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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 000-22817
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HARBOR FLORIDA BANCSHARES, INC
------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 65-0813766
- --------- -------------------------
(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
100 S. SECOND STREET
FORT PIERCE, FL 34950
(Address of principal executive offices/ZIP code)
Registrant's telephone number, including area code (561) 461-2414
--------------------------
Indicate by check whether the Registrant: (1) has filed all reports
required to be filed by 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 ____
As of July 16, 2002, there were 24,196,361 shares of the Registrant's
common stock outstanding.
HARBOR FLORIDA BANCSHARES, INC.
Table of Contents
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as
of June 30, 2002 and September 30, 2001
(unaudited)...........................................................2
Condensed Consolidated Statements of Earnings for the three
and nine months ended June 30, 2002 and 2001
(unaudited)...........................................................3
Condensed Consolidated Statements of Cash Flows for the nine
months ended June 30, 2002 and 2001
(unaudited)...........................................................4
Notes to Condensed Consolidated Financial Statements
(unaudited)...........................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................14
Item 3. Quantitative and Qualitative Disclosures about Market
Risk and Asset and Liability Management...........................20
Part II. Other Information
Item 1. Legal Proceedings....................................................20
Item 2. Changes in Securities................................................20
Item 3. Defaults Upon Senior Securities......................................20
Item 4. Submission of Matters to a Vote of Security-Holders..................20
Item 5. Other Information....................................................20
Item 6. Exhibits and Reports on Form 8-K.....................................20
Signature Page.......................................................22
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (unaudited)
(In thousands)
June 30, September 30,
2002 2001
---- -----
Assets
Cash and amounts due from depository institutions $ 51,336 $ 41,134
Interest-bearing deposits in other banks 82,010 51,658
Investment securities held to maturity 200 200
Investment securities available for sale 96,424 46,414
Mortgage-backed securities held to maturity 195,945 153,714
Loans held for sale 3,232 5,373
Loans, net 1,508,442 1,401,873
Accrued interest receivable 9,392 9,210
Real estate owned 755 917
Premises and equipment 24,954 24,101
Federal Home Loan Bank stock 20,277 15,027
Goodwill, net 3,378 3,378
Other assets 1,897 2,109
----------- ----------
Total assets $ 1,998,242 $1,755,108
=========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 1,338,783 $ 1,200,092
Short-term borrowings 15,004 10,043
Long-term debt 380,532 285,544
Advance payments by borrowers for taxes and insurance 17,471 22,915
Income taxes payable 1,371 4,138
Other liabilities 8,553 7,541
----------- ----------
Total liabilities 1,761,714 1,530,273
----------- ----------
Stockholders' Equity:
Preferred stock --- ---
Common stock 3,143 3,121
Paid-in capital 195,389 192,537
Retained earnings 140,742 125,084
Accumulated other comprehensive income, net 1,998 1,602
Common stock purchased by:
Employee stock ownership plan (ESOP) (10,825) (11,349)
Recognition and retention plans (RRP) (4,436) (4,547)
Treasury stock (89,483) (81,613)
----------- ----------
Total stockholders' equity 236,528 224,835
----------- ----------
Total liabilities and stockholders' equity $ 1,998,242 $1,755,108
=========== ==========
See accompanying notes to condensed consolidated financial statements.
2
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (unaudited)
(In thousands except share data)
Three months ended Nine months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Loans $ 28,782 $ 27,831 $ 85,369 $ 81,579
Investment securities 1,118 1,016 3,016 3,628
Mortgage-backed securities 3,064 2,302 8,294 7,378
Other 227 846 988 1,506
---------- ---------- -------- --------
Total interest income 33,191 31,995 97,667 94,091
---------- ---------- -------- --------
Interest expense:
Deposits 8,884 12,809 29,253 38,374
Other 4,720 3,797 13,421 10,904
---------- ---------- -------- --------
Total interest expense 13,604 16,606 42,674 49,278
---------- ---------- -------- --------
Net interest income 19,587 15,389 54,993 44,813
Provision for loan losses 403 170 1,117 579
---------- ---------- -------- --------
Net interest income after provision for loan
losses 19,184 15,219 53,876 44,234
---------- ---------- -------- --------
Other income:
Other fees and service charges 2,761 2,200 7,768 6,324
Insurance commissions and fees 514 483 1,605 1,202
Income (loss) from real estate operations (4) 63 84 234
Gain on sale of mortgage loans 481 93 1,433 194
Gain on sale of securities 467 336 467 889
Gain (loss) on sale of premises and equipment 32 (8) 26 683
Other 8 15 18 25
---------- ---------- -------- --------
Total other income 4,259 3,182 11,401 9,551
---------- ---------- -------- --------
Other expenses:
Compensation and employee benefits 5,545 4,700 16,029 13,727
Occupancy 1,396 1,326 3,946 3,579
Data processing services 670 569 1,933 1,535
Advertising and promotion 227 303 784 848
Other 1,656 1,485 4,768 4,382
---------- ---------- -------- --------
Total other expense 9,494 8,383 27,460 24,071
---------- ---------- -------- --------
Income before income taxes 13,949 10,018 37,817 29,714
Income tax expense 5,462 3,946 14,774 11,646
---------- ---------- -------- --------
Net income $ 8,487 $ 6,072 $ 23,043 $ 18,068
========== ========== ======== ========
Net income per share
Basic $ 0.37 $ 0.27 $ 1.01 $ 0.78
====== ====== ====== ======
Diluted $ 0.37 $ 0.25 $ 0.99 $ 0.76
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
3
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Nine months ended
June 30,
2002 2001
---- ----
Cash provided by operating activities:
Net income $ 23,043 $ 18,068
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of investment securities available for sale (467) (889)
(Gain) loss on sale of premises and equipment (26) (683)
(Gain) loss on sale of real estate owned 23 (194)
Gain on sale of loans held for sale (1,433) (194)
Provision for loan losses 1,117 579
Depreciation and amortization 1,390 1,927
ESOP forfeitures (57) (17)
Accretion of discount on purchased loans --- (6)
Deferred income tax expense (benefit) 120 (439)
Originations of loans held for sale (72,369) (18,772)
Proceeds from sale of loans held for sale 75,943 17,430
Increase in deferred loan fees and costs 3,214 1,720
Increase in accrued interest receivable (182) (640)
(Increase) decrease in other assets 212 (985)
Increase (decrease) in income taxes payable (2,645) 565
Increase in other liabilities 645 1,178
-------------- --------------
Net cash provided by operating activities 28,528 18,648
-------------- --------------
Cash used by investing activities:
Net increase in loans (109,652) (119,098)
Purchase of mortgage-backed securities (84,143) ---
Proceeds from principal repayments of mortgage-backed securities 41,810 25,742
Proceeds from maturities and calls of investment securities
available for sale 10,000 39,999
Proceeds from sale of investment securities available for sale 1,931 5,330
Purchase of investment securities available for sale (60,934) (12,473)
Proceeds from sale of real estate owned 1,112 1,435
Purchase of premises and equipment (2,640) (4,980)
Proceeds from sale of premises and equipment 101 983
FHLB stock purchase (5,250) (1,278)
Net cash used by purchase of insurance agency --- (9)
-------------- --------------
Net cash used by investing activities (207,665) (64,349)
-------------- --------------
4
Nine months ended
June 30,
2002 2001
---- ----
Cash provided by financing activities:
Net increase in deposits 138,691 107,473
Net repayments of short-term borrowings (10,000) (13,000)
Net proceeds from long-term borrowings 110,000 50,553
Repayments of borrowings (51) (41)
Decrease in advance payments by borrowers for taxes and insurance (5,444) (3,403)
Dividends paid (7,385) (6,664)
Common stock options exercised 1,693 321
Purchase of treasury stock (7,813) (8,832)
-------------- --------------
Net cash provided by financing activities 219,691 126,407
-------------- --------------
Net increase in cash and cash equivalents 40,554 80,706
Cash and cash equivalents - beginning of period 92,792 29,814
-------------- --------------
Cash and cash equivalents - end of period $133,346 $110,520
============== ==============
Supplemental disclosures:
Cash paid for:
Interest $42,640 $48,788
Taxes 17,300 11,520
Noncash investing and financing activities:
Additions to real estate acquired in settlement of loans
through foreclosure 1,129 2,073
Sale of real estate owned financed by the Company 156 966
Tax benefit of stock plans credited to capital 122 155
Change in unrealized gain on securities available for sale 643 1,262
Change in deferred taxes related to securities available for
sale (247) (487)
Treasury stock issued to purchase insurance company --- 117
Transfer to short-term borrowings from long-term debt 15,000 42
See accompanying notes to condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements
1). BASIS OF PRESENTATION
The unaudited condensed consolidated interim financial statements for Harbor
Florida Bancshares, Inc. (the "Company") and its subsidiary Harbor Federal
Savings Bank (the "Bank") reflect all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are necessary to
present fairly the Company's consolidated financial condition and the
consolidated results of operations and cash flows for interim periods. The
results for interim periods are not necessarily indicative of trends or results
to be expected for the full year. These condensed consolidated interim financial
statements and notes should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended September 30, 2001.
The Company's only significant business is holding the common stock of the Bank.
Consequently, its net income is primarily derived from the Bank.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations",
("Statement 141") and SFAS No. 142, "Goodwill and Other Intangible Assets,"
("Statement 142"). Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. Statement
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Other intangible assets would
continue to be amortized over their estimated useful lives. In the transition,
any impairment losses will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
The Company adopted the provisions of Statement 141 immediately and the Company
adopted Statement 142 effective October 1, 2001. As of the date of adoption, the
Company had unamortized goodwill in the amount of approximately $3,378,000 that
is subject to the transition provisions of Statements 141 and 142. Pursuant to
Statement 142, the Company no longer amortizes goodwill. Amortization expense
related to goodwill was approximately $300,000 and $223,000 for the years ended
September 30, 2001 and 2000, respectively. Upon adoption, the Company did not
have a transitional impairment loss. Had goodwill amortization been excluded
from net income for the three and nine months ended June 30, 2001, net income
would have increased to $6,148,179 and $18,291,312 respectively. Basic earnings
per share for the three and nine months ended June 30, 2001 would have remained
at $0.27 and increased to $0.79 per share, respectively, and diluted earnings
per share would have increased to $0.26 and $0.77 per share, respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("Statement 143"), which addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Statement 143 is
effective for fiscal years beginning after June 15, 2002. This Statement is not
expected to have a material impact on the Company's financial statements.
6
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets" ("Statement 144") which supercedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("Statement 121") and the accounting and reporting provisions of APB No. 30,
"Reporting the Results of Operation - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. While
Statement 144 retains many of the fundamental provisions of Statement 121, it
establishes a single accounting model for long-lived assets to be disposed of by
sale, and resolves certain implementation issues not previously addressed by
Statement 121. Statement 144 is effective for fiscal years beginning after
December 15, 2001. This Statement is not expected to have a material impact on
the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("Statement 145"). Among other things, Statement 145 rescinds FASB Statement No.
4, "Reporting Gains and Losses From Extinguishment of Debt", which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. The
provisions of Statement 145 related to the rescission of FASB Statement No. 4
are effective for fiscal years beginning after May 15, 2002, with early
application encouraged. This statement is not expected to have a material impact
on the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("Statement 146") which requires, among other
things, recording a liability for costs associated with an exit or disposal
activity when that liability is incurred and can be measured at fair value.
Commitment to an exit plan or a plan of disposal expresses only management's
future actions and, therefore, does not meet the requirement for recognizing a
liability and the related expense. The provisions of Statement 146 are effective
prospectively for exit and disposal activities initiated after December 31,
2002, with early application encouraged. This statement is not expected to have
a material impact on the Company's consolidated financial statements.
7
2). NET INCOME PER SHARE
Net income per share was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the three and nine months
ended June 30, 2002 and 2001. Adjustments have been made, where material, to
give effect to the shares that would be outstanding, assuming the exercise of
dilutive stock options, all of which are considered common stock equivalents.
Three months ended Nine months ended
June 30, June 30,
--------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net income $8,486,929 $6,071,954 $23,043,230 $18,067,873
========== ========= ========== ==========
Weighted average common shares outstanding:
Shares outstanding 23,846,382 24,297,206 23,865,812 24,425,786
Less weighted average
Uncommitted ESOP shares (1,093,948) (1,163,788) (1,111,408) (1,181,248)
---------- ---------- ---------- ----------
Total
22,752,434 23,133,418 22,754,404 23,244,538
========== ========== ========== ==========
Basic earnings per share $ 0.37 $ 0.27 $ 1.01 $ 0.78
===== ===== ===== =====
Weighted average common shares outstanding 22,752,434 23,133,418 22,754,404 23,244,538
Additional dilutive shares related to
stock benefit plans 682,975 610,912 583,393 490,791
---------- ---------- ---------- ----------
Total weighted average common shares and
equivalents outstanding for diluted
earnings per share computation 23,435,409 23,744,330 23,337,797 23,735,329
========== ========== ========== ==========
Diluted earnings per share $ 0.37 $ 0.25 $ 0.99 $ 0.76
===== ===== ===== =====
Additional dilutive shares are calculated under the treasury stock method
utilizing the average market value of the Company's stock for the period.
8
3). INVESTMENT AND MORTGAGE BACKED SECURITIES
The amortized cost and estimated market value of investment and mortgage-backed
securities as of June 30, 2002 are as follows:
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses market value
---- ----- ------ ------------
(In thousands)
Available for sale:
FHLMC notes $ 40,280 $ 533 $--- $ 40,813
FHLB notes 50,128 907 --- 51,035
-------- ------ ---- --------
90,408 1,440 --- 91,848
Equity securities 2,764 1,812 --- 4,576
-------- ------ ---- --------
93,172 3,252 --- 96,424
-------- ------ ---- --------
Held to maturity:
Municipal securities 200 23 --- 223
-------- ------ ---- --------
200 23 --- 223
-------- ------ ---- --------
FHLMC mortgage-backed securities 96,861 2,405 1 99,265
FNMA mortgage-backed securities 99,084 2,788 --- 101,872
-------- ------ ---- --------
195,945 5,193 1 201,137
-------- ------ ---- --------
$289,317 $8,468 $ 1 $297,784
======== ====== ==== ========
The amortized cost and estimated market value of investment and mortgage-backed
securities as of September 30, 2001 are as follows:
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses market value
---- ----- ------ ------------
(In thousands)
Available for sale:
FHLB notes $ 29,839 $ 1,152 $--- $ 30,991
FHLMC notes 10,089 369 --- 10,458
-------- ------ ---- --------
39,928 1,521 --- 41,449
Equity securities 3,877 1,088 --- 4,965
-------- ------ ---- --------
43,805 2,609 --- 46,414
-------- ------ ---- --------
Held to maturity:
Municipal securities 200 20 --- 220
-------- ------ ---- --------
200 20 --- 220
-------- ------ ---- --------
FHLMC mortgage-backed securities 61,586 1,216 --- 62,802
FNMA mortgage-backed securities 92,128 1,970 --- 94,098
-------- ------ ---- --------
153,714 3,186 --- 156,900
-------- ------ ---- --------
$197,719 $5,815 $ --- $203,534
======== ====== ====== ========
9
The amortized cost and estimated market value of debt securities at June 30,
2002 and September 30, 2001 by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
June 30, 2002 September 30, 2001
------------- ------------------
Amortized Estimated Amortized Estimated
cost market value cost market value
---- ------------ ---- ------------
(In thousands)
Available for sale:
Due in one year or less $30,090 $ 30,725 $ 10,000 $ 10,175
Due in one to five years 60,318 61,123 29,928 31,274
------- ------- ------- -------
90,408 91,848 39,928 41,449
------- ------- ------- -------
Held to maturity:
Due after ten years 200 223 200 220
------- ------- ------- -------
200 223 200 220
------- ------- ------- -------
FHLMC mortgage-backed securities 96,861 99,265 61,586 62,802
FNMA mortgage-backed securities 99,084 101,872 92,128 94,098
------- ------- ------- -------
195,945 201,137 153,714 156,900
------- ------- ------- -------
$286,553 $293,208 $193,842 $198,569
======= ======= ======= =======
As of June 30, 2002, the Company had pledged mortgage-backed securities with a
market value of $13,666,000 and a carrying value of $13,257,000 to collateralize
the public funds on deposit. The Company had also pledged mortgage-backed
securities with a market value of $1,274,000 and a carrying value of $1,198,000
to collateralize treasury, tax and loan accounts as of June 30, 2002.
10
4). LOANS
Loans are summarized below:
June 30, September 30,
2002 2001
---- ----
Mortgage loans: (In thousands)
Construction 1-4 family $ 138,148 $ 119,648
Permanent 1-4 family 1,064,269 1,016,248
Multi-family 15,673 21,314
Nonresidential 151,930 129,875
Land 68,361 51,196
--------- ---------
Total mortgage loans 1,438,381 1,338,281
--------- ---------
Other loans:
Commercial 30,797 31,945
Home improvement 25,289 24,973
Manufactured housing 14,815 14,607
Other consumer 110,640 95,074
--------- ---------
Total other loans 181,541 166,599
--------- ---------
Total loans 1,619,922 1,504,880
--------- ---------
Less:
Loans in process 91,587 84,777
Net deferred loan fees and discounts 5,807 4,813
Allowance for loan losses 14,086 13,417
--------- ---------
111,480 103,007
--------- ---------
Total loans, net $1,508,442 $1,401,873
========= =========
An analysis of the allowance for loan losses follows:
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Beginning balance $ 13,914 $ 13,008 $ 13,417 $ 12,729
Provision for loan losses 403 170 1,117 579
Charge-offs (250) (61) (507) (271)
Recoveries 19 92 59 172
-------- -------- -------- --------
Ending balance $ 14,086 $ 13,209 $ 14,086 $ 13,209
======== ======== ======== ========
11
The allowance for loan losses consists of general allowances of $14,058,000 and
$13,417,000 and specific allowances of $28,000 and $0 at June 30, 2002 and
September 30, 2001, respectively. The specific allowances relate to impaired
loans (primarily consisting of classified commercial loans), other than those
evaluated collectively, of $10,687,000 and $5,813,000 at June 30, 2002 and
September 30, 2001, respectively. The Company evaluates impaired loans based on
(a) the present value of the expected future cash flows of the impaired loan
discounted at the loan's original effective interest rate, (b) the observable
market price of the impaired loan, or (c) the fair value of the collateral of a
collateral dependant loan. To the extent that an impaired loan's value is less
than the loan's recorded investment, a specific allowance is recorded.
At June 30, 2002 and September 30, 2001, loans with unpaid principal balances of
approximately $2,706,000 and $2,585,000, respectively, were 90 days or more
contractually delinquent or on nonaccrual status. As of June 30, 2002 and
September 30, 2001, approximately $2,532,000 and $2,011,000, respectively, of
these loans were in the process of foreclosure.
As of June 30, 2002 and September 30, 2001 mortgage loans which had been sold on
a recourse basis had outstanding principal balances of approximately $413,000
and $644,000 respectively.
5). COMPREHENSIVE INCOME
The following table sets forth the components of the Company's comprehensive
income:
Three months ended Nine months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Net income $8,487 $6,072 $23,043 $ 18,068
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available for sale
(net of deferred tax of $208 and $(137) for the
three months ended June 30, 2002 and 2001,
respectively, and $247 and $487 for the nine months
ended June 30, 2002 and
2001, respectively) 333 (221) 396 775
------ ------- -------- --------
Comprehensive income $8,820 $ 5,851 $ 23,439 $ 18,843
====== ======= ======== ========
12
6) TRANSFERS OF FINANCIAL ASSETS AND SERVICING RIGHTS RETAINED
Transfers of financial assets, primarily mortgage loans, are accounted for as
sales when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.
Upon completion of a transfer of assets that satisfies the conditions described
above to be accounted for as a sale, the Company:
a. Derecognizes all assets sold
b. Recognizes all assets obtained and liabilities incurred in consideration as
proceeds of the sale
c. Initially measures, at fair value, assets obtained and liabilities incurred
in a sale
d. Recognizes in earnings any gain or loss on the sale.
The Company recognized gains on sales of mortgage loans of $481,000 and $93,000,
respectively, for the three months ended June 30, 2002 and 2001. For the nine
months ended June 30, 2002 and 2001, the Company recognized gains on sale of
mortgage loans of $1,433,000 and $194,000, respectively.
The Company receives fees for servicing activities on loans it has sold. These
activities include, but are not limited to, collecting principal, interest and
escrow payments from borrowers; paying taxes and insurance from escrowed funds;
monitoring delinquencies; and accounting for and remitting principal and
interest payments. To the extent that the servicing fees exceed or do not
provide adequate compensation for the services provided, the Company records a
servicing asset or liability for the fair value of the servicing retained.
Currently, the servicing fees retained by the Company are just adequate to
compensate the Company for the servicing responsibilities. As of June 30, 2002,
no servicing assets and/or liabilities were recognized.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note Regarding Forward-Looking Statements
This report contains certain "forward-looking statements." Harbor Florida
Bancshares, Inc. (the "Company") desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and is
including this statement for the express purpose of availing itself of the
protections of the safe harbor with respect to all such forward-looking
statements. These forward-looking statements, which are included in Management's
Discussion and Analysis, describe future plans or strategies and include the
Company's expectations of future financial results. The words "believe,"
"expect," "anticipate," "estimate," "project," and similar expressions identify
forward-looking statements. The Company's ability to predict results or the
effect of future plans or strategies or qualitative or quantitative changes
based on market risk exposure is inherently uncertain. Factors which could
affect actual results include but are not limited to i) change in general market
interest rates, ii) general economic conditions, iii) legislative/regulatory
changes, iv) monetary and fiscal policies of the U.S. Treasury and the Federal
Reserve, v) changes in the quality or composition of the Company's loan and
investment portfolios, vi) demand for loan products, vii) deposit flows, viii)
competition, and ix) demand for financial services in the Company's markets.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.
Results of Operations
Comparisons of quarterly results of operations in this section are between the
three months ended June 30, 2002 and June 30, 2001. Comparison of fiscal year to
date results is between the nine months then ended.
General. Diluted earnings per share for the third fiscal quarter ended June 30,
2002, increased 48.0% to 37 cents per share on net income of $8.5 million,
compared to 25 cents per share on net income of $6.1 million for the same period
last year. Diluted earnings per share for the nine months ended June 30, 2002,
increased 30.3% to 99 cents per share on net income of $23.0 million, compared
to 76 cents per share on net income of $18.1 million for the same period last
year. The increase for both the quarter and nine months was due primarily to the
growth in the loan portfolio, the increase in the net interest margin due
primarily to a decrease in the cost of deposits and a reduction in shares
outstanding due to treasury stock purchases. Diluted earnings per share for the
quarter ended June 30, 2002 included nonrecurring income of $287,000 or 1 cent
per share, after tax, from gains on the sale of equity securities. Diluted
earnings per share for the nine months ended June 30, 2001, included
nonrecurring income of $972,000 or 4 cents per share, after tax, from gains on
the sale of an office building and equity securities.
Net Interest Income. Net interest income increased 27.3% to $19.6 million for
the quarter ended June 30, 2002, from $15.4 million for the same period last
year. For the nine months ended June 30, 2002, net interest income increased
22.7% to $55.0 million compared to $44.8 million for the same period last year.
This increase for both the quarter and nine months was due primarily to the
growth in the loan portfolio and to the decrease in the cost of deposits.
Average interest-earning assets increased by $196.5 million to $1.799 billion
for the nine months ended June 30, 2002, from $1.603 billion for the same period
last year. The average balance of the loan portfolio increased by $140.0
million. The net interest margin increased to 4.08% for the nine months ended
June 30, 2002, from 3.73% for the same period last year due primarily to the
cost of interest-bearing liabilities decreasing more than the yield on
interest-earning assets in the declining interest rate environment. The average
deposit mix changed to 39.2% and 60.8% of core deposits and certificates of
deposits, respectively, for the nine months ended June 30, 2002 from 34.3% and
65.7%, respectively, for the same period last year.
14
Provision for Loan Losses. The determination of the allowance for loan losses is
considered by management to be a critical accounting policy and is based upon
estimates made by management.
The provision for loan losses was $403,000 for the quarter ended June 30, 2002,
compared to $170,000 for the same period last year. The provision for the
quarter ended June 30, 2002 was principally comprised of a charge of $290,000
due to growth in the loan portfolio, primarily in the commercial real estate and
consumer loan portfolios, and $231,000 for net charge offs partially offset by a
credit of $118,000 related to a decrease in the level of classified loans. The
provision for the quarter ended June 30, 2001 was principally comprised of a
charge of $262,000 due to growth in the loan portfolio, primarily in the
residential and consumer loan portfolios, partially offset by credits of $61,000
related to a decrease in the level of classified loans and $31,000 for net loan
recoveries.
For the nine months ended June 30, 2002, the provision for loan losses was $1.1
million compared to $579,000 for the same period last year. The provision for
the nine months ended June 30, 2002 was principally comprised of a charge of
$362,000 due to growth in the loan portfolio, primarily in the commercial real
estate and consumer loan portfolios, $307,000 due to an increase in the level of
classified loans, due primarily to the change in classifications of two
commercial real estate loans, and $448,000 in net charge offs. The provision for
the nine months ended June 30, 2001 was principally comprised of a charge of
$255,000 related to an increase in the level of classified loans, due primarily
to the change in classification of one commercial real estate loan, $225,000 due
to loan growth, primarily in the residential and consumer loan portfolios, and
$99,000 in net charge offs. Nonperforming loans increased to $2.7 million at
June 30, 2002 from $2.5 million at June 30, 2001. The ratio of the allowance for
loan losses to total nonperforming loans decreased to 520.50% at June 30, 2002
from 537.69% at June 30, 2001.
There were no significant changes in the estimation methods or fundamental
assumptions used in the calculation of the allowance for loan losses at June 30,
2002, compared to September 30, 2001. Furthermore, there was no reallocation of
the allowance from September 30, 2001. While the Company's management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions.
Other Income. Other income increased to $4.3 million for the quarter ended June
30, 2002, from $3.2 million for the same period last year. This increase was due
primarily to increases of $561,000 in other fees and service charges, $388,000
in gain on sale of mortgage loans and $131,000 in gain on sale of equity
securities. Other fees and service charges, primarily from fees and service
charges on deposit products, were $2.8 million and $2.2 million for the quarters
ended June 30, 2002 and 2001, respectively. This increase was due primarily to
the growth in transaction accounts. Gain on the sale of mortgage loans was
$481,000 and $93,000 for the quarters ended June 30, 2002 and 2001,
respectively. This increase was due to an increase in the sale of residential
one-to-four family fixed rate mortgage loans to reduce interest rate risk by
limiting the growth of long term fixed rate loans in the portfolio.
Other income increased to $11.4 million for the nine months ended June 30, 2002,
compared to $9.6 million for the same period last year. This increase was due
primarily to increases of $1.4 million in other fees and service charges, $1.2
million in gain on sale of mortgage loans, $403,000 in insurance commissions and
fees partially offset by decreases of $422,000 in gain on the sale of equity
securities and $657,000 in gain on the sale of premises and equipment. Other
fees and service charges, primarily from fees and service charges on deposit
products, were $7.8 million and $6.3 million for the nine months ended June 30,
2002 and 2001, respectively. This increase was due primarily to the growth in
transaction accounts. Insurance commissions and fees were $1.6 million and $1.2
million for the nine months ended June 30, 2002 and 2001, respectively. This
increase was due primarily to fees from the sale of fixed rate annuities and
insurance products. Gain on sale of mortgage loans was $1.4 million and $194,000
for the nine months ended June 30, 2002 and 2001, respectively. This increase
was due to an increase in the sale of residential one-to-four fixed rate
mortgage loans to reduce interest rate risk by limiting the growth of long term
fixed rate loans in the portfolio.
15
Other Expenses. Other expenses increased to $9.5 million for the quarter ended
June 30, 2002, from $8.4 million for the same period last year. This increase
was due primarily to increases of $845,000 in compensation and benefits,
$171,000 in other expenses and $101,000 in data processing services. The
increase in compensation and benefits is due primarily to annual salary
increases and to additional staff required to support the growth in loans and
deposits. The increase in other expenses and data processing services is due
primarily to increases resulting from the growth in loans and deposits.
For the nine months ended June 30, 2002, other expenses increased to $27.5
million compared to $24.1 million for the same period last year. This increase
was due primarily to increases of $2.3 million in compensation and benefits,
$398,000 in data processing services, $386,000 in other expenses and $367,000 in
occupancy expenses. The increase in compensation and benefits is due primarily
to annual salary increases and to additional staff required to support the
growth in loans and deposits. The increases in data processing services and
other expenses are due primarily to increases resulting from the growth in loans
and deposits. The increase in occupancy expense is due primarily to an increase
in data processing equipment expense.
Income Taxes. Income tax expense increased to $5.5 million for the quarter ended
June 30, 2002, from $3.9 million for the same period last year due primarily to
an increase in pretax accounting income. The effective tax rates were 39.2% and
39.4% for the quarters ended June 30, 2002 and 2001, respectively.
For the nine months ended June 30, 2002, income tax expense increased to $14.8
million from $11.6 million for the same period last year due primarily to an
increase in pretax accounting income. The effective tax rates were 39.1% and
39.2% for the nine months ended June 30, 2002 and 2001, respectively.
Financial Condition
Comparisons of financial condition in this section are from the end of the
preceding fiscal year to June 30, 2002.
Total assets increased to $1.998 billion at June 30, 2002, from $1.755 billion
at the fiscal year ended September 30, 2001. The increase is due primarily to
the growth in net loans, investment securities, mortgage-backed securities and
interest bearing deposits in other banks.
Interest-bearing deposits in other banks increased to $82.0 million at June 30,
2002, from $51.7 million at September 30, 2001. The increase is due primarily to
an increase in funds on deposit at the FHLB resulting from the excess cash
provided by the net increase in deposits and FHLB advances.
Investment securities available for sale increased to $96.4 million at June 30,
2002, from $46.4 million at September 30, 2001. The increase is due primarily to
the purchase of $60.5 million FHLMC and FHLB Notes partially offset by the
maturity of a $10.0 million FHLB Note. The purchases were funded with excess
cash provided by the net increase in deposits.
Mortgage-backed securities increased to $195.9 million at June 30, 2002, from
$153.7 million at September 30, 2001. The increase is due primarily to purchases
of $84.1 million of fifteen year fixed rate securities partially offset by $41.8
million of repayments. The purchases were funded with a $50 million long-term
fixed rate FHLB advance and excess cash provided by the net increase in
deposits.
16
Net loans increased to $1.508 billion at June 30, 2002, from $1.402 billion at
September 30, 2001. The increase is due primarily to loan disbursements of
$442.0 million partially offset by repayments of $332.4 million. The increase in
net loans for the nine months ended June 30, 2002 is due primarily to a net
increase of $53.9 million in residential 1-4 family mortgage loans, $22.6
million in nonresidential mortgage loans, $18.0 million in land loans, and $16.2
million in consumer loans.
Deposits increased to $1.339 billion at June 30, 2002, from $1.200 billion at
September 30, 2001. The increase is due primarily to a net increase in deposits
before interest credited of $114.1 million and interest credited of $24.6
million. The increase in deposits for the nine months ended June 30, 2002 is due
primarily to an increase of $93.2 million in core deposits and $45.5 million in
certificate accounts.
FHLB advances increased to $395.5 million at June 30, 2002, from $295.5 million
at September 30, 2001. The increase is due to $100.0 million of new long-term
fixed rate advances taken in order to fund the purchase of $50 million of
fifteen year fixed rate mortgage-backed securities and to offset the interest
rate risk of newly originated residential one-to-four family fixed rate mortgage
loans held in the portfolio.
Stockholders' equity increased to $236.5 million at June 30, 2002, from $224.8
million at September 30, 2001. The increase is due primarily to $23.0 million of
earnings for the nine months partially offset by $7.4 million of dividends paid
and the repurchase of $7.8 million of Company common stock to be held as
treasury stock. During the nine months, the Company repurchased 449,596 shares
at an average price of $17.50 per share to be held as treasury stock in
accordance with the Company's stock repurchase program.
At June 30, 2002 the Bank exceeded all regulatory capital requirements as
follows:
Required Actual
-------- ------ Excess of Actual
% of % of Over Regulatory
Amount Assets Amount Assets Requirements
------ ------ ------ ------ ------------
(Dollars in thousands)
Tangible Capital $29,851 1.50% $200,038 10.05% $170,187
Core Capital $59,701 3.00% $200,038 10.05% $140,337
Risk-Based Capital $91,343 8.00% $213,337 18.68% $121,994
17
Cash Flow
The Bank's primary sources of funds are deposits, repayments of loans and
mortgage-backed securities, maturities of investment securities and other
short-term investments, and earnings and funds from operations. The Bank will
consider increasing its borrowings from the Federal Home Loan Bank (FHLB) from
time to time as an alternative to increasing deposit account interest rates. In
addition, the Bank holds unpledged fixed and adjustable rate mortgage-backed
securities totaling $181.5 million at June 30, 2002 that could be used as
collateral under repurchase transactions with securities dealers. Repurchase
transactions serve as secured borrowings and provide a source of short-term
liquidity for the Bank. At June 30, 2002, the Bank had $802.2 million or 59.9%
of the Bank's deposits in certificates of deposits. Based on past experience,
management believes that a substantial percentage of these certificates will be
renewed at maturity, although there can be no assurance that this will occur.
The Bank would use borrowings from the FHLB or repurchase transactions with
securities dealers if replacement funding was needed as a result of maturing
certificates of deposits.
Net cash provided by the Company's operating activities (i.e. cash items
affecting net income) was $28.5 million and $18.6 million for the nine months
ended June 30, 2002 and 2001, respectively.
Net cash used by the Company's investing activities (i.e. cash used primarily
from its investment securities, mortgage-backed securities and loan portfolios)
was $207.7 million and $64.3 million for the nine months ended June 30, 2002 and
2001, respectively. The increase in cash used in 2002 was principally due to an
increase of $48.5 million in the purchase of investment securities available for
sale, an increase of $84.1 million in the purchase of mortgage-backed securities
and a $33.4 million decrease in proceeds from sale, maturities and calls of
investment securities available for sale, partially offset by a $9.4 million
decrease in the net increase in loans and a $16.1 million increase in the
proceeds from repayments of mortgage-backed securities.
Net cash provided by the Company's financing activities (i.e. cash receipts
primarily from net increases (decreases) in deposits and net FHLB advances) was
$219.7 million and $126.4 million for the nine months ended June 30, 2002 and
2001, respectively. The increase in cash flows in 2002 was primarily due to an
increase of $62.4 million in proceeds from FHLB advances and an increase of
$31.2 million in the increase in deposits.
18
Asset Quality
Loans 90 days past due are generally placed on nonaccrual status. The Company
ceases to accrue interest on a loan once it is placed on nonaccrual status, and
interest accrued but unpaid at the time is charged against interest income.
Additionally, any loan where it appears evident that the collection of interest
is in doubt is also placed on a nonaccrual status. The Company carries real
estate owned at the lower of cost or fair value, less cost to dispose.
Management regularly reviews assets to determine proper valuation.
The followingtable sets forth information regarding the Company's nonaccrual
loans and foreclosed real estate at the dates indicated:
June 30, September 30,
2002 2001
---- ----
(Dollars in thousands)
Nonaccrual mortgage loans:
Delinquent less than 90 days $ 872 $ 87
Delinquent 90 days or more 1,481 2,139
----- -----
Total 2,353 2,226
Nonaccrual other loans:
Delinquent less than 90 days --- 176
Delinquent 90 days or more 353 183
--- ---
Total 353 359
--- ---
Total nonperforming loans 2,706 2,585
Real estate owned, net of related allowance 755 917
--- ---
Total nonperforming assets $ 3,461 $ 3,502
===== =====
Nonperforming loans to total net loans .18% .18%
Total nonperforming assets to total assets .17% .20%
Allowance for loan losses to total loans .93% .96%
Allowance for loan losses to nonperforming loans 520.50% 519.01%
Allowance for loan losses to classified loans 181.45% 251.85%
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk and Asset and
Liability Management.
For a discussion of the Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Company's portfolio equity, see the Company's Annual Report on Form 10-K for
the year ended September 30, 2001. There has been no material change in the
Company's asset and liability position or the market value of the Company's
portfolio equity since September 30, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are various claims and lawsuits in which the Company is periodically
involved incident to the Company's business. In the opinion of management, no
material loss is anticipated from any such pending claims or lawsuits.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security-Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
The following Exhibits are included with this Report or are incorporated into
this Report by reference, as indicated:
Exhibit
Number Description
- ------ -----------
3(i) Certificate of Incorporation of Registrant (Exhibit 3.3 to
Pre-effective Amendment No. 1 to the Registration Statement on Form
S-1, No. 333-37275 filed November 10, 1997)
3(ii) Bylaws of Registrant (Exhibit 3.4 to Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-1, No. 333-37275, filed November
10, 1997)
20
Exhibit
Number Description
- ------ -----------
10(i) Employment contract with Michael J. Brown, Sr. (Exhibit 10(a) to the
Registration Statement on Form S-4 filed December 20, 1996)
10(ii) 1994 Incentive Stock Option Plan (Exhibit 10(b) to the Registration
Statement on Form S-4 filed December 20, 1996)
10(iii) 1994 Stock Option Plan for Outside Directors (Exhibit 10(c) to the
Registration Statement on Form S-4 filed December 20, 1996)
10(iv) Harbor Federal Savings Bank Non-Employee Directors' Retirement Plan
(Exhibit 10(vi) to Form 10-Q for the quarter ended June 30, 1997 filed
August 11, 1997)
10(v) Unfunded Deferred Compensation Plan for Directors (Exhibit 10(vii) to
Form 10-K for the year ended September 30, 1998 filed December 24,
1998)
10(vi) 1998 Stock Incentive Plan for Directors, Officers and Employees
(Exhibit 4.3 to the Registration Statement on Form S-8 filed October
26, 1998)
10(vii) Change of Control Agreements (Exhibit 10(vii) to Form 10-K for the
year ended September 30, 2000 filed December 29, 2000)
99.1 Certification by Michael J. Brown, Sr., Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification by Don W. Bebber, Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARBOR FLORIDA BANCSHARES, INC.
Date: August 14, 2002 /s/
------------------------------
Michael J. Brown, Sr.
President and Chief Executive Officer
Date: August 14, 2002 /s/
-------------------------------------
Don W. Bebber
Senior Vice President, Finance and
Principal Financial Officer
22