UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
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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: December 31, 2002
-----------------
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 (772) 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 January 16, 2003, there were 23,886,947 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 December 31, 2002 (unaudited) and September 30, 2002..............2
Condensed Consolidated Statements of Earnings for the three
months ended December 31, 2002 and 2001 (unaudited)................. 3
Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 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............................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk
and Asset and Liability Management...................................17
Item 4. Controls and Procedures..............................................17
Part II. Other Information
Item 1. Legal Proceedings....................................................18
Item 2. Changes in Securities................................................18
Item 3. Defaults Upon Senior Securities......................................18
Item 4. Submission of Matters to a Vote of Security-Holders..................18
Item 5. Other Information....................................................18
Item 6. Exhibits and Reports on Form 8-K.....................................18
Signature Page.......................................................20
Certifications of Chief Executive Officer and
Chief Financial Officer..............................................21
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(In thousands)
December 31, September 30,
2002 2002
---- -----
(unaudited)
Assets
- ------
Cash and amounts due from depository institutions $ 55,819 $ 52,299
Interest-bearing deposits in other banks 59,699 95,326
Investment securities held to maturity 444 200
Investment securities available for sale 237,965 147,205
Mortgage-backed securities held to maturity 156,428 181,269
Loans held for sale 4,722 8,263
Loans, net 1,545,461 1,541,468
Accrued interest receivable 9,892 9,847
Real estate owned 729 733
Premises and equipment, net 27,411 27,049
Federal Home Loan Bank stock 22,276 22,276
Goodwill, net 3,378 3,378
Other assets 2,177 1,810
---------- ----------
Total assets $2,126,401 $2,091,123
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $1,414,556 $1,372,362
Short-term borrowings 22,000 22,000
Long-term debt 423,523 423,528
Advance payments by borrowers for taxes and insurance 6,919 23,290
Income taxes payable 6,551 1,822
Other liabilities 8,200 9,203
---------- ----------
Total liabilities 1,881,749 1,852,205
---------- ----------
Stockholders' Equity:
Preferred stock --- ---
Common stock 3,149 3,145
Paid-in capital 196,499 195,506
Retained earnings 153,674 146,932
Accumulated other comprehensive income, net 2,967 2,338
Common stock purchased by:
Employee stock ownership plan (ESOP) (10,476) (10,650)
Recognition and retention plans (RRP) (3,597) (3,652)
Treasury stock (97,564) (94,701)
---------- ----------
Total stockholders' equity 244,652 238,918
---------- ----------
Total liabilities and stockholders' equity $2,126,401 $2,091,123
========== ==========
See accompanying notes to condensed consolidated financial statements.
2
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (unaudited)
(In thousands except per share data)
Three months ended
December 31,
2002 2001
---- ----
Interest income:
Loans $29,325 $28,400
Investment securities 1,901 881
Mortgage-backed securities 2,518 2,290
Other 329 463
------- -------
Total interest income 34,073 32,034
------- -------
Interest expense:
Deposits 7,937 10,892
Other 5,647 4,097
------- -------
Total interest expense 13,584 14,989
------- -------
Net interest income 20,489 17,045
Provision for loan losses 451 306
------- -------
Net interest income after provision for loan
losses 20,038 16,739
------- -------
Other income:
Other fees and service charges 3,151 2,360
Insurance commissions and fees 570 509
Income from real estate operations 52 34
Gain on sale of mortgage loans 1,314 459
Gain on sale of securities 305 ---
Other 7 (3)
------- -------
Total other income 5,399 3,359
------- -------
Other expenses:
Compensation and employee benefits 6,025 5,087
Occupancy 1,436 1,261
Data processing services 696 587
Advertising and promotion 343 235
Other 1,700 1,562
------- -------
Total other expense 10,200 8,732
-------
Income before income taxes 15,237 11,366
Income tax expense 5,962 4,429
------- -------
Net income $ 9,275 $ 6,937
======= =======
Net income per share
Basic $ 0.41 $ 0.30
======= =======
Diluted $ 0.40 $ 0.30
======= =======
See accompanying notes to condensed consolidated financial statements.
3
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Three months ended
December 31,
2002 2001
---- ----
Cash provided by operating activities:
Net income $ 9,275 $ 6,937
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of investment securities available for sale (305) ---
(Gain) loss on sale of premises and equipment (2) 5
(Gain) loss on sale of real estate owned 19 (20)
Gain on sale of loans held for sale (1,314) (459)
Provision for loan losses 451 306
Depreciation and amortization 268 442
Deferred income tax expense (benefit) 52 (5)
Originations of loans held for sale (41,874) (27,836)
Proceeds from sale of loans held for sale 46,729 30,815
Increase in deferred loan fees and costs 1,677 1,276
(Increase) decrease in accrued interest receivable (45) 449
(Increase) decrease in other assets (367) 115
Increase in income taxes payable 5,033 184
Decrease in other liabilities (1,449) (168)
------- -------
Net cash provided by operating activities 18,148 12,041
------- -------
Cash used by investing activities:
Net increase in loans (5,113) (36,050)
Proceeds from principal repayments of mortgage-backed securities 24,808 12,504
Purchase of investment securities held to maturity (244) ---
Proceeds from sales of investment securities available for sale 769 ---
Purchase of investment securities available for sale (90,336) (20,442)
Proceeds from sale of real estate owned 85 149
Purchase of premises and equipment (1,014) (500)
Proceeds from sale of premises and equipment 42 30
FHLB stock purchase --- (2,250)
------- -------
Net cash used by investing activities (71,003) (46,559)
------- -------
4
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Three months ended
December 31,
2002 2001
---- ----
Cash provided by financing activities:
Net increase in deposits 42,194 69,803
Net proceeds from long-term borrowings --- 50,000
Repayments of borrowings (5) (17)
Decrease in advance payments by borrowers for taxes and insurance (16,371) (16,364)
Dividends paid (2,533) (2,281)
Common stock options exercised 326 128
Purchase of treasury stock (2,863) (5,200)
-------- --------
Net cash provided by financing activities 20,748 96,069
-------- --------
Net increase (decrease) in cash and cash equivalents (32,107) 61,551
Cash and cash equivalents - beginning of period 147,625 92,792
-------- --------
Cash and cash equivalents - end of period $115,518 $154,343
======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 13,809 $ 14,987
Taxes 1,190 4,250
Noncash investing and financing activities
Additions to real estate acquired in settlement of loans
through foreclosure 101 186
Sale of real estate owned financed by the Company --- 95
Tax benefit of stock plans credited to capital 304 106
Change in unrealized gain (loss) on securities available for
sale 1,023 (164)
Change in deferred taxes related to securities available for
sale (394) 64
Distribution of recognition and retention plan 55 52
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, 2002.
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 June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 did not
have a material impact on the Company's consolidated financial statements.
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 Accounting
Principles Board (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 did not have a
material impact on the Company's consolidated 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 did not 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.
6
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123"
("Statement 148") to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
provisions of Statement 148 are effective for interim periods beginning after
December 15, 2002, with early application encouraged. This statement is not
expected to have a material impact on the Company's consolidated financial
statements. (See Note 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 months ended
December 31, 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
December 31,
2002 2001
---- ----
Net income $ 9,275,408 $ 6,936,865
========== ==========
Weighted average common shares outstanding:
Shares outstanding 23,638,486 23,936,121
Less weighted average
uncommitted ESOP shares (1,059,030) (1,128,870)
---------- ----------
Total
22,579,456 22,807,251
========== ==========
Basic earnings per share $ 0.41 $ 0.30
========== ==========
Weighted average common shares outstanding 22,579,456 22,807,251
Additional dilutive shares related to
stock benefit plans 592,925 587,177
---------- ----------
Total weighted average common shares and
equivalents outstanding for diluted
earnings per share computation 23,172,381 23,394,428
========== ==========
Diluted earnings per share $ 0.40 $ 0.30
========== ==========
Additional dilutive shares are calculated under the treasury stock method
utilizing the average market value of the Company's stock for the period.
7
3). INVESTMENT AND MORTGAGE BACKED SECURITIES
The amortized cost and estimated market value of investment and mortgage-backed
securities as of December 31, 2002 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ ------------
(In thousands)
Available for sale:
FHLMC notes $ 70,408 $ 858 $ --- $ 71,266
FHLB notes 130,332 1,507 --- 131,839
FNMA notes 30,096 207 --- 30,303
-------- -------- -------- --------
230,836 2,572 --- 233,408
Equity securities 2,298 2,259 --- 4,557
-------- -------- -------- --------
233,134 4,831 --- 237,965
-------- -------- -------- --------
Held to maturity:
Municipal securities 444 43 --- 487
-------- -------- -------- --------
444 43 --- 487
-------- -------- -------- --------
FHLMC mortgage-backed securities 78,602 3,461 --- 82,063
FNMA mortgage-backed securities 77,826 3,574 --- 81,400
-------- -------- -------- --------
156,428 7,035 --- 163,463
-------- -------- -------- --------
$390,006 $ 11,909 $ --- $401,915
======== ======== ======== ========
The amortized cost and estimated market value of investment and mortgage-backed
securities as of September 30, 2002 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
----- ----- ----- -----
(In thousands)
Available for sale:
FHLB notes $ 90,226 $ 1,413 $ --- $ 91,639
FHLMC notes 50,408 724 --- 51,132
-------- -------- -------- --------
140,634 2,137 --- 142,771
Equity securities 2,763 1,671 --- 4,434
-------- -------- -------- --------
143,397 3,808 --- 147,205
-------- -------- -------- --------
Held to maturity:
Municipal securities 200 45 --- 245
-------- -------- -------- --------
200 45 --- 245
-------- -------- -------- --------
FHLMC mortgage-backed securities 90,657 3,684 --- 94,341
FNMA mortgage-backed securities 90,612 3,900 --- 94,512
-------- -------- -------- --------
181,269 7,584 --- 188,853
-------- -------- -------- --------
$324,866 $ 11,437 $ --- $336,303
======== ======== ======== ========
8
The amortized cost and estimated market value of debt securities at December 31,
2002 and September 30, 2002 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.
December 31, 2002 September 30, 2002
----------------- ------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
(In thousands)
Available for sale:
Due in one year or less $ 80,250 $ 81,240 $ 60,306 $ 61,358
Due in one to five years 150,586 152,168 80,328 81,413
-------- -------- -------- --------
230,836 233,408 140,634 142,771
-------- -------- -------- --------
Held to maturity:
Due after ten years 444 487 200 245
-------- -------- -------- --------
444 487 200 245
-------- -------- -------- --------
FHLMC mortgage-backed securities 78,602 82,063 90,657 94,341
FNMA mortgage-backed securities 77,826 81,400 90,612 94,512
-------- -------- -------- --------
156,428 163,463 181,269 188,853
-------- -------- -------- --------
$387,708 $397,358 $322,103 $331,869
======== ======== ======== ========
As of December 31, 2002, the Company had pledged mortgage-backed securities with
a market value of $14,715,000 and a carrying value of $14,071,000 to
collateralize the public funds on deposit. The Company had also pledged
mortgage-backed securities with a market value of $1,019,000 and a carrying
value of $949,000 to collateralize treasury, tax and loan accounts as of
December 31, 2002.
9
4). LOANS
Loans are summarized below:
December 31, September 30,
2002 2002
---- ----
Mortgage loans: (In thousands)
Construction 1-4 family $ 142,296 $ 142,181
Permanent 1-4 family 1,053,056 1,072,175
Multi-family 15,617 14,995
Nonresidential 153,680 153,635
Land 92,812 82,339
---------- ----------
Total mortgage loans 1,457,461 1,465,325
---------- ----------
Other loans:
Commercial 41,769 34,172
Home improvement 24,898 25,104
Manufactured housing 14,839 14,832
Other consumer 118,815 116,591
---------- ----------
Total other loans 200,321 190,699
---------- ----------
Total loans 1,657,782 1,656,024
---------- ----------
Less:
Loans in process 90,891 93,999
Net deferred loan fees and discounts 6,730 6,180
Allowance for loan losses 14,700 14,377
---------- ----------
112,321 114,556
---------- ----------
Total loans, net $1,545,461 $1,541,468
========== ==========
An analysis of the allowance for loan losses follows:
Three months ended
December 31,
2002 2001
---- ----
(In thousands)
Beginning balance $ 14,377 $ 13,417
Provision for loan losses 451 306
Charge-offs (139) (108)
Recoveries 11 28
-------- --------
Ending balance $ 14,700 $ 13,643
======== ========
10
The allowance for loan losses consists of general allowances of $14,698,000 and
$14,377,000 and specific allowances of $2,000 and $-0- at December 31, 2002 and
September 30, 2002, respectively. The specific allowances relate to impaired
loans (primarily consisting of classified loans), other than those evaluated
collectively, of $8,969,000 and $8,941,000 at December 31, 2002 and September
30, 2002, 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 December 31, 2002 and September 30, 2002, loans with unpaid principal
balances of approximately $1,810,000 and $1,660,000, respectively, were 90 days
or more contractually delinquent or on nonaccrual status. As of December 31,
2002 and September 30, 2002, approximately $1,526,000 and $1,209,000,
respectively, of these loans were in the process of foreclosure.
As of December 31, 2002 and September 30, 2002, mortgage loans which had been
sold on a recourse basis had outstanding principal balances of approximately
$343,000 and $370,000 respectively.
5). COMPREHENSIVE INCOME
The following table sets forth the components of the Company's comprehensive
income:
Three months ended
December 31,
2002 2001
---- ----
(In thousands)
Net income $ 9,275 $ 6,937
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities
available for sale (net of deferred tax of
$(394) and $64 for the three months ended
December 31, 2002 and 2001, respectively) 629 (100)
------- --------
Comprehensive income $ 9,904 $ 6,837
======= =======
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.
11
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 $1,314,000 and
$459,000, respectively, for the three months ended December 31, 2002 and 2001.
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 December 31,
2002, no servicing assets and/or liabilities were recognized.
7). STOCK OPTION PLANS
At December 31, 2002, the Company had stock option plans for the benefit of
directors, officers and other employees of the Company. The Company accounts for
those plans under the recognition and measurement principles of APB Opinion No.
25 "Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, no compensation cost has been recognized for the stock plans, since
stock option exercise prices are equal to market price at dates of grant.
Had compensation cost for the Company's stock-based compensation plans been
determined in accordance with the fair value based method in FASB Statement No.
123 "Accounting for Stock Based Compensation", the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below:
Three months ended
December 31
2002 2001
---- ----
(In thousands except per share data)
Net income As reported $ 9,275 $ 6,937
Pro forma 8,935 6,616
Net income per share - basic As reported .41 .30
Pro forma .40 .29
Net income per share - diluted As reported .40 .30
Pro forma .39 .28
12
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 December 31, 2002 and December 31, 2001.
General. Diluted earnings per share for the first fiscal quarter ended December
31, 2002, increased 33.3% to 40 cents per share on net income of $9.3 million,
compared to 30 cents per share on net income of $6.9 million for the same period
last year. This increase was due primarily to the increase in net interest
income mainly due to the decrease in the cost of deposits and the growth in the
loan portfolio and investment securities. The current quarter included
nonrecurring income of $187,000 or 1 cent per share, after tax, from gains on
the sale of equity securities.
Net Interest Income. Net interest income increased 20.2% to $20.5 million for
the quarter ended December 31, 2002, from $17.0 million for the same period last
year. This increase was due primarily to the decrease in the costs of deposits
and to the growth in the loan portfolio and investment securities. Average
interest-earning assets increased by $309.6 million to $2.034 billion for the
three months ended December 31, 2002, from $1.724 billion for the same period
last year. The average balance of the loan portfolio increased by $120.9
million. The average balance of investment securities increased by $159.3
million. The net interest margin increased to 4.05% for the three months ended
December 31, 2002, from 3.97% 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 42.0% and 58.0% of core deposits and certificate
accounts, respectively, for the three months ended December 31, 2002 from 37.7%
and 62.3%, respectively, for the same period last year.
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 $451,000 for the
quarter ended December 31, 2002, compared to $306,000 for the same period last
year. The provision for the quarter ended December 31, 2002 was principally
comprised of a charge of $252,000 due to growth in the loan portfolio, primarily
commercial real estate and commercial business loan portfolios, $128,000 for net
charge offs and $71,000 for an increase in the level of classified loans.
13
The provision for the quarter ended December 31, 2001 was principally comprised
of a charge of $187,000 due to an increase in the level of classified loans,
primarily commercial real estate loans, $80,000 in net charge offs, and $39,000
due to growth in the loan portfolio.
Nonperforming loans decreased to $1.8 million at December 31, 2002 from $2.8
million at December 31, 2001. The ratio of the allowance for loan losses to
total nonperforming loans increased to 812.22% at December 31, 2002 from 493.07%
at December 31, 2001.
There were no significant changes in the estimation methods or fundamental
assumptions used in the calculation of the allowance for loan losses at December
31, 2002, compared to September 30, 2002. Furthermore, there was no reallocation
of the allowance from September 30, 2002. 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 $5.4 million for the quarter ended
December 31, 2002, from $3.4 million for the same period last year. This
increase was due primarily to increases of $855,000 in gain on sale of mortgage
loans, $791,000 in other fees and service charges, and $305,000 in gain on the
sale of equity securities. Other fees and service charges, primarily from fees
and service charges on deposit products, were $3.2 million and $2.4 million for
the quarters ended December 31, 2002 and 2001, respectively. This increase was
due primarily to the growth in transaction accounts. Gain on the sale of
mortgage loans was $1.3 million and $459,000 for the quarters ended December 31,
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.
Gains on sale of securities, primarily equity securities, was $305,000 and $-0-
for the quarters ended December 31, 2002 and 2001, respectively.
Other Expenses. Other expenses increased to $10.2 million for the quarter ended
December 31, 2002, from $8.7 million for the same period last year. This
increase was due primarily to increases of $938,000 in compensation and
benefits, $175,000 in occupancy, $109,000 in data processing services, $108,000
in advertising and promotion and $138,000 in other expense. The increase in
compensation and benefits is due primarily to annual salary increases,
additional staff required to support the growth in loans and deposits and
contributions to the defined benefit plan. The increase in occupancy expense was
due primarily to an increase in data processing equipment expense. The increases
in data processing services, advertising and promotion, and other expenses were
due primarily to increases resulting from the growth in loans and deposits.
Income Taxes. Income tax expense increased to $6.0 million for the quarter ended
December 31, 2002, from $4.4 million for the same period last year due primarily
to an increase in pretax accounting income. The effective tax rates were 39.1%
and 39.0% for the quarters ended December 31, 2002 and 2001, respectively.
14
Financial Condition
Comparisons of financial condition in this section are from the end of the
preceding fiscal year to December 31, 2002.
Total assets increased to $2.126 billion at December 31, 2002, from $2.091
billion at the fiscal year ended September 30, 2002. The increase is due
primarily to an increase in investment securities, partially offset by a
decrease in interest bearing deposits in other banks and repayments of
mortgage-backed securities.
Interest-bearing deposits in other banks decreased to $59.7 million at December
31, 2002, from $95.3 million at September 30, 2002. The decrease is due
primarily to a decrease in funds on deposit at the FHLB to fund purchases of
investment securities.
Investment securities available for sale increased to $238.0 million at December
31, 2002, from $147.2 million at September 30, 2002. The increase is due
primarily to the purchase of $90.3 million FHLMC, FHLB, and FNMA Notes. The
purchases were funded with excess cash provided by the net increase in deposits
and the decrease in interest bearing deposits in other banks.
Mortgage-backed securities decreased to $156.4 million at December 31, 2002,
from $181.2 million at September 30, 2002. The decrease is due primarily to
repayments.
Net loans increased to $1.545 billion at December 31, 2002, from $1.541 billion
at September 30, 2002. The increase is due primarily to loan disbursements of
$194.4 million partially offset by repayments of $146.3 million and sale of
mortgage loans of $46.7 million. The increase in net loans for the three months
ended December 31, 2002 is due primarily to a net increase of $10.4 million in
land loans, $7.6 million in commercial business loans, and $2.0 million in
consumer loans, partially offset by a $17.4 million decrease in residential 1-4
family mortgage loans.
Deposits increased to $1.415 billion at December 31, 2002, from $1.372 billion
at September 30, 2002. The increase is due primarily to a net increase in
deposits before interest credited of $35.3 million and interest credited of $6.9
million. The net increase in deposits for the three months ended December 31,
2002 is due primarily to a net increase of $46.0 million in core deposits
partially offset by a decrease of $3.8 million in deposits in certificate
accounts.
FHLB advances remained constant at $445.5 million at December 31, 2002, from
September 30, 2002.
Stockholders' equity increased to $244.7 million at December 31, 2002, from
$238.9 million at September 30, 2002. The increase is due primarily to $9.3
million of earnings for the three months partially offset by $2.5 million of
dividends paid and the repurchase of $2.9 million of Company common stock to be
held as treasury stock. During the three months, the Company repurchased 136,831
shares at an average price of $20.93 per share to be held as treasury stock in
accordance with the Company's stock repurchase program.
15
At December 31, 2002, the Bank exceeded all regulatory capital requirements as
follows:
Required Actual Excess of
-------- ------ Actual Over
% of % of Regulatory
Amount Assets Amount Assets Requirements
------ ------ ------ ------ ------------
(Dollars in thousands)
Tangible Capital $ 31,771 1.50% $ 203,580 9.61% $ 171,809
Core Capital $ 63,543 3.00% $ 203,580 9.61% $ 140,037
Risk-Based Capital $ 94,200 8.00% $ 217,533 18.47% $ 123,333
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 $141.4 million at December 31, 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 December 31, 2002, the Bank had $810.4 million or
57.3% of the Bank's deposits in certificate accounts. 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
certificate accounts.
Net cash provided by the Company's operating activities (i.e. cash items
affecting net income) was $18.1 million and $12.0 million for the three months
ended December 31, 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 $71.0 million and $46.6 million for the three months ended December 31, 2002
and 2001, respectively. The increase in cash used in 2002 was principally due to
an increase of $69.9 million in the purchases of investment securities available
for sale, partially offset by a $30.9 million decrease in the net increase in
loans and a $12.3 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
$20.7 million and $96.0 million for the three months ended December 31, 2002 and
2001, respectively. The decrease in cash flows in 2002 was primarily due to a
decrease of $50.0 million in proceeds from FHLB advances and a decrease of $27.6
million in the net increase in deposits.
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.
16
The following table sets forth information regarding the Company's nonaccrual
loans and foreclosed real estate at the dates indicated:
December 31, September 30,
2002 2002
---- ----
(Dollars in thousands)
Nonaccrual mortgage loans:
Delinquent less than 90 days $ --- $ ---
Delinquent 90 days or more 1,216 1,237
-------- --------
Total 1,216 1,237
-------- --------
Nonaccrual other loans:
Delinquent less than 90 days --- ---
Delinquent 90 days or more 594 423
-------- --------
Total 594 423
-------- --------
Total nonperforming loans 1,810 1,660
Real estate owned, net of related allowance 729 733
-------- --------
Total nonperforming assets $ 2,539 $ 2,393
======== ========
Nonperforming loans to total net loans .12% .11%
Total nonperforming assets to total assets .12% .11%
Allowance for loan losses to total loans .95% .93%
Allowance for loan losses to nonperforming loans 812.22% 865.87%
Allowance for loan losses to classified loans 229.11% 219.44%
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, 2002. 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, 2002.
Item 4. Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing of this Form
10-Q, the Company's Chief Executive Officer, Michael J. Brown, Sr. and Chief
Financial Officer, H. Michael Callahan, have concluded the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect those controls subsequent to
the date of their evaluation.
17
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)
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)
18
10(iv) Harbor Federal Savings Bank Non-Employee Directors' Retirement Plan
(Exhibit 10(vi) to Form 10-Q for the quarter ended December 31, 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 Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by H. Michael Callahan, Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On October 9, 2002, the Company filed a report on Form 8-K announcing its
earnings for the fourth quarter of the 2002 fiscal year and a new stock
repurchase program to acquire up to 1,200,000 shares of its common stock,
subject to market conditions, which took effect upon the discontinuation of the
existing stock repurchase program on October 9, 2002.
19
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: February 11, 2003 /s/
--------------------------------------
Michael J. Brown, Sr.
President and Chief Executive Officer
Date: February 11, 2003 /s/
--------------------------------------
H. Michael Callahan
Senior Vice President, Finance and
Principal Financial Officer
20
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBARNES-OXLEY ACT OF 2002
I, Michael J. Brown, Sr., Chief Executive Officer of Harbor Florida Bancshares,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harbor Florida
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/
- -----------------------
Michael J. Brown, Sr.
Chief Executive Officer
February 11, 2003
21
CERTIFICATION OF CHIEF FINANCIAL OFFICER
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBARNES-OXLEY ACT OF 2002
I, H. Michael Callahan, Chief Financial Officer of Harbor Florida Bancshares,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harbor Florida
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/
- -----------------------
H. Michael Callahan
Chief Financial Officer
February 11, 2003
22
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harbor Florida Bancshares, Inc. (the
"Company") on Form 10-Q for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Michael J. Brown, Sr., Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/
- -----------------------
Michael J. Brown, Sr.
Chief Executive Officer
February 11, 2003
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harbor Florida Bancshares, Inc. (the
"Company") on Form 10-Q for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, H.
Michael Callahan, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/
- -----------------------
H. Michael Callahan
Chief Financial Officer
February 11, 2003