UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 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 January 21, 2005, there were 23,847,786 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, 2004 and September 30, 2004 (unaudited)..............2
Condensed Consolidated Statements of Earnings for the three months
ended December 31, 2004 and 2003 (unaudited)......................3
Condensed Consolidated Statements of Cash Flows for the three
months ended December 31, 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............................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......23
Item 4. Controls and Procedures..........................................23
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings................................................23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......23
Item 3. Defaults Upon Senior Securities..................................24
Item 4. Submission of Matters to a Vote of Security Holders..............24
Item 5. Other Information................................................24
Item 6. Index of Exhibits ...............................................24
Signature Page...................................................26
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (unaudited)
(In thousands)
December 31, September 30,
2004 2004
---- -----
Assets:
Cash and amounts due from depository institutions $ 64,191 $ 67,822
Interest-bearing deposits in other banks 93,503 7,053
Investment securities held to maturity 285 440
Investment securities available for sale 149,015 129,760
Mortgage-backed securities held to maturity 473,431 443,060
Loans held for sale 2,677 2,438
Loans, net 1,933,269 1,891,169
Accrued interest receivable 11,301 11,243
Real estate owned 76 48
Premises and equipment, net 40,041 36,529
Federal Home Loan Bank stock 29,508 29,175
Goodwill 3,591 3,591
Other assets 4,406 4,781
---------- ----------
Total assets $ 2,805,294 $ 2,627,109
========== ==========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $ 1,941,482 $ 1,744,830
Short-term borrowings 13,766 13,785
Long-term debt 535,489 540,492
Advance payments by borrowers for taxes and insurance 7,635 26,328
Income taxes payable 6,554 7,584
Other liabilities 5,473 7,446
---------- ----------
Total liabilities 2,510,399 2,340,465
---------- ----------
Stockholders' Equity:
Preferred stock --- ---
Common stock 3,181 3,179
Paid-in capital 204,128 202,904
Retained earnings 207,212 200,040
Accumulated other comprehensive loss, net (629) (298)
Common stock purchased by:
Employee stock ownership plan (ESOP) (9,079) (9,254)
Recognition and retention plan (RRP) (2,172) (2,228)
Treasury stock (107,746) (107,699)
---------- ----------
Total stockholders' equity 294,895 286,644
---------- ----------
Total liabilities and stockholders' equity $ 2,805,294 $ 2,627,109
========== ==========
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,
------------
2004 2003
---- ----
Interest income:
Loans $ 32,380 $ 28,701
Investment securities 1,060 1,939
Mortgage-backed securities 4,493 3,462
Other 397 34
------- -------
Total interest income 38,330 34,136
------- -------
Interest expense:
Deposits 6,647 5,911
Borrowings and debt 6,158 5,823
------- -------
Total interest expense 12,805 11,734
------- -------
Net interest income 25,525 22,402
Provision for loan losses 450 448
------- -------
Net interest income after provision for
loan losses 25,075 21,954
------- -------
Other income:
Fees and service charges 3,672 3,385
Insurance commissions and fees 645 721
Income from real estate operations 48 169
Gain on sale of mortgage loans 468 741
Gain (loss) on disposal of premises and equipment 303 (1)
Gain on sale of equity securities --- 311
Other 7 (3)
------- -------
Total other income 5,143 5,323
------- -------
Other expenses:
Compensation and employee benefits 7,485 7,010
Occupancy 1,795 1,632
Data processing services 847 837
Advertising and promotion 459 343
Other 1,892 1,769
------- -------
Total other expense 12,478 11,591
------- -------
Income before income taxes 17,740 15,686
Income tax expense 6,950 6,137
------- -------
Net income $ 10,790 $ 9,549
======= =======
Net income per share
Basic $ 0.48 $ 0.42
======= =======
Diluted $ 0.46 $ 0.41
======= =======
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,
------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 10,790 $ 9,549
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of equity securities available for sale --- (311)
(Gain) loss on disposal of premises and equipment (303) 1
Gain on sale of real estate owned (42) (117)
Gain on sale of mortgage loans (468) (741)
Provision for loan losses 450 448
Provision for losses on real estate owned 15 ---
Depreciation and amortization 419 200
Deferred income tax expense 72 287
Originations of loans held for sale (21,634) (28,170)
Proceeds from sale of loans held for sale 21,863 28,909
Increase in deferred loan fees and costs 1,620 1,546
Increase in accrued interest receivable (58) (202)
Decrease (increase) in other assets 253 (315)
(Decrease) increase in income taxes payable (591) 3,970
Decrease in other liabilities (1,973) (975)
--------- ---------
Net cash provided by operating activities 10,413 14,079
--------- ---------
Cash flows from investing activities:
Net increase in loans (42,856) (39,765)
Purchase of mortgage-backed securities (55,145) (82,764)
Proceeds from principal repayments of mortgage-backed securities 24,520 19,719
Proceeds from maturities and calls of investment securities held
to maturity 155 10,000
Proceeds from maturities and calls of investment securities
available for sale --- 40,000
Proceeds from sale of investment securities available for sale --- 435
Purchase of investment securities available for sale (19,881) (10,000)
Proceeds from sale of real estate owned 81 258
Purchase of premises and equipment (4,228) (1,152)
Proceeds from the disposal of premises and equipment 557 13
FHLB stock, net (333) 50
--------- ---------
Net cash used in investing activities (97,130) (63,206)
--------- ---------
4
HARBOR FLORIDA BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Three months ended
December 31,
------------
2004 2003
---- ----
Cash flows from financing activities:
Net increase in deposits 196,652 65,136
Net proceeds of short-term borrowings (5,019) 6,000
Repayments of long-term debt (3) (22)
Decrease in advance payments by borrowers for taxes
and insurance (18,693) (18,152)
Dividends paid (3,618) (3,261)
Common stock options exercised 264 454
Purchase of treasury stock (47) (169)
--------- ----------
Net cash provided by financing activities 169,536 49,986
--------- ----------
Net increase in cash and cash equivalents 82,819 859
Cash and cash equivalents - beginning of period 74,875 59,694
--------- ----------
Cash and cash equivalents - end of period $ 157,694 $ 60,553
========= ==========
Supplemental disclosures:
Cash paid for:
Interest $ 12,983 $ 11,821
Taxes 7,469 2,100
Noncash investing and financing activities:
Additions to real estate acquired in settlement of loans
through foreclosure 82 59
Sale of real estate owned financed by the Company --- 160
Tax benefit of stock plans credited to capital 439 449
Change in unrealized loss on securities available for sale (539) (1,515)
Change in deferred taxes related to securities available for
sale 208 585
Distribution of RRP shares 56 56
Transfer to short-term borrowings from long-term debt 5,000 5,001
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, 2004.
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 December 31, 2003 consolidated financial
statements have been reclassified in order to conform to the December 31, 2004
presentation.
On December 12, 2003, the American Institute of Certified Public Accountants
issued Statement of Position No. 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer" (SOP 03-3). SOP 03-3 requires acquired loans
with poor credit quality to be recorded at fair value and prohibits carrying
over or creation of valuation allowances in the initial accounting for loans.
SOP 03-3 also limits the yield that may be accreted to income. SOP 03-3 applies
to the purchase of an individual loan, a pool of loans, and loans acquired in a
business combination. SOP 03-3 is effective for loans acquired in fiscal years
beginning after December 31, 2004. SOP 03-3 is not expected to have a material
impact on the Company's consolidated financial statements.
In March 2004, the Emerging Issues Task Force (EITF) issued EITF 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" (EITF 03-1) to provide recognition and measurement guidance
regarding when impairments of equity and debt securities are considered
other-than-temporary requiring a charge to earnings, and also requires
additional annual disclosures for investments in unrealized loss positions. In
September 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position EITF 03-1-1, which delayed the recognition and measurements
provisions of EITF 03-1 pending the issuance of further implementation guidance.
The adoption of EITF 03-1 is not expected to have a material impact on the
Company's consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 123R, which is a revision of FASB Statement No. 123 "Accounting for
Stock Based Compensation". This statement, which supersedes Accounting
Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees"
("Statement No. 123"), would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25 and require all
share-based payments to employees, including grants of employee stock options,
to be recognized in the Financial Statements based on their fair values. The
provision of SFAS No. 123R will be effective prospectively beginning July 1,
2005. The implementation of this statement is expected to result in
approximately $360,000 additional expense, net of tax, on an annual basis.
At December 31, 2004, the Company had stock option plans for the benefit of
directors, officers and other employees of the Company. The Company currently
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 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.
6
Had compensation cost for the Company's stock-based compensation plans been
determined in accordance with the fair value based method in Statement No. 123,
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,
------------
2004 2003
---- ----
(In thousands except per share data)
Net income - As reported $ 10,790 $ 9,549
Less: total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax (90) (92)
------- -------
Pro forma net income $ 10,700 $ 9,457
======= =======
Net income per share - basic
As reported $ 0.48 $ 0.42
Pro forma 0.47 0.42
Net income per share - diluted
As reported 0.46 0.41
Pro forma 0.46 0.41
There have been no significant changes in the methods and assumptions used to
compute the pro forma net income for the quarters ended December 31, 2004 and
2003.
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, 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
December 31,
------------
2004 2003
---- ----
Net income $10,789,799 $ 9,548,766
========== ==========
Weighted average common shares outstanding:
Shares outstanding 23,603,661 23,556,969
Less: weighted average uncommitted ESOP shares (919,287) (989,190)
---------- ----------
Total 22,684,374 22,567,779
========== ==========
Basic net income per share $ 0.48 $ 0.42
========== ==========
Weighted average common shares
outstanding 22,684,374 22,567,779
Additional dilutive shares related to
stock options 572,040 620,366
---------- ----------
Total weighted average common shares
and equivalents outstanding for
diluted earnings per share computation 23,256,414 23,188,145
========== ==========
Diluted net income per share $ 0.46 $ 0.41
========== ==========
Additional dilutive shares are calculated under the treasury stock method
utilizing the average market value of the Company's stock for the period.
8
(3) INVESTMENT AND MORTGAGE BACKED SECURITIES
The amortized cost and estimated market value of investment and mortgage-backed
securities at December 31, 2004 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(In thousands)
Available for sale:
FHLB notes $ 99,981 $ --- $ 617 $ 99,364
FNMA notes 30,012 --- 318 29,694
FFCB notes 20,019 --- 88 19,931
-------- -------- -------- --------
150,012 --- 1,023 148,989
Equity securities 26 --- --- 26
-------- -------- -------- --------
150,038 --- 1,023 149,015
-------- -------- -------- --------
Held to maturity:
Municipal securities 285 35 --- 320
FHLMC mortgage-backed securities 280,934 1,091 2,807 279,218
FNMA mortgage-backed securities 192,497 1,084 1,685 191,896
--------- -------- -------- --------
473,431 2,175 4,492 471,114
-------- -------- -------- --------
$ 623,754 $ 2,210 $ 5,515 $ 620,449
======== ======== ======== ========
The amortized cost and estimated market value of investment and mortgage-backed
securities at September 30, 2004 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(In thousands)
Available for sale:
FHLB notes $ 80,127 $ 15 $ 273 $ 79,869
FNMA notes 30,018 11 177 29,852
FFCB note 20,074 --- 60 20,014
-------- -------- -------- --------
130,219 26 510 129,735
Equity securities 25 --- --- 25
-------- -------- -------- --------
130,244 26 510 129,760
-------- -------- -------- --------
Held to maturity:
Municipal securities 440 37 --- 477
-------- -------- -------- --------
440 37 --- 477
-------- -------- -------- --------
FHLMC mortgage-backed securities 239,339 1,244 2,279 238,304
FNMA mortgage-backed securities 203,721 1,235 1,709 203,247
-------- -------- -------- --------
443,060 2,479 3,988 441,551
-------- -------- -------- --------
$ 573,744 $ 2,542 $ 4,498 $ 571,788
======== ======== ======== ========
9
The amortized cost and estimated market value of debt securities at December 31,
2004 and September 30, 2004 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.
December 31, 2004 September 30, 2004
----------------- ------------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ----- ---- -----
(In thousands)
Investment Securities:
Available for sale:
Due in one year or less $ 60,131 $ 59,847 $ 30,175 $ 30,091
Due in one to five years 89,881 89,142 100,044 99,644
-------- -------- -------- --------
150,012 148,989 130,219 129,735
-------- -------- -------- --------
Held to maturity:
Due in one year or less 85 85 155 155
Due in one to five years --- --- 85 86
Due in five to ten years 200 235 200 236
-------- -------- -------- --------
285 320 440 477
-------- -------- -------- --------
Mortgage-backed Securities:
Held to maturity:
Due in one year or less 448 444 599 591
Due in one to five years 75,645 74,850 39,963 39,833
Due in five to ten years 371,838 369,031 374,365 371,609
Due after ten years 25,500 26,789 28,133 29,518
-------- -------- -------- --------
473,431 471,114 443,060 441,551
-------- -------- -------- --------
$ 623,728 $ 620,423 $ 573,719 $ 571,763
======== ======== ======== ========
As of December 31, 2004, the Company had pledged mortgage-backed securities with
a market value of $44,630,000 and a carrying value of $43,986,000 to
collateralize the public funds on deposit. The Company had also pledged
mortgage-backed securities with a market value of $1,485,000 and a carrying
value of $1,400,000 to collateralize treasury, tax and loan accounts as of
December 31, 2004.
10
Gross unrealized losses on investment securities and the fair value of the
related securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2004, were as follows:
Less than 12 months 12 months or more Total
------------------- ----------------- -----
Unrealized Unrealized Unrealized
Fair value losses Fair value losses Fair value losses
---------- ------ ---------- ------ ---------- ------
(In thousands)
Available for sale
Agency securities $ 148,989 $ 1,023 $ --- $ --- $ 148,989 $ 1,023
Held to maturity
Mortgage-backed
securities 338,735 2,754 87,619 1,738 426,354 4,492
-------- -------- -------- -------- --------- --------
Total $ 487,724 $ 3,777 $ 87,619 $ 1,738 $ 575,343 $ 5,515
======== ======== ======== ======== ========= ========
Agency securities: The securities are all AAA rated and the unrealized losses on
investments were caused by interest rate increases. The Company has the ability
and intent to hold these investments until a market price recovery or maturity.
Therefore, these investments are not considered other-than-temporarily impaired.
Mortgage-backed securities: The securities are all AAA rated and the unrealized
losses on investments in mortgage-backed securities were caused by interest rate
increases. The contractual cash flows of these securities are guaranteed by FNMA
and FHLMC. The decline in fair value is attributable to changes in interest
rates and not credit downgrades. The Company has the ability and intent to hold
these investments until a market price recovery or maturity. Therefore, these
investments are not considered other-than-temporarily impaired.
11
(4) LOANS
Loans are summarized below:
December 31, September 30,
2004 2004
---- ----
(In thousands)
Mortgage loans:
Construction 1-4 family $ 310,987 $ 298,585
Permanent 1-4 family 1,094,626 1,069,514
Multi-family 30,015 27,276
Nonresidential 243,943 235,083
Land 207,065 198,937
--------- ---------
Total mortgage loans 1,886,636 1,829,395
--------- ---------
Other loans:
Commercial 74,712 72,276
Home equity lines of credit 62,328 59,838
Other consumer secured by real estate 107,114 103,621
Other consumer 42,296 43,945
--------- ---------
Total other loans 286,450 279,680
--------- ---------
Total loans 2,173,086 2,109,075
--------- ---------
Less:
Loans in process 211,696 190,453
Net deferred loan fees and discounts 9,875 9,651
Allowance for loan losses 18,246 17,802
--------- ---------
239,817 217,906
--------- ---------
Total loans, net $ 1,933,269 $ 1,891,169
========== =========
An analysis of the allowance for loan losses follows:
Three months ended
December 31,
------------
2004 2003
---- ----
(In thousands)
Beginning balance $ 17,802 $ 16,199
Provision for loan losses 450 448
Charge-offs (18) (41)
Recoveries 12 8
------- -------
Ending balance $ 18,246 $ 16,614
======= =======
The allowance for loan losses was $18,246,000 and $17,802,000 at December 31,
2004 and September 30, 2004, 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 December 31, 2004 and
September 30, 2004.
12
The investment in impaired loans (primarily consisting of classified loans),
other than those evaluated collectively for impairment, was $3,742,000 and
$4,627,000 at December 31, 2004 and September 30, 2004 respectively.
At December 31, 2004 and September 30, 2004, loans with unpaid principal
balances of approximately $2,977,000 and $3,032,000, respectively, were 90 days
or more contractually delinquent or on nonaccrual status. As of December 31,
2004 and September 30, 2004, approximately $2,278,000 and $2,777,000,
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
December 31,
------------
2004 2003
---- ----
(In thousands)
Net income $ 10,790 $ 9,549
Other comprehensive loss:
Unrealized holding losses arising during the period (539) (1,204)
Less: reclassification adjustment for net realized
gain included in net income --- 311
------- -------
Net unrealized losses (539) (1,515)
Tax effect 208 585
------- -------
Other comprehensive loss, net of tax (331) (930)
------- -------
Comprehensive income $ 10,459 $ 8,619
======= =======
(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.
13
The Company recognized gains on sales of mortgage loans of $468,000 and
$741,000, respectively, for the three months ended December 31, 2004 and 2003.
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,
2004, no servicing assets and/or liabilities were recognized.
14
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" which are based on
assumptions and describe future plans. 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 and
elsewhere, 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) 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.
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 or losses on disposal 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.
The Company currently utilizes the following strategies to reduce interest rate
risk: (a) the Company seeks to originate and hold in the 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
15
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. These securities
have expected average lives in the three to four-year range. Management expects
that cash flow from investment maturities and repayments can be reinvested at
higher yields in a rising interest rate environment.
The Company operates primarily in seven counties on the east coast of Florida.
As such, the Company's results of operations are affected by the general and
economic conditions of the area. Management believes that the area's rapid
population growth and expanding real estate market will support continued
earning's growth.
During August and September 2004, several hurricanes passed directly over the
Company's market area within weeks of each other, resulting in property damage
throughout the region. The Company provided services to all of its markets on
the first business day after each storm. During the weeks following, Harbor
Insurance Agency handled thousands of insurance claims. The Company noted an
increase in past due loans, particularly in the residential mortgage and
consumer loan portfolios. Loan and deposit programs were implemented to assist
customers with their recovery and rebuilding efforts. Certain customers were
provided with short-term loan principal and/or interest deferments and/or
extended credit facilities. None of these programs had or is expected to have
any significant impact on the financial position, results of operations and cash
flows of the Company. The storm-related damages to the Company's own buildings,
which are predominately covered by insurance, are currently being repaired and
rebuilt.
Management is uncertain of the long-range effects of the hurricanes on the
economy, but believes that the area continues to represent an attractive market
with strong growth potential. In the short-term, the changed environment could
present challenges to the operations of the Company as a result of lower levels
of originations, loan sales, and fee income. The Company also recognized
approximately $186,000, after tax, through the gain on disposal of premises and
equipment during the quarter as a result of insurance proceeds received on
hurricane damaged premises and equipment.
The Company noted a significant increase in deposits during the quarter ended
December 31, 2004 primarily due to a net increase of $177.5 million in core
deposits (transaction and passbook accounts) and $19.1 million in certificate
accounts. The increase in core deposits includes approximately $55 million
increase in public funds on deposit, primarily due to year-end property tax
collections. The increase in core deposits also reflects disaster relief funds
and insurance proceeds flowing into the Company's market area, as well as the
customer's continued preference for shorter-term investments in a low interest
rate environment and growth in the Company's market area. The Company will
continue to emphasize growth in transaction accounts. However, the Company
believes that much of the current quarter's significant growth was attributable
to short-term accumulation of funds for the purpose of repairs to properties by
homeowners and businesses. Future growth in such deposits may, therefore, be
less than the amounts obtained for the quarter.
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 that 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 Company follows a consistent procedural discipline and accounts for loan
loss contingencies in accordance with Statement of Financial Accounting
Standards (SFAS) No. 5, "Accounting for Contingencies" ("Statement 5") and SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan" ("Statement 114").
The following is a description of how each portion of the allowance for loan
losses is determined.
16
The Company segregates the loan portfolio for loan loss purposes into the
following broad segments: commercial real estate; residential real estate;
commercial business; and consumer. The Company provides for a general allowance
for losses inherent in the portfolio by the above categories, which consists of
two components. (1) General loss percentages are established based upon
historical analyses. (2) A supplemental portion of the allowance is established
for inherent losses which probably exist as of the evaluation date even though
they might not have been identified by the more objective processes used. This
is due to the risk of error and/or inherent imprecision in the process. This
portion of the allowance is particularly subjective and requires judgments based
on qualitative factors which do not lend themselves to exact mathematical
calculations such as: trends in delinquencies and nonaccruals; migration trends
in the portfolio; trends in volume, terms, and portfolio mix; new credit
products and/or changes in the geographic distribution of those products;
changes in lending policies and procedures; loan review reports on the efficacy
of the risk identification process; changes in the outlook for local, regional
and national economic conditions; concentrations of credit; and peer group
comparisons.
Specific allowances are provided in the event that the specific collateral
analysis on each impaired loan indicates that the probable loss upon liquidation
of collateral would be in excess of the general percentage allocation. The
provision for loan losses is debited or credited in order to state the allowance
for loan losses to the required level as determined above.
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, 2004, compared to September 30, 2004. Furthermore, there was no reallocation
of the allowance from September 30, 2004. 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.
Results of Operations
Comparisons of quarterly results of operations in this section are between the
three months ended December 31, 2004 and December 31, 2003.
General. Diluted earnings per share for the first fiscal quarter ended December
31, 2004, increased 12.2% to 46 cents per share on net income of $10.8 million,
compared to 41 cents per share on net income of $9.5 million for the same period
last year. The increase for the three month period was due primarily to an
increase in net interest income, resulting from an increase in average
interest-earning assets due to origination of loans and purchases of
mortgage-backed securities. This growth was funded with low cost core deposits
and FHLB advances. The increase in net interest income was partially offset by a
decrease in other income and an increase in other expenses.
Net Interest Income. Net interest income increased 13.9% to $25.5 million for
the quarter ended December 31, 2004, from $22.4 million for the same period last
year. The increase for three month period was due primarily to a 14.8% increase
in average interest-earning assets that were funded primarily with low cost core
deposits and FHLB advances. The average balance of mortgage-backed securities
increased $125.9 million and average interest bearing deposits in other banks
increased $66.0 million, partially offset by a decrease of $137.6 million in
investment securities. 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 $286.6
million. The average balance of core deposits and FHLB advances increased by
$294.1 million and $41.4 million, respectively. The average balance of core
deposits and certificate accounts represent 54.5% and 45.5%, respectively, of
average total deposits for the three months ended December 31, 2004, compared to
48.1% and 51.9%, respectively, for the same period last year.
17
The net interest margin decreased to 3.88% for the three months ended December
31, 2004 from 3.92% for the three months ended December 31, 2003. The decrease
for the three month period was due primarily to the increase in core deposits, a
portion of which may be shorter-term in nature. As such, the additional funds
from these deposits were invested primarily in lower-yielding, shorter-term
investments earning a lower interest rate spread than the overall portfolio.
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 $450,000 for the quarter ended December 31,
2004, compared to $448,000 for the same period last year. The provision for the
quarter ended December 31, 2004 was principally comprised of a charge of
$421,000 due to increased credit risk resulting from growth in the loan
portfolio, primarily commercial real estate loans, a $23,000 increase in the
level of classified loans, and $6,000 in net charge-offs. The provision for the
quarter ended December 31, 2003 was principally comprised of a charge of
$348,000 due to increased credit risk resulting from growth in the loan
portfolio, primarily commercial real estate loans, a $67,000 increase in the
level of classified loans, and $33,000 in net charge-offs.
Nonperforming loans increased to $3.0 million at December 31, 2004 from $2.3
million at December 31, 2003. The ratio of the allowance for loan losses to
total nonperforming loans decreased to 612.82% at December 31, 2004 from 710.74%
at December 31, 2003. The ratio of the allowance for loan losses to total net
loans decreased to .94% of loans as of December 31, 2004, from 1.01% of total
net loans at December 31, 2003.
Other Income. Other income decreased to $5.1 million for the quarter ended
December 31, 2004, from $5.3 million for the same period last year. The decrease
was due primarily to a decrease of $311,000 in gain on sale of equity
securities, a decrease of $273,000 in gain on sale of mortgage loans and a
decrease of $121,000 in income from real estate operations, partially offset by
increases of $287,000 in fees and service charges and $304,000 in gain on
disposal of premises and equipment. Fees and service charges (primarily from
fees and service charges on deposit products) were $3.7 million and $3.4 million
for the quarters ended December 31, 2004 and 2003, respectively. This increase
was due primarily to the growth in transaction accounts. Insurance commissions
and fees were $645,000 and $721,000 for the three months ended December 31, 2004
and 2003, respectively. This decrease was due primarily to decreased annuity
sales. Income from real estate operations decreased $121,000 to $48,000,
primarily due to decreased gains on sale of real estate acquired in settlement
of loans through foreclosure. Gain on the sale of mortgage loans was $468,000
and $741,000 for the quarters ended December 31, 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 $2.3 million; however,
adjustable rate loan originations increased by $24.3 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. The
gain on disposal of premises and equipment was due to insurance proceeds related
to hurricane damaged premises and equipment.
Other Expenses. Other expenses increased to $12.5 million for the quarter ended
December 31, 2004, from $11.6 million for the same period last year, due
primarily to increases of $475,000 in compensation and benefits, $163,000 in
occupancy, $116,000 in advertising and promotion, and $123,000 in other.
Compensation and employee benefits was $7.5 million and $7.0 million for the
quarters ended December 31, 2004 and 2003, respectively. The increase for the
quarter ended December 31, 2004 was due primarily to additional staff required
to support the growth in loans and deposits as well as the opening of new
branches. Occupancy, advertising and promotion and other increased primarily due
to expenses incurred in the opening of new branches and growth in loans and
deposits.
18
The Company has a noncontributory-defined benefit pension plan covering all
full-time employees hired before January 1, 2003 who have attained one year of
service. The plan is a multi-employer plan. Separate actuarial evaluations are
not made for each employer nor are plan assets so segregated. The Company
elected to freeze the plan to all participants effective June 30, 2004 and, as a
result, expects to be required to contribute approximately $500,000 for fiscal
year 2005. The Company recorded pension expense of approximately $127,000 and
$202,000 for the three months ended December 31, 2004 and 2003, respectively.
Income Taxes. Income tax expense increased to $6.9 million for the quarter ended
December 31, 2004, from $6.1 million for the same period last year due primarily
to an increase in pretax accounting income. The effective tax rates were 39.2%
and 39.1% for the quarters ended December 31, 2004 and 2003, respectively.
Financial Condition
Comparisons of financial condition in this section are from the end of the
preceding fiscal year to December 31, 2004.
Total assets increased to $2.805 billion at December 31, 2004, from $2.627
billion at the fiscal year ended September 30, 2004. The increase is due
primarily to increases in interest bearing deposits in other banks, loans and
mortgage-backed securities.
Interest bearing deposits in other banks increased to $93.5 million at December
31, 2004, from $7.1 million at December 31, 2003. This increase is due primarily
to the excess cash provided by the net increase in deposits.
Investment securities available for sale increased to $149.0 million at December
31, 2004, from $129.8 million at September 30, 2004. The increase is due
primarily to purchases of $19.9 million.
Mortgage-backed securities increased to $473.4 million at December 31, 2004,
from $443.1 million at September 30, 2004. The increase is due primarily to
purchases of $55.2 million of 5 and 7 year fixed-rate balloon securities with
expected average lives in the three to four year range, partially offset by
repayments of $24.5 million. The purchases were funded with excess cash provided
by the net increase in deposits. These securities will provide future monthly
principal and interest repayment cash flow to fund loan growth or other
investment alternatives.
Net loans increased to $1.933 billion at December 31, 2004, from $1.891 billion
at September 30, 2004. The increase is due primarily to net increases of $17.1
million in residential one-to-four mortgage loans, $8.2 million in land loans,
$7.9 million in nonresidential mortgage loans, $4.3 million in consumer loans,
and $2.4 million in commercial business loans.
Deposits increased to $1.942 billion at December 31, 2004, from $1.745 billion
at September 30, 2004. The significant growth in deposits for the quarter of
11.3% was due primarily to a net increase of $177.5 million in core deposits
(transaction and passbook accounts), and $19.1 million in certificate accounts.
While the Company's market area is growing and the Company continues to
emphasize growing transaction accounts, the Company believes that much of the
current quarter's significant growth reflects short-term accumulation of funds
related to insurance proceeds, disaster relief funds, and year-end property tax
collections.
19
FHLB advances decreased to $548.5 million from $553.5 million at December 31,
2004, from September 30, 2004. The decrease was primarily due to a $5.0 million
fixed rate advance that matured during the quarter.
Stockholders' equity increased to $294.9 million at December 31, 2004, from
$286.6 million at September 30, 2004. The increase is due primarily to $10.8
million of earnings for the three months partially offset by $3.6 million of
dividends paid and $1.2 million increase in Paid in capital, primarily as a
result of amortization and tax benefits of stock benefit plans.
At December 31, 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 $ 42,067 1.50% $ 284,910 10.16% $ 242,843
Core Capital 84,134 3.00% 284,910 10.16% 200,776
Risk-Based Capital 128,655 8.00% 302,476 18.81% 173,821
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 $428.0 million at December 31, 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.
At December 31, 2004, the Bank had $862.7 million or 44.4% 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 provided by the Company's operating activities (i.e. cash items
affecting net income) was $10.4 million and $14.1 million for the three months
ended December 31, 2004 and 2003, respectively.
Net cash flows used in the Company's investing activities (i.e. cash flows from
its investment securities, mortgage-backed securities and loan portfolios) was
$97.1 million and $63.2 million for the three months ended December 31, 2004 and
2003, respectively. The increase in cash used for the three months ending
December 31, 2004 was principally due to a decrease of $49.8 million in proceeds
from maturities of investment securities and an increase of $9.8 million in the
purchase of investment securities, partially offset by a $27.6 million decrease
in the purchase of mortgage-backed securities.
Net cash flows provided by the Company's financing activities (i.e. cash flows
primarily from net increases (decreases) in deposits and net FHLB advances) was
$169.5 million and $50.0 million for the three months ended December 31, 2004
and 2003, respectively. The increase in cash flows for the three
20
months ending December 31, 2004 was primarily due to a $131.5 million increase
in the net increase in deposits, partially offset by an $11.0 million decrease
in net proceeds from short-term borrowings.
CONTRACTUAL OBLIGATIONS
The following table shows the aggregated amounts at December 31, 2004 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 $ 13,000 $ --- $ 145,000 $ 390,488 $ 548,488
Operating leases 293 205 170 1,204 1,872
Purchase obligations 7,127 3,057 791 --- 10,975
------- ------- ------- ------- -------
Total $ 20,420 $ 3,262 $ 145,961 $ 391,692 $ 561,335
======= ======= ======= ======= =======
The Company expects to contribute approximately $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 $1.3 million as of December
31, 2004. The Company elected to freeze these plans to all participants
effective June 30, 2004.
21
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:
December 31, September 30,
2004 2004
---- ----
(Dollars in thousands)
Nonaccrual mortgage loans:
Delinquent 90 days or more $ 2,862 $ 2,949
Nonaccrual other loans:
Delinquent 90 days or more 115 83
------- -------
Total nonperforming loans 2,977 3,032
Real estate owned, net of related allowance 76 48
------- -------
Total nonperforming assets $ 3,053 $ 3,080
======= =======
Nonperforming loans to total net loans .15% .16%
Total nonperforming assets to total assets .11% .12%
Allowance for loan losses to total net loans .94% .94%
Allowance for loan losses to nonperforming loans 612.82% 587.20%
Allowance for loan losses to classified loans 400.08% 383.37%
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.
22
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.
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, 2004.
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 December 31,
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 and is accumulated and
communicated to the Company's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. During the last fiscal quarter, there have been no changes
in the internal control over financial reporting that has materially affected,
or is 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 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. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth the Company's treasury stock purchases for the
quarter ended December 31, 2004:
Total number of Total number of shares purchased Maximum number of
shares Average as part of the stock repurchase plan shares that may yet be
purchased price extended on October 13, 2004 purchased under the plan
--------- ----- ---------------------------- ------------------------
October --- N/A --- 734,800
November --- N/A --- 734,800
December 1,318 $35.69 --- 734,800
The current stock repurchase program permits repurchases of up to $1.2 million
through October 14, 2005. The Company from time to time purchases shares from
participants in its stock options plans and restricted stock award plans
pursuant to terms of the plans permitting participants at their discretion to
use
23
shares to pay federal income tax withholding liabilities. Those shares are
purchased at fair market value at the time the transactions occur. In the month
of December, the Company purchased 1,318 shares at an average price of $35.69.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
The Board of Directors approved a Senior Officer Incentive Plan during the
quarter for the fiscal year ended September 30, 2005. The purpose of the Plan is
to provide an incentive for extraordinary performance by senior management. The
Plan is limited to the President, Executive Vice President and Senior Vice
Presidents and awards additional compensation upon attainment of certain
performance based objectives. See attached Exhibit 10(xii).
The Board of Directors also approved, in accordance with the contract, an
extension of one year to January 6, 2008 of the employment contract with Michael
J. Brown, Sr. See Exhibits 10(i) and 10(x) for the original contract and
subsequent amendment.
Item 6. Exhibits.
(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)
24
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)
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) *Amendments to Change of Control Agreements (Exhibit 10(xii) to
Form 10-Q for the quarter ended June 30, 2004 filed August 13,
2004)
10(xii) **Senior Officer Incentive Plan for fiscal year 2005
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.
25
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 8, 2005 /s/
------------------------------
Michael J. Brown, Sr.
President and Chief Executive Officer
Date: February 8, 2005 /s/
-------------------------------
H. Michael Callahan
Senior Vice President, Finance and
Chief Financial Officer
26
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 registrant's 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 control over financial reporting.
/s/
- ---------------------
Michael J. Brown, Sr.
Chief Executive Officer
February 8, 2005
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 registrant's 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
control over financial reporting.
/s/
- ----------------------
H. Michael Callahan
Chief Financial Officer
February 8, 2005
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
The following certification accompanies the issuer's Quarterly Report on Form
10-Q and is not filed, as provided in SEC Release Nos. 33-8238, 34-47986 dated
June 5, 2003.
In connection with the Quarterly Report of Harbor Florida Bancshares, Inc. (the
"Company") on Form 10-Q for the period ending December 31, 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 as amended; 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
February 8, 2005
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
The following certification accompanies the issuer's Quarterly Report on Form
10-Q and is not filed, as provided in SEC Release Nos. 33-8238, 34-47986 dated
June 5, 2003.
In connection with the Quarterly Report of Harbor Florida Bancshares, Inc. (the
"Company") on Form 10-Q for the period ending December 31, 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 as amended; 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
February 8, 2005
EXHIBIT 10(xii)
SENIOR OFFICERS INCENTIVE COMPENSATION PLAN - FISCAL YEAR 2005
--------------------------------------------------------------
PURPOSE
- -------
The purpose of the Plan is to provide an incentive for extraordinary performance
by senior management who, individually and collectively as a management team,
have the greatest influence over the financial success of the Bank.
In addition to its primary purpose, the Plan is designed to accomplish other
important objectives of the Bank including: fostering teamwork and cooperation
among senior management; helping to retain and encourage commitment on the part
of senior management, and setting high goals and increasing returns to
shareholders.
ADMINISTRATION
- --------------
The Compensation Committee of the Bank's Board of Directors shall administer the
Plan.
PARTICIPANTS
- ------------
Participation is limited to the President, Executive Vice President and Senior
Vice Presidents. Participants must be actively employed in this capacity on the
date the incentive is paid to be eligible to receive the full award. Those
participants who are no longer senior officers on the date the incentive is
paid, may be eligible for a partial award, depending upon the circumstances.
Those participants promoted into this category during the fiscal year may
receive a pro-rated amount of any incentive compensation awarded.
BANK PERFORMANCE GOALS
- ----------------------
Performance goals to be determined by the Compensation Committee of the Board of
Directors.
CALCULATION OF INCENTIVE AWARDS
- -------------------------------
Incentive compensation awards are calculated based on the attainment of various
goals. For fiscal year 05 the goals and incentives are as follows:
A 10% growth in EPS would mean a bonus of 5% of salary.
ROA of at least 1.5% would be an additional 5% of salary.
ROE of at least 15% would increase the bonus by another 5% of salary.
The maximum bonus would be 15% of salary.
NOT AN EMPLOYMENT CONTRACT
- --------------------------
Nothing contained in the Plan shall give any senior officer the right to be
retained in the employment of the Bank or affect the right of the Bank to
dismiss any senior officer. The adoption of the Plan shall not constitute a
contract between the Bank and any senior officer.
FINAL REVIEW AND APPROVAL BY COMPENSATION COMMITTEE
- ---------------------------------------------------
The Compensation Committee will review the Bank's results for the year to
determine whether the Plan goals should be adjusted for the purpose of the
Senior Officers Incentive Plan. If extraordinary events distort the results, it
will be at the Committee's sole discretion to modify those results to determine
whether the bonus should be paid. The budget will be a gauge in determining what
is an extraordinary event.
The Compensation Committee reserves the right to amend or terminate the Plan,
should the Bank encounter unforeseen or extraordinary circumstances that impact
the financial stability/profitability of the Bank.