVESTMENTS-CARRYING> 10,277 45,818 37,235
<INVESTMENTS-MARKET> 10,305 46,003 37,610
<LOANS> 637,620 557,040 503,578
<ALLOWANCE> 6,663 6,400 6,785
<TOTAL-ASSETS> 949,280 853,105 743,184
<DEPOSITS> 742,263 700,700 612,038
<SHORT-TERM> 74,443 19,613 34,233
<LIABILITIES-OTHER> 21,418 20,489 14,450
<LONG-TERM> 25,000 25,000 0
0 0 0
9,490 10,350 14,365
<COMMON> 54,008 51,080 45,767
<OTHER-SE> 22,658 25,873 22,331
<TOTAL-LIABILITIES-AND-EQUITY> 949,280 853,105 743,184
<INTEREST-LOAN> 53,995 50,643 35,713
<INTEREST-INVEST> 11,672 9,566 6,177
<INTEREST-OTHER> 0 0 0
<INTEREST-TOTAL> 65,667 60,209 41,890
<INTEREST-DEPOSIT> 22,477 21,079 14,873
<INTEREST-EXPENSE> 24,820 21,674 15,924
<INTEREST-INCOME-NET> 40,847 38,535 25,966
<LOAN-LOSSES> 1,717 379 434
<SECURITIES-GAINS> 303 168 (21)
<EXPENSE-OTHER> 46,153 36,474 22,813
<INCOME-PRETAX> 2,993 11,638 9,621
<INCOME-PRE-EXTRAORDINARY> 1,806 7,764 6,232
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,806 7,764 6,232
<EPS-PRIMARY> .05 .33 .32
<EPS-DILUTED> .05 .31 .30
<YIELD-ACTUAL> 5.34 5.50 5.46
<LOANS-NON> 5,414 7,143 5,974
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 6,400 6,785 6,757
<CHARGE-OFFS> 2,204 1,656 1,175
<RECOVERIES> 750 518 769
<ALLOWANCE-CLOSE> 6,663 6,400 6,785
<ALLOWANCE-DOMESTIC> 6,663 6,400 6,785
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 1,407 2,869 2,778
</TABLE>
