1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-2962
KEY FLORIDA BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0105205
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER)
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3901 CORTEZ ROAD WEST, BRADENTON FLORIDA 34210
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (941) 751-0611
NOT APPLICABLE
(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 NO X
--- ---
As of June 30, 1996, there were outstanding 940,986 shares of the Registrant's
Common Stock.
2
FINANCIAL STATEMENTS (UNAUDITED)
KEY FLORIDA BANCORP, INC.
FORM 10-QSB - For the Quarter Ended June 30, 1996
INDEX
CONTENTS
Part I. Financial Information Page
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheet (Audited at September 30, 1995 and Unaudited at
June 30, 1996). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3
Consolidated Statement of Income (Unaudited)
For the Nine Months and the Three Months
Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months and the Three Months
Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Unaudited Financial Statements. . . . . . . . . . . . . . 6-9
Item 2.
Management's Discussion and Analysis of Financial
Conditions and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 10-26
Part II. Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults upon Senior Securities - Not Applicable
Item 4. Submissions of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1996
3
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- - -------------------------------------------------------------------------------
(Unaudited) (Audited)
June 30, September 30,
1996 1995
----------- ------------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 1,484,946 $ 620,511
Interest bearing deposits 2,465,717 2,349,170
------------ ------------
Total cash and cash equivalents 3,950,663 2,969,681
Investment securities
Securities held to maturity (market value
approximates $8,752,546 and $9,325,700) 9,063,011 9,610,555
Securities available for sale 967,660 969,220
------------ ------------
Total investment securities 10,030,671 10,579,775
Loans receivable, net 68,093,230 72,106,000
Bank premises and equipment, net 964,165 1,037,313
Accrued interest receivable 477,224 511,655
Other real estate owned, net 345,978 612,405
Federal Home Loan Bank stock, at cost 500,000 500,000
Loan servicing rights acquired and excess
servicing fees receivable 189,799 252,373
Prepaid expenses and other assets 664,344 374,497
Deferred tax asset 187,000 183,000
------------ ------------
TOTAL ASSETS $ 85,403,074 $ 89,126,699
============ ============
(2)
4
- - -------------------------------------------------------------------------------
(UNAUDITED) (AUDITED)
JUNE 30, SEPTEMBER 30,
1996 1995
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing deposits $ 2,294,580 $ 2,394,823
Interest bearing demand deposits 5,310,310 5,147,064
Money market deposits 3,275,708 4,127,937
Savings deposits 12,073,167 6,816,729
Time deposits 55,378,710 64,729,597
----------- -----------
Total deposits 78,332,475 83,216,150
Federal Home Loan Bank Advances 2,000,000 1,000,000
Notes payable 155,431 172,081
Accrued interest payable 20,586 33,763
Amounts due on loans serviced -- 24,385
Accrued expenses and other liabilities 227,937 130,833
----------- -----------
Total liabilities 80,736,429 84,577,212
Stockholders' Equity
Series A, variable rate cumulative convertible preferred stock,
$.01 par value and $10 stated value, 1,000,000 shares
authorized, 43,025 shares issued and outstanding 430,250 430,250
Common stock, $.01 par value, 4,000,000 shares authorized,
940,986 issued and outstanding 9,411 9,411
Additional paid-in capital 5,720,080 5,720,080
Unrealized (loss) on securities (30,934) (28,964)
Accumulated deficit (1,460,255) (1,580,010)
Less treasury stock at cost (94 shares of common stock, and
266 and 216 shares of preferred stock) (1,907) (1,280)
----------- -----------
Total stockholders' equity 4,666,645 4,549,487
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $85,403,074 $89,126,699
=========== ===========
(3)
5
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
- - -------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
---------------------------- -----------------------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------ ------------- -------------
INTEREST INCOME
Interest and fees on loans $ 4,361,665 $ 4,341,054 $ 1,428,889 $ 1,500,109
Interest on investment securities
U.S. Treasury and Government agencies 292,844 449,344 96,768 147,048
Other 306,935 102,534 72,144 35,853
Interest on federal funds sold -- - -- --
------------- ------------ ------------ ----------
Total interest income 4,961,444 4,892,932 1,597,801 1,683,010
INTEREST EXPENSE
Interest on deposits 3,231,451 2,814,799 977,811 1,010,644
Interest on notes payable 11,347 27,630 3,623 11,874
Interest on Federal Home Loan Bank advances 23,319 472,967 18,427 155,817
------------- ------------ ------------ ----------
Total interest expense 3,266,117 3,315,396 999,861 1,178,335
------------- ------------ ------------ ----------
NET INTEREST INCOME 1,695,327 1,577,536 597,.940 504,675
------------- ------------ ------------ ----------
Provision for loan losses 8,570 102,004 -- 101,000
------------- ------------ ------------ ----------
Net interest income after provision for loan losses 1,686,757 1,475,532 597,940 403,675
Other income 152,604 97,045 25,103 5,594
Other expense 1,692,935 1,656,798 568,765 569,548
------------- ------------ ------------ ----------
NET INCOME (LOSS) BEFORE INCOME TAX PROVISION 146,426 (84,221) 54,278 (160,279)
Current income tax provision -- - -- --
Deferred income tax provision (benefit) (4,000) - 14,000 --
------------- ------------ ------------ ----------
NET INCOME (LOSS) $ 150,426 $ (84,221) $ 40,278 $ (160,279)
============= ============ ============ ==========
(4)
6
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
AND FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
FOR THE NINE MONTHS ENDED
-------------------------
June 30, 1996 June 30, 1995
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 150,426 $ (84,221)
Adjustment to reconcile net income (loss)
to net cash provided by (used in) operating activities
Depreciation and amortization 113,545 71,947
Provision for possible loan losses 8,570 102,004
Amortization of premium on investment and
mortgage-backed securities 32,410 (13,452)
Amortization of loan servicing rights and excess servicing fees 62,574 90,063
Net (gain) loss on disposition of bank premises -- 180
Net (gain) loss on sale of loans (80,328) (34,238)
Net (gain) loss on sale of investment securities -- --
Net (gain) loss on sale of other real estate owned -- 2,530
Deferred income taxes (4,000) (62,000)
------------- -------------
Changes in assets and liabilities
(Increase) decrease in accrued interest receivable 34,431 (14,947)
(Increase) decrease in prepaid expenses and other assets (289,847) (549,363)
Increase (decrease) in accrued interest payable (13,177) (24,468)
Increase (decrease) in amounts due on loans serviced 10,981 (8,235)
Increase (decrease) in accrued expenses and other liabilities 61,738 141,536
Increase (decrease) in income taxes currently payable -- (34,000)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 87,323 (416,664)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of Federal Home Loan Bank stock -- 436,000
Loan originations, net (6,308,658) (8,838,600)
Proceeds from sale of loans 10,362,351 8,011,701
Proceeds on other real estate sold 286,157 212,554
Purchase of investment securities -- --
Proceeds from maturities and repayments of investment
securities held to maturity 514,724 263,811
Purchase of bank premises and equipment (40,397) (53,765)
Proceeds from sale of bank premises and equipment -- 24,062
Recoveries on loans charged-off 11,105 25,027
------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,825,282 80,790
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing deposits (100,243) (346,602)
Net increase (decrease) in interest bearing deposits 163,246 614,961
Net increase (decrease) in money market deposits (852,229) 331,876
Net increase in savings deposits 5,256,438 1,091,058
Net increase (decrease) in time deposits (9,350,887) 2,786,538
Proceeds from Federal Home Loan Bank advances 2,000,000 7,500,000
Repayment from Federal Home Loan Bank advances (1,000,000) (10,250,000)
Repayments on notes payable (16,650) (29,742)
Cash dividends paid on preferred stock (30,671) (35,878)
Proceeds from sale of common stock -- 370,507
Purchase of Treasury stock (627) (1,213)
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,931,623) 2,031,505
------------- -------------
NET INCREASE (DECREASE) IN CASH &CASH EQUIVALENTS 980,982 1,695,631
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,969,681 1,870,585
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,950,663 $ 3,566,216
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 3,244,628 $ 2,839,267
============= =============
Cash payments for income taxes $ -- $ --
============= =============
(UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------
June 30, 1996 June 30, 1995
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 40,278 $ (160,279)
Adjustment to reconcile net income (loss)
to net cash provided by (used in) operating activities
Depreciation and amortization 36,726 24,968
Provision for possible loan losses -- 101,000
Amortization of premium on investment and
mortgage-backed securities 10,584 5,042
Amortization of loan servicing rights and excess servicing fees 14,574 30,062
Net (gain) loss on disposition of bank premises -- (49)
Net (gain) loss on sale of loans (5,239) (10,992)
Net (gain) loss on sale of investment securities -- --
Net (gain) loss on sale of other real estate owned -- 2,530
Deferred income taxes 14,000 --
----------- -----------
Changes in assets and liabilities
(Increase) decrease in accrued interest receivable (6,441) (8,269)
(Increase) decrease in prepaid expenses and other assets 484,104 (477,005)
Increase (decrease) in accrued interest payable 1,724 (22,105)
Increase (decrease) in amounts due on loans serviced 27,955 (13,372)
Increase (decrease) in accrued expenses and other liabilities 45,978 155,970
Increase (decrease) in income taxes currently payable -- --
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 664,243 (372,499)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of Federal Home Loan Bank stock -- 436,000
Loan originations, net (916,782) (2,719,031)
Proceeds from sale of loans 970,848 4,840,359
Proceeds on other real estate sold 286,157 212,554
Purchase of investment securities -- --
Proceeds from maturities and repayments of investment
securities held to maturity 162,276 89,337
Purchase of bank premises and equipment (18,829) (3,325)
Proceeds from sale of bank premises and equipment -- 5,041
Recoveries on loans charged-off 11,105 25,012
----------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 494,775 2,885,947
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing deposits (554,912) 498,438
Net increase (decrease) in interest bearing deposits (1,184,004) (815,397)
Net increase (decrease) in money market deposits 118,663 (1,307,221)
Net increase in savings deposits (349,341) 1,078,088
Net increase (decrease) in time deposits (1,465,931) 1,489,475
Proceeds from Federal Home Loan Bank advances 2,000,000 3,500,000
Repayment from Federal Home Loan Bank advances -- (5,000,000)
Repayments on notes payable (6,038) (18,694)
Cash dividends paid on preferred stock (9,856) (10,274)
Proceeds from sale of common stock -- --
Purchase of Treasury stock (47) (435)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,451,466) (586,020)
----------- -----------
NET INCREASE (DECREASE) IN CASH &CASH EQUIVALENTS (292,448) 1,927,428
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,243,111 1,688,788
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,950,663 $ 3,566,216
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 976,087 $ 1,032,749
=========== ===========
Cash payments for income taxes $ -- $ --
=========== ===========
(5)
7
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION:
The interim financial data is unaudited; however, in the opinion of management,
the interm data includes all adjustments, consisting only of normal recurring
adjustments necessary for a fair statement of the results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading.
NOTE 2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
The Company adopted Statement of Financial Accounting Standards (SFAS) 107,
Disclosures About Fair Value of Financial Instruments, on October 1, 1995.
SFAS 107 requires disclosures about the fair value of financial instruments and
the methods and assumptions used to estimate fair value. Included in the
definition of financial instruments are investment and mortgage-backed
securities, loans, deposit liabilities, and unfunded loan commitments. SFAS
107 relates only to disclosure issues and has no impact on the financial
position of the Company.
The Company adopted Financial Accounting Standards Board (SFAS) 114, Accounting
by Creditors for Impairment of a Loan, and SFAS 118, Accounting by Creditors for
Impairment of a Loan-income Recognition and Disclosures, on October 1, 1995.
Under the new standards, a loan is considered impaired, based on current
information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual value of expected future cash flows discounted at the
historical effective interest rate, except that all collateral-dependent loans
are measured for impairment based on the fair value of the collateral. Prior
to October 1, 1995, the allowance for credit losses related to these loans was
based on undiscounted cash flows or the fair value of the collateral for
collateral dependent loans. The effect of the adoption of SFAS 114 was
immaterial to the Company and, accordingly, no additional provision for credit
losses was necessary for the nine-month period ended June 30, 1996.
NONACCRUAL LOANS - Generally, a loan (including a loan impaired under SFAS 114)
is classified as Nonaccrual and the accrual of interest on such loan is
discounted when the contractual payment of principal or interest has become 90
days due or management has serious doubts about further collectibility of
principal or interest, even though the loan currently is performing. A loan
may remain on accrual status if it is in the process of collection and is either
guaranteed or well collateralized. When a loan is placed on nonaccrual status,
unpaid interest, credited to income in the current year is reversed and unpaid
interest accrued in prior years is charged against the allowance for credit
losses. Generally, loans are restored to accrual status when the obligation is
brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
(6)
8
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS, CONTINUED
The Company's loan portfolio by type of loan consisted of the
following:(in thousands)
June 30, June 30,
1996 1995
----------- ------------
Commercial $ 3,426 $ 2,288
Commercial real estate 8,861 11,429
Residential real estate 54,257 55,926
Consumer loans 1,863 1,643
Loan origination costs, net 383 307
----------- ------------
68,790 71,593
Allowance for loan losses (596) (607)
----------- ------------
Loans, net $ 68,194 $ 70,986
----------- ------------
The adequacy of the allowance for credit losses is periodically evaluated by
the Company in order to maintain the allowance at a level that is sufficient
to absorb probable credit losses. Management's evaluation of the adequacy of
the allowance is based on a review of the Company's historical loss experience,
known and inherent risks in the loan portfolio, including adverse circumstances
that may affect the borrower's ability to repay interest and/or principal, the
estimated value of collateral, and an analysis of the levels and trends of
delinquencies, charge-offs, and the risk ratings of the various loan
categories. Such factors as the level and trend of interest rates and the
condition of the national and local economies are also considered. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
Management does not consider an insignificant delay or shortfall in the amount
of payments an event that, when considered in isolation, would automatically
cause a loan to be considered impaired for purposes of SFAS 114. Examples of
insignificant delays or shortfalls include, depending on the specific facts and
circumstances, those that are associated with a temporary stoppage in
operations due to equipment failure or a natural disaster, or due to tight cash
flows during the off-peak season of a business. Recurring shortfalls or delays
in payments and/or extended delinquency periods may provide evidence that a
delay or shortfall is significant and are considered by management in reviewing
loans for impairment.
Management divides the Company's loan portfolio into the following categories
when estimating the allowance: (1) individually identified impaired loans; (2)
individually classified loans, other than those considered impaired; (3)
groups of homogeneous performing loans, i.e., residential mortgages, consumer,
etc.; and (4) groups of homogeneous loan commitments and other off-balance
sheet exposures.
(7)
9
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS, CONTINUED:
The allowance for credit losses is established through charges to earnings in
the form of a provision for credit losses. Increases and decreases in the
allowance due to changes in the measurement of the impaired loans are included
in the provision for credit losses. Loans continue to be classified as
impaired unless they are brought fully current and the collection of principal
and interest is considered probable.
When a loan or portion of a loan is determined to be uncollectible, the portion
deemed uncollectible is charged against the allowance and subsequently
recovered, if any, are credited to the allowance.
An analysis of the allowance for loan losses for the nine months ended June
30, 1996 and 1995 is as follows:
1996 1995
----------- ----------
Allowance at October 1, 1995 and 1994 $ 607,450 $ 612,601
Provision charged to operating expense 8,570 102,004
Recovered on loans 11,105 25,027
Loans charged off (30,766) (132,182)
----------- ----------
Balance at June 30, 1996 and 1995 $ 596,359 $ 607,450
=========== ==========
At June 30, 1996, the Bank had no loans which were considered impaired and had
nonaccrual loans totaling approximately $910,000. Interest income which would
have been recorded on these loans was insignificant.
The Company adopted SFAS 119, Disclosure About Derivative Financial Instruments
and Fair Value of Financial Instruments, on October 1, 1995. SFAS 119 requires
disclosures about derivative financial instruments--futures, forward, swap, and
option contracts, and other financial instruments with similar characteristics.
SFAS 119 also amends existing requirements of SFAS 105, Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, and SFAS 107. SFAS
119 requires disclosures about amounts, nature, and terms of derivative
financial instruments that are not subject to SFAS 105 because they do not
result in off-balance-sheet risk of accounting loss. It requires that a
distinction be made between financial instruments held or issued for trading
activities measured at fair value with gains and losses recognized in earnings)
and financial instruments held or issued for purposes other than trading.
SFAS 119 relates only to disclosure issues and does not have a financial impact
on the Company.
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of, issued by the FASB in March 1995, is effective for
the Company for fiscal years beginning on or after December 15, 1995. SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity, be reviewed for impairment whenever events or changes in
circumstances indicate that
(8)
10
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS, CONCLUDED:
the carrying amount of an asset may not be recoverable. In performing the
review for recoverability, the entity should estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, and impairment loss is
recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset. Management has not determined the impact, if
any, of SFAS 121 on the Company's financial statements as of June 30, 1996.
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
Accounting for mortgage Servicing Rights, SFAS 122 requires companies that
engage in mortgage banking activities to allocate the total cost of the
mortgage loans it acquires or originates and then sells with servicing rights
retained between the estimated fair value of the loans and the capitalized
mortgage servicing rights, if practical. SFAS 122 also requires that
capitalized mortgage servicing rights be assessed for impairment based on the
fair value of those rights. SFAS 122 applies prospectively to fiscal years
beginning after December 15, 1995. The adoption of the provisions of SFAS 122
is not expected to have a material impact on the financial position of the
Company upon adoption.
In October 1995, the FASB issued SFAS 123, Accounting for Stock Based
Compensation, effective for fiscal years beginning after December 15, 1995.
SFAS 123 requires a fair value-based method of accounting for stock-based
compensation. Since the Company does not utilize any stock-based compensation
plans, SFAS 123 is not expected to have a material impact on the financial
position or results of operations of the Company.
(9)
11
KEY FLORIDA BANCORP, INC.
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the third quarter of fiscal 1996
ending June 30, 1996 prior to the Company's merger with Liberty National Bank.
GENERAL
Bancorp's principal asset is its ownership of controlling interest in Key
Florida Bank (KFB). Accordingly, Bancorp's results of operations are primarily
dependent upon the results of operations of KFB. KFB conducts commercial
business consisting of attracting deposits from the general public and applying
those funds to the origination of commercial, consumer and real estate loans
(including commercial loans collateralized by real estate). KFB's
profitability depends primarily on net interest income, which is the difference
between interest income generated from interest-earning assets (i.e., loans and
investments) less the interest expense incurred on interest-bearing liabilities
(i.e., customer deposits and borrowed funds). Net interest income is affected
by the relative amounts of interest-earning assets and interest-bearing
liabilities, and the interest rate earned and paid on these balances. Net
interest income is dependent upon KFB's interest-rate spread which is the
difference between the average yield earned on its interest-earning assets and
the average rate paid on its interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The interest
rate spread is impacted by interest rates, deposit flows, and loan demand.
Additionally, KFB's profitability is affected by such factors as the level of
non-interest income and expenses, the provision for credit losses, and the
effective tax rate. Non-interest income consists primarily of service fees on
deposit accounts and income from the sale of loans and investment securities.
Non-interest expense consists of compensation and employee benefits, occupancy
and equipment expenses, deposit insurance premiums paid to the FDIC, and other
operating expenses.
Management's discussion and analysis of earnings and related financial data are
presented herein to assist in an understanding of the financial condition of
Bancorp at, and results of operations of Bancorp for the nine months ended
June 30, 1996.
RECENT DEVELOPMENTS
Effective the close of business on July 30, 1996, Bancorp and Liberty National
Bank ("LNB") closed the Merger of Key Florida Bank, F.S.B. ("KFB") with and
into LNB. In the KFB/LNB Merger, the outstanding shares of LNB common stock
were converted into an aggregate of 2,739,847 shares of Bancorp common stock.
(10)
12
Liquidity Management
The objective of liquidity management is to ensure the availability of
sufficient resources to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity Management addresses the
ability to meet deposit withdrawals either on demand or by contractual
maturity, to repay other borrowings as they mature and to make new loans and
investments as opportunities arise.
The Company has numerous sources of liquidity including loan and security
principal repayments and maturities, lines of credit and other financial
institutions, line of credit with the Federal Home Loan Bank, the sale of
securities from its available-for-sale portfolio, whole loan sales and growth
in its core deposit base. As a member of the Federal Home Loan Bank system the
Company has the ability to borrow on a secured basis utilizing mortgage related
loans and securities as collateral. At June 30, 1996 the Company had $2
million in such advances with an original maturity of greater than one year,
the Company also had an available line of credit of $8.5 million.
The liquidity reserve may consist of cash on hand, cash on demand deposit with
other correspondent banks, and other investments and short-term marketable
securities as determined by the rules of the Office of Thrift Supervision, such
as federal funds sold and United States securities and securities guaranteed by
the United States. As a federally chartered thrift the Company is required to
maintain an eligible liquidity ratio of at least 5% and a short-term liquidity
ratio of 1%. At June 30, 1996 the Company had an eligible liquidity ratio of
6.24% and a short-term liquidity ratio of 1.26%.
Liquidity, as measured in the form of cash and cash equivalents, totalled
$3,950,663 at June 30, 1996. At March 31, 1996, cash and cash equivalents
totalled $4,243,111, a decrease of 6.8%. Cash and cash equivalents vary with
seasonal deposit movements and are generally higher in the winter than in the
summer, and vary with the level of principal repayments occurring in the
Company's investment securities portfolio and loan portfolio.
As is typical of financial institutions, cash flows from investing (primarily
in loans and securities) and from financing (primarily through deposit
generation and short-term borrowings) are in excess of cash flows from
operations. For the quarter ended June 30, 1996, the cash flow from operations
of $664,243 was 278% higher than the same period of 1995. Cash flows from
investing activities reflects the net decrease in loans due to sales of loans
and the sales of other real estate owned whereas, cash flows from investing
activities reflect the decrease of $5,272 which is attributable to the change
in the adjustment to the unrealized gain (loss) on securities required by
Statement No. 115 of the Financial Accounting Standards Board (FASB) accounting
for certain investments in debt and equity securities. Net income of $40,278
less dividends declared totalling $9,856 with a small purchase of treasury
common and preferred stock comprise the remainder of the increase.
(11)
13
Capital Resources
The Company's ratio of stockholders' equity to quarter end assets was 5.46%
after the adjustment for FASB Statement No. 115. The 5.46% at June 30, 1996
compares to the previous quarter end ratio of 5.35%.
Bancorp's principal sources of funds are those generated by KFB, including net
increases in deposits, principal and interest payments on loans and proceeds
from sales and maturities of investment and mortgage-backed securities.
KFB uses its capital resources principally to fund existing and continuing loan
commitments and to purchase investment and mortgage-backed securities. At June
30, 1996, KFB had commitments to originate loans totaling $3.9 million. In
addition, scheduled maturities of certificates of deposit during the 12 months
following June 30, 1996 totaled $47.5 million. Management believes that KFB
has adequate resources to fund all its commitments, that substantially all of
its commitments will be funded within 12 months and, if so desired, that KFB
can adjust the rates and terms on certificates of deposit and other deposit
accounts to retain deposits in a changing interest rate environment.
In accordance with capital guidelines issued by the OTS, KFB is required to
maintain core capital to risk-weighted assets of at least 3.0% and total
capital to risk-weighted assets of at least 8.0%. At June 30, 1996 the core
capital to risk-weighted assets ratio was 5.24% compared to 5.12% for the
previous quarter-end. At June 30, 1996 the total capital to risk-weighted
assets was 10.52% compared to 10.35% at March 31, 1996.
RESULTS OF OPERATIONS
(Comparison of the Nine Months Ended June 30, 1996 and 1995)
General
Net earnings for the nine months ended June 30, 1996 were $150,426 compared to
a net loss of $84,221 for the same period of 1995. The increase in net
earnings was due in part to an increase in the interest rate spread. The
remaining increase in net earnings was due to a decrease in the provision for
loan losses and a decrease in average yields paid on deposits.
Interest Income and Expense
Interest income increased by $68,512 from $4,892,932 for the nine months
ended June 30, 1995 to $4,961,444 for the nine months ended June 30, 1996.
For this same time period interest income on loans increased $20,611 even
though there was a decrease in the weighted average yield from 8.10% for the
period ended June 30, 1995 to 7.84% for the period ended June 30, 1996.
During this same time period there was a corresponding decrease in the average
loan portfolio from $72.4 million to $69.6 million at June 30, 1996. The
decrease resulted from the sale of loans during the period. The decrease in
average yield resulted from repricing opportunities during the period primarily
in real estate loans.
(12)
14
The decrease in weighted average yield was the result of decreases in market
interest rates, coupled with a slight decrease in real estate loans. For the
nine months ended June 30, 1996 compared to the nine months ended June 30,
1995 interest on investment and mortgage-backed securities increased $47,901
even though there was a decrease in the average investment and mortgage-backed
securities portfolio from $11.5 million at June 30, 1995 to $10.6 million at
June 30, 1996. There was a slight decrease in the average yield earned to
5.49% at June 30, 1996 from 5.66% at June 30, 1995.
Interest expense increased to $3,266,117 for the nine months ended June 30,
1996 from $3,315,396 at June 30, 1995. Interest expense on deposit accounts
increased even though the average rate paid on deposits decreased from 5.6%
at June 30, 1995 to 4.99% at June 30, 1996. Average deposit balances during
that time period increased from $74.7 million to $81.0 million. There was
material change in deposit mix during the period, with the major changes being
an increase in savings deposits of $9.3 million at June 30, 1996 and a
decrease in time deposits of $6.8 million. These were planned changes in the
Company's deposit mix. During the nine months ended June 30, 1995 Federal
Home Loan Bank borrowings decreased from an average balance of $8.0 million to
an average balance of $1.0 million at June 30, 1996. Corresponding to the
decrease in the average balance of Federal Home Loan Bank (FHLB) borrowings for
the nine months ended June 30, 1996 and 1995 there was a decrease in the
average rate paid to FHLB from 6.18% at June 30, 1995 to 5.54% at June 30,
1996. Also, as the Company continues to retire debt on its notes payable the
interest expense on the notes payable decreases each quarter.
Provisions for Loan Losses
The provision for credit losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by Bancorp, the
amounts of non-performing loans, general economic conditions, particularly as
they relate to Bancorp's market area, and other factors related to the
collectibility of Bancorp's loan portfolio. There was a decrease in the
provision of $101,000 from June 30, 1995 to June 30, 1996. The reduced
provision for the quarter ended June 30, 1996 was primarily due to Bancorp's
reduced level of total loans and decrease in the level of total non-performing
loans and other real estate owned. As management deems necessary additional
provisions will be established to reserve for credit risks originated by prior
management.
Other Income
Total other income increased $55,559 for the nine months ended June 30, 1996 as
compared to the nine months ended June 30, 1995. The increase of 57% was due
primarily to increased fees and service charges on deposit accounts and loans.
Other Expense
Total other expense increased 2% from $1,656,798 at June 30, 1995 to $1,692,935
at June 30, 1996.
(13)
15
ASSET/LIABILITY MANAGEMENT
A principal objective of Bancorp's asset/liability management strategy is to
minimize its exposure to changes in interest rates by matching the maturity and
repricing horizons of interest-earning assets and interest-bearing liabilities.
This strategy is overseen in part through the direction of an Asset and
Liability Committee (the "ALCO" Committee) which establishes policies and
monitors results to control interest rate sensitivity.
Management evaluates interest rate risk and then formulates guidelines
regarding asset generation and repricing, funding sources and pricing, and
off-balance sheet commitments in order to maintain interest rate risk within
target levels for the appropriate level of risk which are determined by the
ALCO Committee. The ALCO Committee uses computer models prepared by a third
party to measure the Bank's interest rate sensitivity. From these reports, the
ALCO Committee can estimate the net income effect of various interest rate
scenarios.
As a part of Bancorp's interest rate risk management policy, the ALCO Committee
examines the extent to which its assets and liabilities are "interest rate
sensitive" and monitors the bank's interest rate sensitivity "gap". An asset
or liability is considered to be interest rate sensitive if it will reprice or
mature within the time period analyzed, usually one year or less. The interest
rate sensitivity gap is the difference between interest earning assets and
interest bearing liabilities scheduled to mature or reprice within such time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive
gap would tend to adversely affect net interest income. If the repricing of
each bank's assets and liabilities were equally flexible and moved
concurrently, the impact of any increase or decrease in interest rates on net
interest rates on net interest income would be minimal.
The assets and liabilities of KFB are managed to provide for a stable and
optimum net interest margin. Efforts continue to further improve the balanced
position between the rate sensitive assets and rate sensitive liabilities.
Interest rate risk (IRR) is defined as the sensitivity of earnings and net
portfolio value (NPV) to changes in interest rates. IRR results from the
differences in the way the values of assets and liabilities are affected by
changes in interest rates. Because deposit liabilities typically reprice more
quickly than mortgage assets, most thrift institutions are exposed to rising
interest rates; that is, their NPV and earnings decline when interest rates
rise and increase when rates fall, and KFB is no exception. The objective of
interest rate risk management is to control the Bank's exposure to changes in
interest rates so as to maintain adequate levels of earnings and capital over a
range of possible interest rate changes.
For monitoring and measurement purposes, the Office of Thrift Supervision
("OTS") measures the effect or "shock" of instantaneous changes in interest
rates on the institution's assets and liabilities. Financial models increase
and/or decrease interest rates by 1% increments (100 basis points) to an
immediate maximum/minimum increase or decrease of 4% and then measure the
effect of such a change. The impact of such interest rate change depends on
the repricing frequency of the instrument, its duration, interest rate
ceilings, floors and caps, prepayment estimates and other such factors. Each
of these variables is considered in the OTS model for measuring interest rate
risk and the information is provided to the OTS by savings associations
(including Bancorp) in the filing of their quarterly reports with the OTS. The
resulting change in value of all assets and liabilities is estimated and
compared to KFB's capital and earnings position in attempting to assess the
degree of risk.
(14)
16
Bancorp seeks to maintain a core deposit base by providing quality services to
its customers without significantly increasing its cost of funds or operating
expenses. Bancorp's demand/money market and NOW deposit accounts approximated
7.0%, and 7.0% of total deposits at June 30, 1996. Management anticipates
that these accounts will continue to comprise a significant portion of
Bancorp's total deposit base. Bancorp also maintains a relatively large
portfolio of liquid assets in order to reduce its overall exposure to changes
in market interest rates. At June 30, 1996 approximately 5.75% of Bancorp's
total assets consisted of cash and cash equivalents and short-term investment
securities. In addition, at June 30, 1996, KFB's liquidity ratio was
approximately 6.24%. Bancorp also maintains a "floor", or minimum rate, on
certain of its floating or prime based loans. These floors allow Bancorp to
continue to earn a higher rate when the floating rate falls below the
established floor rate.
FINANCIAL CONDITION
Lending Activities
A significant source of income for Bancorp is the interest earned on loans. At
June 30, 1996, Bancorp's total assets were $85.4 million and its net loans were
$68 million or 79.7% of total assets. At June 30, 1995, Bancorp's total assets
were $89.7 million and its net loans were $71.1 million or 79% of total assets.
The following table sets forth information concerning Bancorp's loan portfolio
by type of loan at the dates indicated:
At June 30,
-------------------------------------------------------------
1996 1995
-------------------------------------------------------------
(In Thousands)
Amount % of Amount % of
Total Total
--------- ------- -------- -------
Commercial Loans $ 3,426 5% $ 2,288 4%
Commercial Real Estate Loans 8,861 13% 11,429 16%
Residential Mortgage Loans 54,257 79% 55,926 78%
Consumer Loans 1,763 3% 1,643 2%
--------- ---- --------- ----
TOTAL LOANS $ 68,307 100% $ 71,286 100%
========= ==== ========= ====
Less:
Deferred Loan Fees (Costs) 382 307
Allowance for Credit Losses (596) (607)
--------- ---------
LOANS, NET $ 68,093 $ 70,986
========= =========
(15)
17
For the three months ended June 30, 1996 and 1995, the net change in total
loans receivable was approximately as follows:
At June 30,
-------------------------------------------------------
1996 1995
---------------- -----------------
(In (Thousands)
Balance at beginning of period $ 68,775 $ 74,327
Loan originations, net 917 2,719
Sale of loans (966) (4,829)
Loans charged-off (14) (132)
Transfers to other real estate owned (22) (491)
----------- -----------
Balance at end of period $ 68,690 $ 71,594
=========== ===========
Although loan originations decreased to $917,000 during the three months ended
June 30, 1996 from $2.7 million during the same quarter of 1995 so did the sale
of loans decrease. The sale of loans decreased to $966,000 for the quarter
ended June 30, 1996 compared to $4.8 million for the same quarter of 1995. The
effort by management during the period ending June 30, 1996 was to continue to
improve loan quality. The loan charge-offs decreased to $14,000 for the
quarter ending June 30, 1996 from $132,000 for the same period of 1995. Also,
the Company only transferred $22,000 in loans to other real estate owned for
the quarter ended June 30, 1996 whereas, the Company transferred $491,000 to
other real estate owned for the quarter ended June 30, 1995.
ASSET QUALITY
Management seeks to maintain a high quality of assets through conservative
underwriting and sound lending practices. The majority of the loans in
Bancorp's loan portfolio are collateralized by residential real estate
mortgages. As of June 30, 1996 approximately 79% of the total loan portfolio
was collateralized by this type of property. The level of delinquent loans and
real estate owned also is relevant to the credit quality of a loan portfolio.
As of June 30, 1996, total non-performing assets were $1.3 million or 1.47% of
total assets, compared to $1.2 million or 1.43% of total assets for the
previous quarter.
In an effort to maintain the quality of the loan portfolio, management seeks to
minimize higher risk types of lending. In view of the relative significance of
real estate related loans, a downturn in the value of the real estate could
have an adverse impact on Bancorp's profitability. However, as part of its
loan portfolio management strategy, Bancorp, generally limits its loans to a
minimum of 80% of the value of the underlying real estate as determined by
appraisal.
(16)
18
Commercial loans also entail risks since repayment is usually dependent upon
the successful operation of the commercial enterprise. They also are subject
to adverse conditions in the economy. Commercial loans are generally riskier
than mortgage loans because they are typically underwritten on the basis of the
ability to repay from the cash flow of a business rather than on the ability of
the borrower or guarantor to repay. Further, the collateral underlying a
commercial loan may depreciate over time, cannot be appraised with as much
precision as real estate, and may fluctuate in value based on the success of
the business.
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities which would cause them to be similarly impacted
by economic or other conditions. Bancorp, on a routine basis, monitors these
concentrations in order to consider adjustments in its lending practices to
reflect economic conditions, loan to deposit ratios, and industry trends.
Concentrations of loans in the following categories constituted the total loan
portfolio as of June 30, 1996:
Commercial loans 5%
Real estate mortgage loans 92%
Installment and other loans 3%
---
100%
===
As of June 30, 1996 no concentration of loans within any portfolio category to
any group of borrowers engaged in similar activities or in a similar business
exceeded 10% of total loans, except that as of such date loans collateralized
with mortgages on real estate represented 92% of the loan portfolio and were to
borrowers in varying activities and businesses.
The Loan Committee of the Board of Directors of KFB concentrates its efforts
and resources, and that of its senior management and lending officers, on loan
review and underwriting procedures. Internal controls include ongoing reviews
of loans made to monitor documentation and the existence and valuations of
collateral. In addition, management of KFB has established a review process
with the objective of identifying, evaluating, and initiating necessary
corrective action for marginal loans. The goal of the loan review process is
to address classified and nonperforming loans as early as possible.
CLASSIFICATION OF ASSETS
Generally, interest on loans accrues and is credited to income based upon the
principal balance outstanding. It is management's policy to discontinue the
accrual of interest income and classify a loan as non-accrual when principal or
interest is past due 90 days or more and the loan is not adequately
collateralized, or when in the opinion of management, principal or interest is
not likely to be paid in accordance with the terms of the obligation. Consumer
installment loans are generally charged-off after 90 days of delinquency unless
adequately collateralized and in the process of collection. Loans are not
returned to accrual status until principal and interest payments are brought
current and future payments appear reasonably certain. Interest accrued and
unpaid at the time a loan is placed on non- accrual status is charged against
interest income. Subsequent payments received are applied to the outstanding
principal balance.
(17)
19
Real estate acquired by Bancorp as a result of foreclosure or by deed in lieu
of foreclosure is classified as other real estate owned ("OREO"). Bancorp
considers the collateral for a loan in-substance foreclosure when the debtor
has little or no equity in the collateral, expects repayment for the loan to
come only from the operation and sale of the collateral, and the borrower has
either effectively abandoned control of the collateral or has retained control
of the collateral but will be unable to rebuild equity in the collateral or
repay the loan. At June 30, 1996 no loans were considered to be in-substance
foreclosed.
OREO properties are recorded at the lower cost or fair value less estimated
selling costs, and the estimated loss, if any, is charged to the allowance for
credit losses at the time it is transferred to OREO. Further allowances for
losses in OREO are recorded at the time management believes additional
deterioration in value has occurred.
The following table sets forth certain information on nonaccrual loans and real
estate owned, the ratio of such loans and real estate owned to total assets as
of the dates indicated, and certain other related information.
At June 30,
-------------------------------
(Dollars in Thousands)
-------------------------------
1996 1995
---- ----
Non-accrual loans:
Commercial real estate $ 310 $ 54
Residential mortgage loans 532 668
Commercial loans
68 68
Consumer and other loans - 0 - - 0 -
--------- ------------
Total nonaccrual loans $ 910 $ 790
========= ============
Accruing loans over 90 days delinquent - 0 - - 0 -
Troubled debt restructuring - 0 - - 0 -
--------- ------------
Total nonperforming loans $ 910 $ 790
========= ============
Other real estate owned:
Real estate acquired by
foreclosure or deed
in lieu of foreclosure 346 777
Total nonperforming loans and
other real estate owned $ 1,256 1,567
Total nonperforming loans as a per-
centage of total loans 1.32% 1.1%
Total nonperforming loans as a per-
centage of total assets 1.06% 0.88%
Total nonperforming loans and real
estate owned as a percentage
of total assets 1.47% 1.75%
(18)
20
The total nonperforming loans increased approximately 15% from June 30, 1995 to
June 30, 1996. Total nonperforming loans were $790,000 at June 30, 1995 and
increased to $910,000 at June 30, 1996. The increase was primarily
attributable to a commercial real estate loan in the amount of $310,000 which
was placed in non-accrual status for the period ended June 30, 1996.
Other real estate owned, either acquired by foreclosure or by deed in lieu of
foreclosure decreased 55% from June 30, 1995 to June 30, 1996, from
approximately $777,000 to $346,000, respectively. The decrease in other real
estate owned caused the total nonperforming loans and other real estate owned
to decrease 20% between June 30, 1995 and June 30, 1996.
Due to an overall decrease in total loans receivable from $71.6 million at June
30, 1995 to $68.7 million at June 30, 1996 and coupled with the aforementioned
15% increase in total nonperforming loans the ratio of total nonperforming
loans as a percentage of total loans increased from 1.10% at June 30, 1995 to
1.32% at June 30, 1996.
Also, due to the above referenced increase in total nonperforming loans and a
corresponding decrease in total assets from $89.7 million at June 30, 1995 to
$85.4 million at June 30, 1996 the ratio for total nonperforming loans as a
percentage of total assets increased from 0.88% at June 30, 1995 to 1.06% at
June 30, 1996. However, due to the aforementioned decrease in other real
estate owned the ratio of total nonperforming loans and real estate owned as a
percentage of total assets decreased from 1.75% at June 30, 1995 to 1.47% at
June 30, 1996 in spite of the decrease in total assets from $89.7 million to
$85.4 million, respectively.
ALLOWANCE FOR CREDIT LOSSES
In originating loans, KFB recognizes that credit losses will be experienced and
that the risk of loss will vary with, among other things, the type of loan
being made, the credit worthiness of the borrower over the term of the loan
and, in the case of a collateralized loan, the quality of the collateral for
the loan as well as general economic conditions. It is management's policy to
attempt to maintain an adequate allowance for credit losses based on, among
other things, KFB's historical loan loss experience, evaluation of economic
conditions and regular reviews of any delinquencies and loan portfolio quality.
Specific allowances are provided for individual loans when ultimate collection
is considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the net realizable value
of the collateral for the loan. Management recognizes the greater inherent
risks in connection with commercial and consumer lending.
Management continues to actively monitor KFB's asset quality and to charge-off
loans against the allowance for credit losses when appropriate or to provide
specific loss allowances when necessary. Although management believes it uses
the best information available to make determinations with respect to the
allowance for credit losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in
making the initial determinations. KFB's allowance for credit losses at June
30, 1995 was $607,450 and Bancorp decreased the allowance to $599,535 at March
31, 1996. Bancorp further decreased the allowance to $596,359 at June 30,
1996, reflecting management's intent to maintain reserves at a level management
believes to be adequate when compared with KFB's non-performing loans and total
loans.
(19)
21
The following table sets forth information with respect to activity in
Bancorp's allowance for credit losses during the periods indicated:
Three Months Ended
June 30,
-------------------------------
1996 1995
---- ----
( Dollars in Thousands)
Allowance at beginning of period $ 600 $ 613
Charge-offs:
Commercial real estate --- ---
Commercial loans --- ---
Consumer loans --- ---
Residential real estate 15 132
------------ -----------
Total loans charged-off (15) (132)
------------ -----------
Recoveries 11 25
Net charge-offs (3) (107)
Provision for credit losses charged to
operating expenses -0- 101
Allowance at end of period $ 596 $ 607
=========== ===========
Net charge-offs as a percentage
of average loans outstanding 0.001% 0.15%
Allowance for credit losses as a
percentage of period-end total loans 0.87% 0.85%
Allowance for credit losses as a
percentage of nonperforming loans 65.49% 76.83%
------------ -----------
Average loans outstanding, net $ 69,558 $ 72,427
------------ -----------
Period-end total loans $ 68,690 $ 71,594
============ ===========
(20)
22
The following table presents information regarding KFB's total allowance for
losses as well as the allocation of such amounts to the various categories of
loans:
At June 30,
-----------------------------------------------
1996 1995
-------------------- -----------------------
% of % of
Loan to Loans to
(Dollars in thousands) Amount Total Amount Total
--------- ------- -------- --------
Commercial loans $ 30 5% $ 24 4%
Commercial real estate loans 77 13% 97 16%
Residential real estate loans 471 79% 473 78%
Consumer loans and other 18 3% 13 2%
--------- ----- -------- -----
Total allowance for credit
losses $ 596 100% $ 607 100%
========= ===== ======== =====
The allowance for credit losses represented .87% of the total loans outstanding
as of June 30, 1996, compared with .85% of the total loans outstanding as of
June 30, 1995.
INVESTMENT SECURITIES
KFB's investment securities portfolio at June 30, 1996 primarily consisted of
United States Treasury and federal agency securities. Although investment
securities generally have a lower yield than loans, investment securities
increase the quality of Bancorp's assets by virtue of the guarantees that back
them, are more liquid than loans, and may be used to collateralize borrowings
or other obligations of Bancorp. Due to repayment and prepayments of the
underlying loans, mortgage-backed securities are substantially less than the
scheduled maturities. Changes in interest rates may also affect the average
life, yield to maturity, and related market value of Bancorp's securities
portfolio.
(21)
23
The following table sets forth the carrying value of investment securities held
by Bancorp at the dates indicated:
At June 30,
----------------------------------------------------
1996 1995
-------------- ------------------
( Dollars in thousands )
Available for Sale (1):*
U.S. Treasury Securities $ 968 $ 966
Held-to-maturity (2):**
U.S. Treasury Securities --- ---
GNMA certificates 2,684 3,318
FNMA certificates --- ---
Collateralized mortgage
obligations 6,328 6,406
Obligations of states and
municipalities 51 52
-------------- -----------------
Total held-to- $ 9,063 $ 9,776
maturity
-------------- -----------------
Total Investment Securities $ 10,031 $ 10,742
============== =================
* (1) Carried at estimated market value.
** (2) Carried at amortized cost.
Bancorp's mortgage backed securities consist of three Federal Home Loan
Mortgage Corporation (FHLMC) and two Federal National Mortgage Association
(FNMA) obligations. The tranches for the five instruments have a current
average life of 2.7 years with the longest being 3.51 years and the shortest
being 1.49 years. Most have little or no extension risk should rates rise 300
basis points with the average life increasing to only 2.87 years. A fall in
interest rates of 300 basis points would shorten the average life to 1.32
years.
FHLMC is a corporate instrumentality of the United States, created by an act of
Congress on July 24, 1970 in order to increase the availability of mortgage
credit for the financing of housing. FNMA is a government sponsored
corporation subject to regulation by the Secretary of HUD and purchases and
resells residential mortgages insured by FHA or guaranteed by the VA, as well
as conventional home mortgages. Credit risk is the risk of loss due to a
counter party's unwillingness or inability to pay its obligations. Given the
issuers of these obligations, Bancorp sees little or no credit risk.
Interest rate risk arises when a change in interest rates results in a change
in the value of a financial instrument. The magnitude of this change depends
on the sensitivity of the instrument to changes in interest rates as well as
the absolute change in interest rates. Details of each instrument are as
follows:
The first FHLMC is being carried at $800,000 and has a stated interest rate of
5.25%. This particular tranche has a current average life of 1.49 years with
virtually no extension risk should rate rise 300 basis points (1.67 average
life) and would shorten to a 0.88 year average life if rates fall 300 basis
points. The market price could fluctuate in a +/ - 300 basis point interest
rate swing from +3.3% to - 4.8%.
(22)
24
The second FHLMC is being carried at $504,491 and has a stated interest rate of
5.5%. This particular tranche has a current average life of 3.32 years with an
extension risk of only 6 months should rates rise 300 basis points.
Prepayments should increase if rates fall 300 basis points and would shorten
the average life to 1.37 years. The market price could fluctuate in a +/ -
300 basis point interest rate swing from +7.6% to - 10.2%.
The third FHLMC is being carried at $996,874 and has a stated interest rate of
5.5%. This particular tranche has a current average life of 3.51 years with no
extension risk should rates rise 300 basis points. Prepayments should increase
if rates fall 300 basis points and would cause the average life to shorten to
1.96 years. The market price could fluctuate in a +/ - 300 basis point
interest rate swing from +7.7% to - 8.8%.
The first FNMA is being carried at $2,009,040 and has a stated interest rate of
5.25%. This particular tranche has a current average life of 1.85 years with
virtually no extension risk should rates rise 300 basis points. Prepayments
should increase slightly if rates fell 300 basis points and would cause the
average life to shorten to 1.09 years. The market price could fluctuate in a
+/ - 300 basis point interest rate swing from +4.3% to - 5.0%.
The second FNMA is being carried at $2,017,113 and has a stated interest rate
of 5.75%. This particular tranche has a current average life of 3.35 years
with virtually no extension risk should rates rise 300 basis points.
Prepayments should increase slightly if rates fell 300 basis points and would
cause the average life to shorten to 1.32 years. The market price could
fluctuate in a +/ - 300 basis point interest rate swing from +6.2% to - 8.4%.
The following table sets forth, by maturity distribution, certain information
pertaining to the investment securities portfolio as follows:
After One Year After Five Years
-------------- ----------------
One Year or Less to Five Years to Ten Years After Ten Year Total
----------------- ----------------- ----------------- ----------------- -----------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
(Dollars in thousands)
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
June 30, 1996:
U.S.Treasury
securities --- --- $ 968 4.75% --- --- --- --- $ 968 4.75%
GNMA certificates --- --- --- --- --- --- 2,684 7.38% 2,684 7.38%
FNMA certificates --- --- --- --- --- --- --- --- --- ---
Collateralized
mortgage obligations --- --- 2,009 5.25% --- --- 4,319 5.50% 6,328 5.59%
Obligations of state
and municipal 51 5.75% --- --- --- --- --- --- 52 5.75%
--------- ---- ------- ---- ------- ------- ------ ---- ------- ----
Total $ 51 5.75% $ 2,977 5.08% --- --- $7,003 6.44% $10,031 5.96%
========= ==== ======= ==== ======= ======= ====== ==== ======= ====
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25
DEPOSIT ACTIVITIES
Deposits are the major source of Bancorp's funds for lending and other
investment purposes. Deposits are attracted principally from within Bancorp's
primary market area through the offering of a broad variety of deposit
instruments including checking accounts, money market accounts, regular
savings accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more) and retirement savings plans.
Maturity terms, service fees and withdrawal penalties are established by
Bancorp on a periodic basis. The determination of rates and terms is
predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.
FDIC regulations limit the ability of certain insured depository institutions
to accept, renew, or rollover deposits by offering rates of interest which are
significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in
such depository institutions' normal market area. Under these regulations,
"well capitalized" depository institutions may accept, renew, or roll over
deposits at such rates with a waiver from the FDIC (subject to certain
restrictions on payments of rates), and "undercapitalized" depository
institutions may not accept , renew or roll over deposits at such rates. The
regulations contemplate that the definitions of "well capitalized", "adequately
capitalized" and "undercapitalized" will be the same as the definitions adopted
by the agencies to implement the prompt corrective action provisions of
applicable law. KFB's capital ratio's met the regulatory definition of
"adequately capitalized" at June 30, 1996.
The following table shows the distribution of, and certain other information
relating to, Bancorp's deposit accounts by type:
At June 30 ,
------------------------------------------------------------------------
1996 1995
------------------------------------------------------------------------
% of % of
Amount Deposits Amount Deposits
------ -------- ------ --------
(Dollars in thousands)
Demand deposits $ 2,294 3% $ 2,827 4%
NOW deposits 5,310 7% 5,758 7%
Money market deposits 3,276 4% 4,641 6%
Savings deposits 12,073 15% 2,730 3%
--------- ------ ----------- ------
Subtotal 22,953 29% 15,956 20%
--------- ------ ----------- ------
Certificates of deposit(1) 55,379 71% 62,220 80%
--------- ------ ----------- ------
Total deposits $ 78,332 100% $ 78,176 100%
========= ====== =========== ======
(1) Includes individual retirement accounts ("IRA'") totalling $ 3.0 million and
$ 3.2 million at June 30, 1996 and 1995 all of which are in the form of
certificates of deposit.
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26
The following table shows the average amount outstanding and the average rate
paid on each of the following deposit account categories during the periods
indicated:
Nine Months Ended June 30,
--------------------------------------------------------------------
1996 1995
------------------------------ ------------------------
Average Average Average Average
Balance Yield Balance Yield
------- ----- ------- -----
(Dollars in thousands)
Demand, money market and NOW $ 10,155 1.79% $ 12,032 2.30%
Savings deposits 11,986 4.72% 2,373 3.96%
Certificate of deposit 55,472 5.63% 60,297 6.32%
-------- ---- ---------- ----
Total interest-bearing deposits $ 77,613 4.99% $ 74,702 5.60%
======== ==== ========== ====
Bancorp does not have a concentration of deposits from any one source, the loss
of which would have a material adverse effect on Bancorp. Management believes
that substantially all of Bancorp's depositors are residents in its primary
market areas. Bancorp currently does not accept brokered deposits. As shown
in the tables below, a significant amount of Bancorp's certificates of deposit
will mature during the following year ending June 30, 1997. The high volume
of maturities during this period is primarily due to customer demand for
certificates of deposit having original maturities of 12 months or less. Based
upon current and anticipated levels of interest rates and past practice.
Bancorp management anticipates that substantially all of Bancorp's certificates
of deposit maturing during this time period will be renewed or replaced by
certificates of deposit issued to other customers at competitive market rates,
which may be higher or lower than the rates currently being paid.
Consequently, Bancorp management does not believe that the maturity of
Bancorp's certificates of deposit during the next year ending June 30, 1997,
will have a material adverse effect on Bancorp's liquidity. However, if
Bancorp is required to pay substantially higher rates to obtain the renewal of
these or other certificates of deposit or alternative sources of funds, the
higher net interest expense could have a material adverse effect on Bancorp's
net income.
Jumbo certificates ($100,000 and over) mature as follows:
At June 30,
------------------------------------------------------------
1996 1995
---------------------------- ------------------------
(Dollars in thousands)
Average
Amount Rate Amount Average
------ ------- ------ -------
Due in three months or less $ 713 5.38% $ 517 5.18%
Due in three months to six months 713 5.47% 402 5.75%
Due from six month to one year 2,436 6.15% 1,758 6.45%
Due over one year 295 6.29% 2,070 6.69%
--------- --------
Total $ 4,217 $ 4,747
========= ========
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27
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data concerning Bancorp
presented in this Form 10QSB have been prepared in accordance with generally
accepted accounting principals, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. The primary impact of inflation on the operations of Bancorp is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant impact on the performance of a financial institution than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
FUTURE ACCOUNTING REQUIREMENTS
SFAS No. 107 extends fair value disclosure practices for some instruments by
requiring all entities to disclose the fair value of financial instruments,
both assets and liabilities recognized and not recognized in the balance sheet,
for which it is practicable to estimate fair value. This Statement is
effective for Bancorp's financial statements issued for fiscal years ending
after December 15, 1995. SFAS No. 107 requires only additional disclosure and
will not have any impact on the financial statements of Bancorp.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
27 Financial Data Schedule (For SEC Use Only)
Reports
No Reports on Form 8-K were filed during the quarter ended June 30, 1996.
Signatures
Pursuant to the requirement 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.
KEY FLORIDA BANCORP, INC.
(REGISTRANT)
DATED: August 12, 1996 BY: /S/ Daniel S. Hager, President
-----------------------------------------------
Daniel S. Hager, President
DATED: August 12, 1996 BY: /S/ Ronald A. Monteau, Chief Accounting Officer
------------------------------------------------
Ronald A. Monteau, Chief Accounting Officer
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