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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
-----------
FORM 10-Q
(MarkOne)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2004
-------------
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
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 ____
Indicate by check whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X ___ No ____
As of July 20, 2004, there were 23,790,738 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, 2004 and September 30, 2003 (unaudited)....................2
Condensed Consolidated Statements of Earnings for the three and
nine months ended June 30, 2004 and 2003 (unaudited)................3
Condensed Consolidated Statements of Cash Flows for the nine months
ended June 30, 2004 and 2003 (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.........21
Item 4. Controls and Procedures............................................21
Part II. Other Information
Item 1. Legal Proceedings..................................................21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........21
Item 3. Defaults Upon Senior Securities....................................21
Item 4. Submission of Matters to a Vote of Security Holders................21
Item 5. Other Information..................................................21
Item 6. Index of Exhibits and Reports on Form 8-K..........................22
Signature Page.....................................................24
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,
2004 2003
---- -----
Assets:
Cash and amounts due from depository institutions $ 61,109 $ 55,262
Interest-bearing deposits in other banks 5,528 4,432
Investment securities held to maturity 439 50,416
Investment securities available for sale 139,089 246,519
Mortgage-backed securities held to maturity 468,431 308,075
Loans held for sale 3,716 2,648
Loans, net 1,832,279 1,611,385
Accrued interest receivable 10,485 10,108
Real estate owned 333 906
Premises and equipment, net 35,542 30,935
Federal Home Loan Bank stock 27,875 25,525
Goodwill 3,591 3,719
Other assets 3,773 2,141
----------- -----------
Total assets $ 2,592,190 $ 2,352,071
=========== ===========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $ 1,739,670 $ 1,550,260
Short-term borrowings 54,803 25,071
Long-term debt 490,497 479,295
Advance payments by borrowers for taxes and insurance 20,312 25,523
Income taxes payable 2,219 2,246
Other liabilities 6,873 7,793
----------- -----------
Total liabilities 2,314,374 2,090,188
----------- -----------
Stockholders' Equity:
Preferred stock --- ---
Common stock 3,178 3,163
Paid-in capital 202,335 198,936
Retained earnings 192,543 173,150
Accumulated other comprehensive (loss) income, net (769) 2,595
Common stock purchased by:
Employee stock ownership plan (ESOP) (9,428) (9,952)
Recognition and retention plan (RRP) (2,671) (2,795)
Treasury stock (107,372) (103,214)
----------- -----------
Total stockholders' equity 277,816 261,883
----------- -----------
Total liabilities and stockholders' equity $ 2,592,190 $ 2,352,071
=========== ===========
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 Nine months ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Interest income:
Loans $ 30,048 $ 29,028 $ 87,873 $ 87,254
Investment securities 1,216 2,482 4,578 6,567
Mortgage-backed securities 4,726 1,938 12,719 6,604
Other 17 127 72 635
-------- -------- -------- --------
Total interest income 36,007 33,575 105,242 101,060
-------- -------- -------- --------
Interest expense:
Deposits 5,815 6,390 17,561 21,228
Borrowings and debt 5,834 5,479 17,481 16,578
-------- -------- -------- --------
Total interest expense 11,649 11,869 35,042 37,806
-------- -------- -------- --------
Net interest income 24,358 21,706 70,200 63,254
Provision for loan losses 503 659 1,302 1,612
-------- -------- -------- --------
Net interest income after provision for
loan losses 23,855 21,047 68,898 61,642
-------- -------- -------- --------
Other income:
Fees and service charges 3,974 3,197 10,853 9,634
Insurance commissions and fees 923 860 2,529 2,042
Income from real estate operations 47 50 304 135
Gain on sale of mortgage loans 297 1,266 1,707 3,698
Gain on sale of equity securities 1,379 389 1,998 999
Gain on sale of debt securities --- --- 248 ---
Gain (loss) on sale of premises and equipment 342 (18) 334 (17)
Other 3 10 16 15
-------- -------- -------- --------
Total other income 6,965 5,754 17,989 16,506
-------- -------- -------- --------
Other expenses:
Compensation and employee benefits 7,483 6,620 21,836 18,883
Occupancy 1,773 1,551 5,109 4,464
Data processing services 878 750 2,620 2,231
Advertising and promotion 405 364 1,130 1,095
Other 2,922 1,754 6,615 5,106
-------- -------- -------- --------
Total other expense 13,461 11,039 37,310 31,779
-------- -------- -------- --------
Income before income taxes 17,359 15,762 49,577 46,369
Income tax expense 7,090 6,187 19,689 18,173
-------- -------- -------- --------
Net income $ 10,269 $ 9,575 $ 29,888 $ 28,196
======== ======== ======== ========
Net income per share
Basic $ 0.45 $ 0.43 $ 1.32 $ 1.25
======== ======== ======== ========
Diluted $ 0.44 $ 0.42 $ 1.29 $ 1.22
======== ======== ======== ========
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,
--------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 29,888 $ 28,196
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of equity securities available for sale (1,998) (999)
Gain on sale of debt securities available for sale (59) ---
Gain on sale of mortgage-backed securities (189) ---
Gain (loss) on sale of premises and equipment (334) 17
Gain on sale of real estate owned (190) (23)
Gain on sale of mortgage loans (1,707) (3,698)
Provision for loan losses 1,302 1,612
Depreciation and amortization 631 798
ESOP forfeitures transferred to treasury stock --- (108)
Deferred income tax expense (benefit) (282) (740)
Originations of loans held for sale (72,186) (117,916)
Proceeds from sale of loans held for sale 72,825 124,736
Increase in deferred loan fees and costs 5,464 5,266
Increase in accrued interest receivable (377) (442)
(Increase) decrease in other assets (980) 179
Decrease in income taxes payable 454 135
Increase (decrease) in other liabilities 930 38
---------- ----------
Net cash provided by operating activities 33,192 37,051
---------- ----------
Cash flows from investing activities:
Net increase in loans (222,800) (34,051)
Purchase of mortgage-backed securities (234,691) (102,075)
Proceeds from principal repayments of mortgage-backed securities 68,560 74,672
Proceeds from sale of mortgage-backed securities 5,179 ---
Proceeds from maturities and calls of investment securities held
to maturity 49,979 ---
Purchase of investment securities held to maturity --- (50,216)
Proceeds from maturities and calls of investment securities
available for sale 80,000 70,000
Proceeds from sale of investment securities available for sale 53,689 2,038
Purchase of investment securities available for sale (30,000) (220,361)
Proceeds from sale of real estate owned 511 362
Purchase of premises and equipment (6,872) (2,811)
Proceeds from sale of premises and equipment 565 58
FHLB stock, net (2,350) (1,900)
Purchase of insurance agency --- (600)
---------- ----------
Net cash used in investing activities (238,230) (264,884)
---------- ----------
4
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Nine months ended
June 30,
--------
2004 2003
---- ----
Cash flows from financing activities:
Net increase in deposits $ 189,410 $ 126,552
Net proceeds from short-term borrowings 16,000 3,000
Repayments of long-term debt (25,066) (15,041)
Net proceeds from long-term debt 50,000 50,000
Decrease in advance payments by borrowers for taxes
and insurance (5,211) (4,759)
Dividends paid (10,495) (8,395)
Common stock options exercised 1,501 1,227
Purchase of treasury stock (4,158) (8,082)
---------- ----------
Net cash provided by financing activities 211,981 144,502
---------- ----------
Net increase (decrease) in cash and cash equivalents 6,943 (83,331)
Cash and cash equivalents - beginning of period 59,694 147,141
---------- ----------
Cash and cash equivalents - end of period $ 66,637 $ 63,810
========== ==========
Supplemental disclosures:
Cash paid for:
Interest $ 34,989 $ 37,831
Taxes 19,525 19,091
Noncash investing and financing activities:
Additions to real estate acquired in settlement of loans
through foreclosure 400 470
Sale of real estate owned financed by the Company 652 ---
Tax benefit of stock plans credited to capital 481 328
Change in unrealized gain on securities available for sale (5,478) 1,569
Change in deferred taxes related to securities available for
sale 2,114 (605)
Distribution of RRP shares 124 115
Transfer to short-term borrowings from long-term debt 13,732 5,000
Note payable issued to purchase premises --- 900
Adjustment to goodwill for tax benefit related to insurance
agency purchase 128 ---
See accompanying notes to condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements (unaudited)
(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, 2003.
The Company's only significant business is holding the common stock of the Bank.
Consequently, its net income is primarily derived from the Bank.
Certain amounts included in the June 30, 2003 consolidated financial statements
have been reclassified in order to conform to the June 30, 2004 presentation.
At June 30, 2004, 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 Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25"), 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 Financial
Accounting Standards Board (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 Nine months ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
(In thousands except per share data)
Net income - As reported $ 10,269 $ 9,575 $ 29,888 $ 28,196
Less: total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax (94) (265) (288) (791)
-------- ------- -------- --------
Pro forma net income $ 10,175 $ 9,310 $ 29,600 $ 27,405
======== ======== ======== ========
Net income per share - basic
As reported $ 0.45 $ 0.43 $ 1.32 $ 1.25
Pro forma 0.45 0.41 1.31 1.21
Net income per share - dilute
As reported 0.44 0.42 1.29 1.22
Pro forma 0.44 0.40 1.28 1.18
6
(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, 2004 and 2003. Adjustments have been made, 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,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Net income $ 10,268,627 $ 9,575,001 $ 29,888,068 $ 28,195,511
============ =========== ============ ============
Weighted average common shares outstanding:
Shares outstanding 23,564,345 23,635,001 23,578,101 23,627,984
Less weighted average
uncommitted ESOP shares (954,268) (1,024,108) (971,729) (1,041,568)
------------ ----------- ------------ ------------
Total 22,610,077 22,610,893 22,606,372 22,586,416
============ =========== ============ ============
Basic net income per share $ 0.45 $ 0.43 $ 1.32 $ 1.25
============ =========== ============ ============
Weighted average common shares
outstanding 22,610,077 22,610,893 22,606,372 22,586,416
Additional dilutive shares related to
stock options 529,351 630,186 543,457 583,742
------------ ----------- ------------ ------------
Total weighted average common shares
and equivalents outstanding for
diluted earnings per share computation 23,139,428 23,241,079 23,149,829 23,170,158
============ =========== ============ ============
Diluted net income per share $ 0.44 $ 0.42 $ 1.29 $ 1.22
============ =========== ============ ============
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 at June 30, 2004 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(In thousands)
Available for sale:
FHLB notes $ 90,162 $ --- $ 845 $ 89,317
FNMA notes 30,023 14 326 29,711
FFCB notes 20,130 --- 95 20,035
--------- ---------- ---------- ---------
140,315 14 1,266 139,063
Equity securities 26 --- --- 26
--------- ---------- ---------- ---------
140,341 14 1,266 139,089
--------- ---------- ---------- ---------
Held to maturity:
Municipal securities 439 31 --- 470
FHLMC mortgage-backed securities 253,224 1,161 6,863 247,522
FNMA mortgage-backed securities 215,207 1,149 5,888 210,468
--------- ---------- ---------- ---------
468,431 2,310 12,751 457,990
--------- ---------- ---------- ---------
$ 609,211 $ 2,355 $ 14,017 $ 597,549
========= ========== ========== =========
The amortized cost and estimated market value of investment and mortgage-backed
securities at September 30, 2003 are as follows:
Gross Gross Estimated
Amortied unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(In thousands)
Available for sale:
FHLB notes $ 170,404 $ 1,478 $ --- $ 171,882
FNMA notes 60,039 380 88 60,331
FFCB note 10,296 42 --- 10,338
--------- ---------- ---------- ---------
240,739 1,900 88 242,551
Equity securities 1,554 2,414 --- 3,968
--------- ---------- ---------- ---------
242,293 4,314 88 246,519
--------- ---------- ---------- ---------
Held to maturity:
FHLB notes 30,000 128 --- 30,128
FHLMC notes 19,975 166 --- 20,141
Municipal securities 441 43 --- 484
--------- ---------- ---------- ---------
50,416 337 --- 50,753
--------- ---------- ---------- ---------
FHLMC mortgage-backed securities 138,884 1,911 1,237 139,558
FNMA mortgage-backed securities 169,191 2,200 1,027 170,364
--------- ---------- ---------- ---------
308,075 4,111 2,264 309,922
--------- ---------- ---------- ---------
$ 600,784 $ 8,762 $ 2,352 $ 607,194
========= ========== ========== =========
8
The amortized cost and estimated market value of debt securities at June 30,
2004 and September 30, 2003 by contractual maturity are shown below. Actual
maturities of investment securities may be substantially shorter than
contractual maturities because issuers may have the right to call obligations
without penalties. The average expected life of mortgage-backed securities may
be substantially shorter than contractual maturity because borrowers may prepay
or payoff underlying mortgages with or without prepayment penalties.
June 30, 2004 September 30, 2003
------------- ------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
(In thousands)
Investment securities:
Available for sale:
Due in one year or less $ 10,130 $ 10,116 $ 50,044 $ 50,535
Due in one to five years 130,185 128,947 190,695 192,016
--------- --------- --------- ---------
140,315 139,063 240,739 242,551
--------- --------- --------- ---------
Held to maturity:
Due in one year or less 155 155 --- ---
Due in one to five years 84 86 50,216 50,513
Due in five to ten years 200 229 200 240
--------- --------- --------- ---------
439 470 50,416 50,753
--------- --------- --------- ---------
Mortgage-backed securities:
Held to maturity:
Due in one year or less 1,069 1,068 1,056 1,072
Due in one to five years 43,413 42,889 42,635 42,827
Due in five to ten years 391,605 380,245 197,233 195,804
Due after ten years 32,344 33,788 67,151 70,219
--------- --------- --------- ---------
468,431 457,990 308,075 309,922
--------- --------- --------- ---------
$ 609,185 $ 597,523 $ 599,230 $ 603,226
========= ========= ========= =========
As of June 30, 2004, the Company had pledged mortgage-backed securities with a
market value of $23,470,000 and a carrying value of $22,408,000 to collateralize
the public funds on deposit. The Company had also pledged mortgage-backed
securities with a market value of $1,828,000 and a carrying value of $1,731,000
to collateralize treasury, tax and loan accounts as of June 30, 2004.
There were no continuous unrealized losses for twelve months or more as of
June 30, 2004 and September 30, 2003.
9
(4) LOANS
Loans are summarized below:
June 30, September 30,
2004 2003
---- ----
(In thousands)
Mortgage loans:
Construction 1-4 family $ 282,005 $ 190,315
Permanent 1-4 family 1,053,745 1,014,405
Multi-family 21,561 19,754
Nonresidential 234,455 181,752
Land 171,627 126,950
----------- -----------
Total mortgage loans 1,763,393 1,533,176
----------- -----------
Other loans:
Commercial 68,380 56,268
Home improvement 34,271 26,442
Manufactured housing 21,657 17,849
Other consumer 144,519 126,770
----------- -----------
Total other loans 268,827 227,329
----------- -----------
Total loans 2,032,220 1,760,505
----------- -----------
Less:
Loans in process 173,160 124,427
Net deferred loan fees and discounts 9,327 8,494
Allowance for loan losses 17,454 16,199
----------- -----------
199,941 149,120
----------- -----------
Total loans, net $ 1,832,279 $ 1,611,385
=========== ===========
An analysis of the allowance for loan losses follows:
Three months ended Nine months ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
(In thousands)
Beginning balance $ 16,960 $ 15,192 $ 16,199 $ 14,377
Provision for loan losses 503 659 1,302 1,612
Charge-offs (21) (25) (75) (201)
Recoveries 12 22 28 60
-------- -------- -------- --------
Ending balance $ 17,454 $ 15,848 $ 17,454 $ 15,848
======== ======== ======== ========
The allowance for loan losses was $17,454,000 and $16,199,000 at June 30, 2004
and September 30, 2003, 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 dependent loan. To the extent that an impaired loan's value is less
than the loan's recorded investment, a specific allowance is recorded. There
were no specific allowances recorded at June 30, 2004 and September 30, 2003.
10
The investment in impaired loans (primarily consisting of classified loans),
other than those evaluated collectively for impairment, was $5,179,000 and
$6,259,000 at June 30, 2004 and September 30, 2003 respectively.
At June 30, 2004 and September 30, 2003, loans with unpaid principal balances of
approximately $2,083,000 and $2,215,000, respectively, were 90 days or more
contractually delinquent or on nonaccrual status. As of June 30, 2004 and
September 30, 2003, approximately $1,644,000 and $1,638,000, respectively, of
loans 90 days or more contractually delinquent were in the process of
foreclosure.
(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,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
(In thousands)
Net income $ 10,269 $ 9,575 $ 29,888 $ 28,196
Other comprehensive income, net of tax:
Change in unrealized gain on securities available for
sale (net of deferred tax of $1,489 and $15 for
the three months ended June 30, 2004 and 2003,
respectively, and $2,114 and $605 for the nine
months ended June 30, 2004 and 2003, respectively) (2,371) 23 (3,364) 964
-------- -------- -------- --------
Comprehensive income $ 7,898 $ 9,598 $ 26,524 $ 29,160
======== ======== ======== ========
(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; and
d. Recognizes in earnings any gain or loss on the sale.
11
The Company recognized gains on sales of mortgage loans of $297,000 and
$1,266,000, respectively, for the three months ended June 30, 2004 and 2003. For
the nine months ended June 30, 2004 and 2003, the Company recognized gains on
sale of mortgage loans of $1,707,000 and $3,698,000, 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, 2004,
no servicing assets and/or liabilities were recognized.
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 the
following 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, ix) changes in world
events such as war or terrorist attacks against the United States, and x) 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. Except as required by applicable law or
regulation, the Company undertakes no obligation to update these forward-looking
statements to reflect events or circumstances that occur after the date on which
such statements were made.
Overview
The Company owns 100% of the common stock of Harbor Federal Savings Bank ("the
Bank"), a federal savings bank whose deposits are insured by the Federal Deposit
Insurance Corporation (FDIC). The Bank provides a wide range of banking and
related insurance services but is principally engaged in the business of
attracting deposits predominately from the communities it serves and using these
and other funds to originate primarily one-to-four family first mortgage loans.
The Company's results of operations are highly dependent on net interest income.
Net interest income is a function of the balances of loans and investments
("interest-bearing assets") outstanding in any one period, the yields earned on
such loans and investments, and the interest incurred on deposits and borrowed
funds ("interest-bearing liabilities") that were outstanding in that same
period. The Company's noninterest income consists primarily of fees and service
charges, insurance commissions, gains on sale of mortgage loans, gains on sale
of securities, gains on sale of premises and equipment and, depending on the
period, real estate operations which have either provided income or loss. The
results of operations are also significantly impacted by the amount of
provisions for loan losses, which, in turn, is dependent upon, among other
things, the size and makeup of the loan portfolio, loan quality, and other
credit trends. The noninterest expenses consist primarily of employee
compensation and benefits, occupancy expense and data processing services.
Results of operations are affected by general economic and competitive
conditions, including changes in prevailing interest rates and the policies of
regulatory agencies.
The Company attempts to manage its assets and liabilities in a manner that
stabilizes net interest income and net economic value under a broad range of
interest rate environments. This is accomplished by matching maturity and
repricing periods on loans and investments to maturity and repricing periods on
deposits and borrowings.
13
The Company currently utilizes the following strategies to reduce interest rate
risk: (a) the Company seeks to originate and hold in portfolio adjustable rate
loans which have periodic interest rate adjustments; (b) the Company sells a
portion of newly originated fixed rate residential mortgage loans; (c) the
Company seeks to lengthen the maturities of deposits when deemed cost effective
through the pricing and promotion of certificates of deposits; (d) the Company
seeks to attract low cost checking and transaction accounts which tend to be
less interest rate sensitive when interest rates rise; and (e) the Company has
utilized long term Federal Home Loan Bank ("FHLB") advances to fund the
origination of fixed rate loans. The Company also maintains a high level of
liquid assets consisting of short-term securities as well as medium-term
securities with expected average lives in the three to four year range, which
are expected to increase in yield upon reinvestment as interest rates rise.
Critical Accounting Policies
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. Critical accounting policies are defined as policies which are
material to the portrayal of the Company's financial condition and results of
operations, and require management's most difficult, subjective, or complex
judgements. The Company's financial results could differ significantly if
different judgements or estimates are applied in the application of these
policies.
The allowance for loan losses was $17,454,000 and $16,199,000 at June 30, 2004
and September 30, 2003, respectively. Impaired loans (primarily consisting of
classified loans), other than those evaluated collectively for impairment, were
$5,179,000 and $6,259,000 at June 30, 2004 and September 30, 2003, 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. There were no specific
allowances recorded at June 30, 2004 and September 30, 2003.
Results of Operations
Comparisons of quarterly results of operations in this section are between the
three months ended June 30, 2004 and June 30, 2003. 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,
2004, increased 4.8% to 44 cents per share on net income of $10.3 million,
compared to 42 cents per share on net income of $9.6 million for the same period
last year. Diluted earnings per share for the nine months ended June 30, 2004,
increased 5.7% to $1.29 per share on net income of $29.9 million, compared to
$1.22 per share on net income of $28.2 million for the same period last year.
The increase for both the three and nine month periods was due primarily to an
increase in net interest income, resulting from an increase in average
interest-earning assets due to purchases of mortgage-backed securities and
origination of loans. This growth was funded with low cost core deposits and
FHLB advances. The increase in net interest income was supplemented by an
increase in other income and was partially offset by an increase in other
expenses.
Net Interest Income. Net interest income increased 12.2% to $24.4 million for
the quarter ended June 30, 2004, from $21.7 million for the same period last
year. For the nine months ended June 30, 2004, net interest income increased
11.0% to $70.2 million from $63.3 million for the same period last year. The
increase for three and nine month periods was due primarily to a 14.9% and 14.3%
increase, respectively, in average interest-earning assets that were funded
primarily with low cost, core deposits and FHLB advances.
The average balance of mortgage-backed securities for the quarter ended June
30, 2004 increased $335.6 million from the quarter ended June 30, 2003,
partially offset by a decrease of $174.4 million in investment securities and
$36.7 million in interest-bearing deposits in other banks. The Company's
investment strategy has been to shift the securities portfolio from lower
yielding, shorter term investment securities into higher yielding balloon
mortgage-backed securities, with expected average lives in the three to four
year range. Average total loans increased by $194.3 million. The average balance
of core deposits increased by $221.9 million and FHLB advances increased by
$91.4 million. The average deposit composition changed to 51.6% and 48.4% of
core deposits and certificate accounts, respectively, for the three months ended
June 30, 2004 from 44.5% and 55.5%, respectively, for the same period last year.
14
The average balance of mortgage-backed securities for the nine months ended June
30, 2004 increased $270.7 million from the nine months ended June 30, 2003, and
was partially offset by a decrease of $53.6 million in investment securities and
$52.7 million in interest-bearing deposits in other banks. Average total loans
increased by $133.5 million. The average balance of core deposits increased by
$200.0 million and FHLB advances increased by $83.7 million. The average balance
of core deposits increased to 49.9% of total average deposits for the nine
months ended June 30, 2004 from 43.2% for the same period last year.
The net interest margin decreased to 3.97% for the three months ended June 30,
2004 from 4.07% for the three months ended June 30, 2003. The net interest
margin decreased to 3.95% for the nine months ended June 30, 2004, from 4.06%
for the same period last year. The decrease for both the three and nine month
periods was due primarily to the yield on interest-earning assets decreasing
more than the cost of interest-bearing liabilities in the declining interest
rate environment.
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 $503,000 for the quarter ended June 30, 2004,
compared to $659,000 for the same period last year. The provision for the
quarters ended June 30, 2004 and 2003 was principally comprised of a charge of
$607,000 and $647,000, respectively, due to increased credit risk resulting from
growth in the loan portfolio, primarily commercial real estate loans, partially
offset by a $113,000 decrease in the level of classified loans for the quarter
ended June 30, 2004.
For the nine months ended June 30, 2004, the provision for loan losses was $1.3
million compared to $1.6 million for the same period last year. The provision
for the nine months ended June 30, 2004 was principally comprised of a charge of
$1.5 million due to increased credit risk resulting from growth in the loan
portfolio, primarily commercial real estate loans, and $47,000 in net charge
offs, partially offset by a decrease of $200,000 in the level of classified
loans. The provision for the nine months ended June 30, 2003 was principally
comprised of a charge of $1.4 million due to increased credit risk resulting
from growth in the loan portfolio, primarily commercial real estate loans,
$141,000 in net charge offs, and $53,000 due to changes in the level of
classified loans.
Nonperforming loans decreased to $2.1 million at June 30, 2004 from $2.3 million
at June 30, 2003. The ratio of the allowance for loan losses to total
nonperforming loans increased to 838.13% at June 30, 2004 from 696.39% at June
30, 2003. The ratio of the allowance for loan losses to total net loans
decreased to .95% of loans as of June 30, 2004, from 1.01% of total net loans at
June 30, 2003.
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,
2004, compared to September 30, 2003. Furthermore, there was no reallocation of
the allowance from September 30, 2003. 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 $7.0 million for the quarter ended June
30, 2004, from $5.8 million for the same period last year. The increase was due
primarily to increases of $990,000 and $360,000, respectively, in non-operating
gains on sale of equity securities and premises and equipment, and $777,000 in
fees and service charges, partially offset by a decrease of $969,000 in gain on
sale of mortgage loans.
15
Fees and service charges (primarily from fees and service charges on deposit
products) were $4.0 million and $3.2 million for the quarters ended June 30,
2004 and 2003, respectively. This increase was due primarily to the growth in
transaction accounts. Insurance commissions and fees were $923,000 and $860,000
for the three months ended June 30, 2004 and 2003, respectively. This increase
was due primarily to increased sales of insurance products. Gain on the sale of
mortgage loans was $297,000 and $1.3 million for the quarters ended June 30,
2004 and 2003, respectively. This decrease was due primarily to a decline in the
originations of fixed rate residential one-to-four family mortgage loans
available for sale partly as a result of a change in customer preference to
adjustable rate loans. Total fixed rate residential loan originations decreased
by $4.2 million; however, adjustable rate loan originations increased by $83.4
million compared to the same quarter last year. The Company sells loans in order
to reduce interest rate risk by limiting the growth of long term fixed rate
loans in the portfolio.
Other income increased to $18.0 million for the nine months ended June 30, 2004,
compared to $16.5 million for the same period last year. This increase was due
primarily to increases of $1.2 million in fees and service charges, $1.2 million
in gain on sale of securities, $487,000 in insurance commission and fees, and
$351,000 in gain on sale of premises and equipment, partially offset by a
decrease of $2.0 million in gain on sale of mortgage loans, principally
residential fixed rate mortgage loans. Fees and service charges (primarily from
fees and service charges on deposit products) were $10.9 million and $9.6
million for the nine months ended June 30, 2004 and 2003, respectively. This
increase was due primarily to the growth in transaction accounts. Insurance
commissions and fees were $2.5 million and $2.0 million for the nine months
ended June 30, 2004 and 2003, respectively. This increase was due primarily to
increased sales of insurance products. Gains on sale of securities included an
increase of $999,000 in gain on sale of equity securities and $248,000 in gains
on the sale of numerous small-dollar mortgage-backed securities where a
substantial portion of the principal had been repaid. Income from real estate
operations was $304,000 and $135,000 for the nine months ended June 30, 2004 and
2003. This increase was due primarily to gains on sales of real estate acquired
in settlement of loans through foreclosure. Gain on sale of mortgage loans was
$1.7 million and $3.7 million for the nine months ended June 30, 2004 and 2003,
respectively. This decrease was due primarily to a decline in the originations
of fixed rate residential one-to-four family mortgage loans available for sale
partly as a result of a change in customer preference to adjustable rate loans.
Total fixed rate residential loan originations decreased by $40.9 million;
however, adjustable rate loan originations increased by $134.4 million compared
to the same period last year. The Company sells loans in order to reduce
interest rate risk by limiting the growth of long term fixed rate loans in the
portfolio.
Other Expenses. Other expenses increased to $13.5 million for the quarter ended
June 30, 2004, from $11.0 million for the same period last year, due primarily
to increases of $1.2 million in other expenses, $863,000 in compensation and
benefits, $222,000 in occupancy expense, and $128,000 in data processing
services. Other expense increased $1.2 million primarily due to the recognition
of a non-deductible excise tax assessed by the Internal Revenue Service ("IRS")
of $873,000 related to an operational adjustment in the Company's Employee Stock
Ownership Plan ("ESOP"). The Company has recognized an expense for the proposed
IRS assessment but is contesting both its validity and the amount thereof. The
increase in compensation and benefits was 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 expenses incurred in the opening of new
branches and an increase in data processing equipment expense. The increases in
data processing services and other expenses were due primarily to increases
resulting from the growth in loans and deposits.
For the nine months ended June 30, 2004, other expenses increased to $37.3
million compared to $31.8 million for the same period last year. This increase
was due primarily to increases of $3.0 million in compensation and benefits,
$645,000 in occupancy expense, $389,000 in data processing services, and $1.5
million in other expenses. The increase in compensation and benefits was due
primarily to annual salary increases, additional staff required to support the
growth in loans and deposits, and contributions to the defined benefit plan.
16
The increase in occupancy expense was due primarily to expenses incurred in
opening of new branches, closing the West Melbourne Branch in the Wal-Mart
Supercenter, and an increase in data processing equipment expense. The increase
in data processing services was due primarily to increases resulting from the
growth in loans and deposits. The increase in other expense was due primarily to
the recognition of the $873,000 ESOP excise tax and increases resulting from the
growth in loans and deposits.
The Company has a non-contributory defined benefit pension plan (the "Plan")
covering all full-time employees who were hired before January 1, 2003 and have
attained one year of service and 21 years of age. The Plan is part of a
multi-employer plan and separate actuarial evaluations are not made for each
employer nor are plan assets so segregated. As a result of the decline in market
value of the investments held in the Plan, the Company, based on actuarial
calculations, currently expects to be required to increase its pension
contribution to approximately $1.2 million for fiscal year 2004. The Company has
elected to freeze the Plan effective June 30, 2004, accruing no future benefits
for all employees. As a result, the Company expects to be required to contribute
approximately $500,000 for fiscal year 2005. The Company recorded pension
expense of approximately $1.1 million and $388,000 for the nine months ended
June 30, 2004 and 2003, respectively.
Income Taxes. Income tax expense increased to $7.1 million for the quarter ended
June 30, 2004, from $6.2 million for the same period last year due primarily to
an increase in pretax accounting income. The effective tax rates were 40.8% and
39.3% for the quarters ended June 30, 2004 and 2003, respectively. For the nine
months ended June 30, 2004, income tax expense increased to $19.7 million from
$18.2 million for the same period last year due primarily to an increase in
pretax accounting income. The effective tax rates were 39.7% and 39.2% for the
nine months ended June 30, 2004 and 2003, respectively. The increase in the tax
rate for the three and nine month periods was primarily due to the $873,000
non-deductible ESOP excise tax.
Financial Condition
Comparisons of financial condition in this section are from the end of the
preceding fiscal year to June 30, 2004.
Total assets increased to $2.592 billion at June 30, 2004, from $2.352 billion
at the fiscal year ended September 30, 2003. The increase is due primarily to an
increase in loans and mortgage-backed securities, partially offset by a decrease
in investment securities.
Investment securities available for sale decreased to $139.1 million at June 30,
2004, from $246.5 million at September 30, 2003. The decrease is due primarily
to maturities and calls of $80.0 million and sales of $53.7 million, partially
offset by purchases of $30.0 million.
Investment securities held to maturity decreased to $439,000 at June 30, 2004
from $50.4 million at September 30, 2003. The decrease is due primarily to
maturities and calls of $50.0 million.
Mortgage-backed securities increased to $468.4 million at June 30, 2004, from
$308.1 million at September 30, 2003. The increase is due primarily to purchases
of $234.7 million of 5 and 7 year fixed-rate balloon securities, partially
offset by repayments of $68.6 million. The purchases were funded with proceeds
from maturities and calls of investment securities and excess cash provided by
the net increase in deposits. The Company's investment strategy has been to
shift the portfolio from lower yielding, shorter- term investment securities
into higher yielding balloon mortgage-backed securities, with expected average
lives in the three to four year range. These securities will provide future
monthly principal and interest repayment cash flow to fund loan growth or other
investment alternatives.
17
Net loans increased to $1.832 billion at June 30, 2004, from $1.611 billion at
September 30, 2003. The increase is due primarily to loan disbursements of
$743.0 million, partially offset by repayments of $450.9 million, and sales of
mortgage loans of $71.1 million, primarily residential one-to-four family
fixed-rate mortgage loans. The increase in net loans for the nine months is due
primarily to a net increase of $82.7 million in residential one-to-four mortgage
loans, $54.2 million in nonresidential mortgage loans, $44.4 million in land
loans, $29.3 million in consumer loans, and $11.9 million in commercial business
loans.
Deposits increased to $1.740 billion at June 30, 2004, from $1.550 billion at
September 30, 2003. The increase is due primarily to a net increase in deposits
before interest credited of $174.4 million and interest credited of $15.0
million. The increase in deposits for the nine months is due primarily to a net
increase of $172.5 million in core deposits and $16.9 million in certificate
accounts. This change reflects the Company's emphasis on growing transaction
accounts, the customer's preference for shorter-term investments in a low
interest rate environment and growth in the Company's market area.
FHLB advances increased to $544.5 million from $503.5 million at June 30, 2004,
from September 30, 2003. The increase was primarily due to $21.0 million in
daily rate advances and $25.0 million of new long-term fixed rate convertible
advances, callable quarterly, maturing in 2009. These advances were taken in
order to fund the purchase of mortgage-backed securities and other daily cash
needs.
Stockholders' equity increased to $277.8 million at June 30, 2004, from $261.9
million at September 30, 2003. The increase is due primarily to $29.9 million of
earnings for the nine months partially offset by $10.5 million of dividends
paid, the repurchase of $4.2 million of Company common stock to be held as
treasury stock, and a decrease in accumulated other comprehensive income of $3.4
million. During the nine months, the Company repurchased 147,539 shares at an
average price of $28.18 per share to be held as treasury stock in accordance
with the Company's stock repurchase program. The decrease in accumulated other
comprehensive income is attributable to $1.3 million, net of tax, of realized
gain on sale of investment securities and $2.1 million, net of tax, depreciation
of available for sale securities during the nine months, primarily as a result
of rising interest rates.
At June 30, 2004, 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 $ 38,850 1.50% $ 261,039 10.08% $ 222,189
Core Capital 77,701 3.00% 261,039 10.08% 183,338
Risk-Based Capital 119,325 8.00% 277,796 18.62% 158,471
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 $444.3 million at June 30, 2004 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.
18
At June 30, 2004, the Bank had $832.7 million or 47.9% 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 flows from the Company's operating activities (I.e. cash items
affecting net income) was $33.2 million and $37.1 million for the nine months
ended June 30, 2004 and 2003, respectively.
Net cash flows from the Company's investing activities (I.e. cash flows from its
investment securities, mortgage-backed securities and loan portfolios) was
$238.2 million and $264.9 million for the nine months ended June 30, 2004 and
2003, respectively. The decrease in cash used in 2004 was principally due to a
decrease $240.6 million in the purchase of investment securities and an increase
of $111.6 million in proceeds from maturities, calls and sales of investment
securities, offset by an increase of $188.8 million in the net increase in loans
and an increase of $132.6 million in the purchase of mortgage-backed securities.
Net cash flows from the Company's financing activities (I.e. cash flows
primarily from net increases (decreases) in deposits and net FHLB advances) was
$212.0 million and $144.5 million for the nine months ended June 30, 2004 and
2003, respectively. The increase in cash flows in 2004 was primarily due to a
$62.9 million increase in the net increase in deposits and a $13.0 million
increase in the net proceeds from short-term borrowings, offset by a $10.0
increase in repayments of long-term debt.
CONTRACTUAL OBLIGATIONS
The following table shows the aggregated amounts of payments due under specified
contractual obligations, aggregated by category of contractual obligation, for
specified time periods:
One Three More
Within through through than
one year three years five years five years Total
-------- ----------- ---------- ---------- -----
(In thousands)
FHLB advances $ 54,000 $ 5,000 $ 145,000 $ 340,497 $ 544,497
Operating leases 335 267 170 1,247 2,019
Purchase obligations 4,807 2,012 131 5 6,955
--------- --------- --------- --------- ---------
Total $ 59,142 $ 7,279 $ 145,301 $ 341,749 $ 553,471
========= ========= ========= ========= =========
The Company expects to contribute an additional $125,000 for fiscal year 2004
and $500,000 for fiscal year 2005 for its non-contributory defined benefit
pension plan. The Company also has an unfunded supplemental executive retirement
plan for the benefit of Michael J. Brown, Sr. The liability related to this plan
was $1.2 million as of June 30, 2004.
19
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 following table sets forth information regarding the Company's nonaccrual
loans and foreclosed real estate at the dates indicated:
June 30, September 30,
2004 2003
---- ----
(Dollars in thousands)
Nonaccrual mortgage loans:
Delinquent less than 90 days $ --- $ 209
Delinquent 90 days or more 1,841 1,609
------- -------
Total 1,841 1,818
------- -------
Nonaccrual other loans:
Delinquent less than 90 days $ --- $ ---
Delinquent 90 days or more 242 397
------- -------
Total 242 397
------- -------
Total nonperforming loans 2,083 2,215
Real estate owned, net of related allowance 333 906
------- -------
Total nonperforming assets $ 2,416 $ 3,121
======= =======
Nonperforming loans to total net loans .11% .14%
Total nonperforming assets to total assets .09% .13%
Allowance for loan losses to total net loans .95% 1.01%
Allowance for loan losses to nonperforming loans 838.13% 731.34%
Allowance for loan losses to classified loans 322.92% 245.86%
Available Information
The Company's website address is www.harborfederal.com. The Company makes
available, free of charge, on or through its website, its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and beneficial ownership reports on Forms 3, 4,
and 5 as soon as reasonably practicable after electronically filing such
material with, or furnishing it to, the Securities and Exchange Commission. The
information found on the Company's website is not incorporated by reference in
this or any other report the Company files or furnishes to the Securities and
Exchange Commission.
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk and Asset
and Liability Management.
The Company's assets consist primarily of fixed-rate, variable rate and floating
rate loans and fixed-rate mortgage-backed securities. These assets are funded by
customer deposits and borrowings from the FHLB. Customer deposits are comprised
of non-maturity transaction accounts, passbook accounts and certificate
accounts. The Company believes that the non-maturity transaction accounts and
passbook accounts provide a stable source of funding even during periods of
rising interest rates. Historically, balances in these accounts have been
relatively insensitive to changes in interest rates. The Company also uses
long-term borrowings from the FHLB as a means of managing exposure to higher
interest rates.
As of June 30, 2004, the Company has divested substantially all equity security
investments and is no longer exposed to market risk associated with these
investments.
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, 2003.
Item 4. Controls and Procedures.
Based on their evaluation, 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, as of June 30, 2004,
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. During the last fiscal
quarter, there have been no changes in the internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, the internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are various claims and lawsuits in which the Company is periodically
involved in the ordinary course of the Company's business. In the opinion of
management, no material loss is anticipated from any such pending claims or
lawsuits.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security-Holders.
None
21
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The exhibits listed below are included with this Report or are
incorporated herein by reference to an identified document previously filed with
the Securities and Exchange Commission as set forth parenthetically.
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)
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)
10(viii) *Change of Control Agreement (Exhibit 10(viii) to Form
10-Q for the quarter ended June 30, 2003 filed August 14, 2003)
10(ix) *Change of Control Agreement (Exhibit 10(ix) to Form 10-K for
the year ended September 30, 2003 filed December 29, 2003)
22
10(x) *Amendment to employment contract with Michael J. Brown, Sr.
(Exhibit 10(x) to Form 10-K for the year ended September 30, 2003
filed December 29, 2003)
10(xi) *Senior Officer Incentive Plan for fiscal year 2004 (Exhibit
10(xi) to Form 10-K for the year ended September 30, 2003 filed
December 29, 2003)
10(xii) **Amendments to Change of Control Agreements
14.1 *Code of Ethics (Exhibit 14.1 to Form 10-K for the year ended
September 30, 2003 filed December 29, 2003)
31.1 **Certification by Michael J. Brown, Sr., Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 **Certification by H. Michael Callahan, Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 **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.
32.2 **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.
*Incorporated by reference.
**Included with this report.
(b) Reports on Form 8-K
On April 14, 2004, the Company furnished a Form 8-K announcing its earnings for
the second quarter of the 2004 fiscal year.
23
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 12, 2004 /s/
--------------------------
Michael J. Brown, Sr.
President and Chief Executive Officer
Date: August 12, 2004 /s/
--------------------------
H. Michael Callahan
Senior Vice President, Finance and
Chief Financial Officer
24
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael J. Brown, Sr., Chief Executive Officer of Harbor Florida Bancshares,
Inc., certify that:
1. I have reviewed this report on Form 10-Q of Harbor Florida Bancshares,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during registrant's
most recent fiscal quarter (the registrants fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; 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 over financial reporting.
/s/
- -----------------------
Michael J. Brown, Sr.
Chief Executive Officer
August 12, 2004
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, H. Michael Callahan, Chief Financial Officer of Harbor Florida Bancshares,
Inc., certify that:
1. I have reviewed this report on Form 10-Q of Harbor Florida Bancshares,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during registrant's
most recent fiscal quarter (the registrants fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; 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 over financial reporting.
/s/
- -----------------------
H. Michael Callahan
Chief Financial Officer
August 12, 2004
EXHIBIT 32.1
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 June 30, 2004 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.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
/s/
- ------------------------
Michael J. Brown, Sr.
Chief Executive Officer
August 12, 2004
EXHIBIT 32.2
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 June 30, 2004 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.
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
/s/
- -----------------------
H. Michael Callahan
Chief Financial Officer
August 12, 2004
EXHIBIT 10(xii)
AMENDMENT TO THE
CHANGE IN CONTROL AND NON-COMPETE AGREEMENT
BETWEEN J. HAL ROBERTS AND
HARBOR FEDERAL SAVINGS BANK
The Change in Control and Non-compete Agreement between J.
Hal Roberts and Harbor Federal Savings Bank is hereby amended as follows:
1. Amended Paragraphs to the Agreement to read as follows:
4.TERMINATION BENEFITS. (a) Upon the occurrence of a Change of
Control, followed at any time during the term of this Agreement by the
voluntary or involuntary termination of the Executive's employment,
other than for Termination for Cause, the Bank and the company shall pay
the Executive, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal three times the sum of (i) the
Employee's base salary from the Employer during the 12-month period
immediately preceding the Date of Termination, plus (ii) the amount of
the bonuses received by the Employee from the Employer during the
12-month period immediately preceding the Date of Termination, plus
(iii) the cost to the Employer of all benefits to which the Employee was
entitled during the 12-month period immediately preceding the Date of
Termination. At the election of the Executive such payment may be made
in a lump sum or paid in equal monthly installments during the
thirty-six (36) months following the Executive's termination. In the
event that no election is made, payment to the Executive will be in
equal monthly installments.
(d) Notwithstanding the preceding paragraphs of this Section 4,
in no event shall the aggregate payments or benefits (excluding any
payments or benefits which occur solely as a result of terms requiring
acceleration in plans for stock related benefits such as stock options
or restricted stock) to be made or afforded to Executive under said
paragraphs (the "Terminations Benefits") constitute an "excess parachute
payment" under Section 280G of the code or any successor thereto, and in
order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of
which is one dollar ($1.00) less than an amount equal to three (3) times
Executive's "base amount", as determined in accordance with said Section
280G. The allocation of the reduction required hereby among the
Termination Benefits provided by the preceding paragraphs of this
Section 4 shall be determined by the Executive.
7.NON-COMPEITION AND CONFIDENTIAL INFORMATION (a) During the
term of this Agreement, and for two (2) years after the date the
Executive is terminated by the Bank or Bancshares, whether voluntarily
or involuntarily, with or without cause, the Executive shall not
compete directly or indirectly in the Florida counties of St. Lucie,
Martin, Indian River, Brevard, Volusia or Okeechobee (collectively, the
"Counties") with any business then being conducted by the Bank or
Bancshares without their prior written consent. The term "compete"
means rendering any service by the Executive, whether as an employee,
director, consultant, independent contractor, partner, co-venturer or
investor (excluding any interest of the Executive through investment of
up to an aggregate of 10% in the equity or debt securities or
equivalent partnership interest of any person required to register
under Section 12(g) of the securities Exchange Act of 1934) to or on
behalf of any organization, including but not limited to any commercial
bank, savings bank, savings and loan association, credit union,
mortgage banking company, insurance company or brokerage firm,
conducting any business then competitive to that of the Bank or
Bancshares in the Counties.
DATE: April 14, 2004 HARBOR FEDERAL SAVINGS BANK
-------------
EMPLOYER:
/s/
--------------------------
Michael J. Brown, Sr.,
President
EMPLOYEE:
/s/
--------------------------
J. Hal Roberts
AMENDMENT TO THE
CHANGE IN CONTROL AND NON-COMPETE AGREEMENT
BETWEEN ALBERT L. FORT AND
HARBOR FEDERAL SAVINGS BANK
The Change in Control and Non-compete Agreement between
Albert L. Fort and Harbor Federal Savings Bank is hereby amended as follows:
1. Amended Paragraph to the Agreement to read as follows:
4.TERMINATION BENEFITS. (a) Upon the occurrence of a Change of
Control, followed at any time during the term of this Agreement by the
voluntary or involuntary termination of the Executive's employment,
other than for Termination for Cause, the Bank and the company shall pay
the Executive, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal two times the sum of (i) the
Employee's base salary from the Employer during the 12-month period
immediately preceding the Date of Termination, plus (ii) the amount of
the bonuses received by the Employee from the Employer during the
12-month period immediately preceding the Date of Termination, plus
(iii) the cost to the Employer of all benefits to which the Employee was
entitled during the 12-month period immediately preceding the Date of
Termination. At the election of the Executive such payment may be made
in a lump sum or paid in equal monthly installments during the
twenty-four (24) months following the Executive's termination. In the
event that no election is made, payment to the Executive will be in
equal monthly installments.
DATE: April 14, 2004 HARBOR FEDERAL SAVINGS BANK
--------------
EMPLOYER:
/s/
--------------------------
Michael J. Brown, Sr.
President
EMPLOYEE:
/s/
--------------------------
Albert L. Fort
AMENDMENT TO THE
CHANGE IN CONTROL AND NON-COMPETE AGREEMENT
BETWEEN DAVID C. HANKLE AND
HARBOR FEDERAL SAVINGS BANK
The Change in Control and Non-compete Agreement between David
C. Hankle and Harbor Federal Savings Bank is hereby amended as follows:
1. Amended Paragraph to the Agreement to read as follows:
4.TERMINATION BENEFITS. (a) Upon the occurrence of a Change of
Control, followed at any time during the term of this Agreement by the
voluntary or involuntary termination of the Executive's employment,
other than for Termination for Cause, the Bank and the company shall pay
the Executive, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal two times the sum of (i) the
Employee's base salary from the Employer during the 12-month period
immediately preceding the Date of Termination, plus (ii) the amount of
the bonuses received by the Employee from the Employer during the
12-month period immediately preceding the Date of Termination, plus
(iii) the cost to the Employer of all benefits to which the Employee was
entitled during the 12-month period immediately preceding the Date of
Termination. At the election of the Executive such payment may be made
in a lump sum or paid in equal monthly installments during the
twenty-four (24) months following the Executive's termination. In the
event that no election is made, payment to the Executive will be in
equal monthly installments.
DATE: April 14, 2004 HARBOR FEDERAL SAVINGS BANK
--------------
EMPLOYER:
/s/
--------------------------
Michael J. Brown, Sr.
President
EMPLOYEE:
/s/
--------------------------
David C. Hankle
AMENDMENT TO THE
CHANGE IN CONTROL AND NON-COMPETE AGREEMENT
BETWEEN H. MICHAEL CALLAHAN AND
HARBOR FEDERAL SAVINGS BANK
The Change in Control and Non-compete Agreement between H.
Michael Callahan and Harbor Federal Savings Bank is hereby amended as follows:
1. Amended Paragraph to the Agreement to read as follows:
4.TERMINATION BENEFITS. (a) Upon the occurrence of a Change of
Control, followed at any time during the term of this Agreement by the
voluntary or involuntary termination of the Executive's employment,
other than for Termination for Cause, the Bank and the company shall pay
the Executive, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal two times the sum of (i) the
Employee's base salary from the Employer during the 12-month period
immediately preceding the Date of Termination, plus (ii) the amount of
the bonuses received by the Employee from the Employer during the
12-month period immediately preceding the Date of Termination, plus
(iii) the cost to the Employer of all benefits to which the Employee was
entitled during the 12-month period immediately preceding the Date of
Termination. At the election of the Executive such payment may be made
in a lump sum or paid in equal monthly installments during the
twenty-four (24) months following the Executive's termination. In the
event that no election is made, payment to the Executive will be in
equal monthly installments.
DATE: April 14, 2004 HARBOR FEDERAL SAVINGS BANK
--------------
EMPLOYER:
/s/
--------------------------
Michael J. Brown, Sr.
President
EMPLOYEE:
/s/
--------------------------
H. Michael Callahan
AMENDMENT TO THE
CHANGE IN CONTROL AND NON-COMPETE AGREEMENT
BETWEEN MICHAEL J. BROWN, JR. AND
HARBOR FEDERAL SAVINGS BANK
The Change in Control and Non-compete Agreement between
Michael J. Brown, Jr. and Harbor Federal Savings Bank is hereby amended as
follows:
1. Amended Paragraph to the Agreement to read as follows:
4.TERMINATION BENEFITS. (a) Upon the occurrence of a Change of
Control, followed at any time during the term of this Agreement by the
voluntary or involuntary termination of the Executive's employment,
other than for Termination for Cause, the Bank and the company shall pay
the Executive, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal two times the sum of (i) the
Employee's base salary from the Employer during the 12-month period
immediately preceding the Date of Termination, plus (ii) the amount of
the bonuses received by the Employee from the Employer during the
12-month period immediately preceding the Date of Termination, plus
(iii) the cost to the Employer of all benefits to which the Employee was
entitled during the 12-month period immediately preceding the Date of
Termination. At the election of the Executive such payment may be made
in a lump sum or paid in equal monthly installments during the
twenty-four (24) months following the Executive's termination. In the
event that no election is made, payment to the Executive will be in
equal monthly installments.
DATE: April 14, 2004 HARBOR FEDERAL SAVINGS BANK
--------------
EMPLOYER:
/s/
--------------------------
Michael J. Brown, Sr.
President
EMPLOYEE:
/s/
--------------------------
Michael J. Brown, Jr.