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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
--------------------
For the Quarterly Period Ended December 31, 1997 Commission File #0-21942
FIRST PALM BEACH BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0418027
(State of Incorporation) (I.R.S. Employer Identification No.)
450 South Australian Avenue
West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 655-8511
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 5,054,746 at January 31, 1998.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
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 December 31, 1997 (unaudited).......................................3
Consolidated Statements of Operations for the Three
Months ended December 31, 1996 and 1997 (unaudited)........................................4
Consolidated Statements of Changes in Stockholders' Equity
for the Three Months ended December 31, 1996 and 1997 (unaudited)..........................5
Consolidated Statements of Cash Flows for the Three Months
ended December 31, 1996 and 1997 (unaudited)...............................................7
Notes to Unaudited Consolidated Financial Statements.......................................9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................11
PART II. OTHER INFORMATION
Item 1 Legal Proceedings.........................................................................16
Item 2 Changes in Securities.....................................................................16
Item 3 Default upon Senior Securities............................................................16
Item 4 Submission of Matters to a Vote of Security Holders.......................................17
Item 5 Other Information.........................................................................17
Item 6 Exhibits and Reports on Form 8-K..........................................................17
Signature Page..........................................................................................18
Exhibit Index...........................................................................................19
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Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
for Forward-Looking Information
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), First Palm Beach Bancorp,
Inc., (the "Company") is hereby filing cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in "forward-looking statements" (as such term is
defined in the Reform Act) of the Company made by or on behalf of the Company
which are made orally, whether in presentations, in response to questions or
otherwise, or in writing in this report or any other future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases or other public or shareholder communications. Any 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 and, accordingly, such statements
involve estimates, assumptions, and uncertainties which could cause actual
results to differ materially from those expressed in the forward-looking
statements. Accordingly, any such statements are qualified in their entirety by
reference to, and are accompanied by, the following 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.
The Company cautions that the following important factors could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include those
related to the national economic environment, particularly in the region in
which the Company's subsidiary, First Bank of Florida (the "Bank"), operates,
competition, fiscal and monetary policies of the U.S. Government, changes in
governmental legislation and regulations affecting financial institutions,
including regulatory fees and capital requirements, changes in prevailing
interest rates, credit risk management and asset/liability management, the
financial and securities markets, deposit flows, changes in the quality or
composition of the Bank's loan and investment portfolios, and the availability
of and cost associated with sources of liquidity.
All such factors are difficult to predict, contain uncertainties which may
materially affect actual results and are beyond the control of the Company.
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PART I - FINANCIAL INFORMATION
FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
September 30, December 31,
1997 1997
------------- -------------
(Unaudited)
ASSETS
Cash and amounts due from depository institutions.................................... $ 21,123 $ 25,459
Interest earning deposits............................................................ 78,806 94,158
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Total cash and cash equivalents.................................................. 99,929 119,617
Securities available-for-sale........................................................ 59,468 49,883
Securities held-to-maturity.......................................................... 14,988 4,990
Mortgage-backed and related securities available-for-sale............................ 208,342 207,483
Mortgage-backed and related securities held-to-maturity.............................. 213,303 206,558
Trading securities................................................................... - 5,138
Loans receivable - net of allowance for loan losses.................................. 1,144,100 1,156,797
Real estate owned, at fair value..................................................... 1,795 2,403
Repossessed automobiles, at estimated fair value..................................... 474 637
Office properties and equipment, net................................................. 28,313 28,431
Federal Home Loan Bank stock, at cost................................................ 18,296 19,045
Accrued interest receivable.......................................................... 9,879 9,732
Goodwill............................................................................. 2,631 2,575
Other assets......................................................................... 6,902 7,788
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Total assets..................................................................... $ 1,808,420 $ 1,821,077
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts..................................................................... $ 1,229,279 $ 1,249,049
Advances from Federal Home Loan Bank................................................. 365,925 380,900
Securities sold under agreements to repurchase....................................... 28,946 15,186
Senior debentures - net of unamortized issuance costs................................ 33,839 33,889
Advances by borrowers for taxes and insurance........................................ 17,866 4,665
Other liabilities.................................................................... 19,538 20,928
Deferred income taxes................................................................ (3) 448
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Total liabilities................................................................ $ 1,695,390 $ 1,705,065
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 5,054,746
(net of treasury stock) at September 30, 1997 and December 31,
respectively....................................................................... 55 55
Additional paid-in capital........................................................... 53,521 54,007
Retained earnings, substantially restricted.......................................... 71,397 72,826
Treasury stock, at cost (448,629 shares at September 30, 1997 and 441,629
shares at December 31, 1997)....................................................... (9,825) (9,671)
Common stock purchased by:
Employee stock ownership plan........................................................ (955) (748)
Recognition and retention plans...................................................... (117) (87)
Unrealized decrease in fair value on available-for-sale securities
(net of applicable income taxes)................................................... (1,046) (370)
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Total stockholders' equity........................................................... 113,030 116,012
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Total liabilities and stockholders' equity........................................... $ 1,808,420 $ 1,821,077
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These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements on pages 9 and 10 herein and the
Notes to Consolidated Financial Statements appearing in First Palm Beach
Bancorp, Inc.'s 1997 Annual Report to Stockholders.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
For the Three Months Ended
-------------------------------------
December 31, 1996 December 31, 1997
----------------- ------------------
INTEREST INCOME:
Loans $ 21,067 $ 22,907
Securities available-for-sale 2,055 1,398
Securities held-to-maturity 268 146
Mortgage-backed and related securities available-for-sale 1,312 3,865
Mortgage-backed and related securities held-to-maturity 2,098 3,745
Trading securities - 84
Other 188 351
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Total interest income 26,988 32,496
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INTEREST EXPENSE:
Deposits 13,796 15,147
Advances from Federal Home Loan Bank 2,623 5,341
Securities sold under agreements to repurchase 149 188
Senior debentures - 967
----------------- ------------------
Total interest expense 16,568 21,643
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Net interest income 10,420 10,853
Provision for loan losses 802 968
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Net interest income after provision for loan losses 9,618 9,885
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OTHER INCOME:
Servicing income and other fees 1,002 1,107
Net gain on sale of loans and mortgage-backed and related securities 531 592
Net gain on sale of securities available-for-sale - 186
Net realized and unrealized gain on trading securities - 696
Miscellaneous 374 793
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Total other income 1,907 3,374
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OTHER EXPENSES:
Employee compensation and benefits 4,083 5,492
Occupancy and equipment 1,394 1,840
Federal deposit insurance premium 412 197
Provision for losses and net losses (gains) on sale of real estate owned (38) 95
Advertising and promotion 372 229
Miscellaneous 1,515 1,595
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Total other expenses 7,738 9,448
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Income before provision for income taxes 3,787 3,811
Provision for income taxes 1,514 1,497
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Net income $ 2,273 $ 2,314
================= ==================
Earnings per share:
Basic $ 0.46 $ 0.47
Fully diluted $ 0.45 $ 0.45
These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements on pages 9 and 10 herein and the
Notes to Consolidated Financial Statements appearing in First Palm Beach
Bancorp, Inc.'s 1997 Annual Report to Stockholders.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Unrealized
(Decrease)
Common Common Increase 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
---------- ----------- ----------- ---------- ----------- ----------- --------------- ------------
THREE MONTHS ENDED
DECEMBER 31, 1996
Balance at
September 30, 1996........ $ 55 $ 52,891 $ 65,064 $ (8,660) $ (1,769) $ (161) $ (1,995) $ 105,425
Net income................ - - 2,273 - - - - 2,273
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..... - - - - - (10) (10)
Change in unrealized
losses on securitie
available-for-sale
and mortgage-backed
and related securities
available-for-sale,
net of income taxes..... - - - - - - 123 123
Amortization of deferred
compensation, Employee
Stock Ownership
Plan and Recognition
and Retention Plans..... - 198 - - 189 (46) - 341
Purchase of Treasury Stock
at cost (54,000 shares). - - - (1,243) - - - (1,243)
Exercise of stock options
by certain directors and
employees............... - (12) - 22 - - - 10
Declaration of dividends
of $0.15 per share...... - - (760) - - - - (760)
--------- ---------- ---------- --------- --------- --------- ----------- ------------
Balance at
December 31, 1996......... $ 55 $ 53,077 $ 66,577 $ (9,881) $ (1,580) $ (207) $ (1,882) $ 106,159
========= ========== ========== ========= ========= ========= =========== ============
(CONTINUED)
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Unrealized
(Decrease)
Common Common Increase in
Additional Stock Stock Fair Value Total
Common Paid-In Retained Treasury Purchased Purchased Available-for- Stockholders'
Stock Capital Earnings Stock by ESOP by RRP Sale Securities Equity
---------- ----------- ----------- ---------- ----------- ----------- --------------- -------------
THREE MONTHS ENDED
DECEMBER 31, 1997
Balance at
September 30, 1997...... $ 55 $ 53,521 $ 71,397 $ (9,825) $ (955) $ (117) $ (1,046) $ 113,030
Net income.............. - - 2,314 - - - - 2,314
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 - - - - - 1 1
Change in unrealized
losses on securities
available-for-sale
and mortgage-backed
and related securities
available-for-sale,
net of income taxes..... - - - - - - 675 675
Amoritzation of deferred
compensation, Employee
Stock Ownership Plan and
Recognition and Retention
Plans................... - 450 - - 207 30 - 687
Exercise of stock options
by certain directors and
employees............... - 36 - 154 - - - 190
Declaration of dividends
of $0.175 per share..... - - (885) - - - - (885)
---------- ----------- ----------- ---------- ---------- ---------- ------------ ---------
Balance at
December 31, 1997....... $ 55 $ 54,007 $ 72,826 $ (9,671) $ (748) $ (87) $ (370) $ 116,012
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These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements on pages 9 and 10 herein and the
Notes to Consolidated Financial Statements appearing in First Palm Beach
Bancorp, Inc.'s 1997 Annual Report.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
December 31, December 31,
1996 1997
------------- -------------
Cash flow from (for) operating activities:
Net income......................................................................... 2,273 2,314
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation..................................................................... 381 639
Employee Stock Ownership Plan and Recognition and Retention Plan compensation
expense........................................................................ 341 687
Amortization of Senior Debentures' issuance cost................................. - 61
Accretion of discounts, amortization of premiums, and other deferred yield items. (173) (457)
Amortization of goodwill......................................................... 49 56
Provision for loan losses........................................................ 802 968
Provision for losses and net (gains) losses on sales of real estate owned........ (38) 95
Net realized and unrealized gain on trading securities........................... - (696)
Purchase of trading securities..................................................... - (116,830)
Sale of trading securities......................................................... - 112,162
Net gain on sale of:
Loans.......................................................................... (18) -
Mortgage-backed and related securities available-for-sale...................... (504) (600)
Securities available-for-sale.................................................. - (186)
Property and equipment......................................................... - (160)
(Increase) decrease in accrued interest receivable............................... (168) 147
(Increase) decrease in other assets.............................................. 43 (886)
Increase (decrease) in other liabilities - net of change in dividends payable
and deferred taxes............................................................. (7,216) 1,262
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Net cash provided by operating activities.................................... (4,228) (1,424)
------------- -------------
Cash flow from (for) investing activities:
Loan originations and principal payments on loans.................................. (44,428) (10,331)
Principal payments received on mortgage-backed and related securities.............. 12,426 11,246
Purchases of:
Loans............................................................................ (102) (5,347)
Mortgage-backed and related securities held-to-maturity.......................... (14,223) -
Mortgage-backed and related securities available-for-sale........................ (12,769) (75,030)
Securities held-to-maturity...................................................... (15,413) -
Securities available-for-sale.................................................... (46,820) (19,983)
Office properties and equipment.................................................. (4,417) (844)
Proceeds from sales of:
Loans............................................................................ 4,426 124
Mortgage-backed and related securities available-for-sale........................ 31,990 73,564
Securities available-for-sale.................................................... 15,000 29,905
Repossessed automobiles.......................................................... 2,842 711
Real estate acquired in settlement of loans...................................... 403 622
Office properties and equipment.................................................. - 247
(Purchase) Sale of Federal Home Loan Bank stock.................................... 3 (749)
Proceeds from maturities of securities............................................. 15,297 10,000
Other investing activities......................................................... (369) (240)
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Net cash used for investing activities........................................... (56,154) 13,895
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(CONTINUED)
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
December 31, December 31,
1996 1997
------------- -------------
Cash flow from (for) financing activities:
Purchase of treasury stock at cost................................................. (1,243) -
Exercise of stock options.......................................................... 10 190
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts.............................. 14,309 22,009
Certificates of deposit.......................................................... 16,738 (2,239)
Advances from Federal Home Loan Bank............................................. (25) 14,975
Securities sold under agreement to repurchase.................................... - (13,760)
Advances by borrowers for taxes and insurance.................................... (11,908) (13,201)
Dividends paid on stock.......................................................... (509) (757)
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Net cash provided by financing activities...................................... 17,372 7,217
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Net increase in cash and cash equivalents............................................ (43,010) 19,688
Cash and cash equivalents, beginning of period....................................... 161,413 99,929
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Cash and cash equivalents, end of period............................................. $ 118,403 $ 119,617
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Supplemental disclosure of cash flows
Supplemental disclosure of cash flow information:
Cash paid for income taxes....................................................... $ 0 $ 0
============= =============
Cash paid for interest on deposits and other borrowings.......................... $ 17,350 $ 22,645
============= =============
Supplemental schedule of noncash investing and financing activities:
Repossessed automobiles acquired in settlement of loans.......................... $ 5,918 $ 2,678
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Real estate acquired in settlement of loans and in-substance foreclosed loans.... $ 463 $ 1,311
============= =============
Changes in unrealized loss (gain) on available-for-sale securities,
net of income taxes.............................................................. $ (113) $ (676)
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These financial statements should be read in conjunction with the Notes to
Unaudited Consolidated Financial Statements on pages 9 and 10 herein and the
Notes to Consolidated Financial Statements appearing in First Palm Beach
Bancorp, Inc.'s 1997 Annual Report to Stockholders.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(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 (the "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. Certain
amounts included in prior periods' consolidated financial statements
have been reclassified to conform to the current period's presentation.
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 three months ended December 31, 1997 are not necessarily
indicative of results that may be expected for the entire fiscal year
ending September 30, 1998.
(2) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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 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. 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. Both statements are effective for
fiscal years beginning after December 15, 1997, with earlier
application permitted.
(3) Earnings Per Share
In February 1997, the FASB issued SFAS #128 "Earnings per Share." 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 excludes dilution. For the quarters ended
December 31, 1997 and 1996 basic earnings per share were determined by
dividing net income for the period by the weighted average number of
shares of common stock outstanding which were 4,957,272 and 4,896,238,
respectively, 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
9
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in the earnings of the Bank. For the quarters ended December 31, 1997
and 1996 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 common stock equivalents outstanding which
were 5,162,002 and 5,038,596, respectively, excluding unallocated
shares held by the ESOP and unvested Recognition and Retention Plan
shares.
(4) Commitments and Contingencies
Commitments to originate loans of $27.9 million at December 31, 1997
represent the total principal amounts which the Bank plans to fund
within the normal commitment period of 60 to 90 days. As of December
31, 1997, the Bank had $3.5 million in commitments to purchase
securities. As of December 31, 1997, the Bank had $3.3 million in
commitments to purchase loans.
(5) Loans
An analysis of the changes in the allowance for loan losses for the
three months ended December 31, 1997 and fiscal year ended September
30, 1997, is as follows:
Fiscal Year Ended Three Months Ended
September 30, 1997 December 31, 1997
------------------ -------------------
(In thousands)
Balance at beginning of period $ 11,855 $ 6,046
Current provision 3,281 968
Charge-offs - net (9,090) (1,803)
------------------ -------------------
Ending balance $ 6,046 $ 5,211
================== ===================
On October 1, 1995, the Bank adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Recognition
and Disclosures," an amendment of SFAS No. 114. At December 31, 1997,
and September 30, 1997 the Bank's impaired loans consisted of the
following:
September 30, 1997 December 31, 1997
-------------------- ------------------
Impaired loan balances................................. $ 1,267 $ 709
Related allowance for loan losses...................... $ 349 $ 367
Average recorded investment in impaired loans.......... $ 4,924 $ 988
Interest income recognized during impairment period.... $ 921 -
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS DISCUSSION 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 (the "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.
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.
The Company's consolidated results of operation are primarily those of 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 December 31, 1997, the Bank had 48 full-service branches in Palm Beach,
Martin, Broward, Dade and Lee Counties, Florida. Two loan production offices are
located in Palm Beach County. As of December 31, 1997, the Bank operated four of
its full-service branches inside Winn-Dixie supermarkets and eighteen inside
Albertson's supermarkets. The Bank intends to open additional supermarket
branches at Albertson's in the future. During the quarter ended December 31,
1997, the Bank opened three full-service supermarket branches.
The Bank has four wholly-owned subsidiaries, only one of which, First Bank of
Florida Mortgage Corporation, which provides mortgage brokerage services to the
Bank, is currently active.
The Bank's results of operations depend primarily on net interest income, which
is the difference between the interest income earned on its loans 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 Bank'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. The Bank's operating expenses consist primarily of employee compensation,
occupancy expenses, FDIC insurance premiums and other general and administrative
11
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expenses. The Bank'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, 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
December 31, 1997, cash, amounts due from depository institutions and
interest-earning deposits totaled $119.7 million.
The Bank's primary sources of funds are deposits, proceeds from principal and
interest payments on loans, proceeds from the amortization of, the maturing of
and sales of securities, advances from the FHLB and securities sold under
agreements to repurchase ("reverse repurchase agreements"). Recently the Bank's
sources of funds included $25 million from a capital infusion from the Company
as a result of the issuance of $35 million 10.35% Senior Debentures in June of
1997. 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.
OTS regulations currently 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 preceding quarter) of its net withdrawable deposit accounts plus
short-term borrowings. The Bank historically has maintained a level of liquid
assets in excess of this regulatory requirements. The liquidity requirement at
September 30, 1997 was 5.0%. The requirement was changed during the quarter
ended December 31, 1997 to 4.0%. The Bank's average liquidity ratio was 7.0% and
8.8% at September 30, 1997 and December 31, 1997, respectively. Liquidity
management for the Bank 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 primary investment activity of the Bank is the origination of mortgage and
consumer loans. During the quarter ended December 31, 1997, the Bank originated
mortgage and consumer loans in the aggregate amount of $80.1 million as
compared to $96.5 million for the quarter ended December 31, 1996. 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 higher delinquency rates and a level of repossessed
assets which management deemed unacceptable and which resulted in higher loan
loss provisions. 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 December 31, 1997, the Bank had outstanding commitments to originate $27.9
million of loans and had $3.5 in commitments to purchase securities. At December
31, 1997, the Bank had $3.3 million in commitments to purchase loans. Management
is of the opinion that the Bank will have sufficient funds available to meet all
of these commitments. At December 31, 1997, certificates of deposits scheduled
to mature in one year or less after December 31, 1997 totaled $692.1 million.
Based on the Bank's past experience and current market conditions, management is
of the opinion that a significant portion of these funds will remain with the
Bank.
At December 31, 1997, the Bank exceeded each of the OTS capital requirements. At
December 31, 1997 both the Core (Tier 1) Capital to Adjusted Tangible Assets and
Tangible Capital to Tangible Assets ratios were 7.2% (minimum requirements 4.0%
and 1.5%, respectively). The Core (Tier 1) Capital to Risk-weighted Assets ratio
was 14.6% (well
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capitalized requirements 6.0%) and Total Capital to Risk-weighted Assets ratio
was 15.1% (minimum requirement 8.0%).
Changes in Financial Condition
Total assets increased $12.7 million to $1.821 billion at December 31, 1997 from
$1.808 billion at September 30, 1997. Cash and cash equivalents, securities
held-to-maturity, securities available-for-sale, trading securities,
mortgage-backed and related securities held-to-maturity and mortgage-backed and
related securities available-for-sale decreased $2.4 million to $593.7 million
at December 31, 1997 from $596.0 million at September 30, 1997. Loans receivable
increased by $12.7 million to $1.157 billion at December 31, 1997 from $1.144
billion at September 30, 1997. Loans originated amounted to $80.1 million (which
included $64.8 million of mortgage loans and $15.3 million of consumer loans)
during the quarter ended December 31, 1997 compared to $96.5 million (which
included $82.9 million of mortgage loans and $13.6 million of consumer loans)
during the quarter ended December 31, 1996. Indirect automobile loan balances
decreased to $76.4 million at December 31, 1997 from $88.4 million at September
30, 1997 primarily as a result of the repayment of such loans.
Deposit accounts increased $19.8 million to $1.249 billion at December 31, 1997
from $1.229 billion at September 30, 1997. The average interest rate paid on
deposits decreased to 4.98% as of December 31, 1997 from 4.99% as of September
30, 1997.
Advances from the FHLB and other borrowed funds increased $15.0 million to
$380.9 million from $365.9 million at September 30, 1997. Securities sold under
agreements to repurchase decreased $13.8 million to $15.2 million at December
31, 1997 from $28.9 million at September 30, 1997 due to the payoff of a portion
of the borrowings that matured in October 1997. Advances from borrowers for
taxes and insurance decreased by $13.2 million to $4.7 million at December 31,
1997 from $17.9 million at September 30, 1997 due to the remittance of escrowed
real estate taxes in November 1997.
Stockholders' equity increased $3.0 million to $116.0 million at December 31,
1997 from $113.0 million at September 30, 1997. Increases to stockholders'
equity during the period include net income of $2.3 million for the quarter
ended December 31, 1997 and an increase in the unrealized gains/losses on
available-for-sale securities of $0.7 million. Dividends were declared during
the quarter ended December 31, 1997 which reduced stockholders' equity by $0.9
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 that 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.
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 December 31, 1997, these loans made up approximately 49% of outstanding
mortgage loans. Approximately 7% of outstanding mortgage loans are loans with
seven year and ten year fixed rates which become one year adjustable loans
thereafter. These are classified as ARM loans. The Bank also manages its
exposure by purchasing short term securities and short average life and
adjustable-rate collateralized mortgage obligations. The Bank's one year
interest rate sensitivity gap as a percentage of total assets
13
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was a negative 13.1% at December 31, 1997 as compared to a negative 15.4% at
September 30, 1997. During a period of rising interest rates, a negative gap
would tend to result in a decrease in net interest income while a positive gap
would tend to increase net interest income. During a period of declining
interest rates a negative gap would generally be expected, absent the effect of
other factors, to result in a greater decrease in the cost of liabilities
relative to yield on assets and thus an increase in the net interest income.
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 quarter ended December 31, 1997,
non-performing assets decreased $0.6 million to $9.8 million from $10.4 million
at September 30, 1997. Non-performing loans decreased by $1.3 million to $6.7
million at December 31, 1997 from $8.1 million at September 30, 1997. Real
estate owned increased $0.6 million to $2.4 million at December 31, 1997 from
$1.8 million at September 30, 1997. Repossessed assets increased $163,000 to
$637,000 at December 31, 1997 from $474,000 at September 30, 1997. The overall
change in the composition of non-performing assets during the quarter ended
December 31, 1997 reflects the transfer of certain assets from non-performing
loans to real estate owned as the Bank progresses in disposing of these assets.
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.
ASSET QUALITY
(Dollars in thousands)
September 30, 1997 December 31, 1997
------------------ -----------------
Non-performing mortgage loans
delinquent more than 90 days $ 6,824 $ 5,485
Non-performing other loans
delinquent more than 90 days 1,262 1,257
----------------- -----------------
Total non-performing loans 8,086 6,742
Real estate owned, net of
related allowance 1,795 2,403
Repossessed assets,
net of related allowance 474 637
----------------- ------------------
Total non-performing assets $ 10,355 $ 9,782
================= ==================
Non-performing loans to total loans 0.68% 0.56%
Non-performing assets to total assets 0.57% 0.54%
Allowance for loan losses to
non-performing loans 74.77% 77.29%
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RESULTS OF OPERATIONS
Comparison of results in this section are for the three month periods ended
December 31, 1997 and December 31, 1996.
General
Net income for both the quarters ended December 31, 1997 and 1996 was $2.3
million.
Net Interest Income
Net interest income before provision for loan losses was $10.9 million for the
quarter ended December 31, 1997 as compared to $10.4 million for the quarter
ended December 31, 1996. The increase in net interest income was primarily due
to an increase in loans receivable to $1.157 billion at December 31, 1997 from
$1.044 billion at December 31, 1996.
The net interest margin declined to 2.50% for the quarter ended December 31,
1997 from 2.93% for the quarter ended December 31, 1996. The decrease in the net
interest margin was a result of the continued planned reductions in indirect
automobile loan balances, the cost of the Series A Debentures (subsequently
exchanged for the Series B Debentures as set forth above) and the effect of
lower yield on interest earning assets which was not offset by a corresponding
decrease in cost of funds. The average yield on interest earning assets
decreased from 7.60% to 7.50%, and the average cost of funds increased from
5.08% to 5.44% from December 31, 1996 to December 31, 1997, respectively.
Additionally, the decrease in the net interest margin was affected by the
current declining long-term interest rate environment resulting in a decreasing
difference between long-term and short-term interest rates.
Provision for Loan Losses
During the quarter ended December 31, 1997, the provision for loan losses
increased to $968,000 from $802,000 for the comparable period ended December 31,
1996.
Other Income
Other income increased to $3.4 million for the quarter ended December 31, 1997
from $1.9 million for the quarter ended December 31, 1996. During the quarter
ended December 31, 1997, the Bank sold securities and property resulting in a
net gain of $1.6 million, of which approximately $0.7 million was gain on the
sale of securities held in the trading portfolio, as compared to a net gain of
$0.5 million for the quarter ended December 31, 1996 on the sale of securities.
Miscellaneous income increased to $623,000 at December 31, 1997 from $330,000 at
December 31, 1996. Portions of this increase are due to additional fees
collected from use of the Bank's ATM machines by non-customers.
Other Expenses
Other expenses increased to $9.4 million for the quarter ended December 31, 1997
as compared to $7.7 million for the quarter ended December 31, 1996. This
increase was primarily due to an increase in employee compensation and benefits
to $5.5 million at December 31, 1997 from $4.1 million at December 31, 1996, as
well as an increase in occupancy and equipment to $1.8 million at December 31,
1997 from $1.4 million at December 31, 1996. These increases were the result of
the addition of eleven new full-service branches, the continued strengthening of
the credit review department, the addition of a commercial loan department and
expanded loan servicing requirements. This expansion in services resulted in the
number of employees increasing to 436 at December 31, 1997 from 395 at December
31, 1996.
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PART II - OTHER INFORMATION
FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
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
The Indenture entered into by the Company in connection with the issuance
of the 10.35% Series A Senior Debentures Due 2002, and the Series B Senior
Debentures Due 2002 for which such series A Debentures were exchanged on
December 23, 1997, includes certain covenants which, among other things,
(i) limit the Company's disposition of the voting stock of the Bank, other
than dispositions which (a) are for fair market value and, after giving
effect to such dispositions and to any potential dilution, the Company will
own not less than 80% of the shares of voting stock of the Bank free and
clear of any security interest; (b) are made in compliance with an order of
a court or regulatory authority of competent jurisdiction, a condition
imposed by any such court or authority permitting the acquisition by the
Company, directly or indirectly, of any other bank or entity the activities
of which are legally permissible for a bank holding company or a subsidiary
thereof to engage in, or an undertaking made to such authority in
connection with such an acquisition; (c) are made where the Bank, having
obtained any necessary regulatory approvals, unconditionally guarantees
payment when due of the principal of and interest on the Series A
Debentures; or (d) are made to the Company or any wholly-owned subsidiary
if such wholly-owned subsidiary agrees to be bound by the covenant as if it
were the Company and the Company agrees to maintain such wholly-owned
subsidiary as a wholly-owned subsidiary (notwithstanding the foregoing, the
Bank may be merged into or consolidated with another banking institution
if, after giving effect to such merger or consolidation, the Company or any
wholly-owned subsidiary owns at least 80% of the voting stock of such other
banking institution then issued and outstanding free and clear of any
security interest and if, immediately after giving effect thereto and
treating any such resulting banking institution thereafter as the Bank and
a subsidiary, for purposes of the Indenture, no Event of Default (as such
term is defined in the Indenture), and no event which, after notice or
lapse of time or both, would become an Event of Default, shall have
happened and be continuing); (ii) limit, to a percentage of net worth, the
Company's and the Bank's ability to become liable on certain forms of
indebtedness generally outside the normal course of the Company's and the
Bank's business; (iii) provide that the Company will not permit its
Consolidated Net Worth minus Goodwill to be less than $90 million; (iv)
provide that the Company shall not allow the Bank to be classified as other
than "well-capitalized"; and (v) restrict dividend or other distributions
of the Company and the Bank and stock repurchases by the Company in such a
way that any such dividends or stock repurchases after March 31, 1997 may
not exceed in the aggregate, the sum of (a) $10,000,000 plus (b) 75% (or
100% in the case of deficit) of consolidated net income for the period
beginning March 31, 1997 and ending and including the date such dividend,
distribution or stock repurchase (each a Restricted Payment) is declared or
made (plus 100% of the proceeds of issuances of equity securities after
March 31, 1997), and a Restricted Payment may not be made if at the time of
and immediately before the Restricted Payment is declared, and after giving
effect to the Restricted Payment a Default (as such term is defined in the
Indenture) or Event of Default is existing or shall have occurred within
365 days of the declaration of the Restricted Payment.
Item 3 Default upon Senior Securities
Not applicable.
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Item 4 Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on January 21, 1998.
The number of votes cast for, against or withheld, as well as the number of
abstentions as to each matter presented to such meeting were as follows:
1. NOMINEES FOR THREE-YEAR TERM FOR AGAINST & WITHHELD
---------------------------- --------- ------------------
Dr. Edward M. Eissey 4,069,263 213,581
Holly W. Hadley, M.D. 4,081,622 201,222
R. Randy Guemple 4,082,817 200,027
2. Ratification of the selection of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending September 30, 1998:
FOR AGAINST & ABSTAIN
--------- -----------------
4,080,719 202,125
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 October 21, 1997 regarding earnings release
issued on that date.
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FIRST PALM BEACH BANCORP, INC. AND SUBSIDIARY
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:
February 9, 1998 /s/ LOUIS O. DAVIS, JR.
-----------------------
Louis O. Davis, Jr.
President and Chief Executive Officer
(Duly Authorized Officer)
Date:
February 9, 1998 /s/ SUZANNE S. BRENNER
----------------------
Suzanne S. Brenner
Treasurer and Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
11 Statement Re: Computation of Per Share Earnings..............20
27 Financial Data Schedule (for SEC use only)...................21
19