UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-21942
FIRST PALM BEACH BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0418027
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Australian Avenue, West Palm Beach, Florida
(Address of principal executive offices)
33401
(Zip Code)
561-655-8511
(Registrant's telephone number, including area code)
-------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
The number of shares outstanding of the issuer's common stock, par value
$.01 per share, was 5,145,859 at July 31, 1998.
FIRST PALM BEACH BANCORP, INC.
FORM 10-Q
Index
Page
Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995 for Forward-Looking Information.........................................................................2
Part I. Financial Information
Item 1 Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 1997 and June 30, 1998 (unaudited)...........................................................3
Consolidated Statements of Operations for the Three and Nine
Months ended June 30, 1997 and 1998 (unaudited)............................................................4
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months ended June 30, 1997 and 1998 (unaudited)...............................................5
Consolidated Statements of Cash Flows for the Nine Months
ended June 30, 1997 and 1998 (unaudited)...................................................................7
Notes to Unaudited Consolidated Financial Statements.......................................................9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................................12
Item 3 Quantitative and Qualitative Disclosures about Market Risk................................................19
Part II. Other Information
Item 1 Legal Proceedings.........................................................................................20
Item 2 Changes in Securities and Use of Proceeds.................................................................20
Item 3 Defaults Upon Senior Securities...........................................................................20
Item 4 Submission of Matters to a Vote of Security Holders.......................................................20
Item 5 Other Information.........................................................................................20
Item 6 Exhibits and Reports on Form 8-K..........................................................................20
Signature Page............................................................................................................21
Exhibit Index.............................................................................................................22
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
for Forward-Looking Information
Information in this report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that are subject
to risks and uncertainties that could cause the Company's actual results to
differ materially from those projected in forward-looking statements. The use of
forward-looking statements can be identified by statements that express or
involve discussions as to expectations, beliefs, plans, objectives, assumptions
or future events or performance (often, but not always, through the use of words
or phrases such as "will likely result," "are expected to," "will continue," "is
anticipated," "estimated," "projection," or "outlook"), are not historical facts
and may be forward-looking. Such statements involve estimates, assumptions, and
uncertainties which include, but are not limited to, overall business
conditions, particularly in the business markets in which First Palm Beach
Bancorp, Inc. and its wholly owned subsidiary, First Bank of Florida operate;
general economic conditions, changes in interest rates, deposit flows, loan
demand, real estate values, and competition; changes in accounting principles,
policies, or guidelines; changes in legislation or regulation; and other
economic, competitive, governmental, regulatory, and technological factors that
affect the Company's operations, pricing, products, and services. Other factors,
such as the general state of the economy, could also cause actual results to
vary materially from the future results covered in such forward-looking
statements. Accordingly, any such statements are qualified in their entirety by
reference to, and are accompanied by, the above mentioned important factors that
could cause the Company's actual results to differ materially from those
contained in the forward-looking statements of the Company made by or on behalf
of the Company.
All such factors are difficult to predict, contain uncertainties which may
materially affect actual results and are beyond the control of the Company.
2
PART I - FINANCIAL INFORMATION
FIRST PALM BEACH BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
September 30, June 30,
1997 1998
--------------- ---------------
(Unaudited)
Assets
Cash and amounts due from depository institutions............................................. $ 21,123 $ 28,673
Interest earning deposits..................................................................... 78,806 73,529
--------------- ---------------
Total cash and cash equivalents.......................................................... 99,929 102,202
Securities available-for-sale................................................................. 59,468 72,528
Securities held-to-maturity................................................................... 14,988 --
Mortgage-backed and related securities available-for-sale..................................... 208,342 465,271
Mortgage-backed and related securities held-to-maturity....................................... 213,303 --
Loans receivable - net of allowance for loan losses........................................... 1,144,100 1,058,983
Real estate owned, at fair value.............................................................. 1,795 2,648
Repossessed automobiles, at estimated fair value.............................................. 474 318
Office properties and equipment, net.......................................................... 28,313 28,404
Federal Home Loan Bank stock, at cost......................................................... 18,296 14,044
Accrued interest receivable................................................................... 9,879 9,210
Goodwill...................................................................................... 2,631 2,485
Other assets.................................................................................. 6,902 7,933
--------------- ---------------
Total assets............................................................................. $ 1,808,420 $ 1,764,026
=============== ===============
Liabilities and Stockholders' Equity
Deposit accounts.............................................................................. $ 1,229,279 $ 1,299,323
Advances from Federal Home Loan Bank.......................................................... 365,925 270,850
Securities sold under agreements to repurchase................................................ 28,946 --
Senior debentures - net of unamortized issuance costs......................................... 33,839 33,942
Advances by borrowers for taxes and insurance................................................. 17,866 12,490
Deferred income taxes......................................................................... (3) 1,259
Other liabilities............................................................................. 19,538 25,334
--------------- ---------------
Total liabilities........................................................................ $ 1,695,390 $ 1,643,198
Stockholders' equity:
Preferred stock ($.01 par value) authorized 1,000,000 shares; none outstanding................ -- --
Common stock ($.01 par value) authorized 10,000,000 shares; issued 5,496,375 shares;
outstanding 5,047,746 and 5,136,459 (net of treasury stock) at September 30, 1997
and June 30, 1998, respectively............................................................ 55 55
Additional paid-in capital.................................................................... 53,521 53,912
Retained earnings, substantially restricted................................................... 71,397 74,291
Treasury stock, at cost (448,629 shares at September 30, 1997 and 359,916 shares at
June 30, 1998)............................................................................. (9,825) (7,882)
Common stock purchased by:
Employee stock ownership plan................................................................. (955) (315)
Recognition and retention plans............................................................... (117) (141)
Unrealized increase (decrease) in fair value on available-for-sale securities (net of
applicable income taxes)................................................................... (1,046) 908
--------------- ---------------
Total stockholders' equity.................................................................... 113,030 120,828
--------------- ---------------
Total liabilities and stockholders' equity.................................................... $ 1,808,420 $ 1,764,026
=============== ===============
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements herein and the Notes to Consolidated
Financial Statements appearing in First Palm Beach Bancorp, Inc.'s 1997 Annual
Report to Stockholders.
3
FIRST PALM BEACH BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
---------------------------------- -----------------------------------
June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998
---------------- ---------------- ---------------- ----------------
Interest Income:
Loans..................................................... $ 22,327 $ 20,135 $ 65,006 $ 66,108
Securities available-for-sale............................. 876 1,662 3,967 4,159
Securities held-to-maturity............................... 260 92 873 347
Mortgage-backed and related securities available-for-sale. 3,119 6,034 6,431 14,350
Mortgage-backed and related securities held-to-maturity... 3,583 2,235 8,021 9,534
Trading securities........................................ -- -- -- 239
Other..................................................... 277 308 639 1,021
---------------- ---------------- ---------------- ----------------
Total interest income................................ 30,442 30,466 84,937 95,758
---------------- ---------------- ---------------- ----------------
Interest Expense:
Deposits.................................................. 14,665 15,620 42,506 46,008
Advances from Federal Home Loan Bank...................... 3,752 4,099 8,746 14,880
Securities sold under agreements to repurchase............ 294 -- 589 279
Senior debentures......................................... -- 967 -- 2,901
---------------- ---------------- ---------------- ----------------
Total interest expense................................. 18,711 20,686 51,841 64,068
---------------- ---------------- ---------------- ----------------
Net interest income.................................... 11,731 9,780 33,096 31,690
Provision for loan losses................................. 831 211 2,200 4,062
---------------- ---------------- ---------------- ----------------
Net interest income after provision for loan losses.... 10,900 9,569 30,896 27,628
---------------- ---------------- ---------------- ----------------
Other Income:
Servicing income and other fees........................... 1,042 1,096 2,997 3,307
Net gain on sale of loans and mortgage-backed and related
securities............................................. 207 1,235 1,134 4,692
Net gain on sale of securities available-for-sale......... 85 5 277 400
Net realized and unrealized gain on trading securities.... 94 -- 231 204
Miscellaneous............................................. 524 736 1,354 2,481
---------------- ---------------- ---------------- ----------------
Total other income..................................... 1,952 3,072 5,993 11,084
---------------- ---------------- ---------------- ----------------
Other Expenses:
Employee compensation and benefits........................ 4,693 5,686 13,535 16,489
Occupancy and equipment................................... 1,839 1,906 4,796 5,529
Federal deposit insurance premium......................... 191 288 785 774
Provision for losses and net losses on sale of real estate
owned.................................................. 214 36 266 228
Advertising and promotion................................. 179 566 861 1,137
Miscellaneous............................................. 1,781 2,213 5,108 5,304
---------------- ---------------- ---------------- ----------------
Total other expenses................................... 8,897 10,695 25,351 29,461
---------------- ---------------- ---------------- ----------------
Income before provision for income taxes.................. 3,955 1,946 11,538 9,251
Provision for income taxes................................ 1,603 783 4,637 3,688
---------------- ---------------- ---------------- ----------------
Net income............................................. $ 2,352 $ 1,163 $ 6,901 $ 5,563
================ ================ ================ ================
Earnings per share:
Basic.................................................. $ 0.48 $ 0.23 $ 1.41 $ 1.12
Diluted................................................ $ 0.47 $ 0.23 $ 1.38 $ 1.09
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements herein and the Notes to Consolidated
Financial Statements appearing in First Palm Beach Bancorp, Inc.'s 1997 Annual
Report to Stockholders.
4
FIRST PALM BEACH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
Unrealized
Common Common Gain (Loss) In
Additional Stock Stock Fair Value on Total
Common Paid-in Retained Treasury Purchased Purchased Available-for- Stockholders'
Stock Capital Earnings Stock by ESOP by RRP Sale Securities Equity
------ ---------- -------- --------- --------- --------- --------------- -------------
Nine months ended June 30, 1997
Balance at September 30, 1996........ $ 55 $ 52,891 $ 65,064 $ (8,660) $ (1,769) $ (161) $ (1,995) $ 105,425
Net income........................... -- -- 6,901 -- -- -- -- 6,901
Accretion of unrealized gain
on securities and mortgage-
backed and related securities
transferred from available-
for-sale to held-to-maturity,
net of income taxes................ -- -- -- -- -- -- (22) (22)
Change in unrealized losses on
securities available-for-sale
and mortgage-backed and related
securities available-for-sale,
net of income taxes................ -- -- -- -- -- -- 42 42
Amortization of deferred
compensation, Employee Stock
Ownership Plan and Recognition
and Retention Plans................ -- 945 -- -- 607 14 -- 1,566
Purchase of Treasury Stock at
cost (114,000 shares).............. -- -- -- (2,668) -- -- -- (2,668)
Exercise of stock options by
certain directors and employees.... -- (615) -- 1,133 -- -- -- 518
Declaration of dividends of
$0.45 per share.................... -- -- (2,267) -- -- -- -- (2,267)
------ ---------- -------- --------- --------- --------- -------------- -------------
Balance at June 30, 1997............. $ 55 $ 53,221 $ 69,698 $(10,195) $ (1,162) $ (147) $ (1,975) $ 109,495
====== ========== ======== ========= ========= ========= ============== =============
(Continued)
5
FIRST PALM BEACH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
Unrealized
Common Common Gain (Loss) In
Additional Stock Stock Fair Value on Total
Common Paid-in Retained Treasury Purchased Purchased Available-for- Stockholders'
Stock Capital Earnings Stock by ESOP by RRP Sale Securities Equity
------ ---------- -------- --------- --------- --------- --------------- -------------
Nine months ended June 30, 1998
Balance at September 30, 1997........ $ 55 $ 53,521 $ 71,397 $ (9,825) $ (955) $ (117) $ (1,046) $ 113,030
Net income........................... -- -- 5,563 -- -- -- -- 5,563
Accretion of unrealized gain
on securities and mortgage-
backed and related securities
transferred from available-
for-sale to held-to-maturity,
net of income taxes................ -- -- -- -- -- -- 11 11
Change in unrealized gain on
securities available-for-sale
and mortgage-backed and related
securities available-for-sale,
net of income taxes................ -- -- -- -- -- -- 1,943 1,943
Amortization of deferred
compensation, Employee Stock
Ownership Plan and Recognition
and Retention Plans................ -- 1,106 -- -- 640 (24) -- 1,722
Exercise of stock options by
certain directors and employees.... -- (715) -- 1,943 -- -- -- 1,228
Declaration of dividends of
$0.525 per share................... -- -- (2,669) -- -- -- -- (2,669)
------ ---------- -------- --------- --------- -------- --------------- ------------
Balance at June 30, 1998............. $ 55 $ 53,912 $ 74,291 $ (7,882) $ (315) $ (141) $ 908 $ 120,828
====== ========== ======== ========= ========= ======== =============== ============
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements herein and the Notes to Consolidated
Financial Statements appearing in First Palm Beach Bancorp, Inc.'s 1997 Annual
Report to Stockholders.
6
FIRST PALM BEACH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the Nine Months Ended
June 30, 1997 June 30, 1998
--------------- ---------------
Cash flow from (for) operating activities:
Net income................................................................................. $ 6,901 $ 5,563
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation............................................................................. 1,413 1,898
Employee Stock Ownership Plan and Recognition and Retention Plan compensation expense.... 1,566 1,722
Amortization of Senior Debentures' issuance cost......................................... -- 184
Accretion of discounts, amortization of premiums, and other deferred yield items......... (799) 947
Amortization of goodwill................................................................. 146 146
Provision for loan losses................................................................ 2,200 4,062
Provision for losses and net losses on sales of real estate owned........................ 266 228
Net realized and unrealized (gain) on trading securities................................. (231) (204)
Purchase of trading securities............................................................. (48,119) (148,431)
Sale of trading securities................................................................. 48,263 148,373
Net gain on sale of:
Loans.................................................................................. (402) (2,390)
Mortgage-backed and related securities available-for-sale.............................. (740) (2,344)
Securities available-for-sale.......................................................... (277) (400)
Property and equipment................................................................. -- (161)
(Increase) decrease in accrued interest receivable....................................... (1,182) 453
Increase in other assets................................................................. (475) (1,031)
Increase (decrease) in other liabilities - net of change in dividends payable and
deferred taxes......................................................................... (322) 5,654
--------------- ---------------
Net cash (used for) provided by operating activities................................. 8,208 14,269
--------------- ---------------
Cash flow from (for) investing activities:
Loan originations and principal payments on loans.......................................... (139,262) (70,480)
Principal payments received on mortgage-backed and related securities...................... 43,410 52,829
Purchases of:
Loans.................................................................................... (7,771) (11,754)
Mortgage-backed and related securities held-to-maturity.................................. (132,449) --
Mortgage-backed and related securities available-for-sale................................ (128,815) (290,414)
Securities held-to-maturity.............................................................. (15,413) --
Securities available-for-sale............................................................ (102,957) (65,961)
Office properties and equipment.......................................................... (8,159) (2,464)
Proceeds from sales of:
Loans.................................................................................... 27,747 161,012
Mortgage-backed and related securities available-for-sale................................ 82,070 199,573
Securities available-for-sale............................................................ 62,161 60,113
Repossessed automobiles.................................................................. 6,580 2,305
Real estate acquired in settlement of loans.............................................. 2,798 2,102
Office properties and equipment.......................................................... -- 636
(Purchase) Sale of Federal Home Loan Bank stock............................................ (2,996) 4,252
Proceeds from maturities of securities..................................................... 41,896 10,000
Other investing activities................................................................. (1,841) (3,093)
--------------- ---------------
Net cash (used for) provided by investing activities..................................... (273,001) 48,656
--------------- ---------------
(Continued)
7
FIRST PALM BEACH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the Nine Months Ended
June 30, 1997 June 30, 1998
--------------- ---------------
Cash flow from (for) financing activities:
Issuance of senior debentures.............................................................. 33,875 --
Purchase of treasury stock at cost......................................................... (2,668) --
Exercise of stock options.................................................................. 518 1,228
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts...................................... 12,655 79,462
Certificates of deposit.................................................................. 77,900 (9,418)
Advances from Federal Home Loan Bank..................................................... 49,925 (95,075)
Securities sold under agreement to repurchase............................................ -- (28,946)
Advances by borrowers for taxes and insurance............................................ (1,986) (5,376)
Dividends paid on stock.................................................................. (2,021) (2,527)
--------------- ---------------
Net cash (used for) provided by financing activities................................... 168,198 (60,652)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents.......................................... (96,595) 2,273
Cash and cash equivalents, beginning of period................................................ 161,413 99,929
--------------- ---------------
Cash and cash equivalents, end of period...................................................... $ 64,818 $ 102,202
=============== ===============
Supplemental disclosure of cash flows
Supplemental disclosure of cash flow information:
Cash paid for income taxes............................................................... $ 189 $ 2,650
=============== ===============
Cash paid for interest on deposits and other borrowings.................................. $ 52,933 $ 65,868
=============== ===============
Supplemental schedule of noncash investing and financing activities:
Repossessed automobiles acquired in settlement of loans.................................. $ 12,426 $ 6,103
=============== = ===============
Real estate acquired in settlement of loans.............................................. $ 1,947 $ 3,219
=============== = ===============
Changes in unrealized loss on available-for-sale securities, net of income taxes........... $ (20) $ (1,954)
=============== ===============
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements herein and the Notes to Consolidated
Financial Statements appearing in First Palm Beach Bancorp, Inc.'s 1997 Annual
Report to Stockholders.
8
FIRST PALM BEACH BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AT AND FOR THE THREE AND NINE MONTH PERIODS ENDED
JUNE 30, 1997 AND 1998
(1) Basis of Presentation
First Palm Beach Bancorp, Inc. (the "Company") was organized in May 1993 as
the holding company for First Bank of Florida (the "Bank"), formerly First
Federal Savings and Loan Association of the Palm Beaches, in connection
with the Bank's conversion from a federally chartered mutual savings and
loan association to a federally chartered stock savings and loan
association. The Bank changed its name from First Federal Savings and Loan
Association of the Palm Beaches to First Bank of Florida on October 15,
1996.
The unaudited consolidated financial statements include the accounts of
First Palm Beach Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, First Bank of Florida (the "Bank"), and the Bank's wholly-owned
subsidiaries - The Big First, Inc., Retail Investment Corporation, First
Corporate Center, Inc., and First Bank of Florida Mortgage Corporation.
Material intercompany accounts and transactions have been eliminated in
financial statement consolidation.
On May 28, 1998, the Company announced the execution of a definitive
agreement to be merged into Republic Security Financial Corporation
(NASDAQ: RSFC), the parent company of Republic Security Bank. Republic
Security Financial Corporation, with total assets of $1.0 billion, operates
thirty-four full service banking offices and is headquartered in Palm Beach
County, Florida. The merger is subject to various conditions, including the
receipt of regulatory approvals from the Federal Reserve and the Florida
Banking Department and the approval of the stockholders of each of the
Company and Republic Security Financial Corporation. During the quarter
ended June 30, 1998, the Company capitalized approximately $260,000 of
merger related expenses. The approval of the Federal Reserve was received
on July 29, 1998. The merger is expected to close in the fourth quarter of
calendar 1998.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles (GAAP)
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all material adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation have been included. The results
of operations and other data for the nine months ended June 30, 1998 are
not necessarily indicative of results that may be expected for the entire
fiscal year ending September 30, 1998.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Areas in the accompanying
financial statements where estimates are significant include the allowance
for loan losses, and the carrying value of real estate owned.
Certain amounts in the June 30, 1997 and September 30, 1997 consolidated
financial statements have been reclassified to conform to the presentation
for June 30, 1998.
9
(2) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income," which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the
period from nonowner sources; and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information," which establishes annual and
interim reporting standards for an enterprise's operating segments and
related disclosures about its products, services, geographic areas, and
major customers. In February 1998, FASB issued SFAS No. 132, "Employers'
Disclosure about Pensions and Other Post-retirement Benefits." SFAS No. 132
revises employers' disclosures about pension and other post-retirement
benefit plans, but does not change the measurement or recognition of those
plans. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and
any effect will be limited to the form and content of its disclosures.
These statements are effective for fiscal years beginning after December
15, 1997, with earlier application permitted.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require companies to
record all derivatives, except those derivatives used to hedge other
securities, on the balance sheet as assets or liabilities, measured at fair
value. The income statement generally will be required to reflect gains or
losses in the values of those derivatives as of the date of the income
statement. SFAS No. 133 is effective for fiscal years beginning after June
15, 1999. Adoption of this statement is not expected to have a material
impact on the Company's consolidated financial position, or results of
operations as the Company currently does not have any derivative financial
instruments.
(3) Earnings Per Share
The Company adopted the provisions of SFAS No. 128, "Earnings per Share" as
of December 31, 1997, and restated all prior periods presented. The
statement is designed to make the earnings per share computation comparable
to International Accounting Standards and is effective for financial
statements issued for periods ending after December 15, 1997. Basic
earnings per share were determined by dividing net income for the period by
the weighted average number of shares of common stock outstanding,
excluding unallocated shares held by the ESOP. Diluted earnings per share
reflects the potential dilutions that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company. Diluted earnings per share were determined by
dividing net income for the period by the weighted average number of shares
of common stock outstanding and potential common stock outstanding
excluding unallocated shares held by the ESOP and Recognition and Retention
Plan shares.
The following is a reconciliation of the numerator and denominator of basic
and diluted earnings per share for the three month and nine month periods
ended June 30, 1998.
Three Months Ended Nine Months Ended
June 30, June 30,
1997 1998 1997 1998
-------------- --------------- --------------- ---------------
Numerator:
Net Income (in thousands)................................ $ 2,352 $ 1,163 $ 6,901 $ 5,563
============== =============== =============== ===============
Denominator:
Average shares common stock outstanding utilized
in the calculation of basic earnings per share........... 4,886,886 5,003,645 4,878,050 4,969,132
Potential common stock due to the dilutive effect
of stock options......................................... 133,492 153,126 124,244 150,062
-------------- --------------- --------------- ---------------
Average shares outstanding utilized in the calculation
of diluted earnings per share............................ 5,020,378 5,156,771 5,002,294 5,119,194
============== =============== =============== ===============
10
(4) Commitments and Contingencies
Commitments to originate loans of $28.5 million at June 30, 1998 represent
the total principal amounts which the Bank plans to fund within the normal
commitment period of 60 to 90 days. As of June 30, 1998 the Bank had $50.0
million in commitments to fund undisbursed balances of loans previously
closed. As of June 30, 1998, the Bank had $64.0 million in commitments to
purchase securities and $2.6 million in commitments to purchase loans.
(5) Allowance for Loan Losses; Impaired Loans
An analysis of the changes in the allowance for loan losses for the nine
months ended June 30, 1998 and fiscal year ended September 30, 1997, is as
follows:
Fiscal Year Ended Nine Months Ended
September 30, 1997 June 30, 1998
--------------------- ----------------------
(In thousands)
Balance at beginning of period.......... $ 11,855 $ 6,046
Current provision....................... 3,281 4,062
Charge-offs - net....................... (9,090) (4,745)
--------------------- ----------------------
Ending balance.......................... $ 6,046 $ 5,363
===================== ======================
At June 30, 1998, and September 30, 1997 the Bank's impaired loans
consisted of the following:
September 30, 1997 June 30, 1998
---------------------- ---------------------
(In thousands)
Impaired loan balances.......................................... $ 1,267 $ 1,490
Related allowance for loan losses............................... $ 349 $ 394
Average recorded investment in impaired loans................... $ 4,924 $ 1,495
Interest income recognized during impairment period............. $ 921 $ 32
11
FIRST PALM BEACH BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED HEREIN AND WITH
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS APPEARING IN FIRST PALM BEACH BANCORP, INC.'S 1997 ANNUAL REPORT TO
STOCKHOLDERS.
General
First Palm Beach Bancorp, Inc. (the "Company") was organized in May 1993 as the
holding company for First Bank of Florida (the "Bank"), formerly First Federal
Savings and Loan Association of the Palm Beaches, in connection with the Bank's
conversion from a federally chartered mutual savings and loan association to a
federally chartered stock savings and loan association. The Bank changed its
name from First Federal Savings and Loan Association of the Palm Beaches to
First Bank of Florida on October 15, 1996. The Company is headquartered in West
Palm Beach, Florida.
On May 28, 1998, the Company announced the execution of a definitive agreement
to be merged into Republic Security Financial Corporation (NASDAQ: RSFC), the
parent company of Republic Security Bank. Republic Security Financial
Corporation, with total assets of $1.0 billion, operates thirty-four full
service banking offices and is headquartered in Palm Beach County, Florida. The
merger is subject to various conditions, including the receipt of regulatory
approvals from the Federal Reserve and the Florida Banking Department and the
approval of the stockholders of each of the Company and Republic Security
Financial Corporation. The approval of the Federal Reserve was received on July
29, 1998. The merger is expected to close in the fourth quarter of calendar
1998.
The Company's consolidated results of operation are primarily those of its
wholly owned subsidiary, the Bank.
The Bank's principal business has been, and continues to be, attracting retail
deposits from the general public and investing those deposits, together with
funds generated from operations and borrowings, primarily in one-to-four family,
owner-occupied, residential mortgage loans, consumer loans, and to a lesser
extent, construction loans, commercial real estate loans, multi-family
residential mortgage loans, and other commercial loans. In addition, the Bank
invests in mortgage-backed securities, securities issued by the U.S. Government
and government agencies, and other investments permitted by federal laws and
regulations. The Bank is a member of the FHLB system and its deposits are
insured to the applicable limits by the Federal Deposit Insurance Corporation
(the "FDIC"). The Bank is subject to regulation by the Office of Thrift
Supervision (the "OTS") as its chartering agency and the FDIC as its deposit
insurer.
At June 30, 1998, the Bank had 51 full-service branches in Palm Beach, Martin,
Broward, Dade and Lee Counties, Florida. Two loan production offices are located
in Palm Beach County and one loan production office is in Lee County. As of June
30, 1998, the Bank operated four of its full-service branches inside Winn-Dixie
supermarkets and twenty inside Albertson's supermarkets. During the quarter
ended June 30, 1998, the Bank opened one full-service branch, which is a
supermarket branch. The Bank has under construction two additional Albertson's
branches. The Bank may open additional supermarket branches at Albertson's in
the future.
The Company's results of operations depend primarily on net interest income,
which is the difference between the interest income earned on its loan and
investment portfolio, and its cost of funds, consisting of the interest paid on
deposits and borrowings. Net interest income is impacted by the provision for
loan losses. The Company's operating results are also affected, to a lesser
extent, by fee income and by gains or losses on the sale of loans, trading
securities, securities and mortgage-backed securities available-for-sale, and
real estate owned, as well as operating expenses. The Company's operating
expenses consist primarily of employee compensation and benefits, occupancy and
equipment expenses, FDIC insurance premiums, advertising and promotional
expenses and other general and administrative
12
expenses. The Company's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates and U.S. Treasury yield curves, and to a lesser extent by
government policies and actions of regulatory authorities.
Liquidity and Capital Resources
The Bank's most liquid assets are cash, amounts due from depository institutions
and interest-bearing deposits. The levels of these assets depend on the Bank's
lending, investing, operating and deposit activities during any given period. At
June 30, 1998, cash and amounts due from depository institutions and
interest-earning deposits totaled $102.2 million.
The Bank's primary sources of funds are deposits, proceeds from principal and
interest payments on loans, proceeds from the amortization, maturing and sales
of securities, advances from the FHLB and securities sold under agreements to
repurchase ("reverse repurchase agreements"). On June 30, 1997, the Company
issued $35 million of 10.35% Series A Senior Debentures Due 2002 ("Series A
Debentures"). The net proceeds of the debenture issuance are being used for
general corporate purposes, including a contribution of $25 million of the net
proceeds to the Bank. On December 23, 1997 the Company completed an exchange of
all of the outstanding Series A Debentures for Series B Debentures, which are
registered under the Securities Act of 1933, as amended, and are otherwise
identical to the Series A Debentures. Liquidated damages provided for in the
Series A Debentures for failure to so register the Series B Debentures are
therefore not applicable. While maturity and scheduled amortization of loans and
securities are predictable sources of funds, deposit inflows and mortgage
prepayments are greatly influenced by local market conditions, general interest
rates and regulatory changes.
The primary investing activities of the Bank are the origination of
single-family mortgage loans and the purchase of mortgage-backed and other
securities. A primary component of the Bank's current strategic plan is to
increase its originations of mortgage and consumer loans, excluding indirect
automobile loans. At September 30, 1996, the Bank discontinued its indirect
automobile lending program, which produced delinquency rates and a level of
repossessed assets which management deemed unacceptable and which resulted in
increased loan loss provisions. During the nine months ended June 30, 1998, the
Bank's loan originations totaled $307.3 million, compared to $303.4 million for
the nine months ended June 30, 1997. Purchases of mortgage-backed and other
securities totaled $356.4 million for the nine months ended June 30, 1998,
compared to $379.6 million for the nine months ended June 30, 1997. These
activities were funded primarily by principal repayments on loans and
mortgage-backed securities, maturities of investment securities, and increases
in deposits. Principal repayments on loans and mortgage-backed securities
totaled $278.4 million during the nine months ended June 30, 1998, compared to
$204.8 million for the nine months ended June 30, 1997. Maturities and calls of
investment securities totaled $10.0 million and $41.9 million, respectively,
during the nine months ended June 30, 1998 and 1997. Loan and securities sales,
which totaled $420.7 million and $172.0 million, respectively, during the nine
months ended June 30, 1998 and 1997, provided additional cash flows.
Deposits increased $70.0 million during the nine months ended June 30, 1998,
compared to an increase of $90.6 million during the nine months ended June 30,
1997. Deposit flows are affected by, among other things, the level of interest
rates, and the interest rates and products offered by local competitors.
Certificates of deposit which are scheduled to mature in one year or less from
June 30, 1998 totaled $780.0 million. Based upon the Bank's current pricing
strategy and deposit retention experience, management believes that a
significant portion of such deposits will remain with the Bank. Net borrowings
decreased by $123.9 million during the nine months ended June 30, 1998, which
decrease was comprised of decreases of $95.0 million and $28.9 million in FHLB
advances and reverse repurchase agreements, respectively.
OTS regulations require a savings institution to maintain an average daily
balance of liquid assets (generally cash; certain time deposits; bankers'
acceptances; specified United States Government, state or federal agency
obligations; shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to a specified percentage (determined as
of the end of the preceding calendar quarter or as an average daily balance
during the
13
preceding quarter) of its net withdrawable deposit accounts plus short-term
borrowings. The computation of the average liquidity ratio and the minimum
liquidity requirement was revised by OTS regulations in January 1998. The
minimum liquidity requirement was 5.0% and 4.0% as of September 30, 1997 and
June 30, 1998, respectively. The Bank historically has maintained a level of
liquid assets in excess of this regulatory requirement. The Bank's average
liquidity ratio was 7.0% and 36.1% (the latter as computed under the revised
regulatory requirements) at September 30, 1997 and June 30, 1998, respectively.
Liquidity management is a daily and long-term function of the Bank's management
strategy. If the Bank requires liquid funds beyond its ability to generate them
internally, additional sources of funds are available through the use of FHLB
advances and reverse repurchase agreements.
The Bank also invests in U.S. Treasury and agency securities, collateralized
mortgage obligations, municipal bonds and FHLB overnight funds. During periods
when the Bank's loan demand is lower, the Bank may purchase short-term
investment securities to obtain a higher yield than otherwise would be
available.
At June 30, 1998, the Bank had outstanding commitments to originate $28.5
million of loans and $50.0 million in commitments to fund undisbursed balances
of loans previously closed. At June 30, 1998, the Bank had $2.6 million in
commitments to purchase loans and $64.0 million in commitments to purchase
securities. Management is of the opinion that the Bank will have sufficient
funds available to meet all of these commitments.
At June 30, 1998, the Bank exceeded each of the OTS capital requirements and was
considered a "well capitalized" institution for regulatory purposes. The
following tables present the capital of the Bank at June 30, 1998:
To Be Considered Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------------- ---------------------- --------------------------
Ratio Ratio Ratio
----------------------- ---------------------- --------------------------
As of June 30, 1998:
Total Capital (to Risk-weighted Assets) 16.38% 8.00% 10.00%
Core (Tier 1) Capital (to Adjusted Tangible Assets) 7.81% 4.00% 5.00%
Tangible Capital (to Tangible Assets) 7.81% 1.50% N/A
Core (Tier 1) Capital (to Risk-weighted Assets) 15.80% N/A 6.00%
Changes in Financial Condition
Total assets decreased $44.4 million to $1.764 billion at June 30, 1998 from
$1.808 billion at September 30, 1997. Cash and cash equivalents, securities
held-to-maturity, securities available-for-sale, mortgage-backed and related
securities held-to-maturity and mortgage-backed and related securities
available-for-sale increased $44.0 million to $640.0 million at June 30, 1998
from $596.0 million at September 30, 1997. During the quarter ended June 30,
1998, the Bank transferred $192.0 million of securities "held-to-maturity" and
mortgage backed and related securities "held-to-maturity" to
"available-for-sale." Loans receivable decreased by $85.1 million to $1.059
billion at June 30, 1998 from $1.144 billion at September 30, 1997. Loans
originated amounted to $307.3 million (which included $248.9 million of one- to
four-family residential mortgage loans, $9.9 million of commercial mortgage
loans and $48.5 million of consumer loans) during the nine months ended June 30,
1998 compared to $303.4 million (which included $240.4 million of one- to
four-family residential mortgage loans, $13.9 million of commercial mortgage
loans and $49.1 million of consumer loans) during the nine months ended June 30,
1997. Indirect automobile loan balances decreased to $55.6 million at June 30,
1998 from $88.4 million at September 30, 1997 primarily as a result of the
repayment of such loans and repossession activity. On March 31, 1998, as part of
the Bank's interest rate risk management strategy and to take advantage of a
market opportunity to capture additional income which might not have been
available at a later time, the Bank sold $117.0 million principal balance of
fixed rate and $43.7 million of adjustable rate residential loans at a premium
resulting in net loan sale proceeds of $165.5 million. The Bank used such net
loan sale proceeds to repay
14
$100.0 million of FHLB advances and reinvested the remaining loan sale proceeds
of $65.5 million in loans and other investments.
Deposit accounts increased $70.0 million to $1.299 billion at June 30, 1998 from
$1.229 billion at September 30, 1997. The average interest rate paid on deposits
was 4.99% as of June 30, 1998 and September 30, 1997.
Advances from the FHLB decreased $95.0 million to $270.9 million at June 30,
1998 from $365.9 million at September 30, 1997 as a result of the previously
discussed $100.0 million FHLB repayment. There are no reverse repurchase
agreements at June 30, 1998 compared to $28.9 million at September 30, 1997. All
reverse repurchase agreements existing at September 30, 1997 matured and were
paid off during the nine months ended June 30, 1998. Advances from borrowers for
taxes and insurance decreased by $5.4 million to $12.5 million at June 30, 1998
from $17.9 million at September 30, 1997 due to the remittance of escrowed real
estate taxes in November 1997.
Stockholders' equity increased $7.8 million to $120.8 million at June 30, 1998
from $113.0 million at September 30, 1997. The increase to stockholders' equity
during the nine month period ended June 30, 1998 was due to net income of $5.6
million and increases in additional paid in capital and employee stock ownership
plan accounts of $1.7 million due to the amortization of related compensation
expense. During the quarter ended June 30, 1998, the Bank transferred $192.0
million of securities held-to-maturity and mortgage backed and related
securities held-to-maturity to "available- for-sale" resulting in an increase to
stockholders' equity of approximately $1.2 million, net of applicable taxes. The
increase in fair market value of securities which were classified as
"available-for-sale" increased stockholders' equity by an additional $0.7 net of
applicable income taxes. Dividends declared during the nine months ended June
30, 1998 reduced stockholders' equity by $2.7 million.
Interest Rate Sensitivity
The matching of assets and liabilities may be analyzed by examining the extent
to which assets and liabilities are "interest rate sensitive" and by monitoring
an institution's interest rate sensitivity "gap." An asset or liability is
"interest rate sensitive" within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the aggregate amount of interest-earning assets maturing
or anticipated to reprice, based upon certain assumptions, within a specified
time period and the aggregate amount of interest-bearing liabilities maturing or
anticipated to reprice, based upon certain assumptions, within the same time
period. A gap is considered negative when the amount of interest rate sensitive
liabilities maturing or repricing within a specified time frame exceeds the
amount of interest rate sensitive assets maturing or repricing within that same
time frame.
During a period of rising interest rates, a company with a negative gap position
would tend to experience a decrease in net interest income while a company with
a positive gap position would tend to experience an increase in net interest
income. During a period of declining interest rates a company with a negative
gap position would generally be expected, absent the effect of other factors, to
experience a greater decrease in the cost of liabilities relative to yield on
assets and thus an increase in the net interest income.
The Bank's one year interest rate sensitivity gap as a percentage of total
assets was a negative 34.8% at June 30, 1998 as compared to a negative 15.4% at
September 30, 1997. During the quarter ended March 31, 1998, the Bank
reevaluated the methods and assumptions used for evaluating interest rate risk.
As part of this evaluation the Bank implemented a new asset liability software
modeling program. This new modeling program computes interest rate sensitivity
on an individual asset and liability cash flow basis rather than on an aggregate
cash flow basis, as was the case under the previous model. The increase in the
Bank's negative interest rate sensitivity gap is primarily attributable to this
change in interest rate sensitive asset and liability valuation methodology
together with the impact of the sale of $117.0 million principal balance of
fixed rate and $43.7 million of adjustable rate residential loans, the sale of
$93.5 million adjustable rate mortgage backed securities and the subsequent
reinvestment in fixed rate securities and the further deleveraging of the
balance sheet through the repayment of FHLB advances. The software model
utilized to
15
compute the Bank's interest rate sensitivity gap makes various estimates
regarding cash flows from principal repayments on loans and mortgage-backed
securities and/or call activity on investment securities. Actual results could
differ significantly from these estimates, which may result in material
variances in the calculated interest rate sensitivity gap.
The Bank's policy is to manage its exposure to interest rate risk by attempting
to match the maturities of its interest rate sensitive assets and liabilities,
in part, by emphasizing, when market conditions permit, the origination of
adjustable rate mortgages ("ARM") and short term residential construction loans.
As of June 30, 1998, these loans constituted approximately 43% of outstanding
mortgage loans. Approximately 7% of outstanding mortgage loans with seven year
and ten year fixed rates which become one year adjustable loans thereafter are
classified as ARM loans. The Bank also manages its exposure by purchasing short
average life and adjustable-rate collateralized mortgage obligations and
mortgage-backed securities.
Asset Quality
The Company and the Bank regularly review interest earning assets to determine
proper valuation of those assets. Management monitors the asset portfolio by
reviewing historical loss experience, known and inherent risks in the portfolio,
the value of any underlying collateral, prospective economic conditions and the
regulatory environment. During the nine months ended June 30, 1998,
non-performing assets decreased $1.4 million to $9.0 million from $10.4 million
at September 30, 1997. Non-performing loans decreased by $2.0 million to $6.1
million at June 30, 1998 from $8.1 million at September 30, 1997. Real estate
owned increased $0.8 million to $2.6 million at June 30, 1998 from $1.8 million
at September 30, 1997. Repossessed assets, carried at fair value, decreased
$156,000 to $318,000 at June 30, 1998 from $474,000 at September 30, 1997.
During the quarter ended March 31, 1998, an additional loan loss provision of
$2.2 million with respect to the Bank's discontinued indirect automobile lending
business was recorded. At June 30, 1998 and September 30, 1997, the allowance
for loan losses related to the indirect automobile loan portfolio was 4.80% and
3.68% (as a percentage of the outstanding balance of such portfolio)
respectively on outstanding balances of $55.6 million and $88.4 million,
respectively. Indirect automobile loan delinquencies as a percentage of the
total outstanding indirect automobile loan portfolio were 9.81% at June 30,
1998. During the nine months ended June 30, 1998 management continued to monitor
and evaluate the performance of the remaining indirect automobile loan portfolio
and recorded net charge-offs related to indirect automobile loans for the three
months and nine months ended June 30, 1998 of $908,000 and $3.6 million,
respectively. Prior to the quarter ended March 31, 1998, management estimated
that the rate of repossessed collateral and loan delinquencies related to
indirect automobile loans would significantly improve in the future as the
indirect automobile loan portfolio matured. During the quarter ended March 31,
1998, repossessions decreased, but not as quickly as anticipated. Additionally,
delinquencies remained at 7.55% (as a percentage of the outstanding balance of
the indirect automobile loan portfolio) at March 31, 1998 as compared to 8.77%
at September 30, 1997. The combination of the net charge-offs on indirect loans
being higher than expected and no significant improvement of the delinquency
rate on indirect loans during the six month period caused management to revise
its estimate related to the Company's loan loss provision with respect to the
indirect automobile loan portfolio. The additional provision was based on
management's evaluation of the portfolio's remaining term to maturity,
historical loss experience, related delinquency rates and the value of the
underlying collateral. Management will continue to monitor the performance of
the remaining indirect automobile loan portfolio, and will adjust the loan loss
provision if current estimates of collectibility change.
The following table sets forth information regarding the Bank's non-performing
loans, repossessed assets and real estate owned at the dates indicated. The Bank
generally discontinues accruing interest on loans that are 90 days or more past
due, or when management determines that a loan is impaired, or not performing,
at which time the accrued but uncollected interest is excluded from interest
income.
16
ASSET QUALITY
(In thousands)
September 30, 1997 June 30, 1998
--------------------- ---------------------
Non-performing mortgage loans delinquent more than 90 days.. $ 6,824 $ 5,261
Non-performing other loans delinquent more than 90 days..... 1,262 800
--------------------- ---------------------
Total non-performing loans.................................. 8,086 6,061
Real estate owned, at fair value............................ 1,795 2,648
Repossessed assets, at estimated fair value................. 474 318
--------------------- ---------------------
Total non-performing assets................................. $ 10,355 $ 9,027
===================== =====================
Non-performing loans to total loans......................... 0.68% 0.55%
Non-performing assets to total assets....................... 0.57% 0.51%
Allowance for loan losses to non-performing loans........... 74.77% 88.48%
RESULTS OF OPERATIONS
Comparison of results in this section are for the three month periods ended June
30, 1998 and June 30, 1997, and the nine month periods then ended.
General
Net income for the quarter ended June 30, 1998 was $1.2 million as compared to
$2.4 million for the quarter ended June 30, 1997, a decrease of $1.2 million.
Earnings for the quarter ended June 30, 1998 as compared to the same quarter
last year were primarily impacted by a $2.0 million increase in interest expense
which, together with a $1.8 million increase in non-interest expense, was offset
in part by a $1.1 million increase in non-interest income, primarily from gains
on security sales. Net income for the nine months ended June 30, 1998 was $5.6
million as compared to $6.9 million for the nine months ended June 30, 1997, a
decrease of $1.3 million.
Net Interest Income
Net interest income before provision for loan losses was $9.8 million for the
quarter ended June 30, 1998 as compared to $11.7 million for the quarter ended
June 30, 1997. For the nine months ended June 30, 1998, net interest income
before provision for loan losses was $31.7 million as compared to $33.1 million
for the nine months ended June 30, 1997.
The decrease in net interest income for the nine months ended June 30, 1998 was
in part due to the negative impact of the recent declining interest rate
environment. The declining rate environment has led to an increase in
residential loan refinancings at lower interest rates without a corresponding
decrease in the Bank's cost of funds. Net interest margin declined from 3.02% on
June 30, 1997 to 2.32% on June 30, 1998. On June 30, 1997, the Company issued
$35.0 million of 10.35% Senior Debentures Due 2002 ("Senior Debentures"). The
Company's interest expense, increased $2.7 million for the nine months ended
June 30, 1998, primarily due to the interest paid on the Senior Debentures. The
Company infused $25.0 million of capital into the Bank following the issuance of
the Senior Debentures, which was leveraged on a wholesale basis at lower
margins, further reducing the percentage net interest margin. Interest earning
assets increased $88.0 million to $1.684 billion at June 30, 1998 from $1.596
billion at June 30, 1997. The average balance of interest earning deposits,
securities and mortgage-backed and related securities available-for-sale and
held-to- maturity and FHLB stock increased by $193 million from $407 million for
the nine months period ended June 30, 1997 to $600 million for the nine month
period ended June 30, 1998. During these same periods the average balance of
loans increased by $69 million from $1.054 billion to $1.123 billion.
17
The increase in interest bearing liabilities was $82.0 million from $1.522
billion at June 30, 1997 to $1.604 billion at June 30, 1998. The average balance
of deposits increased by $61 million from $1.140 billion for the nine month
period ended June 30, 1997 to $1.201 billion for the nine month period ended
June 30, 1998. During these same periods the average balance of FHLB advances
increased $138 million from $197 million to $335 million. For the nine months
ended June 30, 1997 and 1998 the average balance of interest-earning assets
exceeded the average balance of interest- bearing liabilities by $109 million
and $147 million, respectively. The average yield on interest earning assets
decreased from 7.77% to 7.43%; however, the average cost of funds increased from
5.12% to 5.43% from June 30, 1997 to June 30, 1998, respectively.
Provision for Loan Losses
During the quarter ended June 30, 1998, the provision for loan losses decreased
to $211,000 from $831,000 for the comparable period ended June 30, 1997. For the
nine months ended June 30, 1998 the provision for loan losses increased to $4.1
million as compared to $2.2 million for the nine months ended June 30, 1997. The
decrease for the quarter, and the increase for the nine month period, are
primarily attributable to an additional loan loss provision of $2.2 million with
respect to the Company's indirect automobile loan portfolio recorded during the
quarter ended March 31, 1998. The additional provision was based upon
management's evaluation of such factors as the portfolio's remaining term to
maturity, historical loss experience and value of the underlying collateral. The
balance of the indirect automobile loan portfolio at June 30, 1998 was $55.6
million as compared to $101.7 million at June 30, 1997. See "Asset Quality."
Other Income
Other income increased to $3.1 million for the quarter ended June 30, 1998 from
$2.0 million for the quarter ended June 30, 1997. For the nine months ended June
30, 1998 other income increased to $11.1 million from $6.0 million for the nine
months ended June 30, 1997. The increase in other income for the quarter ended
June 30, 1998 is primarily the result of a $1.2 million gain on the Bank's sale
of $93.5 million principal balance of adjustable rate mortgage-backed
securities. The increase in other income for the nine months ended June 30, 1998
was primarily the result of the aforementioned sale and an additional $2.4
million gain on the sale of $160.7 million principal balance of fixed and
adjustable rate residential loans, and gains of $2.7 million on the sale of
securities. Miscellaneous income increased from $1.35 million for the nine
months ended June 30, 1997 to $2.48 million during the nine months ended June
30, 1998 primarily due to fees related to the increased refinancing of mortgages
during the period and increased fees collected from use of the Bank's ATM
network by non-customers.
Other Expenses
Other expenses increased to $10.7 million for the quarter ended June 30, 1998 as
compared to $8.9 million for the quarter ended June 30, 1997. For the nine
months ended June 30, 1998, other expenses increased to $29.5 million as
compared to $25.4 million for the nine months ended June 30, 1997. The increase
of $1.8 million in other expenses for the quarter ended June 30, 1998 as
compared to the quarter ended June 30, 1997 includes increases in compensation
of approximately $1.0 million, increases in advertising and promotion of
approximately $0.4 million, and increases in miscellaneous expenses of
approximately $0.4 million. The increase of $4.1 million in other expenses for
the nine months ended June 30, 1998 as compared to the nine months ended June
30, 1997 includes increases in compensation of $3.0 million, primarily due to an
increase of approximately $0.7 million in ESOP expense attributed to the
increased market value of the Company's stock, as well as an increase in
employees from 415 to 468 from June 30, 1997 to June 30, 1998 in order to staff
seven additional branch locations, continue strengthening the credit review
department, add a commercial loan department and expand loan servicing. For the
nine months ended June 30, 1998 as compared to the nine months ended June 30,
1997 the Bank also experienced increases in occupancy and equipment of
approximately $0.7 million and advertising and promotion of approximately $0.3
million. The increases for both the quarter and the nine month periods are
primarily due to the growth of the Bank and an aggressive advertising campaign.
Between June 30, 1997 and June 30, 1998 the Bank increased its branch network by
16% with the addition of seven full-service
18
branches. Since June 30, 1997 the Bank has also added a loan production office
and a commercial loan department, and has expanded the credit review and loan
servicing functions and related staff.
The Company utilizes and is dependent upon data processing systems and software
to conduct its business. The data processing systems and software include a
mainframe processing system licensed to the Company by an outside vendor and
various purchased software packages which are run on in-house computer networks.
In 1997, the Company initiated a review and assessment of all hardware and
software to confirm that it will function properly in the year 2000. The
Company's mainframe software vendor and the majority of the other vendors which
have been contacted have indicated that their hardware and/or software will be
Year 2000 compliant. The Company has started to test certain software for Year
2000 compliance. The Company, at present, is unable to determine the financial
effect of Year 2000 noncompliance by all outside parties with whom the Company
may transact business. As the Bank principally originates one-to-four family
residential mortgage loans, and other loans which are collateralized by real
property, management believes that the Bank's credit risk related to Year 2000
issues with respect to their loan portfolio is not material. While some expenses
will be incurred during the next eighteen months, Year 2000 compliance is not
expected to have a material effect on the Company's consolidated financial
statements. Costs of a non-capital nature, of addressing the Year 2000 issues
will be charged to earnings as they are incurred.
Quantitative and Qualitative Disclosures about Market Risk
As a financial institution holding company, the Company's primary component of
market risk is interest rate volatility. Fluctuations in interest rates will
ultimately impact both the level of income and expense recorded on a large
portion of the Bank's assets and liabilities, and the market value of all
interest-earning assets, other than those with short term maturities. All of the
Company's interest rate risk exposure lies at the Bank level. Accordingly,
interest rate risk management procedures are performed at the Bank level. Based
on the nature of the Bank's operations, the Bank is not subject to foreign
currency exchange or commodity price risk. The Bank's real estate portfolio,
concentrated primarily within Palm Beach, Martin, Broward, Dade and Lee counties
of Florida, is subject to risks associated with the local economy. See "Interest
Rate Sensitivity."
19
PART II - OTHER INFORMATION
FIRST PALM BEACH BANCORP, INC.
Item 1 Legal Proceedings
Neither the Company nor its subsidiaries are involved in any pending
legal proceedings, other than routine legal matters occurring in the
ordinary course of business which in the aggregate involve amounts
which in management's opinion are not material to the consolidated
financial condition or results of operations of the Company.
Item 2 Changes in Securities and Use of Proceeds.
Not applicable.
Item 3 Defaults upon Senior Securities
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5 Other Information
Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
11 Statement Re: Computation of Per Share Earnings.
27 Financial Data Schedule (for SEC use only)
(b) Report on Form 8-K dated June 8, 1998, regarding Agreement and
Plan of Merger with Republic Security Financial Corporation.
20
FIRST PALM BEACH BANCORP, INC.
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.
First Palm Beach Bancorp, Inc.
(Registrant)
Date:
August __, 1998 /s/ Louis O. Davis, Jr.
-------------------------------------
Louis O. Davis, Jr.
President and Chief Executive Officer
(Duly Authorized Officer)
Date:
August __, 1998 /s/ Suzanne S. Brenner
-------------------------------------
Suzanne S. Brenner
Treasurer and Chief Financial Officer
(Principal Financial Officer)
21
EXHIBIT INDEX
Exhibit
Number Description Page
2.1 Agreement and Plan of Merger by and between Republic Security Financial
Corporation and First Palm Beach Bancorp, Inc. dated as of May 27, 1998
(incorporated by reference from Form 8-K filed June 8, 1998).......................................--
10.1 Form of Change of Control Agreement between First Bank of Florida and
William R. Martin dated as of March 2, 1998 (incorporated by reference
from Form 10-K filed on December 23, 1997).........................................................--
10.2 Form of Change of Control Agreement between First Palm Beach Bancorp, Inc.
and William R. Martin dated as of March 2, 1998 (incorporated by reference
from Form 10-K filed on December 23, 1997).........................................................--
10.3 Form of Amendment to First Palm Beach Bancorp, Inc. Change of Control
Agreement effective as of April 21, 1998 between First Palm Beach Bancorp,
Inc. and each of Alissa Ballot, Rodney Bayliff, Suzanne Brenner, Calvin
Cearley, Jon Geitner, William Martin, John Rudy, John Trammel and
Rita Zambuto (filed herewith)......................................................................24
10.4 Form of Amendment to First Bank of Florida Change of Control
Agreement effective as of April 21, 1998 between First Bank of
Florida and each of Alissa Ballot, Rodney Bayliff, Suzanne
Brenner, Jon Geitner, William Martin,
John Rudy, John Trammel and Rita Zambuto (filed herewith)..........................................26
10.5 Form of Amendment to First Palm Beach Bancorp, Inc. Employment Agreement
effective as of April 21, 1998 between First Palm Beach Bancorp, Inc. and each of
Louis O. Davis, Jr. and R. Randy Guemple (filed herewith)..........................................28
10.6 Form of Amendment to First Bank of Florida Employment Agreement effective
as of April 21, 1998 between First Bank of Florida and each of Louis O. Davis, Jr.
and R. Randy Guemple (filed herewith)..............................................................30
10.7 Amendment No. 3 to First Palm Beach Bancorp, Inc. Incentive Stock Option
Plan for Officers and Employees (filed herewith)...................................................32
10.8 Amendment No. 3 to Amended and Restated Employee Stock Ownership Plan
(filed herewith)...................................................................................33
10.9 Amendment No. 4 to Amended and Restated Employee Stock Ownership Plan
(filed herewith)...................................................................................36
10.10 Amendment No. 5 to Amended and Restated Employee Stock Ownership Plan
(filed herewith)...................................................................................42
11 Statement Re: Computation of Per Share Earnings....................................................43
22
EXHIBIT INDEX
(Continued)
Exhibit
Number Description Page
27 Financial Data Schedule (for SEC use only).........................................................44
99.1 Amendment No. 1, dated as of May 27, 1998, to the Rights Agreement, dated as
of January 23, 1995, between First Palm Beach Bancorp, Inc. and Mellon Bank,
N.A., as rights agent (incorporated by reference from Form 8-K filed
June 8, 1998)......................................................................................--
99.2 Stock Option Agreement, dated May 27, 1998, between Republic Security Financial
Corporation and First Palm Beach Bancorp, Inc. (incorporated by reference from
Form 8-K filed June 8, 1998).......................................................................--
23