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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20552
----------
FORM 10-K
(MARKONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998 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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 S. SECOND STREET
FORT PIERCE, FL 34950
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (561) 461-2414
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (par value $0.10)
------------------------------
(TITLE OF CLASS)
------------------------------
(TITLE OF CLASS)
Indicate by check mark 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 mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the average bid and asked price of
the common stock as of December 7, 1998 ($11.00) was $340,100,662.
The number of shares of common stock outstanding on December 7, 1998
was 30,918,242.
Documents incorporated by reference:
1. Annual Report to Stockholders for the fiscal year ended September 30,
1998 (Parts II and III).
2. Proxy Statement for the 1999 Annual Meeting of Stockholder's (Part
III). (To be filed pursuant to General Instruction G.(3)).
TABLE OF CONTENTS
Item Page
No. No.
PART I
1 Business...........................................................2
2 Properties........................................................20
3 Legal Proceedings.................................................22
4 Submission of Matters to a Vote of Security-Holders...............23
PART II
5 Market for Registrant's Common Equity and
Related Stockholder Matters................................. 23
6 Selected Financial Data...........................................23
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................24
7A Quantitative and Qualitative Disclosures about Market Risk........24
8 Financial Statements and Supplementary Data.......................24
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................25
PART III
10 Directors and Executive Officers of the Registrant................25
11 Executive Compensation............................................25
12 Security Ownership of Certain Beneficial Owners and Management....25
13 Certain Relations and Related Transactions........................25
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..26
HARBOR FLORIDA BANCSHARES, INC.
1
PART I
ITEM 1. BUSINESS
GENERAL
Harbor Florida Bancshares, Inc. (the "Company" or "Bancshares") is the
holding company for Harbor Federal Savings Bank (the "Bank"). The Company owns
100% of the Bank's common stock. Currently, it engages in no other significant
activities beyond its ownership of the Bank's common stock. Consequently, its
net income is derived from the Bank. The Bank provides a wide range of banking
services and is engaged in the business of attracting deposits primarily from
the communities it serves and using these and other funds to originate primarily
one-to-four family first mortgage loans for retention in its portfolio.
Prior to March 18, 1998, the Company's predecessor entity, Harbor
Florida Bancorp, Inc. ("Bancorp"), was owned approximately 53.37% by Harbor
Financial M.H.C. ("Mutual Holding Company") and 46.63% by public shareholders.
On March 18, 1998, pursuant to a plan of conversion and reorganization, and
after a series of transactions: (1) a new entity, Bancshares, became the
surviving corporate entity, (2) Bancshares sold the ownership interest in
Bancorp previously held by the Mutual Holding Company to the public in a
subscription offering (the "Offering") (16,586,752 common shares at $10.00
resulting in net cash proceeds after costs and funding the ESOP (note 17) of
approximately $150 million), (3) previous public shareholders of Bancorp had
their shares exchanged into 14,112,400 common shares of Bancshares (exchange
ratio of 6.0094 to 1) (the "Exchange"), and (4) the Mutual Holding Company
ceased to exist. The total number of shares of common stock outstanding
following the Offering and Exchange was 30,699,152. The reorganization was
accounted for in a manner similar to a pooling of interests and did not result
in any significant accounting adjustments. As a result of the reorganization,
the consolidated financial statements for prior periods have been restated to
reflect the changes in the par value of common stock from $.01 to $.10 per share
and in the number of authorized shares of common stock from 13,000,000 to
70,000,000.
On June 1, 1996, the Company acquired all of the outstanding common
stock of Treasure Coast Bank, F.S.B. ("Treasure Coast"), a Florida based federal
savings association, for approximately $6.8 million in cash. The acquisition was
accounted for using the purchase method. Treasure Coast had assets of
approximately $75 million. The Treasure Coast acquisition resulted in the
addition of one branch to the Company's branch network. The results of
operations of Treasure Coast from June 1, 1996 to September 30, 1996 are
included in the consolidated financial statements of the Company.
MARKET AREA
The Company serves communities in six growing and diverse Florida
counties. Its headquarters are in Fort Pierce, Florida, located on the eastern
coast of Florida between Stuart and Daytona Beach. In addition to its
headquarters, it has sixteen branch offices in St. Lucie, Indian River and
Martin counties, located on Florida's "Treasure Coast." This area is
characterized by both a large retirement and vacation home population and a
significant agricultural economy, primarily citrus crops. The Company has five
branch offices located in Brevard County, which encompasses the "Space Coast" of
the state. Brevard County has a greater industrial base fueled primarily by
companies related to NASA and the John F. Kennedy Space Center. Prominent
electronics concerns such as Harris Corporation are also major employers in this
area. The Company also has one branch office in Okeechobee County, a rural,
agricultural area, and four branch offices in Volusia County, where tourism and
a large retirement population predominate.
LENDING ACTIVITIES
GENERAL. The Company's principal lending activity has historically
been, and will continue to be for the foreseeable future, the origination of
one-to-four family residential mortgage loans. Although the Company sells some
conforming loans, primarily to the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), and has, on
rare occasions, purchased whole loans and loan participations, it focuses
primarily on the origination of loans and retains them in its portfolio for
investment. See " -- Lending Activities -- One
HARBOR FLORIDA BANCSHARES, INC.
2
to Four Family Permanent Residential Mortgage Loans" below. The Company also
originates a substantial amount of one-to-four family residential construction
and consumer loans, and consumer installment, commercial real estate and
commercial business loans. Substantially all of the Company's mortgage loans are
secured by property in its market area and most of its nonmortgage loans are
made to borrowers in its market area.
The Company offers both fixed-rate and adjustable rate mortgage ("ARM")
loans. The Company has sought to increase its origination of ARM loans to reduce
its interest rate risk. However, the Company's ability to originate ARM loans
has been limited by borrower preference for fixed-rate loans in many instances,
particularly in low interest rate environments.
LOAN AND MORTGAGE - BACKED SECURITIES PORTFOLIO COMPOSITION. The
following table sets forth a summary of the composition of the Company's loan
and mortgage-backed securities portfolio by type of loan.
September 30,
-------------
1998 1997 1996
------ ------ -----
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
MORTGAGE LOANS
Construction 1 - 4 Family..... $ 66,671 6.62% $ 47,800 5.42% $ 43,994 5.46%
Permanent 1 - 4 Family........ 707,078 70.26 629,906 71.46 584,297 72.49
Multifamily................... 11,074 1.10 15,326 1.74 17,804 2.21
Nonresidential................ 84,254 8.37 54,983 6.24 41,970 5.21
Land.......................... 27,562 2.75 33,182 3.76 29,034 3.60
-------- -------- -------- -------- -------- --------
Total Mortgage Loans...... 896,639 89.10 781,197 88.62 717,099 88.97
------- ------- ------- ------- ------- -------
OTHER LOANS
Commercial Nonmortgage........ 15,074 1.50 11,287 1.28 8,199 1.02
Consumer:
Home Improvement.......... 19,016 1.89 20,614 2.34 20,679 2.56
Manufactured Housing...... 16,418 1.63 16,399 1.86 15,784 1.96
Other Consumer (1)........ 59,223 5.88 51,988 5.90 44,265 5.49
-------- -------- -------- -------- -------- --------
Total Other Loans......... 109,731 10.90 100,288 11.38 88,927 11.03
-------- ------ -------- ------- -------- -------
Total Loans Receivable........ 1,006,370 100.00% 881,485 100.00% 806,026 100.00%
--------- ====== ------- ====== ------- ======
LESS:
Loans in process.............. 46,152 32,078 26,788
Deferred loan fees and
discounts................. 3,700 3,446 3,203
Allowance for loan losses..... 11,818 11,691 11,016
-------- -------- --------
Subtotal.................. 61,670 47,215 41,007
-------- -------- --------
TOTAL LOANS RECEIVABLE,
NET...................... 944,700 834,270 765,019
------- ------- -------
LOANS HELD FOR SALE........... 714 141 4,870
-------- -------- --------
MORTGAGE-BACKED
SECURITIES................ 201,049 176,854 153,293
------- ------- -------
TOTAL......................... $1,146,463 $1,011,265 $923,182
========== ========== ========
- ------------
(1) Includes home equity and other second mortgage loans.
---------------
HARBOR FLORIDA BANCSHARES, INC.
3
The following table shows the maturity or period to repricing of the
Company's loan and mortgage-backed securities portfolios at September 30, 1998.
Loans that have adjustable rates are shown as being due in the period in which
the interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on loans totaled $246.4, $163.0, and $143.5 million for
fiscal years 1998, 1997 and 1996, respectively. Loans having no stated maturity
and no schedule of repayments (including delinquent loans), and demand loans are
reported as due within one year.
One Three Five
Within through through through Ten through Beyond
one year three years five years ten years twenty years twenty years Total
-------- ----------- ---------- --------- ------------------------- -----
(In thousands)
Mortgage loans:
Permanent 1 - 4 family.... $153,039 $40,388 $70,525 $47,807 $202,113 $221,954 $735,826
Other..................... 39,944 9,137 29,039 15,043 19,603 729 113,495
Other loans:
Consumer ................. 27,120 12,347 24,706 24,977 5,369 --- 94,519
Commercial ............... 8,392 342 2,848 1,197 26 1,976 14,781
Nonperforming loans (1)..... 2,311 --- --- --- --- --- 2,311
Mortgage-backed
securities.............. 32,986 8,881 13,933 89,599 55,211 439 201,049
-------- ------ ------- ------- ------- -------- --------
Sub-total............... $263,792 $71,095 $141,051 $178,623 $282,322 $225,098 $1,161,981
======== ======= ======== ======== ======== ========
Deferred loan fees and
discounts............... (3,700)
Allowance for loan
losses.................. (11,818)
---------
Total (2)(3)................ $1,146,463
==========
(1) All nonperforming loans are reported as due within one year regardless of
the actual maturity term. (2) Amounts reported do not include principal
repayment or prepayment assumptions. (3) Amounts include loans held for sale of
$714,000 at September 30, 1998.
--------------
The following table sets forth the amount of fixed-rate and
adjustable-rate loans at September 30, 1998 due after September 30, 1999.
Adjustable
Fixed Rate Rate Total
(In thousands)
Mortgage loans:
Permanent 1 - 4 family..... $464,484 $118,303 $582,787
Other...................... 39,772 33,779 73,551
Other loans:
Consumer .................. 67,399 --- 67,399
Commercial ................ 6,389 --- 6,389
--------- --------- ---------
Total loans.................. 578,044 152,082 730,126
Mortgage-backed securities... 168,063 --- 168,063
-------- --------- --------
Total........................ $746,107 $152,082 $898,189
======== ======== ========
ONE-TO-FOUR FAMILY PERMANENT RESIDENTIAL MORTGAGE LOANS. The Company's
primary lending activities focus on the origination of one-to-four family
residential mortgage loans. The Company generally does not originate one-to-four
HARBOR FLORIDA BANCSHARES, INC.
4
family residential loans on properties outside of its market area. At September
30, 1998, $707.1 million or 70.26% of the Company's total loan portfolio and
52.35% of total assets consisted of one-to-four family loans and over 95% of
such loans were collateralized by properties located in the Company's market
area.
The Company's fixed rate loans generally are originated and underwritten
according to standards that permit sales in the secondary market. However, the
decision to sell depends on a number of factors including the yield and the term
of the loan, market conditions, and the Company's current portfolio position.
The Company sells a small portion of newly originated 30 year fixed rate
mortgage loans. In addition, the Company sells loans under the single family
Mortgage Revenue Bond Programs through local County Housing Finance Authorities.
The servicing on these loans is also released.
The Company currently offers one-to-four family residential mortgage
loans with fixed, adjustable or a combination of fixed/adjustable interest
rates. Originations of fixed rate mortgage loans versus ARM loans are monitored
on an ongoing basis and are affected significantly by the level of market
interest rates, customer preference, the Company's interest rate gap position,
and loan products offered by the Company's competitors. In a low interest rate
environment, borrowers typically prefer fixed rate loans to ARM loans, and even
if management's strategy is to emphasize ARM loans, market conditions may be
such that there is greater demand for fixed rate mortgage loans.
The Company generates residential mortgage loan activity through local
advertising, its existing customers and referrals from local real estate brokers
and home builders. All loans are originated by Company loan officers, none of
whom have underwriting authority. Independent loan brokers are not used.
Residential loans are authorized and approved under central authority by
experienced underwriters. Underwriters have individual authority to approve
loans up to the maximum amount of $250,000. Residential mortgage loans in excess
of this amount are approved by management individually up to $750,000 or by
committee if above $750,000. The Company also has direct endorsement authority
from the Federal Housing Authority ("FHA") to allow for internal approval of FHA
insured loans. FHA loans are approved under central authority by an underwriter
with a "Direct Endorsement" designation from the FHA. The Company's underwriting
standards are intended to ensure that borrowers are sufficiently credit worthy,
and all of the Company's lending is subject to written underwriting policies and
guidelines approved by the Company's Board of Directors. Detailed loan
applications are designed to determine the borrower's ability to repay the loan
and certain information solicited in these applications is verified through the
use of credit reports, financial statements and other confirmations. The Company
obtains an appraisal of substantially all of the proposed security property in
connection with residential mortgage loans. Additionally, title insurance is
required for all mortgage loans except home equity loans of $50,000 or less.
The types, amounts, terms of and security for conventional loans (those
not insured or guaranteed by the U.S. government or agencies thereof, or state
housing agencies) originated by the Company are significantly prescribed by
federal regulation. OTS regulations limit the amount which the Company can lend
up to specified percentages of the value of the real property securing the loan,
as determined by an appraisal at the time the loan is originated (referred to as
"loan-to-value ratios"). The Company makes one-to-four family home loans and
other residential real estate loans with loan-to-value ratios generally of up to
80% of the appraised value of the security property. In certain circumstances
loan-to-value ratios exceed 80%, in which case private mortgage insurance is
generally required. A substantial part of the Company's loan originations are
made to borrowers to finance second homes for vacation use or for use as a
rental property. Such loans may be considered to have a higher credit risk than
loans to finance a primary residence.
ONE-TO-FOUR FAMILY RESIDENTIAL CONSTRUCTION LOANS. A part of the
Company's loan originations are to finance the construction of one-to-four
family homes in the Company's market area. At September 30, 1998 the Company had
$66.7 million in such loans, representing 6.62% of total loans. It is the
Company's policy to disburse loan proceeds as construction progresses and as
inspections warrant.
A portion of these loans are made directly to the individual who will
ultimately own and occupy the home. Of these, the vast majority are structured
at origination to guarantee the permanent financing to the Company as well. In
recent years the origination of these construction loans to individuals is
second in volume only to the origination of traditional loans to finance the
purchase or refinance of an existing home. However, the significance of this
type of lending to the Company is not evident from the amount of these loans in
its portfolio at any given time because these construction loans to individuals
usually "roll" into permanent financing.
HARBOR FLORIDA BANCSHARES, INC.
5
Approximately one-half of the Company's one-to-four family construction
loans are to builders. In most instances these loans are also structured to
guarantee permanent financing by the Company.
CONSUMER LOANS. The Company originates consumer loans as an essential
element in its retail-oriented strategy. Secured consumer loans include
automobile, manufactured housing, boat and truck loans, home equity and home
improvement loans as well as loans secured by the borrower's deposit accounts
with the Company. The loans for manufactured housing are generally originated
within quality, retirement lifestyle communities spread throughout the six
county market area that feature amenities such as full service clubhouse
facilities, swimming pools, and, in a number of cases, golf courses. These loans
are subject to the normal underwriting standards of the Company. Loans are made
on either a fixed-rate or adjustable-rate basis, with terms generally up to 20
years. A limited amount of unsecured consumer loans are also originated. At
September 30, 1998, consumer-oriented loans accounted for $94.7 million or 9.4%
of the Company's total loan portfolio.
NON-RESIDENTIAL AND LAND MORTGAGE LOANS. In the late 1980's the Company
curtailed its lending in non-residential mortgages with the exception of loans
to finance the sale of the Company's real estate acquired through foreclosure.
In recent years, the Company re-entered this market and made a total of $38.3
million, $18.3 million, and $12.9 million of non-residential mortgage loans in
1998, 1997 and 1996, respectively. At September 30, 1998, nonresidential loans
constituted 8.37%of the Company's total loan portfolio. Origination of these
loans plays a subordinate role to the origination of residential mortgage and
consumer-related loans. Non-residential mortgage loans are offered on properties
within the Company's primary market area using both fixed or adjustable rate
programs.
Loans secured by non-residential real estate generally carry larger
balances and involve a greater degree of risk than one-to-four family
residential mortgage loans. This increased risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income-producing
properties, and the increased difficulty of evaluating and monitoring these
loans. Furthermore, the repayment of loans secured by non-residential property
is typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired.
See "Business -- Delinquent, Nonperforming and Classified Assets."
The Company also originates developed building lot loans ("lot loans")
secured by individual improved lots for future residential construction. Lot
loans are offered with either a fixed or adjustable interest rate and with a
maximum term of up to 15 years. At September 30, 1998 these loans accounted for
$14.9 million or 1.48% of the Company's total loan portfolio.
OTHER LOANS. The balance of the Company's lending consists of
multi-family mortgage and commercial non-mortgage loans. At September 30, 1998
these loans represented $11.0 million or 1.10% and $15.1 million or 1.50%,
respectively, of the Company's total loan portfolio. The multi-family mortgage
loans are secured primarily by apartment complexes. These loans are subject to
the same lending limits as apply to the Company's commercial real estate
lending. The commercial non-mortgage loans represent primarily equipment and
other business loans to professionals such as physicians and attorneys. These
loans are an integral part of the Company's strategy of seeking synergy between
its various deposit and loan products and as a service to existing customers.
ORIGINATION AND SALE OF LOANS
From time to time the Company has sold mortgage loans, primarily to the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation. Historically, the Company has not purchased significant amounts of
loans, particularly in light of its past policy to control asset growth.
The Company sells a small portion of newly originated 30 year fixed rate
mortgage loans. In addition, the Company sells loans under the single family
Mortgage Revenue Bond Programs through local County Housing Finance Authorities.
The servicing on these loans is also released. The purpose of selling a portion
of fixed rate loans from current production is to reduce interest rate risk by
limiting the growth of longer term fixed rate loans in the portfolio and to
generate service fee income over time.
HARBOR FLORIDA BANCSHARES, INC.
6
The following table shows total loan origination activity including
mortgage-backed securities, during the periods indicated.
Years Ended September 30,
=====================================
1998 1997 1996
---- ---- ----
(In thousands)
MORTGAGE LOANS (GROSS):
At beginning of year (1)............. $781,341 $722,435 $596,478
Mortgage loans originated:
Construction 1-4 Family............ 83,429 63,237 59,000
Permanent 1-4 Family............... 173,758 84,853 85,853
Multi-family....................... 605 2,526 2,935
Nonresidential..................... 38,260 18,302 12,941
Land............................... 11,313 12,264 13,384
------- ------- -------
Total mortgage loans originated (2).. 307,365 181,182 174,113
Mortgage loans acquired (3).......... --- --- 60,482
Mortgage loans sold.................. (9,125) (8,583) (4,653)
Principal repayments................. (179,354) (111,255) (101,359)
Mortgage loans transferred to real
estate owned....................... (2,864) (2,438) (2,626)
--------- --------- ---------
At end of year....................... $897,363 $781,341 $722,435
======== ======== ========
OTHER LOANS (GROSS):
At beginning of year................. $ 100,288 $ 88,927 $ 73,760
Other loans originated............... 77,044 63,406 52,702
Loans acquired (3)................... --- --- 4,468
Principal repayments................. (67,601) (52,045) (42,003)
------- -------- --------
At end of year....................... $109,731 $100,288 $ 88,927
======== ======== ========
MORTGAGE-BACKED SECURITIES (GROSS):
At beginning of year................. $176,854 $153,293 $164,759
Mortgage-backed securities purchased. 100,222 61,769 29,265
Principal repayments................. (76,027) (38,208) (40,731)
-------- -------- --------
At end of year....................... $201,049 $176,854 $153,293
======== ======== ========
(1) Includes loans held for sale.
(2) Loans originated represent loans closed, however all loans may not be
fully disbursed at time of closing.
(3) Represents loans acquired in connection with the acquisition of
Treasure Coast.
MORTGAGE-BACKED SECURITIES
A substantial part of the Company's business involves investments in
mortgage-backed securities issued or guaranteed by an agency of the United
States government. Historically, the Company's mortgage-backed securities
portfolio has consisted primarily of pass-through mortgage participation
certificates issued by FHLMC and FNMA. These pass-through certificates represent
a participation interest in a pool of single-family mortgages, the principal and
interest payments on which are passed from the loans' originators, through the
FHLMC and FNMA that pools and packages the participation interests into the form
of securities, to investors such as the Company. The FHLMC and FNMA guarantees
the payment of principal and interest. The underlying pool of mortgages can
consist of either fixed-rate or adjustable-rate loans. At September 30, 1998,
the Company's portfolio of mortgage-backed securities consisted entirely of
FHLMC and FNMA participation certificates. Of the $201.0 million in
mortgage-backed securities at that date, approximately $23.0 million or 11%
represented adjustable-rate securities and $178.0 million or 89% represented
fixed-rate securities with anticipated maturity dates from 3 months to 28 years.
HARBOR FLORIDA BANCSHARES, INC.
7
Adjustable-rate mortgage-backed securities ("ARM Securities") have periodic
adjustments in the coupons based on the underlying mortgages. These periodic
coupon adjustments are subject to annual and lifetime caps. The caps serve as a
limit to the amount that the coupon will change during any coupon reset period.
As interest rates on the mortgages underlying the ARM Securities are reset
periodically (one to 12 months), the yields on these securities will gradually
adjust to reflect changes in market rates. Management believes that the
adjustable-rate feature of ARM Securities will help to reduce sharp fluctuations
in security value that result from normal changes in interest rates.
During periods of declining interest rates, the coupon on ARM Securities may
adjust downward, resulting in lower yields and reduced income from these
securities. Thus, ARM Securities may have less potential for capital
appreciation as compared to fixed-rate debt securities. During periods of rising
interest rates, the coupon on ARM Securities may not fully adjust upward in
conjunction with changes in market rates due to annual or lifetime coupon
adjustment caps. This could result in ARM Securities that depreciate in value
similar to long-term, fixed-rate mortgage securities in a rising interest rate
environment.
The Company's fixed-rate mortgage-backed securities consist of both
long-term and balloon securities. The long-term securities have original
maturity terms of ten, fifteen and thirty years. The balloon securities have
principal and interest amortization based on a thirty-year maturity schedule
with final principal balloon payments due in five years or seven years from the
date of the security. Balloon mortgage-backed securities are held in the
portfolio as a means of reducing the average life of the fixed-rate portfolio. A
shorter average portfolio life will help reduce the interest rate risk
associated with these investments. As of September 30, 1998, long-term,
fixed-rate mortgage-backed securities amounted to $70.1 million and five-year
and seven-year balloon mortgage-backed securities amounted to $32.6 million and
$75.3 million, respectively.
During periods of declining interest rates, fixed-rate mortgage-backed
securities may have accelerated principal reductions due to increased
refinancing activity on the underlying mortgage loans. The reinvestment of the
accelerated principal reductions at lower prevailing rates could result in lower
overall portfolio yields and income. During periods of rising interest rates,
fixed-rate mortgage-backed securities will tend to depreciate in value. Thus,
total returns on fixed-rate mortgage-backed securities are expected to decline
as market interest rates rise.
If the Company purchases mortgage-backed securities at a premium,
accelerated principal repayments may result in some loss of principal investment
to the extent of the premium paid. Conversely, if mortgage-backed securities are
purchased at a discount, accelerated principal reductions will increase current
and total returns.
DELINQUENT, NONPERFORMING AND CLASSIFIED ASSETS
DELINQUENT LOANS. All delinquent loan results are reviewed monthly by the
Company's Board of Directors. The Company believes it has an effective process
and policy for dealing with delinquent loans.
Residential delinquencies are handled by the Loan Collections Department.
This department begins collection efforts on residential loans when a loan
appears on the 15-day delinquent list. Borrowers are sent a notice to accelerate
the debt when the debt is 45 days delinquent. If the delinquent account has not
been corrected, foreclosure proceedings are begun generally at the 75th day of
delinquency. At September 30, 1998, residential loans delinquent 90 days and
longer represented 0.10% of the total residential loan portfolio.
Commercial delinquent accounts are processed by the Problem Asset and
Lending Departments. For commercial accounts classified as Substandard, as
defined below, or worse, the Problem Asset Department has jurisdiction over the
collection efforts. As with residential delinquent loans, any commercial loans
90 days past due or where the collection of the interest or full principal is
considered doubtful are placed on a non-accrual basis.
If a collection action is instituted on a consumer or commercial loan,
the Company, in compliance with the loan documents and the law, may repossess
and sell the collateral security for the loan through private sales or through
judicially ordered sales when necessary. Should the sale result in a deficiency
owing to the Company, the borrowers generally are pursued where such action is
deemed appropriate, including recourse based on personal loan guarantees by the
borrower's principals.
HARBOR FLORIDA BANCSHARES, INC.
8
The following table shows the Company's loans delinquent 90 days or more
at the dates indicated.
September 30,
1998 1997 1996
------ ------ ------
(Dollars in thousands)
Number Amount Number Amount Number Amount
Mortgage loans:
Construction and land.... --- $ --- 2 $ 162 2 $ 98
Permanent 1 - 4
family................. 19 778 28 1,565 23 1,196
Other mortgage........... 4 1,102 3 689 2 423
-- ------ -- ------- --- -------
Total mortgage loans..... 23 1,880 33 2,416 27 1,717
Other loans................ 13 542 10 164 9 132
-- ------- -- ------- --- -------
Total loans................ 36 $2,422 43 $2,580 36 $1,849
== ====== == ======= == ======
Delinquent loans to
total loans............ .26% .31% .24%
==== ==== ====
As of September 30, 1998, 1997 and 1996, $25,000, $0, and $323,000,
respectively, of loans were on nonaccrual status which were not 90 days past
due.
NONPERFORMING ASSETS. The Company also places emphasis on improving asset
quality. The Company's nonperforming assets as a percentage of total assets have
decreased from .50% at September 30, 1996 to .37% at September 30, 1998.
Loans 90 days past due are generally placed on non-accrual status. The
Company ceases to accrue interest on a loan once it is placed on non-accrual
status, and interest accrued but unpaid at that 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 non-accrual status. The investment in
impaired loans (primarily consisting of classified loans), other than those
evaluated collectively for impairment, at September 30, 1998 and 1997 was
$6,109,000 and $12,157,000, respectively. The average recorded investment in
impaired loans during the years ended September 30, 1998 and 1997 were
approximately $7,695,000 and $12,122,000, respectively. The total specific
allowance for loan losses related to these loans was approximately $29,000 and
$117,000, respectively, on September 30, 1998 and 1997. Interest income on
impaired loans of approximately $790,000 and $1,147,000 was recognized in the
year ended September 30, 1998 and 1997, respectively.
If a foreclosure action is instituted on a real estate-secured loan and
the loan is not reinstated, paid in full, refinanced, or deeded back to the
Company, the property is sold at a foreclosure sale at which the Company may be
the buyer. Thereafter, such acquired property is listed in the Company's real
estate owned ("REO") account or that of a subsidiary, until the property is
sold. The Company carries REO at the lower of cost or fair value less cost to
dispose. The Company also finances the sales of REO properties. Should the
foreclosure sale not produce sufficient proceeds to pay the loan balance and
court costs, the Company's attorneys, where appropriate, may pursue the
collection of a deficiency judgment against the responsible borrower.
It is the Company's policy to try to liquidate its holdings in REO on a
timely basis while considering both market conditions and the cost of carrying
REO properties. Upon acquisition the Company records all REO at the lower of its
fair value (less estimated costs to dispose), or cost. The fair value is based
upon the most recent appraisal and management's evaluation. If the fair value of
the asset is less than the loan balance outstanding, the difference is charged
against the Company's loan loss allowance prior to transferring the asset to
REO. Administration of REO property is handled by the Problem Asset Department
which is responsible for the sale of all residential and commercial properties.
In those instances where the property may be located outside the Company's
market area or where the property, due to its nature, requires certain expertise
(I.E., hotels, apartment complexes), outside management firms may be utilized.
HARBOR FLORIDA BANCSHARES, INC.
9
At the dates indicated, nonperforming assets in the Company's portfolio
were as follows:
September 30,
-------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Non-accrual mortgage loans:
Delinquent less than 90 days............ $ --- $ --- $ 323
Delinquent 90 days or more.............. 1,880 2,416 1,717
----- ----- -----
Total................................ 1,880 2,416 2,040
----- ----- -----
Non-accrual other loans:
Delinquent less than 90 days............ 25 --- ---
Delinquent 90 days or more.............. 542 164 132
------ ------ ------
Total................................ 567 164 132
------ ------ ------
Total non-accrual loans................... 2,447 2,580 2,172
Accruing loans 90 days or more delinquent --- --- ---
-------- -------- --------
Total nonperforming loans............... 2,447 2,580 2,172
----- ----- -----
Other nonperforming assets:
Real estate owned....................... 3,168 2,892 4,830
Less allowance for losses............. (634) (578) (1,712)
------- ------- -------
Total............................... 2,534 2,314 3,118
------ ------ ------
Total nonperforming assets, net........... $4,981 $4,894 $5,290
====== ====== ======
Nonperforming loans to total net loans.... 0.26% 0.31% 0.28%
Total nonperforming assets to
total assets............................ 0.37% 0.43% 0.50%
For the year ended September 30, 1998, interest income of $135,000 would
have been recorded on loans accounted for on a non-accrual basis if the loans
had been current throughout the period. No interest income was actually included
in net income regarding non-accrual loans during the same period.
The Company's policy requires that a general allowance be maintained on
all REO. The Company's periodic provisions to its allowance for losses on REO
are included in income (losses) from real estate operations on its consolidated
statements of earnings.
Management evaluates each REO property on no less than a quarterly basis
to assure that the net carrying value of the property on the Company's books is
no greater than the fair market value less estimated costs to dispose. When
necessary, the property is written down or specific allowances are established
to reduce the carrying value.
REO Allowances
Years Ended September 30,
-------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Beginning balance................... $578 $1,712 $1,857
Provision for (recovery of) losses.. 136 (150) 117
Allowance for losses on REO
acquired......................... --- --- 21
Charge-offs......................... (80) (984) (283)
----- ------ ------
Ending balance...................... $ 634 $ 578 $1,712
===== ====== ======
Not included in the preceding table are net gains, (losses) or recoveries
on the sale of real estate owned of $176,000, $127,000 and ($39,000) for the
years ended September 30, 1998, 1997 and 1996, respectively.
HARBOR FLORIDA BANCSHARES, INC.
10
CLASSIFIED ASSETS. Under OTS regulations, problem assets of insured
institutions are classified as either "substandard," "doubtful" or "loss." An
asset is considered "substandard" if the current net worth and paying capacity
of the obligor and/or the value of the collateral pledged are no longer adequate
to support the loan. "Substandard" assets are characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. In
addition to the classification of assets as "substandard," "doubtful" or "loss,"
the OTS regulations also require that assets that do not currently expose the
Company to a sufficient degree of risk to warrant one of the three foregoing
classifications but which do possess credit deficiencies or potential weaknesses
deserving management's close attention must be designated "special mention."
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish specific allowances for
loan losses in an amount considered appropriate by management. See "--Allowance
for Loan Losses" below. Additionally, the institution establishes general
allowances to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies problem assets as "loss,"
it is required either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge-off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which can
order the establishment of additional general or specific loss allowances.
The following table presents the Company's classified assets at the dates
indicated.
September 30,
-------------
1998 1997 1996
---- ---- ----
(In thousands)
Substandard:
Real Estate Owned.......... $ 3,168 $ 2,892 $ 3,897
Loans...................... 5,375 9,832 8,150
------- ------- -------
Total Substandard........ 8,543 12,724 12,047
Doubtful..................... --- --- 192
Loss......................... 202 117 174
--------- --------- ---------
$8,745 $12,841 $12,413
====== ======= =======
---------------
At September 30, 1997 in addition to the Company's classified loans noted
above, the Company had five commercial real estate and commercial business
loans, aggregating approximately $3.9 million, which were currently performing,
where management had obtained information about possible credit problems of the
borrowers or had been seriously delinquent in the past and had other
characteristics which caused management to question the ability of such
borrowers to comply with present loan repayment terms. During 1998, one of these
loans which had a net book value prior to allowance of $2.6 million was paid in
full.
ALLOWANCE FOR LOAN LOSSES
Provisions for loan losses are charged to operations to establish an
allowance for loan losses; recognized loan losses (recoveries) are then charged
(credited) to the allowance. The Company evaluates the outstanding loan
portfolio with respect to the adequacy of the allowance for loan losses at least
quarterly.
Management's policy is to provide for estimated losses on the Company's
loan portfolio based on management's evaluation of the probable losses (existing
and inherent). Such evaluations are made for all major loans on which full
HARBOR FLORIDA BANCSHARES, INC.
11
collectibility of interest and/or principal may not be reasonably assured. The
factors which the Company considers are the estimated value of the underlying
collateral, the management of the borrower, and current operating results,
trends and cash flow. In addition to analyzing individual loans, management also
analyzes on a regular basis its asset classification and recent loss experience
on other loans to help insure that prudent general allowances are maintained on
one-to-four family loans, automobile loans and home equity loans. Management
periodically evaluates the allowance percentages utilized for general allowance
purposes based upon delinquencies, charge-off, underwriting, and other trends.
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 loans.
The Company provides for a general allowance for losses inherent in the
portfolio by the above categories, which consists of two components. General
loss percentages are calculated based upon historical analyses. A supplemental
portion of the allowance is calculated 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 for the portion of the allowance described above.
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 classified loan indicates that the probable loss
upon liquidation of collateral would be in excess of the general percentage
allocation. The provision for loan loss is debited or credited in order to state
the allowance for loan losses to the required level as determined above.
HARBOR FLORIDA BANCSHARES, INC.
12
The following tables set forth an analysis of the Company's allowance for
loan losses at the dates indicated.
Years Ended September 30,
-------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Balance at beginning of year...... $11,691 $11,016 $10,083
Provision for (recovery of)
losses........................ 297 782 (76)
Allowance for loan losses
acquired (1).................. --- --- 885
Charge-offs:
Residential................... (259) (43) (137)
Commercial real estate........ --- (91) ---
Consumer...................... (213) (125) (48)
Other......................... (102) (3) (180)
--------- ------- ---------
Total charge-offs.......... (574) (262) (365)
Recoveries:
Residential................... 86 44 28
Commercial real estate........ 2 19 207
Consumer...................... 16 62 79
Other......................... 300 30 175
-------- ------- --------
Total recoveries........... 404 155 489
Balance at end of year............ $11,818 $11,691 $11,016
======= ======= =======
Allowance for loan losses to
total loans................... 1.25% 1.40% 1.44%
Allowance for loan losses to
total non-performing loans... 483.13% 453.11% 507.25%
Allowance for loan losses and
allowance for REO to total
non- performing assets........ 221.80% 224.21% 181.78%
Net charge-offs (recoveries) to
average loans outstanding
during the period............ 0.02% 0.01% (0.02)%
Classified loans to total net 0.59% 1.19% 1.11%
loans
(1) Represents allowance acquired in conjunction with acquisition of Treasure
Coast.
HARBOR FLORIDA BANCSHARES, INC.
13
The following table presents an allocation of the entire allowance for
loan losses among various loan classifications and sets forth the percentage of
loans in each category to total loans. The allowance shown in the table should
not be interpreted as an indication that charge-offs in future periods will
occur in these amounts or proportions or that the analysis indicates future
charge-off trends.
September 30,
-------------
1998 1997 1996
---- ---- ----
Amount Percent(1) Amount Percent(1) Amount Percent(1)
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
Allowance at end of period
applicable to:
Residential................... $ 2,251 76.88% $ 2,141 76.88% $ 2,077 77.95%
Commercial real estate........ 5,986 12.22 6,487 11.74 6,088 11.02
Consumer ..................... 2,310 9.40 2,068 10.10 1,802 10.01
Commercial business........... 1,271 1.50 995 1.28 1,049 1.02
-------- ------- -------- ------- -------- -------
Total..................... $11,818 100.00% $11,691 100.00% $11,016 100.00%
======= ====== ======= ====== ======= ======
- ------------------
(1) Percent of loans in each category to total loans at the dates indicated.
INVESTMENT ACTIVITIES
The Company invests primarily in overnight funds, U.S. Government and
agency obligations, and Federal Home Loan Bank of Atlanta capital stock. The
Company does not invest in derivatives, collateralized mortgage obligations or
other hedging instruments.
The table below summarizes the carrying value and estimated market value
of the Company's portfolio of investment securities at the dates indicated.
September 30,
1998 1997 1996
------ ------ -----
(In thousands)
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
Available for sale:
Treasury Notes.......... $ --- $ --- $17,985 $17,985 $23,347 $23,347
FHLB notes.............. 50,721 50,721 29,486 29,486 10,031 10,031
FNMA Notes 20,343 20,343 --- --- --- ---
Other securities........ 452 452 82 82 115 115
------- -------- ------- ------- ------- -------
Total $71,516 $71,516 $47,553 $47,553 $33,493 $33,493
====== ====== ====== ====== ====== ======
Held to maturity:
FHLB notes.............. 19,989 20,268 5,000 4,993 20,000 20,016
FNMA notes.............. 10,000 10,005 --- --- --- ---
------- ------ ---------- ------- ------ -------
Total............... $29,989 $30,273 $ 5,000 $ 4,993 $20,000 $20,016
====== ====== ====== ====== ====== ======
FHLB stock................ $ 8,212 $ 8,212 $ 7,595 $ 7,595 $ 7,158 $ 7,158
On November 15, 1995, the FASB issued Special Report No. 155-B, A GUIDE TO
IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES, (the "Special Report"). Pursuant to the Special Report,
the Company was permitted to conduct a one-time reassessment of the
classifications of all securities held at that time. Any reclassifications from
the held-to-maturity category made in conjunction with that reassessment would
not call into question an enterprise's intent to hold other debt securities to
maturity in the future. The Company undertook such
HARBOR FLORIDA BANCSHARES, INC.
14
a reassessment and, effective December 31, 1995, all investment securities were
reclassified as available for sale. On the effective date of the
reclassification, the securities transferred had a carrying value of $25.8
million and an estimated fair value of $26.0 million, resulting in a net
increase to stockholders' equity for the net unrealized appreciation of
$126,000, after deducting applicable income taxes of $76,000.
The table below presents the contractual maturities and weighted average
yields of investment securities at September 30, 1998, excluding FHLB stock and
equity securities.
One Year or Less One to Five Years More Than Five Years Total Investment Securities
---------------- ----------------- -------------------- ----------------------------
(Dollars in thousands)
Average
Weighted Weighted Weighted Remaining Weighted
Carrying Average Carrying Average Carrying Average Years to Carrying Market Average
Value Yield Value Yield Value Yield Maturity Value Value Yield
----- ----- ----- ----- ----- ----- -------- ----- ----- -----
FHLB Notes $ --- 0.00% $70,710 5.97% $ --- 0.00% 1.8 $70,710 $70,989 5.97%
FNMA Notes --- 0.00 30,343 5.72 --- 0.00 2.1 30,343 30,348 5.72
------------------
SOURCES OF FUNDS
DEPOSITS. The Company offers a number of different deposit accounts,
including regular savings, interest-bearing checking or NOW accounts,
non-interest checking, money market deposit, term certificate accounts and
individual retirement accounts.
The Company has twenty-four full-service banking offices and one in-store
branch location in addition to its home office in Fort Pierce. The Company's
strategy has been to have conveniently located offices in growth markets as one
of its main methods of attracting funds. The Company's deposits primarily are
obtained from areas surrounding its offices. Certificate accounts in excess of
$100,000 are not actively solicited nor are brokers used to obtain deposits.
The Company had a decline in deposit balances for several years prior to
1993. This was a strategy that the Company used to improve its capital ratios.
Much of the decline was accomplished by the closing of less profitable branches.
With the Company's improved capital position in the beginning of 1993, it made
an effort to stabilize deposits and increase account balances. As part of this
strategy, the Company has upgraded a number of branch facilities and moved from
leased storefronts to full service free-standing offices.
Management believes that demand and passbook accounts are less sensitive
to changes in interest rates than other types of accounts, such as certificates
of deposit. As of September 30, 1998, the Company had 27.10% of its deposits in
passbook and demand accounts, 71.76% in certificates of deposit and 1.14% in
official checks. Due to the recent low interest rate environment, the Company
has also been pricing its certificates of deposit to encourage lengthening of
maturities. When management determines the levels of its deposit rates,
consideration is given to local competition, U.S.
Treasury securities offerings, and anticipated funding requirements.
HARBOR FLORIDA BANCSHARES, INC.
15
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated and the weighted average interest rates on each
category of deposits presented. Management does not believe that the use of
year-end balances instead of average monthly balances produces any material
difference in the information presented:
September 30,
-------------
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Nominal Nominal Nominal
Amount Percent Rate Amount Percent Rate Amount Percent Rate
------ ------ ---- ------ ------- ---- ------ ------- ----
(Dollars in thousands)
Demand accounts:
Non-interest
bearing demand.... $ 54,954 5.99% N/A $ 40,749 4.47% N/A $ 33,613 3.95% N/A
NOW accounts........ 60,129 6.55 1.13% 52,045 5.71 1.32% 54,806 6.43 1.51%
Money market
accounts.......... 41,074 4.46 2.54 43,401 4.76 2.51 42,561 5.00 2.58
------- ---- ---- ------- ----- ---- ------- ---- ----
Subtotal.......... 156,157 17.00 1.10 136,195 14.94 1.30 130,980 15.38 1.46
Savings accounts:
Passbook............ 92,698 10.10 2.06 76,540 8.40 1.69 77,305 9.07 1.78
Certificates of
deposit........... 658,842 71.76 5.43 689,760 75.67 5.47 636,907 74.77 5.37
Official checks....... 10,429 1.14 N/A 9,081 .99 N/A 6,661 .78 N/A
-------- ------- ---- -------- ------ ---- -------- ------- ----
Total deposits........ $918,126 100.00% 4.29% $911,576 100.00% 4.47% $851,853 100.00% 4.41%
======== ====== ==== ======== ====== ==== ======== ====== ====
The following table presents, by various categories, information concerning
the amounts and maturities of the Company's time deposits.
September 30,
-------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
0.00 - 3.00%................ $ 328 $ 545 $ 307
3.01 - 4.00%................ -- -- 1
4.01 - 5.00%................ 84,192 88,472 155,121
5.01 - 6.00%................ 540,209 553,986 378,999
6.01 - 7.00%................ 33,674 46,333 101,780
7.01 - 8.00%................ 434 424 603
8.01 - 9.00%................ 5 --- 3
Premiums on deposits
acquired -- -- 93
---------- ---------- ----------
Total Certificate Accounts.... $658,842 $689,760 $636,907
======== ======== ========
HARBOR FLORIDA BANCSHARES, INC.
16
At September 30, 1998, the Company had certificates of deposit in amounts of
$100,000 or more maturing as follows:
Amount
Maturity Period (In thousands)
- ---------------
3 Months or Less......................................... $13,276
Over 3 to 6 Months....................................... 13,355
Over 6 to 12 Months...................................... 14,370
Over 12 Months........................................... 21,726
-------
Total.................................................... $62,727
=======
The following table contains information regarding deposit account activity
for the periods shown.
Years Ended September 30,
-------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Net increase (decrease)
before interest credited.. $ (28,838) $ 25,563 $ 30,644
Interest credited............ 35,388 34,160 30,035
Deposits acquired............ --- --- 70,193
------- -------- --------
Deposit account increase..... $ 6,550 $ 59,723 $130,872
======= ======== ========
Weighted average cost
of deposits during the
year...................... 4.35% 4.42% 4.44%
Weighted average cost of 4.29% 4.47% 4.41%
deposits at end of year...
BORROWINGS. The Company is a member of the Federal Home Loan Bank of
Atlanta ("FHLB of Atlanta"). The FHLB of Atlanta offers various fixed rate and
variable rate advances to its members. Requests for advances with an original
term to maturity of five years or less may be approved for any sound business
purpose in which the member is authorized to engage. Requests for advances with
original maturity in excess of five years may be approved only for the purpose
of enabling that member to provide funds for residential housing finance. The
FHLB of Atlanta underwrites each advance request based on factors such as
adequacy and stability of capital position, quality and composition of assets,
liquidity management, level of borrowings from all sources and other such
factors. Pursuant to a collateral agreement with the FHLB, advances are secured
by all stock in the FHLB and a blanket floating lien that requires the Company
to maintain qualifying first mortgage loans as pledged collateral in an amount
equal to, when discounted at 75% of the unpaid principal balances, the advances.
As of September 30, 1998, the Company had $145 million of outstanding FHLB
advances. Of this amount, all have remaining maturity dates of thirty-six months
or longer.
As of September 30, 1998, the Company had a total credit limit of $250
million and an availability limit of $105 million with the FHLB of Atlanta.
In addition to FHLB advances, the Company had $199.2 million of unpledged
mortgage-backed securities at September 30, 1998. These unpledged
mortgage-backed securities could be used as collateral under reverse repurchase
transactions with various security dealers. Such borrowing transactions could
provide additional cash and liquidity to the Company in the event of sudden or
unforeseen deposit withdrawals.
HARBOR FLORIDA BANCSHARES, INC.
17
The Company recognizes the maturity characteristics of its time deposit
portfolio. Management believes that unused FHLB advances and other borrowing
sources would provide sufficient funding for potential deposit withdrawals.
The following table sets forth information regarding the Company's
borrowing at and for the periods indicated:
At or for the Year Ended September 30,
1998 1997 1996
(Dollars in thousands)
FHLB Advances:
Average Balance................................$104,877 $ 99,342 $75,096
Maximum balance at any month-end............... 145,000 110,000 95,000
Balance at year end............................ 145,000 100,000 95,000
Weighted average interest rate during the
year................................... 6.12% 6.00% 6.12%
Weighted average interest rate at year end..... 5.76% 6.00% 6.02%
Other Borrowings:
Average Balance................................ $ 167 $ 561 $ 857
Maximum balance at any month-end............... 475 674 974
Balance at year end............................ --- 475 674
Weighted average interest rate during the
year................................... 11.98% 9.48% 9.47%
Weighted average interest rate at year end..... --- 7.12% 8.50%
Total Borrowings:
Average Balance................................$105,044 $99,903 $75,953
Maximum balance at any month-end............... 145,000 110,674 95,974
Balance at year end............................ 145,000 100,475 95,674
Weighted average interest rate during the
year................................... 6.13% 6.02% 6.15%
Weighted average interest rate at year end..... 5.76% 6.01% 6.04%
---------------
SUBSIDIARIES
Federal associations generally may invest up to 2% of their assets in
service corporations plus an additional 1% of assets for community purposes. In
addition, federal associations such as the Bank may invest up to 50% of their
regulatory capital in conforming loans to service corporations. In addition to
investments in service corporations, federal associations are permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal association may engage in directly.
The Bank has two active subsidiary corporations. Appraisal Analysts, Inc.
provides real estate appraisal services to the Bank as well as third parties. H.
F. Development Company, Inc. serves as a repository for some of the Company's
commercial REO properties held for disposition. See "Business -- Delinquent,
Nonperforming and Classified Assets".
COMPETITION
The Company encounters strong competition both in attracting deposits and
in originating real estate and consumer loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations and credit unions in its market area. The Company expects
continued strong competition from such financial institutions in the foreseeable
future. The Company's market area includes branches of a number of commercial
banks that are substantially larger than the Company in terms of statewide
deposits. The Company competes for deposits by offering depositors a high level
of personal service, convenient locations and a competitive interest rate.
HARBOR FLORIDA BANCSHARES, INC.
18
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings associations.
Lending competition has increased substantially in recent years, as a result of
the large number of institutions seeking to benefit from the growth in the
Company's market area.
The Company competes for loans primarily through the interest rates and
loan fees it charges, the types of loans it offers, and the efficiency and
quality of services it provides borrowers, real estate brokers and builders.
Factors that affect competition include general and local economic conditions,
current interest rate levels and volatility of the mortgage markets. Based on
total assets, as of September 30, 1998, the Company was the largest savings
institution headquartered in the six county area served by the Company.
EMPLOYEES
At September 30, 1998, the Company had a total of 329 full-time employees
and 96 part-time employees, none of whom were represented by a collective
bargaining unit. The Company considers its relations with its employees to be
good.
ITEM 2. PROPERTIES
The Company conducts its business from its headquarters in Fort Pierce and
through 24 full-service banking offices, one loan production office and one
in-store branch location. These offices are located in Brevard, Indian River,
Martin, Okeechobee, St. Lucie, and Volusia counties, Florida. The net book value
at September 30, 1998 of the Company's offices was $13.3 million. The following
table sets forth information regarding the Company's offices.
Year Lease
Location Opened Owned/Leased Expiration Date
-------- ------ ------------ ---------------
ST. LUCIE COUNTY
- ----------------
MAIN OFFICE 1934 OWNED
100 SOUTH SECOND STREET
FORT PIERCE, FL 34950
VIRGINIA AVENUE 1968 OWNED
500 VIRGINIA AVENUE
FORT PIERCE, FL 34950
PSL MAIN 1975 OWNED
7181 SOUTH U.S. #1
PORT ST. LUCIE, FL 34952
H.F. CENTER 1981 OWNED
2400 S.E. MIDPORT RD., SUITE 300
PORT ST. LUCIE, FL 34952
LAKEWOOD PARK 1981 OWNED
5100 TURNPIKE FEEDER RD.
FORT PIERCE, FL 34951
DARWIN SQUARE 1991 OWNED
3201 S.W. PSL BLVD.
PORT ST. LUCIE, FL 34953
ORANGE BLOSSOM 1984 OWNED
4156 OKEECHOBEE ROAD
FORT PIERCE, FL 34947
HARBOR FLORIDA BANCSHARES, INC.
19
Year Lease
Location Opened Owned/Leased Expiration Date
-------- ------ ------------ ---------------
ST. LUCIE WEST 1993 OWNED
1320 S.W. ST. LUCIE WEST BLVD.
PORT ST. LUCIE, FL 34986
INDIAN RIVER
- ------------
VERO MAIN 1978 OWNED
655 21st STREET
VERO BEACH, FL 32960
CAUSEWAY 1981 OWNED
1700 S.A1A
VERO BEACH, FL 32963
INDIAN RIVER MALL 1997 OWNED
6080 20TH ST.
VERO BEACH, FL 32966
SEBASTIAN 1979 OWNED
13397 U.S. HIGHWAY #1
SEBASTIAN, FL 32958
WEST SEBASTIAN 1998 OWNED
993 FELLSMERE ROAD
SEBASTIAN, FL 32958
MARTIN COUNTY
- -------------
PALM CITY 1978 LEASED 07/26/05
1251 S.W. 27TH STREET
PALM CITY, FL 34990
EAST OCEAN 1981 OWNED
1500 E. OCEAN BLVD.
STUART, FL 34996
STUART MAIN 1996 LEASED 08/15/99
789 S. FEDERAL HWY.
STUART, FL 34994
BREVARD COUNTY
- --------------
PALM BAY 1981 OWNED
5245 BABCOCK ST., N.E.
PALM BAY, FL 32905
INDIALANTIC 1981 OWNED
305 5th AVENUE
INDIALANTIC, FL 32903
WEST MELBOURNE 1982 OWNED
2950 W. NEW HAVEN AVENUE
MELBOURNE, FL 32904
VIERA 1995 OWNED
100 CAPRON TRAIL
MELBOURNE, FL 32940
HARBOR FLORIDA BANCSHARES, INC.
20
Year Lease
Location Opened Owned/Leased Expiration Date
-------- ------ ------------ ---------------
WAL-MART 1998 LEASED 08/31/03
1000 N WICKHAM ROAD
MELBOURNE, FL 32935
LOAN PRODUCTION OFFICE 1998 LEASED 10/10/99
2460 N COURTENAY PARKWAY
SUITE 107
MERRITT ISLAND, FL 32953
OKEECHOBEE COUNTY
- -----------------
OKEECHOBEE 1980 OWNED
2801 HIGHWAY #441 SOUTH
OKEECHOBEE, FL 34974
VOLUSIA COUNTY
- --------------
NEW SMYRNA BEACH 1988 LEASED 09/30/99
REGIONAL SHOPPING CENTER
1940 STATE ROAD #44
NEW SMYRNA BEACH, FL 32168
PORT ORANGE 1983 OWNED
4035 NOVA ROAD
PORT ORANGE, FL 32127
ORMOND BEACH 1984 OWNED
75 N. NOVA ROAD
ORMOND BEACH, FL 32174
DELTONA 1998 OWNED
2901 HOWLAND BOULEVARD
DELTONA, FL 32725
All leases are anticipated to renew upon their expiration.
The Company uses a data processing service located in Orlando, Florida for
record keeping activities. The data processor specializes in servicing savings
associations. The Company's current contract expires in 2002. All data
processing equipment that is used internally by the Company is owned by the
Company. The net book value of such data processing equipment and related
software as of September 30, 1998 was $1,985,000.
ITEM 3. 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.
HARBOR FLORIDA BANCSHARES, INC.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
A Special Meeting of Stockholders of Harbor Florida Bancshares, Inc. was held
September 18, 1998 for the purpose of considering and voting upon the following
matters:
1. To approve the Harbor Florida Bancshares, Inc. 1998 Stock Incentive Plan
for directors, officers and employees (the "Plan").
2. The approval of the adjournment of the Special Meeting, if necessary, to
permit solicitation of proxies in the event there are not sufficient
votes at the time of the Special Meeting to approve the Plan.
The following table sets forth the results as to each matter voted upon:
% BROKER
PROPOSAL FOR AGAINST ABSTAIN APPROVED NON-VOTES
- -------- --- ------- ------- -------- ---------
No. 1 18,356,951 3,218,808 --- 59% -
No. 2 18,361,951 422,083 --- 59% -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock trades on the NASDAQ National Market under the
symbol HARB. The approximate number of shareholders of record and beneficial
shareholders of the common stock at December 7, 1998 was 10,886, some of which
are street name holders.
The Company paid $0.246 in cash dividends per share for the twelve months
ended in fiscal 1998. Payments were $0.058 in the first and second quarters and
$0.065 in the third and fourth quarters. The Company currently expects that
comparable cash dividends will continue to be paid in the future.
On December 7, 1998 the closing sales price of the Company's common stock
was $11.00 per share. The following table sets forth the price range of the high
and low closing sales price per share of common stock as reported by the NASDAQ
stock market for the four quarters of fiscal year 1998 and 1997.
On March 8, 1998, the conversion and reorganization of Harbor Financial,
M.H.C. was consummated. Pursuant to this transaction, the Company became the
stock holding company for the Bank and Harbor Financial, M.H.C., the Bank's
mutual holding company, ceased to exist. Each existing share of Harbor Florida
Bancorp, Inc., except for those shares held by Harbor Financial, M.H.C. were
exchanged for 6.0094 shares of the Company. The prices in the following table
have been adjusted to reflect this transaction.
Low $ High $
----- ------
FISCAL 1998
First Quarter.................... 9.29 11.61
Second Quarter .................. 10.65 12.56
Third Quarter.................... 11.63 12.81
Fourth Quarter................... 9.31 13.56
HARBOR FLORIDA BANCSHARES, INC.
22
Low $ High $
----- ------
FISCAL 1997
First Quarter.................... 4.91 6.03
Second Quarter .................. 5.57 6.49
Third Quarter.................... 5.82 7.65
Fourth Quarter................... 8.99 9.88
ITEM 6. SELECTED FINANCIAL DATA.
The information contained in the table captioned "Selected Consolidated
Financial Data" in the Annual Report on pages 2-3 is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 4 through 16 in the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the sections captioned "Market Risk and Asset
and Liability Management" and "Interest Rate Sensitivity" on pages 9 through 12
in the Annual Report is incorporated herein by reference.
Interest Rate Risk
The monetary nature of the Company's assets and liabilities exposes the
Company to significant interest rate risk. Interest rate risk generally results
from a mismatch between the extent and timing of asset cash flows compared to
liability cash flows.
The Company uses a computer model to quantify its interest rate risk. The
computer model measures the sensitivity of asset and liability fair values to
hypothetical changes in interest rates. Interest rate sensitive instruments used
in the computer model include: loans, mortgage-backed securities, investment
securities, federal funds sold, interest-bearing deposits in other banks, FHLB
stock, deposits, advances from the FHLB, and off- balance sheet loan servicing
rights and commitments. The model calculates net portfolio value of fair values
for assets, liabilities and off-balance sheet contracts using a discounted cash
flow methodology. Management estimates discount rates by using current market
yields on similar financial instruments. Discount rates are adjusted upward and
downward by 100 basis points and 200 basis points to reflect a hypothetical
parallel shift in interest rates. In addition, management estimates loan
prepayments rates, deposit decay rates, and values of certain assets that could
correspond with such hypothetical parallel shifts in interest rates. Management
also assumes that loan delinquency rates will not change as a result of changes
in interest rates, although there can be no assurance that this will be the
case.
HARBOR FLORIDA BANCSHARES, INC.
23
Presented below is an analysis of the Company's interest rate risk at
September 30, 1998 as calculated utilizing the Company's computer model. The
table presents net portfolio value, dollar and percent changes in net portfolio
value, for instantaneous and parallel shifts in the yield curve in 100 basis
point increments up and down.
Change in Net Portfolio
Rates Value Amount Dollar Change Percent
----- ------------ ------------- -------
(Dollars in thousands)
+200 B.P. $ 269,410 $ (42,933) (13.7)%
+100 B.P. $ 293,342 $ (19,001) (6.1)%
0 B.P. $ 312,343 $ 0 0%
- -100 B.P. $ 313,737 $ 1,394 0.4%
- -200 B.P. $ 313,506 $ 1,163 0.4%
The preceding analysis is based on numerous assumptions that management
believes to be reasonable. These assumptions relate to interest rates, loan
prepayment rates, deposit decay rates, and market values of certain assets under
various interest rate scenarios. It was also assumed that delinquency rates will
not change as a result of changes in interest rates although there can be no
assurance that this will be the case. Even if interest rates change in the
designated increments, there can be no assurance that the Company's assets and
liabilities would perform as indicated in the table above. Since there is no
quoted market for most of the Company's financial instruments, management has no
basis to determine that values presented would be indicative of the amounts
realized in an actual negotiated sale. Furthermore, management has not
considered the tax effect or transaction costs that may be associated with
disposal of the Company's assets and liabilities. A change in U.S. Treasury
rates in the indicated amounts, accompanied by a change in the slope or shape of
the yield curve, could result in significantly different net portfolio values
than shown above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements listed in Item 14 herein,
together with the report thereon by KPMG Peat Marwick LLP, are found in the
Annual Report on pages 16 through 47 and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the sections captioned "Beneficial
Ownership of Common Stock," "Management of the Company," and "Management of the
Bank" in the Proxy Statement of Harbor Florida Bancshares, Inc. (the "Proxy
Statement") to be filed pursuant to General Instruction G.(3) is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the sections captioned "Management of the
Bank" and "Management of the Company" in the Proxy Statement to be filed
pursuant to General Instruction G.(3) is incorporated herein by reference.
HARBOR FLORIDA BANCSHARES, INC.
24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information required by this item is incorporated herein by reference to the
sections captioned "Voting Securities" and "Beneficial Ownership of Common
Stock" in the Proxy Statement to be filed pursuant to General Instruction
G.(3).
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information required by this item is incorporated herein by reference to the
section captioned "Beneficial Ownership of Common Stock" in the Proxy
Statement to be filed pursuant to General Instruction G.(3).
(c) CHANGES IN CONTROL
Management of the Company knows of no arrangements, including any pledge by
any persons of securities of the Company, the operation of which may, at a
subsequent date, result in a change in control of the Registrant.
ITEM 13. CERTAIN RELATIONS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities", "Beneficial Ownership of Common
Stock" and "Management of the Bank -- Certain Transactions" in the Proxy
Statement to be filed pursuant to General Instruction G.(3).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Report:
(1) The Consolidated Financial Statements of the Registrant are attached and
are listed below:
Pages in Annual
Report
------
Independent Auditors' Report 18
Consolidated Statements of Financial Condition 19
Consolidated Statements of Earnings 20
Consolidated Statements of Stockholders' Equity 21
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24 - 48
(2) The Consolidated Financial Statement Schedules of the Registrant as
required to be filed in this Report are either not applicable or are included
elsewhere in this Report.
HARBOR FLORIDA BANCSHARES, INC.
25
(3) Exhibit Index
The exhibits listed below are included with this Report or are
incorporated herein by reference to the 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) Recognition and Retention Plan and Trust Agreement (Exhibit 10(d)
to the Registration Statement on Form S-4 filed December 20, 1996)
10(iii)Outside Directors' Recognition and Retention Plan and Trust
Agreement (Exhibit 10(e) to the Registration Statement on Form S-4
filed December 20, 1996)
10(iv) 1994 Incentive Stock Option Plan (Exhibit 10(b) to the
Registration Statement on Form S-4 filed December 20, 1996)
10(v) 1994 Stock Option Plan for Outside Directors (Exhibit 10(c) to the
Registration Statement on Form S-4 filed December 20, 1996)
10(vi) Harbor Federal Savings Bank Non-Employee Directors' Retirement
Plan (Exhibit 10(vi) to Form 10-Q for the quarter ended June 30,
1997 filed August 11, 1997)
10(vii) Unfunded Deferred Compensation Plan for Directors
10(viii) Management Incentive Compensation Plan for fiscal year ending
September 30, 1998 (Exhibit 10(xiii) to Form 10-Q for the quarter
ended December 31, 1997 filed February 11, 1998)
10(ix) 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(x) Change of Control Agreements
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Consolidated Financial Statements of the Registrant (Annual Report
to Stockholders for fiscal year September 30, 1998)
(b) Reports on Form 8-K
None.
HARBOR FLORIDA BANCSHARES, INC.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
Dated: December 22, 1998 By:
Michael J. Brown, Sr.
President and Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
- -----/s/------------ December 22, 1998
Michael J. Brown, Sr.
President, Chief Executive
Officer and Director
- ----/s/------ December 22, 1998
Don W. Bebber
Senior Vice President, Finance
(Principal Financial and Accounting Officer)
- ----/s/-------------------------- December 22, 1998
Bruce R. Abernethy, Sr., Director
- ----/s/-------------- December 22, 1998
Richard K. Davis, Director
- ----/s/----------------- December 22, 1998
Edward G. Enns, Director
- ----/s/-------------------- December 22, 1998
Frank H. Fee, III, Director
- ----/s/----------------------- December 22, 1998
Richard B. Hellstrom, Director
- ----/s/------------------- December 22, 1998
Richard N. Bird, Director
27