As filed with the Securities and Exchange Commission on December 18, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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FLORIDAFIRST BANCORP
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(Exact name of registrant as specified in charter)
United States 6035 59-3545582
- ---------------------------- ----------------- --------------------
(State or other jurisdiction (Primary SIC No.) (I.R.S. Employer
of incorporation or Identification No.)
organization)
205 East Orange Street, Lakeland, Florida 33801-4611
(941) 688-6811
--------------------------------
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Mr. Gregory C. Wilkes
President
FloridaFirst Bancorp
205 East Orange Street, Lakeland, Florida
(941) 688-6811
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(Name, address and telephone number of agent for service)
Please send copies of all communications to:
Charles E. Sloane, Esq.
Ruel B. Pile, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), check the following
box [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Aggregate Offering Registration Fee
To Be Registered Registered Per Share Price
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Common Stock, $0.10 par 2,703,851 $10.00 $27,038,510 $7,516.71
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The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the registration statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
PROSPECTUS FloridaFirst Bancorp
Up to 2,703,851 Shares (Proposed Holding Company for First Federal Florida)
of Common Stock 205 East Orange Street
Lakeland, Florida
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First Federal Florida is reorganizing from a federally chartered mutual
savings institution to a federally chartered stock savings institution. As part
of the reorganization, First Federal Florida will become a wholly owned
subsidiary of FloridaFirst Bancorp, a federally chartered stock corporation.
Upon consummation of the reorganization, FloridaFirst Bancorp will own all of
the stock of First Federal Florida. A majority of the common stock of
FloridaFirst Bancorp to be issued will be owned by a federally chartered mutual
savings institution holding company that will have the same directors and
officers as First Federal Florida and FloridaFirst Bancorp. The remainder (less
than half) of the common stock of FloridaFirst Bancorp is being offered to the
public in accordance with a plan of reorganization and stock issuance. The
reorganization must be approved by a majority of the votes eligible to be cast
by members of First Federal Florida and approved by the Office of Thrift
Supervision. No common stock will be sold if First Federal Florida, FloridaFirst
Bancorp and the mutual holding company do not receive the necessary votes or
regulatory approvals or FloridaFirst Bancorp does not receive orders for at
least the minimum number of shares. The common stock is expected to be quoted on
The Nasdaq Stock Market under the symbol "_______."
The shares of common stock are first being offered pursuant to
nontransferable subscription rights in a subscription offering. Depositor and
borrower members as of certain eligibility dates will receive subscription
rights. Any transfer of subscription rights is prohibited. Common stock not
subscribed for in the subscription offering may be offered for sale in a
community offering with preference given first to residents of Polk and Manatee
Counties in Florida and second to other residents of Florida. Sandler O'Neill &
Partners, L.P. is not required to sell any specific number or dollar amount of
common stock but will use their best efforts to sell the common stock offered.
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TERMS OF OFFERING
An independent appraiser has estimated the market value of the
reorganized First Federal Florida to be between $37.0 million and $50.0 million.
Of this amount, 47%, between $17.4 million and $23.5 million, is being offered
publicly, which establishes the number of shares to be offered. Subject to
regulatory approval, up to 2,703,851 shares, an additional 15% above the maximum
number of shares, may be sold. Based on these estimates, we are making the
following offering of shares of common stock:
o Price Per Share: $10.00
o Number of Shares
Minimum/Maximum/Maximum, as adjusted: 1,737,825 to 2,351,175 to 2,703,851
o Underwriting Commissions and Expenses
Minimum/Maximum/Maximum, as adjusted: $1,003,000 to $1,046,000 to $1,070,000
o Net Proceeds
Minimum/Maximum/Maximum, as adjusted: $16,375,000 to $22,466,000 to $25,969,000
o Net Proceeds per Share
Minimum/Maximum/Maximum, as adjusted: $9.42 to $9.56 to $9.60
Please refer to Risk Factors beginning on page 1 of this document.
These securities are not deposits or savings accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
For information on how to subscribe, call the Stock Information Center at
(941) ____-____. Sandler O'Neill & Partners, L.P.
The Date of this Prospectus is __________ ____, 1999
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[MAP GOES HERE]
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THE PLAN OF REORGANIZATION AND STOCK ISSUANCE IS CONTINGENT UPON
RECEIPT OF ALL REQUIRED REGULATORY APPROVALS, APPROVAL OF THE PLAN BY THE
MEMBERS OF THE BANK, AND THE SALE OF AT LEAST THE MINIMUM NUMBER OF SHARES
OFFERED PURSUANT TO THE PLAN.
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QUESTIONS AND ANSWERS
Q: What is the purpose of the reorganization and offering?
A: The reorganization will establish a stock holding company and First Federal
Florida will convert to the stock form of ownership, which will enable it
to raise additional capital in order to compete and expand more effectively
in the financial services marketplace. FloridaFirst Bancorp will be able to
issue capital stock, which is a source of capital not available to mutual
savings institutions, and will enable members, employees and directors to
indirectly obtain an ownership interest in the Bank. The reorganization and
offering also will provide greater flexibility to structure and finance the
expansion of its operations, including the potential expansion of branch
facilities, and to diversify into other financial services, to the extent
permitted by law.
Q: Why are we creating a mutual holding company instead of selling all of our
stock?
A: We are using a structure (a bank that is wholly owned by a stock holding
company that is in turn majority owned by a mutual holding company and
minority owned by public stockholders) that we feel is best for First
Federal Florida, our members and the communities we serve. If FloridaFirst
Bancorp offered all of its stock to the public, we would be forced to
invest a much larger amount of proceeds (at least twice as much) and might
feel pressured to make investments with substantially more risk in order to
achieve higher returns. We believe that the proceeds we will receive in the
offering will be sufficient to implement the business strategy we feel is
appropriate.
In addition, the use of this structure enables First Federal Florida to
achieve many of the benefits of a stock company while reducing the threat
of an acquisition by another financial institution, as can occur following
a full conversion from mutual to stock form. Sales of locally based,
independent savings institutions to larger, regional financial institutions
can result in closed branches, fewer choices for consumers, employee
layoffs and the loss of community support and involvement by local savings
institutions.
Q: Who will be the minority stockholders of FloridaFirst Bancorp?
A: Other than the mutual holding company that will own 53% of the common
stock, everyone who purchases common stock will be a minority stockholder.
Q: How do I purchase the stock?
A: You must complete and return the stock order form (no copies will be
accepted) together with your payment, on or before ____:____ __________,
Florida time on _________________, 1999. If we do not receive sufficient
orders by that time, the offering may be extended until _____, 1999.
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(i)
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Q: How much stock may I purchase?
A: The minimum purchase is 25 shares of common stock (or $250). The maximum
purchase is 20,000 shares (or $200,000) for any individual person or
persons ordering through a single account. No person or persons ordering
through multiple accounts, together with their associates, or group of
persons acting together, may purchase in total more than 20,000 shares (or
$200,000). We may decrease or increase the maximum purchase limitation
without notifying you. In the event that the offering is oversubscribed,
there will not be enough common stock to fill all orders.
Q: What happens if there is not enough common stock to fill all orders?
A: You might not receive any or all of the common stock you want to purchase.
If there is an oversubscription in the subscription offering, orders will
be filled in the following order of priorities:
o Priority 1 - Depositors of First Federal Florida at the close of
business on June 30, 1997 with deposits of at least $50.00.
o Priority 2 - The employee stock ownership plan of First Federal
Florida (which may purchase up to 8% of the common stock offered).
o Priority 3 - Depositors of First Federal Florida at the close of
business on December 31, 1998 with deposits of at least $50.00.
o Priority 4 - Other depositors and certain borrowers of First Federal
Florida as of _______________, 1999 who are entitled to vote on the
reorganization.
If the persons described above do not subscribe for all of the shares, the
remaining shares may be offered in a community offering. In the event of a
community offering, we will give a preference to natural persons who reside
in Polk and Manatee Counties, Florida (first preference) and Florida
(second preference). We may offer shares to others in a syndicated
community offering. In a syndicated community offering, we would offer any
remaining shares to the general public through a group of brokers/dealers
organized by Sandler O'Neill. We have the right to reject any stock order
in the community offering or syndicated community offering.
Q: What particular factors should I consider when deciding whether to buy the
stock?
A: Before you decide to purchase stock, you should read this prospectus,
including the Risk Factors section that starts on page 1.
Q: As a depositor or borrower member of First Federal Florida, what will
happen if I do not purchase any stock?
A: You are not required to purchase stock. Your deposit account, certificate
account and any loans you may have with us will not be affected.
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(ii)
Q: May I sell or otherwise transfer my subscription rights?
A: No. Selling or assigning your subscription rights is illegal. If you
exercise your subscription rights you will be required to certify that you
are purchasing common stock solely for your own account and that you have
no agreement or understanding regarding the sale or transfer of such common
stock to another person. First Federal Florida intends to pursue any and
all legal and equitable remedies in the event it becomes aware of the
transfer of subscription rights. If we believe your order violates this
restriction, your order will not be filled. You also may be subject to
sanctions and penalties imposed by the Office of Thrift Supervision.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire document. If you have any questions about the stock offering, you
should contact:
Stock Information Center
FloridaFirst Bancorp
220 E. Lemon Street, 6th Floor
Lakeland, Florida
(941) ____-____
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(iii)
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements. References
in this document to "we," "us," and "our" refer to FloridaFirst Bancorp, because
we are offering the stock. In certain instances where appropriate, "we," "us,"
or "ours" refers collectively to FloridaFirst Bancorp and First Federal Florida.
Throughout this document we refer to First Federal Florida (whether in mutual or
stock form) as the "Bank." We also refer to ourselves as the "Company." Our
mutual holding company is FloridaFirst Bancorp, MHC or the "MHC."
This document contains forward-looking statements which involve risks
and uncertainties. FloridaFirst Bancorp's actual results may differ
significantly from the results discussed in the forward- looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 1 of this document.
The Companies
First Federal Florida was founded in 1934 and primarily serves Polk and
Manatee Counties in Florida. The Bank is a federally chartered community and
customer oriented mutual savings institution. The Bank provides financial
services primarily to individuals, families and small businesses. The Bank
emphasizes residential mortgage lending, primarily originates residential
mortgage loans and funds these loans with deposits. The Bank originates other
loans secured by real estate, purchases investment and mortgage-backed
securities, and uses borrowings as a secondary source of funding. At September
30, 1998, the Bank had assets of $419.0 million, deposits of $352.2 million and
equity of $36.1 million. See pages _______.
FloridaFirst Bancorp is not an operating company and has not engaged in
any significant business to date. Minority owners will hold 47% of its common
stock. It is a federally chartered stock holding company that will own 100% of
the stock of the Bank. See pages _______.
FloridaFirst Bancorp, MHC will become the mutual holding company for
FloridaFirst Bancorp. The MHC will be a federally chartered mutual savings
institution holding company owning a majority of the stock of FloridaFirst
Bancorp. See pages _______.
The address and telephone number of the Company, the MHC, and the Bank
is 205 East Orange Street, Lakeland, Florida 33801, (941) 688-6811.
The Reorganization and Offering
The reorganization from mutual to stock form and the stock offering
include the following steps:
o The Bank will initially establish the MHC which will establish
both an interim stock savings institution and the Company. The
Company, the MHC, and the interim institution will have no
assets prior to the completion of the reorganization.
o The Bank will convert from a federally chartered mutual
savings institution to a federally chartered stock savings
institution and merge with the interim stock savings
institution.
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(iv)
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o Following the merger of the interim stock savings institution
owned by the MHC into the Bank, the Bank will initially become
a wholly owned subsidiary of the MHC.
o The MHC will then contribute 100% of the Bank's stock to the
Company and the Bank will then become the wholly owned
subsidiary of the Company.
o The Company will issue between 3,697,500 shares (minimum) and
5,002,500 shares (maximum) of its common stock in the
reorganization; 53% of these shares (or between 1,959,675
shares and 2,651,325 shares) will be issued to the MHC, and
47% (or between 1,737,825 shares and 2,351,175 shares) will be
sold to the public.
Description of the Mutual Holding Company Structure
This chart shows the corporate structure following completion of the
reorganization:
- ------------------------------------- ----------------------------------------
FloridaFirst Bancorp, MHC Public Stockholders
- ------------------------------------- ----------------------------------------
| 53% of the | 47% of the
| Common Stock | Common Stock
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FloridaFirst Bancorp
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|
| 100% of the Common Stock
|
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First Federal Florida
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The mutual holding company structure differs in significant respects
from the holding company structure that is often used in a full mutual-to-stock
conversion. In a full conversion, a converting mutual institution or its
newly-formed holding company sells 100% of its common stock in a stock offering.
A savings institution that converts from the mutual to stock form of
organization using the mutual holding company structure sells less than half of
its shares at the time of the reorganization. By doing so, a converting
institution using the mutual holding company structure will raise less than half
the capital that it would have raised in a full mutual-to-stock conversion.
The common stock that is issued to the MHC may be subsequently sold to
the Bank's members if the MHC converts from the mutual to the stock form of
organization. In addition,
because regulations
generally prohibit the sale of a savings association in the mutual holding
company structure, the reorganization and stock offering will permit the Bank to
achieve many of the benefits of a stock company while reducing the threat of an
acquisition by another institution, as can occur following a full conversion
from mutual to stock form. Sales of locally based, independent savings
institutions to larger, regional
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(v)
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financial institutions can result in closed branches, fewer choices for
consumers, employee layoffs and the loss of community support and involvement by
local savings institutions.
Because the MHC is a mutual corporation, its actions will not
necessarily always be in the best interests of the Company's stockholders. In
making business decisions, the MHC's board of directors will consider a variety
of constituencies, including the depositors of the Bank, the employees of the
Bank and the communities in which the Bank operates. As the majority stockholder
of the company, the MHC is also interested in the continued success and
profitability of the Bank and the Company. Consequently, the MHC will act in a
manner that furthers the general interests of all of its constituencies,
including, but not limited to, the interests of the stockholders of the Company.
The MHC believes that the interests of the stockholders of the Company and those
of the MHC's other constituencies are, in many circumstances the same, such as
the increased profitability of the Company and the Bank and continued service to
the communities in which the Bank operates.
Stock Purchases
The shares of common stock will be offered on the basis of priorities.
As a depositor or borrower member, you will receive non-transferable
subscription rights to purchase the common stock. The common stock will be
offered first in a subscription offering and any remaining common stock may be
offered in a community offering, with preference given first to residents of
Polk and Manatee Counties in Florida and second to other Florida residents, or a
syndicated public offering. Sandler O'Neill & Partners, L.P. will assist us in
selling our common stock in the offering. See pages __________.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the
estimated market value of the common stock by Feldman Financial Advisors, Inc.
("Feldman Financial"), an appraisal firm experienced in appraisals of savings
institutions. Feldman Financial has estimated, that in its opinion as of
December ____, 1998 the aggregate pro forma market value of the common stock
ranged between $37.0 million and $50.0 million (with a mid-point of $43.5
million). The Board of Directors has decided to offer 47% of the common stock,
or between 1,737,825 and 2,351,175 shares in the offerings to the public and
issue 53% of the common stock to the MHC. The estimated market value of the
shares is our estimated market value after giving effect to the reorganization
and the offering.
The appraisal was based in part upon our financial condition and
operations and the effect of the additional capital we will raise in this
offering. The $10.00 price per share was determined by our board of directors.
It is the price most commonly used in stock offerings involving conversions of
mutual savings institutions. The independent appraisal will be updated before we
complete the reorganization. If the estimated market value of the common stock
is either below $37.0 million or above $50.0 million you will be notified and
will have the opportunity to modify or cancel your order. The appraisal is not a
recommendation about buying the common stock. You should read the entire
prospectus before making an investment decision. See pages __________.
Termination of the Offering
The subscription offering will terminate at ____:____ __________,
Florida time, on __________ ____, 1999. The community offering or syndicated
community offering, if any, may terminate at any time without notice but no
later than __________ ____, 1999.
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(vi)
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Benefits to Directors, Officers and Employees from the Offering
Our employees may participate in the offering through individual
purchases and through purchases of stock by our employee stock ownership plan,
which is a type of retirement plan. We also intend to implement a restricted
stock plan and a stock option plan, which may benefit the president, other
officers, and the directors. We may decide to adopt these stock plans within the
first year after the reorganization. The restricted stock plan and stock option
plan are subject to stockholder approval and compliance with OTS regulations.
Use of the Proceeds Raised from the Sale of Common Stock
We will use a portion of the net proceeds from the offering to purchase
all the common stock to be issued by the Bank in the reorganization and to make
a loan to an ESOP
of the Bank to fund the plan's
purchase of stock in the offering. The balance of the funds will be retained as
our initial capitalization. The Bank will invest the portion of the net proceeds
received by it primarily in residential and commercial real estate loans,
mortgage-backed securities, consumer loans and investment securities. Proceeds
may also be used for new equipment, additional office facilities, and the
refurbishment of existing branches. See page __________.
Dividends
We anticipate paying a semi-annual cash dividend following the
completion of the full first quarter of operations following the reorganization
in an amount that has yet to be determined. There are restrictions on dividends.
See pages __________.
Market for the Common Stock
We expect the common stock to be quoted on The Nasdaq Stock Market
under the symbol "__________." If we do not meet the requirements for the Nasdaq
National Market, our common stock will be traded on the Nasdaq SmallCap Market.
Sandler O'Neill intends to make a market in the common stock but it is under no
obligation to do so. See page __________.
Important Risks in Owning the Common Stock of FloridaFirst Bancorp
Before you decide to purchase common stock in the offering, you should
read the Risk Factors section on pages 1-____ of this document.
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(vii)
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SELECTED FINANCIAL AND OTHER DATA
Selected Financial Data
At September 30,
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1998(1) 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Total Amount of:
Assets................................... $419,041 $466,765 $440,294 $431,414 $409,866
Loans receivable, net.................... 338,610 355,551 321,327 260,675 247,943
Investment securities.................... 60,961 74,573 99,841 138,234 135,270
Cash and cash equivalents................ 5,217 21,842 3,885 18,222 13,691
Deposits................................. 352,180 429,714 404,184 397,594 378,502
FHLB advances............................ 21,000 -- -- -- --
Equity (restricted)...................... 36,107 33,588 30,569 30,774 28,606
Number of:
Real estate loans outstanding............ 4,433 5,149 5,461 5,187 5,396
Deposit accounts......................... 38,409 46,012 43,002 40,083 37,310
Full service offices..................... 9 14 13 14 14
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(1) During fiscal year 1998, the Bank sold five branches (and $55.3 million
in related deposits) that were not contiguous to its main market area
for a pre-tax gain of $3.0 million. In connection with the Branch Sale,
the Bank transferred $45.1 million in loans and $700,000 in premises
and equipment.
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(viii)
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Summary of Operations
Year Ended September 30,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- --------------
(In thousands)
Interest and dividend income...... $ 31,892 $ 33,790 $ 31,694 $29,820 $27,532
Interest expense.................. 18,966 19,702 18,961 7,689 14,707
------ ------- ------- ------
Net interest income............. 12,926 14,088 12,733 12,131 12,825
Provision for loan losses......... 405 317 600 75 189
------
Net interest income after
provision for loan losses...... 12,521 13,771 12,133 12,056 12,636
Other income...................... 4,961(1) 1,575 1,546 1,064 1,125
Other expense..................... 13,946 11,520 13,382(2) 10,081 9,662
------ ------- ------- ------ ------
Income before income taxes........ 3,536 3,826 297 3,039 4,099
Provision for income taxes........ 1,151 1,299 44 1,057 1,400
------
Income before cumulative
effect of change in
accounting principle............ 2,385 2,527 253 1,982 2,699
Cumulative effect of change
in accounting principle......... -- -- -- -- 118(3)
-------- ------- -------- ------- -------
Net income........................ $ 2,385 $ 2,527 $ 253 $ 1,982 $ 2,817
======== ======= ======= ====== ======
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(1) Reflects sale of five branches and related deposits.
(2) Includes a $2.5 million one-time special assessment to recapitalize the
Savings Association Insurance Fund.
(3) Reflects adoption of SFAS 109.
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(ix)
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Selected Financial Ratios
At or For the Year Ended
September 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Performance Ratios:
Return on average assets (net income
divided by average total assets)...................... .55% .56% .06% .48% .68%
Return on average equity (net income
divided by average equity)............................ 6.55 7.71 .79 6.58 10.15
Net interest rate spread................................ 2.73 2.96 2.76 2.38 2.83
Net interest margin on average
interest-earnings assets.............................. 3.02 3.21 3.03 2.99 3.18
Average interest-earning assets to average
interest-bearing liabilities.......................... 110 108 108 107 107
Efficiency ratio (noninterest expense (other than the
Bank's $2.5 million SAIF special assessment in
1997) divided by the sum of net interest income
and noninterest income)............................... 78 74 76 76 69
Asset Quality Ratios:
Non-performing loans to total assets.................... .20 .49 .27 .28 .57
Non-performing loans to total loans, net................ .25 .65 .37 .46 .94
Non-performing assets to total assets................... .32 .53 .28 .36 .62
Net charge-offs to average loans outstanding............ .14 .02 .04 .03 .09
Allowance for loan losses to total loans................ .76 .74 .74 .73 .78
Capital Ratios:
Average equity to average assets ratios
(average equity divided by average total assets)...... 8.31 7.25 7.41 7.22 6.72
Equity to assets at period end.......................... 8.62 7.20 6.94 7.13 6.98
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(x)
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in our
common stock.
Potential Impact of Changes in Interest Rates on Profitability
Our ability to make a profit largely depends on our net interest
income. Net interest income is the difference between the interest income we
earn on our interest-earning assets (such as mortgage loans and investment
securities) and the interest expense we pay on our interest-bearing liabilities
(such as deposits and borrowings). Most of our mortgage loans have rates of
interest which are fixed for the term of the loan ("fixed rates") and are
generally originated with terms of up to 30 years, while our deposit accounts
have significantly shorter terms to maturity. Because our interest-earning
assets generally have fixed rates of interest and have longer effective
maturities than our interest-bearing liabilities, the yield on our
interest-earning assets generally will adjust more slowly to changes in interest
rates than the cost of our interest-bearing liabilities, which are primarily
time deposits. As a result, our net interest income may be adversely affected by
material and prolonged increases in interest rates. In addition, rising interest
rates may adversely affect our earnings because there may be a lack of customer
demand for loans. Declining interest rates may also adversely affect our net
interest income if adjustable rate or fixed rate mortgage loans are refinanced
at lower rates or prepaid, and we reinvest the resulting funds in lower yielding
assets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Management of Interest Rate Risk and Market Risk."
Changes in interest rates can also affect the average life of loans and
mortgage-backed securities. Historically lower interest rates have resulted in
increased prepayments of loans and mortgage-backed securities, as borrowers
refinanced their mortgages in order to reduce their borrowing cost. Under these
circumstances, we are subject to reinvestment risk to the extent that we are not
able to reinvest such prepayments at rates which are comparable to the rates on
the prepaid loans or securities.
Potential Increase in Credit Risk From Non-One- to Four-Family Residential First
Mortgage Lending
Like any company in the business of lending money, the Bank faces
"credit risk," that is the risk that its borrowers will not pay back their
loans. Because the Bank's lending has traditionally consisted of loans secured
by the borrower's home, its exposure to credit risk has not been as great as
that faced by other lenders. Over the past five years, however, we have
significantly increased our origination of commercial real estate loans and
intend to continue to do so. We also intend to continue to expand our
origination of home equity loans and consumer loan products, such as automobile
loans. This type of lending has a greater degree of credit risk than traditional
one- to four-family residential lending, which could result in increases in
non-performing assets and provisions for loan losses. See "Business of the Bank
- - Lending Activities - Consumer Loans."
Low Return on Equity After Reorganization
As a result of the reorganization, our equity will increase
substantially. Our ability to leverage this capital will be significantly
affected by competition for loans and deposits and economic conditions. Our
expenses will increase because of the costs associated with our employee stock
ownership plan, our expected stock benefit plans, and the costs of being a
public company. Our offering of new types of commercial and consumer products
will also increase our ongoing operating expenses. We do not know if we will
receive sufficient income to offset these additional costs. Because of the
increases in our equity
1
and expenses, our return on equity may decrease as compared to our performance
in previous years. Initially, we intend to invest the net proceeds in short term
investments which generally have lower yields than residential mortgage loans. A
low return on equity could reduce the trading price of our common stock.
Reduced Ownership Following MHC Conversion Due to Waived Dividends
If the MHC converted to stock form in the future, our plan of
reorganization provides that our stockholders would exchange their common stock
of the Company for common stock of the converted MHC on an equitable basis. If
the MHC were to convert to stock form, the related stock offering would likely
(1) provide subscription rights to members of the Bank, (2) limit the maximum
number of shares that could be purchased by a person and (3) include shares
received in exchange of our common stock in the maximum number of shares that
could be purchased. This could mean that our stockholders who own a large amount
of our common stock might not be able to exercise their subscription rights for
stock sold by the converted MHC or, possibly, be forced to sell some stock (if
the maximum purchase limit were below the number of shares of stock that such a
person would own after they received shares in exchange of our shares they
already owned).
With regulatory approval, the MHC may waive its right to receive
dividends that we pay. One of the conditions to such approval would be that any
waived dividends would reduce the percentage ownership that minority
stockholders would receive in exchange of their shares of our common stock if
the MHC converted to stock form in the future. The plan of reorganization also
provides for such an adjustment. See "MHC Conversion to Stock Form." The MHC has
not determined whether it will waive the receipt of dividends that we pay. In
addition, the value of assets owned by the MHC would reduce the percentage
ownership that minority stockholders would receive if the MHC converted to stock
form.
You should not assume that the MHC would be permitted to convert to
stock form or, even if permitted, that our stockholders would be entitled to
exchange or redeem their shares of our common stock.
Reliance Upon Local Economy and Competition Within Our Market Area
We originate primarily residential real estate and consumer loans in
our market area. Our ability to originate loans that meet our underwriting
standards and the ability of borrowers to make monthly payments of principal and
interest depends substantially upon the strength of the local economy. Local
economic activity may be affected by a variety of factors including changes in
the overall economy and more localized events such as a hurricane or other
natural disaster. Both local financial institutions and much larger financial
institutions headquartered outside our market area but with local offices
provide substantial competition with respect to the generation of loans. In our
market area, we compete with commercial banks, savings institutions, credit
unions, finance companies, mutual funds, insurance companies, and brokerage and
investment banking firms operating locally and elsewhere. Many of these
competitors have substantially greater resources and lending limits than we have
and offer services that we do not or cannot provide. Our profitability depends
upon our continued ability to successfully compete in our market area. Further,
economic stagnation or decline in economic activity in our market area could
have an adverse effect on our financial condition or results of operations.
Takeover Restrictions
Mutual Holding Company Structure. Under federal regulations and the
plan of reorganization, the MHC must own at least a majority of our common stock
at all times after the offering. The MHC
2
will be controlled by the same directors and officers who control the Bank.
Because of this, our directors and management will be able to control a majority
of our common stock.
Provisions in the Company's Governing Instruments. Our charter and
bylaws provide for, among other things, a staggered board of directors,
noncumulative voting for directors, limits on the calling of special meetings,
and limits on a person or group voting shares in excess of 10% of the
outstanding shares. These restrictions may discourage proxy contests and other
takeover attempts, particularly those which have not been negotiated with the
Board of Directors, and thus may perpetuate current management. See "Certain
Restrictions on Acquisition of the Company."
Ownership and Control of Common Stock by Management. Our directors and
executive officers are expected to purchase approximately 127,500 shares of our
common stock in the offering (6.2% at the midpoint of the offering range). In
addition, approximately 8% of the shares of common stock issued in the offering
are expected to be purchased by the ESOP. Shares owned by the ESOP but not yet
allocated to the accounts of participants will be voted by the ESOP trustee
committee comprised of non-employee directors. Further, because of the MHC's
ownership of 53% of our stock, current officers and directors will control up to
56.4% of the total number of shares outstanding at the completion of the Bank's
reorganization. To the extent we implement stock benefit plans, the ownership
and control by officers and directors would increase. See "Management -
Executive Compensation - Employee Stock Ownership Plan" and "- Potential Stock
Benefit Plans."
Certain provisions of employment agreements with our key officers
provide for cash payments in the event of a change in control. These provisions
increase the cost of, and may discourage a future attempt to acquire the
Company, and thus generally may serve to perpetuate current management. See
"Management - Executive Compensation - Employment Agreements."
Limited Market for Common Stock
We have never issued capital stock and there is not, at this time, any
market for the common stock. We have applied to have the common stock quoted on
the National Market of The Nasdaq Stock Market under the symbol "__________". If
the common stock is not listed on the National Market, we expect that the common
stock will be quoted on the Nasdaq SmallCap Market.
Due to the relatively small size of the offering (due, in part from the
public offering of less than half of the shares to be issued), you have no
assurance that an active and liquid market for the common stock will exist. You
should consider the potentially illiquid nature of an investment in the common
stock and recognize that the absence of an established market might make it
difficult to buy or sell the common stock. See "Market for the Common Stock."
Expenses Associated with the ESOP and Stock Benefit Plans
The ESOP currently intends to purchase up to 8% of the common stock
offered in the offering. The net proceeds of the offering available for
investment by the Bank will be reduced by the cost of the shares (including the
costs of borrowing) bought by the ESOP. The Bank will recognize material
employee compensation and benefit expenses assuming the ESOP and the stock
benefit plans are implemented. The actual aggregate amount of these new expenses
cannot be predicted at the present time because applicable accounting practices
require that such expenses be measured based on the fair market value of the
shares of common stock. In the case of the ESOP, fair market value would be
measured annually when shares are committed to be released for allocation to the
ESOP participants; in the case
3
of the stock benefit plans, fair market value would be measured at the grant
date and amortized over the award's vesting period. These expenses have been
reflected in the pro forma financial information under "Pro Forma Data" assuming
the purchase price ($10.00 per share) represents the fair market value for
accounting purposes. Actual expenses, however, will be based on the fair market
value of the common stock at future dates, which may be higher or lower than the
purchase price. See "Pro Forma Data" and "Management - Executive Compensation -
Employee Stock Ownership Plan."
Recent Stock Market Volatility
Publicly traded stocks, including the stocks of financial institutions,
have recently experienced substantial market price volatility. These market
fluctuations may be unrelated to the operating performance of particular
companies whose shares are traded. The purchase price per share of the common
stock has been set at $10 and the total number of shares sold will be based on
the independent appraisal by Feldman Financial. After the offering, the trading
price of the common stock will be determined by the marketplace, and may be
influenced by many factors, including prevailing interest rates, investor
perceptions of the Company and general industry and economic conditions. Due to
possible continued market volatility and to other factors, including certain
Risk Factors discussed in this document, there can be no assurance that,
following the reorganization, the trading price of the common stock will be at
or above the initial offering price. See "Market for the Common Stock."
Financial Institution Regulation and Possible Legislation
The Bank is subject to extensive regulation and supervision as a
federally-chartered savings bank with deposits insured by the Federal Deposit
Insurance Corporation ("FDIC"). The regulatory authorities have extensive
discretion in connection with their supervision and enforcement activities and
their examination policies, including the imposition of restrictions on Bank
operation, the classification of assets and the imposition of an increase in
allowance for loan losses. In addition, the Company, as a savings institution
holding company, will be subject to extensive regulation and supervision.
Regulatory changes, whether by the Office of Thrift Supervision ("OTS"), the
FDIC, the Board of Governors of the Federal Reserve System (the "Federal Reserve
System"), or Congress, could have a material impact on us. See "Regulation -
Regulation of the Company."
Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to our operations. Data processing is
also essential to most other financial institutions and many other companies.
Most of the Bank's material data processing that could be affected by
this problem is provided by a third party service bureau. The service bureau has
advised the Bank that it expects to resolve this problem before the year 2000.
However, if this problem is not resolved before the year 2000, the Bank would
likely experience significant data processing delays, mistakes or failures.
These delays, mistakes or failures could have a significant adverse impact on
the Bank's financial condition and its results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations - Year 2000 Readiness Disclosure."
4
FIRST FEDERAL FLORIDA
First Federal Florida is a federally chartered mutual savings
institution, originally chartered in 1934 as First Federal Savings and Loan
Association of Lakeland. The Bank became a member of the Federal Home Loan Bank
("FHLB") System in 1934 and the Bank's deposits are currently insured by the
Savings Association Insurance Fund ("SAIF") as administered by the FDIC. The
Bank is regulated by the OTS and the FDIC.
The Bank is a community-oriented retail savings bank offering
traditional deposit, residential real estate mortgage loans and, to a lesser
extent, commercial real estate loans, consumer loans and other loans. Through
our nine offices located in Polk and Manatee Counties in Florida, we provide
retail banking services, with an emphasis on one- to four-family residential
mortgages. Currently, the Bank originates 15 year and 30 year conforming fixed
rate residential mortgage loans primarily for its asset portfolio. At September
30, 1998, net loans receivable amounted to approximately $338.6 million or 80.8%
of total assets, of which approximately $244.7 million or 72.3% of such total
was secured by one- to four-family residential real estate. The Bank invests
excess liquidity in mortgage-backed and investment securities (consisting
primarily of U.S. government agency securities). Investment and mortgage-backed
securities amounted to $61.0 million or 14.6% of total assets at September 30,
1998. At September 30, 1998, the Bank had total assets, deposits and total
equity of $419.0 million, $352.2 million, and $36.1 million, respectively. See
"Business of the Bank."
FLORIDAFIRST BANCORP
We are a federally chartered corporation organized on __________ ____,
1998 at the direction of the Bank to acquire all of the capital stock that the
Bank will issue upon its conversion from the mutual to stock form of ownership.
We have not engaged in any significant business to date but will serve as a
holding company of the Bank following the reorganization. A majority of our
common stock will, in turn, be owned by the MHC. We have applied for approval to
acquire control of the Bank. We will retain up to 50% of the net proceeds from
the issuance of common stock as our initial capitalization less the amount
retained by the MHC. Part of the proceeds retained by us will be used to fund
the loan to the Bank's ESOP. We will use the balance of the net proceeds to
purchase all of the common stock of the Bank to be issued upon conversion. Upon
consummation of the reorganization, we will have no significant assets other
than that portion of the net proceeds of the offering, the promissory note
representing the amount of our loan to the Bank's ESOP, and the shares of the
Bank's capital stock acquired in the reorganization, and we will have no
significant liabilities. Our cash flow will be dependent upon earnings from the
investment of the portion of net proceeds we retain in the reorganization and
any dividends received from the Bank. See "Use of Proceeds."
Management believes that the holding company structure will provide
flexibility for possible diversification of business activities through existing
or newly-formed subsidiaries, or through acquisitions of or mergers with both
savings institutions and commercial banks, as well as other financial services
related companies. Although there are no current arrangements, understandings,
or agreements regarding any such opportunities, the Company will be in a
position after the reorganization, subject to regulatory limitations and the
Company's financial condition, to take advantage of any such acquisition and
expansion opportunities that may arise. However, some of these activities could
be deemed to entail a greater risk than the activities permissible for federally
chartered savings institutions such as the Bank. The initial activities of the
Company are anticipated to be funded by the portion of the net proceeds retained
by the Company and earnings thereon.
5
FLORIDAFIRST BANCORP, MHC
As part of the reorganization, the Bank will organize the MHC as a
federally chartered mutual holding company. As long as they remain depositors of
the Bank, persons who had liquidation rights with respect to the Bank as of the
date of the reorganization will continue to have such rights solely with respect
to the MHC after the reorganization.
The MHC's principal assets will be the shares of common stock received
and up to $200,000 received as its initial capitalization in the reorganization.
Immediately after consummation of the reorganization, it is expected that the
MHC will not engage in any business activity other than its investment in a
majority of the common stock of the Company and its initial capitalization. The
MHC will be a mutual corporation chartered under federal law and regulated by
the OTS and the Federal Reserve. The MHC will be subject to the limitations and
restrictions imposed on savings institution holding companies under federal law.
See "Regulation - Regulation of the Company."
USE OF PROCEEDS
The net proceeds will depend on the total number of shares of common
stock issued in the offering, which will be dependent on the independent
valuation and marketing considerations, and the expenses incurred by the Company
and the Bank in connection with the offering. Although the actual net proceeds
from the sale of the common stock cannot be determined until the offering is
completed, it is currently estimated that net proceeds, assuming the sale of
1,737,825 and 2,351,175 shares of stock at $10.00 per share, would be
approximately $16.4 million and $22.5 million respectively. The actual net
proceeds may vary from these estimates because, among other things, actual
expenses may be more or less than those estimated.
Of the net proceeds at least one half will be used by the Company to
purchase 100% of the common stock of the Bank that is issued. The Company
intends to use a portion of the net proceeds it retains to make a loan directly
to the ESOP to enable the ESOP to purchase stock in the offering, or in the open
market to the extent the stock is not available to fill the ESOP's subscription.
Of the remainder of the net proceeds, the MHC will receive $200,000 as its
initial capitalization and the Company will retain the rest. These funds will
initially be invested in U.S. government and federal agency securities,
marketable securities, or a combination of both. Proceeds from the offering may
also be used to fund repurchases of the Company's stock. See "The Offering -
Restrictions on Repurchases of Shares."
The net proceeds from the offering received by the Bank will be used
for general corporate purposes and will increase the Bank's total capital to
expand investment and lending, internal growth, and possible external growth
through the expansion and refurbishment of its branch office system within its
existing market areas, including the installation of automated teller machines
("ATMs"), technological advancements and expansion of its commercial and
consumer lending programs. However, there are no current agreements and
arrangements regarding expansion. Net proceeds may also be used by the Bank to
make contributions to the ESOP which in turn would be used to repay the loan
from the Company.
In the event the ESOP does not purchase common stock in the offering,
the ESOP may purchase shares of common stock in the market after the
reorganization. In the event the purchase price of the common stock is higher
than $10.00 per share, the amount of proceeds required for the purchase by the
ESOP will increase and the resulting stockholders' equity will decrease.
The net proceeds may vary because total expenses of the reorganization
may be more or less than those estimated. The net proceeds will also vary if the
number of shares to be issued in the
6
reorganization are adjusted to reflect a change in the estimated pro forma
market value of the Company and the Bank. Payments for shares made through
withdrawals from existing Bank deposit accounts will not result in the receipt
of new funds for investment by the Bank but will result in a reduction of the
Bank's deposits and interest expense as funds are transferred from interest
bearing certificates or other deposit accounts.
DIVIDEND POLICY
The Company intends to establish a policy to pay cash dividends after
the reorganization. The initial annual amount of the dividends is as yet
undetermined. Dividends will be subject to determination and declaration by the
Company's Board of Directors, which will take into account, among other factors,
the Company's financial condition, results of operations, tax considerations,
industry standards, economic conditions, regulatory restrictions which affect
the payment of dividends by the Company to the MHC, and other factors. If the
MHC elects not to waive receipt of dividends from the Company or if the OTS does
not approve such a waiver, the amount of dividends may be adversely affected.
See "Risk Factors - Reduced Ownership Following MHC Conversion Due to Waived
Dividends" and "Waiver of Dividends by the MHC." There can be no assurance that
dividends will in fact be paid on the common stock or that, if paid, such
dividends will not be reduced or eliminated in future periods.
The Company's ability to pay dividends also depends on the receipt of
dividends from the Bank which is subject to a variety of regulatory limitations
on the payment of dividends. See "Regulation -- Regulation of the Bank --
Dividend and Other Capital Distribution Limitations." Furthermore, as a
condition to OTS approval of the reorganization, the Company has agreed that it
will not initiate any action within one year of completion of the reorganization
in the furtherance of payment of a special distribution or return of capital (as
distinguished from a regular or special dividend payment in the ordinary course
of business) to stockholders of the Company. See also "Waiver of Dividends by
the MHC."
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by the Bank on the amount of earnings
deemed to be removed from the reserves for such distribution. See "Taxation" and
Note 10 of the financial statements. The Bank does not contemplate any
distribution out of its bad debt reserve which would cause such tax liability.
WAIVER OF DIVIDENDS BY THE MHC
The MHC, prior to the declaration of any dividends by the Company, will
determine whether to apply to the OTS for permission to waive the receipt of any
dividends paid by the Company to its stockholders. Any waiver of dividends, if
approved by the OTS, will be subject to various conditions. There can be,
however, no assurances that the OTS will approve such application or if such
approval is obtained, that the MHC will continue to waive dividends. In waiving
dividends, the Board of Directors must conclude, among other things, that a
dividend waiver by the MHC, which permits retention of capital by the Company
and the Bank, is in the best interest of the MHC because, among other reasons:
(i) the MHC has no need for the dividend for its business operations; (ii) the
cash that would be received by the MHC could be invested by the Company and the
Bank at a more favorable rate of return; (iii) such waiver increases the capital
of the Company and the Bank and enhances the Bank's business so that customers
will continue to have access to the offices and services of the Bank; and (iv)
such waiver preserves the net worth of the MHC through its principal asset (the
common stock of the Company),
7
which would be available for distribution in the unlikely event of a voluntary
liquidation of the Company and the Bank after satisfaction of claims of
depositors, other creditors and minority stockholders.
If the MHC determines that the waiver of dividends is in the best
interest of the parties involved:
o The MHC will make prior application to the OTS for approval to waive
any dividends declared on the capital stock of the Company. Such
application will be made on an annual basis with respect to any year in
which the MHC intends to waive such dividends.
o If a waiver is granted, dividends waived by the MHC will not be
available for payment to minority stockholders and will be excluded
from the capital accounts of the Bank for purposes of calculating any
dividend payments to minority stockholders.
o If a waiver is granted, the Bank will, so long as the MHC remains a
mutual holding company, establish a restricted capital account in the
cumulative amount of any dividends waived by the MHC for the benefit of
the mutual members of the MHC. The restricted capital account would be
senior to the claims of minority stockholders of the Company and would
not decrease notwithstanding changes in depositors of the Bank. This
restricted capital account would be added to any liquidation account in
the Bank established in connection with a conversion of the MHC to
stock form and would not be available for distribution to minority
stockholders.
o In any conversion of the MHC from mutual to stock form, the Bank,
Company and MHC will comply with the requirements of the OTS.
o In the event that the OTS adopts regulations regarding dividend waivers
by mutual holding companies, the MHC will comply with the applicable
requirements of such regulations. See "MHC Conversion to Stock Form."
Immediately after the reorganization, it is expected that the MHC's
operations will consist of activities relating to its investment in a majority
of the common stock of the Company and its initial capitalization. In the
future, the MHC may accept dividends paid by the Company to be used for other
purposes, including purchasing common stock from time to time in the open market
or from the Company, if permitted. The Company may establish an open market
purchase dividend reinvestment plan, pursuant to which stockholders may elect to
have cash dividends used to purchase additional shares of common stock in the
open market. The MHC may participate in any such plan. There can be no
assurances that the MHC will accept dividends paid by the Company, or if such
dividends are accepted, that the MHC will purchase shares of common stock in the
open market. Any purchases of common stock other than from the MHC will increase
the percentage of the Company's outstanding shares of common stock held by the
MHC and increase the number of shares eligible to be sold in any subsequent
secondary offering or mutual to stock conversion of the MHC.
MHC CONVERSION TO STOCK FORM
Following completion of the reorganization, the MHC may elect to
convert to stock form in accordance with applicable federal law, if any. The
MHC's directors, who will be the initial directors of the Bank and the Company,
have no current plans to convert the MHC to stock form. The terms of such a
conversion cannot be determined at this time and there is no assurance when, if
ever, a conversion will occur. In the event of a conversion, minority
stockholders will be entitled to exchange their shares of common stock for
shares of the converted MHC in a manner that is fair and reasonable to such
stockholders and the MHC. This will include an appropriate downward adjustment
in the exchange ratio
8
to account for waived dividends, if any. See "Risk Factors - Reduced Ownership
Following MHC Conversion Due to Waived Dividends." Moreover, in the event that
the MHC converts to stock form in a conversion, any options or other convertible
securities held by any trustee, officer, or employee of the Company, will be
convertible into the right to acquire shares of the converted MHC (or its
successor) on the same basis as outstanding common stock (pursuant to applicable
exchange ratios); provided, however, that if such shares cannot be so converted,
the holders of such options or other convertible securities shall be entitled to
receive cash equal to the fair value of such options or convertible securities.
Any exchange or redemption will be subject to the approval of the OTS and the
OTS has made no determination as to the permissibility of any exchange or
redemption described in the plan of reorganization.
Although the plan of reorganization allows for such an event, there can
be no assurances when, if ever, a conversion will occur, or what conditions may
be imposed by the OTS. If a conversion does not occur, the MHC will always own a
majority of the common stock of the Company.
MARKET FOR COMMON STOCK
The Company has never issued capital stock. Consequently, there is not,
at this time, any market for the common stock. The Company has received
preliminary approval to have the common stock quoted on the National Market of
the Nasdaq Stock Market under the symbol "__________." If the number of shares
of common stock sold to our non-affiliates is not at least 1.1 million, we will
seek approval for quotation of our common stock on the Nasdaq SmallCap Market.
If the number of shares of common stock sold to our non-affiliates is not at
least 1.0 million, we will ask market makers to seek quotation of our common
stock on the Nasdaq OTC Bulletin Board. One of the conditions for Nasdaq
quotation (National Market and SmallCap Market) is that at least three market
makers make, or agree to make, a market in the stock. The Company will seek to
encourage and assist at least three market makers to make a market in the common
stock. Sandler O'Neill intends to make a market in the common stock upon the
completion of the offering, subject to compliance with applicable laws and
regulations, but is under no obligation to do so. While the Company anticipates
that prior to the completion of the offering it will obtain a commitment from at
least two other broker-dealers to make a market in the common stock, there can
be no assurance that there will be three or more market makers for the common
stock.
An active and liquid market for the common stock may not develop or be
maintained. Accordingly, prospective purchasers should consider the potentially
illiquid nature of an investment in the common stock and recognize that the
absence of an established market might make it difficult to buy or sell the
common stock. In the event the common stock is not listed on the National
Market, the common stock is expected to be quoted and traded on either the
SmallCap Market of The Nasdaq Stock Market or the OTC Bulletin Board.
The aggregate price of the common stock is based upon an independent
appraisal of the pro forma market value of the common stock. However, there can
be no assurance that an investor will be able to sell the common stock purchased
in the offering at prices in the range of the pro forma book values of the
common stock or at or above the purchase price. See "Pro Forma Data" and "The
Offering - Stock Pricing and Number of Shares to be Offered."
9
CAPITALIZATION
Set forth below is the historical capitalization, including deposits
and borrowed funds, of the Bank as of September 30, 1998, and the pro forma
capitalization of the Company after giving effect to the shares issued to the
MHC in the reorganization, the sale of shares offered pursuant to the offering
and other assumptions set forth under "Pro Forma Data." A change in the number
of shares to be sold in the offering may affect materially such pro forma
capitalization.
Pro Forma Capitalization at September 30, 1998
----------------------------------------------------------------
Maximum,
Minimum Midpoint Maximum as adjusted
1,737,825 2,044,500 2,351,175 2,703,851
Actual, at Shares at Shares at Shares at Shares at
September 30, $10.00 per $10.00 per $10.00 per $10.00 per
1998 share share share share(1)
---------------- --------------- ---------------- ------------- ------------
(In thousands)
Deposits(2)................................... $352,180 $352,180 $352,180 $352,180 $352,180
Borrowed funds................................ 21,000 21,000 21,000 21,000 21,000
------- ------- ------- ------- -------
Total deposits and borrowed funds............. $373,180 $373,180 $373,180 $373,180 $373,180
======= ======= ======= ======= =======
Stockholders' equity:
Preferred stock, no par value, 2,000,000
shares authorized; none to be issued........ $ -- $ -- $ -- $ -- $ --
Common stock, $0.10 par value, 8,000,000
shares authorized, assuming shares
outstanding as shown(3)................... -- 370 435 500 575
Additional paid-in capital(3)(4).............. -- 15,805 18,785 21,766 25,193
Retained earnings............................. 35,887 35,887 35,887 35,887 35,887
Unrealized gain on securities available
for sale, net............................... 220 220 220 220 220
Less:
Common stock acquired by ESOP(5)............ -- (1,390) (1,636) (1,881) (2,163)
Common stock acquired by
stock programs(6)......................... -- (695) (818) (940) (1,082)
------- -------- ------- -------- ----------
Total equity/stockholders' equity............. $ 36,107 $ 50,197 $ 52,873 $ 55,552 $ 58,630
======= ======== ======== ======== ==========
- ------------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the independent valuation and a
commensurate increase in the offering range of up to 15% to reflect changes
in market and financial conditions.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) No effect has been given to the issuance of additional shares of common
stock pursuant to any stock option plans that may be adopted by the Company
and the Bank and presented for approval by the minority stockholders after
the offering. An amount equal to 10% of the shares of common stock sold in
the offering would be reserved for issuance upon the exercise of options to
be granted under the stock option plans within one year following the
reorganization. See "Risk Factors - Expenses Associated with the ESOP and
Stock Benefit Plans" and "Management - Potential Stock Benefit Plans -
Stock Options Plans."
(4) The reduction in additional paid in capital of the Bank reflects the
retention by the MHC of up to $200,000 upon consummation of the
reorganization.
(5) Assumes that 8.0% of the shares sold in the offering will be purchased by
the ESOP, and that the funds used to acquire the ESOP shares will be
borrowed from the Company. For an estimate of the impact of the loan on
earnings, see "Pro Forma Data." The Bank intends to make scheduled
discretionary contributions to the ESOP sufficient to enable the ESOP to
service and repay its debt over a ten year period. The amount of shares to
be acquired by the ESOP is reflected as a reduction of stockholders'
equity. See "Management - Executive Compensation - Employee Stock Ownership
Plan." If the ESOP is unable to purchase common stock in the reorganization
due to an oversubscription in the offering by Eligible Account Holders, and
the purchase price in the open market is greater than the original $10.00
price per share, there will be a corresponding reduction in stockholders'
equity.
(6) Assumes that an amount equal to 4% of the shares of common stock sold in
the offering is purchased by stock programs within one year following the
reorganization. The common stock purchased by the stock programs is
reflected as a reduction of stockholders' equity. See "Risk Factors -
Expenses Associated with the ESOP and Stock Benefit Plans" and "Management
- Potential Stock Benefit Plans - Stock Programs."
10
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the offering is completed. However, net proceeds to the Company
are currently estimated to be between $16.2 million and $22.3 million (or $25.8
million in the event the independent valuation is increased by 15%) based upon
the following assumptions: (i) an amount equal to 4% of the shares offered will
be awarded pursuant to the stock programs (which will be adopted no sooner than
six months following the offering), funded through open market purchases; (ii)
Sandler O'Neill will receive an advisory and marketing fee equal to 0.75% of the
aggregate purchase price of the shares of common stock sold in the offerings to
the public, excluding any shares purchased by any employee benefit plan of the
Bank, and any director, officer or employee of the Bank or members of their
immediate families; and (iii) other fixed expenses incurred in connection with
the offering are estimated to be $893,000. As part of the reorganization, the
MHC will be capitalized at $200,000, which will result in a reduction of the
Company's assets and equity by the same amount.
Pro forma earnings have been calculated assuming the common stock had
been sold at the beginning of the period and the net proceeds had been invested
at an average yield of 4.40% for the year ended September 30, 1998, which
approximates the yield on a one-year U.S. Treasury bill on September 30, 1998.
The yield on a one-year U.S. Treasury bill, rather than an arithmetic average of
the average yield on interest-earning assets and average rate paid on deposits,
has been used to estimate income on net proceeds because it is believed that the
one-year U.S. Treasury bill rate is a more accurate estimate of the rate that
would be obtained on an investment of net proceeds from the offering. The pro
forma after-tax yield is assumed to be 2.75% for the year ended September 30,
1998, based on an effective tax rate of 37.5%. The effect of withdrawals from
deposit accounts for the purchase of common stock has not been reflected.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of common
stock, as adjusted (in the case of pro forma net earnings per share) to give
effect to the purchase of shares by the ESOP. Pro forma stockholders' equity
amounts have been calculated as if the common stock had been sold on September
30, 1998 and, accordingly, no effect has been given to the assumed earnings
effect of the transactions.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of consolidated assets and liabilities
of the Company computed in accordance with generally accepted accounting
principles ("GAAP"). The pro forma stockholders' equity is not intended to
represent the fair market value of the common stock and may be greater than
amounts that would be available for distribution to stockholders in the event of
liquidation.
The following tables summarize historical data of the Bank and pro
forma data of the Company at or for the year ended September 30, 1998, based on
the assumptions set forth above and in the tables and should not be used as a
basis for projections of market value of the common stock following the
reorganization. No effect has been given in the tables to the possible issuance
of additional common stock reserved for future issuance pursuant to a stock
option plan that may be adopted by the Board of Directors of the Company within
one year following the reorganization, nor does book value give any effect to
the liquidation account to be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders or the bad debt reserve in
liquidation. See "The Reorganization - Effects of Reorganization - Liquidation
Rights" and "Management - Potential Stock Benefit Plans - Stock Option Plans."
11
At or For the Year Ended September 30, 1998
------------------------------------------------------------
$36,975,000 $43,500,000 $50,025,000 $57,528,750
Independent Independent Independent Independent
Valuation Valuation Valuation Valuation
--------- --------- --------- ---------
1,737,825 2,044,500 2,351,175 2,703,851
Shares Shares Shares Shares
------ ------ ------ ------
(Dollars in thousands, except per share amounts)
Gross proceeds .................................. $ 17,378 $ 20,445 $ 23,512 $ 27,039
Less expenses ................................... (1,003) (1,025) (1,046) (1,070)
Less capital to MHC ............................. (200) (200) (200) (200)
----------- ----------- ----------- -----------
Estimated net proceeds ....................... 16,175 19,220 22,266 25,769
Less ESOP funded by the Company ................. (1,390) (1,636) (1,881) (2,163)
Less stock programs adjustment .................. (695) (818) (940) (1,082)
----------- ----------- ----------- -----------
Estimated investable net proceeds ............ $ 14,090 $ 16,766 $ 19,445 $ 22,524
=========== =========== =========== ===========
Net Income:
Historical ................................... $ 2,385 $ 2,385 $ 2,385 $ 2,385
Pro forma income on net proceeds ............. 387 461 535 619
Pro forma ESOP adjustments(1) ................ (87) (102) (118) (135)
Pro forma stock programs adjustment(2) ....... (87) (102) (118) (135)
----------- ----------- ----------- -----------
Pro forma net income(1)(3)(4) ................ $ 2,598 $ 2,642 $ 2,684 $ 2,734
=========== =========== =========== ===========
Per share net income
Historical ................................... $ 0.67 $ 0.57 $ 0.49 $ 0.43
Pro forma income on net proceeds ............. 0.11 0.11 0.11 0.11
Pro forma ESOP adjustments(1) ................ (0.02) (0.02) (0.02) (0.02)
Pro forma stock programs adjustment(2) ....... (0.02) (0.02) (0.02) (0.02)
----------- ----------- ----------- -----------
Pro forma net income per share(1)(3)(4) ...... $ 0.73 $ 0.63 $ 0.56 $ 0.49
=========== =========== =========== ===========
Shares used in calculation of income per share(1) 3,572,377 4,202,796 4,833,215 5,558,198
Stockholders' equity:
Historical ................................... $ 36,107 $ 36,107 $ 36,107 $ 36,107
Estimated net proceeds ....................... 16,175 19,220 22,266 25,769
Less: Common Stock acquired by the ESOP(1) ... (1,390) (1,636) (1,881) (2,163)
Less: Common stock acquired by stock
programs(2) ............................ (695) (818) (940) (1,082)
----------- ----------- ----------- -----------
Pro forma stockholders' equity(1)(3)(4) ...... $ 50,197 $ 52,873 $ 55,552 $ 58,631
=========== =========== =========== ===========
Stockholders' equity per share:
Historical ................................... $ 9.77 $ 8.30 $ 7.22 $ 6.28
Estimated net proceeds ....................... 4.37 4.42 4.45 4.48
Less: Common Stock acquired ESOP(1) .......... (0.38) (0.38) (0.38) (0.38)
Less: Common Stock acquired by stock
programs(2) ............................ (0.19) (0.19) (0.19) (0.19)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(4) .. $ 13.58 $ 12.15 $ 11.10 $ 10.19
=========== =========== =========== ===========
Offering price as a percentage of pro forma
stockholders' equity per share ................ 73.66% 82.27% 90.05% 98.12%
=========== =========== =========== ===========
Offering price to pro forma
net income per share .......................... 13.75X 15.91X 18.01X 20.33X
=========== =========== =========== ===========
Shares used in calculation of book value/share .. 3,697,500 4,350,000 5,002,500 5,752,875
- ---------------------
(1) Assumes that 8% of the shares of common stock sold in the offering will be
purchased by the ESOP and that the ESOP will borrow funds from the Company.
The common stock acquired by the ESOP is reflected as a reduction of
stockholder's equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the loan. This table assumes a 10 year amortization period. See
"Management - Executive Compensation - Employee Stock Ownership
12
Plan." The pro forma net earnings assumes: (i) that the Bank's contribution
to the ESOP for the principal portion of the debt service requirement for
the year ended September 30, 1998 were made at the end of the period; (ii)
that 13,903, 16,356, 18,809, and 21,631 shares at the minimum, midpoint,
maximum, and 15% above the maximum of the range, respectively, were
committed to be released during the year ended September 30, 1998 at an
average fair value of $10.00 per share and were accounted for as a charge
to expense in accordance with Statement of Position ("SOP") No. 93-6; and
(iii) only the ESOP shares committed to be released were considered
outstanding for purposes of the net earnings per share calculations, while
all ESOP shares were considered outstanding for purposes of the
stockholders' equity per share calculations. See also "Risk Factors -
Expenses Associated with the ESOP and Stock Benefit Plans' for a discussion
of possible added costs for the ESOP.
(2) Gives effect to the stock programs that may be adopted by the Bank
following the reorganization and presented for approval at a meeting of
stockholders to be held within one year after completion of the
reorganization. If the stock programs are approved by the stockholders, the
stock programs would be expected to acquire an amount of common stock equal
to 4% of the shares of common stock sold in the offering, or 69,513,
81,780, 94,047, and 108,154 shares of common stock respectively at the
minimum, midpoint, maximum and 15% above the maximum of the range through
open market purchases. Funds used by the stock programs to purchase the
shares will be contributed to the stock programs by the Bank. In
calculating the pro forma effect of the stock programs, it is assumed that
the required stockholder approval has been received, that the shares were
acquired by the stock programs at the beginning of the year ended September
30, 1998 through open market purchases, at $10.00 per share, and that 20%
of the amount contributed was amortized to expense during the year ended
September 30, 1998. There can be no assurance that stockholder approval of
the stock programs will be obtained, or the actual purchase price of the
shares will be equal to $10.00 per share. See "Management - Potential Stock
Benefit Plans - Stock Programs."
(3) The retained earnings of the Company and the Bank will continue to be
substantially restricted after the reorganization. See "Dividend Policy,"
"The Reorganization - Effects of Reorganization - Liquidation Rights" and
"Regulation - Regulation of the Bank - Dividends and Other Capital
Distribution Limitations."
(4) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plans that may be adopted by the Bank
following the reorganization which, in turn, would be presented for
approval at a meeting of stockholders to be held within one year after the
completion of the reorganization. If the stock option plans are presented
and approved by stockholders, an amount equal to 10% of the common stock
sold in the offering, or 173,782, 204,450, 235,117, and 270,385 shares at
the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plans. The issuance of common
stock pursuant to the exercise of options under the stock option plans will
result in the dilution of existing stockholders' interests. Assuming
stockholder approval of the stock option plans and the exercise of all
options at the end of the period at an exercise price of $10.00 per share,
the pro forma net earnings per share would be $0.71, $0.61, $0.54, and
$0.48, respectively at the minimum, midpoint, maximum and 15% above the
maximum of the range for the year ended September 30, 1998; pro forma
stockholders' equity per share would be $13.42, $12.06, $11.06 and $10.18,
respectively at the minimum, midpoint, maximum and 15% above the maximum of
the range for the year ended September 30, 1998. See "Management -
Potential Stock Benefit Plans - Stock Option Plans."
13
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Bank's historical and pro forma
capital position relative to its capital requirements as of September 30, 1998.
For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see "Use of Proceeds," "Capitalization" and "Pro
Forma Data." The definitions of the terms used in the table are those provided
in the capital regulations issued by the OTS. For a discussion of the capital
standards applicable to the Bank, see "Regulation - Regulation of the Bank -
Regulatory Capital Requirements."
Pro Forma at September 30, 1998
----------------------------------------------------------------------------------------
Actual, at $17,378,250 $20,445,000 $23,511,750 $27,038,510
September 30, 1998 Offering Offering Offering Offering(1)
------------------- --------------------- ----------------------- ------------------ --------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------------------- ------ ------------
(Dollars in thousands)
GAAP Capital(3)...... $36,107 8.6% $ 44,194 10.3% $ 45,717 10.7% $47,240 11.0% $ 48,991 11.3%
====== === ======== ====== ====== ====== ====== ====== ======== ======
Tangible Capital:
Actual or
Pro Forma......... $35,887 8.6% $ 43,974 10.3% $ 45,497 10.6% $ 47,020 10.9% $ 48,771 11.3%
Required........... 6,286 1.5 6,407 1.5 6,430 1.5 6,453 1.5 6,479 1.5
------ --- -------- ----- ------- ----- ------- ------ -------- -----
Excess............. $29,601 7.1% $ 37,568 8.8% $ 39,067 9.1% $ 40,567 9.4% $ 42,292 9.8%
====== === ======== ===== ======= ===== ======= ====== ======== =====
Core Capital:
Actual or
Pro Forma........ $35,887 8.6% $ 43,974 10.3% $45,497 10.6% $ 47,020 10.9% $ 48,771 11.3%
Required(4)........ 16,762 4.0 17,085 4.0 17,146 4.0 17,207 4.0 17,277 4.0
------ --- ------- ----- -------- ----- ------- ----- -------- -----
Excess............. $19,125 4.6% $ 26,889 6.3% $ 28,351 6.6% $ 29,813 6.9% $ 31,494 7.3%
====== === ======= ===== ======== ===== ======= ===== ======== =====
Risk-Based Capital:
Actual or
Pro Forma(5)(6).. $38,451 15.5% $ 46,538 18.5% $ 48,061 19.1% $ 49,584 19.6% $ 51,335 20.2%
Required........... 19,795 8.0 20,119 8.0 20,180 8.0 20,241 8.0 20,311 8.0
------ ---- ------- ----- ------- ----- ------- ----- ------- -----
Excess............. $18,656 7.5% $ 26,420 10.5% $ 27,882 11.1% $ 29,343 11.6% $ 31,025 12.2%
====== ==== ======= ===== ======== ===== ======= ===== ======= =====
- -----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Offering Range of up to 15% as a
result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of total adjusted assets.
Risk-based capital levels are shown as a percentage of risk-weighted
assets.
(3) GAAP Capital includes unrealized gain on available-for-sale securities,
net, which is not included as regulatory capital.
(4) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a 4% to 5% core capital ratio requirement for all other
thrifts. See "Regulations - Regulation of the Bank-Regulatory Capital
Requirements.
(5) Assumes net proceeds are invested in assets that carry a 50% risk-weighting
(6) The difference between equity under GAAP and regulatory risk-based capital
is attributable to the addition of the general valuation allowance of
$2,564,000 at September 30, 1998, and the subtraction of the unrealized
gain on available-for-sale securities, net of $220,000.
14
FIRST FEDERAL FLORIDA
STATEMENTS OF EARNINGS
The Statements of Earnings of the Bank for each of the years in the
three year period ended September 30, 1998 have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, whose report thereon
appears elsewhere in the prospectus. These Statements of Earnings should be read
in conjunction with the Financial Statements and Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Years ended September 30,
---------------------------------------------
1998 1997 1996
------------- ------------- ------------
(In thousands)
Interest income:
Interest and fees on loans $ 26,992 27,655 23,346
Interest and dividends on investment securities
available for sale and held to maturity 3,906 5,513 7,617
Other interest income 994 622 731
------------- ------------- ------------
Total interest income 31,892 33,790 31,694
------------- ------------- ------------
Interest expense:
Interest on deposits 18,831 19,702 18,961
Interest on Federal Home Loan Bank advances 135 -- --
------------- ------------- ------------
Total interest expense 18,966 19,702 18,961
------------- ------------- ------------
Net interest income before loan loss provision 12,926 14,088 12,733
Provision for loan losses 405 317 600
------------- ------------- ------------
Net interest income 12,521 13,771 12,133
------------- ------------- ------------
Other income:
Fees and service charges 1,607 1,455 1,301
Gain (loss) on sale of loans and investments available for sale 117 114 170
Gain on sale of branches 3,016 -- --
Other, net 221 6 75
------------- ------------- ------------
Total other income 4,961 1,575 1,546
------------- ------------- ------------
Other expenses:
Compensation and employee benefits 6,323 5,863 5,288
Other compensation and employee benefits 2,085 -- --
Occupancy and equipment costs 1,818 1,646 1,453
Marketing 495 488 471
Data processing costs 558 479 443
Federal insurance premiums 338 456 1,003
Savings Association Insurance Fund special assessment -- -- 2,513
Real estate operations, net 180 22 39
Other 2,149 2,566 2,172
------------- ------------- ------------
Total other expenses 13,946 11,520 13,382
------------- ------------- ------------
Income before income taxes 3,536 3,826 297
Income tax expense 1,151 1,299 44
============= ============= ============
Net income $ 2,385 2,527 253
============= ============= ============
15
See accompanying notes to financial statements beginning on page F-6 which are
an integral part of these statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of the Bank's financial condition
and results of operations is intended to provide assistance and understanding of
the Bank's financial condition and results of operations. The information in
this section should be read with the financial statements and the notes to
financial statements beginning at page F-___.
The Bank's results of operations are primarily dependent on its net
interest income. Net interest income is a function of the balances of loans and
investments outstanding in any one period, the yields earned on such loans and
investments and the interest paid on deposits and borrowed funds that were
outstanding in that same period. The Bank's noninterest income consists
primarily of fees and service charges. The results of operations are
significantly impacted by the amount of provisions for loan losses which, in
turn, are dependent upon, among other things, the size and makeup of the loan
portfolio, loan quality and loan trends. The noninterest expenses consist
primarily of employee compensation and benefits, occupancy and equipment
expenses, data processing costs, marketing costs, professional fees and federal
deposit insurance premiums. The Bank's results of operations are affected by
general economic and competitive conditions, including changes in prevailing
interest rates and the policies of regulatory agencies.
Business Strategy
The Bank's business strategy has been to operate as a well-capitalized
independent community savings bank dedicated to providing quality service at
competitive prices. Generally, the Bank has sought to implement this strategy by
maintaining a substantial part of its assets in loans secured by one- to
four-family residential real estate located in the Bank's market area, consumer
loans, home equity loans, mortgage-backed securities and U.S. Government and
agency obligations.
While management intends to continue emphasizing these objectives, the
additional capital will allow the Bank to modify the existing operating strategy
in order to achieve greater growth and profitability. Specifically, the Bank
intends to: (i) increase its percentage of commercial and consumer loans and
commercial deposit accounts, among other products; (ii) expand within the Bank's
existing market area through its branch network and through its lending and
deposit taking services; and (iii) invest in appropriate technology that will
enable the Bank to serve its customers effectively. By seeking to broaden the
range of its products and services offered, the Bank believes it will offset the
declining margins in the competitive market for one- to four-family residential
mortgage loans.
16
Highlights of the Bank's business strategy are as follows:
Community-Oriented Institution. Based on total assets, Bank is the
largest independent financial institution headquartered in Polk County, Florida.
The Bank is committed to meeting the financial needs of the communities in which
it operates. Management believes that the Bank is large enough to provide a full
range of personal and business financial services, and yet is small enough to
provide such services in a personalized and efficient manner. Management
believes that the Bank can be more effective in servicing its customers than
many of its non-local competitors because of the Bank's ability to quickly and
effectively provide senior management responses to customer needs and inquiries.
The Bank intends to maintain its community orientation by continuing to
emphasize traditional deposit and loan products, primarily single-family
residential mortgages. The Bank has recently added several convenience services
to enhance its capabilities as a full service community bank, including the
issuance of debit cards and placing ATMs at five of its branches. The Bank
expects that, by the end of 1999, all of its branches will be equipped with
ATMs. A complete analysis of the Bank's product and services offerings will be
made in 1999 with the focus to deliver the products and services that meet the
needs of its customers, including internet banking and telephone banking
services.
Market Focus. During 1997, management of the Bank developed a product
and branch profitability model to analyze its operations. Based on the Bank's
strategic analyses and other discussions relative to future growth and
utilization of capital, the Bank entered into an agreement in October 1997 with
another financial institution to sell certain branches and related deposits. The
five branches sold were referred to as the Bank's Tri-County Region (the "Branch
Sale"). The branches were not contiguous to the Bank's main market area, having
been acquired from a troubled financial institution in the early 1980's. In
addition, the growth projections for the area were below the projected growth in
Polk and Manatee Counties. The Bank believed its capital could be more
effectively utilized in Polk and Manatee Counties.
The Branch Sale resulted in the sale of $55.3 million in deposits. The
Bank transferred loans totaling $45.1 million that included the consumer and
mortgage loans from the region and certain mortgage loans from Polk County to
satisfy the deposit sale. The Bank realized a $3.0 million gain on the Branch
Sale.
Commercial Banking. The Bank is expanding its lending programs for
commercial business and commercial real estate loans in an effort to satisfy a
perceived need within its market area and increase its loan portfolio. Also, the
Bank's diversification efforts to become a full service community bank will
place a greater emphasis on providing products and services to meet the credit
and checking needs of small to medium sized businesses.
In 1998, the Bank hired a senior commercial loan officer to head up its
lending and credit activities. Two additional commercial loan staff members were
added to support the Bank's increased activities in this area. To further
enhance its transition to a full service community bank, the Bank plans to hire
additional personnel experienced in commercial lending and will increase its
marketing efforts on smaller businesses operating in the Bank's market areas.
Residential Mortgage Lending. Since its inception, the Bank has
originated mortgage loans and held most of the loans in its loan portfolio. The
Bank has emphasized and will continue to emphasize the origination of mortgage
loans secured by one- to four-family residential properties located in its
market areas. Such mortgage loans generally have less credit risk than loans
collateralized by multi-family or commercial real estate. At September 30, 1998,
one- to four-family residential mortgage loans
17
totaled $272.0 million, or 75.9% of the Bank's loan portfolio. Generally, the
yield on mortgage loans originated by the Bank is greater than that of
mortgage-backed securities purchased by the Bank.
The Bank is the top residential construction lender in Polk County.
Although the Bank makes residential mortgage loans to local builders to
construct houses that are not pre-sold, the large majority of the construction
loans are made to individual borrowers that have contracted to have their
permanent residence built. These construction loans are modified into permanent
loans upon completion of construction and have less credit risk since the
borrower has previously been qualified for the permanent loan under the Bank's
customary underwriting criteria. Construction loans made to a builder carry the
extra risk of ultimate sale of the completed house to a qualified borrower. The
Bank minimizes its risk on construction loans made directly to builders by
limiting the number of non-pre-sold houses it finances to any individual
builder.
Analysis of Net Interest Income
The Bank's earnings have historically depended primarily upon the
Bank's net interest income, which is the difference between interest income
earned on its loans and investments ("interest-earning assets") and interest
paid on its deposits and any borrowed funds ("interest-bearing liabilities").
Net interest income is affected by (i) the difference between rates of interest
earned on the Bank's interest-earning assets and rates paid on its
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of its interest-earnings assets and interest-bearing liabilities.
18
Average Balance Sheet. The following table sets forth certain
information relating to the Bank's average balance sheet, the interest earned on
interest-earning assets and paid on interest-bearing liabilities and the average
yields earned and rates paid on such assets and liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
presented. Similar information is provided as of September 30, 1998. Average
balances are derived from month-end balances. Management does not believe that
the use of month-end balances instead of daily average balances has caused any
material differences in the information presented.
Year Ended September 30,
----------------------------------------------------------------------------------
At September 30, 1998 1998 1997 1996
--------------------- ------------------------- ---------------------------- ---------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- ---- ------- -------- -------- ------- -------- --------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1)....... $341,192 7.91% $339,218 $26,992 7.96% $339,992 $27,655 8.13% $288,901 $23,346 8.08%
Investment securities
and other(2)............ 67,905 5.85% 85,594 4,900 5.72 98,836 6,135 6.21 131,145 8,348 6.37
------- ------- ------ ------- ------ ------- ------
Total interest-
earning assets......... 409,097 7.60% 424,812 $31,892 7.51 438,828 $33,790 7.70 420,046 $31,694 7.55
====== ====== ======
Non-interest-earning
assets................... 9,944 12,557 13,640 11,434
------- ------ ------- ------
Total assets............. $419,041 $437,369 $452,468 $431,480
======= ======= ======= =======
Interest-bearing
liabilities:
Checking accounts......... $24,456 1.80% $ 25,177 $ 469 1.86 $ 24,343 $ 607 2.49 $ 21,276 $ 539 2.53
Savings accounts.......... 37,758 1.75% 41,456 859 2.07 48,155 1,204 2.50 49,396 1,235 2.50
Money market accounts..... 18,091 3.97% 15,356 582 3.79 11,767 351 2.98 12,259 333 2.72
Certificates of deposit... 261,382 5.53% 301,093 16,921 5.62 321,938 17,540 5.45 306,256 16,854 5.50
FHLB advances............. 21,000 5.12% 3,539 135 5.10 -- -- -- -- -- --
------- ------- ------- ---------- -------- -------- --------
Total interest-
bearing liabilities.... 362,687 4.65% 386,621 $18,966 4.78 406,203 $19,702 4.74 389,187 $18,961 4.79
====== ====== ======
Non-interest-
bearing liabilities(3)... 20,247 14,354 13,478 10,336
------- ------- ------- -------
Total liabilities......... 382,934 400,975 419,681 399,523
Equity..................... 36,107 36,394 32,787 31,957
------- ------ ------- -------
Total liabilities
and equity.............. $419,041 $437,369 $452,468 $431,480
======= ======= ======= =======
Net interest income........ $12,926 $14,088 $12,733
====== ====== ======
Interest rate spread(4).... 2.95% 2.73% 2.96% 2.76%
===== ====== ====== ======
Net margin on interest-
earning assets(5)........ 3.37% 3.02% 3.21% 3.03%
===== ====== ====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities............... 113% 110% 108% 108%
=== === === ===
- --------------------------------
(1) Average balances include non-accrual loans.
(2) Investment securities includes both securities that are available for sale
and held to maturity. Includes interest-bearing deposits in other financial
institutions.
(3) Includes non-interesting-bearing checking accounts.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities and the Bank's investment in FHLB stock.
(5) Net margin on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
19
Rate/Volume Analysis. The relationship between the volume and rates of
the Bank's interest-bearing assets and interest-bearing liabilities influences
the Bank's net interest income. The following table reflects the sensitivity of
the Bank's interest income and interest expense to changes in volume and in
prevailing interest rates. Each category reflects the: (1) changes in volume
(changes in volume multiplied by old rate); (2) changes in rate (changes in rate
multiplied by old volume); and (3) net change. The net change attributable to
the combined impact of volume and rate has been allocated proportionally to the
absolute dollar amounts of change in each.
Year Ended September 30, Year Ended September 30,
------------------------------ -----------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------ -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------ -----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in thousands)
Interest income:
Loans receivable ..................... $ (65) $ (557) $ (622) $ 4,165 $ 145 $ 4,310
Investment securities and other ...... (780) (496) (1,276) (2,009) (205) (2,214)
------- ------- ------- ------- ------- -------
Total interest-earning assets ....... $ (845) $(1,053) $(1,898) $ 2,156 $ (60) $ 2,096
======= ======= ======= ======= ======= =======
Interest expense:
Checking accounts ..................... $ 24 $ (162) $ (138) $ 109 $ (41) $ 68
Savings accounts ...................... (156) (189) (345) (31) -- (31)
Money market accounts ................. 122 109 231 (13) 31 18
Certificates of deposit ............... (1,156) 537 (619) 842 (156) 686
Other liabilities .................... 135 -- 135 -- -- --
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities . $(1,031) $ 295 $ (736) $ 907 $ (166) $ 741
======= ======= ======= ======= ======= =======
Net change in interest income ......... $ 186 $(1,348) $(1,162) $ 1,249 $ 106 $ 1,355
======= ======= ======= ======= ======= =======
20
Management of Interest Rate Risk and Market Risk
Because the majority of the Bank's assets and liabilities are sensitive
to changes in interest rates, the Bank's most significant form of market risk is
interest rate risk. The Bank, like many other financial institutions, is
vulnerable to an increase in interest rates to the extent that interest-bearing
liabilities generally mature or reprice more rapidly than interest-earning
assets. The lending activities of the Bank have historically emphasized the
origination of long-term, fixed rate loans secured by single-family residences,
and the primary source of funds has been deposits with substantially shorter
maturities. While having interest-bearing liabilities that reprice more
frequently than interest-earning assets is generally beneficial to net interest
income during a period of declining interest rates, such an asset/liability
mismatch is generally detrimental during periods of rising interest rates.
The Board of Directors has established an asset/liability committee
which consists of the Bank's president and senior bank officers. The committee
meets on a monthly basis to review loan and deposit pricing and production
volumes, interest rate risk analysis, liquidity and borrowing needs, and a
variety of other assets and liability management topics.
To reduce the effect of interest rate changes on net interest income
the Bank has adopted various strategies to enable it to improve matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include: (a) the Bank seeks to originate
commercial and consumer loans with adjustable rate features or fixed rate loans
with short maturities; (b) the Bank seeks to lengthen the maturities of its
liabilities when deemed cost effective through the pricing and promotion of
certificates of deposit and utilization of FHLB advances; (c) the Bank seeks to
attract low cost checking and transaction accounts which tend to be less
interest rate sensitive when interest rates rise; and (d) the Bank seeks, when
market conditions permit, to originate and hold in its portfolio adjustable rate
loans which have annual interest rate adjustments. The Bank also maintains an
investment portfolio that provides a stable cash flow, thereby providing
investable funds in varying interest rate cycles.
The Bank has also made a significant effort to maintain its level of
lower cost deposits as a method of enhancing profitability. At September 30,
1998, the Bank had 25.6% of its deposits in low-cost passbook, checking and
money market accounts. These deposits have traditionally remained relatively
stable and would be expected to be moderately affected in a period of rising
interest rates. Because of this relative stability in a significant portion of
its deposits, the Bank has been able to offset the impact of rising rates in
other deposit accounts.
Exposure to interest rate risk is actively monitored by management. The
Bank's objective is to maintain a consistent level of profitability within
acceptable risk tolerances across a broad range of potential interest rate
environments. The Bank uses the OTS Net Portfolio Value ("NPV") Model to monitor
its exposure to interest rate risk, which calculates changes in net portfolio
value. Reports generated from assumptions provided and modified by management
are reviewed by the Asset/Liability Management Committee and reported to the
Board of Directors quarterly. The Interest Rate Sensitivity of Net Portfolio
Value Report shows the degree to which balance sheet line items and net
portfolio value are potentially affected by a 100 to 400 basis point (1/100th of
a percentage point) upward and downward parallel shift (shock) in the Treasury
yield curve.
The following table presents the Bank's NPV as of September 30, 1998,
as calculated by the OTS, based on information provided by the Bank.
21
Net Portfolio Value ("NPV") NPV as % of Present Value of Assets
--------------------------- -----------------------------------
Change Basis Point
in Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- -------- -------- --------- ------
(Dollars in thousands)
+400 bp $29,878 $-14,699 -33% 7.56% -291 bp
+300 bp 34,781 -9,797 -22% 8.61% -186 bp
+200 bp 39,155 -5,423 -12% 9.50% -97 bp
+100 bp 42,431 -2,146 -5% 10.12% -35 bp
0 bp 44,578 10.47%
-100 bp 45,285 +708 +2% 10.51% +4 bp
-200 bp 46,215 +1,637 +4% 10.58% +11 bp
-300 bp 48,047 +3,470 +8% 10.83% +36 bp
-400 bp 49,875 +5,297 +12% 11.07% +60 bp
Future interest rates or their effects on NPV or net interest income
are not predictable. Nevertheless, the Bank's management does not expect current
interest rates to have a material adverse effect on the Bank's NPV or net
interest income in the near future. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in such computations. Although certain assets and liabilities may
have similar maturity or periods of repricing, they may react at different times
and in different degrees to changes in the market interest rates. The interest
rate on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while rates on other types of assets and
liabilities may lag behind changes in market interest rates. Certain assets such
as adjustable rate mortgages, generally have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. In the
event of a change in interest rates, prepayments and early withdrawal levels
could deviate significantly from those assumed in making calculations set forth
above. Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Comparison of Financial Condition at September 30, 1998 and 1997
Assets. Total assets decreased $47.8 million, or 10.2%, to $419.0
million at September 30, 1998 from $466.8 million at September 30, 1997. The
decrease in total assets resulted primarily from: the transfer of $45.1 million
in loans in connection with the Branch Sale which was partially offset by a
$27.2 million increase in net loans outstanding from new originations; a
reduction of $14.5 million in the Bank's federal funds sold position; and a
reduction in the investment securities portfolio of $13.6 million, that was used
to fund the new loan growth.
Liabilities. Total liabilities decreased $50.3 million, or 11.6%, to
$382.9 million at September 30, 1998 from $433.2 million at September 30, 1997.
The decrease in total liabilities resulted primarily from: the transfer of $55.3
million in deposits in connection with the Branch Sale; and a $35.2 million
decrease in deposits, primarily certificates of deposit due to the Bank's
elimination of premium pricing on these accounts to reduce its cost of funds.
These deposit outflows were offset partially by $12.9 million in interest
credited to deposit accounts and an increase in FHLB advances of $21.0 million
since the rates on the advances fit into the Bank's strategy to reduce its cost
of funds.
22
Equity. The increase in the Bank's equity reflects the $2.4 million in
net income for the year ended September 30, 1998 and an increase of $134,000 in
unrealized gains on investments available for sale.
Liquidity and Capital Resources
The liquidity of a savings institution reflects its ability to provide
funds to meet loan requests, to accommodate possible outflows in deposits, and
to take advantage of interest rate market opportunities. Funding of loan
requests, providing for liability outflows, and management of interest rate
fluctuations require continuous analysis in order to match the maturities of
specific categories of short-term loans and investments with specific types of
deposits and borrowings. Savings institution liquidity is normally considered in
terms of the nature and mix of the savings institution's sources and uses of
funds.
Asset liquidity is provided through loan repayments and the management
of maturity distributions for loans and securities. An important aspect of
liquidity lies in maintaining sufficient levels of loans and mortgage-backed
securities that generate monthly cash flows.
In addition to the $2.5 million in cash provided by operations, other
significant cash flows or uses (amounts shown in parentheses) were as follows:
Cash provided by operations $2.5 million
FHLB advances 21.0 million
Decrease in net deposits (excluding Branch Sale) (22.0) million
Maturities of and repayments on investment securities 47.9 million
Purchases of investment securities (34.0) million
Cash required to complete Branch Sale (6.7) million
Net increase in loans (excluding Branch Sale) (30.8) million
Other net 5.5 million
-------
Net decrease in cash ($16.6) million
=======
The Bank is subject to federal regulations that impose certain minimum
capital requirements. For a discussion on such capital levels, see "Historical
and Pro Forma Capital Compliance" and "Regulation -
Regulation of the Bank - Regulatory Capital Requirements."
Management is not aware of any known trends, events or uncertainties
that will have or are reasonably likely to have a material effect on the Bank's
liquidity, capital or operations nor is management aware of any current
recommendation by regulatory authorities, which if implemented, would have such
an effect.
Comparison of Operating Results for Year Ended September 30, 1998 to Year
Ended September 30, 1997
Net Income. Net income for the year ended September 30, 1998 decreased
4.0% to $2.4 million, compared to $2.5 million for the same period last year.
Net income was affected by certain nonrecurring transactions as follows:
o $3.0 million gain from the Branch Sale. See -- "Market Focus" and "Other
Income."
o $2.2 million in charges resulting from changes in the Bank's employee
benefit plans. The changes relate mainly to the freezing of benefits under
the existing defined benefit pension plan
23
($1.5 million) and the adoption of a directors' retirement plan ($400,000).
See -- "Other Expense."
Net interest income decreased 8.5% to $12.9 million for the year ended
September 30, 1998 compared to $14.1 million for the year ended September 30,
1997. This decrease resulted from a decrease in interest income of $1.9 million
which was partially offset by a decrease in interest expense of $736,000. Other
income increased to $5.0 million for the year ended September 30, 1998 from $1.6
million for the year ended September 30, 1997, resulting primarily from the
Branch Sale. Other expenses increased to $14.0 million for the year ended
September 30, 1998 from $11.5 million for the year ended September 30, 1997, due
primarily to certain nonrecurring transactions discussed above.
Interest Income. Total interest income decreased to $31.9 million for
the year ended September 30, 1998 from $33.8 million for the year ended
September 30, 1997, as a result of a decrease in average interest-earning assets
and a decrease in the average interest rates earned. Average interest-earning
assets decreased to $424.8 million for the year ended September 30, 1998 from
$438.8 million for the year ended September 30, 1997. This decrease resulted
from the transfer of $45.1 million in interest-earning assets in January 1998 in
connection with the Branch Sale, partially offset by strong loan growth
throughout the year. The average rate earned on interest-earning assets
decreased to 7.51% for the year ended September 30, 1998 from 7.70% for the year
ended September 30, 1997, a decrease of 19 basis points. Interest income on
loans decreased $663,000 to $27.0 million for the year ended September 30, 1998
from $27.7 million for the year ended September 30, 1997. This slight decrease
reflects the strong loan growth, particularly refinancings, that offset the sale
of loans noted above. In addition, the average yield on loans decreased by 17
basis points during the year, reflecting the general downward trend in interest
rates. Interest income on investment securities and other investments decreased
$1.2 million to $4.9 million for the year ended September 30, 1998 from $6.1
million for the year ended September 30, 1997. This decrease was primarily the
result of a $13.2 million decrease in the average balance to $85.6 million in
1998 from $98.8 million in 1997. The decrease in the average balance of
investment securities was primarily due to the maturities and calls of certain
securities and the redeployment of these funds into loans. Also the average
yield on investment securities and other investments decreased by 49 basis
points since yields on the reinvestment of available assets have decreased with
the general downward trend in interest rates.
Interest Expense. Total interest expense decreased by $736,000 for the
year ended September 30, 1998 from $19.7 million for the year ended September
30, 1997, as a result of a decrease in average interest-bearing liabilities,
offset by a slight 4 basis point increase in the average cost of funds. Average
interest-bearing liabilities decreased to $386.6 million for the year ended
September 30, 1998 from $406.2 million for the year ended September 30, 1997.
The decrease is attributable to the sale of $55.3 million in deposits in January
1998 when the Bank sold the deposits of five branches, partially offset by new
deposits and borrowings to fund the asset growth. The average interest rate paid
on interest-bearing liabilities was 4.78% for the year ended September 30, 1998
compared to 4.74% for the year ended September 30, 1997, an increase of 4 basis
points. The increase in rates paid on interest-bearing liabilities reflects
market rates as well as the transfer of lower yielding certificates of deposit
in connection with the Branch Sale. Interest expense on deposits decreased
$871,000 to $18.8 million for the year ended September 30, 1998 from $19.7
million for the year ended September 30, 1997. This decrease was a result of a
decrease of $23.1 million in the average balance of interest-bearing deposits to
$383.1 million in 1998 from $406.2 million in 1997 partially offset by an
increase of 18 basis points in the average rate to 4.92% in 1998 from 4.74% in
1997. The Bank began using FHLB advances in June 1998 to control its cost of
funds and lengthen the maturity of its liabilities.
Provision for Loan Losses. The provision for loan losses is charged to
operations to bring the total allowance for loan losses to a level considered
appropriate by management based on historical
24
experience, volume and type of lending conducted by the Bank, industry
standards, the level and status of past due and nonperforming loans, the general
economic conditions in the Bank's lending area and other factors affecting the
collectibility of the Bank's loan portfolio. The provision for loan losses was
$405,000 for the year ended September 30, 1998 compared to $317,000 for the year
ended September 30, 1997. The allowance for loan losses was $2.6 million at
September 30, 1998 and 1997. The current allowance represents .76% of total
loans outstanding at September 30, 1998. The Bank had net charge-offs of
$474,000 for the year ended September 30, 1998 compared to net charge-offs of
$69,000 for the year ended September 30, 1997. See "Business of the Bank --
Non-Performing Loans and Problem Assets." The Bank monitors its loan portfolio
on a continuing basis and intends to continue to provide for loan losses based
on its ongoing review of the loan portfolio and general market conditions.
Other Income. In addition to the gain from the Branch Sale, fees and
service charges increased $152,000, or 10.4% from 1997 to 1998. This reflects
the Bank's continuing emphasis on charging appropriate fees for its services.
The Bank continues to review its products with a goal to increase sources of
non-interest income, including fees and service charges.
Other Expense. Other expense increased by $2.5 million to $14.0 million
for the year ended September 30, 1998 from $11.5 million for the year ended
September 30, 1997. In addition to the nonrecurring charges discussed in "Net
Income" above, compensation and employee benefits increased due to the hiring of
additional commercial lending staff personnel, an average 5% increase in salary
adjustments, a full year of staff cost associated with the Bank's newest branch
that opened in September 1997, partially offset by the staff costs savings
realized through the Branch Sale. Occupancy and equipment costs increased due to
expenses related to a data processing conversion in 1998 as well as a full
year's cost related to the new customer service platform system installed in May
1997.
The Company expects increased expenses in the future as a result of the
establishment of the ESOP, potential stock benefit plans, and the adoption of
the directors and executive retirement plans, as well as increased costs
associated with being a public company (e.g., periodic reporting, annual meeting
materials, transfer agent, professional and stock listing fees).
Comparison of Operating Results for Year Ended September 30, 1997 to Year Ended
September 30, 1996
Net Income. Net income for the year ended September 30, 1997 increased
31.6% to $2.5 million, compared to $1.9 million for fiscal year 1996, excluding
the one-time SAIF special assessment of $1.7 million after tax. Including the
one-time SAIF special assessment, net income for the year ended September 30,
1996 was $253,000. Net interest income increased 11.0% to $14.1 million for the
year ended September 30, 1997 compared to $12.7 million for the year ended
September 30, 1996. This increase was due to an increase in interest income of
$2.1 million offset by an increase in interest expense of $741,000. Other
expense decreased to $11.5 million for the year ended September 30, 1997 from
$13.4 million for the year ended September 30, 1996, due primarily to the
one-time SAIF special assessment of $2.5 million before taxes.
Interest Income. Total interest income increased to $33.8 million for
the year ended September 30, 1997 from $31.7 million for the year ended
September 30, 1996, as a result of an increase in average interest-earning
assets and an increase in the average interest rate. Average interest-earning
assets increased to $438.8 million for the year ended September 30, 1997 from
$420.0 million for the year ended September 30, 1996. The average rate earned on
interest-earning assets increased to 7.70% for the year ended September 30, 1997
from 7.55% for the year ended September 30, 1996, an increase of 15 basis
points. Interest income on loans increased $4.3 million to $27.7 million for the
year ended
25
September 30, 1997 from $23.4 million for the year ended September 30, 1996.
This increase was a result of a $51.1 million increase in the average balance to
$340.0 million in 1997 from $288.9 million in 1996. In addition, the average
yield on loans increased by 5 basis points to 8.13% in 1997 from 8.08% in 1996.
The increase in the average balance of total loans was mainly due to strong
growth in the residential loan portfolio resulting from high levels of loan
originations and significant growth in consumer loans resulting from
concentrated sales efforts in this area. Interest income on investment
securities and other investments decreased $2.2 million to $6.1 million for the
year ended September 30, 1997 from $8.3 million for the year ended September 30,
1996. This decrease was primarily the result of a gradual liquidation of the
investment portfolio to fund the strong loan demand.
Interest Expense. Total interest expense increased to $19.7 million for
the year ended September 30, 1997 from $19.0 million for the year ended
September 30, 1996, as a result of an increase in average interest-bearing
liabilities, partially offset by a decrease in the cost of these funds. Average
interest-bearing liabilities increased to $406.2 million for the year ended
September 30, 1997 from $389.2 million for the year ended September 30, 1996.
The average interest rate paid on interest-bearing liabilities was 4.74% for the
year ended September 30, 1997 compared to 4.79% for the year ended September 30,
1996, a decrease of 5 basis points. The increase in average-interest bearing
liabilities reflects a strong growth in certificates of deposit and checking
accounts used to fund the loan demand.
Provision for Loan Losses. The provision for loan losses is charged to
operations to bring the total allowance for loan losses to a level considered
appropriate by management based on historical experience, volume and type of
lending conducted by the Bank, industry standards, the level and status of past
due and nonperforming loans, the general economic conditions in the Bank's
lending area and other factors affecting collectibility of the Bank's loan
portfolio. The provision for loan losses was $317,000 for the year ended
September 30, 1997 compared to $600,000 for the year ended September 30, 1996,
respectively. The allowance for loan losses was $2.6 million and $2.4 million at
September 30, 1997 and 1996, respectively. The allowance was .74% of total loans
at both September 30, 1997 and 1996. The Bank had net charge-offs of $69,000 for
the year ended September 30, 1997 compared to $117,000 for the year ended
September 30, 1996. The Bank monitors its loan portfolio on a continuing basis
and intends to continue to provide for loan losses based on its ongoing review
of the loan portfolio and general market conditions.
Other Income. Other income stayed essentially even at $1.6 million for
the year ended September 30, 1997 compared to $1.5 million for the year ended
September 30, 1996. During the 1997 fiscal year, the Bank recorded a $154,000,
or 11.8%, increase in fees and service charges as the Bank sought to increase
other income through explicit pricing of services. The increase in fees and
service charges was partially offset by a decrease in gains on sales of loans
and investments.
Other Expense. Other expense decreased by $1.9 million to $11.5 million
for the year ended September 30, 1997 from $13.4 million for the year ended
September 30, 1996. The decrease was primarily due to the special assessment to
recapitalize the SAIF fund of $2.5 million for the year ended September 30, 1996
and a decrease of $547,000 in premiums for the year ended September 30, 1997 due
to lower assessment rates resulting from recapitalization of the SAIF. Other
changes included an increase of $575,000 in compensation and benefits, and an
increase of $394,000 in other expense. The increase in compensation and benefits
is due primarily to additional staff required to support the growth in loans and
deposits.
Provision for Income Taxes. Provision for income taxes increased by
$1.3 million from $44,000 in 1996, or an effective tax rate of 15%, to $1.3
million in 1997, or an effective tax rate of 34%. The effective tax rate in 1997
appears appropriate based upon the income and expenses incurred
26
during the year. The low effective tax rate reflected for 1996 is attributable
to certain adjustments deemed necessary by the Bank. These adjustments are not
anticipated to be recurring and should not have any effect on the financial
condition of the Bank in the future.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (Statement No. 130) establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Under Statement No. 130, comprehensive income is
divided into net income and other comprehensive income. Other comprehensive
income includes items previously recorded directly in equity, such as unrealized
gains or losses on securities available for sale. Statement No. 130 has not been
adopted by the Bank as of this date, but will apply the provisions of this
statement commencing with the first quarterly reporting period after September
30, 1998. Comparative financial statements provided for earlier periods once
quarterly periods begin, will be reclassified to reflect the application of the
provisions of Statement No. 130. For the Bank, comprehensive income is
determined by adding unrealized investment holding gains or losses during the
period to net income.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information (Statement No. 131)," which changes the
way public companies report information about segments of their business and
requires them to report selected segment information in their quarterly reports
issued to stockholders. Among other things, Statement No. 131 requires public
companies to report (i) certain financial and descriptive information about its
reportable operating segments (as defined), and (ii) certain enterprise-wide
financial information about products and services, geographic areas and major
customers. The required segment financial disclosures include a measure of
profit or loss, certain specific revenue and expense items, and total assets.
Statement No. 131 is effective for reporting by public companies in fiscal years
beginning after December 15, 1997 and, accordingly, would be adopted by the Bank
upon completion of its reorganization. Statement No. 131 is not expected to have
a significant impact on the Bank's financial reporting.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 "Employers Disclosures about Pensions and Other Postretirement
Benefits" (Statement No. 132). Statement 132 revised employers' disclosures
about pension and other postretirement benefits plans. It does not change the
measurement of recognition of those plans. It standardized the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information in changes in the benefit
obligations and fair value of plan assets that will facilitate financial
analysis and eliminates certain required disclosures of previous accounting
pronouncements.
Statement No. 132 is effective for fiscal years beginning after
December 15, 1997. Restatement of disclosures for earlier periods provided for
comparative purposes is required unless the information is not readily
available. As Statement No. 132 affects disclosure requirements, it is not
expected to have a material impact on the financial statements of the Bank.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(Statement No. 133). Statement No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Statement No. 133 is effective for all fiscal
quarters
27
of fiscal years beginning after June 15, 1999. Initial application of this
Statement should be as of the beginning of an entity's fiscal quarter, on that
date, hedging relationships must be designated anew and documented pursuant to
the provisions of this Statement. Earlier application of all of the provisions
of Statement No. 133 is encouraged, but it is permitted only as of the beginning
of any fiscal quarter that begins after issuance of this Statement. This
Statement should not be applied retroactively to financial statements of prior
periods. Statement No. 133 is not expected to have a material impact on the
Bank's financial statement presentations.
Year 2000 Readiness Disclosure
Rapid and accurate data processing is essential to the Bank's
operations. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in prior years) are
expected to read entries for the year 2000 as the year 1900 or as zero and
incorrectly attempt to compute payment, interest, delinquency and other data.
The following discussion of the implications of the year 2000 problem
for the Bank, contains numerous forward looking statements based on inherently
uncertain information. The cost of the project and the date on which the Bank
plans to complete the internal year 2000 modifications are based on management's
best estimates, which are derived utilizing a number of assumptions of future
events including the continued availability of internal and external resources,
third party modifications and other factors. However, there can be no guarantee
that these statements will be achieved and actual results could differ.
Moreover, although management believes it will be able to make the necessary
modifications in advance, there can be no guarantee that failure to modify the
systems would not have a material adverse effect on the Bank or the Company.
The Bank places a high degree of reliance on computer systems of third
parties, such as customers, suppliers, and other financial and governmental
institutions. Although the Bank is assessing the readiness of these third
parties and preparing contingency plans, there can be no guarantee that the
failure of these third parties to modify their systems in advance of December
31, 1999 would not have a material adverse affect on the Bank.
The Bank's Year 2000 Plan (the "Plan") was presented to the Board of
Directors in September 1997. The Plan was developed using the guidelines
outlined in the Federal Financial Institutions Examination Council's "The Effect
of Year 2000 on Computer Systems" and is scheduled for substantial completion by
December 31, 1998, with only final testing remaining. The Year 2000 Committee is
responsible for the Plan with the Board of Directors receiving Year 2000
progress reports on a quarterly basis.
An OTS on-site examination was conducted in April 1998, and based upon
the examination results, the Bank was progressing satisfactorily towards
completing the Plan requirements.
The primary operating software for the Bank is through a third party
service bureau ("External Provider"). The Bank has maintained ongoing contact
with this vendor so that modification of the software for Year 2000 readiness is
a top priority and is expected to be accomplished, though there is no assurance,
by December 31, 1998. The Bank has performed significant testing of the software
utilized by the External Provider with successful results. The External Provider
has represented that the software currently being utilized for the Bank's
current operations is Year 2000 compliant.
The Bank has contacted all other material vendors and suppliers
regarding their Year 2000 readiness. Each of these third parties has delivered
written assurance to the Bank that they expect to be
28
Year 2000 compliant prior to the Year 2000. The Bank is in the process of
contacting all significant customers and non-information technology suppliers
(i.e. utility systems, telephone systems, etc.), regarding their year 2000 state
of readiness.
Costs will be incurred to replace certain non-compliant software and
hardware. The Bank does not anticipate that direct costs for renovating or
replacing non-compliant hardware and software will exceed $325,000, of which
approximately $221,000 had been expended as of September 30, 1998. No assurance
can be given that the Year 2000 Plan will be completed successfully by the Year
2000, in which event the Bank could incur significant costs. If the External
Provider fails to maintain its system in compliant state or incurs other
obstacles prior to Year 2000, the Bank would likely experience significant data
processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial statements of the Bank.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of the
External Provider, testing plans, and all vendors, suppliers and customer
readiness.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with the Bank, such as customers, vendors, payment system providers and other
financial institution, makes it impossible to assure that a failure to achieve
compliance by one or more of these entities would not have material adverse
impact on the operations of the Bank.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying notes presented
elsewhere in this Prospectus have been prepared in accordance with GAAP which
generally requires the measurement of financial position and operating results
in terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. As a
result, interest rates have a greater impact on the Bank's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or, to the same extent, as prices of goods and
services.
BUSINESS OF THE COMPANY
Upon consummation of the reorganization we will own all of the stock of
the Bank. We have not engaged in any significant business to date. We will
retain up to 50% of the net proceeds from the issuance of common stock (less
$200,000 for the initial capitalization of the mutual holding company). We will
use the balance of the net proceeds to purchase all of the common stock of the
Bank to be issued at the conclusion of the reorganization. Part of the proceeds
we retain will be used to fund the loan to the ESOP. Prior to the
reorganization, we will not transact any material business. In the future, we
may pursue other business activities, including the merger with or acquisition
of other financial institutions or other entities, borrowing funds for
investment in the Bank and diversification of operations. There are, however, no
current plans for such activities. We may sell or issue a portion of our common
stock, subject to applicable regulatory approvals, provided that the MHC owns at
least a majority of our common stock as long as the MHC remains in existence.
Initially, we will not maintain offices separate from those of the Bank or
employ any persons other than their officers. Company officers will not be
separately compensated for such service.
29
BUSINESS OF THE BANK
General
The Bank provides retail banking services, with an emphasis on one- to
four-family residential mortgage loans, home equity loans and lines of credit
and consumer loans as well as certificates of deposit, checking accounts and
savings accounts. In addition, the Bank originates commercial real estate loans
and offers checking accounts and other credit facilities to businesses within
its market area. At September 30, 1998, the Bank had total assets, deposits and
equity of $419.0 million, $352.2 million, and $36.1 million, respectively.
The Bank attracts deposits from the general public and uses these
deposits primarily to originate loans and to purchase investment,
mortgage-backed and other securities. The principal sources of funds for the
Bank's lending and investing activities are deposits, FHLB advances, the
repayment and maturity of loans and sale, maturity, and call of securities. The
principal source of income is interest on loans and investment and
mortgage-backed securities. The principal expense is interest paid on deposits
and FHLB advances.
Market Area and Competition
The Bank operates seven offices (including the main office) in Polk
County and two offices in Manatee County. Polk County is situated in central
Florida and Manatee County is located in west central Florida. There are
approximately 680,000 residents and 268,000 households within the Bank's primary
market area. Polk County had an estimated 1997 population of 445,000 and
includes Lakeland, Winter Haven, and Bartow among its most populous cities. The
Bank operates primarily in Lakeland and Winter Haven. Polk County is positioned
for continued growth as it is situated between the rapidly developing counties
of Orange (Orlando) and Hillsborough (Tampa). Manatee County had an estimated
1997 population of 235,000 and includes Bradenton and Palmetto as its most
populous cities. The Bank operates five offices in Lakeland, two in Winter
Haven, and two in Bradenton.
The Polk County economy had long been dependent on the citrus and
phosphate mining industries. These industries remain strong and are continuing
to grow through capital investment. The citrus industry however, remains
vulnerable to severe weather conditions and increased competition, both domestic
and international. In addition, the economy has diversified and has strengthened
the area's business development. Polk County is home to the largest privately
owned employer in the state, a grocery chain that operates over 575 stores in
four states. Because of Polk County's location in central Florida between
Orlando and Tampa and its accessibility to major interstate highways, Polk
County is considered a major distribution location and has become a home for
large transportation and distribution companies and related warehousing and
supplies operations. The weather conditions, affordable labor pool and lifestyle
amenities have attracted other major employers in the insurance servicing area
and a variety of other industries.
Manatee County is situated southwest of Polk County and just south of
Tampa and St. Petersburg, Florida. Manatee and neighboring Sarasota County have
experienced growth rates among the highest in the nation over the past several
years. Local economies have been supported primarily by the services industry
(which includes tourism). However, recent efforts have resulted in
diversification into light manufacturing operations.
Based on deposits at June 30, 1997, the Bank ranked fifth among FDIC
insured financial institutions operating in Polk County. The Bank is the only
remaining thrift institution based in Polk
30
County and had a deposit market share of 7.9%. The Bank ranked twelfth in
Manatee County among 16 FDIC insured financial institutions and had a deposit
market share of 2.3%. The deposit markets in both of these counties are
dominated by large regional banks that are headquartered outside of Florida.
The Bank faces strong competition in its primary market area for the
attraction of retail deposits and in the origination of loans. The Bank's most
direct competition for deposits has historically come from commercial banks,
thrift institutions, and credit unions operating in its primary market area. The
Bank's competition for loans also comes from banks, thrifts, and credit unions,
in addition to mortgage bankers and brokers. The Bank's market area can be
characterized as a market with moderate incomes, increasing wealth, and strong
population growth, representing an attractive market that can be served by a
community financial institution such as the Bank.
Lending Activities
General. The Bank primarily originates one- to four-family residential
real estate loans and, to a lesser extent commercial real estate loans, consumer
loans and other loans. Consumer loans consist primarily of direct and indirect
automobile loans, home equity loans and lines of credit, and other consumer
purpose loans. The Bank's commercial real estate loans consist primarily of
mortgage loans secured by small commercial office/retail space, warehouses and
small and medium sized apartment buildings.
31
Loan Portfolio Composition. The following table analyzes the
composition of the Bank's loan portfolio by loan category at the dates
indicated.
At September 30,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ----------------- ----------------- ---------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Type of Loans:
Mortgage loans:
Residential:
Permanent.............$244,667 68.3% $256,742 69.3% $247,609 73.7% $206,415 77.1% $200,639 77.8%
Construction.......... 27,311 7.6 22,350 6.0 19,778 5.9 9,729 3.6 11,710 4.5
Multi-family............ 4,464 1.2 4,154 1.1 4,564 1.4 5,510 2.1 6,740 2.6
Commercial and
real estate (1)....... 17,217 4.8 12,282 3.3 8,562 2.5 4,260 1.6 4,860 1.9
Land.................... 6,796 1.9 6,153 1.7 779 .2 629 .2 1,738 .7
Consumer Loans:
Home equity loans(2).. 13,137 3.7 18,310 4.9 18,361 5.5 18,396 6.9 16,511 6.4
Auto loans............ 34,795 9.7 43,504 11.7 30,911 9.2 19,307 7.2 12,669 4.9
Other................. 9,959 2.8 7,415 2.0 5,311 1.6 3,586 1.3 3,156 1.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans............. 358,346 100.0% 370,910 100.0% 335,875 100.0% 267,832 100.0% 258,023 100.0%
===== ===== ===== ===== =====
Less:
Loans in process(3)... 17,013 12,589 12,072 5,060 7,865
Deferred loan fees
and unearned
interest............ 159 137 91 195 313
Allowance for loan
losses.............. 2,564 2,633 2,385 1,902 1,902
-------- -------- -------- -------- --------
Total loans, net........$338,610 $355,551 $321,327 $260,675 $247,943
======= ======= ======= ======= =======
- --------------------
(1) Includes commercial loans of $1,085,000 in 1998 and $218,000 in 1997 which
were not secured by real estate.
(2) Includes home equity lines of credit.
(3) Relates to construction loans.
32
Loan Maturity Schedule. The following table sets forth the maturity or
repricing of Bank's loan portfolio at September 30, 1998. Demand loans, loans
having no stated maturity and overdrafts are shown as due in one year or less.
Commercial Home Auto and
Multi- Real Estate Equity Other
Residential(1) family and Land Loans Consumer Total
(In thousands)
Amounts Due:
Within 1 Year .......... $ 85,636 $ -- $ 5,325 $ -- $ 8,623 $ 99,584
-------- -------- -------- -------- -------- --------
After 1 year:
1 to 3 years ......... 11,049 1,127 3,002 2,089 12,020 29,287
3 to 5 years ......... 19,799 1,131 2,659 2,348 22,345 48,282
5 to 10 years ........ 9,341 841 6,165 4,246 1,766 22,359
10 to 20 years ....... 66,278 1,037 6,862 4,451 -- 78,628
Over 20 years ........ 79,875 328 -- 3 -- 80,206
-------- -------- -------- -------- -------- --------
Total due after one year 186,342 4,464 18,688 13,137 36,131 258,762
-------- -------- -------- -------- -------- --------
Total amount due ....... $271,978 $ 4,464 $ 24,013 $ 13,137 $ 44,754 $358,346
======== ======== ======== ======== ======== ========
- ------------------
(1) Includes $27,311,000 in construction loans.
The following table sets forth the dollar amount of all loans due after
September 30, 1999, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Residential........................ $149,074 $37,268 $186,342
Multi-family....................... 3,571 893 4,464
Commercial real estate and land.... 14,016 4,672 18,688
Home equity loans.................. 10,153 2,984 13,137
Auto and other consumer............ 36,131 -- 36,131
------- -------- -------
Total............................ $212,945 $45,817 $258,762
======= ====== =======
Residential Lending. The Bank's primary lending activity consists of
the origination of one- to four-family residential mortgage loans secured by
property located in the Bank's market area. The Bank generally originates one-
to four-family residential mortgage loans in amounts up to 80% of the lesser of
the appraised value or selling price of the mortgaged property without requiring
private mortgage insurance. The Bank will originate a mortgage loan in an amount
up to 95% of the lesser of the appraised value or selling price of a mortgaged
property, however, private mortgage insurance for the borrower is required on
the amount financed in excess of 80%. The Bank originates fixed rate and
adjustable rate loans for retention in its portfolio. A mortgage loan originated
by the Bank, whether fixed rate or adjustable rate, can have a term of up to 30
years. Adjustable rate loans limit the periodic interest rate adjustment and the
minimum and maximum rates that may be charged over the term of the loan.
33
The majority of the Bank's one- to four-family residential loans (both
fixed rate and adjustable rate) are underwritten in accordance with Federal
National Mortgage Association ("FNMA") guidelines, regardless of whether they
will be sold in the secondary market. However, the Bank also originates both
fixed and adjustable residential loans that do not conform to FNMA guidelines.
Substantially all of the Bank's residential mortgages include "due on sale"
clauses, which are provisions giving the Bank the right to declare a loan
immediately payable if the borrower sells or otherwise transfers an interest in
the property to a third party.
Property appraisals on real estate securing the Bank's single-family
residential loans are made by state certified and licensed independent
appraisers approved by the Board of Directors. Appraisals are performed in
accordance with applicable regulations and policies. The Bank obtains title
insurance policies on all first mortgage real estate loans originated. Borrowers
generally advance funds with each monthly payment of principal and interest, to
a loan escrow account from which the Bank makes disbursements for such items as
real estate taxes and hazard insurance premiums and mortgage insurance premiums
as they become due.
Construction Lending. The Bank is an active lender in the construction
of one- to four-family homes. The residential construction loans are made both
to individual homeowners for the construction of their primary residence and to
local builders for the construction of pre-sold houses or houses that are being
built for speculative purposes.
As of September 30, 1998, 65% of all the Bank's residential
construction loans were made to individual homeowners. Upon completion of the
construction of the house, the loan terms are modified to terms that apply to
permanent residential loans. The underwriting guidelines for the construction to
permanent loans are the same as the permanent loans, but additional construction
administration procedures and inspections are followed during the construction
process to assure that satisfactory progress is being made prior to funding the
construction draw requests.
Construction lending is generally considered to involve a higher degree
of credit risk than long term financing of residential properties. The Bank's
risk of loss on a construction loan is dependent largely upon the accuracy o the
initial estimate of the property's value at completion of construction and the
estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon completion of the project prove to be
inaccurate, we may be compelled to advance additional funds to complete the
construction. Furthermore, if the final value of the completed property is less
than the estimated amount, the value of the property might not be sufficient to
assure the repayment of the loan.
The Bank limits its exposure for construction loans made to local
builders through periodic credit analysis on the individual builder and a series
of inspections throughout the construction phase. In addition, the Bank limits
the amount and number of loans made to an individual builder for the
construction of pre-sold and speculative houses based on the financial strength
of the builder.
Commercial Real Estate and Other Loans. The Bank originates commercial
real estate mortgage loans and, to a lesser extent, loans on multi-family
dwellings and developed and undeveloped land. The Bank's commercial real estate
mortgage loans are primarily permanent loans secured by improved property such
as office buildings, retail stores, commercial warehouses and apartment
buildings. The terms and conditions of each loan are tailored to the needs of
the borrower and based on the financial strength of the project and any
guarantors. The average loan size is approximately $150,000 and typically are
made with fixed rates of interest with five to ten year maturities, at which
point the loan is repaid or the terms and conditions are renegotiated.
Essentially all originated commercial real estate
34
loans are within the Bank's market area and all are within the State of Florida.
As of September 30, 1998, the Bank had commercial real estate loans, totalling
$16.1 million, or 4.5% of the Bank's total loan portfolio. The Bank's largest
commercial real estate loan had a balance of $1.4 million on September 30, 1998
and was secured by a commercial warehouse. See also "-Loans to One Borrower."
Typically, commercial real estate loans are originated in amounts up to 80% of
the appraised value of the mortgaged property.
Commercial real estate, multi-family and land loans generally are
deemed to entail significantly greater risk than that which is involved with
single family real estate lending. The repayment of these loans typically is
dependent on the successful operations and income stream of the commercial real
estate and the borrower. Such risks can be significantly affected by economic
conditions. In addition, commercial real estate lending generally requires
substantially greater oversight efforts compared to residential real estate
lending.
Commercial Banking. To accomplish the Bank's mission to become a full
service community bank, plans have been developed to expand its products and
services offerings to the small to medium size businesses within its market
area. Experienced personnel have been added within the past year and the plans
call for the hiring of additional personnel over the next few years to assist in
reaching its objectives. New sales call programs, credit analysis guidelines,
loan grading systems, technology upgrades and new products and services either
have been implemented or are in the process of implementation. The Bank plans to
satisfy not only the borrowing needs of new prospective business customers, but
plans to have the full complement of deposit services and customer services
related to the checking, savings, and cash management needs of these businesses.
Consumer Loans. As of September 30, 1998 consumer loans amounted to
$57.9 million or 16.2% of the Bank's total loan portfolio and consist primarily
of direct and indirect auto loans and home equity loans and credit lines. To a
lesser extent, the Bank originates lines of credit, loans secured by savings
accounts and other consumer loans. Consumer loans are originated in the Bank's
market area and generally have maturities of up to 10 years. For savings account
loans, the Bank will lend up to 90% of the account balance.
Consumer loans have a shorter term and generally provide higher
interest rates than residential loans. The consumer loan market can be helpful
in improving the spread between average loan yield and costs of funds and at the
same time improve the matching of the rate sensitive assets and liabilities.
Consumer loans entail greater risks than one- to four-family
residential mortgage loans, particularly consumer loans secured by rapidly
depreciable assets such as automobiles or loans that are unsecured. In such
cases, any repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is a
greater likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections are dependent on the borrower's continuing
financial stability, and therefore are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Even for consumer loans
secured by real estate the risk to the Bank is greater than that inherent in the
single family loan portfolio in that the security for consumer loans is
generally not the first lien on the property and ultimate collection of amounts
due may be dependent on whether any value remains after collection by a holder
with a higher priority than the Bank. Finally, the application of various
federal laws, including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans in the event of a default.
At September 30, 1998, 70% of the Bank's automobile loans outstanding
were loans originated through local automobile dealerships. Although this type
of lending generally carries a greater risk
35
factor, the Bank has experienced personnel to handle this type of lending. The
dealer arrangements are limited primarily to a few local dealers where long term
relationships have been established and the loans acquired typically are those
made to higher credit quality borrowers.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's credit history and an assessment of
the applicant's ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be determined
by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also
includes a comparison of the value of the collateral in relation to the proposed
loan amount.
Loans to One Borrower. Under federal law, savings institutions have,
subject to certain exemptions, lending limits to one borrower in an amount equal
to the greater of $500,000 or 15% of the institution's unimpaired capital and
surplus. As of September 30, 1998, the Bank's largest aggregation of loans to
one borrower was $4.7 million, consisting of fifteen loans secured primarily by
commercial warehouses, in the Lakeland, Florida area, which was within the
Bank's legal lending limit to one borrower of $5.4 million at such date. At
September 30, 1998, the loans were current. The increase in the capital of the
Bank from this offering will increase its lending limit.
Loan Solicitation and Processing. The Bank's customary sources of
mortgage loan applications include repeat customers, walk-ins, and referrals
from home builders and real estate brokers. Commercial customer relationships
are developed through the officer call program and from referrals developed
through the branch network.
Upon receipt of any loan application from a prospective borrower, a
credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by an independent fee appraiser. In connection with the loan approval process,
the Bank's staff analyze the loan applications and the property involved.
Officers and lenders are granted lending authority based on the loan types that
they work with and their level of experience. An officers' loan committee
approves loans exceeding individual authorities, with the Executive Committee
approving loans between $500,000 and $1 million, and the full Board of Directors
approving loans in excess of $1 million.
Loan applicants are promptly notified of the decision of the Bank by a
letter setting forth the terms and conditions of the decision. If approved,
these terms and conditions include the amount of the loan, interest rate basis,
amortization term, a brief description of real estate to be mortgaged to the
Bank, tax escrow and the notice of requirement of insurance coverage to be
maintained to protect the Bank's interest. The Bank requires title insurance on
first mortgage loans and fire and casualty insurance on all properties securing
loans, which insurance must be maintained during the entire term of the loan.
Loan Commitments. The Bank generally grants commitments to fund fixed
and adjustable-rate single-family mortgage loans for periods of 60 days at a
specified term and interest rate. The total amount of the Bank's commitments to
extend credit as of September 30, 1998, 1997, and 1996 was $2.7 million, $3.7
million and $2.7 million, respectively.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank receives loan origination and commitment fees for originating or
purchasing certain loans. Since most loans are originated without points being
charged, the Bank has assessed customers certain fees related to
36
underwriting and document preparation. The Bank believes these fees are just
slightly above the costs to originate the loans. Therefore, the net deferred
fees are minimal and deferrals have an immaterial effect on operating results.
The Bank also receives other fees and charges relating to existing
loans, which include late charges, and fees collected in connection with a
change in borrower or other loan modifications. These fees and charges have not
constituted a material source of income.
Non-performing Loans and Problem Assets
Collection Procedures. The Bank's collection procedures provide that
when a loan is 15 to 20 days delinquent, the borrower is notified. If the loan
becomes 30 days delinquent, the borrower is sent a written delinquent notice
requiring payment. If the delinquency continues, subsequent efforts are made to
contact the delinquent borrower. In certain instances, the Bank may modify the
loan or grant a limited moratorium on loan payments to enable the borrower to
reorganize his financial affairs and the Bank attempts to work with the borrower
to establish a repayment schedule to cure the delinquency. As to mortgage loans,
if the borrower is unable to cure the delinquency or reach a payment agreement
with the Bank within 90 days, the Bank will institute foreclosure actions. If a
foreclosure action is taken and the loan is not reinstated, paid in full or
refinanced, the property is sold at judicial sale at which the Bank may be the
buyer if there are no adequate offers to satisfy the debt. Any property acquired
as the result of foreclosure or by deed in lieu of foreclosure is classified as
real estate owned ("REO") until such time as it is sold or otherwise disposed of
by the Bank. When REO is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair market value less estimated
selling costs. The initial writedown of the property is charged to the allowance
for loan losses.
As to commercial related loans, the main thrust of the Bank's
collection efforts is through telephone contact and a sequence of collection
letters. If the Bank is unable to resolve the delinquency within 90 days or in
some situations shorter time periods, the Bank will pursue all available legal
remedies. The Bank's commercial lenders are required to evaluate each assigned
account on a case-by-case basis, within the parameters of the Bank's policies.
Loans are reviewed on a regular basis and are placed on a non-accrual
status when they are more than 90 days delinquent. Loans may be placed on a
non-accrual status at any time if, in the opinion of management, the collection
of additional interest is doubtful. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At September 30, 1998, the Bank had $836,000 of
loans that were held on a non-accrual basis and held five residential properties
as REO with an aggregate book balance of $403,000 and $91,000 in other
non-performing assets consisting primarily of repossessed vehicles.
37
Non-Performing Assets. The following table provides information
regarding the Bank's non-performing loans and other non-performing assets as of
the end of each of the last five fiscal years. As of each of the dates
indicated, the Bank did not have any troubled debt restructurings within the
meaning of Statement of Financial Accounting Standards No. 114.
At September 30,
------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- -------- -------- ------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Residential ............................. $ 445 $ 1,624 $ 654 $ 605 $ 721
Multi-family ............................ -- -- -- -- --
All other mortgage loans ................ -- 491 491 584 1,612
Consumer loans:
Home equity loans ....................... -- -- -- -- --
Other consumer .......................... 391 199 39 17 --
-------- ------- -------- -------- ------
Total ..................................... $ 836 $ 2,314 $ 1,184 $ 1,206 $2,333
======== ======= ======== ======== ======
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Residential ............................. $ -- $ -- $ -- $ -- $ --
Multi-family ............................ -- -- -- -- --
All other mortgage loans ................ -- -- -- -- --
Consumer loans:
Home equity and second mortgages ........ -- -- -- -- --
Other consumer .......................... -- -- -- -- --
-------- ------- -------- -------- ------
Total ..................................... $ -- $ -- $ -- $ -- $ --
======== ======= ======== ======== ======
Total non-performing loans ................ $ 836 $ 2,314 $ 1,184 $ 1,206 $2,333
======== ======= ======== ======== ======
Real estate owned ......................... $ 403 $ 67 $ 8 $ 337 $ 187
======== ======= ======== ======== ======
Other non-performing assets ............... $ 91 $ 104 $ 42 $ 11 $ 14
======== ======= ======== ======== ======
Total non-performing assets ............... $ 1,330 $ 2,485 $ 1,234 $ 1,554 $2,534
======== ======= ======== ======== ======
Total non-performing loans to net loans ... .25% .65% .37% .46% .94%
======== ======= ======== ======== ======
Total non-performing loans to total assets .20% .49% .27% .28% .57%
======== ======= ======== ======== ======
Total non-performing assets to total assets .32% .53% .28% .36% .62%
======== ======= ======== ======== ======
The increase in non-accrual loans during the year ended September 30,
1997 was attributable primarily to $698,000 in residential construction loans
which were placed in non-accrual status after the builder declared bankruptcy.
During the year ended September 30, 1998, the Bank foreclosed on and sold the
properties securing the loans which consisted of six individual houses. During
fiscal year 1998, the Bank also resolved foreclosure and counterclaim litigation
relating to a $491,000 loan secured by a retail strip shopping center. In
connection with the settlement of this litigation, the Bank received payments
totalling $348,000 from the borrower and charged off the remainder of its
investment. As a result of these events, total non-performing assets declined to
$1.3 million at September 30, 1998 from $2.5 million at September 30, 1997.
38
During the year ended September 30, 1998, approximately $71,000 of
interest would have been recorded on loans accounted for on a non-accrual basis
if such loans had been current according to the original loan agreements for the
entire period. These amounts were not included in the Bank's interest income for
the respective periods. The amount of interest income on loans accounted for on
a non-accrual basis that was included in income during the same periods was
insignificant during September 30, 1998. At September 30, 1998, the Bank had no
loans classified as troubled debt restructurings.
Classified Assets. Management, in compliance with regulatory
guidelines, has instituted an internal loan review program, whereby loans are
classified as special mention, substandard, doubtful or loss. When a loan is
classified as substandard or doubtful, management is required to establish a
valuation reserve for loan losses in an amount that is deemed prudent. When
management classifies a loan as a loss asset, a reserve equal to 100% of the
loan balance is required to be established or the loan is to be charged-off.
This allowance for loan losses is composed of an allowance for both inherent
risk associated with lending activities and particular problem assets.
An asset is considered "substandard" if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full, highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a loss
reserve is not warranted. Assets which do not currently expose the insured
institution to a sufficient degree of risk to warrant classification in one of
the aforementioned categories but possess credit deficiencies or potential
weaknesses are required to be designated special mention by management. In
addition, each loan that exceeds $500,000 and each group of loans to one
borrower that exceeds $500,000 is monitored more closely due to the potentially
greater losses from such loans.
Management's evaluation of the classification of assets and the
adequacy of the allowance for loan losses is reviewed by the Board on a regular
basis and by the regulatory agencies as part of their examination process.
At
September 30,
1998
-------------
(In thousands)
Special mention............................. $ 717
Substandard................................. 1,119
Doubtful.................................... --
------
Total.................................. $1,836
=====
Allowance for Loan Losses and REO. The Bank segregates the loan
portfolio for loan losses into the following broad categories: residential real
estate, commercial real estate, commercial loans, home equity loans and lines of
credit, automobile loans including both direct and dealer originated loans and
other consumer loans. The Bank provides for a general allowance for losses
inherent in the portfolio by the above categories, which consists of two
components. General loss percentages are calculated based upon historical
analyses and other factors. A supplemental portion of the allowance is
calculated for inherent losses which probably exist as of the evaluation date
even though they might not have been
39
identified by the more objective processes used. This is due to the risk of
error and/or inherent imprecision in the process. This portion of the allowance
is particularly subjective and requires judgments based on qualitative factors
which do not lend themselves to exact mathematical calculations such as: trends
in delinquencies and nonaccruals; trends in volume, terms and portfolio mix; new
credit products; changes in lending policies and procedures; changes in the
outlook for the local, regional and national economy; and peer group
comparisons.
At least quarterly, the Bank's management evaluates the need to
establish reserves against losses on loans and other assets based on estimated
losses on specific loans and on any real estate held for sale or investment when
a finding is made that a loss is estimable and probable. Such evaluation
includes a review of all loans for which full collectibility may not be
reasonably assured and considers, among other matters, the estimated market
value of the underlying collateral of problem loans, prior loss experience,
economic conditions and overall portfolio quality.
Provisions for losses are charged against earnings in the period they
are established. The Bank had $2.6 million in allowances for loan losses at
September 30, 1998.
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP, there can be no assurance that regulators,
in reviewing the Bank's loan portfolio, will not request the Bank to
significantly increase its allowance for loan losses, or that general economic
conditions, a deteriorating real estate market, or other factors will not cause
the Bank to significantly increase its allowance for loans losses, therefore
negatively affecting the Bank's financial condition and earnings.
In making loans, the Bank 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 creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.
During 1998, the Bank's charge-offs increased to $474,000 from $68,000
in 1997. The increase in charge-offs related primarily to loans to two
borrowers. One loan was secured by a small shopping center that the Bank had
been litigating for several years. Final resolution and repayment of the loan
occurred in 1998 with the Bank incurring a loss approximating $140,000. Another
large charge-off involved loans made to a local builder for the construction of
single family houses. The Bank foreclosed on the properties and recognized a
charge-off of $110,000 in 1998. See further discussion of these loans under --
"Non Performing Assets."
It is the Bank's policy to review its loan portfolio, in accordance
with regulatory classification procedures, on at least a quarterly basis.
Additionally, the Bank maintains a program of reviewing loan applications prior
to making the loan and immediately after loans are made in an effort to maintain
loan quality.
40
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
At September 30,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance balance (at beginning of period)....... $ 2,633 $ 2,385 $ 1,902 $ 1,902 $ 1,942
------- ------- ------- ------- -------
Provision for loan losses........................ 405 317 600 75 188
------- ------- ------- ------- -------
Charge-offs:
Residential.................................... (218) (19) (70) (55) (163)
Commercial real estate......................... (146) (12) -- -- --
Consumer....................................... (110) (38) (49) (20) (65)
------- ------ ------ ------- -------
Total charge-offs................................ (474) (69) (119) (75) (228)
Recoveries....................................... -- -- 2 -- --
----- ----- ----- ------ ------
Net (charge-offs) recoveries..................... (474) (69) (117) (75) (228)
----- ------ ----- ------ -------
Allowance balance (at end of period)............. $ 2,564 $ 2,633 $ 2,385 $ 1,902 $ 1,902
======= ======= ======= ======= =======
Total loans outstanding.......................... $338,610 $355,551 $321,327 $260,675 $247,943
======= ======= ======= ======= =======
Average loans outstanding........................ $339,218 $339,992 $288,901 $261,259 $248,729
======= ======= ======= ======= =======
Allowance for loan losses as a percent of
total loans outstanding.......................... .76% .74% .74% .73% .78%
Net loans charged off as a percent of
average loans outstanding........................ .14% .02% .04% .03% .09%
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable, net, at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio.
At September 30,
------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- -------------------------- ----------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
At end of period allocated
to:
Residential.................. $1,521 75.9% $1,760 75.3% $1,620 79.6%
Multi-family................. 17 1.2 -- 1.1 -- 1.4
Commercial real estate and
land......................... 315 6.7 358 5.0 350 2.7
Consumer..................... 711 16.2 515 18.6 415 16.3
------ ------- ------ ------- ------ -------
Total allowance.............. $2,564 100.00% $2,633 100.00% $2,385 100.00%
===== ====== ===== ====== ===== ======
41
Investment Activities
General. Federally chartered savings banks have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various Federal agencies (including securities collateralized by
mortgages), certain certificates of deposits of insured banks and savings
institutions, municipal securities, corporate debt securities and loans to other
banking institutions.
The Bank maintains liquid assets which may be invested in specified
short-term securities and certain other investments. See "Regulation -
Regulation of the Bank - Federal Home Loan Bank System" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources". Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of future yield levels, as well as
management's projections as to the short-term demand for funds to be used in the
Bank's loan origination and other activities. The Bank maintains an investment
securities portfolio and a mortgage-backed securities portfolio as part of its
investment portfolio. At September 30, 1998, the Bank had an investment
securities portfolio of $33.7 million (8.0% of total assets) and a
mortgage-backed securities portfolio of $27.3 million (6.5% of total assets),
consisting primarily of U.S. government agency obligations. At September 30,
1998, the market value of the investment securities portfolio was $33.7 million
and the market value of the mortgage-backed securities portfolio was $27.1
million. See Notes 2 and 3 of the financial statements.
Investment Policies. The investment policy of the Bank, which is
established by the Board of Directors, is designed to foster earnings and
liquidity within prudent interest rate risk guidelines, while complementing the
Bank's lending activities. The policy provides for available for sale, held to
maturity and trading classifications. However, the Bank does not currently use a
trading classification and does not anticipate doing so in the future. The
policy permits investments in high credit quality instruments with diversified
cash flows while permitting the Bank to maximize total return within the
guidelines set forth in the Bank's interest rate risk and liquidity management
policy. Permitted investments include but are not limited to U. S. government
obligations, government agency or government-sponsored agency obligations,
state, county and municipal obligations, mortgage backed securities and
collateralized mortgage obligations guaranteed by government or
government-sponsored agencies, investment grade corporate debt securities, and
commercial paper. The Bank also invests in FHLB overnight deposits and federal
funds, but these instruments are not considered part of the investment
portfolio.
The policy also includes several specific guidelines and restrictions
to insure adherence with safe and sound activities. The policy prohibits
investments in high risk mortgage derivative products (as defined within its
policy) without prior approval from the Board of Directors. Management must
demonstrate the business advantage of such investments. In addition, the policy
limits the maximum amount of the investment in a specific investment category.
The Bank does not participate in hedging programs, interest rate swaps, or other
activities involving the use of off-balance sheet derivative financial
instruments. Further, the Bank does not invest in securities which are not rated
investment grade.
The Board through its Investment and Asset Liability Committee ("ALCO")
has charged the Chief Financial Officer to implement the policy. All
transactions are reported to the Board of Directors monthly, with the entire
portfolio reported quarterly, including market values and unrealized gains
(losses).
42
Investment Securities. The Bank maintains a portfolio of investment
securities, classified as either available for sale or held to maturity, to
enhance total return on investments. At September 30, 1998, all of the Bank's
investment securities were U.S. Government Agency obligations with varying
characteristics as to rate, maturity and call provisions. Callable agency
securities, representing 79.0% of the Bank's U.S. Government Agency obligations
at September 30, 1998, could reduce the Bank's investment yield if these
securities are called prior to maturity.
Mortgage-backed Securities. The Bank invests in mortgage-backed
securities to provide earnings, liquidity, cash flows, and diversification to
the Banks' overall balance sheet. These mortgage-backed securities are
classified as either available for sale or held to maturity. These securities
are participation certificates issued and guaranteed by the Government National
Mortgage Association ("GNMA"), the FNMA and the Federal Home Loan Mortgage
Corporation ("FHLMC") and secured by interest in pools of mortgages.
Mortgage-backed securities typically represent a participation interest in a
pool of single-family or multi-family mortgages, although the Bank focuses its
investments on mortgage-backed securities secured by single-family mortgages.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate
or adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages.
Collateralized Mortgage Obligations ("CMOs"). The Bank also invests in
CMOs, issued or sponsored by FNMA and FHLMC. CMOs are a type of debt security
that aggregates pools of mortgages and mortgage-backed securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage-backed securities as opposed to pass through
mortgage-backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage backed-securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage-backed securities underlying CMOs are paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche or class may
carry prepayment risk which may be different from that of the underlying
collateral and other tranches. Investing in CMOs allows the Bank to moderate
reinvestment risk resulting from unexpected prepayment activity associated with
conventional mortgage-backed securities. Management believes these securities
represent attractive alternatives relative to other investments due to the wide
variety of maturity, repayment and interest rate options available.
Other Securities. Other securities used by the Bank, but not
necessarily included in the investment portfolio, consist of equity securities,
interest-bearing deposits and federal funds sold. Equity securities owned
consist of a $2.9 million investment in FHLB of Atlanta common stock (this
amount is not shown in the securities portfolio). As a member of the FHLB of
Atlanta, ownership of FHLB of
43
Atlanta common shares is required. The remaining securities provide
diversification and complement the Bank's overall investment strategy.
The following table sets forth the carrying value of the Bank's
investment and mortgage-backed securities portfolio at the dates indicated.
At September 30,
----------------------------------------------------------
1998 1997 1996
------ ------ -----
(In thousands)
Securities Held to Maturity:
U.S. Government Agency Securities.................. $ 8,998 $27,993 $34,983
Collateralized Mortgage Obligations................ 9,738 9,819 9,818
------ ------ ------
Total Securities Held to Maturity.................. 18,736 37,812 44,801
------ ------ ------
Securities Available for Sale (at fair value):
U.S. Government Agency Securities ................. 24,711 31,126 38,501
Collateralized Mortgage Obligations................ 3,229 -- --
Mortgage-Backed Securities......................... 14,285 5,635 6,619
Mutual Funds....................................... -- -- 9,920
------ ------ ------
Total Securities Available for Sale................ 42,225 36,761 55,040
------ ------ ------
Total Investment and
Mortgage-Backed Securities....................... $60,961 $74,573 $99,841
====== ====== ======
44
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Bank's investment
and mortgage-backed securities portfolio at September 30, 1998.
At September 30, 1998
----------------------------------------------------------------------------------------------------
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities
---------------- ----------------- ----------------- ------------------- ---------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- -------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
U.S. Government Agency
Securities.................. $ 4,999 5.71% $21,620 5.92% $7,090 6.79% $ -- --% $33,709 6.10% $33,677
Mortgage-backed securities:
Adjustable rate............. 10,082 5.35 -- -- -- -- -- -- 10,082 5.35 10,082
Fixed rate.................. -- -- -- -- 4,203 6.18 -- -- 4,203 6.18 4,203
Collateralized mortgage
obligations............... 9,738 5.94 -- -- -- -- 3,229 5.76 12,967 5.90 12,784
------- ---- ------- ----- ------ ----- ------ ---- ------ ---- -------
Total....................... $24,819 5.65% $21,620 5.92% $11,293 6.56% $3,229 5.76% $60,691 5.94% $60,746
====== ==== ====== ===== ====== ==== ====== ==== ====== ==== ======
45
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. Borrowings (principally from the FHLB) are used
to compensate for reductions in the availability of funds from other sources. In
addition to deposits and borrowings, the Bank derives funds from loan and
mortgage-backed securities principal repayments, and proceeds from the maturity,
call and sale of mortgage-backed securities and investment securities. Loan and
mortgage-backed securities payments are a relatively stable source of funds,
while deposit inflows are significantly influenced by general interest rates and
money market conditions.
Deposits. The Bank offers a variety of deposit accounts, although a
majority of deposits are in fixed-term, market-rate certificate accounts.
Deposit account terms vary, primarily as to the required minimum balance amount,
the amount of time that the funds must remain on deposit and the applicable
interest rate.
The Bank's current deposit products include certificates of deposit
accounts ranging in terms from 90 days to five years as well as checking,
savings and money market accounts. Individual retirement accounts (IRAs) are
included in these accounts, depending on the customers investment preference.
Deposits are obtained primarily from residents of Polk and Manatee
Counties. The Bank attracts deposit accounts by offering outstanding service,
competitive interest rates, and convenient locations and service hours. The Bank
uses traditional methods of advertising to attract new customers and deposits,
including radio, cable television, direct mail and print media advertising. The
Bank does not utilize the services of deposit brokers and management believes
that an insignificant number of deposit accounts are held by non-residents of
Florida.
The Bank pays interest on its deposits which are competitive in its
market. Interest rates on deposits are set weekly by senior management, based
upon a number of factors, including: (1) projected cash flow; (2) a current
survey of a selected group of competitors' rates for similar products; (3)
external data which may influence interest rates; (4) investment opportunities
and loan demand; and (5) scheduled certificate maturities and loan and
investment repayments.
Because of the large percentage of certificates of deposit in the
deposit portfolio (74.4% at September 30, 1998), the Bank's liquidity could be
reduced if a significant amount of certificates of deposit, maturing within a
short period of time, were not renewed. A significant portion of the
certificates of deposit remain with the Bank after they mature and the Bank
believes that this will continue. However, the need to retain these time
deposits could result in an increase in the Bank's cost of funds.
46
Deposits in the Bank as of September 30, 1998, were represented by
various types of savings programs described below.
Minimum Balance at Percentage of
Category Term Interest Rate(1) Balance Amount September 30, 1998 Total Deposits
- -------- ---- ---------------- -------------- ------------------ --------------
(In thousands)
Checking Accounts None 0-2.25% $ -- $34,949 9.9%
Savings Accounts None 1.75% $ -- 37,758 10.7
Money Market Accounts 4.75%(2) $ -- 18,091 5.2
Certificates of Deposit:
All Other CD's Various $ 500 23,971 6.8
Fixed Term, Fixed Rate 4-6 Months 4.50% $ 500 31,672 9.0
Fixed Term, Fixed Rate 7-12 Months 4.75% $ 500 61,864 17.6
Fixed Term, Fixed Rate 13-24 Months 5.00% $ 500 29,458 8.4
Fixed Term, Fixed Rate 25-36 Months 5.05% $ 500 7,728 2.2
Fixed Term, Fixed Rate 37-48 Months 5.10% $ 500 2,877 .8
Fixed Term, Fixed Rate 49-60 Months 5.10% $ 500 51,432 14.6
Fixed Term, Fixed Rate 12-18 Months 4.75% $ 500 3,390 .9
Jumbo Certificates Same as above $ 75,000 3,312 .9
Jumbo Certificates Same as above $ 100,000 45,678 13.0
------- -----
Total $352,180 100.0%
======= =====
- ---------------
(1) Interest rate offerings as of September 30, 1998.
(2) Tiered-rate shown is for highest tier.
The following table sets forth the time deposits in the Bank classified
by interest rate as of the dates indicated.
At September 30,
---------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Interest Rate
4.00% or less.................. $ 66 $ 1,959 $ 2,206
4.00-4.99%..................... 53,555 7,334 73,958
5.00-5.99%..................... 130,910 228,331 178,519
6.00-6.99%..................... 74,719 92,676 51,949
7.00-7.99%..................... 2,132 2,696 7,210
------- ------- -------
Total........................ $261,382 $332,996 $313,842
======= ======= =======
47
The following table sets forth the amount and maturities of time
deposits at September 30, 1998.
Amount Due
----------------------------------------------------------------------------------
After
September 30, September 30, September 30, September 30,
Interest Rate 1999 2000 2001 2002 Total
- ------------- ----- ------ ------ ------ ---------
(In thousands)
4.00% or less......... $ 51 $ 15 $ -- $ -- $ 66
4.00-4.99%............ 53,089 466 -- -- 53,555
5.00-5.99%............ 84,818 27,795 9,034 9,263 130,910
6.00-6.99%............ 27,447 23,781 2,680 20,811 74,719
7.00-7.99%............ -- 2,132 -- -- 2,132
-------
Total $261,382
========
The following table shows the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of September 30,
1998.
Certificates
Maturity Period of Deposits
(In thousands)
Within three months................... $12,031
Three through six months.............. 8,611
Six through twelve months............. 9,974
Over twelve months.................... 15,062
------
$45,678
=======
The following table sets forth the deposit activities of the Bank for
the periods indicated:
Years Ended September 30,
-------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Net increase (decrease) before interest credited... $(35,158) $11,843 $(7,262)
Deposits sold in January 1998...................... (55,305) -- --
Interest credited.................................. 12,931 13,687 13,852
------- ------ ------
Net increase (decrease) deposits................... $(77,532) $25,530 $ 6,590
======= ====== ======
After reviewing its funding alternatives and related costs in 1998, the
Bank decided to reduce its premium pricing on certain certificate accounts and
began pricing other deposit accounts more competitively to reduce the Bank's
overall cost of funds. Accordingly, the Bank experienced a reduction in deposit
balances, primarily in certificate accounts, for 1998.
48
Borrowings. Deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank, as the need arises or in order to take advantage of funding opportunities,
may borrow funds in the form of advances from the FHLB to supplement its supply
of lendable funds and to meet deposit withdrawal requirements. Advances from the
FHLB are typically secured by the Bank's stock in the FHLB and a portion of the
Bank's residential mortgage loans and may be secured by other assets
(principally securities which are obligations of or guaranteed by the U.S.
Government). The Bank typically has funded loan demand and investment
opportunities out of current loan and mortgage-backed securities repayments,
investment maturities and new deposits. However, the Bank recently has utilized
FHLB advances to supplement these sources and as a match against certain assets
in order to better manage interest rate risk. See Note 8 to Notes to Financial
Statements.
Subsidiary Activity
The Bank is permitted to invest its assets in the capital stock of, or
originate secured or unsecured loans to, subsidiary corporations. The Bank does
not have any subsidiaries.
Personnel
As of September 30, 1998, the Bank had 150 full-time employees and 10
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees to be
satisfactory.
Competition
The Bank faces strong competition in its attraction of deposits, which
are its primary source of funds for lending, and in the origination of real
estate, commercial and consumer loans. The Bank's competition for deposits and
loans historically has come from local and regional commercial banks and credit
unions located in the Bank's market area. The Bank also competes with mortgage
banking companies for real estate loans, and commercial banks and savings
institutions for consumer loans; and faces competition for investor funds from
mutual fund accounts, short-term money funds and corporate and government
securities. The Bank's primary market area is Polk and Manatee Counties in
Florida.
The Bank competes for loans by charging competitive interest rates and
loan fees, and emphasizing outstanding service for its customers. The Bank
offers consumer banking services such as checking and savings accounts,
certificates of deposit, retirement accounts, overdraft protection, and consumer
and mortgage loans. The Bank also provides drive-up facilities and offers a
debit card program. The Bank has recently added five ATMs and plans to purchase
additional ATMs for its remaining branches during the next year. The emphasis on
outstanding services differentiates the Bank in its competition for deposits.
The Bank offers overall market rates on deposits. Although the Bank is the
largest locally based financial institution in terms of deposit share in its
primary market area, many of the regional commercial banking competitors of the
Bank offer a much broader array of services and products.
49
Properties and Equipment
The Bank's executive offices are located at 205 East Orange Street in
Lakeland, Florida. The Bank conducts its business through nine offices, which
are located in Polk and Manatee Counties in Florida. The following table sets
forth the location of each of the Bank's offices, the year the office was opened
and the net book value of each office and its related equipment.
Year Net Book
Facility Value at
Opened or Leased or September 30,
Building/Office Location Acquired Owned 1998
- ------------------------ --------- ------- -----
Main Office/Corporate Headquarters 1957 Owned $ 2,300,000
Branch Offices:
Grove Park 1961 Owned 255,000
Highlands 1972 Owned 455,000
Interstate 1985 Owned 440,000
Winter Haven North 1978 Owned 433,000
Winter Haven South 1995 Owned 874,000
West Bradenton 1989 Owned 744,000
Cortez (Bradenton) 1972 Leased(1) 63,000
Scott Lake 1997 Owned 700,000
Operations Center 1964 Owned 288,000
- --------------
(1) This is a five-year lease that terminates December 31, 2003, but has
two three-year renewal options.
As of September 30, 1998, the net book value of land, buildings,
furniture, and equipment owned by the Bank, less accumulated depreciation,
totalled $6.8 million.
At September 30, 1998, the Bank held two additional properties which
formerly housed branches that were sold in connection with the Branch Sale.
These properties were under contract for sale to another financial institution
which was leasing the sites from the Bank pending closing. In connection with
the sale of these properties, the Bank has agreed to indemnify the purchaser for
the costs of obtaining closure with state environmental authorities regarding
the necessity of further remediation of certain environmental contamination on
the sites due to outside sources. The sale of one property was completed in
December 1998 after the Bank received a notice of no further action required
from the State of Florida. Closing on the other property is scheduled to take
place on or before April 15, 1999. The Bank does not currently anticipate that
it will incur additional material expense associated with the sale of this
property.
Legal Proceedings
The Bank, from time to time, is a party to routine litigation, which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Bank. There were no lawsuits
pending or known to be contemplated against the Bank at September 30, 1998 that
would have a material effect on our operations or income.
50
REGULATION
Set forth below is a brief description of certain laws which relate to
the regulation of the Bank and the Company. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with federal statutory and
regulatory requirements. The Bank is also subject to reserve requirements of the
Federal Reserve System. Federal regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and members. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
The OTS regularly examines the Bank and prepares reports for
consideration by the Bank's board of directors on deficiencies, if any, found in
the Bank's operations. The Bank's relationship with its members and borrowers is
also regulated by federal law, especially in such matters as the ownership of
savings accounts and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, and must obtain regulatory approvals prior
to entering into certain transactions such as mergers with or acquisitions of
other financial institutions. Any change in such regulations, whether by the
OTS, the FDIC or the United States Congress, could have a material adverse
impact on the Company and the Bank, and their operations.
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits during 1996 and prior years.
The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. In 1996, the annual insurance
premium for most BIF members was lowered to $2,000. The lower insurance premiums
for BIF members placed SAIF members at a competitive disadvantage to BIF
members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
0.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the
deposit insurance assessment for most SAIF members was reduced to 0.064% of
deposits on an annual basis through the end of 1999. During this same period,
BIF members will be assessed approximately 0.013% of deposits. After 1999,
assessments for BIF and SAIF members should be the same. It is expected that
these continuing assessments for both SAIF and BIF members
51
will be used to repay outstanding Financing Corporation bond obligations. As a
result of these changes, beginning January 1, 1997, the rate of deposit
insurance assessed the Bank declined by approximately 70%.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 3% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. The Bank's capital ratios are set forth under "Historical and Pro Forma
Capital Compliance."
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill, less nonqualifying intangible assets, certain
mortgage servicing rights and certain investments.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock, and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets.
The OTS has adopted a rule requiring a deduction from capital for
institutions with certain levels of interest rate risk. The OTS calculates the
sensitivity of an institution's net portfolio value based on data submitted by
the institution in a schedule to its quarterly Thrift Financial Report and using
the interest rate risk measurement model adopted by the OTS. The amount of the
interest rate risk component, if any, to be deducted from an institution's total
capital will be based on the institution's Thrift Financial Report filed two
quarters earlier. Federal savings institutions with less than $300 million in
assets and a risk-based capital ratio above 12% are generally exempt from filing
the interest rate risk schedule with their Thrift Financial Reports. However,
the OTS may require any exempt institution that it determines may have a high
level of interest rate risk exposure to file such schedule on a quarterly basis
and may be subject to an additional capital requirement based upon its level of
interest rate risk as compared to its peers.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including dividend payments.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all capital requirements before and
after a proposed capital distribution ("Tier 1 institution") and has not been
advised by the OTS that it is in need of more than the normal supervision can,
after prior
52
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of (i) 100% of its net income to date during
the calendar year plus the amount that would reduce by one-half its "surplus
capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year, or (ii) 75% of its net
income over the most recent four-quarter period. Any additional capital
distributions require prior regulatory notice. As of September 30, 1998, the
Bank was a Tier 1 institution.
In the event the Bank's capital falls below its fully phased-in
requirement or the OTS notified it that it was in need of more than normal
supervision, the Bank would become a Tier 2 or Tier 3 institution and, as a
result, its ability to make capital distributions could be restricted. Tier 2
institutions, which are institutions that before and after the proposed
distribution meet their current minimum capital requirements, may only make
capital distributions of up to 75% of net income over the most recent
four-quarter period. Tier 3 institutions, which are institutions that do not
meet current minimum capital requirements and propose to make any capital
distribution, and Tier 2 institutions that propose to make a capital
distribution in excess of the noted safe harbor level, must obtain OTS approval
prior to making such distribution. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. The OTS recently relaxed certain
approval and notice requirements for well-capitalized institutions.
In January 1998, the OTS proposed amendments to its current regulations
with respect to capital distributions by savings associations. Under the
proposed regulation, savings associations that would remain at least adequately
capitalized following the capital distribution, and that meet other specified
requirements, would not be required to file a notice or application for capital
distributions (such as cash dividends) declared below specified amounts. Under
the proposed regulation, savings associations which are eligible for expedited
treatment under current OTS regulations are not required to file a notice or an
application with the OTS if (i) the savings association would remain at least
adequately capitalized following the capital distribution and (ii) the amount of
capital distribution does not exceed an amount equal to the savings
association's net income for that year to date, plus the savings association's
retained net income for the previous two years. Thus, under the proposed
regulation, only undistributed net income for the prior two years may be
distributed in addition to the current year's undistributed net income without
the filing of an application with the OTS. Savings associations which do not
qualify for expedited treatment or which desire to make a capital distribution
in excess of the specified amount, must file an application with, and obtain the
approval of, the OTS prior to making the capital distribution. Under certain
other circumstances, savings associations will be required to file a notice with
OTS prior to making the capital distribution. The OTS proposed limitations on
capital distributions are similar to the limitations imposed upon national
banks. We are unable to predict whether or when the proposed regulation will
become effective.
A federal savings institution is prohibited from making a capital
distribution if, after making the distribution, the savings institution would be
undercapitalized (i.e., not meet any one of its minimum regulatory capital
requirements). Further, a federal savings institution cannot distribute
regulatory capital that is needed for its liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet a
qualified thrift lender ("QTL") test or they become subject to certain operating
restrictions. If we maintain an appropriate level of qualified thrift
investments ("QTIs") (primarily residential mortgages and related investments,
including certain mortgage-related securities) and otherwise qualify as a QTL,
we will have full borrowing privileges from the FHLB of Atlanta. The required
percentage of QTIs is 65% of portfolio assets
53
(defined as all assets minus intangible assets, property used by the institution
in conducting its business and liquid assets equal to 10% of total assets).
Certain assets are subject to a percentage limitation of 20% of portfolio
assets. In addition, federal savings institutions may include shares of stock of
the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined
on a monthly basis in nine out of every twelve months.
Transactions With Affiliates. Generally, federal banking law requires
that transactions between a savings institution or its subsidiaries and its
affiliates must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, certain types of these
transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. In
addition, a savings institution may not extend credit to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of any affiliate that is not a subsidiary. The OTS has the discretion
to treat subsidiaries of savings institution as affiliates on a case-by-case
basis.
Liquidity Requirements. All federal savings institutions are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. The liquidity requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings institutions. Monetary penalties may
be imposed upon institutions for violations of liquidity requirements.
Federal Home Loan Bank System. We are a member of the FHLB of Atlanta,
which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from funds
deposited by savings institutions and proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB
of Atlanta in an amount equal to at least 1% of our aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year. We are in compliance with this requirement. The FHLB imposes
various limitations on advances such as limiting the amount of certain types of
real estate related collateral to 30% of a member's capital and limiting total
advances to a member.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future.
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS.
Savings institutions have authority to borrow from the Federal Reserve
System "discount window," but Federal Reserve System policy generally requires
savings institutions to exhaust all other sources before borrowing from the
Federal Reserve System.
54
Regulation of the Company
General. Upon completion of the reorganization, the Company will become
a federal mutual holding company within the meaning of Section 10(o) of the Home
Owners' Loan Act ("HOLA"). The Company will be required to register and file
reports with the OTS and will be subject to regulation and examination by the
OTS. In addition, the OTS will have enforcement authority over the Company and
any non-savings institution subsidiaries. This will permit the OTS to restrict
or prohibit activities that it determines to be a serious risk to us. This
regulation is intended primarily for the protection of our members and not for
the benefit of you, as stockholders of the Company.
QTL Test. Since the Company will only own one savings institution, it
will be able to diversify its operations into activities not related to banking,
but only so long as we satisfy the QTL test. If the Company controls more than
one savings institution, it would lose the ability to diversify its operations
into nonbanking related activities, unless such other savings institutions each
also qualify as a QTL or were acquired in a supervised acquisition. See
"Regulation of the Bank - Qualified Thrift Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured savings institution. No
person may acquire control of a federally insured savings institution without
providing at least 60 days written notice to the OTS and giving the OTS an
opportunity to disapprove the proposed acquisition.
TAXATION
Federal Taxation
Savings institutions are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), in the same general manner as
other corporations. Prior to certain changes to the Code in 1996, thrift
institutions enjoyed a tax advantage over banks with respect to determining
additions to its bad debt reserves. All thrift institutions, prior to 1996, were
generally allowed a deduction for additions to a reserve for bad debts. In
contrast, only "small banks" (the average adjusted bases of all assets of such
institution equals $500 million or less) were allowed a similar deduction for
additions to their bad debt reserves. In addition, while small banks were only
allowed to use the experience method in determining their annual addition to a
bad debt reserve, all thrift institutions generally enjoyed a choice between (i)
the percentage of taxable income method and, (ii) the experience method, for
determining the annual addition to their bad debt reserve. This choice of
methods provided a distinct advantage to thrift institutions that continually
experienced little or no losses from bad debts, over small banks in a similar
situation, because thrift institutions in comparison to small banks were
generally allowed a greater tax deduction by using the percentage of taxable
income method (rather than the experience method) to determine their deductible
addition to their bad debt reserves.
The Code was revised in August 1996 to equalize the taxation of thrift
institutions and banks, effective for taxable years beginning after 1995. All
thrift institutions are now subject to the same provisions as banks with respect
to deductions for bad debt. Now only thrift institutions that are treated as
small banks under the Code may continue to account for bad debts under the
reserve method; however such institutions may only use the experience method for
determining additions to their bad debt reserve. Thrift institutions that are
not treated as small banks may no longer use the reserve method to account for
their bad debts but must now use the specific charge-off method.
55
The revisions to the Code in 1996 also provided that all thrift
institutions must generally recapture any "applicable excess reserves" into
their taxable income, over a six year period beginning in 1996; however, such
recapture may be delayed up to two years if a thrift institution meets a
residential-lending test. Generally, a thrift institution's applicable excess
reserves equals the excess of (i) the balance of its bad debt reserves as of the
close of its taxable year beginning before January 1, 1996, over (ii) the
balance of such reserves as of the close of its last taxable year beginning
before January 1, 1988 ("pre- 1988 reserves"). The Bank will be required to
recapture $1.2 million of applicable excess reserve.
In addition, all thrift institutions must continue to keep track of
their pre-1988 reserves because this amount remains subject to recapture in the
future under the Code. A thrift institution such as the Bank, would generally be
required to recapture into its taxable income its pre-1988 reserves in the case
of certain excess distributions to, and redemptions of the Bank's stockholders.
For taxable years after 1995, the Bank will continue to account for its bad
debts under the reserve method. The balance of the Bank's pre-1988 reserves
equaled $13.0 million.
The Company may exclude from its income 100% of dividends received from
the Bank as a member of the same affiliated group of corporations. A 70%
dividends received deduction generally applies with respect to dividends
received from corporations that are not members of such affiliated group.
The Bank's federal income tax returns for the last five tax years have
not been audited by the IRS.
State Taxation
The Bank files Florida franchise tax returns. For Florida franchise tax
purposes, savings institutions are presently taxed at a rate equal to 5.5% of
taxable income which is calculated based on federal taxable income, subject to
certain adjustments (including the addition of interest income on state and
municipal obligations).
The Bank's state tax returns have not been audited for the past five
years.
MANAGEMENT
Directors and Executive Officers
Our board of directors is composed of eight members each of whom serves
for a term of three years, with approximately one-third of the directors elected
each year. Our proposed charter and bylaws require that directors be divided
into three classes, as nearly equal in number as possible. Our officers are
elected annually by our board and serve at the board's discretion. These same
provisions apply to the Bank and mutual holding company, which will have the
same directors and executive officers that we have.
56
The following table sets forth information with respect to our
directors and executive officers, all of whom will continue to serve in the same
capacities after the reorganization.
Age at Current
September 30, Director Term
Name 1998 Position Since Expires (1)
- ------------------------------- ------------------- -------------------------------- ------------- -----------
Charles W. Bovay 70 Chairman of the Board 1987 2000
Gregory C. Wilkes 50 President, Director 1995 2001
Robert H. Artman 66 Director 1986 2002
Llewellyn N. Belcourt 66 Director 1989 2002
Stephen A. Moore, Jr. 56 Director 1998 2002
Nis Nissen 57 Director 1996 2000
Rudy H. Thornberry 70 Director 1986 2000
G.F. Zimmermann, III 54 Director 1993 2001
Don A. Burdett 52 SVP - Retail Sales and
Service
Kerry P. Charlet 45 SVP - Chief Financial
Officer
William H. Cloyd 41 SVP - Chief Lending
Officer
Marion Moore 58 SVP - Deposit
Administration
- -------------------
(1) The terms for directors of the Company and the MHC are the same as those of
the Bank.
The business experience for the past five years of each of the
directors and executive officers is as follows:
Charles W. Bovay has been a Director of the Bank since 1987 and is
currently the Chairman of the Board. Mr. Bovay was also, until December 31,
1998, Chairman of the Board and Chief Executive Officer of Lanier Upshaw, Inc.,
an insurance company located in Lakeland, Florida, where he was employed since
1963. He has served as Chairman of the Lakeland Regional Medical Center and the
Lakeland Area Chamber of Commerce, and is a member of the Rotary Club of
Lakeland.
Gregory C. Wilkes has been the Bank's President, Director and Chief
Executive Officer since 1995. From 1990 to 1995, Mr. Wilkes was employed by Home
Federal Savings Bank in Rome, Georgia, where he served as President, Director
and Chief Executive Officer. He also serves as a board member for the Lakeland
Chamber of Commerce, Lakeland Rotary Club, Polk Theatre, the YMCA, the Salvation
Army, the Florida Southern College President's Council, and the Lakeland
Regional Hospital Foundation. In addition, Mr. Wilkes is the elected director
for the State of Florida for the FHLB of Atlanta and is a member of the board of
the Florida Bankers Association and board and faculty member of the Florida
School of Banking.
Robert H. Artman has been a Director of the Bank since 1986. Mr. Artman
has been employed for the past 31 years by Traman Corp., a real estate
management and development company located in Lakeland, Florida, and is
currently serving as President. He is also a member of the Kiwanis Club of
Lakeland.
57
Llewellyn N. Belcourt has been a Director of the Bank since 1989. Mr.
Belcourt is a shareholder, Director and Vice President of Carter, Belcourt &
Atkinson, P.A., an accounting firm located in Lakeland, Florida. He also is an
Advisory Board Member of the Imperial Symphony Orchestra and a Professional
Advisory Council Member of the Lakeland Regional Medical Center Foundation.
Stephen A. Moore, Jr. has been a Director of the Bank since February
1998. Mr. Moore is President, Director and majority stockholder of Moore
Business Service, Inc., an accounting firm located in Lakeland, Florida. He has
been with Moore Business Service, Inc. since 1974. Mr. Moore is also a member of
the Lakeland Rotary Club, a Director and officer of the Central Florida Speech &
Hearing Center, and a Board member of the Polk Community College Foundation.
Nis H. Nissen, III has been a Director of the Bank since 1996. Mr.
Nissen is President and Chief Executive Officer of Nissen Advertising, Inc., an
advertising and public relations firm located in Lakeland, Florida that he has
been affiliated with since 1971. He also is a member of the Rotary Club, a
Director of the Central Florida Speech & Hearing Center, a Director of
Crimestoppers of Polk County, Vice Chairman of the Public Information Committee,
Community Foundation of Lakeland, a member of the Fine Arts Council of the
Florida Southern Foundation of Lakeland, and a member of the Board of Governors
of Florida Southern College.
Rudolph H. Thornberry has been a Director of the Bank since 1988. Mr.
Thornberry is currently retired from other employment.
G.F. Zimmermann, III has been a Director of the Bank since 1993. Mr.
Zimmermann is President and majority stockholder of Zimmermann Associates, Inc.,
a building design firm located in Lakeland, Florida, which he has been with
since 1974. He has been active with the Salvation Army, the Kiwanis Club of
Lakeland, the Lakeland Kiwanis Foundation and the Chamber of Commerce. He also
has served as a member of the Habitat for Humanity Board of Directors, the City
of Lakeland Civil Service Board, the Pension Board, the Arbitration Board and
the Lakeland Regional Medical Center Community Board.
Don A. Burdett joined the Bank as Senior Vice President of Retail
Banking in November 1998. Prior to joining the Bank, Mr. Burdett served as a
market executive and various sales management positions at Barnett Bank from
1979 to 1998. Mr. Burdett has completed various graduate banking programs during
his career. Mr. Burdett has held leadership positions in the Clearwater Chamber
of Commerce, Suncoast Junior Achievement, Eastlake Optimist and has participated
in both the Leadership Manatee and Leadership Lakeland Programs.
Kerry P. Charlet has been Chief Financial and Operations Officer of the
Bank since March 1998. Prior to joining the Bank, Mr. Charlet served in varying
positions from 1986 to 1995 at FloridaBank, FSB, including Executive Vice
President and Chief Financial Officer. He was also employed by AmSouth Bank of
Florida from 1995 to 1998, where he served as Senior Vice President and Chief
Financial Officer for the State. Mr. Charlet has also served as officer and
committee chairman for the Gator Bowl Association, Chairman of Payment Systems
Network, President and Treasurer of Jacksonville Biddy Basketball, Inc., and
President and Board member of the Beaches Youth Basketball Association.
58
William H. Cloyd has been Chief Lending Officer of the Bank since
January 1998. Previously, Mr. Cloyd was Senior Vice President of SunTrust Bank
Mid-Florida, N.A. He has also been active with the United Way, the Lakeland
North Rotary Club, the Lakeland Chamber of Commerce, and has served as Chairman
of the Lakeland Downtown Development Authority.
Marion L. Moore serves as Senior Vice President of Deposit
Administration for the Bank. Mr. Moore has been employed at the Bank since 1984.
He has also been active with the Rotary Club, the Boy Scouts of America, the
Lakeland Chamber of Commerce and the Winter Haven Chamber of Commerce.
Meetings and Committees of the Board of Directors
The board of directors conducts its business through meetings of the
board and through activities of its committees. During the year ended September
30, 1998, the board of directors held 13 regular meetings. No director attended
fewer than 75% of the total meetings of the board of directors and committees on
which such director served during the year ended September 30, 1998. The Bank
has a standing audit committee, as well as other standing committees such as the
executive, building, marketing, retirement plan and asset liability committees.
The entire board of directors serves as a nominating committee and a
compensation committee.
The audit committee of the Bank consists of Directors Belcourt, Artman,
Moore and Nissen. The audit committee meets at least semi-annually and meets
with the Bank's independent certified public accountants to review the results
of the annual audit and other related matters. The audit committee met four
times during the year ended September 30, 1998.
Director Compensation
Board Fees. During 1998 each director was paid a fee of $1,000 for each
board meeting attended and each director emeritus was paid $667 per Board
meeting attended. The chairman of the board receives an additional $1,500 fee
for each board meeting. Each non-management director was paid $200 for each
committee meeting attended. The total fees paid to the directors for the year
ended September 30, 1998 were approximately $177,000.
Directors Consultant and Retirement Plan ("DRP"). The DRP provides
retirement benefits to directors following retirement and completion of at least
10 years of service. If a director agrees to become a consulting director to our
board upon retirement, he or she will receive a monthly payment equal to the
Board fee in effect at the date of retirement for a period of 120 months.
Benefits under our DRP will begin upon a director's retirement. In the event
there is a change in control, all directors will be presumed to have not less
than 10 years of service and each director will receive a lump sum payment equal
to the present value of future benefits payable.
59
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer for
the year ended September 30, 1998. No other current executive officer received a
total annual salary and bonus in excess of $100,000 during the reporting
periods.
Annual Compensation
--------------------------------
Other Annual
Fiscal Compensation
Name and Principal Position Year Salary Bonus (1)
- --------------------------- ---- ------ ----- ------------
George C. Wilkes, President 1998 $164,500 $2,400 $13,000
and Chief Executive Officer
- --------------------
(1) Includes directors fees.
Employment Agreements. The Bank has entered into an employment
agreement with its President, Gregory C. Wilkes. Mr. Wilkes' current base salary
under the employment agreement is $182,000. The employment agreement has a term
of three years. The agreement is terminable by us for "just cause" as defined in
the agreement. If we terminate Mr. Wilkes without just cause, he will be
entitled to a continuation of his salary from the date of termination through
the remaining term of the agreement, but in no event for a period of less than 1
year. The employment agreement contains a provision stating that in the event of
the termination of employment in connection with any change in control of us,
Mr. Wilkes will be paid a lump sum amount equal to 2.99 times his five-year
average annual taxable cash compensation. If a payment had been made under the
agreement as of September 30, 1998, the payment would have equaled approximately
$496,000. The aggregate payment that would have been made to Mr. Wilkes would be
an expense to us and would have resulted in reductions to our net income and
capital. The agreement may be renewed annually by our board of directors upon a
determination of satisfactory performance within the board's sole discretion. If
Mr. Wilkes shall become disabled during the term of the agreement, he shall
continue to receive payment of 100% of the base salary for a period of 12 months
and 65% of such base salary for the remaining term of the agreement. Such
payments shall be reduced by any other benefit payments made under other
disability programs in effect for our employees.
Pension Plan. The following table indicates the annual retirement
benefit that would be payable under the Bank's Pension Plan upon retirement at
age 65 in calendar year 1998, expressed in the form of a single life annuity for
the average annual salary and benefit service classifications specified below.
- --------------------------------------------------------------------------------
Average Annual
Compensation Years of Service and Benefit Payable at Retirement
- --------------------------------------------------------------------------------
3 5 10 15 20 25
- --------------------------------------------------------------------------------
$50,000 2,625 4,375 8,750 13,125 17,500 21,875
- --------------------------------------------------------------------------------
$75,000 4,020 6,700 13,400 20,100 26,800 33,500
- --------------------------------------------------------------------------------
$100,000 5,745 9,575 19,150 28,725 38,300 47,875
- --------------------------------------------------------------------------------
$125,000 7,470 12,450 24,900 37,350 49,800 62,250
- --------------------------------------------------------------------------------
$160,000 9,885 16,475 32,950 49,425 65,900 82,375
================================================================================
60
The Pension Plan provides for benefits as a life annuity payable
monthly after retirement or termination. The benefits listed in the pension plan
table above are not subject to any deduction for Social Security or other offset
amounts. As of September 30, 1998, Mr. Wilkes had 3 years of credited service
under the Pension Plan.
Generally, the Annual Compensation covered under the Pension Plan
includes total cash compensation paid to a participant during a plan year as
reported for income tax withholding purposes on Wage and Tax Statement Form W-2,
but after excluding all pay for overtime work, commissions, bonuses or other
extra pay over basic compensation, plus any contributions by the Bank for such
year pursuant to a salary reduction agreement on behalf of the participant. If a
participant retires at age 65 his monthly income payable will be 1/12 of an
annual income equal to 1.75% of the participant's Average Annual Compensation up
to his Covered Compensation, plus 2.30% of his Average Annual Compensation above
his Covered Compensation, both multiplied by the number of years of service
under the Pension Plan (not to exceed 25 years). Covered Compensation generally
means the average (without indexing) of the maximum amount of a participant's
earnings that are considered to be wages for Social Security purposes for each
calendar year during the 35 year period ending with the last day of the calendar
year in which the participant attains (or will attain) Social Security
Retirement Age (as defined in the Pension Plan). The Bank anticipates that it
will terminate the Pension Plan effective April 15, 1999. Upon such termination,
all participant benefits shall become immediately vested.
Supplemental Executive Retirement Plan. We have implemented a
supplemental executive retirement plan ("SERP") for the benefit of senior
officers, including our President, Gregory C. Wilkes. The Bank intends to
terminate the existing defined benefit pension plan ("Pension Plan") as of April
15, 1999. The SERP will provide benefits at age 65 that would be comparable to
approximately 83% of the benefits that would have accrued under the terminating
Pension Plan upon retirement at age 65. The SERP will provide each participant
with a defined annual deferred compensation amount; therefore, no future
actuarial calculations will be required. The annual accruals under the SERP for
Mr. Wilkes will be $59,000, during the term of his continued employment.
Benefits will accrue annually and will be credited with interest earnings of not
less than 5% per annum on the aggregate account accruals. If a participant
terminates employment prior to age 65, then the target retirement benefits will
be reduced. The accumulated deferred compensation account for each participant
will be payable to such participant at anytime following termination of
employment after attainment of age 55, the death or disability of the
participant, or termination of employment following a change in control of the
Bank whereby the Bank or its parent company is not the resulting entity.
Benefits under the SERP are not taxable to the participant or deductible by the
Bank until they are actually paid.
Employee Stock Ownership Plan. We have established an employee stock
ownership plan, the ESOP, for the exclusive benefit of participating employees
of ours, to be implemented upon the completion of the reorganization.
Participating employees are employees who have completed one year of service
with us or our subsidiary and have attained the age of 21. An application for a
letter of determination as to the tax-qualified status of the ESOP will be
submitted to the IRS. Although no assurances can be given, we expect that the
ESOP will receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash. In
accordance with the plan, the ESOP may borrow funds with which to acquire up to
8% of the common stock to be issued in the offering. The ESOP intends to borrow
funds from the Company. The loan is expected to be for a term of ten years at an
annual interest rate equal to the prime rate as published in The Wall Street
Journal. Presently it is
61
anticipated that the ESOP will purchase up to 8% of the common stock to be
issued in the offering (i.e., -- shares, based on the midpoint of the offering
range). The loan will be secured by the shares purchased and earnings of ESOP
assets. Shares purchased with such loan proceeds will be held in a suspense
account for allocation among participants as the loan is repaid. It is
anticipated that all such contributions will be tax-deductible. This loan is
expected to be fully repaid in approximately 10 years.
Shares sold above the maximum of the offering range (i.e., more than
__________ shares) may be sold to the ESOP before satisfying remaining unfilled
orders of Eligible Account Holders to fill the ESOP's subscription or the ESOP
may purchase some or all of the shares covered by its subscription after the
offering in the open market.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation. All
participants must be employed at least 1,000 hours in a plan year, or have
terminated employment following death, disability or retirement, in order to
receive an allocation. Participant benefits become fully vested in plan
allocations following five years of service. Employment prior to the adoption of
the ESOP shall be credited for the purposes of vesting. Our contributions to the
ESOP are discretionary and may cause a reduction in other forms of compensation.
Therefore, benefits payable under the ESOP cannot be estimated.
The board of directors has appointed the non-employee directors to the
ESOP Committee to administer the ESOP and to serve as the initial ESOP
Directors. The ESOP Directors must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. Unallocated
shares and allocated shares for which no timely direction is received will be
voted by the ESOP Directors as directed by the board of directors or the ESOP
Committee, subject to the Directors' fiduciary duties.
401(k) Savings Plan. Effective January 1, 1999, the Bank sponsors a
tax-qualified defined contribution savings plan ("401(k) Plan") for the benefit
of its employees. Employees become eligible to participate under the 401(k) Plan
after reaching age 21 and completing three months of service. Under the 401(k)
Plan, employees may voluntarily elect to defer between 0% and 15% of
compensation, not to exceed applicable limits under the Code (i.e., $10,000 in
calendar 1998). The Bank matches a minimum of 25% of the first 6% of employee
contributions. Employee and matching contributions immediately vest. The Bank
intends to amend the 401(k) Plan to permit voluntary investments of plan assets
by participants in the common stock following the offering.
Benefits are payable upon termination of employment, retirement, death,
disability, or plan termination. Normal retirement age under the 401(k) Plan is
65. Additionally, funds under the 401(k) Plan may be distributed upon
application to the plan administrator upon severe financial hardship in
accordance with uniform guidelines which comply with those specified by the
Code. It is intended that the 401(k) Plan operate in compliance with the
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the requirements of Section 401(a) of the Code. Contributions to
the 401(k) Plan by the Bank for employees may be reduced in the future or
eliminated as a result of contributions made to the Employee Stock Ownership
Plan. See "- Employee Stock Ownership Plan."
62
Potential Stock Benefit Plans
Stock Option Plans. Following the offering, we intend to adopt a stock
option plan for directors and key employees within one year after the
reorganization. Any plan adopted will be subject to stockholder approval and
applicable laws. Any plan adopted within one year of the reorganization will
require the approval of a majority of our stockholders, other than the mutual
holding company and will also be subject to various other regulatory
limitations. Up to 10% of the shares of common stock sold in the offering will
be reserved for issuance under the stock option plan. No determinations have
been made as to the specific terms of, or awards under, the stock option plan.
The purpose of the stock option plan will be to attract and retain
qualified personnel in key positions, provide officers, key employees and
directors with a proprietary interest in the Company as an incentive to
contribute to our success and reward officers and key employees for outstanding
performance. Although the terms of the stock option plan have not yet been
determined, it is expected that the stock option plan will provide for the grant
of: (i) options to purchase the common stock intended to qualify as incentive
stock options under the Code (incentive stock options); and (ii) options that do
not so qualify (non-statutory stock options). Any stock option plans would be in
effect for up to ten years from the earlier of adoption by the board of
directors or approval by the stockholders.
Under the OTS conversion regulations, a stock option plan adopted
within a year of the reorganization, would provide for a term of 10 years, after
which no awards could be made, unless earlier terminated by the board of
directors pursuant to the option plan and the options would vest over a five
year period (i.e., 20% per year), beginning one year after the date of grant of
the option. Options would expire no later than 10 years from the date granted
and would expire earlier if the option committee so determines or in the event
of termination of employment. Options would be granted based upon several
factors, including seniority, job duties and responsibilities, job performance,
our financial performance and a comparison of awards given by other savings
institutions converting from mutual to stock form.
Stock Programs. Following the offering, we also intend to establish
stock programs to provide our officers and outside directors with a proprietary
interest in the Company. The stock programs are expected to provide for the
award of common stock, subject to vesting restrictions, to eligible officers,
employees and directors. Any plan adopted within one year of the reorganization
would require the approval of a majority of our stockholders other than the MHC
and will also be subject to various other regulatory limitations.
We expect to contribute funds to stock programs to acquire, in the
aggregate, up to 4% of the shares of common stock sold in the offering. Shares
used to fund the stock programs may be acquired through open market purchases or
from authorized but unissued shares. No determinations have been made as to the
specific terms of stock programs.
Restrictions on Stock Benefit Plans. OTS regulations provide that in
the event we implement stock option or management and/or employee stock benefit
plans within one year from the date of reorganization, such plans must comply
with the following restrictions: (1) the plans must be fully disclosed in the
prospectus, (2) for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares issued in the
conversion, (3) for restricted stock plans such as the MRP, the shares may not
exceed 3% of the shares issued in the conversion (4% for institutions with 10%
or greater tangible capital), (4) the aggregate amount of stock purchased by the
ESOP in the conversion may not exceed 10% (12% for well-capitalized institutions
utilizing a 4% management
63
recognition plan), (5) no individual employee may receive more than 25% of the
available awards under the option plan or a restricted stock plan, (6) directors
who are not employees may not receive more than 5% individually or 30% in the
aggregate of the awards under any plan, (7) all plans must be approved by a
majority of the total votes eligible to be cast at any duly called meeting of
the Company's stockholders held no earlier than six months following the
reorganization, (8) for stock option plans, the exercise price must be at least
equal to the market price of the stock at the time of grant, (9) for restricted
stock plans, no stock issued in a mutual-to-stock conversion may by used to fund
the plan, (10) neither stock option awards nor restricted stock awards may vest
earlier than 20% as of one year after the date of stockholder approval and 20%
per year thereafter, and vesting may be accelerated only in the case of
disability of death (or if not inconsistent with applicable OTS regulations in
effect at such time, in the event of a change in control, (11) the proxy
material must clearly state that the OTS in no way endorses or approves of the
plans, and (12) prior to implementing the plans, all plans must be submitted to
the Regional Director of the OTS within five days after stockholder approval
with a certification that the plans approved by the stockholders are the same
plans that were filed with and disclosed in the proxy materials relating to the
meeting at which stockholder approval was received.
Transactions with Management and Others
No directors, executive officers or immediate family members of such
individuals were engaged in transactions with the Bank or any subsidiary
involving more than $60,000 (other than through a loan) during the year ended
September 30, 1998. Furthermore, the Bank had no "interlocking" relationships in
which (i) any executive officer is a member of the board of directors or of
another entity, one of whose executive officers are a member of the Bank's board
of directors, or where (ii) any executive officer is a member of the
compensation committee of another entity, one of whose executive officers is a
member of the Bank's board of directors.
The Bank has followed the policy of offering residential mortgage loans
for the financing of personal residences, share loans, and consumer loans to its
officers, directors and employees. Loans are made in the ordinary course of
business and also made on substantially the same terms and conditions, including
interest rate and collateral, as those of comparable transactions prevailing at
the time with other persons, and do not include more than the normal risk of
collectibility or present other unfavorable features. As of September 30, 1998,
the aggregate principal balance of loans outstanding to all directors, executive
officers and immediate family members of such individuals was approximately
$34,000.
Proposed Stock Purchases by Management
The following table sets forth for each of the directors and executive
officers of the Bank and for all such directors and executive officers as a
group (including in each case all "associates" of such persons) the number of
shares of common stock which such person or group intends to purchase, assuming
the sale of __________ shares of common stock at $10.00 per share. The table
does not include
64
purchases by the ESOP (8% of the common stock sold in the offering or 163,560
shares), and does not take into account any stock benefit plans to be adopted
within one year following the reorganization. See "Management - Potential Stock
Benefit Plans."
Percentage of
Total Number Total Dollar 2,044,500 Total
of Shares Amount of Shares Shares Sold in
Name to be Purchased to be Purchased the Offering(1)
---- --------------- --------------- ---------------
Charles W. Bovay 20,000 $200,000 1.0%
Gregory C. Wilkes 20,000 200,000 1.0
Robert H. Artman 1,000 10,000 *
Llewellyn N. Belcourt 2,500 25,000 *
Stephen A. Moore, Jr. 20,000 200,000 1.0
Nis Nissen 20,000 200,000 1.0
Rudy H. Thornberry 1,000 10,000 *
G. F. Zimmermann, III 5,000 50,000 *
Don A. Burdett 7,500 75,000 *
Kerry P. Charlet 20,000 200,000 1.0
William H. Cloyd 10,000 100,000 *
Marion Moore 500 5,000 *
-------- --------- ---
Total 127,500 $ 1,275,000 6.2%
======== ========== ===
- -----------------
* Less than 1.0%
(1) In the event the stockholders of the Company approve the stock benefit
plans as discussed in this prospectus (stock programs (4% of the common
stock sold in the offering) and the stock option plans (10% of the common
stock sold in the offering)), and all of the common stock is awarded
pursuant to the stock benefit plans and all options are exercised
(increasing the number of outstanding shares), directors and executive
officers would own 413,730 or 18.4% of the shares of common stock owned by
persons other than the MHC (9.1% of the total shares outstanding, including
those held by the mutual holding company). If fewer than 2,044,500 shares
were publicly sold, these percentage ownership estimates would increase.
See "- Potential Stock Benefit Plans."
THE REORGANIZATION
THE BOARD OF DIRECTORS OF THE BANK HAS ADOPTED THE PLAN AUTHORIZING THE
REORGANIZATION, SUBJECT TO THE APPROVAL OF THE OTS AND OF THE MEMBERS OF THE
BANK AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. OTS APPROVAL DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE OTS.
General
On September 28, 1998, the Board of Directors of the Bank adopted the
plan of reorganization and stock issuance which was subsequently amended,
pursuant to which the Bank proposes to reorganize from a federally chartered,
mutual savings institution to a federally chartered stock savings institution.
The Bank will be a wholly owned subsidiary of the Company, the majority of whose
shares are to be owned by the MHC. Concurrently with the reorganization, the
Company will sell a minority percentage of its common stock in the offering to
the Bank's depositors and members of the general public. The Board of Directors
unanimously adopted the Plan after consideration of the advantages and the
disadvantages of the reorganization and offering and alternative transactions,
including a full conversion
65
from the mutual to stock form of organization. Following the receipt of all
required regulatory approvals, the approval of the plan by the Bank's and the
satisfaction of all other conditions precedent to the reorganization, the Bank
will effect the reorganization (i) by exchanging its federal mutual savings
institution charter for a federal stock savings institution charter and becoming
a wholly owned subsidiary of the Company and the Company then becoming a
majority-owned subsidiary of the MHC, and having the depositors of the Bank
receive such liquidation interests in the MHC as they have in the Bank before
the reorganization; or (ii) in any other manner consistent with the plan or
reorganization and applicable regulations. See "- Description of the
Reorganization." On the effective date, the Company will commence business as
FloridaFirst Bancorp, a bank holding company, and the Bank will commence
business as First Federal Florida, a federally chartered stock savings
institution, and the MHC will commence business as FloridaFirst Bancorp, MHC,
majority owner of the common stock of the Company. The reorganization will be
accomplished in accordance with the procedures set forth in the plan, the
requirements of applicable laws and regulations, and the policies of the OTS.
For additional information concerning the offering, see "The Offering."
Purposes of the Reorganization
The Board of Directors of the Bank has determined that the
reorganization is in the best interest of the Bank and has several business
purposes for the reorganization.
The reorganization will structure the Bank in the stock form, which is
used by commercial banks, most major business corporations and an increasing
number of savings institutions. Formation of the Bank as a capital stock savings
institution subsidiary of the Company will permit the Company to issue common
stock, which is a source of capital not available to mutual savings institutions
or savings and loan associations. At the same time, the Bank's mutual form of
ownership will be preserved in the MHC, and the MHC, as a mutual corporation,
will control at least a majority of the common stock of the Company so long as
the MHC remains in existence as a mutual institution. The reorganization will
enable the Bank to achieve certain benefits of a stock company without a loss of
control that sometimes follows standard conversions from mutual to stock form.
Sales of locally based, independent savings institutions to larger, regional
financial institutions following such mutual to stock conversions can result in
closed branches, fewer choices for consumers, employee layoffs and the loss of
community support and involvement by a financial institution. The Bank is
committed to being an independent, community- oriented institution, and the
Board of Directors believes that the mutual holding company structure is best
suited for this purpose. The mutual holding company structure also will give the
Company flexibility to issue its common stock at various times and in varying
amounts as market conditions permit, rather than in a single stock offering. The
MHC may convert from mutual to stock form of organization in the future. The
holding company form of organization is expected to provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with other
financial institutions, as well as other companies. Although the Bank has no
current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the reorganization and
offering, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise.
The Company is offering for sale up to 47% of the common stock in an
offering at an aggregate price based upon an independent appraisal. The proceeds
from the sale of common stock of the Company will provide the Bank with new
equity capital, which will support future deposit growth and expanded
operations. The ability of the Company to sell common stock also will enable the
Company and the Bank to increase capital in response to the changing capital
requirements of the OTS. While the Bank currently
66
meets or exceeds all regulatory capital requirements, the sale of common stock
in connection with the reorganization, coupled with the accumulation of earnings
(net of dividends) from year to year, represents a means for the orderly
preservation and expansion of the Bank's capital base, and allows flexibility to
respond to sudden and unanticipated capital needs. After the reorganization, the
Company may repurchase common stock. The investment of the net proceeds of the
offering also will provide additional income to enhance further the Bank's
future capital position.
The ability of the Company to issue common stock also will enable it in
the future to establish stock benefit plans for management and employees of the
Company and the Bank, including incentive stock option plans, stock award plans,
and employee stock ownership plans.
The formation of the Company also will allow the Company to borrow
funds, on a secured and unsecured basis, and to issue debt to the public or in a
private placement. The proceeds of any such borrowings or debt issuance may be
contributed to the Bank as core capital for regulatory capital purposes. The
Company has not made a determination to borrow funds or issue debt at the
present time.
The Board of Directors believes that these advantages outweigh the
potential disadvantages of the mutual holding company structure, which include:
the inability of the Company to sell shares of common stock representing 50% or
more so long as the MHC remains in existence; the more limited liquidity of the
common stock, as compared to a full conversion; and the inability of
stockholders other than the MHC to obtain a majority ownership of the Company
which may result in the perpetuation of the existing management and Board of
Directors of the Company and the Bank. The MHC will be able to elect all members
of the Board of Directors of the Company, and will be able to control the
outcome of all matters presented to the stockholders of the Company for
resolution by vote, except for matters which by regulation must be approved by a
majority of the shares owned by persons other than the MHC (the "minority
stockholders"), including certain matters relating to stock compensation plans
and certain votes regarding a conversion to stock form by the MHC. No assurance
can be given that the Company will not take action adverse to the interests of
the minority stockholders. For example, the Company can revise the dividend
policy, prevent the sale of control of the Company or defeat a candidate for the
Board of Directors of the Company or other proposal put forth by the minority
stockholders.
Description of the Reorganization
Following receipt of all required regulatory approvals and ratification
of the plan of reorganization by the voting depositors, the reorganization will
be effected by a series of mergers or in any manner approved by the OTS that is
consistent with the purposes of the plan of reorganization and applicable laws
and regulations. The Bank's intention is to complete the reorganization using a
series of mergers, although it may elect to use any method consistent with
applicable regulations, subject to OTS approval.
For a detailed description of the merger structure, see "- Federal and
State Tax Consequences of the Reorganization." Upon consummation of the
reorganization, the legal existence of the Bank will not terminate, the
converted stock bank will be a continuation of the Bank and all property of the
Bank, including its right, title, and interest in and to all property of any
kind and nature, interest and asset of every conceivable value or benefit then
existing or pertaining to the Bank, or which would inure to the Bank immediately
by operation of law and without the necessity of any conveyance or transfer and
without any further act or deed, will continue to be owned by the Bank as the
survivor of the merger. The Bank will possess, hold and enjoy the same in its
right and fully and to the same extent as the same was possessed, held and
enjoyed by the Bank. The Bank will continue to have, succeed to, and be
67
responsible for all the rights, liabilities, and obligations of the Bank and
will maintain its headquarters operations at the Bank's present location.
The foregoing description of the reorganization is qualified in its
entirety by reference to the plan and the charter and bylaws of the Bank, the
MHC and the Company to be effective upon consummation of the reorganization.
Effects of the Reorganization
General. The reorganization will not have any effect on the Bank's
present business of accepting deposits and investing its funds in loans and
other investments permitted by law. The reorganization will not result in any
change in the existing services provided to depositors and borrowers, or in
existing offices, management, and staff. Upon completion of the reorganization,
the Bank will continue to be subject to regulation, supervision, and examination
by the OTS and the FDIC.
Deposits and Loans. Each holder of a deposit account in the Bank at the
time of the reorganization will continue as an account holder in the Bank after
the reorganization, and the reorganization will not affect the deposit balance,
interest rate, and other terms of such accounts. Each such account will be
insured by the FDIC to the same extent as before the reorganization. Depositors
will continue to hold their existing certificates, passbooks, checkbooks, and
other evidence of their accounts. The reorganization will not affect the loans
of any borrower from the Bank. The amount, interest rate, maturity, security
for, and obligations under each loan will remain contractually fixed as they
existed prior to the reorganization. See "- Voting Rights" and "- Liquidation
Rights" below for a discussion of the effects of the reorganization on the
voting and liquidation rights of the depositors and borrowers of the Bank.
Voting Rights. As a federally chartered mutual savings institution, the
Bank has no authority to issue capital stock and thus, no stockholders. Control
of the Bank in its mutual form is vested in the Board of Directors of the Bank.
Although they have no statutory right, certain qualifying holders of the Bank's
savings, demand, or other authorized accounts will be given an opportunity to
vote on the reorganization. In the consideration of the reorganization, each
holder of qualifying account is permitted to cast one vote for each $100, or
fraction thereof, of the withdrawal value of the voting depositor's account up
to a maximum of 1,000 votes.
After the reorganization, the affairs of the Bank will be under the
direction of the Board of Directors of the Company and the Bank and all voting
rights as to the Bank will be vested exclusively in the holders of the
outstanding voting capital stock of the Company, which initially will consist
exclusively of common stock. By virtue of its ownership of a majority of the
outstanding shares of common stock, the MHC will be able to elect all members of
the Board of Directors of the Company and generally will be able to control the
outcome of most matters presented to the stockholders of the Company for
resolution by vote, excluding certain matters where shares held by the MHC are
not counted.
The MHC will be controlled by its Board of Directors, which will
initially consist of the current directors of the Bank. Under the mutual form of
ownership, current directors elect new directors, which can perpetuate existing
management and control of the MHC, the Company and the Bank. All depositors of
the Bank at the time of the reorganization will become members of and have
voting rights in the MHC.
68
Liquidation Rights. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, existing holders of deposit accounts of the
Bank would be entitled to share in a liquidating distribution after the payment
of claims of all creditors (including the claims of all account holders to the
withdrawal value of their accounts). Each account holder's pro rata share of
such liquidating distribution would be in the same proportion as the value of
his or her deposit accounts was to the total value of all deposit accounts in
the Bank at the time of liquidation.
Upon a complete liquidation of the Bank after the reorganization, the
Company, as holder of the Bank's common stock, would be entitled to any assets
remaining upon a liquidation or dissolution of the Bank. Each depositor would
not have a claim in the assets of the Bank. However, upon a complete liquidation
of the MHC after the reorganization, each depositor would have a claim up to the
pro rata value of his or her accounts, in the assets of the MHC remaining after
the claims of the creditors of the MHC are satisfied. Depositors who have
liquidation rights in the Bank immediately prior to the reorganization will
continue to have such rights in the MHC after the reorganization for so long as
they maintain deposit accounts in the Bank after the reorganization.
Upon a complete liquidation of the Company, each holder of shares of
the common stock would be entitled to receive a pro rata share of the Company's
assets, following payment of all debts, liabilities and claims of greater
priority of or against the Company.
Federal and State Tax Consequences of the Reorganization
The reorganization may be effected in any manner approved by the OTS
that is consistent with the purposes of the plan and applicable law regulations
and policies. However, the Bank intends to consummate the reorganization using a
series of mergers as described below. This structure enables the Bank to retain
all of its historical tax attributes and produces significant savings to the
Bank because it simplifies regulatory approvals and conditions associated with
the completion of the reorganization.
The merger structure will be accomplished as follows: (i) the Bank will
organize the MHC initially as an interim federal stock savings institution as
its wholly owned subsidiary; (ii) the MHC will organize a capital stock
corporation under federal law (i.e., the Company) as its wholly owned subsidiary
that will subsequently hold 100% of the Bank's common stock; (iii) the MHC will
also organize an interim federal stock savings institution as its wholly owned
subsidiary ("Interim"). The following transactions will then occur
simultaneously: (iv) the Bank will exchange its charter for a federal stock
savings institution charter (the "Reorganization"); (v) the MHC (while in its
stock form) will cancel its outstanding stock and exchange its charter for a
federal mutual savings institution holding company charter and thereby become
the MHC; (vi) Interim will merge with and into the Bank with the Bank being the
surviving institution and (vii) the initially issued stock of the Bank (which
will be constructively received by former Bank depositors when the Bank becomes
the Bank pursuant to step (iv)) will be issued to the MHC in exchange for
liquidation interests in the MHC which will be held by the Bank's depositors.
The MHC will then contribute 100% of the stock of the Bank to the Company, its
wholly owned subsidiary. The Company will subsequently offer for sale 47% of
its common stock pursuant to the plan. As a result of these transactions: (a)
the Bank will be a wholly owned subsidiary of the Company; (b) the Company will
be a majority-owned subsidiary of the MHC; and (c) the former depositors of the
Bank will hold liquidation interests in the MHC.
Under this structure: (i) the Reorganization is intended to be a
tax-free reorganization under Code section 368(a)(1)(F); and (ii) the exchange
of the shares of the Bank's initial common stock deemed
69
constructively received by the Bank's depositors for liquidation interests in
the MHC (the "Exchange") is intended to be a tax-free exchange under Code
section 351.
Under the plan, consummation of the Reorganization is conditioned upon,
among other things, the prior receipt by the Bank of either a private letter
ruling from the IRS and from the federal taxing authorities or an opinion of the
Bank's counsel as to the federal and Florida income tax consequences of the
Reorganization to the Bank (in both its mutual and stock form), the Company and
the Eligible Account Holders and Supplemental Account Holders. In Revenue
Procedure 99-3, the IRS announced that it will not rule on whether a transaction
qualifies as a tax-free reorganization under Code section 368(a)(1)(F) or as a
tax-free exchange of stock for stock in the formation of a holding company under
Code section 351, but that it will rule on significant sub-issues that must be
resolved to determine whether the transaction qualifies under either of these
Code sections.
The Bank has requested a private letter ruling from the IRS regarding
certain significant sub- issues associated with the Reorganization. Based in
part upon this private letter ruling, Malizia, Spidi, Sloane & Fisch, P.C. will
issue its opinion regarding certain federal income tax consequences of the
reorganization. There is no assurance that a private letter ruling will be
obtained.
In the following discussion, "Mutual Bank" refers to the Bank before
the Reorganization and "Stock Bank" refers to the Bank after the Reorganization.
With regard to the Reorganization, Malizia, Spidi, Sloane & Fisch, P.C.
intends to issue an opinion that: (1) the Reorganization will constitute a
reorganization under Code section 368(a)(1)(F), and the Bank (in either its
status as Mutual Bank or Stock Bank) will recognize no gain or loss as a result
of the Reorganization; (2) the basis of each asset of Mutual Bank received by
Stock Bank in the Reorganization will be the same as Mutual Bank's basis for
such asset immediately prior to the Reorganization; (3) the holding period of
each asset of Mutual Bank received by Stock Bank in the Reorganization will
include the period during which such asset was held by Mutual Bank prior to the
Reorganization; (4) for purposes of Code section 381(b), Stock Bank will be
treated as if there had been no Reorganization and, accordingly, the taxable
year of the Mutual Bank will not end on the effective date of the reorganization
and the tax attributes of Mutual Bank (subject to application of Code sections
381, 382, and 384) will be taken into account by Stock Bank as if the
Reorganization had not occurred; (5) Mutual Bank's qualifying depositors will
recognize no gain or loss upon their constructive receipt of shares of Stock
Bank common stock solely in exchange for their interest (i.e., liquidation
rights) in Mutual Bank; and (6) no gain or loss will be recognized by depositors
of Mutual Bank upon the issuance to them of deposits in Stock Bank in the same
dollar amount as their deposits in the Mutual Bank.
Unlike private rulings of the IRS, an opinion of counsel is not binding
on the IRS and the IRS could disagree with conclusions reached therein. In the
event of such disagreement, there can be no assurance that the IRS would not
prevail in a judicial or administrative proceeding.
Hahn, McClurg, Watson, Griffith & Bush, P.A. intends to opine, subject
to the limitations and qualifications in its opinion, that, for purposes of the
Florida corporate income tax, the Reorganization will not become a taxable
transaction to the Bank (in either its status as Mutual Bank or Stock Bank), the
MHC, the Company, the stockholders of the Stock Bank or the depositors of the
Bank.
70
Accounting Consequences
The reorganization will be accounted for in a manner similar to a
pooling-of-interests under GAAP. Accordingly, the carrying value of the Bank's
assets, liabilities, and capital will be unaffected by the reorganization and
will be reflected in the Company's and Bank's consolidated financial statements
based on their historical amounts.
Conditions to the Reorganization
Consummation of the reorganization is subject to the receipt of all
requisite regulatory approvals, including various approvals or non-objections,
as the case may be, of the OTS. The receipt of such approvals or non-objections
from the OTS does not constitute a recommendation or endorsement of the plan or
reorganization by the OTS. Consummation of the reorganization also is subject to
ratification of the plan by a majority of the total votes of depositors at a
special meeting called for the purpose of approving the plan, as well as the
receipt of satisfactory rulings or opinions with respect to the tax consequences
of the reorganization, as discussed under "The Reorganization - Effects of the
Reorganization - Federal and State Tax Consequences" above.
Capital and Financial Resources of the MHC
The Company intends to capitalize the MHC with up to $200,000 in the
reorganization. Subsequent to the reorganization, the MHC's capital and
financial resources will initially be dependent primarily on earnings from the
investment of its initial capitalization and dividends from the Company. The
payment of dividends by the Company will be subject to declaration by the
Company's Board of Directors, which will take into account the Company's
financial condition, results of operations, tax considerations, industry
standards, economic conditions, regulatory restrictions which affect the payment
of dividends by the Company to the MHC and other factors.
Additional financial resources also may be available to the MHC (and,
through contribution by the MHC, to the Company) through borrowings from an
unaffiliated lender or lenders. In connection with any such borrowings, the MHC
could grant a security interest in the assets of the MHC, including the common
stock held by the MHC. However, a mutual holding company generally may not
pledge the stock of a subsidiary savings association and may not be able to
pledge the Stock of the Company unless the proceeds of the loan secured by the
pledge are infused into the institution whose stock is pledged and the OTS is
notified of such pledge within 10 days thereafter. Any borrowings of the MHC
would be serviced with available resources, which initially will consist of
dividends from the Company, subject to applicable regulatory and tax
considerations. The MHC does not have any plans to incur any indebtedness
following consummation of the reorganization.
Amendment or Termination of the Plan of Reorganization
If deemed necessary or desirable by the Board of Directors of the Bank,
the plan may be amended by a two-thirds vote of the Bank's Board of Directors,
with the concurrence of the OTS, at any time prior to or after submission of the
plan to voting depositors of the Bank for ratification. The plan may be
terminated by the Board of Directors of the Bank at any time prior to or after
ratification by the voting depositors, by a two-thirds vote with the concurrence
of the OTS.
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Management of the MHC
After the reorganization, the MHC will operate under essentially the
same mutual organization structure as was previously applicable to the Bank.
Directors of the MHC will be classified into three classes as equal in size as
is possible, with one of such classes being elected on an annual basis for
three-year terms by the Board of Directors of the MHC. All current members of
the Board of Directors of the Bank will be the initial members of the Board of
Directors of the MHC. For information about these persons, whose terms as
directors of the MHC will be the same as their terms as directors of the Bank,
see "Management." The initial executive officers of the Company will be persons
who are executive officers of the Bank.
It is not anticipated that the directors and executive officers of the
MHC will receive separate compensation in their capacities as such until such
time as such persons devote significant time to the separate management of the
MHC's affairs, which is not expected to occur unless the MHC becomes actively
involved in other investments. The MHC, however, may determine that such
compensation is appropriate in the future.
THE OFFERING
General
Concurrently with the reorganization, we, the Company, are offering
shares of common stock to persons other than the MHC. We are offering between a
minimum of 1,737,825 shares and an anticipated maximum of 2,351,175 shares of
common stock in the offering (subject to adjustment to up to 2,703,851 shares in
the event our estimated pro forma market value has increased at the conclusion
of the offering), which will expire at ____:____ __________, Florida time, on
__________ ____, 1998 unless extended. The shares of common stock that will be
sold in the offering will constitute no more than 47% of the shares that will be
outstanding upon completion of the offering. The minimum purchase is 25 shares
of common stock (minimum investment of $250). Our common stock is being offered
at a fixed price of $10.00 per share in the offering.
Subscription funds may be held by the Bank for up to 45 days after the
last day of the subscription offering in order to consummate the reorganization
and offering and thus, unless waived by the Bank, all orders will be irrevocable
until __________ __, 1999. In addition, the reorganization and offering may not
be consummated until the Bank receives approval from the OTS. Approval by the
OTS is not a recommendation of the reorganization or offering. Consummation of
the reorganization and offering will be delayed, and resolicitation will be
required, in the event the OTS does not issue a letter of approval within 45
days after the last day of the subscription offering, or in the event the OTS
requires a material change to the offering prior to the issuance of its
approval. In the event the reorganization and offering are not consummated by
________, 1999, subscribers will have the right to modify or rescind their
subscriptions and to have their subscription funds returned with interest at the
Bank's passbook rate and all withdrawal authorizations will be canceled.
We may cancel the offering at any time, and orders for common stock
which have been submitted are subject to cancellation under such circumstances.
72
Conduct of the Offering
Subject to the limitations of the plan, shares of common stock are
being offered in descending order of priority in the subscription offering to:
(i) Eligible Account Holders; (ii) the ESOP; (iii) Supplemental Eligible Account
Holders; and (iv) Other Members. To the extent that shares remain available and
subject to market conditions at or near the completion of the subscription
offering, we will conduct one or more of a community, public and syndicated
public offering.
We have the right, in our sole discretion, to determine whether
prospective purchasers are "associates" or "acting in concert." All such
determinations are in our sole discretion and may be based on whatever evidence
we choose to use in making any such determination.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe
for the purchase of common stock have been granted under the plan of
reorganization to the following persons:
Priority 1: Eligible Account Holders. Each Eligible Account Holder
shall be given the opportunity to purchase up to $200,000 of common stock
offered in the subscription offering; subject to the overall limitations
described under " - Limitations on Purchases of Common Stock." If there are
insufficient shares available to satisfy all subscriptions of Eligible Account
Holders, shares will be allocated to Eligible Account Holders so as to permit
each subscribing Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to 25 shares. Thereafter,
unallocated shares will be allocated to remaining subscribing Eligible Account
Holders whose subscriptions remain unfilled in the same proportion that each
such subscriber's qualifying deposit bears to the total amount of qualifying
deposits of all subscribing Eligible Account Holders, in each case on June 30,
1997, whose subscriptions remain unfilled. Subscription rights received by
executive officers and directors, based on their increased deposits in the Bank
in the one year preceding the eligibility record date will be subordinated to
the subscription rights of other eligible account holders. To ensure proper
allocation of stock, each Eligible Account Holder must list on his order form
all accounts in which he had an ownership interest as of the Eligibility Record
Date.
Priority 2: The ESOP. The tax-qualified employee stock benefit plans
may be given the opportunity to purchase in the aggregate up to 10% of the
common stock issued in the subscription offering. It is expected that the ESOP
will purchase up to 8% of the common stock issued in the offering. In the event
of a an oversubscription in the offering by Eligible Account Holders, the ESOP
may, in whole or in part, fill its order through open market purchases
subsequent to the closing of the offering. See also "Risk Factors - Expenses
Associated with the ESOP and Stock Benefit Plans."
Priority 3: Supplemental Eligible Account Holders. To the extent there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the ESOP and other tax-qualified employee stock benefit
plans, if any, each Supplemental Eligible Account Holder shall have the
opportunity to purchase up to $200,000 of common stock offered in the
subscription offering, subject to the overall limitations described under
"Limitations on Purchases of Common Stock." In the event Supplemental Eligible
Account Holders subscribe for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders and the ESOP and other tax-qualified
employee stock benefit plans, if any, is in excess of the total number of shares
offered in the offering, the shares of common stock will be allocated among
subscribing Supplemental Eligible Account Holders first so as to permit
73
each subscribing Supplemental Eligible Account Holder to purchase a number of
shares sufficient to make his total allocation equal to 25 shares. Thereafter,
unallocated shares will be allocated to each subscribing Supplemental Eligible
account Holder whose subscription remains unfilled in the same proportion that
such subscriber's qualifying deposits bear to the total amount of qualifying
deposits of all subscribing Supplemental Eligible Account Holders, in each case
on December 31, 1998, whose subscriptions remain unfilled. To ensure proper
allocation of stock each Supplemental Eligible Account Holder must list on his
order form all accounts and loans in which he had an ownership interest as of
the Supplemental Eligible Date.
Priority 4: Other Members. To the extent that there are sufficient
shares remaining after satisfaction of all subscriptions by the Eligible Account
Holders, the tax-qualified employee stock benefit plans, and Supplemental
Eligible Account Holders, each Other Member who is not an Eligible or
Supplemental Eligible Account Holder shall have the opportunity to purchase up
to $200,000 of common stock offered in the subscription offering, subject to the
overall limitations described under "- Limitations on Purchases of Common
Stock." In the event Other Members subscribe for a number of shares which, when
added to the shares subscribed for by Eligible Account Holders, the
tax-qualified employee stock benefit plans and Supplemental Eligible Account
Holder, is in excess of the total number of shares offered in the offering, the
subscriptions of Other Members will be allocated among subscribing Other Members
so as to permit each subscribing Other Member, to the extent possible, to
purchase a number of shares sufficient to make his total allocation of common
stock equal to the lesser of 25 shares or the number of shares subscribed for by
Other Members. Any shares remaining will be allocated among the subscribing
Other Members whose subscriptions remain unsatisfied on a 25 shares (or whatever
lesser amount is available) per order basis until all orders have been filled or
the remaining shares have been allocated.
State Securities Laws. We in our sole discretion, may make reasonable
efforts to comply with the securities laws of any state in the United States in
which Bank depositors reside, and will only offer and sell the common stock in
states in which the offers and sales comply with state securities laws. However,
no person will be offered or allowed to purchase any common stock under the plan
if he resides in a foreign country or in a state of the United States with
respect to which: (i) a small number of persons otherwise eligible to purchase
shares under the plan reside in such state or foreign country; and/or (ii) the
offer or sale of shares of common stock to such persons would require us or the
Bank or our employees to register, under the securities laws of such state or
foreign country, as a broker or dealer or to register or otherwise qualify its
securities for sale in such state or foreign country and such registration or
qualification would be impracticable for reasons of cost or otherwise.
Restrictions on Transfer of Subscription Rights and Shares. The plan
prohibits any person with subscription rights, including Eligible Account
Holders, Supplemental Eligible Account Holders, and Other Members, from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the subscription rights issued under the plan
or the shares of common stock to be issued upon their exercise. Such rights may
be exercised only by the person to whom they are granted and only for his or her
account. Each person subscribing for shares will be required to certify that
such person is purchasing shares solely for his or her own account and that such
person has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of common stock prior to the completion of the
offering.
We and the Bank will pursue any and all legal and equitable remedies in
the event we become aware of the transfer of subscription rights and will not
honor orders we know to involve the transfer of such rights.
74
Expiration Date. The subscription offering will expire at ____:____
__________, Florida time, on __________ ____, 1999, unless it is extended, up to
an additional 45 days with the approval of the OTS, if necessary, but without
additional notice to subscribers (the "expiration date"). Subscription rights
will become void if not exercised prior to the expiration date.
Community Offering
If less than the total number of shares of common stock to be
subscribed for in the offering are sold in the subscription offering, shares
remaining unsubscribed may be made available for purchase in the community
offering to certain members of the general public, which may subscribe together
with any associate or group of persons acting in concert for up to $200,000 of
common stock. In the community offering, if any, shares will be available for
purchase by the general public with preference given first to natural persons
residing in either Polk or Manatee County in Florida and second, to natural
persons residing in the State of Florida. We will attempt to issue common stock
in such a manner as to promote a wide distribution of common stock.
If purchasers in the community offering (if any), whose orders would
otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among persons
submitting orders in the community offering in an equitable manner we determine.
The community offering, if any, may commence simultaneously with,
during or subsequent to the completion of the subscription offering and if
commenced simultaneously with or during the subscription offering the community
offering may be limited to residents of Polk or Manatee County in Florida. The
community offering, if any, must be completed within 45 days after the
completion of the subscription offering unless otherwise extended by the OTS.
We, in our absolute discretion, reserve the right to reject any or all
orders in whole or in part which are received in the community offering, at the
time of receipt or as soon as practicable following the completion of the
community offering.
Syndicated Community Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the subscription offering, we may offer
shares, to selected persons in a syndicated community offering on a best-efforts
basis through Sandler O'Neill in such a manner as to promote a wide distribution
of the common stock. Orders received in connection with the syndicated community
offering, if any, will receive a lower priority than orders received in the
subscription offering. Common stock sold in the syndicated community offering
will be sold at the same price as all other shares in the subscription offering.
We have the right to reject orders, in whole or in part, in our sole discretion
in the syndicated community offering.
No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than 20,000 shares or $200,000 of
common stock in the syndicated community offering. To order common stock in the
syndicated community offering, if held, an executed stock order and account
withdrawal authorization (if applicable) must be received by Sandler O'Neill
prior to the termination of the syndicated community offering. Promptly upon
receipt of available funds, together with a properly executed stock order and
account withdrawal authorization, if applicable, and
75
certification, Sandler O'Neill will forward such funds to the Bank to be
deposited in a subscription escrow account.
The date by which orders must be received in the syndicated community
offering will be set by us at the time of commencement of the syndicated
community offering; provided however, if the syndicated community offering is
extended beyond ___________, 1999, each purchaser will have the opportunity to
maintain, modify, or rescind his order. In such event, all funds received in the
syndicated community offering will be promptly returned with interest to each
purchaser unless he affirmatively indicates otherwise.
If an order in the syndicated community offering is accepted, promptly
after the completion of the reorganization, a certificate for the appropriate
amount of shares will be forwarded to Sandler O'Neill as nominee for the
beneficial owner. In the event that an order is not accepted or the
reorganization is not consummated, the Bank will promptly refund with interest
the funds received to Sandler O'Neill which will then return the funds to
subscribers' accounts. If the aggregate pro forma market value of the Bank, as
converted, is less than $37.0 million or more than $50.0 million, each purchaser
will have the right to modify or rescind his or her order.
Limitations on Purchases of Common Stock
The following additional limitations have been imposed upon purchases
of shares of common stock:
1. The aggregate amount of our outstanding common stock owned or
controlled by persons other than the mutual holding company at
the close of the offering will be less than 50% of the Company's
total outstanding common stock.
2. The maximum number of shares of common stock which may be
purchased in the subscription offering by any person (or persons
through a single account) in the first priority, third priority
and fourth priority shall not exceed 20,000 shares or $200,000.
3. The maximum number of shares of common stock which may be
subscribed for or purchased in all categories in the offering by
any person (or persons through a single account) together with
any associate or group of persons acting in concert shall not
exceed 20,000 shares or $200,000 for our employee plans, which in
the aggregate may subscribe for up to 10% of the common stock
issued in the offering.
4. The maximum number of shares of common stock which may be
purchased in all categories in the offering by officers and
directors of the Bank and their associates in the aggregate shall
not exceed 27% of the total number of shares of common stock
issued in the offering to persons other than the mutual holding
company.
5. A minimum of 25 shares of common stock must be purchased by each
person purchasing shares in the offering to the extent those
shares are available.
6. If the number of shares of common stock otherwise allocable to
any person or that person's associates would be in excess of the
maximum number of shares permitted as set forth above, the number
of shares of common stock allocated to each such person
76
shall be reduced to the lowest limitation applicable to that
person, and then the number of shares allocated to each group
consisting of a person and that person's associates shall be
reduced so that the aggregate allocation to that person and his
associates complies with the above maximums, and such maximum
number of shares shall be reallocated among that person and his
associates in proportion to the shares subscribed by each (after
first applying the maximums applicable to each person,
separately).
7. Depending upon market or financial conditions, the Board of
Directors of the Bank, without further approval of the
depositors, may decrease or increase the purchase limitations in
the plan, provided that the maximum purchase limitations may not
be increased to a percentage in excess of 5% of the offering. If
the Company increases the maximum purchase limitations, the
Company is only required to resolicit Persons who subscribed for
the maximum purchase amount and may, in the sole discretion of
the Company, resolicit certain other large subscribers.
8. In the event of an increase in the total number of shares offered
in the offering due to an increase in the maximum of the
estimated valuation range of up to 15% (the adjusted maximum")
the additional shares will be used in the following order of
priority: (i) in the event that there is an oversubscription at
the Eligible Account Holder level, to fill unfilled subscriptions
of Eligible Account Holders exclusive of the adjusted maximum;
(ii) in the event that there is an oversubscription at the
Employee Plan level, fill the Employee Plan's subscription up to
10% of the adjusted maximum; (iii) in the event that there is an
oversubscription at the Supplemental Eligible Account Holder
level, to fill unfilled subscriptions of Supplemental Eligible
Account Holders exclusive of the adjusted maximum; (iv) in the
event that there is an oversubscription at the depositor level,
to fill unfilled subscriptions of depositors exclusive of the
adjusted maximum; and (v) to fill unfilled Subscriptions in the
community offering exclusive of the adjusted maximum, with
preference given to persons residing in the local community.
9. No person shall be entitled to purchase any common stock to the
extent such purchase would be illegal under any federal law or
state law or regulation or would violate regulations or policies
of the NASD, particularly those regarding free riding and
withholding. The Bank and/or its agents may ask for an acceptable
legal opinion from any purchaser as to the legality of such
purchase and may refuse to honor any purchase order if such
opinion is not timely furnished.
10. The Board of Directors has the right to reject any order
submitted by a person whose representations the Board of
Directors believes to be false or who it otherwise believes,
either alone or acting in concert with others, is violating,
circumventing, or intends to violate, evade, or circumvent the
terms and conditions of the plan.
11. The foregoing restrictions on purchases by any person also apply
to purchases by persons acting in concert under applicable
regulations of the OTS. Under regulations of the OTS, directors
of the Bank are not deemed to be affiliates or a group acting in
concert with other directors solely as a result of membership on
the Board of Directors of the Bank.
The term "associate" of a person is defined in the plan to mean (i) any
corporation or organization (other than the Bank or a majority-owned subsidiary
of the Bank) of which such person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of
77
equity securities, (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, (excluding tax-qualified employee stock benefit
plans or tax-qualified employee stock benefit plans in which a person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity and except that, for purposes of aggregating total shares that may be
held by officers and directors, the term "Associate" does not include any
tax-qualified employee stock benefit plan), and (iii) any relative or spouse of
such person or any relative of such spouse, who has the same home as such person
or who is a trustee or officer of the Bank, or any of its parents or
subsidiaries. For example, a corporation of which a person serves as an officer
would be an associate of such person, and therefore, all shares purchased by
such corporation would be included with the number of shares which such person
individually could purchase under the above limitations.
Each person purchasing shares of the common stock in the offering will
be deemed to confirm that such purchase does not conflict with the maximum
purchase limitation. In the event that such purchase limitation is violated by
any person (including any associate or group of persons affiliated or otherwise
acting in concert with such persons), we will have the right to purchase from
such person at the purchase price per share all shares acquired by such person
in excess of such purchase limitation or, if such excess shares have been sold
by such person, to receive the difference between the purchase price per share
paid for such excess shares and the price at which such excess shares were sold
by such person.
Our right to purchase such excess shares will be assignable.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by directors and officers of the Bank.
For certain restrictions on the common stock purchased by directors and
officers, see "- Restrictions on Transferability by Directors and Officers." In
addition, under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an order form. Any person receiving an order form who desires to
subscribe for shares of common stock must do so prior to the applicable
expiration date by delivering (by mail or in person ) to the Bank a properly
executed and completed order form, together with full payment of the purchase
price for all shares for which subscription is made; provided, however, that if
the Employee Plans subscribe for shares during the subscription offering, the
Employee Plans will not be required to pay for the shares at the time they
subscribe but rather may pay for the shares upon consummation of the
reorganization. Except for institutional investors, all subscription rights
under the plan will expire on the expiration date, whether or not the Bank has
been able to locate each person entitled to such subscription rights. The Bank
shall have the right, in its sole discretion, to permit institutional investors
to submit contractually irrevocable orders in the public offering at any time
prior to the completion of the offering. Once tendered, subscription orders
cannot be revoked without the consent of the Bank unless the reorganization is
not completed within 45 days of the expiration date.
In the event an order form (i) is not delivered and is returned to the
Bank by the United States Postal Service or the Bank is unable to locate the
addressee; (ii) is not received or is received after the applicable expiration
date, (iii) is defectively completed or executed; (iv) is not accompanied by the
full required payment for the shares subscribed for (including instances where a
savings account or certificate balance from which withdrawal is authorized is
insufficient to fund the amount of such required payment,
78
but excluding subscriptions by the Employee Plans) or, in the case of an
institutional investor in the public offering, by delivering irrevocable orders
together with a legally binding commitment to pay the full purchase price prior
to 48 hours before the completion of the reorganization; or (v) is not mailed
pursuant to a "no mail" order placed in effect by the account holder, the
subscription rights for the person to whom such rights have been granted will
lapse as though such person failed to return the completed order form within the
time period specified. However, we may, but will not be required to, waive any
irregularity on any order form or require the submission of corrected order
forms or the remittance of full payment for subscribed shares by such date as we
may otherwise specify. The waiver of an irregularity on an order form in no way
obligates us to waive any other irregularity on any other order form. Waivers
will be considered on a case by case basis. We reserve the right in our sole
discretion to accept or reject orders received on photocopies or facsimile order
forms, or whose payment is to be made by wire transfer or payment from private
third parties. Our interpretation of the terms and conditions of the plan and of
the acceptability of the order forms will be final, subject to the authority of
the OTS.
To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date . Execution of the order form will confirm receipt or delivery in
accordance with Rule 15c2- 8. Order forms will only be distributed with a
prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. Employee Plans subscribing for shares during the subscription
offering may pay for such shares upon consummation of the offering. Payment for
shares of common stock may be made (i) in cash, if delivered in person, (ii) by
check or money order, or (iii) for shares of common stock subscribed for in the
subscription offering, by authorization of withdrawal from savings accounts
(including certificates of deposit) maintained with the Bank. Appropriate means
by which such withdrawals may be authorized are provided in the order form. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be used by a subscriber for any purpose other than to purchase the common
stock for which a subscription has been made until the offering has been
completed or terminated. In the case of payments authorized to be made through
withdrawal from savings accounts, all sums authorized for withdrawal will
continue to earn interest at the contract rate until the offering has been
completed or terminated. Interest penalties for early withdrawal applicable to
certificate accounts will not apply to withdrawals authorized for the purchase
of shares, however, if a partial withdrawal results in a certificate account
with a balance less than the applicable minimum balance requirement, the
certificate shall be canceled at the time of withdrawal, without penalty, and
the remaining balance will earn interest at the passbook savings account rate
subsequent to the withdrawal. In the case of payments made in cash or by check
or money order, such funds will be placed in a segregated account and interest
will be paid by the Bank at the passbook savings account rate from the date
payment is received until the offering is completed or terminated. An executed
order form, once we receive it, may not be modified, amended, or rescinded
without our consent, unless the offering is not completed within 45 days after
the conclusion of the subscription offering, in which event subscribers may be
given the opportunity to increase, decrease, or rescind their subscription for a
specified period of time. In the event that the offering is not consummated for
any reason, all funds submitted pursuant to the offerings will be promptly
refunded with interest as described above.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of common stock in the offerings, provided that such IRAs are
not maintained on deposit at the Bank. Persons with IRAs maintained at the Bank
must have their accounts transferred to an unaffiliated institution or broker
79
to purchase shares of common stock in the offerings. There is no early
withdrawal or IRS interest penalties for such transfers. Instructions on how to
transfer self-directed IRAs maintained at the Bank can be obtained from the
stock information center. Depositors interested in using funds in a Bank IRA to
purchase common stock should contact the stock information center as soon as
possible so that the necessary forms may be forwarded, executed and returned
prior to the expiration date.
Federal regulations prohibit the Bank from lending funds or extending
credit to any person to purchase the common stock in the reorganization.
Stock Information Center. The stock information center is located at
220 E. Lemon Street, 6th Floor, Lakeland, Florida. Its phone number is (941)
____-____.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering will be mailed to the persons entitled thereto at the
address noted on the order form, as soon as practicable following consummation
of the offering. Any certificates returned as undeliverable will be held until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for the common stock are
available and delivered to subscribers, subscribers may not be able to sell the
shares of stock for which they subscribed.
Restriction on Sales Activities
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock in jurisdictions where such
participation is not prohibited. Other employees of the Bank may participate in
the offering in ministerial capacities. Such other employees have been
instructed not to solicit offers to purchase common stock or provide advice
regarding the purchase of common stock. Questions of prospective purchasers will
be directed to executive officers of the Bank or registered representatives of
Sandler O'Neill. No officer, director or employee of the Bank will be
compensated in connection with such person's solicitations or other
participation in the offering by the payment of commissions or other
remuneration based either directly or indirectly on transactions in the common
stock.
Restrictions on Repurchase of Shares
Generally, during the first year following the reorganization, the
Company may not repurchase its shares. During each of the second and third years
following the reorganization, the Company may repurchase up to five percent of
the outstanding shares provided they are purchased in open-market transactions.
Repurchases must not cause us to become undercapitalized and at least 10 days
prior notice of the repurchase must be provided to the OTS. The OTS may
disapprove a repurchase program upon a determination that (1) the repurchase
program would adversely affect our financial condition, (2) the information
submitted is insufficient upon which to base a conclusion as to whether the
financial condition would be adversely affected, or (3) a valid business purpose
was not demonstrated. In addition, SEC rules also govern the method, time,
price, and number of shares of common stock that may be repurchased by the
Company and affiliated purchasers. If, in the future, the rules and regulations
regarding the repurchase of stock are liberalized, the Company may utilize the
rules and regulations then in effect.
80
Stock Pricing and the Number of Shares to be Offered
Feldman Financial, which is experienced in the valuation and appraisal
of business entities, including savings institutions, has been retained to
prepare an appraisal of the estimated pro forma market value of the common stock
(the "Independent Valuation"). This independent valuation will express our pro
forma market value in terms of an aggregate dollar amount. Feldman Financial
will receive fees of $23,500 for its appraisal services, including the
independent valuation and subsequent updates, and $5,000 for assistance in
preparation of our business plan, plus its reasonable out-of-pocket expenses
incurred in connection with the independent valuation and business plan. The
Bank has agreed to indemnify Feldman Financial under certain circumstances
against liabilities and expenses (including certain legal fees) arising out of
or based on any misstatement or untrue statement of a material fact contained in
the information supplied by the Bank to Feldman Financial, except where Feldman
Financial is determined to have been negligent or failed to exercise due
diligence in the preparation of the independent valuation.
Pursuant to the plan, the number of shares of common stock to be
offered in the offering will be based upon the estimated pro forma market value
of the common stock and the purchase price of $10.00 per share. The final
minority ownership percentage will be determined as follows: (i) the numerator
will be the product of (x) the number of shares of common stock sold in the
offering and (y) the purchase price ($10.00 per share); and (ii) the denominator
will be the updated valuation of our pro forma market value immediately upon
conclusion of the offering as determined by Feldman Financial.
Feldman Financial has determined that as of December ____, 1998, our
estimated aggregate pro forma market value was $43.5 million. Pursuant to
regulations, this estimate must be included within a range with a minimum of
$37.0 million and a maximum of $50.0 million. We have determined to offer shares
of common stock in the offering at a price of $10.00 per share. We are offering
a maximum of 2,351,175 shares in the offering (subject to adjustment),
representing a 47% minority ownership percentage. In determining the offering
range, the Board of Directors reviewed Feldman Financial's appraisal and in
particular, considered (i) the Bank's financial condition and results of
operations for the year ended September 30, 1998, (ii) financial comparisons of
the Bank in relation to financial institutions of similar size and asset quality
and (iii) stock market conditions generally and in particular for financial
institutions, all of which are set forth in the appraisal. The Board also
reviewed the methodology and the assumptions used by Feldman Financial in
preparing its appraisal. The number of shares, and the minority ownership
interest, are subject to change if the independent valuation changes at the
conclusion of the offering.
The number of shares and price per share of common stock was determined
by the Board of Directors based upon the independent valuation. The actual
number of shares to be sold in the offering may be increased or decreased prior
to the completion of the offering, subject to approval and conditions that may
be imposed by the OTS, to reflect any change in our estimated pro forma market
value. The total number of shares of common stock that may be sold to persons
other than the mutual holding company in the offering may not exceed 49.99% of
our issued and outstanding voting stock.
Depending on market and financial conditions at the time of the
completion of the offering, the Bank may increase or decrease the number of
shares to be issued in the reorganization and offering. No resolicitation of
purchasers will be made and purchasers will not be permitted to modify or cancel
their purchase orders unless the change in the number of shares to be issued in
the offering results in fewer than 1,737,825 shares or more than 2,351,175
shares being sold in the offering at the purchase price of $10.00, in which
event the Bank may also elect to terminate the offering. In the event that the
Bank
81
elects to terminate the offering, purchasers will receive a prompt refund of
their purchase orders (including termination of withdrawal authorizations),
together with interest earned thereon from the date of receipt to the date of
termination of the offering. In the event we receive orders for less than
1,737,825 shares, at the discretion of the Board of Directors and subject to
approval of the OTS, we may establish a new offering range and resolicit
purchasers. In the event of such a resolicitation, purchasers will be permitted
to modify or cancel their purchase orders. Any adjustments in our pro forma
market value as a result of market and financial conditions or a resolicitation
of prospective purchasers would be subject to OTS approval. A resolicitation, if
any, following conclusion of the offering would not extend beyond the expiration
date, without prior approval of the OTS.
The independent valuation will be updated at the time of the completion
of the offering, and the minority ownership interest may increase or decrease to
reflect the changes in market conditions, the estimated pro forma market value
of the Bank, or both. If the updated estimate of the pro forma market value of
the Bank immediately upon conclusion of the offering changes, there will be a
corresponding change to the 4,350,000 shares issued, in the aggregate, to the
mutual holding company in the reorganization and sold to subscribers in the
offering. For example, if the independent valuation at the conclusion of the
offering increases to $50.0 million, or decreases to $37.0 million, then the
total number of shares outstanding after the reorganization and offering will be
5,002,500 or 3,697,500, respectively. If the updated independent valuation
increases, the Company may increase the number of shares sold in the offering
(to up to 2,703,851 shares), and will increase the number of shares issued to
the mutual holding company. Subscribers will not be given the opportunity to
change or withdraw their orders unless more than 2,351,175 shares or fewer than
1,737,825 shares are sold in the offering. Any adjustment of shares of common
stock sold will have a corresponding effect on the estimated net proceeds of the
offering and the pro forma capitalization and per share data of the Bank.
The independent valuation is not intended, and must not be construed,
as a recommendation of any kind as to the advisability of purchasing the common
stock. In preparing the independent valuation, Feldman Financial has relied upon
and assumed the accuracy and completeness of financial and statistical
information provided by the Bank. Feldman Financial did not independently verify
the financial statements and other information provided by the Bank, nor did
Feldman Financial value independently the assets and liabilities of the Bank.
The independent valuation considers the Bank only as a going concern and should
not be considered as a indication of the liquidation value of the Bank.
Moreover, because such independent valuation is based upon estimates and
projections on a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing the common stock will
be able to sell such shares at a price equal to or greater than the purchase
price.
No sale of shares of common stock may be consummated unless, Feldman
Financial confirms that, to the best of its knowledge, nothing of a material
nature has occurred that, taking into account all relevant factors, would cause
Feldman Financial to conclude that the independent valuation is incompatible
with its estimate of our pro forma market value at the conclusion of the
offering. Any change that would result in an aggregate value that is below $37.0
million or above $50.0 million would be subject to OTS approval. If confirmation
from Feldman Financial is not received, the Bank may extend the offering, reopen
or commence a new offering, request a new Independent Valuation, establish a new
offering range and commence a resolicitation of all purchasers with the approval
of the OTS, or take such other action as permitted by the OTS in order to
complete the offering.
82
Plan of Distribution/Marketing Arrangements
The common stock will be offered in the offering principally by the
distribution of this prospectus and through activities conducted at the stock
information center. It is expected that a registered representative employed by
Sandler O'Neill will be working at, and supervising the operation of, the stock
information center. Sandler O'Neill will be responsible for overseeing the
mailing of material relating to the offering, responding to questions regarding
the reorganization and the offering and processing order forms.
The Bank and Company have entered into an agency agreement with Sandler
O'Neill under which Sandler O'Neill will provide advisory assistance and assist,
on a best efforts basis, in the solicitation of subscriptions and purchase
orders for the common stock in the offering. Sandler O'Neill is a broker-dealer
registered with the National Association of Securities Dealers, Inc.
Specifically, Sandler O'Neill will assist in the offering in the following
manner: (i) assisting in the design and implementation of a marketing strategy
for the offering; (ii) assisting Bank management in scheduling and preparing for
meetings with potential investors and broker-dealers; and (iii) providing such
other general advice and assistance as may be requested to promote the
successful completion of the offering.
Sandler O'Neill will receive, as compensation, an advisory and
marketing fee of 0.75% of the aggregate amount of stock sold in the Subscription
and Community Offerings, excluding shares sold to the Bank's employee benefit
plans, any director, officer or employee of the Bank or any members of their
immediate families. In the event common stock is sold through licensed brokers
under a selected dealers agreement, we will pay the sales commission payable to
the selected dealer pursuant to the agreement, any sponsoring dealer's fees and
a managing dealer's fee to Sandler O'Neill of 0.75% of the aggregate price of
such shares. Sandler O'Neill's fee shall not exceed 0.75% for any shares sold.
Sandler O'Neill will also be reimbursed for its legal fees and out-of-pocket
expenses, not to exceed $35,000. The Bank has agreed to indemnify Sandler
O'Neill, to the extent allowed by law, for reasonable costs and expenses in
connection with certain claims or liabilities, including certain liabilities
under the Securities Act of 1933, as amended. See "Pro Forma Data" for further
information regarding expenses of the offering.
Restrictions on Transferability by Directors and Officers
Shares of the common stock purchased by directors or officers of the
Bank cannot be sold for a period of one year following completion of the
reorganization, except for a disposition of shares in the event of the death of
the stockholder. Accordingly, shares of the common stock issued to directors and
officers will bear a legend restricting their sale. Any shares issued to
directors and officers as a stock dividend, stock split, or otherwise with
respect to restricted stock will be subject to the same restriction.
83
For a period of three years following the reorganization, no director
or officer of the Bank or their associates may, without the prior approval of
the OTS, purchase our common stock except from a broker or dealer registered
with the SEC. This prohibition does not apply to negotiated transactions
including more than 1% of our common stock or purchases made for tax qualified
or non-tax qualified employee stock benefit plans which may be attributable to
individual officers or directors.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Prior to the completion of the reorganization and offering, no
depositor may transfer or enter into an agreement or understanding to transfer
any subscription rights or the legal or beneficial ownership of the shares of
common stock to be purchased by such person in the offering. Depositors who
submit an order form will be required to certify that their purchase of common
stock is solely for their own account and there is no agreement or understanding
regarding the sale or transfer of their shares. We intend to pursue any and all
legal and equitable remedies in the event it becomes aware of any such agreement
or understanding, and will not honor orders we reasonably believe to involve
such an agreement or understanding.
Conditions to the Offering
Consummation of the offering is subject to (i) consummation of the
reorganization, which requires the receipt of various approvals from the OTS,
the ratification of the Bank's voting depositors, and the receipt of rulings
and/or opinions of counsel as to the tax consequences of the reorganization,
(ii) the receipt of all required federal approvals for the issuance of common
stock in the offering, including without limitation the approval of the OTS, and
(iii) the sale of a minimum of 1,737,825 shares of common stock. In the event
that conditions (i) and (ii) are not satisfied prior to completion of the
offering, all funds received will be promptly returned with interest at the
Bank's passbook rate and all withdrawal authorizations will be canceled.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY
General
The following discussion is a summary of statutory and regulatory
restrictions on the acquisition of our common stock. In addition, the following
discussion summarizes the mutual holding company structure, certain provisions
of certificates of incorporation and bylaws and certain regulatory provisions
that have an anti-takeover effect.
Mutual Holding Company Structure
The mutual holding company structure will restrict the ability of our
stockholders of the Company to effect a change of control of management because
mutual holding company, as long as it remains in existence as a mutual entity,
will control a majority of our voting stock. In addition, voting rights in the
mutual holding company are vested in the Board of Directors, as such, management
of the Bank (which is also management of the Company and the mutual holding
company) will be able to exert voting control over the mutual holding company.
84
Change in Bank Control Act
Federal law provides that no person, acting directly or indirectly or
through or in concert with one or more other persons, may acquire control of a
savings association unless the OTS has been given 60 days prior written notice.
Federal law provides that no company may acquire control of a bank holding
company without the prior approval of the OTS. Any company that acquires control
becomes a "savings and loan holding company" subject to registration,
examination and regulation by the OTS. Pursuant to federal regulations, control
is conclusively deemed to have occurred when an entity, among other things, has
acquired more than 25 percent of any class of voting stock of the institution or
the ability to control the election of a majority of the directors of an
institution. Moreover, control is presumed to have occurred, subject to
rebuttal, upon the acquisition of more than 10 percent of any class of voting
stock, or of more than 25 percent of any class of stock, of a savings
institution, where certain enumerated control factors are also present in the
acquisition. The OTS may prohibit an acquisition of control if: (i) it would
result in a monopoly or substantially lessen competition; (ii) the financial
condition of the acquiring person might jeopardize the financial stability of
the institution; or (iii) the competence, experience or integrity of the
acquiring person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of control by such person.
The foregoing restrictions do not apply to the acquisition of stock by one or
more tax-qualified employee stock benefit plans, provided that the plan or plans
do not have beneficial ownership in the aggregate of more than 25 percent of any
class of our equity security.
The Company's Charter and Bylaws
General. Our charter and bylaws are available at our administrative
office or by writing or calling us, 205 East Orange Street, Lakeland, Florida
33801 (our telephone number is (941) 688-6811).
Classified Board of Directors and Related Provisions. Our board of
directors is divided into three classes which are as nearly equal in number as
possible. Directors serve for terms of three years. As a result, each year, only
one-third of the directors are eligible to be elected and it would take at least
two years to elect a majority of our directors. A director may be removed only
by the affirmative vote of the holders of at least 80% of the shares then
entitled to vote.
Restrictions on Voting of Securities. The charter provides that any
shares of common stock beneficially owned directly or indirectly in excess of
10% by any person, other than the mutual holding company will not be counted as
shares entitled to vote, shall not be voted by any person or counted as voting
shares in connection with any matter submitted to stockholders for a vote, and
shall not be counted as outstanding for purposes of determining a quorum or the
affirmative vote necessary to approve any matter submitted to the stockholders
for a vote. It is possible for such a person to have voting authority for less
than 10% of our shares, depending on how the shares are registered. The purpose
of this provision is to reduce the chance that minority stockholders could
challenge our management.
Prohibition Against Cumulative Voting. Our charter prohibits cumulative
voting by stockholders in the election of directors. The absence of cumulative
voting rights effectively means that the holders of a majority of the shares
voted at a meeting of stockholders may, if they so choose, elect all directors
elected at the meeting, thus precluding a minority stockholder from obtaining
representation on the Board of Directors unless the minority stockholder is able
to obtain the support of a majority. In accordance with the law governing mutual
holding companies, the mutual holding company must remain the majority holder of
our voting stock.
85
Additional Anti-Takeover Provisions. The provisions described above are
not the only provisions of our charter and bylaws having an anti-takeover
effect. For example, the charter authorizes the issuance of up to five million
shares of preferred stock, which conceivably would represent an additional class
of stock required to approve any proposed acquisition. This preferred stock,
none of which has been issued, together with authorized but unissued shares of
the common stock (the charter authorizes the issuance of up to 10 million shares
of the common stock), also could represent additional capital required to be
purchased by the acquiror.
In addition to discouraging a takeover attempt which a majority of our
stockholders might determine to be in their best interest or in which our
stockholders might receive a premium over the current market prices for their
shares, the effect of these provisions may render the removal of our management
more difficult. It is possible that incumbent officers and directors might be
able to retain their positions (at least until their term of office expires)
even though a majority of our stockholders, other than the mutual holding
company, desire a change.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 8,000,000 shares of common stock, par value
$0.10 per share and 2,000,000 shares of preferred stock, no par value. We
currently expect to issue between 3,697,500 and 5,002,500 shares of common stock
in the reorganization (between 1,737,825 and 2,351,175 shares to persons other
than the mutual holding company). See "Capitalization." Upon payment of the
purchase price shares of common stock issued in the offering will be fully paid
and non-assessable. The common stock will represent nonwithdrawable capital,
will not be an account of insurable type and will not be insured by the FDIC or
any other governmental agency. See also "Dividend Policy" and "Waiver of
Dividends by the MHC."
Voting Rights
The holders of common stock will possess exclusive voting rights in the
Company. The holder of shares of common stock will be entitled to one vote for
each share held on all matters subject to stockholder vote. See also "The
Reorganization - Effects of the Reorganization - Voting Rights"
Liquidation Rights
In the event of any liquidation, dissolution, or winding-up of the
Company, the holders of the common stock generally would be entitled to receive,
after payment of all debts and liabilities of the Company (including all debts
and liabilities of the Bank), all assets of the Company available for
distribution. See also "The Reorganization - Effects of the Reorganization -
Liquidation Rights."
Preemptive Rights; Redemption
The holders of the common stock do not have any preemptive rights with
respect to any shares we may issue. Any subsequent stock issuance, however, may
only be effected through a Stock Issuance Plan approved by the OTS which would
grant subscription priorities to the MHC's members unless the Company
demonstrates that a non-conforming stock issuance would be more beneficial to
the Company.
The common stock will not be subject to any redemption provisions.
86
Preferred Stock
We are authorized to issue up to 2,000,000 shares of preferred stock
and to fix and state voting powers, designations, preferences, or other special
rights of such shares and the qualifications, limitations and restrictions of
those shares as the Board of Directors may determine in its discretion.
Preferred stock may be issued in distinctly designated series, may be
convertible into common stock and may rank prior to the common stock as to
dividends rights, liquidation preferences, or both, and may have full or limited
voting rights. Accordingly, the issuance of preferred stock could adversely
affect the voting and other rights of holders of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares. Depending on the circumstances, however, stockholder approval may be
required pursuant to requirements for eligibility for quotation of the common
stock on The Nasdaq Stock Market or by any exchange on which the common stock
may then be listed.
LEGAL AND TAX OPINIONS
The legality of the issuance of the common stock being offered and
certain matters relating to the reorganization and federal taxation will be
passed upon for us by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.
Certain matters relating to state taxation will be passed upon for us by Hahn,
McClurg, Watson, Griffith & Bush, P.A., Lakeland, Florida. Certain legal matters
will be passed upon for Sandler O'Neill & Partners, L.P. by Housley Kantarian &
Bronstein, P.C., Washington, D.C.
EXPERTS
The financial statements of First Federal Florida as of September 30,
1998 and 1997 and for each of the years in the three year period ended September
30, 1998 have been included in this prospectus in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
Feldman Financial has consented to the publication in this document of
a summary of its letter to First Federal Florida setting forth its opinion as to
the estimated pro forma market value of us in the converted form and its opinion
setting forth the value of subscription rights and to the use of its name and
statements with respect to it appearing in this document.
REGISTRATION REQUIREMENTS
Our common stock will be registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We will be
subject to the information, proxy solicitation, insider trading restrictions,
tender offer rules, periodic reporting and other requirements of the SEC under
the Exchange Act. We may not deregister the common stock under the Exchange Act
for a period of at least three years following the reorganization.
87
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the informational requirements of the Exchange Act
and must file reports and other information with the SEC.
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. You may obtain information on the operation of the Public
Reference Room by calling 1-800-SEC-0330. The SEC also maintains an internet
address ("Web site") that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the SEC. The address for this Web site is
"http://www.sec.gov." The statements contained in this document as to the
contents of any contract or other document filed as an exhibit to the Form S-1
are, of necessity, brief descriptions and are not necessarily complete; each
such statement is qualified by reference to such contract or document.
A copy of our charter and bylaws, as well as those of the Bank and the
MHC, are available without charge from First Federal Florida. Copies of the plan
of reorganization are also available without charge.
The Bank has filed notice of mutual holding company reorganization with
the OTS. This prospectus omits certain information contained in that
application.
88
INDEX TO FINANCIAL STATEMENTS
First Federal Florida
Independent Auditors' Reports F-1
Statements of Financial Condition at September 30, 1998
and September 30, 1997 F-2
Statements of Earnings for each of the years in the
three-year period ended September 30, 1998 15
Statements of Equity for each of the years in the
three-year period ended September 30, 1998 F-3
Statements of Cash Flows for each of the years in the
three-year period ended September 30, 1998 F-4
Notes to Financial Statements F-6
Other schedules are omitted as they are not required or are not applicable or
the required information is shown in the financial statements or related notes.
Financial statements of FloridaFirst Bancorp, MHC and FloridaFirst Bancorp have
not been provided because they have conducted no operations.
89
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Financial Statements
September 30, 1998 and 1997
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
The Board of Directors
First Federal Savings and Loan Association of Florida:
We have audited the accompanying statements of financial condition of First
Federal Savings and Loan Association of Florida (the Bank) as of September 30,
1998 and 1997, and the related statements of earnings, equity capital, and cash
flows for each of the years in the three-year period ended September 30, 1998.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Federal Savings and Loan
Association of Florida at September 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the years in the three-year period
ended September 30, 1998 in conformity with generally accepted accounting
principles.
Tampa, Florida
October 23, 1998
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Statements of Financial Condition
September 30, 1998 and 1997
(In thousands)
Assets 1998 1997
-------------- -------------
Cash and amounts due from depository institutions $ 1,137 3,272
Federal funds sold 4,080 18,570
Investments available for sale, at fair value 42,225 36,761
Investment securities held to maturity, market value
$18,524 in 1998 and $37,311 in 1997 18,736 37,811
Loans receivable, net of allowance for loan losses of
$2,564 and $2,633 in 1998 and 1997, respectively 338,610 355,551
Premises and equipment, at cost less accumulated depreciation
and amortization 6,845 7,800
Real estate owned 493 167
Federal Home Loan Bank stock, at cost 2,864 2,864
Accrued interest receivable on loans, net 1,793 1,900
Accrued interest receivable on investments available for sale and
investments held to maturity 605 793
Income tax receivable 166 --
Deferred income taxes, net 936 151
Other assets 551 1,125
============== =============
$ 419,041 466,765
============== =============
Liabilities and Equity Capital
Liabilities:
Deposits $ 352,180 429,714
Federal Home Loan Bank advances 21,000 --
Advance payments by borrowers for taxes and insurance 1,971 2,004
Due to banks 4,569 483
Current income tax payable -- 364
Other liabilities 3,214 612
-------------- -------------
Total liabilities 382,934 433,177
-------------- -------------
Equity capital:
Retained income, restricted 35,887 33,502
Unrealized gain on investments available for sale, net 220 86
-------------- -------------
Total equity capital 36,107 33,588
============== =============
$ 419,041 466,765
============== =============
See accompanying notes to financial statements.
F-2
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Statements of Equity Capital
Years ended September 30, 1998, 1997 and 1996
(In thousands)
Unrealized
gain (loss) on
investments Total
Retained available equity
income for sale capital
--------------- -------------- --------------
Balance at September 30, 1995 $ 30,722 52 30,774
Net income for the year ended September 30, 1996 253 -- 253
Change in unrealized gain on investments
available for sale, net -- (458) (458)
--------------- -------------- --------------
Balance at September 30, 1996 30,975 (406) 30,569
Net income for the year ended September 30, 1997 2,527 -- 2,527
Change in unrealized gain on investments
available for sale, net -- 492 492
--------------- -------------- --------------
Balance at September 30, 1997 33,502 86 33,588
Net income for the year ended September 30, 1998 2,385 -- 2,385
Change in unrealized gain on investments
available for sale, net -- 134 134
=============== ============== ==============
Balance at September 30, 1998 $ 35,887 220 36,107
=============== ============== ==============
See accompanying notes to financial statements.
F-3
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Statements of Cash Flows
September 30, 1998 and 1997
(In thousands)
1998 1997 1996
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 2,385 2,527 253
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 405 317 600
Provision for loss on real estate owned 18 6 80
Provision for deferred income taxes (864) 588 (939)
Depreciation 632 478 399
Amortization of discount on investments and mortgage-backed securities
available for sale and held to maturity (9) (16) (75)
(Gain) loss on sale of investments and mortgage-backed securities
available for sale (117) 35 (170)
Gain on sale of loans available for sale -- (149) --
Gain on sale of investments held to maturity -- -- (2)
Gain on sale of branches (3,016) -- --
Loss (gain) on sale of assets, net 123 30 (92)
Decrease (increase) in deferred loan fees and costs (10) (48) 88
Decrease (increase) in accrued interest receivable 295 (44) 201
Increase in other assets 574 (99) (190)
(Decrease) increase in other liabilities 2,602 (2,578) 2,379
Increase (decrease) in advance payments by borrowers for taxes and insurance (33) 189 404
Decrease (increase) in federal income tax receivable (530) 440 (58)
-------- -------- --------
Net cash provided by operating activities 2,455 1,676 2,878
-------- -------- --------
Cash flows from investing activities:
Proceeds from the sale of FHLB stock -- 1,123 --
Proceeds from the sale of loans available for sale -- 9,927 --
Proceeds from sales of investments available for sale 3,386 10,965 21,714
Proceeds from the sale of investments held to maturity -- -- 4,002
Proceeds from the maturity of investment securities available for sale 24,131 8,000 11,503
Proceeds from the maturity of investment securities held to maturity 19,000 7,000 22,350
Proceeds from the sale of assets 1,824 313 897
Principal repayments of mortgage-backed securities available for sale 1,413 1,054 1,985
Principal repayments of mortgage-backed securities held to maturity -- -- 765
Increase in loans, net (30,299) (44,726) (62,067)
Purchases of premises and equipment (434) (1,862) (558)
Purchase of investments available for sale (33,981) (990) (23,003)
Cash transferred in connection with sale of branches, net (10,186) -- --
Purchases of investment securities held to maturity -- -- (1,000)
Dividends reinvested in mutual fund -- -- (402)
-------- -------- --------
Net cash used in investing activities (25,146) (9,196) (23,814)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits (19,020) 25,530 6,590
Net increase in FHLB advances 21,000 -- --
Net increase (decrease) in due to banks 4,086 (53) 10
-------- -------- --------
Net cash provided by financing activities 6,066 25,477 6,600
-------- -------- --------
Net increase (decrease) in cash (16,625) 17,957 (14,336)
Cash amounts due from depository institutions and cash equivalents
at beginning of period 21,842 3,885 18,221
-------- -------- --------
Cash amounts due from depository institutions and cash equivalents
at end of period $ 5,217 21,842 3,885
======== ======== ========
(Continued)
F-4
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Statements of Cash Flows, Continued
September 30, 1998 and 1997
(In thousands)
1998 1997 1997
------- ------ -------
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $18,971 19,677 18,969
======= ====== =======
Taxes $ 2,557 270 1,034
======= ====== =======
Supplemental disclosure of non-cash information:
Additions to investment in real estate acquired through foreclosure $ 2,238 456 727
======= ====== =======
Change in unrealized gain (loss) on investments available for sale, net of
deferred taxes of $79, $(289) and $269, respectively $ 134 492 (458)
======= ====== =======
Net assets transferred in connection with branch sale:
Loans receivable $44,607 -- --
Premises and equipment 705 -- --
Deposits 55,498 -- --
======= ====== =======
Transfer of investments and mortgage-backed securities from
held to maturity to available for sale $ -- -- 39,167
======= ====== =======
Transfer of loans from held to maturity to available for sale $ -- -- 9,778
======= ====== =======
F-5
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(1) Summary of Significant Accounting Policies
The following is a description of significant accounting and reporting
policies which First Federal Savings and Loan Association of Florida (the
"Bank") follows in preparing and presenting its financial statements:
(a) Reorganization Plan
On September 28, 1998, the Board of Directors of the Bank unanimously
adopted the "Plan of Mutual Holding Company Reorganization and Stock
Issuance" (Reorganization). Pursuant to the Reorganization, the Bank
will reorganize from a federal mutual savings and loans association
into a federally chartered capital stock savings bank. All of the
stock of the capital stock bank will be owned by a "mid-tier" holding
company. A majority of the shares of stock of the "mid-tier" holding
company will be owned by a mutual holding company, and a minority of
shares will be issued to minority shareholders in a public offering.
The Reorganization must be approved by the Office of Thrift
Supervision and by depositors and borrower members of the Bank. There
are no assurances that the above transaction will be consummated.
The Bank, in conjunction with the reorganization plan and the initial
public offering, has revised its accounting policies used in preparing
its financial statements in accordance with generally accepted
accounting principles. Management believes the financial statements of
the Bank as presented are in accordance with generally accepted
accounting principles on a consistent basis for all periods presented.
(b) Accounting Principles
The financial statements have been prepared in conformity with
generally accepted accounting principles.
(c) Mortgage Loan Interest Income
The Bank provides an allowance for uncollected interest generally on
all accrued interest related to loans 90 days or more delinquent. This
allowance is netted against accrued interest receivable for financial
statement disclosure. Such interest, if ultimately collected, is
credited to income in the period of recovery.
(d) Loan Fees
Loan origination and commitment fees and certain related costs are
deferred and amortized over the estimated loan life as an adjustment
to yield using methods which approximate the level-yield method. For
loans on non-accrual, such amortization is ceased.
(e) Loans and Provisions for Losses
Loans are stated at unpaid principal balances, less loans in process,
the allowances for loan losses, unearned interest, and net deferred
loan origination fees.
The Bank follows a consistent procedural discipline and accounts for
loan loss contingencies in accordance with Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies (SFAS No. 5).
The following is a description of how each portion of the allowance
for loan losses is determined.
(Continued)
F-6
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
The Bank segregates the loan portfolio for loan loss purposes into
the following broad segments: commercial real estate, residential
real estate, and consumer. The Bank provides for a general
allowance for losses inherent in the portfolio by the above
categories, which consists of two components. General loss
percentages are calculated based upon historical analyses. A
supplemental portion of the allowance is calculated for inherent
losses which probably exist as of the evaluation date even though
they might not have been identified by the more objective
processes used. This is due to the risk of error and/or inherent
imprecision in the process. This portion of the allowance is
particularly subjective and requires judgments based on
qualitative factors which do not lend themselves to exact
mathematical calculations such as: trends in delinquencies and
nonaccruals; migration trends in the portfolio; trends in volume,
terms, and portfolio mix; new credit products and/or changes in
the geographic distribution of those products; changes in lending
policies and procedures; loan review reports on the efficacy of
the risk identification process; changes in the outlook for local,
regional and national economic conditions; concentrations of
credit; and peer group comparison.
Specific allowances are provided in the event that the specific
collateral analysis on each classified loan indicates that the
probable loss upon liquidation of collateral would be in excess of
the general percentage allocation. The provision for loan loss is
debited or credited in order to state the allowance for loan
losses to the required level as determined above.
The Bank considers a loan to be impaired when it is probable that
the Bank will be unable to collect all amounts due, both principal
and interest, according to the contractual terms of the loan
agreement. When a loan is impaired, the Bank may measure
impairment based on (a) the present value of the expected future
cash flows of the impaired loan discounted at the loan's original
effective interest rate; (b) the observable market price of the
impaired loans; or (c) the fair value of the collateral of a
collateral-dependent loan. The Bank selects the measurement method
on a loan-by-loan basis, except for collateral-dependent loans for
which foreclosure is probable must be measured at the fair value
of the collateral. In a troubled debt restructuring involving a
restructured loan, the Bank measures impairment by discounting the
total expected future cash flows at the loan's original effective
rate of interest.
(e) Investment Securities and Mortgage-Backed Securities
Investments available for sale are recorded at fair value. Both
unrealized gains and losses on investments available for sale, net
of taxes, are included as a separate component of equity capital
in the statement of financial condition until these gains or
losses are realized. If a security has a decline in fair value
that is other than temporary, then the security will be written
down to its fair value by recording a loss in the statements of
earnings.
(Continued)
F-7
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
Investments that management has the intent and the Bank has the
ability at the time of purchase to hold until maturity are
classified as securities held to maturity. Securities in this
category are carried at amortized cost adjusted for accretion of
discounts and amortization of premiums over the estimated life of
the securities. If a security has a decline in fair value below
its amortized cost that is other than temporary, then the security
will be written down to its new cost basis by recording a loss in
the statements of earnings.
Regulations require the Bank to maintain, in cash and U.S.
Government and other approved securities, an amount equal to 5% of
deposits (net of loans on deposits) plus short-term borrowings.
The Bank maintained a liquidity ratio of approximately 9.6% and
13.4% at September 30, 1998 and 1997, respectively.
Capital stock in the Federal Home Loan Bank of Atlanta is held in
accordance with certain requirements of the Federal Home Loan Bank
of Atlanta, and is carried at cost and serves as collateral for
FHLB advances.
(f) Loans Held For Sale
Loans originated and held for sale by the Bank are carried at the
lower of cost or market using the specific identification method.
Gains and losses on the sale of such loans are recognized using
the specific identification method.
(g) Real Estate Owned
Real estate owned represents real estate acquired through
foreclosure or deed in lieu of foreclosure. Real estate so
acquired is recorded at the lower of cost (principal balance of
the former mortgage loan) or estimated fair value, less estimated
selling expenses.
(h) Premises and Equipment
Depreciation of office properties and equipment is accumulated on
a straight-line basis over the estimated useful lives of the
related assets. Estimated lives are 10 to 50 years for buildings
and leasehold improvements, and 4 to 10 years for furniture,
fixtures and equipment.
Maintenance and repairs are charged to expense as incurred.
Expenditures for renewals and betterments generally are
capitalized. The costs and accumulated depreciation relating to
office properties and equipment retired or otherwise disposed of
are eliminated from the accounts, and any resulting gains and
losses are credited or charged to income.
(Continued)
F-8
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(i) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that included the enactment
date.
(j) Discount and Premium on Investment Securities Purchased
Discount and premium on investment securities purchased are
amortized over the estimated remaining lives of the loans using
methods which approximate the level-yield method.
(k) Financial Instruments With Off-Balance Sheet Risk
In the ordinary course of business, the Bank is a party to
financial instruments with off-balance sheet risk to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit at both fixed and variable
rates and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized, if any, in the balance sheet. The Bank's exposure to
credit loss for commitments to extend credit and standby letters
of credit is represented by the contractual amount of these
instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance
sheet instruments.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. The
Bank evaluates each customer's credit worthiness on a case-by-case
basis.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities
to customers.
(l) Cash and Cash Equivalents
For statements of cash flows purposes, the Bank considers federal
funds sold, generally of one day duration, to be cash equivalents.
(Continued)
F-9
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(m) Mortgage Servicing Rights
The Bank originates mortgage servicing rights by selling loans
and retaining servicing rights. In May 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 122, Accounting for Mortgage Servicing
Rights ("SFAS No. 122"). This Statement provides guidance for the
recognition of mortgage servicing rights as an asset when a
mortgage loan is sold and servicing rights are retained. The Bank
adopted SFAS No. 122 effective October 1, 1996. The results of
this adoption were material to the Bank.
(n) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amount of revenues and expenses during the reporting
period. Estimates by management that are critical to the
accompanying financial statements are the appropriate level of
allowance for loan losses which can be significantly impacted by
future industry, market and economic trends and conditions. Actual
results could differ from these estimates.
(o) Self-Insurance
The Bank is partially self-insured for certain employee benefits,
namely medical and dental claims. The policies are administrated
through an insurance company and the related liabilities are
included in the accompanying financial statements. The Bank's
policy is to accrue a liability equal to the average claims paid
for the past three years. The accrual is based on historical
information along with certain assumptions about future events.
Changes in assumptions, for such matters as medical and
administrative costs, and changes in actual experience could cause
these estimates to change in the future.
(p) Reclassifications
Certain amounts in the 1997 and 1996 financial statements have
been reclassified to conform to the 1998 presentation.
(q) Derivative Instruments
The Bank does not purchase, sell or enter into derivative
financial instruments or derivative commodity instruments as
defined by SFAS No. 119, Disclosures About Derivative Financial
Instruments and Fair Value of Financial Instruments, other than
fixed rate loan commitments.
(Continued)
F-10
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(r) New Accounting Pronouncements
SFAS No. 130, Reporting Comprehensive Income, establishes
standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial
statements. Under SFAS No. 130, comprehensive income is divided
into net income and other comprehensive income. Other
comprehensive income includes items previously recorded directly
in equity, such as unrealized gains or losses on securities
available for sale. SFAS No. 130 has not been adopted by the Bank
as of this date, but will apply the provisions of this statement
commencing with the first quarterly reporting period after
September 30, 1998. Comparative financial statements, provided for
earlier periods once quarterly periods begin, will be reclassified
to reflect the application of the provisions of SFAS No. 130. SFAS
No. 130 requires total comprehensive income and its components to
be reported in a financial statement with equal prominence as
other financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which changes
the way public companies report information about segments of
their business and requires them to report selected segment
information in their quarterly reports issued to stockholders.
Among other things, SFAS No. 131 requires public companies to
report (a) certain financial and descriptive information about its
reportable operating segments (as defined); and (b) certain
enterprise-wide financial information about products and services,
geographic areas, and major customers. The required segment
financial disclosures include a measure of profit or loss, certain
specific revenue and expense items, and total assets. SFAS No. 131
is effective for reporting by the Bank to the extent such segments
are defined, beginning with the quarter ended December 31, 1998.
SFAS No. 131 is not expected to have a significant impact on the
Bank's financial reporting.
In February 1998, the FASB issued SFAS No. 132, Employers
Disclosures About Pensions and Other Postretirement Benefits. SFAS
No. 132 revised employers' disclosures about pension and other
postretirement benefits plans. It does not change the measurement
of recognition of those plans. It standardized the disclosure
requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information in changes in
the benefit obligations and fair value of plan assets that will
facilitate financial analysis, and eliminates certain required
disclosures of previous accounting pronouncements. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for
comparative purposes is required unless the information is not
readily available. As SFAS No. 132 affects disclosure
requirements, it is not expected to have a material impact on the
financial statements of the Bank.
F-11
(Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this
Statement should be as of the beginning of an entity's fiscal
quarter; on that date, hedging relationships must be designated
anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is
encouraged, but it is permitted only as of the beginning of any
fiscal quarter that begins after issuance of this Statement. This
Statement should not be applied retroactively to financial
statements of prior periods. SFAS No. 133 is not expected to have
a material impact on the Bank's financial statement presentations.
(2) Investments Available For Sale
The amortized cost and estimated fair values of investments available for
sale are as follows:
1998
(In thousands)
--------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------------- ------------ ------------- --------------
Obligations of U.S.
Governmental agencies $ 24,426 285 -- 24,711
Collateralized Mortgage
Obligations 3,185 44 -- 3,229
Mortgage-backed securities 14,265 31 (11) 14,285
============== ============ ============= ==============
$ 41,876 360 (11) 42,225
============== ============ ============= ==============
(Continued)
F-12
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
1997
(In thousands)
--------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------------- ------------ ------------- --------------
Obligations of U.S.
Governmental agencies $ 31,158 136 (168) 31,126
Mortgage-backed securities 5,467 186 (18) 5,635
============== ============ ============= ==============
$ 36,625 322 (186) 36,761
============== ============ ============= ==============
The following table shows the maturity distribution of the investments
available for sale portfolio at amortized cost and fair value at
September 30, 1998:
Amortized Fair
cost value
-------------- ------------
(In thousands)
Due after one year through five years $ 17,349 17,500
Due after five years through ten years 7,077 7,211
Due after ten years 3,185 3,228
-------------- ------------
27,611 27,939
Mortgage-backed securities 14,265 14,286
-------------- ------------
$ 41,876 42,225
============== ============
Proceeds from sales of investments available for sale during the year
ended September 30, 1998, 1997 and 1996 were $3.4 million, $11 million
and $21.7 million, respectively. Gross gains of $135,672 and gross losses
of $31,694 were realized on those sales during 1998. Gross gains of $313
and gross losses of $34,964 were realized on those sales during 1997.
Gross gains of $182,003 and gross losses of $11,831 were realized on
those sales during 1996.
Mortgage-backed securities available for sale aggregating $1.0 million
and $896,820, with a fair value of $1.0 million and $932,592, were
pledged as collateral to secure public funds at September 30, 1998 and
1997, respectively.
(Continued)
F-13
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(3) Investment Securities Held to Maturity
The amortized cost and estimated fair values of investment securities
held to maturity are as follows:
1998
(In thousands)
--------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------------- ------------ ------------- --------------
Obligations of U.S.
Governmental agencies $ 8,998 11 (40) 8,969
Collateralized Mortgage
Obligations 9,738 40 (223) 9,555
============== ============ ============= ==============
$ 18,736 51 (263) 18,524
============== ============ ============= ==============
1997
(In thousands)
--------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------------- ------------ ------------- --------------
Obligations of U.S.
Governmental agencies $ 27,993 15 (255) 27,753
Collateralized Mortgage
Obligations 9,818 28 (288) 9,558
============== ============ ============= ==============
$ 37,811 43 (543) 37,311
============== ============ ============= ==============
Proceeds from the sale of investments held to maturity, within 90 days of
the date the investment matured or became callable, during the year ended
September 30, 1996 were $4,002,344. Gross gains of $3,906 and gross
losses of $1,562 were realized on those sales during 1996.
The collateralized mortgage obligations ("CMOs") have both a principal
and interest component and have predominately variable rates of return.
The weighted average rates at September 30, 1998, 1997 and 1996 were
5.80%, 5.94% and 5.93%, respectively.
(Continued)
F-14
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
On November 15, 1995, the FASB issued Special Report No. 115-B, A Guide
to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities (the Special Report). Pursuant to the
Special Report, the Bank was permitted to conduct a one-time reassessment
of the classifications of all securities held at that time. Any
reclassifications from the held to maturity category made in conjunction
with that reassessment would not call into question a bank's intent to
hold other debt securities to maturity in the future.
The Bank's investment in obligations of U.S. Government agencies include
step-up and floating interest rate bonds. The step-up bonds have a
carrying value of $4.0 million and $9.0 million at September 30, 1998 and
1997, respectively, and pay interest on a predetermined schedule of
escalating rates. These step-up bonds have an estimated fair value of
approximately $4.01 million and $9.0 million at September 30, 1998 and
1997, respectively. The floating interest rate bonds have a carrying
value of $5.0 million and $16.0 million at September 30, 1998 and 1997,
respectively, and pay interest on a variable basis depending on relevant
market rates. These floating interest rate bonds have an estimated fair
value of approximately $5.0 million and $15.8 million at September 30,
1998 and 1997, respectively. The Bank purchased these bonds to offset its
risk related to its portfolio of adjustable and fixed rate mortgages and
these bonds subject the Bank to a certain degree of market risk as these
rates change with prevailing market interest rates.
The amortized cost and estimated fair value of investment securities held
to maturity at September 30, 1998, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Amortized Estimated
cost fair value
-------------- --------------
(In thousands)
Due in one year or less $ 4,999 5,009
Due after one year through five years 3,999 3,960
Due after five years through ten years 3,499 3,442
Due after ten years 6,239 6,113
-------------- --------------
$ 18,736 18,524
============== ==============
(Continued)
F-15
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(4) Loans Receivable, Net
Loans receivable at September 30, 1998 and 1997 consist of the following:
1998 1997
-------------- -------------
(In thousands)
Loans secured by first mortgages on real estate:
Residential:
Permanent $ 244,667 256,742
Construction 27,311 22,350
Multi-family 4,464 4,154
Commercial real estate 16,132 12,064
Land 6,796 6,153
-------------- -------------
Total first mortgage loans 299,370 301,463
-------------- -------------
Other loans:
Consumer loans 57,891 69,229
Other loans 1,085 218
-------------- -------------
Total other loans 58,976 69,447
-------------- -------------
Total loans 358,346 370,910
Deferred loan costs (fees), net (18) (8)
Unearned interest on installment loans (141) (129)
Allowance for loan losses (2,564) (2,633)
Loans in process (17,013) (12,589)
-------------- -------------
$ 338,610 355,551
============== =============
Weighted average yield on total loans
at dates indicated 7.91% 8.07%
============== =============
(Continued)
F-16
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
The activity in the allowance for loan losses was as follows:
(In thousands)
Balance at September 30, 1995 $ 1,902
Provision for losses 600
Charge offs (119)
Recoveries 2
-------------
Balance at September 30, 1996 2,385
Provision for losses 317
Charge offs (69)
Recoveries --
-------------
Balance at September 30, 1997 2,633
Provision for losses 405
Charge offs (474)
Recoveries --
-------------
Balance at September 30, 1998 $ 2,564
=============
Outstanding mortgage loan commitments amounted to approximately $2.1
million and $2.0 million for fixed rate loans, and $540,400 and $1.7
million for variable rate loans at September 30, 1998 and 1997,
respectively, with terms generally of 30 days. There were no letters of
credit outstanding at September 30, 1998 and 1997. Furthermore, the Bank
was servicing approximately $23.3 million, $16.1 million and $9.7 million
in loans for the benefit of others in 1998, 1997 and 1996, respectively.
The Bank holds custodial escrow deposits for these serviced loans
totaling approximately $57,000 and $70,000 at September 30, 1998 and
1997, respectively.
Loan customers of the Bank include certain executive officers and
directors and their related interests and associates. All loans to this
group were made in the ordinary course of business at prevailing terms
and conditions. As of September 30, 1998, these loans amounted to
approximately $34,000.
The Bank's loan portfolio is predominantly secured by residential first
mortgages of property located in Central Florida.
Impaired loans amounted to $1.1 million, $1.9 million and $1.1 million at
September 30, 1998, 1997 and 1996, respectively, and have been recognized
in conformity with FASB Statement No. 114, as amended by FASB Statement
No. 118. The average recorded investment in impaired loans during 1998,
1997 and 1996 was approximately $1.9 million, $1.9 million and $1.2
million, respectively. The allowance for loan losses related to loans
at September 30, 1998, 1997, and 1996 was $224,000, $380,000, and
$216,000, respectively. Interest income on impaired loans of
approximately $96,000, $167,000 and $220,000 was recognized for cash
payments received in 1998, 1997 and 1996, respectively.
(Continued)
F-17
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(5) Premises and Equipment
Premises and equipment at September 30, 1998 and 1997 consists of the
following:
1998 1997
----------- -----------
(In thousands)
Land $ 1,887 2,142
Buildings and leasehold improvements 7,054 7,589
Furniture, fixtures and equipment 3,703 3,583
----------- -----------
12,644 13,314
Less accumulated depreciation and amortization (5,799) (5,514)
----------- -----------
$ 6,845 7,800
=========== ===========
The Bank conducts a portion of its operations from leased facilities and
leases certain equipment under operating leases. As of September 30,
1998, the Bank was committed to noncancelable operating leases with the
following minimum lease payments:
Minimum
Year ended lease
September 30, payments
---------------------- --------------
(In thousands)
1999 $ 112
2000 86
2001 70
2002 69
--------------
$ 337
==============
Rent expense under all operating leases was approximately $296,000,
$152,000 and $173,000 for the years ended September 30, 1998, 1997 and
1996, respectively.
(Continued)
F-18
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(6) Deposits
A summary of deposits by interest rates at September 30, 1998 and 1997
follows:
Weighted Weighted
average average
interest interest
1998 rate 1997 rate
--------------- ----------- -------------- ------------
(In thousands) (In thousands)
Noninterest-bearing checking $ 10,492 0% 10,529 0%
Interest-bearing checking 24,456 1.94% 24,149 2.46%
Savings accounts 37,758 1.77% 47,354 2.50%
Money market accounts 18,092 3.99% 14,686 3.53%
Certificate accounts:
2.00% - 2.99% -- 1,958
4.00% - 4.99% 31,676 7,335
5.00% - 5.99% 166,610 228,331
6.00% - 6.99% 63,096 92,676
7.00% - 7.99% -- 2,696
--------------- --------------
Total certificates 261,382 5.52% 332,996 5.23%
---------------
==============
Total deposits $ 352,180 4.63% 429,714 4.88%
=============== ==============
Certificates of deposit issued in amounts of $100,000 or more totaled
approximately $45.7 million and $57.5 million at September 30, 1998
and 1997, respectively.
Interest on deposits at September 30, 1998 and 1997 is summarized as
follows:
1998 1997 1996
---------- ---------- ----------
(In thousands)
Interest on interest-bearing checking and
money market accounts $ 1,051 958 872
Interest on savings and certificate accounts 17,868 18,841 18,174
Less early withdrawal penalties (88) (97) (85)
---------- ---------- ----------
$ 18,831 19,702 18,961
========== ========== ==========
(Continued)
F-19
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
A summary of certificate accounts by year of scheduled maturity at
September 30, 1998 and 1997 follows:
Year ended
September 30, 1998 1997
------------- -------------- ------------
(In thousands)
1998 $ -- 221,586
1999 165,547 49,946
2000 54,045 30,166
2001 11,715 8,827
2002 21,527 22,471
2003 8,548 --
============== ============
$ 261,382 332,996
============== ============
(7) Advances From Federal Home Loan Bank
A summary of the Bank's borrowings from the Federal Home Loan Bank of
Atlanta by year of maturity as of September 30, 1998 is as follows:
1998 Rate
---------------- -----------
(In thousands)
1999 $ 1,000 6.00%
2008 20,000 5.08%
---------------- -----------
Total weighted average rate $ 21,000 5.12%
================ ===========
Fixed interest rate advances in the amounts of $5 million, $10 million
and $5 million can be converted to variable interest rates by the Federal
Home Loan Bank of Atlanta in years 2000, 2001 and 2003, respectively.
There were no borrowings from the Federal Home Loan Bank as of September
30, 1997. Should the Bank elect to prepay these borrowings prior to
maturity, prepayment penalties may be incurred. Advances from the Federal
Home Loan Bank are secured with a blanket floating lien which includes a
security interest in the FHLB stock held by the Bank and first mortgage
loans of the Bank.
(Continued)
F-20
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(8) Income Taxes
The provision for income taxes for 1998, 1997 and 1996 consists of the
following:
Current Deferred Total
------------- ------------ ------------
(In thousands)
Year ended September 30, 1998:
Federal $ 1,825 (782) 1,043
State 190 (82) 108
============= ============ ============
$ 2,015 (864) 1,151
============= ============ ============
Year ended September 30, 1997
Federal $ 681 531 1,212
State 30 57 87
============= ============ ============
$ 711 588 1,299
============= ============ ============
Year ended September 30, 1996:
Federal $ 888 (848) 40
State 95 (91) 4
============= ============ ============
$ 983 (939) 44
============= ============ ============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1998 and 1997 are presented below.
1998 1997
-------- ---------
(In thousands)
Deferred tax assets:
Loans receivable, due to allowance for loan losses, net $ 827 781
Pension asset 379 --
Prepaid interest income 21 10
Self-insurance reserve 339 11
-------- ---------
Total deferred tax assets 1,566 802
Less valuation allowance -- --
-------- ---------
Net deferred tax assets 1,566 802
-------- ---------
(Continued)
F-21
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
1998 1997
-------- ---------
(In thousands)
Deferred tax liabilities:
FHLB stock $ (457) (456)
Unrealized gain on investments available for sale (129) (50)
Loans receivable, due to deferred loan fees (1) (25)
Premises and equipment, due to differences in
depreciation methods and useful lives (42) (32)
Pension liability -- (88)
Other (1) --
-------- ---------
Total deferred tax liabilities (630) (651)
-------- ---------
Net deferred tax assets (liabilities) $ 936 (151)
======== =========
The Bank's effective rate on pretax income differs from the statutory
Federal income tax rate as follows:
Years ended September 30,
-------------------------------------------------------------------------
1998 % 1997 % 1996 %
---------- ------- --------- --------- ---------- -------
Tax provision at statutory $ 1,202 34% 1,301 34% 101 34%
rate
Increase (decrease) in tax
resulting from:
Tax-exempt interest,
net of (17) (1%) (22) (1%) (45) (15%)
scaleback
State income taxes,
net of
Federal income tax 65 2% 78 38% (38) (13%)
benefit
Other, net (99) (2%) (58) (26%) (26) (9%)
---------- ------- --------- --------- ---------- -------
$ 1,151 33% 1,299 44% 44 15%
========== ======= ========= ========= ========== =======
Until 1997, under the Internal Revenue Code (Code), the Bank was allowed
a special bad debt deduction for additions to tax bad debt reserves
established for the purpose of absorbing losses. Provisions of the Code
permitted the Bank two methods of determining the bad debt deduction: the
experience method or the percentage of taxable income method. The
statutory percentage used to calculate the percentage of taxable income
method bad debt deduction was 8% before such deduction. The experience
method was calculated using actual loss experience of the Bank.
(Continued)
F-22
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
The Small Business Job Protection Act of 1996 repealed the percentage of
taxable income method of accounting for bad debts for tax years beginning
after 1995. The Bank switched solely to the experience method to compute
its bad debt deduction in 1997 and future years. The Bank is required to
recapture into taxable income the portion of its bad debt reserves that
exceed its bad debt reserves calculated under the experience method since
1987. The Bank will recapture bad debt reserves totaling approximately
$350,000 as a result of this change in law.
The Bank elected to use the percentage of taxable income method for the
year ended September 30, 1996. The Code also imposes an alternative
minimum tax at a 20% rate on taxable income plus certain adjustments and
preference items. The alternative minimum tax is imposed only if it
exceeds the regular tax liability.
Retained income at September 30, 1998 includes approximately $5.8 million
base year tax bad debt reserve for which no deferred Federal and state
income tax liability has been recognized. These amounts represent an
allocation of income to bad debt deductions for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt
losses or adjustments arising from carryback of net operating losses
would create income for tax purposes only, which would be subject to the
then current corporate income tax rate. The unrecorded deferred income
tax liability on the above amounts was approximately $4.9 million at
September 30, 1998.
(9) Concentration of Credit Risk
The Bank originates real estate, consumer, and commercial loans primarily
in its Central Florida market area. Although the Bank has a diversified
loan portfolio, a substantial portion of its borrowers' ability to honor
their contracts is dependent upon the economy of Central Florida. The
Bank does not have a significant exposure to any individual customer or
counterparty.
The Bank manages its credit risk by limiting the total amount of
arrangements outstanding with individual customers, by monitoring the
size and maturity structure of the loan portfolio, by obtaining
collateral based on management's credit assessment of the customers, and
by applying a uniform credit process for all credit exposures.
(Continued)
F-23
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(10) Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined).
As of May 15, 1998, the most recent notification from the Office of
Thrift Supervision categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
"well capitalized," the Bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
(Dollars in thousands)
-------------------------------------------------------------------
To be well
capitalized
For capital under prompt
adequacy corrective action
Actual purpose provisions
------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 1998:
Total capital (to risk-
weighted assets) $38,451 15.6% $19,786 8.0% $24,732 10.0%
Tier I capital (to risk-
weighted assets) 35,887 14.5% 9,893 4.0% 14,839 6.0%
Tier I capital
(to average assets) 35,887 8.7% 16,599 4.0% 20,748 5.0%
========== ========= ========== ========= ========== ==========
(Continued)
F-24
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(Dollars in thousands)
-------------------------------------------------------------------
To be well
capitalized
For capital under prompt
adequacy corrective action
Actual purpose provisions
------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 1997:
Total capital (to risk-
weighted assets) $36,135 13.6% $21,288 8.0% $26,610 10.0%
Tier I capital (to risk-
weighted assets) 33,502 12.6% 10,644 4.0% 15,966 6.0%
Tier I capital
(to average assets) 33,502 7.2% 18,715 4.0% 23,394 5.0%
========== ========= ========== ========= ========== ==========
(11) Savings Association Insurance Fund
The Bank pays deposit insurance premiums to the FDIC's Savings
Association Insurance Fund (SAIF). The majority of commercial banks pay
such premiums to the FDIC's Bank Insurance Fund (BIF). The SAIF and BIF
previously assessed deposit insurance premiums at the same rate. However,
effective September 30, 1995, the FDIC reduced the minimum assessment
rate applicable to BIF deposits, but not SAIF deposits, from 23 basis
points of covered deposits to four basis points of covered deposits, and
effective January 1, 1996, further reduced the BIF rate to zero. This
disparity in assessment rates may place the Bank at a competitive
disadvantage to institutions whose deposits are exclusively or primarily
BIF insured (such as most commercial banks).
(Continued)
F-25
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
On September 30, 1996, President Clinton signed into law H.R. 3610, which
is intended to recapitalize the SAIF and substantially bridge the
assessment rate disparity existing between SAIF and BIF insured
institutions. The new law subjects institutions with SAIF assessable
deposits, including the Bank, to a one-time assessment estimated to be
approximately .657% of covered deposits as of March 31, 1995, and
provides for a 20% reduction of this assessment for certain institutions,
including the Bank. The new law remains to be implemented by the FDIC and
the FDIC's interpretation of the new law may affect actual amounts paid
by depository institutions. This one-time assessment resulted in a
pre-tax charge of approximately $2.5 million. Under the provisions of the
new law, the assessment may be treated for tax purposes as a fully
deductible "ordinary and necessary business expense." Results of
operations for the year ended September 30, 1996 included this one-time
assessment.
(12) Sale of Branches
On October 29, 1997, the Bank entered into an agreement to sell
substantially all of the loans, with a majority of the loans sold on a
servicing-released basis, and certain liabilities (primarily deposit
liabilities) of the branches located in north Florida. The sale included
loans at 80% of the deposit liability. The remaining 20% of the purchase
was funded with cash. The purchase included the branches, except for two
branches which were closed by the Bank because the Bank is precluded from
conducting any further business at those locations. The transaction was
completed January 30, 1998. Assets of approximately $52.5 million,
including loans of $44.6 million, property and equipment of $705,000,
cash of $10.1 million, and liabilities consisting primarily of deposit
accounts of $55.5 million, were sold for a gain of approximately $3.0
million. The remaining two branches are under contract for sale to a
third party. The sale of the two branches is expected to close in 1999 at
no loss to the Bank.
(13) Benefit Plans
On September 28, 1998, the Board of Directors approved a non-qualified
Director Retirement Plan (Retirement Plan). The Retirement Plan will pay
all Directors that have served on the board at least ten years, $1,000
per month for 120 months beginning at the end of their final three-year
term. For the year ended September 30, 1998, the Bank has recognized
expense of $410,000 related to this Retirement Plan. The weighted-average
discount rate used to measure the expense for the year ended September
30, 1998 was 5.5%. This expense is a component of compensation expense on
the statements of earnings.
The Bank maintains a noncontributory defined benefit pension plan
("Plan") covering substantially all employees who meet minimum service
requirements. The benefit formula of the Plan generally bases payments to
retired employees upon their length of service and a percentage of
qualifying compensation during the final years of employment.
(Continued)
F-26
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
On September 28, 1998, the Board of Directors froze benefit accruals for
the Plan effective November 3, 1998. The Bank anticipates allocating to the
participants their full present value of accrued benefits based on the Plan
liquidation guidelines, as prescribed by the Internal Revenue Code. The
present value of benefit obligations at September 30, 1998 is approximately
$5.7 million and the plan assets at fair value are approximately $4.0
million. As a result, the Bank recognized compensation and employee
benefits expense for 1998 of $1.7 million as an actuarial estimate of
benefits payable upon liquidation, and the related liability is a component
of other liabilities on the statement of financial condition.
The following table sets forth the funded status of the Plan and amounts
recognized in the Bank's balance sheet at September 30, 1998 and 1997:
1998 1997
---------- ----------
(In thousands)
Actuarial present value of benefit obligations:
Vested accumulated benefit obligation $ (5,672) (3,272)
---------- ----------
Accumulated benefit obligation (5,672) (3,272)
Additional benefits based on estimated future salary levels
-- (1,132)
---------- ----------
Projected benefit obligation (5,672) (4,404)
Plan assets at fair value 3,997 3,616
---------- ----------
Funded status $ (1,675) (788)
==========
Unrecognized net assets at October 1, 1987 being
recognized over 13 years (117)
Unrecognized net loss 52
Unrecognized prior service cost 440
----------
$ (413)
==========
(Continued)
F-27
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
Pension cost for the year ended September 30, 1997 and 1996 included the
following components:
1997 1996
--------- ---------
(In thousands)
Service cost - benefits earned during the period $ 207 200
Interest cost 304 272
Actual return on assets held in plan (580) (155)
Net amortization and deferral 335 (64)
--------- ---------
Net periodic pension cost $ 266 253
========= =========
The weighted-average discount rate used to measure the projected benefit
obligation is approximately 6% at September 30, 1998 and approximately 8%
at September 30, 1997 and 1996; the rate of increase in future
compensation levels is 5% at September 30, 1997 and 1996; and the
expected long-term rate of return on assets is approximately 6.5% for
September 30, 1998 and approximately 8.25% for September 30, 1997 and
1996. No increase in future compensation levels was used at September 30,
1998 as the Plan has been frozen by the Board of Directors.
(14) Fair Values of Financial Instruments
Fair value estimates, methods and assumptions are set forth below for
the Bank's financial instruments at September 30, 1998 and 1997.
Cash and cash equivalents: The carrying amount of cash and cash
equivalents (demand deposits maintained by the Bank at various financial
institutions and federal funds sold) represents fair value.
Investments: The Bank's investment securities represent investments in
U.S. Government Agency obligations, Collateralized Mortgage Obligations
and mortgage-backed securities. The fair value of these investments was
estimated based on quoted market prices or bid quotations received from
securities dealers.
Federal Home Loan Bank stock: The Federal Home Loan Bank stock is not
publicly traded and the carrying amount was used to estimate the fair
value.
(Continued)
F-28
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
Loans: Fair values are estimated for the Bank's portfolio of loans by
grouping loans with similar financial characteristics. The loans have
been segregated by type, such as fixed and variable rate first mortgage
loans and other loans. The fair value of loans is estimated by
discounting the future cash flows using current rates at which similar
loans would be made to borrowers with similar credit ratings and for
similar maturities.
Deposit liabilities: The fair value of deposits with no stated maturity
(i.e., interest and noninterest-bearing checking accounts and savings
accounts) is equal to the amount payable as of September 30, 1998 and
1997. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered by the Bank for deposits of
similar remaining maturities.
Federal Home Loan Bank advances: The fair value of advances is based on
the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered by creditors for advances of
similar remaining maturities.
Due to banks: The carrying value of cash due to other financial
institutions represents fair value.
Commitments: The Bank makes commitments in the normal course of business
to originate loans. All such commitments are for relatively short periods
of time, so the market value of the loan on the commitment date and
origination or delivery date is seldom materially different.
(Continued)
F-29
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
The estimated fair values of the Bank's financial instruments at
September 30, 1998 and 1997 are as follows:
1998
-----------------------------
Carrying Estimated
amount fair value
----------- ------------
(In thousands)
Financial assets:
Cash and cash equivalents $ 5,217 5,217
Investments available for sale 42,225 42,225
Investment securities held to maturity 18,736 18,524
Federal Home Loan Bank stock 2,863 2,864
Loans (carrying amount net of allowance
for loan loss of $2,564) 338,610 341,513
=========== ============
Financial liabilities:
Deposits:
Without stated maturities $ 90,798 90,798
With stated maturities 261,382 258,744
Federal Home Loan Bank advances 21,000 19,149
Due to banks 4,569 4,569
=========== ============
Commitments:
Loan commitments $ -- 1,985
=========== ============
1997
-----------------------------
Carrying Estimated
amount fair value
----------- ------------
(In thousands)
Financial assets:
Cash and cash equivalents $ 21,842 21,842
Investments available for sale 36,761 36,761
Investment securities held to maturity 37,812 37,311
Federal Home Loan Bank stock 2,864 2,864
Loans (carrying amount net of allowance
for loan loss of $2,633) 355,551 364,311
=========== ============
Financial liabilities:
Deposits:
Without stated maturities $ 96,718 96,718
With stated maturities 332,996 332,465
Due to banks 483 483
=========== ============
Commitments:
Loan commitments $ -- 3,721
=========== ============
(Continued)
F-30
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998 and 1997
(15) Commitments and Contingencies
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. In addition, the Bank is a defendant
in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the financial conditions of the Bank.
F-31
================================================================================ ==================================================
You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different.This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which such offer or solicitation would be unlawful. The affairs of First
Federal Florida or FloridaFirst Bancorp may change after the date of this
prospectus. Delivery of this document and the sales of shares made hereunder
does not mean otherwise.
TABLE OF CONTENTS
Page
----
Questions and Answers........................... Up to 2,703,851 Shares
Summary ........................................ Common Stock
Selected Financial and Other Data...............
Risk Factors....................................
First Federal Florida ..........................
FloridaFirst Bancorp............................
FloridaFirst Bancorp, MHC.......................
Use of Proceeds.................................
Dividend Policy................................. FloridaFirst Bancorp
Wavier of Dividends by the MHC..................
MHC Conversion to Stock Form....................
Market for Common Stock.........................
Capitalization..................................
Pro Forma Data..................................
Historical and Pro Forma Capital Compliance..... -----------------
Statements of Earnings..........................
Management's Discussion and Analysis of
Financial Condition and Results of Operations.. PROSPECTUS
Business of the Company.........................
Business of the Bank............................ -----------------
Regulation .....................................
Taxation........................................
Management .....................................
The Reorganization..............................
The Offering.................................... Sandler O'Neill & Partners, L.P.
Certain Restrictions on Acquisition of
the Company....................................
Description of Capital Stock....................
Registration Requirements....................... , 1999
Legal and Tax Opinions.......................... ----------- ----
Experts.........................................
Registration Requirements.......................
Where You Can Find Additional Information.......
Index to Financial Statements .................
Until the later of __________ ____, 1999 or 25 days after commencement of the THESE SECURITIES ARE NOT DEPOSITS OR
offering, all dealers effecting transactions in these securities, whether or not SAVINGS ACCOUNTS AND ARE NOT FEDERALLY
participating in this offering, may be required to deliver a prospectus. This is INSURED OR GUARANTEED.
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
================================================================================ ==================================================
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
* Legal Fees and Expenses.................................... $240,000
* Accounting Fees and Expenses............................... 125,000
* Appraisal/Business Plan Fees and Expenses.................. 31,000
* Blue Sky Legal and Filing Fees............................. 25,000
* Conversion Agent........................................... 42,000
* Printing Fees and Expenses................................. 125,000
* Postage and Mailing Expenses............................... 185,000
* Stock Certificate Expenses................................. 5,000
* Transfer Agent Fees........................................ 25,000
* Underwriting Fees and Expenses............................. 175,000
Filing Fees:
OTS............................................... 16,400
Nasdaq (including entry and listing fees)......... 26,650
SEC............................................... 7,500
NASD.............................................. 3,300
* Other .................................................. 36,150
Total..................................... $1,068,000
=========
- -----------------
* Estimated, at supermax.
Item 14. Indemnification of Directors and Officers
Federal regulations define areas for indemnity coverage by First
Federal Savings and Loan Association of Florida (to be known as First Federal
Florida) (the "Bank") as follows:
(a) Any person against who any action is brought or threatened because
that person is or was a director or officer of the Bank shall be indemnified by
the Bank, as the case may be, for:
(i) Any amount for which such person becomes liable under a
judgment in such action; and
(ii) Reasonable costs and expenses, including reasonable
attorney's fees, actually paid or incurred by such person in
defending or settling such action, or in enforcing his or her
rights to indemnification if the person attains a favorable
judgment in such enforcement action.
(b) Indemnification provided for in subparagraph (a) shall be made to
such officer or director only if the requirements of this paragraph are met:
(i) The Bank shall make the indemnification provided by
subparagraph (a) in connection with any such action which
results in a final judgment on the merits in favor of such
officer or director.
(ii) The Bank shall make the indemnification provided by
subparagraph (a) in case of settlement of such action, final
judgment against such director or officer or final judgment in
favor of such director or officer other than on the merits, if
a majority of the disinterested directors of the Bank
determines that such a director or officer was acting in good
faith within the scope of his or her employment or authority
as he or she could reasonably have believed under the
circumstances was in the best interest of the Bank or its
members.
(c) As used in this paragraph:
(i) "action" means any judicial or administrative proceeding,
or threatened proceeding, whether civil, criminal, or
otherwise, including any appeal or other proceeding for
review;
(ii) "final judgment" means a judgment, decree, or order which
is not appealable and as to which the period for appeal has
expired with no appeal taken:
(iii) "settlement" includes the entry of a judgment by consent
or by confession or a plea of guilty or nolo contendere.
The Office of Thrift Supervision ("OTS") has not yet issued final
regulations governing entities, such as FloridaFirst Bancorp (the "Company"),
that are subsidiary holding companies of mutual holding companies. However,
proposed regulations promulgated by the OTS, if adopted in the form proposed,
would subject the Company to the same indemnification regulations applicable to
the Bank as described above.
The Bank has a directors and officers liability policy providing for
insurance against certain liabilities incurred by directors and officers of the
Bank while serving in their capacities as such.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable
Item 16. Exhibits and Financial Statement Schedules:
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
(a) List of Exhibits:
1 Agency Agreement with Sandler O'Neill & Partners, L.P.
2 Plan of Mutual Holding Company Reorganization and Stock Issuance
3(i) Charter of FloridaFirst Bancorp
3(ii) Bylaws of FloridaFirst Bancorp
4 Specimen Stock Certificate of FloridaFirst Bancorp
5 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities
registered
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 Form of Florida Tax Opinion of Hahn, McClurg, Watson, Griffith & Bush,
P.A.
8.3 Statement of Feldman Financial Advisors, Inc. as to the value of subscription
rights
10.1 Employment Agreement with Gregory C. Wilkes
10.2 Form of Employment Agreement**
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (included with Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Feldman Financial Advisors, Inc.
24 Power of Attorney (included with signature page)
27 Financial Data Schedule***
99.1 Marketing Materials
99.2 Appraisal Report*
- -------------------
* To be filed by amendment
** To be entered into with four senior officers of First Federal Florida
*** Filed electronically only
(b) Financial Statements and Schedules:
Except for schedules required for electronic filers, financial
statement schedules are omitted because they are not required or are not
applicable or the required information is shown in the financial statements or
the notes thereto.
Item 17. Undertakings
I. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933 ("Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Lakeland,
Florida as of December 18, 1998.
FLORIDAFIRST BANCORP
/s/ Gregory C. Wilkes
----------------------------------
Gregory C. Wilkes
President, Chief Executive Officer,
and Director
(Duly authorized representative)
We the undersigned directors and officers of FloridaFirst Bancorp do
hereby severally constitute and appoint Gregory C. Wilkes and Kerry P. Charlet
our true and lawful attorneys and agents, to do any and all things and acts in
our names in the capacities indicated below and to execute all instruments for
us and in our names in the capacities indicated below which said Gregory C.
Wilkes and Kerry P. Charlet may deem necessary or advisable to enable
FloridaFirst Bancorp to comply with the Securities Act of 1933, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form S-1 relating
to the offering of FloridaFirst Bancorp's common stock, including specifically
but not limited to, power and authority to sign for us or any of us in our names
in the capacities indicated below the registration statement and any and all
amendments (including post-effective amendments) thereto; and we hereby ratify
and confirm all that Gregory C. Wilkes and Kerry P. Charlet shall do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed below by the following
persons in the capacities indicated as of December 18, 1998.
/s/ Gregory C. Wilkes /s/ Kerry P. Charlet
- ---------------------------------- ----------------------------------
Gregory C. Wilkes Kerry P. Charlet
President, Chief Executive Officer Senior Vice President and Chief
and Director Financial Officer
(Principal Financial and Accounting Officer)
/s/ Charles W. Bovay /s/ Llewellyn N. Belcourt
- ---------------------------------- ----------------------------------
Charles W. Bovay Llewellyn N. Belcourt
Chairman of the Board Director
/s/ Robert H. Artman /s/ Rudy H. Thornberry
- ---------------------------------- ----------------------------------
Robert H. Artman Rudy H. Thornberry
Director Director
/s/ Nis Nissen /s/ Stephen A. Moore, Jr.
- ---------------------------------- ----------------------------------
Nis Nissen Stephen A. Moore, Jr.
Director Director
/s/ G.F. Zimmermann, III
- ----------------------------------
G.F. Zimmermann, III
Director
As filed with the Securities and Exchange Commission on December 18, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------------
FLORIDAFIRST BANCORP
----------------------------
(Exact name of registrant as specified in charter)
United States 6035 59-3545582
- ---------------------------- ----------------- -------------------
(State or other jurisdiction (Primary SIC No.) (I.R.S. Employer
of incorporation or Identification No.)
organization)
205 East Orange Street, Lakeland, Florida 33801-4611
(941) 688-6811
----------------------------
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Mr. Gregory C. Wilkes
President
FloridaFirst Bancorp
205 East Orange Street, Lakeland, Florida
(941) 688-6811
----------------------------
(Name, address and telephone number of agent for service)
Please send copies of all communications to:
Charles E. Sloane, Esq.
Ruel B. Pile, Esq.
MALIZIA, SPIDI, SLOANE & FISCH, P.C.
1301 K Street, N.W., Suite 700 East, Washington, D.C. 20005
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement
becomes effective.
INDEX TO EXHIBITS TO FORM S-1
Exhibit
(a) List of Exhibits:
1 Agency Agreement with Sandler O'Neill & Partners, L.P.
2 Plan of Mutual Holding Company Reorganization and Stock Issuance
3(i) Charter of FloridaFirst Bancorp
3(ii) Bylaws of FloridaFirst Bancorp
4 Specimen Stock Certificate of FloridaFirst Bancorp
5 Opinion of Malizia, Spidi, Sloane & Fisch, P.C. regarding legality of securities registered
8.1 Federal Tax Opinion of Malizia, Spidi, Sloane & Fisch, P.C.
8.2 Form of Florida Tax Opinion of Hahn, McClurg, Watson, Griffith & Bush, P.A.
8.3 Statement of Feldman Financial Advisors, Inc. as to the value of subscription rights
10.1 Employment Agreement with Gregory C. Wilkes
10.2 Form of Employment Agreement**
23.1 Consent of Malizia, Spidi, Sloane & Fisch, P.C. (included with Exhibit 5)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Feldman Financial Advisors, Inc.
24 Power of Attorney (included with signature page)
27 Financial Data Schedule***
99.1 Marketing Materials
99.2 Appraisal Report*
- -------------------
* To be filed by amendment
** To be entered into with four senior officers of First Federal Florida
*** Filed electronically only