PROSPECTUS
2,351,175 Shares
of
Common Stock
of
FloridaFirst Bancorp
205 East Orange Street
Lakeland, Florida 33801-4611
(941) 688-6811
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^ We are offering 47% of our common stock at $10.00 per share ^ as part
of First Federal Florida's ^ conversion to stock ownership. The deadline for
ordering stock is 4:00 p.m. on March 18, 1999 and may be extended to May 2,
1999. All funds submitted shall be placed in a deposit account at First Federal
until the shares are issued or the funds are returned. No stock will be sold if
FloridaFirst does not receive orders for at least the minimum number of shares.
There is currently no public market for the stock. ^ We expect the
stock ^ to be quoted on The Nasdaq Stock Market under the symbol "FFBK."
Sandler O'Neill & Partners, L.P. is not required to sell any specific
number or dollar amount of stock but will use their best efforts to sell the
stock offered.
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MINIMUM MAXIMUM
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Number of Shares 1,737,825 2,351,175
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Total Underwriting Commissions and Expenses $1,003,000 $1,046,000
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Net Proceeds $16,375,000 $22,466,000
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Net Proceeds Per Share $9.42 $9.56
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Based upon market conditions and the approval of the Office of Thrift
Supervision, FloridaFirst may increase the offering by up to 15% of the
2,351,175 shares to be sold.
Please refer to Risk Factors beginning on page ^ 8 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, the Office of Thrift
Supervision, 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.
Sandler O'Neill & Partners, L.P.
The Date of this Prospectus is ^ February 12, 1999
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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.
FloridaFirst Bancorp.
FloridaFirst is not an operating company and has not yet engaged in any
business. Its primary activity will be owning all the stock of First Federal.
See ^ page 32.
FloridaFirst Bancorp MHC.
FloridaFirst Bancorp MHC will own a majority of FloridaFirst's stock
for as long as FloridaFirst Bancorp MHC remains a mutual holding company. See ^
page 32.
First Federal Florida.
First Federal is a federally chartered mutual savings institution. It
is converting from the mutual to stock form of ownership as part of its
reorganization. See ^ pages 31 and 32.
How First Federal's ownership structure will change after the reorganization.
As a mutual savings association, First Federal depositors and eligible
borrowers are members and have voting rights. The ownership structure following
the reorganization is shown in the chart below.
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Members of FloridaFirst Bancorp MHC
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|
| 100% of voting rights
|
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FloridaFirst Bancorp MHC Public Stockholders
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| |
| 53% of FloridaFirst | 47% of FloridaFirst ^
| Common Stock | Common Stock
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FloridaFirst
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First Federal
(stock form)
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Although we anticipate paying cash dividends, we have not determined the amount
or frequency at which we will pay cash dividends after the offering.
After our stock offering, we expect to have adequate capital and earnings
to pay cash dividends. The amount and frequency at which we will pay cash
dividends after the offering have not been determined. There are restrictions on
our ability to pay dividends. See ^ "Regulation --Regulation of First Federal --
Dividend and Other Capital Distribution Limitations."
Our use of the proceeds raised from the sale of stock.
FloridaFirst will use approximately 50% of the cash received in the
offering to purchase all of First Federal's stock. FloridaFirst will also lend
First Federal's employee stock ownership plan enough cash to enable the plan to
buy 8% of the shares sold in the offering. The balance will be held as
FloridaFirst's initial capitalization. See pages ^ 32 and 33.
How we determined the price per share and the number of shares we are offering.
The number of shares offered is based on an independent appraisal of
the pro forma estimated market value of the stock by Feldman Financial Advisors,
Inc. divided by the purchase price of $10.00 and multiplied by the percentage of
shares being offered to the public. The $10.00 per share was determined by the
board of directors. According to the appraisal, which was based on information
at December 14, 1998, the ratio of our $10.00 purchase price to pro forma net
income per share represented a modest discount to the average ratio of trading
price to earnings per share of all publicly traded savings association mutual
holding companies. Also, at that date, the ratio of our $10.00 purchase price to
pro forma book value, or stockholders' equity, per share represented a
significant discount to the average ratio of trading price to book value per
share of all publicly traded savings association mutual holding companies.
Based on various assumptions about the offering and the reinvestment of
the amount of cash raised in the offering, FloridaFirst's ratio of offering
price to pro forma net income per share measured:
o 13.75x at the minimum;
o 15.91x at the midpoint;
o 18.01x at the maximum; and
o 20.33x at the adjusted maximum,
of the estimated valuation range.
Based on market price information as of December 14, 1998, the mean
ratio of trading price to earnings per share for all publicly traded savings
association mutual holding companies was 22.51x. The median ratio of trading
price to earnings per share for all publicly traded savings association mutual
holding companies was 22.50x as of December 14, 1998.
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FloridaFirst's ratio of offering price to pro forma stockholders'
equity per share measured:
o 73.66% at the minimum;
o ^ 82.27% at the midpoint;
o 90.05% at the maximum; and
o 98.12% at the adjusted maximum,
of the estimated valuation range.
Based on market price information as of December 14, 1998, the mean
ratio of trading price to book value per share for all publicly traded savings
association mutual holding companies was 150.88%. The median ratio of trading
price to book value per share for all publicly traded savings association mutual
holding companies was 140.47% as of December 14, 1998.
Because of possible differences in important factors such as operating
characteristics, financial performance, asset size, capital structure, and
business prospects between FloridaFirst and other savings association mutual
holding companies, you should not rely on these comparative valuation ratios as
an indication as to whether or not the stock is a good investment for you. See
- -- "Risk Factors -- There is ^ no guarantee that the price of our stock will
increase to a level comparable to other publicly traded mutual holding
companies" and "Pro Forma Data" and "The Offering -- Stock Pricing and the
Number of Shares to be Offered."
The amount of stock you may purchase.
Minimum purchase = 25 shares
Maximum purchase = 20,000 shares in the subscription, community or other offerings
= 24,000 shares in the offerings combined
= 24,000 shares for any person or persons acting together
How we will prioritize orders if we receive orders for more shares than are
available.
You might not receive any or all of the stock you want to purchase.
Orders received in the subscription offering will be filled first in the
following order of priority:
o Priority 1 - Depositors of First Federal at the close of business
on June 30, 1997 with deposits of at least $50.00.
o Priority 2 - The employee stock benefit plans of First Federal.
o Priority 3 - Depositors of First Federal 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 as of ^ the close of business on February 2, 1999 who are
entitled to vote on the reorganization.
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If these persons do not submit orders for all of the shares, the
remaining shares may be offered in a community offering. In a community
offering, first preference will be given to persons who reside in Polk or
Manatee Counties, Florida and second preference will be given to persons who
reside in other counties in Florida. Any remaining shares may be offered to the
general public through a group of brokers/dealers organized by Sandler O'Neill.
FloridaFirst and First Federal have the right to reject any stock order received
in the community offering or offering through broker/dealers.
Our officers, directors and employees will receive benefits from the offering or
within one year of the offering.
In order to tie our employees' and directors' interests closer to our
stockholders' interests, we intend to establish certain benefit plans that use
our stock as compensation. Officers, directors, and employees will not be
required to pay cash in exchange for their stock benefits.
The following table presents information regarding the participants in
each plan, total amount, the percentage, and the dollar value of the stock that
we intend to set aside for our employee stock ownership plan and stock-based
incentive plans. The stock-based incentive plans may not be adopted for at least
six months after the offering and must be approved by a majority vote of the
public stockholders. The table below assumes the sale of 2,351,175 shares in the
offering. It is assumed that the value of the stock is $10 per share. Options
are given no value because their exercise price will be equal to the fair market
value of the stock on the day the options are granted. As a result, anyone who
receives an option will only benefit from the option if the price of the stock
rises above the exercise price. See pages ^ 100 and 101 for more information,
including regulatory restrictions on the maximum amount of benefits participants
may receive and the rate at which benefits may be earned under the incentive
plans.
Percentage of
Estimated Total Shares Sold
Participants Value of Shares in the Offering
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Employee Stock Ownership Plan....... Employees $1,880,940 8.0%
Stock-Based Incentive Plans:
Stock Awards............... Officers and Directors 940,470 4.0
Stock Options.............. Officers and Directors -- 10.0
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Total................. $2,821,410 22.0%
========= ====
As a public company, it is important for us to reassure our management
of our commitment to their employment with First Federal. With this in mind,
some of our employees will receive employment agreements. The agreements provide
that if FloridaFirst or First Federal is acquired and the employee is terminated
the employee will receive a cash payment. Participants in our stock-based
benefit plans may also receive benefits if FloridaFirst or First Federal is
acquired.
Deadlines for purchasing stock.
The subscription offering will terminate at ^ 4:00 p.m., Eastern time,
on ^ March 18, 1999. The community offering and the other offering through
broker/dealers, if any, may terminate at any time without notice but no later
than ^ May 2, 1999.
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Subscription rights are not transferable.
Selling or transferring your right to buy stock in the subscription
offering is illegal. If you exercise this right you must tell FloridaFirst that
you are purchasing stock for your own account. If FloridaFirst believes your
order violates this restriction, your order will not be filled. You also may be
subject to penalties imposed by the Office of Thrift Supervision.
There are conditions that must be satisfied before we can complete the offering
and issue the stock.
The following must occur before we can complete the offering and issue
our stock:
o we must receive all the required approvals from the government agencies
that regulate us;
o First Federal's members must approve the conversion and reorganization; and
o we must sell at least the minimum number of shares offered.
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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 stock.
Our mutual holding company structure makes it unlikely that we will be acquired.
This may prevent you from receiving a premium over the price you paid for your
stock.
The Board of Directors of First Federal intends for First Federal to
remain an independent financial institution. This is why it chose to reorganize
into the mutual holding company structure. Under this structure the mutual
holding company must own a majority of the stock of FloridaFirst for as long as
the mutual holding company exists. FloridaFirst will own all the stock of First
Federal. As the majority owner of FloridaFirst, the mutual holding company will
elect the directors of FloridaFirst and control its affairs and business
operations. The directors of the mutual holding company will also be the
directors of FloridaFirst and First Federal. The mutual holding company has no
stockholders. Its directors will be elected by its members who are generally
First Federal's depositors. Accordingly, the public stockholders of FloridaFirst
will be minority stockholders and as a result will have no control in electing
directors or controlling the affairs of FloridaFirst. In addition, the public
stockholders will have no control over the affairs of the mutual holding company
except to the extent they are also members of the mutual holding company. There
is no guarantee that the mutual holding company will not take actions which the
public stockholders believe are against their interests. For example, the mutual
holding company could: (1) prevent the sale of FloridaFirst; (2) defeat a
candidate proposed by a public stockholder for election to the board of
directors of FloridaFirst; (3) prevent the mutual holding company from
converting to stock form; or (4) defeat other proposals submitted by the public
stockholders.
We intend to increase our commercial and consumer lending after the offering.
The risk related to these types of loans is greater than the risk related to
residential loans.
The risk that commercial and consumer loans will not be repaid is
generally greater than the risk that residential loans will not be repaid. As
First Federal increases the amount of commercial and consumer loans it makes and
holds for investment, the likelihood increases that some of its loans will not
be repaid or will be late in paying. Any failure to pay or late payments would
hurt our earnings.
If our return on equity after the offering is low, this may negatively affect
the price of our stock.
The net proceeds from the offering will substantially increase our
equity capital. It will take some time to carefully invest this capital. The
stock based benefit plans and cost of preparing reports for stockholders and the
SEC will cause our expenses to increase. The development of new types of
commercial and consumer loan products will also increase our expenses. As a
result, our return on equity, which is the ratio of our earnings divided by our
equity capital, may decrease as compared to previous years and may be lower than
that of similar companies. To the extent that the stock market values a company
based on its return on equity, a decline in our return on equity could cause the
trading price of our stock to decline.
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The expenses related to our stock-based benefit plans will reduce our earnings.
We intend to adopt an employee stock ownership plan as part of the
reorganization. We also intend to adopt other stock-based benefit plans in the
future. We will not be able to invest the money that we use to buy stock to fund
our stock-based benefit plans. Also, our future expenses are expected to
increase because we are adopting these plans. Both of these factors will cause
our earnings to be lower than they would be if we chose not to adopt stock-based
benefit plans. See "Pro Forma Data" and "Management - Executive Compensation -
Employee Stock Ownership Plan."
If FloridaFirst Bancorp MHC converts to stock form in the future, our
stockholders will have their ownership interest reduced.
If FloridaFirst Bancorp MHC converts from a mutual company to a stock
company in the future, our stockholders will exchange their shares for shares in
the converted mutual holding company pursuant to an exchange ratio. The exchange
ratio ensures that the public stockholders will own the same percentage of the
issued shares of the converted mutual holding company as they owned in
FloridaFirst. The Office of Thrift Supervision requires that the exchange ratio
be reduced for: (1) any dividends which we paid but the mutual holding company
elected not to receive; and (2) the value of any assets owned by the mutual
holding company, such as dividends received by it, which will be transferred to
the stock company. The greater the amount of dividends paid, the greater the
reduction in the exchange ratio will be. For example, a stockholder who owned 1%
of the total issued shares of FloridaFirst would own less than 1% of the shares
issued by the converted mutual holding company.
Whether or not we make a profit after the offering depends on our local economy
and our competition.
First Federal primarily conducts its business of attracting deposits
and making loans within its market area. A downturn in our local economy could
reduce the amount of funds available for deposit and the ability of borrowers to
repay their loans. As a result, First Federal's ability to make a profit could
be hurt. First Federal has substantial competition for deposits and loans. Many
competitors have greater resources than First Federal. First Federal's ability
to compete successfully will affect its profitability.
If our computer systems do not work properly with the Year 2000 date, we may not
be able to continue running our business properly.
A great deal of information has been widely spread about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the last 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 our material data processing that could be affected by this
problem is provided by a third party service bureau. If our third party service
bureau does not resolve this problem, we would likely experience significant
data processing delays, mistakes, or failures. These delays, mistakes, or
failures could reduce our profitability. See "Management's Discussion and
Analysis of Financial Condition and ^- Results of Operations - Year 2000
Readiness Disclosure."
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Future laws or regulations could hurt our profitability and the trading price of
our stock.
We operate in a highly regulated industry. The U.S. government could
adopt regulations or pass laws which restrict our operations or impose
burdensome requirements on us. This could reduce our profitability and the value
of our franchise which could hurt the trading price of our stock.
Future changes in interest rates may reduce our profits.
Our ability to make a profit largely depends on our net interest
income. Net interest income is the difference between:
o the interest income we earn on our interest-earning assets, such as
mortgage loans and investment securities; and
o the interest expense we pay on our interest-bearing liabilities, such as
deposits and amounts we borrow.
Most of our mortgage loans have rates of interest which are fixed for the life
of the loan and are generally originated for periods of up to 30 years, while
our deposit accounts have significantly shorter periods 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 reduced when interest
rates increase significantly for long periods of time. In addition, rising
interest rates may reduce our earnings because there may be a lack of customer
demand for loans. Declining interest rates may also reduce our net interest
income if adjustable rate or fixed rate mortgage loans are refinanced at reduced
rates or paid off earlier than expected, and we reinvest these funds in assets
which earn us a lower rate of interest. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Management of
Interest Rate Risk and Market Risk."
The small amount of stock being issued to the public may make it difficult to
buy or sell our stock in the future.
Due to the relatively small size of the offering to the public, you
have no assurance that an active market for the stock will exist after the
offering. This might make it difficult to buy or sell the stock. See "Market for
the Stock."
There is no guarantee that the price of our stock will increase to a level
comparable to other publicly traded mutual holding companies.
Although our stock is priced at a discount on a valuation ratio basis
to other publicly traded companies which are in the mutual holding company form,
there is no guarantee that the price of our stock will increase to the relative
levels of those companies. In making a decision whether to buy our stock you
should consider, among other things, the unique characteristics of each publicly
traded mutual holding company. For more information see "Pro Forma Data."
Before you buy the stock, you must understand that any information
contained in this document, related to Feldman Financial's independent appraisal
of FloridaFirst, must not be interpreted as financial advice to you as a
potential investor in FloridaFirst. A copy of the appraisal
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report is available for your review at our main office and all the information
presented should be considered before buying the stock. In addition, the board
of directors of FloridaFirst does not make any recommendation as to whether or
not the stock will be a good investment for you.
^ The Reorganization
^ The board of directors of First Federal has adopted a plan
authorizing the reorganization and the offering, subject to the approval of the
OTS and the members of First Federal and the satisfaction of certain other
conditions. OTS approval does not mean the OTS recommends or endorses First
Federal's plan to reorganize.
General
On September 28, 1998, the Board of Directors of First Federal adopted
the plan of reorganization and stock issuance which was ^ later amended,
pursuant to which First Federal ^ plans to reorganize from a federally
chartered^ mutual savings institution to a federally chartered stock savings
institution. First Federal will be a wholly owned subsidiary of FloridaFirst,
the majority of whose shares will be owned by the Mutual Holding Company.
Concurrently with the reorganization, FloridaFirst will sell a minority
percentage of its common stock in the offering to First Federal's members and
the general public. The Board of Directors unanimously adopted the ^ plan after
^ considering the advantages and ^ disadvantages of the reorganization and
offering and alternative transactions, including a full conversion from the
mutual to stock form of organization.
After we receive all the required approvals from the relevant
government agencies ^, the approval of the plan by First Federal's members and
the satisfaction of all other conditions precedent to the reorganization, First
Federal will effect the reorganization
(1) by exchanging its federal mutual savings institution charter
for a federal stock savings institution charter and becoming a
^ 100% owned subsidiary of FloridaFirst ^, FloridaFirst will
then ^ become a majority owned subsidiary of the Mutual
Holding Company, and ^ the depositors of First Federal will
receive ^ liquidation interests in the Mutual Holding Company
^ similar to their liquidation interests in First Federal
before the reorganization; or
(2) in any other manner consistent with the plan of reorganization
and applicable regulations. See "- Description of the
Reorganization."
^ When the reorganization and the offering are complete, FloridaFirst will ^
begin business as ^ a savings and loan holding company, and First Federal will ^
continue its business ^ in its new form, a federally chartered stock savings
institution, and the Mutual Holding Company will ^ begin business as the 53%
owner of FloridaFirst's outstanding stock. The reorganization will be ^
completed according to First Federal's plan, 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 First Federal ^ determined ^ the
reorganization ^ to be in the best interest of First Federal and has several
business purposes for the reorganization, including, but not limited to the
following:
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(1)^ The reorganization will ^ convert First Federal ^ to the stock
form, a structure which is used by commercial banks, most
major business corporations and an increasing number of
savings institutions.
^(2) The reorganization will allow FloridaFirst to issue stock,
which is a source of capital for First Federal. This source of
capital is not available to mutual savings institutions.
^(3) The reorganization will enable First Federal to achieve
certain benefits of a stock company without a loss of control
that sometimes follows standard mutual to stock conversions.
The benefits of First Federal's mutual form of ownership will
be preserved in the Mutual Holding Company^. The Mutual
Holding Company^ must continue to control at least a majority
of ^ FloridaFirst's outstanding stock so long as it remains a
mutual institution.
^(4) First Federal 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. 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.
^(5) The mutual holding company structure will also ^ give
FloridaFirst flexibility to issue its common stock at various
times and in varying amounts as market conditions permit,
rather than in a single stock offering.
^(6) The reorganization will still allow the Mutual Holding Company
^ to convert to the stock form of ownership in the future.
(7) Although First Federal has no current arrangements,
understandings or agreements regarding any such opportunities,
FloridaFirst will be in a position after the reorganization
and offering, subject to regulatory limitations and
FloridaFirst's financial position, to take advantage of any
such opportunities that may arise.
FloridaFirst is offering for sale up to 47% of the common stock in an
offering at an aggregate price based on an independent appraisal. The proceeds
from the sale of common stock of FloridaFirst will provide First Federal with
new equity capital, which will support future deposit growth and expanded
operations. The ability of FloridaFirst to sell stock also will enable
FloridaFirst and First Federal to increase capital in response to the changing
capital requirements of the OTS. While First Federal currently meets or exceeds
all regulatory capital requirements, the sale of 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 First Federal's capital base, and allows flexibility to respond to sudden and
unanticipated capital needs. After the reorganization and offering, FloridaFirst
may repurchase shares of its common stock. The investment of the net proceeds of
the offering also will provide additional income to enhance further First
Federal's future capital position.
The ability of FloridaFirst to issue stock also will enable it in the
future to establish stock benefit plans for management and employees of
FloridaFirst and First Federal, including incentive stock option plans, stock
award plans, and an employee stock ownership ^ plan.
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FloridaFirst will also be able 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 First
Federal as core capital for regulatory capital purposes. FloridaFirst 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:
o the inability of FloridaFirst to sell to the public shares of common stock
representing 50% or more of its total outstanding shares so long as the
Mutual Holding Company remains in existence;
o the more limited liquidity of the ^ stock, as compared to a full
conversion; and
o the inability of public stockholders ^ to obtain a majority ownership of
FloridaFirst which may result in the perpetuation of the existing
management and Board of Directors of FloridaFirst and First Federal.
The Mutual Holding Company will be able to elect all members of the
Board of Directors of FloridaFirst, and will be able to control the outcome of
all matters presented to the stockholders of FloridaFirst 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 Mutual Holding Company, including
certain matters relating to stock compensation plans and certain votes regarding
a conversion to stock form by the Mutual Holding Company. No assurance can be
given that FloridaFirst will not take action adverse to the interests of the
minority stockholders. For example, FloridaFirst can revise the dividend policy,
prevent the sale of control of FloridaFirst or defeat a candidate for the Board
of Directors of FloridaFirst or other proposal ^ made by the minority
stockholders.
Description of the Reorganization
After receiving all of the required approvals from the government
agencies that regulate us and the ratification of the plan of reorganization by
First Federal's members, the reorganization will be completed following 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.
First Federal'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." After the reorganization, the
legal existence of First Federal will not terminate, the converted stock bank
will be a continuation of First Federal and all property of First Federal,
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 First Federal, or which would inure to First Federal
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 First
Federal as the survivor of the merger. First Federal 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 First Federal. First Federal will continue to
have, succeed to, and be responsible for all the rights, liabilities, and
obligations of First Federal and will maintain its headquarters operations at
First Federal's present location.
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The foregoing description of the reorganization is qualified in its
entirety by reference to the plan and the charter and bylaws of First Federal,
the Mutual Holding Company and FloridaFirst to be effective after the
reorganization.
Effects of the Reorganization
General. The reorganization will not have any effect on First Federal'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. After the reorganization, First Federal
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 First Federal
at the time of the reorganization will continue as an account holder in First
Federal 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 First Federal. 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 First Federal.
Voting Rights. As a federally chartered mutual savings institution,
First Federal has no authority to issue capital stock and thus, no stockholders.
Control of First Federal in its mutual form is vested in the Board of Directors
of First Federal. The Directors are elected by First Federal's members. Holders
of qualifying deposits in First Federal and borrowers of First Federal with
loans outstanding on October 23, 1984 which remain outstanding are members of
First Federal. In the consideration of all questions requiring action by members
of First Federal, each holder of a qualifying deposit is permitted to cast one
vote for each $100, or fraction thereof, of the withdrawal value of the voting
depositor's account. Voting borrowers are entitled to cast one vote. No member
may cast more than 1,000 votes.
After the reorganization, the affairs of First Federal will be under
the direction of the Board of Directors of First Federal and all voting rights
as to First Federal will be vested exclusively in the holders of the outstanding
voting capital stock of First Federal, which initially will consist exclusively
of common stock. All of the outstanding stock of First Federal will be owned by
FloridaFirst. FloridaFirst will elect First Federal's Board of Directors and
determine the outcome of matters presented to stockholders of First Federal. By
virtue of its ownership of a majority of the outstanding shares of common stock
of FloridaFirst, the Mutual Holding Company will be able to elect all members of
the Board of Directors of FloridaFirst and generally will be able to control the
outcome of most matters presented to the stockholders of FloridaFirst for
resolution by vote, excluding certain matters where shares held by the Mutual
Holding Company are not counted.
The Mutual Holding Company will be controlled by its Board of
Directors, which will initially consist of the current directors of First
Federal. All members of First Federal at the time of the reorganization will
become members of and have voting rights transferred to the Mutual Holding
Company. The directors of the Mutual Holding Company will be elected by its
members, which could allow the current management of the Mutual Holding Company,
FloridaFirst and First Federal to maintain control over these companies
indefinitely.
14
Liquidation Rights. In the unlikely event of a complete liquidation of
First Federal in its present mutual form, existing holders of deposit accounts
of First Federal 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 First Federal at the time of liquidation.
After a complete liquidation of First Federal after the reorganization,
FloridaFirst, as holder of First Federal's common stock, would be entitled to
any assets remaining after a liquidation or dissolution of First Federal. Each
depositor would not have a claim in the assets of First Federal. However, after
a complete liquidation of the Mutual Holding Company 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 Mutual Holding Company remaining after the claims
of the creditors of the Mutual Holding Company are satisfied. Depositors who
have liquidation rights in First Federal immediately prior to the reorganization
will continue to have such rights in the Mutual Holding Company after the
reorganization for so long as they maintain deposit accounts in First Federal
after the reorganization.
After a complete liquidation of FloridaFirst, each holder of shares of
the common stock would be entitled to receive a pro rata share of FloridaFirst's
assets, following payment of all debts, liabilities and claims of greater
priority of or against FloridaFirst.
Federal and State Tax Consequences of the Reorganization
The reorganization may be ^ completed in any manner approved by the OTS
that is consistent with the purposes of the plan and applicable ^ laws,
regulations, and policies. However, First Federal intends to ^ complete the
reorganization using a series of mergers as described below. This structure ^
allows First Federal to retain all of its historical tax attributes and produces
significant savings to First Federal because it simplifies regulatory approvals
and conditions associated with the ^ reorganization.
The ^ reorganization will be ^ completed as follows:
o First Federal will organize the Mutual Holding Company initially as a
temporary federal stock institution ^;
o the Mutual Holding Company will then organize a ^ stock corporation under
federal law (i.e., FloridaFirst) as its ^ 100% owned subsidiary ^; and
o the Mutual Holding Company will also organize a temporary federal stock
institution as its ^ 100% owned subsidiary^;
The following transactions will then occur simultaneously:
o First Federal will exchange its charter for a federal stock savings
institution charter^;
o the Mutual Holding Company ^ will cancel its outstanding stock and exchange
its charter for a federal mutual savings and loan holding company charter
^;
o the Mutual Holding Company's 100% owned temporary federal stock institution
^ will merge with and into First Federal, with First Federal surviving;
o the initially issued stock of First Federal^, which will be constructively
received by former members of First Federal when First Federal becomes a
stock institution^, will initially be issued to the Mutual Holding Company
in exchange for liquidation interests in the Mutual Holding Company which
will be held by First Federal's members;
15
o the Mutual Holding Company will then contribute 100% of the stock of First
Federal to FloridaFirst^; and
o FloridaFirst will ^ offer for sale 47% of its common stock.
As a result of these transactions: (a) First Federal will be a wholly
owned subsidiary of FloridaFirst; (b) FloridaFirst will be a majority-owned
subsidiary of the Mutual Holding Company; and (c) the former depositors of First
Federal will hold liquidation interests in the Mutual Holding Company.
Under this structure: (1) the ^ reorganization is intended to be a
tax-free reorganization under Code section 368(a)(1)(F); and (2) the exchange of
the shares of First Federal's initial common stock deemed constructively
received by First Federal's depositors for liquidation interests in the Mutual
Holding Company ^ is intended to be a tax-free exchange under Code section 351.
^ The reorganization is conditioned on, among other things, the prior
receipt by First Federal of either a private letter ruling from the IRS and from
the federal taxing authorities or an opinion of First Federal's counsel as to
the federal and Florida income tax consequences of the ^ reorganization to First
Federal (in both its mutual and stock form), FloridaFirst 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.
First Federal 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 favorable private letter ruling
will be obtained.
In the following discussion, "Mutual Bank" refers to First Federal
before the ^ reorganization and "Stock Bank" refers to First Federal after the ^
reorganization.
With regard to the ^ reorganization, Malizia, Spidi, Sloane & Fisch,
P.C. has issued an opinion that:
o the ^ reorganization will constitute a reorganization under Code section
368(a)(1)(F), and First Federal (in either its status as Mutual Bank or
Stock Bank) will recognize no gain or loss as a result of the ^
reorganization;
o 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;
o 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;
o 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;
16
o 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
o 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. If the
IRS disagrees with our lawyer's opinion, there is no guarantee that the IRS
would not prevail in a judicial or administrative proceeding.
Hahn, McClurg, Watson, Griffith & Bush, P.A. ^ has issued an opinion,
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 First Federal (in either its status as Mutual Bank or
Stock Bank), the Mutual Holding Company, FloridaFirst, the stockholders of the
Stock Bank or the depositors of First Federal. This opinion is not binding on
the Florida taxing authorities and these taxing authorities could disagree with
the conclusions reached in the opinion of Hahn, McClurg, Watson, Griffith &
Bush, P.A.
Accounting Consequences
The reorganization will be accounted for in a manner similar to a
pooling-of-interests under GAAP. Accordingly, the carrying value of First
Federal's assets, liabilities, and capital will be unaffected by the
reorganization and will be reflected in FloridaFirst's and First Federal's
consolidated financial statements based on their historical amounts.
Conditions to the Reorganization
Before we can complete the reorganization, FloridaFirst and First
Federal must receive all the required approvals from the government agencies
that regulate us, including various approvals or non- objections from 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. The board of directors may decide to
consummate the reorganization even if the offering is terminated. If this
happens the Mutual Holding Company will own all the stock of FloridaFirst and
FloridaFirst will own all the stock of First Federal. FloridaFirst, subject to
regulatory approvals, would have the right to hold a new offering in the future.
Capital and Financial Resources of the Mutual Holding Company
The Mutual Holding Company will be capitalized with up to $200,000 in
the reorganization. After the reorganization, the Mutual Holding Company's
capital and financial resources will initially depend on the earnings from the
investment of its initial capitalization and dividends from FloridaFirst. The
payment of dividends by FloridaFirst will be subject to declaration by
FloridaFirst's board of directors. See "Dividend Policy."
Additional financial resources also may be available to the Mutual
Holding Company through borrowings from an unaffiliated lender or lenders. In
connection with any such borrowings, the
17
Mutual Holding Company could grant a security interest in the assets of the
Mutual Holding Company, including the common stock held by the Mutual Holding
Company. 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
FloridaFirst 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 Mutual Holding Company
would be serviced with available resources, which initially will consist of
dividends from FloridaFirst, subject to applicable regulatory and tax
considerations. The Mutual Holding Company 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 First
Federal, the plan may be amended by a two-thirds vote of First Federal's Board
of Directors, with the concurrence of the OTS, at any time prior to or after
submission of the plan to members of First Federal for ratification. The plan
may be terminated by the Board of Directors of First Federal at any time prior
to or after ratification by the members, by a two-thirds vote with the
concurrence of the OTS.
Management of the Mutual Holding Company
After the reorganization, the Mutual Holding Company will operate under
essentially the same mutual organization structure as was previously applicable
to First Federal. Directors of the Mutual Holding Company 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 Mutual Holding Company. All current members of the Board of Directors of
First Federal will be the initial members of the Board of Directors of the
Mutual Holding Company. For information about these persons, whose terms as
directors of the Mutual Holding Company will be the same as their terms as
directors of First Federal, see "Management." The initial executive officers of
FloridaFirst will be persons who are executive officers of First Federal
immediately before the reorganization.
It is not anticipated that the directors and executive officers of the
Mutual Holding Company will receive separate compensation in their capacities as
such until such time as such persons devote significant time to the separate
management of the Mutual Holding Company's affairs, which is not expected to
occur unless the Mutual Holding Company becomes actively involved in other
investments. The Mutual Holding Company, however, may determine that such
compensation is appropriate in the future.
^ The Offering
General
Concurrently with the reorganization, we, FloridaFirst, are offering
shares of common stock to persons other than the Mutual Holding Company. 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 if our estimated pro forma market value has increased at the
conclusion of the offering), which will expire at ^ 4:00 p.m., Eastern time, on
^ March 18, 1999 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 after 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.
18
Subscription funds may be held by First Federal 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 First Federal, all orders
will be irrevocable until ^ May 2, 1999. In addition, the reorganization and
offering may not be ^ completed until First Federal 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, if 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. If the reorganization and offering are not completed by ^ May 2, 1999,
^ subscribers will have the right to modify or rescind their subscriptions and
to have their subscription funds returned with interest at First Federal'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.
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:
o Eligible Account Holders;
o the employee stock ownership plan;
o Supplemental Eligible Account Holders; and
o 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 and syndicated community 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 believe to be relevant.
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 20,000 shares, or $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 the lesser of 100 shares or the
number of shares ordered. 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 First Federal in the one year preceding the
eligibility
19
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 Employee Plans. The employee stock ownership plan 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 employee
stock ownership plan will purchase up to 8% of the common stock issued in the
offering. If an oversubscription occurs in the offering by Eligible Account
Holders, the employee stock ownership plan may, in whole or in part, fill its
order through open market purchases subsequent to the closing of the offering.
See also "Risk Factors - ^ The expenses related to our stock-based benefit plans
will reduce our earnings."
Priority 3: Supplemental Eligible Account Holders. ^ If any stock is
available after satisfaction of subscriptions by Eligible Account Holders and
the employee stock ownership plan and other tax-qualified employee stock benefit
plans, if any, each Supplemental Eligible Account Holder shall have the
opportunity to purchase up to 20,000 shares, or $200,000, of common stock
offered in the subscription offering, subject to the overall limitations
described under "Limitations on Purchases of Common Stock." If Supplemental
Eligible Account Holders subscribe for a number of shares which, when added to
the shares subscribed for by Eligible Account Holders and the employee stock
ownership plan 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 each subscribing Supplemental Eligible Account
Holder to purchase a number of shares sufficient to make his total allocation
equal to the lesser of 100 shares or the number of shares ordered. 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 Eligibility Record Date.
Priority 4: Other Members. ^ If any stock is available 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 20,000 shares, or
$200,000, of common stock offered in the subscription offering, subject to the
overall limitations described under ^"Limitations on Purchases of Common Stock."
If 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
100 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 100 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 First Federal members reside, and will only offer and sell the common
stock in states in which the offers and sales comply with state
20
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:
o a small number of persons otherwise eligible to purchase shares under the
plan reside in such state or foreign country; and/or
o the offer or sale of shares of common stock to such persons would require
us or First Federal 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 when they are exercised. 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 before the completion of the
offering.
FloridaFirst and First Federal 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 which we determine involve the transfer of such
rights.
Expiration Date. The subscription offering will expire at 4:00 p.m.,
^Eastern time, on March 18, 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. The maximum amount of common
stock that any person may purchase in the community offering is 20,000 shares,
or $200,000. 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, 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.
21
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 and community 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
will be permitted to purchase more than 20,000 shares, or $200,000, of common
stock in the syndicated community offering.
If a syndicate of broker-dealers ("selected dealers") is formed to
assist in the syndicated community offering^, a purchaser may pay for his shares
with funds held or deposited with a selected dealer. If an order form is
executed and forwarded to the selected dealer or if the selected dealer is
authorized to execute the order form on behalf of a purchaser, the selected
dealer is required to forward the order form and funds to the Bank for deposit
in a segregated account on or before noon of the business day following receipt
of the order form or execution of the order form by the selected dealer.
Alternatively, selected dealers may solicit indications of interest from their
customers to place orders for shares. Such selected dealers shall subsequently
contact their customers who indicated an interest and seek their confirmation as
to their intent to purchase. Those indicating an intent to purchase shall
execute order forms and forward them to their selected dealer or authorize the
selected dealer to execute such forms. The selected dealer will acknowledge
receipt of the order to its customer in writing on the following business day
and will debit such customer's account on the third business day after the
customer has confirmed his intent to purchase (the "debit date") and on or
before noon of the next business day following the debit date will send order
forms and funds to the Bank for deposit in a segregated account. Although
purchasers' funds are not required to be in their accounts with selected dealers
until the debit date in the event that such alternative procedure is employed
once a confirmation of an intent to purchase has been received by the selected
dealer, the purchaser has no right to rescind his order.
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 ^ May 2, 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.
22
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. If an order is not accepted or the reorganization is not
consummated, First Federal 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 First Federal, as converted, is less
than $37.0 million or more than $57.5 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 on 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 FloridaFirst'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 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
together with any associate or group of persons acting in concert
shall not exceed 24,000 shares, or $240,000, except 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 First
Federal 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 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 on market or financial conditions, the Board of Directors of
First Federal, 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 FloridaFirst increases
23
the maximum purchase limitations, FloridaFirst is only required to
resolicit Persons who subscribed for the maximum purchase amount and
may, in the sole discretion of FloridaFirst, resolicit certain other
large subscribers.
8. If the total number of shares offered increases 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) to fill the Employee Plan's
subscription up to 10% of the adjusted maximum; (ii) if there is an
oversubscription at the Eligible Account Holder level, to fill
unfilled subscriptions of Eligible Account Holders exclusive of the
adjusted maximum; (iii) if 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) if there is an oversubscription at the
other member level, to fill unfilled subscriptions of other members
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. FloridaFirst
or First Federal 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 First Federal 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 First Federal.
The term "associate" of a person is defined in the plan to mean (1) any
corporation or organization other than First Federal or a majority-owned
subsidiary of First Federal 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
equity securities, (2) 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 (3) 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 First Federal, 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.
24
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. If this purchase limitation is violated by any person or
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 First
Federal. 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 after
the 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 First Federal 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 after the reorganization. Except for
institutional investors, all subscription rights under the plan will expire on
the expiration date, whether or not First Federal has been able to locate each
person entitled to such subscription rights. First Federal shall have the right,
in its sole discretion, to permit institutional investors to submit
contractually irrevocable orders in the syndicated community offering at any
time before completing the syndicated community offering. Once tendered,
subscription orders cannot be revoked without the consent of First Federal
unless the reorganization is not completed within 45 days of the expiration
date.
If an stock order form:
o is not delivered and is returned to First Federal by the ^ U.S. Postal
Service or First Federal is unable to locate the addressee;
o is not received or is received after the applicable expiration date;
o is not completed correctly or executed;
o 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, but excluding subscriptions by the Employee Plans or, in
the case of an institutional investor in the syndicated community offering,
by delivering irrevocable orders together with a legally binding commitment
to pay the full purchase price prior to 48 hours before the reorganization
is completed; or
25
o 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 after the offering. Payment for shares of
common stock may be made
o in cash, if delivered in person,
o by check or money order, or
o for shares of common stock subscribed for in the subscription offering, by
authorization of withdrawal from savings accounts maintained with First
Federal.
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 First Federal 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. If the offering is not completed for any reason, all funds submitted
pursuant to the offerings will be promptly refunded with interest as described
above.
26
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 First Federal. Persons with IRAs maintained at
First Federal must have their accounts transferred to an unaffiliated
institution or broker 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 First Federal
can be obtained from the stock information center. Depositors interested in
using funds in a First Federal 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 First Federal 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
129 South Kentucky Avenue, Suite 602, Lakeland, Florida 33801. Its phone number
is (941) 802-1356.
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 First Federal 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 First Federal or registered representatives
of Sandler O'Neill. No officer, director or employee of First Federal 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,
FloridaFirst may not repurchase its shares. During each of the second and third
years following the reorganization, FloridaFirst 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 after it determines that:
o the repurchase program would adversely affect our financial condition;
o the information submitted is not enough to base a conclusion as to whether
our financial condition would be adversely affected; or
o a valid business purpose was not demonstrated.
27
In addition, SEC rules also govern the method, time, price, and number of shares
of common stock that may be repurchased by FloridaFirst and affiliated
purchasers. If, in the future, the rules and regulations regarding the
repurchase of stock are liberalized, FloridaFirst may utilize the rules and
regulations then in effect.
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. First
Federal has agreed to indemnify Feldman Financial under certain circumstances
against liabilities and expenses arising out of or based on any misstatement or
untrue statement of a material fact contained in the information supplied by
First Federal 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 on 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: (1) 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 (2) the denominator will be the
updated valuation of our pro forma market value immediately after the offering
as determined by Feldman Financial.
Feldman Financial has determined that as of December 14, 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 (1) First Federal's financial condition and results of
operations for the year ended September 30, 1998, (2) financial comparisons of
First Federal in relation to financial institutions of similar size and asset
quality and (3) 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 on the independent valuation. The actual number
of shares to be sold in the offering may be increased or decreased before
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, First Federal may increase or decrease the number of
shares to be issued in the reorganization and
28
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 First Federal may also elect to terminate the
offering. If First Federal terminates the offering, purchasers will receive a
prompt refund of their purchase orders, together with interest earned thereon
from the date of receipt to the date of termination of the offering.
Furthermore, any account withdrawal authorizations will be terminated. If 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. If we resolicit, purchasers will be allowed 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 must be approved by 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 First Federal, or both. If the updated estimate of the pro forma market value
of First Federal immediately after 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, FloridaFirst 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 First Federal.
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 on
and assumed the accuracy and completeness of financial and statistical
information provided by First Federal. Feldman Financial did not independently
verify the financial statements and other information provided by First Federal,
nor did Feldman Financial value independently the assets and liabilities of
First Federal. The independent valuation considers First Federal only as a going
concern and should not be considered as a indication of the liquidation value of
First Federal. Moreover, because such independent valuation is based on
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, First Federal 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
29
approval of the OTS, or take such other action as permitted by the OTS in order
to complete the offering.
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.
First Federal 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: (1) assisting in the design and implementation of a marketing strategy
for the offering; (2) assisting First Federal's management in scheduling and
preparing for meetings with potential investors and broker-dealers; and (3)
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 First Federal's employee
benefit plans, any director, officer or employee of First Federal or any members
of their immediate families. If 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. First Federal 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 First
Federal cannot be sold for a period of one year following completion of the
reorganization, except for a disposition of shares after the death of a
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.
For a period of three years following the reorganization, no director
or officer of First Federal 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.
30
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before 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 after 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
Completion of the offering is subject to:
1. completion of the reorganization, which requires approvals from certain
government agencies, the ratification of First Federal's voting
depositor and borrower members, and the receipt of rulings and/or
opinions of counsel as to the tax consequences of the reorganization;
2. the receipt of all the required approvals for the issuance of
common stock in the offering, including the approval of the
OTS; and
3. the sale of a minimum of 1,737,825 shares of common stock.
If conditions 1 and 2 above are not met before we complete the offering, all
funds received will be promptly returned with interest at First Federal's
passbook rate and all withdrawal authorizations will be canceled.
^ First Federal Florida
First Federal is a federally chartered mutual savings institution. It
is converting from the mutual to stock form of ownership as part of its
reorganization. First Federal was originally chartered in 1934 as First Federal
Savings and Loan Association of Lakeland. First Federal became a member of the
Federal Home Loan Bank ("FHLB") System in 1934 and First Federal's deposits are
currently insured by the Savings Association Insurance Fund ("SAIF") as
administered by the FDIC. First Federal is regulated by the Office of Thrift
Supervision ("OTS") and the FDIC.
First Federal 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
its nine offices located in Polk and Manatee Counties in Florida, First Federal
provides retail banking services, with an emphasis on one- to four-family
residential mortgages. Currently, First Federal 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. First Federal 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, First Federal had
31
total assets, deposits and total equity of $419.0 million, $352.2 million, and
$36.1 million, respectively. See "Business of First Federal."
^ FloridaFirst Bancorp
FloridaFirst Bancorp has not yet been organized. It will be
incorporated under federal law as part of the reorganization of First Federal
into the mutual holding company structure. FloridaFirst will serve as a savings
and loan holding company for First Federal after it buys all of First Federal's
stock in the reorganization. FloridaFirst has applied to the Office of Thrift
Supervision for approval to acquire control of First Federal. FloridaFirst has
not yet engaged in any business. A majority of FloridaFirst's stock will, in
turn, be owned by FloridaFirst Bancorp MHC. FloridaFirst will initially have no
significant liabilities. Our cash flow will depend on earnings from the
investment of the portion of net proceeds retained in the reorganization and any
dividends received from First Federal.
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, FloridaFirst will be in a
position after the reorganization, subject to regulatory limitations and
FloridaFirst'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 First Federal. The initial
activities of FloridaFirst are anticipated to be funded by the portion of the
net proceeds retained by FloridaFirst and earnings thereon.
^ FloridaFirst Bancorp MHC
As part of the reorganization, First Federal will organize FloridaFirst
Bancorp MHC as a federally chartered mutual holding company. As long as they
remain depositors of First Federal, persons who had liquidation rights with
respect to First Federal as of the date of the reorganization will continue to
have such rights solely with respect to the Mutual Holding Company after the
reorganization. Voting rights in the Mutual Holding Company will be limited to
its members. The members of the Mutual Holding Company consist of persons who
either have deposits in First Federal or ^ a loan from First Federal which was
outstanding on October 23, 1984 and ^ is still outstanding.
The Mutual Holding Company's principal assets will be the shares of
stock of FloridaFirst received in the reorganization and up to $200,000 received
as its initial capitalization in the reorganization. Immediately after
consummation of the reorganization, it is expected that the Mutual Holding
Company will not engage in any business activity other than its investment in a
majority of the common stock of FloridaFirst and its initial capitalization. The
Mutual Holding Company will be a mutual corporation chartered under federal law
and regulated by the OTS. The Mutual Holding Company will be subject to the
limitations and restrictions imposed on mutual holding companies under federal
law. See "Regulation - Regulation of FloridaFirst."
32
^ Use of Proceeds
The net proceeds will depend on the total number of shares of stock
issued in the offering, which will depend on the independent valuation and
marketing considerations, and the expenses incurred by FloridaFirst and First
Federal in connection with the offering. We estimate that we will receive net
proceeds from the sale of the common stock of between $16.2 million at the
minimum of the offering range and $25.8 million at the maximum, as adjusted of
the offering range. Assuming the sale of $20.4 million of common stock at the
midpoint of the offering range and the purchase of 8% of the shares by the
employee stock ownership plan, the following table shows the manner in which we
will use the net proceeds:
Loan to employee stock ownership plan $ 1,636,000
Investment in First Federal 9,610,000
FloridaFirst working capital 7,974,000
-----------
$19,220,000
===========
These funds will be initially ^ invested in U.S. government and federal
agency securities, marketable securities, or a combination of both. We may also
use the net proceeds to repurchase our stock. See "The Offering - Restrictions
on Repurchases of Shares."
The funds received by First Federal from FloridaFirst in return for the
purchase of all its stock to be issued will be used for general corporate
purposes. These funds will increase First Federal'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,
technological advancements and expansion of its commercial and consumer lending
programs. However, there are no current agreements or arrangements regarding
expansion or the allocation of the proceeds. Net proceeds may also be used by
First Federal to make contributions to the employee stock ownership plan which
in turn would be used to repay the loan from FloridaFirst.
If the employee stock ownership plan does not purchase common stock in
the offering, it may purchase shares of common stock in the market after the
reorganization. If the purchase price of the common stock is higher than $10.00
per share, the amount of proceeds required for the purchase by the employee
stock ownership plan 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 reorganization are adjusted to reflect a
change in the estimated pro forma market value of FloridaFirst and First
Federal. Payments for shares made through withdrawals from existing First
Federal deposit accounts will not result in the receipt of new funds for
investment by First Federal but will result in a reduction of First Federal's
deposits and interest expense as funds are transferred from interest-bearing
certificates or other deposit accounts.
33
^ Dividend Policy
FloridaFirst intends to establish a policy to pay cash dividends. The
initial annual amount of the dividends has not yet been determined. Dividends
will be subject to determination and declaration by FloridaFirst's Board of
Directors. In making its decision, the Board of Directors will consider several
factors, including:
o FloridaFirst's financial condition;
o results of operations;
o tax considerations;
o industry standards; and
o economic conditions
The Mutual Holding Company, as a stockholder of FloridaFirst, is
entitled to receive dividends from FloridaFirst. The board of directors of the
Mutual Holding Company may decide to waive the receipt of dividends in order to
pay a higher dividend to the public stockholders of FloridaFirst. If the Mutual
Holding Company elects not to waive receipt of dividends from FloridaFirst or if
the OTS does not approve such a waiver, the amount of dividends may be adversely
affected. See "Risk Factors - If FloridaFirst Bancorp MHC converts to stock form
in the future, our stockholders will have their ^ ownership interest reduced"
and "Waiver of Dividends by the Mutual Holding Company." There can be no
assurance that dividends will in fact be paid on the stock or that, if paid,
such dividends will not be reduced or eliminated in future periods.
FloridaFirst's ability to pay dividends also depends on the receipt of
dividends from First Federal which is subject to a variety of regulatory
limitations on the payment of dividends. See "Regulation -- Regulation of First
Federal -- Dividend and Other Capital Distribution Limitations." Furthermore, as
a condition to OTS approval of the reorganization, FloridaFirst has agreed that
it will not initiate any action within one year of completion of the
reorganization to pay a special distribution or a return of capital to
stockholders of FloridaFirst. See also "Waiver of Dividends by the Mutual
Holding Company."
In addition, earnings of First Federal 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 First Federal on the amount of earnings
deemed to be removed from the reserves for such distribution. See "Taxation" and
Note 10 of the financial statements. First Federal does not contemplate any
distribution out of its bad debt reserve which would cause such tax liability.
^ Waiver of Dividends by the Mutual Holding Company
The Mutual Holding Company, prior to the declaration of any dividends
by FloridaFirst, will determine whether to apply to the OTS for permission to
waive the receipt of any dividends paid by FloridaFirst 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 Mutual Holding Company
will continue to waive dividends. In waiving dividends, the Board of Directors
must conclude, among other things, that a dividend waiver by the Mutual Holding
Company, which permits retention of capital by FloridaFirst and First Federal,
is in the best interest of the Mutual Holding Company because, among other
reasons:
o the Mutual Holding Company has no need for the dividend for its business
operations;
34
o the cash that would be received by the Mutual Holding Company could be
invested by FloridaFirst and First Federal at a more favorable rate of
return;
o such waiver increases the capital of FloridaFirst and First Federal and
enhances First Federal's business so that customers will continue to have
access to the offices and services of First Federal; and
o such waiver preserves the net worth of the Mutual Holding Company through
its principal asset (the common stock of FloridaFirst), which would be
available for distribution in the unlikely event of a voluntary liquidation
of FloridaFirst and First Federal after satisfaction of claims of
depositors, other creditors and minority stockholders.
If the Mutual Holding Company determines that the waiver of dividends
is in the best interest of the parties involved:
o The Mutual Holding Company will make prior application to the OTS for
approval to waive any dividends declared on the capital stock of
FloridaFirst. Such application will be made on an annual basis with respect
to any year in which the Mutual Holding Company intends to waive such
dividends.
o If a waiver is granted, dividends waived by the Mutual Holding Company will
not be available for payment to minority stockholders and will be excluded
from the capital accounts of First Federal for purposes of calculating any
dividend payments to minority stockholders.
o If a waiver is granted, First Federal will, so long as the Mutual Holding
Company remains a mutual holding company, establish a restricted capital
account in the cumulative amount of any dividends waived by the Mutual
Holding Company for the benefit of the members of the Mutual Holding
Company. The restricted capital account would be senior to the claims of
minority stockholders of FloridaFirst and would not decrease
notwithstanding changes in depositors of First Federal. This restricted
capital account would be added to any liquidation account in First Federal
established in connection with a conversion of the Mutual Holding Company
to stock form and would not be available for distribution to minority
stockholders.
o In any conversion of the Mutual Holding Company from mutual to stock form,
First Federal, ^ FloridaFirst, and the Mutual Holding Company will comply
with the requirements of the OTS.
o If the OTS adopts regulations regarding dividend waivers by mutual holding
companies, the Mutual Holding Company will comply with the applicable
requirements of such regulations. See ^"Mutual Holding Company Conversion
to Stock Form."
Immediately after the reorganization, it is expected that the Mutual
Holding Company's operations will consist of activities relating to its
investment in a majority of the common stock of FloridaFirst and its initial
capitalization. In the future, the Mutual Holding Company may accept dividends
paid by FloridaFirst to be used for other purposes, including purchasing common
stock from time to time in the open market or from FloridaFirst, if permitted.
FloridaFirst 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 Mutual Holding Company
may participate in any such plan. There can be no assurances that the Mutual
Holding Company will accept dividends paid by FloridaFirst, or if such dividends
are
35
accepted, that the Mutual Holding Company will purchase shares of common stock
in the open market. Any purchases of common stock other than from the Mutual
Holding Company will increase the percentage of FloridaFirst's outstanding
shares of common stock held by the Mutual Holding Company and increase the
number of shares eligible to be sold in any subsequent secondary offering or
mutual to stock conversion of the Mutual Holding Company.
^ Mutual Holding Company Conversion to Stock Form
Following completion of the reorganization, the Mutual Holding Company
may elect to convert to stock form in accordance with applicable laws and
regulations. The Mutual Holding Company's directors, who will be the initial
directors of First Federal and FloridaFirst, have no current plans to convert
the Mutual Holding Company 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. If the Mutual Holding Company converts to stock form, minority
stockholders will be entitled to exchange their shares of common stock for
shares of the newly converted mutual holding company in a way that is fair and
reasonable to such stockholders and the Mutual Holding Company. This will
include an appropriate downward adjustment in the exchange ratio to account for:
o the amount of waived dividends; or
o assets received by the Mutual Holding Company, such as dividends received,
which will be ^ transferred to the newly converted company. See "Risk
Factors - If FloridaFirst Bancorp MHC ^ converts to stock form in the
future, our stockholders will have their ownership interest reduced."
Further, if the Mutual Holding Company converts to stock form, any options or
other convertible securities held by any trustee, officer, or employee of
FloridaFirst, will be convertible into the right to acquire shares of the newly
converted mutual holding company, 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 Mutual Holding
Company will always own a majority of the common stock of FloridaFirst.
^ Market for the Stock
FloridaFirst has never issued capital stock. Consequently, there is
not, at this time, any market for the stock. FloridaFirst has received
preliminary approval to have the stock quoted on the National Market of the
Nasdaq Stock Market under the symbol "FFBK." One of the conditions for Nasdaq
quotation is that at least three market makers make, or agree to make, a market
in the stock. FloridaFirst will seek to encourage and assist at least three
market makers to make a market in the stock. Sandler O'Neill intends to help
match orders from buyers and sellers of the stock and may hold the stock as
inventory after the offering, and intends to comply with applicable laws and
regulations, but is under no obligation to do so. While FloridaFirst anticipates
that before completion
36
of the offering it will obtain a commitment from at least two other
broker-dealers to make a market in the stock, there can be no assurance that
there will be three or more market makers for the stock.
An active and liquid market for the stock may not develop or be
maintained. Accordingly, prospective purchasers should consider the risk of not
being able to easily buy or sell the stock. If the stock is not listed on the
National Market, the stock will be quoted and traded on either The Nasdaq
SmallCap Market or the OTC Bulletin Board.
The aggregate price of the stock is based on an independent appraisal
of the pro forma market value of the stock. However, there can be no assurance
that an investor will be able to sell the stock purchased in the offering at
prices in the range of the pro forma book values of the stock or at or above the
initial purchase price of $10.00. See "Pro Forma Data" and "The Offering - Stock
Pricing and Number of Shares to be Offered."
37
^ Capitalization
Set forth below is the historical capitalization of First Federal as of
September 30, 1998, and the pro forma capitalization of FloridaFirst after
giving effect to the offering. The table also gives affect to the assumptions
set forth under "Pro Forma Data." A change in the number of shares sold in the
offering may affect materially the 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
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 stock
pursuant to any stock option plans that may be adopted by FloridaFirst and
First Federal and presented for approval by the minority stockholders after
the offering. An amount equal to 10% of the shares of 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 stock benefit
plans will reduce our earnings" and "Management - Potential Stock Benefit
Plans - Stock Options Plans."
(4) The reduction in additional paid in capital of First Federal reflects the
retention by the Mutual Holding Company of up to $200,000 after the
reorganization.
(5) Assumes that 8.0% of the shares sold in the offering will be purchased by
the employee stock ownership plan, and that the funds used to acquire these
shares will be borrowed from FloridaFirst. For an estimate of the impact of
the loan on earnings, see "Pro Forma Data." First Federal intends to make
scheduled discretionary contributions to the employee stock ownership plan
sufficient to enable the employee stock ownership plan to service and repay
its debt over a ten year period. The amount of shares to be acquired by the
employee stock ownership plan is reflected as a reduction of stockholders'
equity. See "Management - Executive Compensation - Employee Stock Ownership
Plan." If the employee stock ownership plan is unable to purchase 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 stock sold in the
offering is purchased by stock programs within one year following the
reorganization. The stock purchased by the stock programs is reflected as a
reduction of stockholders' equity. See footnote (2) to the table under "Pro
Forma Data." See "Risk Factors - Expenses Associated with Stock Benefit
Plans Will Reduce Our Earnings" and "Management - Potential Stock Benefit
Plans - Stock Programs."
38
^ Pro Forma Data
The actual net proceeds from the sale of the stock cannot be determined
until the offering is completed. However, net proceeds to FloridaFirst are
currently estimated to be between $16.2 million and $22.3 million (or $25.8
million if the independent valuation is increased by 15%) based on the following
assumptions:
o an amount equal to 4% of the shares offered will be awarded pursuant to the
stock programs adopted no sooner than six months following the offering,
funded through open market purchases;
o Sandler O'Neill will receive an advisory and marketing fee equal to 0.75%
of the aggregate purchase price of the shares of stock sold in the
offerings to the public, excluding any shares purchased by any employee
benefit plan of First Federal, and any director, officer or employee of
First Federal or members of their immediate families;
o other fixed expenses of the offering are estimated to be $893,000; and
o the Mutual Holding Company will be capitalized at $200,000, which will
result in a reduction of FloridaFirst's assets and equity by the same
amount.
We have prepared the following table, which sets forth our historical
net earnings and net worth prior to the reorganization and our pro forma
consolidated net income and stockholders' equity following the reorganization.
In preparing this table and in calculating pro forma data, we have made the
following assumptions:
o Pro forma earnings have been calculated assuming the 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.
o The pro forma after-tax yield on the net proceeds is assumed to be 2.75%
for the year ended September 30, 1998, based on an effective tax rate of
37.5%.
o We did not include any withdrawals from deposit accounts to purchase shares
in the offering.
o Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of
stock, as adjusted in the pro forma net earnings per share to give effect
to the purchase of shares by the employee stock ownership plan.
o Pro forma stockholders' equity amounts have been calculated as if the stock
had been sold on September 30, 1998 and, accordingly, no effect has been
given to the assumed earnings effect of the transactions.
39
The following pro forma data relies on the assumptions we outlined
above, and this data does not represent the fair market value of the common
stock, the current value of assets or liabilities, or the amount of money that
would be distributed to stockholders if we liquidated FloridaFirst. The pro
forma data does not predict how much we will earn in the future.
The following tables summarize historical data of First Federal and pro
forma data of FloridaFirst 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 stock following the reorganization.
No effect has been given in the tables to the possible issuance of additional
stock reserved for future issuance pursuant to a stock option plan that may be
adopted by the Board of Directors of FloridaFirst 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."
40
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 FloridaFirst..................... (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 stock sold in the offering will be
purchased by the employee stock ownership plan and that it will borrow
funds from FloridaFirst. The stock acquired by the employee stock
ownership plan is reflected as a reduction of stockholder's equity.
First Federal intends to make annual contributions to this plan in an
amount at least equal to the principal and interest requirement of
41
the loan. This table assumes a 10 year amortization period. See "Management
- Executive Compensation - Employee Stock Ownership Plan." The pro forma
net earnings assumes: (i) that First Federal's contribution to the employee
stock ownership plan 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 employee stock ownership plan shares committed
to be released were considered outstanding for purposes of the net earnings
per share calculations, while all employee stock ownership plan shares were
considered outstanding for purposes of the stockholders' equity per share
calculations. See also "Risk Factors - ^ The expenses related to our
stock-based benefit plans will reduce our earnings" for a discussion of
possible added costs for the employee stock ownership plan.
(2) Gives effect to the stock programs that may be adopted by First Federal
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 stock equal to 4%
of the shares of stock sold in the offering, or 69,513, 81,780, 94,047, and
108,154 shares of 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 First Federal. 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. The issuance
of authorized but unissued shares of stock to the stock plans instead of
open market purchases would dilute the voting interests of existing
shareholders by approximately 1.8% and pro forma net income per share would
be $0.72, $0.62, $0.55 and $0.49 at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, and pro forma stockholders'
equity per share would be $13.51, $12.11, $11.08 and $10.19 at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively.
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 FloridaFirst and First Federal will continue to be
substantially restricted after the reorganization. See "Dividend Policy,"
"The Reorganization - Effects of Reorganization Liquidation Rights" and
"Regulation - Regulation of First Federal - Dividends and Other Capital
Distribution Limitations."
(4) No effect has been given to the issuance of additional shares of stock
pursuant to the stock option plans that may be adopted by First Federal
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 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 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."
42
^ Historical and Pro Forma Capital Compliance
The following table presents First Federal's historical and pro forma
capital position relative to its capital requirements as of September 30, 1998.
Pro forma capital levels assume receipt by First Federal of 50% of the net
proceeds of the offering. Pro forma capital levels are then reduced by employee
stock ownership plan purchases of stock and the stock programs to be adopted.
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 First Federal, see "Regulation - Regulation of First
Federal - 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
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ---------
(Dollars in thousands)
GAAP Capital(3)..... $36,107 8.6% $ ^ 42,109 9.9% $ 43,263 10.2% $ 44,419 10.4% $ 45,746 10.7% ^
====== === =========== ====== ========== ====== ========== ===== ======== =====
Tangible Capital:
Actual or
Pro Forma....... $35,887 8.6% $ 41,889 9.9% $ 43,043 10.1% $ 44,199 10.3% $ 45,526 10.6%
Required.......... 6,286 1.5 6,376 1.5 6,393 1.5 6,410 1.5 6,430 1.5
------ --- ----------- ----- ---------- ----- ---------- ----- -------- -----
Excess.......... $29,601 7.1% $ 35,514 8.4% $ 36,650 8.6% $ 37,789 8.8% $ 39,096 9.1%
====== === =========== ===== ========== ===== ========== ===== ========= =====
Core Capital:
Actual or
Pro Forma....... $35,887 8.6% $41,889 9.9% $ 43,043 10.1% $ 44,199 10.3% $ 45,526 10.6% ^
Required(4)....... 16,762 4.0 17,002 4.0 17,048 4.0 17,094 4.0 17,147 4.0
------ --- ----------- ----- ---------- ----- ---------- ----- --------- -----
Excess............ $19,125 4.6% $ 24,888 5.9% $ 25,995 6.1% $ 27,105 6.3% $ 28,379 6.6%
====== === =========== ===== ========== ===== ========== ===== ========= =====
Risk-Based Capital:
Actual or
Pro Forma(5)(6). $38,451 15.5% $ 44,453 17.7% 45,607 18.2% 46,763 18.6% $ 48,090 19.1%
Required.......... 19,795 8.0 20,035 8.0 20,082 8.0 20,128 8.0 20,181 8.0
------ ---- ----------- ----- ---------- ----- ---------- ----- --------- -----
Excess............ $18,656 7.5% $ 24,418 9.7% $ 25,526 10.2% $ 26,635 10.6 % $ 27,909 11.1%
====== ====== =========== ===== ========== ===== ========== ===== ========= =====
- -----------------
(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 "Regulation - Regulation of First Federal-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.
43
^ Recent Developments
The information set forth below at or for the periods ended December
31, 1998 and 1997, is unaudited and, in the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results for the unaudited periods have been made. The
results of operations for the three months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the entire year
or any other period. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements contained elsewhere in this prospectus.
Selected Financial Data
At December 31, At September 30,
1998 1998
--------------- ----------------
(Dollars in thousands)
Total Amount of:
Assets................................. $429,899 $419,041
Loans receivable, net.................. 352,574 338,610
Investment securities.................. 58,950 60,961
Cash and cash equivalents.............. 7,368 5,217
Deposits............................... 348,016 352,180
FHLB advances.......................... 41,000 21,000
Equity (restricted).................... 36,565 36,107
Number of:
Real estate loans outstanding.......... ^ 4,477 4,433
Deposit accounts....................... 38,016 38,409
Full service offices................... 9 9
Summary of Operations
For the Three Months Ended
December 31,
--------------------------
1998 1997
--------- ----------
(In thousands)
Interest and dividend income............. $7,753 $ 8,893
Interest expense......................... 4,282 5,365
----- -----
Net interest income.................... 3,471 3,528
Provision for loan losses................ 150 105
------ ------
Net interest income after provision
for loan losses........................ 3,321 3,423
Other income............................. 542 468
Other expense............................ 2,840 3,035
----- -----
Income before income taxes............... 1,023 856
Provision for income taxes............... 379 300
------ ------
Net income............................... $ 644 $ 556
====== ======
44
Selected Financial Ratios
At or For the
Three Months Ended
December 31,
-------------------
1998(1) 1997(1)
------- -------
Performance Ratios:
Return on average assets ............................. .61% .47%
Return on average equity ............................. 7.01 6.40
Net interest rate spread ............................. ^ 2.89 ^ 2.69
Net interest margin on average interest-earning assets ^ 3.38 ^ 3.09
Average interest-earning assets to average
interest bearing liabilities ......................... 112 109
Efficiency ratio ..................................... 71 76
Asset Quality Ratios:
Non-performing loans to total assets ................. .25% .41%
Non-performing loans to total loans, net ............ .30 .53
Non-performing assets to total assets ............... .29 .59
Net charge-offs to average loans outstanding ........ .05 .07
Allowance for loan losses to total loans ............ .76 .74
Capital Ratios:
Average equity to average assets ratios .............. 8.68 7.38
Equity to assets at period end ....................... 8.52 7.42
- -----------------
(1) Annualized where appropriate.
45
^ Management's Discussion and Analysis
^ of Recent Developments
Comparison of Financial Condition at December 31, 1998 and September 30, 1998
Assets. Total assets increased $10.9 million, or 2.6%, to $429.9
million at December 31, 1998 from $419.0 million at September 30, 1998. The
increase in total assets resulted primarily from a $14.0 million, or 4.1%
increase, in the loan portfolio.
Liabilities. Total liabilities increased $10.4 million, or 2.7%, to
$393.3 million at December 31, 1998 from $382.9 million at September 30, 1998.
The increase in total liabilities resulted primarily from a $20.0 million
increase in FHLB advances utilized to fund the loan growth, partially offset by
a $4.2 million decrease in deposits and a $4.0 million decrease in amounts due
to banks. The decrease in deposits resulted from an outflow of certificates of
deposit due to the continued low interest rate environment.
Equity. The increase in First Federal's equity reflects the $644,000 in
net income for the three months ended December 31, 1998 and a decrease of
$186,000 in the net unrealized gain on investments available for sale. At
December 31, 1998, First Federal was in full compliance with all regulatory
capital requirements. Tangible, core, and risk-based capital ratios were 8.5%,
8.5%, and 14.9%, respectively.
Comparison of Operating Results for the Three Months Ended December 31, 1998 and
December 31, 1997
Net Income. Net income for the three months ended December 31, 1998
increased 15.8% to $644,000, compared to $556,000 for the same period in 1997.
Net income was affected by an overall reduction in non-interest expenses related
to the Branch Sale.
Net interest income decreased $57,000, or 1.6%, for the three months
ended December 31, 1998 compared to the three months ended December 31, 1997.
This slight decrease resulted from a decrease in interest income of $1.1 million
which substantially offset a smaller decrease in interest expense. Other income
increased to $542,000 for the three months ended December 31, 1998 from $468,000
for the three months ended December 31, 1997, resulting primarily from increased
service fees on customer accounts. Other expenses decreased to $2.8 million for
the three months ended December 31, 1998 from $3.0 million for the three months
ended December 31, 1997, due primarily to cost savings related to the Branch
Sale.
Interest Income. Total interest income decreased to $7.8 million for
the three months ended December 31, 1998 from $8.9 million for the three months
ended December 31, 1997, as a result of a 10% decrease in average
interest-earning assets and a 25 basis point decrease in the overall portfolio
yield. Average interest-earning assets decreased to $411.0 million for the three
months ended December 31, 1998 from $456.9 million for the three months ended
December 31, 1997. This decrease resulted from the $52.5 million transfer of
assets ($44.6 million in loans) in the Branch Sale, partially offset by new loan
growth. The average rate earned on interest-earning assets decreased to 7.54%
for the three months ended December 31, 1998 from 7.79% for the three months
ended December 31, 1997, a decrease of 25 basis points, Interest income on loans
decreased $645,000 to $6.8 million for the three months ended December 31, 1998
from $7.4 million for the three months ended December 31, 1997. This 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 40
46
basis points during the three months, reflecting the general downward trend in
interest rates, Interest income on investment securities and other investments
decreased $495,000 to $958,000 for the three months ended December 31, 1998 from
$1.5 million for the three months ended December 31, 1997. This decrease was
primarily the result of a $31.6 million decrease in the average balance to $64.0
million in 1998 from $95.6 million in 1997. The decrease in the average balance
of investment securities was primarily due to maturities and calls on investment
securities. The cash from these activities were used to fund new loan growth.
Also the average yield on investment securities and other investments decreased
by 9 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 $1.1 million for
the three months ended December 31, 1998 from $5.4 million for the three months
ended December 31, 1997, as a result of a decrease in average interest-bearing
liabilities and a 44 basis point decrease in the average cost of funds. Average
interest-bearing liabilities decreased to $367.9 million for the three months
ended December 31, 1998 from $421.0 million for the three months ended December
31, 1997. The decrease is attributable to the sale of deposits in the Branch
Sale. The average interest rate paid on interest-bearing liabilities was 4.66%
for the three months ended December 31, 1998 compared to 5.10 % for the three
months ended December 31, 1997, a decrease of 44 basis points. The decrease in
rates paid on interest-bearing liabilities reflects market rates as well as
management's decision to use FHLB advances to control its cost of funds and to
lengthen the maturity of its liabilities. Interest expense on deposits decreased
$1.4 million to $3.9 million for the three months ended December 31, 1998 from
$5.3 million for the three months ended December 31, 1997. This decrease was a
result of a decrease of $84.6 million in the average balance of interest-bearing
deposits to $336.4 million in 1998 from $421.0 million in 1997 and a decrease of
46 basis points in the average rate to 4.64 % in 1998 from 5.10% in 1997, The
decrease in the average balance of interest-bearing deposits resulted from the
$55.5 million in deposits sold in the Branch Sale and a decision to use FHLB
advances as a funding source. The average balance of FHLB advances in the three
months ended December 31, 1998 were $31.5 million at an average cost of 4.81%.
Provision for Loan Losses. The provision for loan losses was $150,000
for the three months ended December 31, 1998 compared to $105,000 for the three
months ended December 31, 1997. The allowance for loan losses was $2.7 million
at December 31, 1998 and 1997. The current allowance represents .76% of total
loans outstanding at December 31, 1998. First Federal had net charge-offs of
$40,000 for the three months ended December 31, 1998 compared to net charge-offs
of $62,000 for the three months ended December 31, 1997.
Other Income. The increase in other income is attributable to fees and
service charges which increased $74,000, or 15.8% from 1997 to 1998, this
reflects First Federal's continuing emphasis on charging appropriate fees for
its services.
Other Expense. Other expense decreased by $195,000 to $2.8 million for
the three months ended December 31, 1998 from $3.0 million for the three months
ended December 31, 1997. Compensation and employee benefits increased $48,000
due to additional personnel and increased benefit costs. Although certain cost
savings were realized through the Branch Sale, new staff personnel were added to
enhance the transition into a full service community bank. Also, loan production
generated through commissioned loan originators was 32% higher in the 1998
period. In addition, benefit programs were changed to be more competitive in the
banking environment. Other expenses decreased $158,000 due to general banking
and loan related expenses that were saved in connection with the Branch Sale.
47
^ Selected Financial and Other Data
Selected Financial Data
At September 30,
----------------------------------------------------------------------------
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
- -----------
(1) During fiscal year 1998, First Federal sold five branches (and $55.5
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
sale of branches, First Federal transferred $44.6 million in loans and
$705,000 in premises and equipment.
48
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 17,689 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
======== ======== ======= ====== =======
- -----------------
(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.
49
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 .......................... 2.59 2.85 2.68 2.38 2.83
Net interest margin on average
interest-earnings assets ........................ 3.04 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 First Federal'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 ........ 8.31 7.25 7.41 7.22 6.72
assets)
Equity to assets at period end .................... 8.62 7.20 6.94 7.13 6.98
50
^ Management's Discussion and Analysis
^ of Financial Condition and Results of Operations
General
Management's discussion and analysis of First Federal's financial
condition and results of operations is intended to provide assistance and
understanding of First Federal'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-2.
First Federal's results of operations primarily depend 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. First Federal'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, depend on, 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. First Federal's results of operations are affected by
general economic and competitive conditions, including changes in prevailing
interest rates and the policies of regulatory agencies.
Forward - Looking Statements
This document contains statements that project the future operations of
FloridaFirst which involve risks and uncertainties. FloridaFirst's actual
results may differ significantly from the results discussed in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors" beginning on page 10
of this document.
Business Strategy
First Federal's business strategy has been to operate as a
well-capitalized independent community savings bank dedicated to providing
quality service at competitive prices. Generally, First Federal 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 First
Federal'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 First Federal to modify the existing operating
strategy in order to achieve greater growth and profitability. Specifically,
First Federal intends to:
o increase its percentage of commercial and consumer loans and commercial
deposit accounts, among other products;
o expand within First Federal's existing market area through its branch
network and through its lending and deposit taking services; and
o invest in appropriate technology that will enable First Federal to serve
its customers effectively.
51
By seeking to broaden the range of its products and services offered,
First Federal believes it will offset the declining margins in the competitive
market for one- to four-family residential mortgage loans.
Highlights of First Federal's business strategy are as follows:
Community-Oriented Institution. Based on total assets, First Federal is
the largest independent financial institution headquartered in Polk County,
Florida. First Federal is committed to meeting the financial needs of the
communities in which it operates. Management believes that First Federal 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 First Federal can be more effective
in servicing its customers than many of its non-local competitors because of
First Federal's ability to quickly and effectively provide senior management
responses to customer needs and inquiries. First Federal intends to maintain its
community orientation by continuing to emphasize traditional deposit and loan
products, primarily single-family residential mortgages. First Federal has
recently added several convenience services to enhance its capabilities as a
full service community bank, including the issuance of debit cards and placing
automated teller machines at five of its branches. First Federal expects that,
by the end of 1999, all of its branches will be equipped with automated teller
machines. A complete analysis of First Federal'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 First Federal developed a
product and branch profitability model to analyze its operations. Based on First
Federal's strategic analyses and other discussions relative to future growth and
utilization of capital, First Federal 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 First Federal's Tri-County
Region (the "Branch Sale"). The branches were not contiguous to First Federal'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. First Federal believed its
capital could be more effectively utilized in Polk and Manatee Counties.
The Branch Sale resulted in the sale of $55.5 million in deposits.
First Federal transferred loans totaling $44.6 million that included the
consumer and mortgage loans from the region and certain mortgage loans from Polk
County to satisfy the deposit sale. First Federal realized a $3.0 million gain
on the Branch Sale. A similar sale is not anticipated in the foreseeable future.
However, First Federal will continue to review all opportunities that may
benefit the business of First Federal.
Commercial Banking. First Federal 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,
First Federal'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.
First Federal should realize a positive impact on its net interest
margin since commercial customers generally provide a higher loan yield and a
source of lower cost funds. The risks of commercial lending relate to the source
of repayment of the loan which is weighted toward the ability to repay versus
being primarily collateral dependent.
52
In 1998, First Federal hired a senior commercial loan officer to head
up its lending and credit activities. Two additional commercial loan staff
members were added to support First Federal's increased activities in this area.
To further enhance its transition to a full service community bank, First
Federal plans to hire additional personnel experienced in commercial lending and
will increase its marketing efforts on smaller businesses operating in First
Federal's market areas.
Residential Mortgage Lending. Since its inception, First Federal has
originated mortgage loans and held most of the loans in its loan portfolio.
First Federal 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 totaled $272.0 million, or 75.9%
of First Federal's loan portfolio. Generally, the yield on mortgage loans
originated by First Federal is greater than that of mortgage-backed securities
purchased by First Federal.
First Federal is the top residential construction lender in Polk
County. Although First Federal 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 when construction is completed and have less credit risk since
the borrower has previously been qualified for the permanent loan under First
Federal'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. First Federal 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
First Federal's earnings have historically depended primarily on First
Federal'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 (a) the difference between rates of interest
earned on First Federal's interest-earning assets and rates paid on its
interest-bearing liabilities ("interest rate spread") and (b) the relative
amounts of its interest-earnings assets and interest-bearing liabilities.
53
Average Balance Sheet. The following table sets forth certain
information relating to First Federal at and for the periods indicated. The
average 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 alance 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 1.94 $ 25,177 $ 469 1.86 24,343 $ 607 2.49 $ 21,276 $ 539 2.53
Savings accounts............ 37,758 1.77 41,456 859 2.07 48,155 1,204 2.50 49,396 1,235 2.50
Money market accounts....... 18,091 3.99 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 2,647 135 5.10 -- -- -- -- -- --
------- ------- ------- ------- ------- -------- --------
Total interest-bearing
liabilities.............. 362,687 4.65% 385,729 $18,966 4.92 406,203 $19,702 4.85 389,187 $18,961 4.87
====== ====== ======
Non-interest-bearing
liabilities(3)............. 20,247 15,246 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% 2.59% 2.85% 2.68%
===== ====== ====== ======
Net margin on interest-
earning assets(5).......... 3.37% 3.04% 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 First Federal's investment in FHLB stock.
(5) Net margin on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
54
Rate/Volume Analysis. The relationship between the volume and rates of
First ^ Federal's interest-bearing assets and interest-bearing liabilities
influences First ^ Federal's net interest income. The following table reflects
the sensitivity of First Federal's interest income and interest expense to
changes in volume and in prevailing interest rates during the periods indicated.
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 ..................... $ (75) $ (588) $ (663) $ 4,165 $ 145 $ 4,310
Investment securities and other ...... (739) (496) (1,235) (2,009) (205) (2,214)
------- ------- ------- ------- ------- -------
Total interest-earning assets ....... $ (814) $(1,084) $(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
======= ======= ======= ======= ======= =======
55
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. Because the majority of First Federal's assets
and liabilities are sensitive to changes in interest rates, First Federal's most
significant form of market risk is interest rate risk, or changes in interest
rates. First Federal, is vulnerable to an increase in interest rates to the
extent that interest-bearing liabilities mature or reprice more rapidly than
interest-earning assets. The lending activities of First Federal have
historically emphasized the origination of long-term, fixed rate loans secured
by single-family residences. 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 First Federal'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
First Federal 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) First Federal seeks to
originate commercial and consumer loans with adjustable rate features or fixed
rate loans with short maturities; (b) First Federal 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) First
Federal seeks to attract low cost checking and transaction accounts which tend
to be less interest rate sensitive when interest rates rise; and (d) First
Federal seeks, when market conditions permit, to originate and hold in its
portfolio adjustable rate loans which have annual interest rate adjustments.
First Federal also maintains an investment portfolio that provides a stable cash
flow, thereby providing investable funds in varying interest rate cycles.
First Federal has also made a significant effort to maintain its level
of lower cost deposits as a method of enhancing profitability. At September 30,
1998, First Federal had 25.6% of its deposits in low-cost passbook, checking and
money market accounts. These deposits have traditionally remained relatively
stable and are expected to be only moderately affected in a period of rising
interest rates. This stability has enabled First Federal to offset the impact of
rising rates in other deposit accounts.
Quantitative Analysis. Exposure to interest rate risk is actively
monitored by management. First Federal's objective is to maintain a consistent
level of profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. First Federal 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.
56
The following table presents First Federal's NPV as of September 30,
1998. The NPV was calculated by the OTS, based on information provided by First
Federal.
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, First Federal's management does not expect
current interest rates to have a material adverse effect on First Federal'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. After 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 if our borrowers
are unable to meet their repayment obligations as interest rates 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 $44.6 million
in loans in connection with the Branch Sale which was partially offset by a
$27.7 million increase in net loans outstanding from new originations; a
reduction of $14.5 million in First Federal'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 $55.5
million in deposits in connection with the Branch Sale; and a $34.9 million
decrease in deposits, primarily certificates of deposit due to First Federal'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 First Federal's strategy to reduce its
57
cost of funds. The due to banks balance at September 30, 1998 was a temporary
timing difference created by a large volume of checks that cleared on the last
day of the year, causing an overdraft in the account. However, First Federal's
federal funds investment account, maintained with the same bank, had sufficient
funds to cover the checks cleared. The overdrafted account was reclassified as a
liability for financial reporting purposes. Funds from the investment account
were transferred the next day to satisfy the obligation.
Equity. The increase in First Federal'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:
(In millions)
-------------
Cash provided by operations $ 2.5
FHLB advances 21.0
Decrease in net deposits (excluding Branch Sale) (19.0)
Maturities of and repayments on investment securities 47.9
Purchases of investment securities (34.0 )
Cash required to complete Branch Sale (10.2)
Net increase in loans (excluding Branch Sale) (30.3)
Other net 5.5
------
Net decrease in cash $(16.6)
======
First Federal 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
First Federal - 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 First
Federal's liquidity, capital or operations nor is management aware of any
current recommendation by regulatory authorities, which if implemented, would
have such an effect.
58
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 First Federal's employee
benefit plans. The changes relate mainly to the freezing of benefits under
the existing defined benefit pension plan ($1.7 million) and the adoption
of a directors' retirement plan ($410,000). 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 $44.6 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 7 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
59
attributable to the sale of $55.5 million in deposits in January 1998 when First
Federal 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 4.92% for the year ended September 30, 1998
compared to 4.85% for the year ended September 30, 1997, an increase of 7 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 7 basis points in the average rate to 4.92% in 1998 from 4.85% in
1997. First Federal 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 experience, volume and type of
lending conducted by First Federal, industry standards, the level and status of
past due and nonperforming loans, the general economic conditions in First
Federal's lending area and other factors affecting the collectibility of First
Federal'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 increase in the provision for loan losses relates primarily to
large charge-offs during fiscal 1998 that reduced the allowance for loan losses
below First Federal's policy guidelines. The allowance for loan losses declined
from September 30, 1997 to September 30, 1998, primarily due to a reduction in
net loans outstanding resulting from the Branch Sale. 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. First Federal
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 First Federal -- NonPerforming Loans and Problem Assets." First
Federal 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
First Federal's continuing emphasis on charging appropriate fees for its
services. First Federal 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 First Federal'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.
FloridaFirst expects increased expenses in the future as a result of
the establishment of the employee stock ownership plan, 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).
60
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 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 4.85% for the
year ended September 30, 1997 compared to 4.87% for the year ended September 30,
1996, a decrease of 2 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 First Federal, industry standards, the level and status of
past due and nonperforming loans, the general economic conditions in First
Federal's lending area and other factors affecting collectibility of First
Federal'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. First Federal's policy guidelines for establishing the
allowance for loan losses considers the amount and mix of loans outstanding, in
addition to a review of classified loans. Net loans outstanding increased $34.2
during the year ended
61
September 30, 1997, and increased $60.7 in the preceding fiscal year. Based
primarily on the volume of loan growth in the respective years, the provision
for loan losses in 1997 was less than the provision required in 1996. 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. First Federal 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. First Federal 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, First Federal recorded a
$154,000, or 11.8%, increase in fees and service charges as First Federal 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 on the income and expenses incurred during the year.
The low effective tax rate reflected for 1996 is attributable to certain
adjustments deemed necessary by First Federal. These adjustments are not
anticipated to be recurring and should not have any effect on the financial
condition of First Federal 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 First Federal as of this date, but will apply this statement
beginning 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 Statement No.
130. For First Federal, 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
62
report (1) certain financial and descriptive information about its reportable
operating segments (as defined), and (2) 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 First Federal after its
reorganization. Statement No. 131 is not expected to have a significant impact
on First Federal'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 First Federal.
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 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 this Statement. Earlier application 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 First Federal's financial statement presentations.
Year 2000 Readiness Disclosure
Rapid and accurate data processing is essential to First Federal'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 First Federal, contains numerous forward looking statements based on
inherently uncertain information. The cost of the project and the date on which
First Federal 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
63
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 First
Federal or FloridaFirst.
First Federal places a high degree of reliance on computer systems of
third parties, such as customers, suppliers, and other financial and
governmental institutions. Although First Federal 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 First Federal.
First Federal'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." The Year 2000 Committee is responsible for
the Plan with the Board of Directors receiving Year 2000 progress reports on a
quarterly basis. Our primary operating systems, as provided by a third party
service bureau ("External Provider"), have been tested satisfactorily. The main
hardware and software used to serve our customer base and maintain the customer
transaction histories and company accounting records are currently operating on
Year 2000 compliant systems.
An OTS on-site examination was conducted in April 1998, and based on
the examination results, First Federal was progressing satisfactorily towards
completing the Plan requirements.
The primary operating software for First Federal is maintained by
the External Provider. First Federal is maintaining ongoing contact with this
vendor so that modification of the software for Year 2000 readiness is a top
priority. First Federal 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 First Federal's
current operations is Year 2000 compliant.
First Federal has contacted all other material vendors and suppliers
regarding their Year 2000 readiness. Each of these third parties has delivered
written assurance to First Federal that they expect to be Year 2000 compliant
prior to the Year 2000. First Federal 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.
No contracts, written assurances, or oral assurances with First Federal's
material vendors, systems providers, and suppliers include any type of remedy or
penalty for breach of contract in the event that any of these parties are not
year 2000 compliant.
First Federal has identified 19 vendors and systems as mission critical
and 68% of First Federal's mission critical vendors are Year 2000 compliant. The
only critical vendors that have not confirmed that they are Year 2000 compliant
are the utility companies and some of our correspondent banks.
Testing has been completed on the most significant vendor applications,
except the utilities as noted above, however, final testing remains on a few
critical applications. This final testing, and development of contingency plans,
is expected to be completed for all critical and important applications and
services by June 30, 1999. Most of the items identified as minor are services
that are performed by outside vendors. We have received communication from these
vendors indicating they will be in compliance for Year 2000 without any
disruption in service. Appropriate testing, if possible, and any related
contingency plans would be performed in the second and third quarter of 1999.
64
We are unable to test the Year 2000 readiness of our significant
suppliers of utilities. We are relying on the utility companies' internal
testing and representations to provide the required services that drive our data
systems.
Software provided by our External Provider is supported by a
contractual agreement that states the software will be Year 2000 compliant prior
to January 1, 2000. The contracts for our other systems and services do not
contain similar statements since they have longer terms and were not subject to
specific contract negotiation in the past few years.
All non-information technology providers that were identified have been
contacted. They have assured us that the Year 2000 will not be an issue or that
the issue will be satisfactorily resolved prior to the end of 1999.
Major commercial loan customers (loan balances in excess of $500,000)
have been contacted in writing. In addition, the commercial loan relationship
managers have implemented an active telephone and personal contact program with
all these customers to determine any potential exposure that might be present
due to the customer's failure to prepare adequately for the Year 2000. This
contact program should be completed by March 31, 1999. Any potential risk
exposure will be identified and adequate consideration given to adjusting the
loan loss provision.
As a practical matter, individual mortgage loan, consumer loan and
smaller commercial loan customers were not contacted regarding their Year 2000
readiness. It was deemed to be beyond the scope of our testing parameters to
contact these borrowers. Further, most of these are individuals with adequate
collateral for their loans.
If the Plan fails to significantly address the Year 2000 issues of
First Federal, the following, among other things, could negatively affect First
Federal:
(a) utility service companies may be unable to provide the
necessary service to drive our data systems or provide
sufficient sanitary conditions for our offices;
(b) our primary software provider could have a major malfunction
in its system or their service could be disrupted due to its
utility providers, or some combination of the two; or
(c) First Federal may have to transact its business manually.
First Federal will attempt to monitor these uncertainties by continuing
to request an update on all critical and important vendors throughout the
remainder of 1999. If First Federal identifies any concern related to any
critical or important vendor, the contingency plans will be implemented
immediately to assure continued service to First Federal's customers.
Costs will be incurred to replace certain non-compliant software and
hardware. First Federal 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 First Federal could incur significant costs. If the
External Provider fails to maintain its system in compliant state or incurs
other obstacles prior to Year 2000, First Federal would likely experience
significant data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant negative affect on our earnings.
65
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 First Federal, 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 First Federal.
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 First Federal's operations. As a
result, interest rates have a greater impact on First Federal'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 FloridaFirst
After the reorganization we will own all of the stock of First Federal.
We have not yet engaged in any significant business. Before the reorganization,
we will not transact any material business. We will invest our initial capital
as discussed in the "Use of Proceeds" section. In the future, we may pursue
other business activities, including mergers and acquisitions, investment
alternatives and diversification of operations. There are, however, no current
plans for such activities. Initially, we will not maintain offices separate from
those of First Federal or employ any persons other than their officers. Company
officers will not be separately compensated for their service.
^ Business of First Federal
General
First Federal 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, First Federal originates commercial real
estate loans and offers checking accounts and other credit facilities to
businesses within its market area. At September 30, 1998, First Federal had
total assets, deposits and equity of $419.0 million, $352.2 million, and $36.1
million, respectively.
First Federal 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 First
Federal'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.
66
Market Area and Competition
First Federal operates seven offices (including its main office) in
Polk County and two offices in Manatee County. Polk County is in central Florida
and Manatee County is located in west central Florida. There are approximately
680,000 residents and 268,000 households within First Federal'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. First Federal
operates primarily in Lakeland and Winter Haven. Polk County is positioned for
continued growth as it is located 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. First Federal operates five offices in Lakeland, two in Winter Haven,
and two in Bradenton.
The Polk County economy has depended on the citrus and phosphate mining
industries for a long time. 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, First Federal ranked fifth among
FDIC insured financial institutions operating in Polk County. First Federal is
the only remaining thrift institution based in Polk County and had a deposit
market share of 7.9%. First Federal 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.
First Federal faces strong competition in its primary market area for
the attraction of retail deposits and in the origination of loans. First
Federal's most direct competition for deposits has historically come from
commercial banks, thrift institutions, and credit unions operating in its
primary market area. First Federal's competition for loans also comes from
banks, thrifts, and credit unions, in addition to mortgage bankers and brokers.
First Federal'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 First Federal.
67
Lending Activities
General. First Federal 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. First Federal'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.
68
Loan Portfolio Composition. The following table analyzes the
composition of First Federal'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.
69
Loan Maturity Schedule. The following table sets forth the maturity or
repricing of First Federal'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. First Federal's primary lending activity consists
of the origination of one- to four-family residential mortgage loans secured by
property located in First Federal's market area. First Federal 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. First Federal 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%. First Federal
originates fixed rate and adjustable rate loans for retention in its portfolio.
A mortgage loan originated by First Federal, whether fixed rate or adjustable
rate, can have a term of up to 30 years.
70
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.
The majority of First Federal'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, First Federal also
originates both fixed and adjustable residential loans that do not conform to
FNMA guidelines. Substantially all of First Federal's residential mortgages
include "due on sale" clauses, which give First Federal 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 First Federal'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. First Federal
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 First Federal makes
disbursements for such items as real estate taxes and hazard insurance premiums
and mortgage insurance premiums as they become due.
Construction Lending. First Federal 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 First Federal's residential
construction loans were made to individual homeowners. After the house is
constructed, 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. First
Federal's risk of loss on a construction loan depends largely on the accuracy of
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 after the project is completed 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.
First Federal 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, First Federal
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. First Federal originates
commercial real estate mortgage loans and, to a lesser extent, loans on
multi-family dwellings and developed and undeveloped land. First Federal'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
71
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 loans are within First Federal's market area
and all are within the State of Florida. As of September 30, 1998, First Federal
had commercial real estate loans, totalling $16.1 million, or 4.5% of First
Federal's total loan portfolio. First Federal'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 have a
significantly greater risk than that which is involved with single family real
estate lending. The repayment of these loans typically depends 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 First Federal'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. First Federal
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 First Federal's total loan portfolio and consist
primarily of direct and indirect auto loans and home equity loans and credit
lines. To a lesser extent, First Federal originates lines of credit, loans
secured by savings accounts and other consumer loans. Consumer loans are
originated in First Federal's market area and generally have maturities of up to
10 years. For savings account loans, First Federal 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 depend 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 First Federal 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 depend
on whether any value remains after collection by a holder with a higher priority
than First Federal. Finally, the application of various federal laws, including
federal and
72
state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans after a default.
At September 30, 1998, 70% of First Federal's automobile loans
outstanding were loans originated through local automobile dealerships. Although
this type of lending generally carries a greater risk factor, First Federal 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 First Federal 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, First Federal'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 First
Federal'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 First
Federal from this offering will increase its lending limit.
Loan Solicitation and Processing. First Federal'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.
After receiving a 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,
First Federal'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 First Federal
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 First
Federal, tax escrow and the notice of requirement of insurance coverage to be
maintained to protect First Federal's interest. First Federal 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. First Federal generally grants commitments to fund
fixed and adjustable-rate single-family mortgage loans for periods of 60 days at
a specified term and interest
73
rate. The total amount of First Federal'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, First Federal receives loan origination and commitment fees for
originating or purchasing certain loans. Since most loans are originated without
points being charged, First Federal has assessed customers certain fees related
to underwriting and document preparation. First Federal 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.
First Federal 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. First Federal'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, First Federal may
modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his financial affairs and First Federal 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 First Federal within 90 days, First Federal 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 First Federal 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 First Federal. 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 First Federal's
collection efforts is through telephone contact and a sequence of collection
letters. If First Federal is unable to resolve the delinquency within 90 days or
in some situations shorter time periods, First Federal will pursue all available
legal remedies. First Federal's commercial lenders are required to evaluate each
assigned account on a case-by-case basis, within the parameters of First
Federal'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, First Federal 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.
Non-Performing Assets. The following table provides information
regarding First Federal's non-performing loans and other non-performing assets
as of the end of each of the last five fiscal
74
years. As of each of the dates indicated, First Federal 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, First Federal foreclosed on and sold
the properties securing the loans which consisted of six individual houses.
During fiscal year 1998, First Federal 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, First
Federal 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.
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 First Federal'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.
75
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. First Federal 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. First Federal 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 on 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 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:
76
o trends in delinquencies and nonaccruals;
o trends in volume, terms and portfolio mix;
o new credit products;
o changes in lending policies and procedures;
o changes in the outlook for the local, regional and national economy; and
o peer group comparisons.
At least quarterly, First Federal'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:
o the estimated market value of the underlying collateral of problem loans;
o prior loss experience;
o economic conditions; and
o overall portfolio quality.
Provisions for losses are charged against earnings in the period they
are established. First Federal had $2.6 million in allowances for loan losses at
September 30, 1998.
While First Federal believes it has established its existing allowance
for loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing First Federal's loan portfolio, will not request First
Federal to significantly increase its allowance for loan losses, or that general
economic conditions, a deteriorating real estate market, or other factors will
not cause First Federal to significantly increase its allowance for loans
losses, therefore negatively affecting First Federal's financial condition and
earnings.
In making loans, First Federal 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, First Federal'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 First Federal
had been litigating for several years. Final resolution and repayment of the
loan occurred in 1998 with First Federal incurring a loss approximating
$140,000. Another large charge-off involved loans made to a local builder for
the construction of single family houses. First Federal 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 First Federal's policy to review its loan portfolio, in
accordance with regulatory classification procedures, on at least a quarterly
basis. Additionally, First Federal 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.
77
The following table sets forth information with respect to First
Federal'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 First Federal'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%
===== ====== ===== ====== ===== ======
78
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.
First Federal maintains liquid assets which may be invested in
specified short-term securities and certain other investments. See "Regulation -
Regulation of First Federal - 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 on 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
First Federal's loan origination and other activities. First Federal maintains
an investment securities portfolio and a mortgage-backed securities portfolio as
part of its investment portfolio. At September 30, 1998, First Federal 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 First Federal, which is
established by the Board of Directors, is designed to foster earnings and
liquidity within prudent interest rate risk guidelines, while complementing
First Federal's lending activities. The policy provides for available for sale,
held to maturity and trading classifications. However, First Federal 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 First Federal to maximize total return
within the guidelines set forth in First Federal'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. First Federal 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.
First Federal does not participate in hedging programs, interest rate swaps, or
other activities involving the use of off-balance sheet derivative financial
instruments. Further, First Federal 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).
79
Investment Securities. First Federal 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
First Federal'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 First Federal's U.S. Government Agency
obligations at September 30, 1998, could reduce First Federal's investment yield
if these securities are called prior to maturity.
Mortgage-backed Securities. First Federal invests in mortgage-backed
securities to provide earnings, liquidity, cash flows, and diversification to
First Federals' 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 First Federal 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"). First Federal 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 First Federal 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.
80
Other Securities. Other securities used by First Federal, 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 Atlanta common shares is required. The remaining
securities provide diversification and complement First Federal's overall
investment strategy.
The following table sets forth the carrying value of First Federal'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
====== ====== ======
81
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of First Federal's
investment and mortgage-backed securities portfolio at September 30, 1998.
At September 30, 1998
--------------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total 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% $60,961 5.94% $60,746
====== ==== ====== ===== ====== ==== ===== ==== ====== ==== ======
82
Sources of Funds
General. Deposits are the major source of First Federal'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, First Federal 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. First Federal 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.
First Federal'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. First Federal attracts deposit accounts by offering outstanding
service, competitive interest rates, and convenient locations and service hours.
First Federal uses traditional methods of advertising to attract new customers
and deposits, including radio, cable television, direct mail and print media
advertising. First Federal 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.
First Federal pays interest on its deposits which are competitive in
its market. Interest rates on deposits are set weekly by senior management,
based on a number of factors, including:
o projected cash flow;
o a current survey of a selected group of competitors' rates for similar
products;
o external data which may influence interest rates;
o investment opportunities and loan demand; and
o 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), First Federal'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 First Federal after they mature and First
Federal believes that this will continue. However, the need to retain these time
deposits could result in an increase in First Federal's cost of funds.
83
Deposits in First Federal 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 First Federal
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
======= ======= =======
84
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 First Federal'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 First Federal
for the periods indicated:
Years Ended September 30,
-------------------------------------
1998 1997 1996
--------- --------- ----------
(In thousands)
Net increase (decrease) before interest credited.... $(34,967) $11,843 $(7,262)
Deposits sold in January 1998....................... (55,498) -- --
Interest credited................................... 12,931 13,687 13,852
------- ------ ------
Net increase (decrease) deposits.................... $(77,534) $25,530 $ 6,590
======= ====== ======
After reviewing its funding alternatives and related costs in 1998,
First Federal decided to reduce its premium pricing on certain certificate
accounts and began pricing other deposit accounts more competitively to reduce
First Federal's overall cost of funds. Accordingly, First Federal experienced a
reduction in deposit balances, primarily in certificate accounts, for 1998.
85
Borrowings. Deposits are the primary source of funds of First Federal's
lending and investment activities and for its general business purposes. First
Federal, 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 First Federal's
stock in the FHLB and a portion of First Federal's residential mortgage loans
and may be secured by other assets (principally securities which are obligations
of or guaranteed by the U.S. Government). First Federal typically has funded
loan demand and investment opportunities out of current loan and mortgage-backed
securities repayments, investment maturities and new deposits. However, First
Federal 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
First Federal is permitted to invest its assets in the capital stock
of, or originate secured or unsecured loans to, subsidiary corporations. First
Federal does not have any subsidiaries.
Personnel
As of September 30, 1998, First Federal had 150 full-time employees and
10 part-time employees. The employees are not represented by a collective
bargaining unit. First Federal believes its relationship with its employees to
be satisfactory.
Competition
First Federal 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. First Federal's competition for
deposits and loans historically has come from local and regional commercial
banks and credit unions located in First Federal's market area. First Federal
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. First Federal's primary market area is
Polk and Manatee Counties in Florida.
First Federal competes for loans by charging competitive interest rates
and loan fees, and emphasizing outstanding service for its customers. First
Federal offers consumer banking services such as checking and savings accounts,
certificates of deposit, retirement accounts, overdraft protection, and consumer
and mortgage loans. First Federal also provides drive-up facilities and offers a
debit card program. First Federal has recently added five automated teller
machines and plans to purchase additional automated teller machines for its
remaining branches during the next year. The emphasis on outstanding services
differentiates First Federal in its competition for deposits. First Federal
offers overall market rates on deposits. Although First Federal 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 First
Federal offer a much broader array of services and products.
86
Properties and Equipment
First Federal's executive offices are located at 205 East Orange Street
in Lakeland, Florida. First Federal 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 First Federal'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 First Federal, less accumulated depreciation,
totalled $6.8 million.
At September 30, 1998, First Federal 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 First Federal pending closing. In
connection with the sale of these properties, First Federal 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 First Federal 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. First
Federal does not currently anticipate that it will incur additional material
expense associated with the sale of this property.
Legal Proceedings
First Federal, 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 First Federal holds security
interests, claims involving the making and servicing of real property
87
loans, and other issues incident to the business of First Federal. There were no
lawsuits pending or known to be contemplated against First Federal at September
30, 1998 that would have a material effect on our operations or income.
^ Regulation
Set forth below is a brief description of certain laws which relate to
the regulation of First Federal and FloridaFirst. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Regulation of First Federal
General. As a federally chartered, SAIF-insured savings association,
First Federal is subject to extensive regulation by the OTS and the FDIC.
Lending activities and other investments must comply with federal statutory and
regulatory requirements. First Federal 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 depositors. This
regulatory structure gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies regarding to the classification of assets and the
establishment of adequate loan loss reserves.
The OTS regularly examines First Federal and prepares reports to First
Federal's board of directors on deficiencies, if any, found in First Federal's
operations. First Federal's relationship with its depositors and borrowers is
also regulated by federal law, especially in such matters as the ownership of
savings accounts and the form and content of First Federal's mortgage documents.
First Federal 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 FloridaFirst and First Federal, and their operations.
Insurance of Deposit Accounts. The deposit accounts held by First
Federal are insured by the SAIF to a maximum of $100,000 as permitted by law.
Insurance of deposits may be terminated by the FDIC if it finds an 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, First Federal 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 First Federal of
approximately 0.657% of deposits held on
88
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. It is expected that these continuing
assessments for both SAIF and BIF members 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 First Federal 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. First Federal's capital ratios are set forth under "Historical and Pro
Forma Capital Compliance."
Tangible capital is defined as core capital less all intangible assets,
less certain mortgage servicing rights and less certain investments. Core
capital is defined as common stockholders' equity, 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 of 8% of risk-weighted assets.
Risk-based capital is comprised of core and supplementary capital. 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.
OTS rules require 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, deducted from an institution's total capital is 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. 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 on
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 on all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of
89
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 notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (1) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its excess capital divided by its fully phased-in
capital requirements at the beginning of the calendar year, or (2) 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, First
Federal was a Tier 1 institution.
If First Federal's capital falls below its fully phased-in requirement
or the OTS notified it that it was in need of more than normal supervision,
First Federal 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 1999, the OTS amended its regulations with respect to
capital distributions, including cash dividends, by savings associations. Under
the new regulation, savings associations that remain at least adequately
capitalized following the capital distribution, and that meet other specified
requirements, are not required to file a notice or application for capital
distributions declared below specified amounts. Under the new 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 (1) the savings association would remain at least adequately capitalized
following the capital distribution and (2) 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, 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 not
qualifying for expedited treatment or desiring 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. These limitations on capital
distributions are similar to the limitations imposed on national banks. First
Federal is required by statute to give prior notice before making a capital
distribution because it is owned by a holding company.
A federal savings institution is prohibited from making a capital
distribution if, after making the distribution, the savings institution would
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.
90
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 investments consisting
primarily of residential mortgages, mortgage-backed securities and other
mortgage-related investment, and otherwise qualify as a QTL, we will have full
borrowing privileges from the FHLB of Atlanta. The required percentage these
mortgage-related investments is 65% of portfolio assets. Portfolio assets are
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.
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. Depending on economic
conditions and savings flows of all savings institutions, the OTS can vary the
liquidity requirement from time to time between 4% and 10%. Monetary penalties
may be imposed on institutions for liquidity requirement violations.
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 financial institutions and proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members pursuant
to 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.
91
Federal Reserve System. The Federal Reserve System requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their 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
OTS liquidity requirements.
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.
Regulation of FloridaFirst
General. After the reorganization, FloridaFirst will become a federal
mutual holding company within the meaning of Section 10(o) of the Home Owners'
Loan Act ("HOLA"). FloridaFirst 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 FloridaFirst and any
non-savings institution subsidiaries. The OTS can restrict or prohibit
activities that it determines to be a serious risk to us. This regulation is
intended primarily for the protection of our depositors and not for the benefit
of you, as stockholders of FloridaFirst.
Restrictions on Acquisitions. FloridaFirst 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 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 (1) the percentage of
taxable income method and, (2) 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
92
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.
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 (1) the balance of its bad debt reserves as of the
close of its taxable year beginning before January 1, 1996, over (2) the balance
of such reserves as of the close of its last taxable year beginning before
January 1, 1988 ("pre-1988 reserves"). First Federal will be required to
recapture $350,000 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 First Federal, 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 First
Federal's stockholders and in the case of a reduction in First Federal's
outstanding loans when comparing loans currently outstanding to loans
outstanding at the end of the base year. For taxable years after 1995, First
Federal will continue to account for its bad debts under the reserve method. The
balance of First Federal's pre-1988 reserves equaled $5.8 million.
FloridaFirst may exclude from its income 100% of dividends received
from First Federal 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.
First Federal's federal income tax returns for the last five tax years
have not been audited by the IRS.
State Taxation
First Federal 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). First Federal also for Florida Franchise tax
purposes reflects a credit for Florida Intangible taxes paid.
First Federal'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.
93
Our officers are elected annually by our board and serve at the board's
discretion. These provisions apply to First Federal and mutual holding company,
which will have the same directors and executive officers that we have.
The following table sets forth information with respect to the
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 FloridaFirst and the Mutual Holding Company are
the same as those of First Federal.
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 First Federal 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 First Federal'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.
94
Robert H. Artman has been a Director of First Federal 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.
Llewellyn N. Belcourt has been a Director of First Federal 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 First Federal 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 First Federal 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 First Federal since 1988.
Mr. Thornberry is currently retired from other employment.
G.F. Zimmermann, III has been a Director of First Federal 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 First Federal as Senior Vice President of Retail
Banking in November 1998. Prior to joining First Federal, 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
First Federal since March 1998. Prior to joining First Federal, Mr. Charlet
served in varying positions from 1986 to 1994 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
95
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.
William H. Cloyd has been Chief Lending Officer of First Federal 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 First Federal. Mr. Moore has been employed at First Federal
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. First
Federal 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 First Federal consists of Directors Belcourt,
Artman, Moore and Nissen. The audit committee meets at least semi-annually and
meets with First Federal'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 after 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 after a director's retirement. If 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.
96
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. First Federal has entered into an employment
agreement with its President, Gregory C. Wilkes. Mr. Wilkes's 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 after Mr.
Wilkes's employment is terminated 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
$544,000. 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 after 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. First Federal has also entered
into employment agreements with four other executive officers and the aggregate
payment, based on current salaries, that may have to be made to these four
executives after a change in control of First Federal is approximately
$1,058,000.
Pension Plan. The following table indicates the annual retirement
benefit that would be payable under First Federal's Pension Plan after
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
97
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 First Federal 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). First Federal anticipates that
it will terminate the Pension Plan effective April 15, 1999. After 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. First Federal intends to
terminate the existing defined benefit pension plan ("Pension Plan") as of April
5, 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 after 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 First
Federal whereby First Federal or its parent company is not the resulting entity.
Benefits under the SERP are not taxable to the participant or deductible by
First Federal until they are actually paid.
Employee Stock Ownership Plan. We have established an employee stock
ownership plan for the exclusive benefit of participating employees of ours, to
be implemented after 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 employee stock ownership
plan will be submitted to the IRS. Although no assurances can be given, we
expect that the employee stock ownership plan will receive a favorable letter of
determination from the IRS.
The employee stock ownership plan 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. The plan will
98
borrow funds with which to acquire up to 8% of the common stock to be issued in
the offering. The employee stock ownership plan intends to borrow funds from
FloridaFirst. 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 anticipated that the employee stock ownership plan will purchase
up to 8% of the common stock to be issued in the offering. The loan will be
secured by the shares purchased and earnings of employee stock ownership plan
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
2,351,175 shares) may be sold to the employee stock ownership plan before
satisfying remaining unfilled orders of Eligible Account Holders to fill the
plan's subscription, or the plan may purchase some or all of the shares covered
by its subscription after the offering in the open market.
Contributions to the employee stock ownership plan 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 before
the adoption of the employee stock ownership plan shall be credited for the
purposes of vesting. Our contributions to the employee stock ownership plan are
discretionary and may cause a reduction in other forms of compensation.
As a result, benefits payable under this plan cannot be estimated.
The board of directors has appointed the non-employee directors to a
committee that will administer the plan and to serve as the plan's trustees. The
trustees must vote all allocated shares held in the plan as directed by plan
participants. Unallocated shares and allocated shares for which no timely
direction is received will be voted as directed by the board of directors or the
plan's committee, subject to the trustees' fiduciary duties.
401(k) ^Retirement Plan. Effective January 1, 1999, First Federal
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). First Federal matches a minimum of 25% of the first 6% of
employee contributions. Employee and matching contributions immediately vest.
First Federal 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 after 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 after
application to the plan administrator after 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
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
First Federal 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."
99
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 FloridaFirst 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: (1) options to purchase the common stock intended to qualify as incentive
stock options under the Code (incentive stock options); and (2) 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 equally over a
five year period, 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 on 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 FloridaFirst. 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
Mutual Holding Company 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.
100
Restrictions on Stock Benefit Plans. If we adopt a stock option or
management and/or employee stock benefit plan within one year from the date of
our reorganization, these plans must comply with the following OTS restrictions:
o the plans must be fully disclosed in the prospectus;
o 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;
o 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);
o the aggregate amount of stock purchased by the employee stock ownership
plan in the conversion may not exceed 10% (12% for well-capitalized
institutions utilizing a 4% management recognition plan);
o no individual employee may receive more than 25% of the available awards
under the option plan or a restricted stock plan;
o directors who are not employees may not receive more than 5% individually
or 30% in the aggregate of the awards under any plan;
o all plans must be approved by a majority of the total votes eligible to be
cast at any duly called meeting of FloridaFirst's stockholders held no
earlier than six months following the reorganization;
o for stock option plans, the exercise price must be at least equal to the
market price of the stock at the time of grant;
o for restricted stock plans, no stock issued in a mutual-to-stock conversion
may by used to fund the plan;
o 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 or death, or if consistent with applicable OTS regulations in
effect at such time, after a change in control;
o the proxy material must clearly state that the OTS in no way endorses or
approves of the plans; and
o 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 First Federal or any subsidiary
involving more than $60,000 (other than through a loan) during the year ended
September 30, 1998. Furthermore, First Federal had no "interlocking"
relationships in which (1) any executive officer is a member of the board of
directors or of another entity, one of whose executive officers are a member of
First Federal's board of directors, or where (2) any executive officer is a
member of the compensation committee of another entity, one of whose executive
officers is a member of First Federal's board of directors.
First Federal 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
101
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 the approximate purchases of common
stock by each director and executive officer and their associates. The table
assumes that we sell at the midpoint of the offering range.
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) If the stockholders of FloridaFirst 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 Mutual
Holding Company (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."
102
^ Restrictions on Acquisition of FloridaFirst
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, provisions of
certificates of incorporation and bylaws and regulatory provisions that have an
anti-takeover effect.
Mutual Holding Company Structure
The mutual holding company structure will restrict the ability of our
stockholders to effect a change of control of management because the 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
First Federal will be able to exert voting control over the Mutual Holding
Company.
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 savings and loan
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, after 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:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o 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.
103
FloridaFirst'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 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 a majority 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 that relates to
mutual holding companies, the Mutual Holding Company must remain the majority
holder of our voting stock for as long as it exists.
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 two 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 eight 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 even though a majority of our stockholders, other
than the Mutual Holding Company, desire a change.
104
^ 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, including between 1,737,825 and 2,351,175 shares to
persons other than the Mutual Holding Company. See "Capitalization." After
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 Mutual Holding Company."
Voting Rights
The holders of common stock will possess exclusive voting rights in
FloridaFirst. 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
After any liquidation, dissolution, or winding-up of FloridaFirst, the
holders of the common stock generally would be entitled to receive, after
payment of all debts and liabilities of FloridaFirst and First Federal, all
assets of FloridaFirst 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 Mutual Holding Company's members unless
FloridaFirst demonstrates that a non-conforming stock issuance would be more
beneficial to FloridaFirst. The common stock will not be subject to any
redemption provisions.
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
105
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 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 the common stock upon the reorganization
and stock offering 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.
^ 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 FloridaFirst, that file
electronically with the SEC. The
106
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 First Federal and
the Mutual Holding Company, are available without charge from First Federal
Florida. Copies of the plan of reorganization are also available without charge.
First Federal has filed a notice of mutual holding company
reorganization with the OTS. This prospectus omits certain information contained
in that application.
107
^ 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 F-3
Statements of Equity for each of the years in the
three-year period ended September 30, 1998 F-4
Statements of Cash Flows for each of the years in the
three-year period ended September 30, 1998 F-5
Notes to Financial Statements F-7
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.
108
[LOGO] KPMG LLP
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.
/s/KPMG LLP
Tampa, Florida
October 23, 1998
F-1
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Statements of Financial Condition
September 30, 1998 and 1997
(In thousands)
1998 1997
---------- -------
Assets
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 0
Deferred income taxes, net 936 151
Other assets 551 1,125
---------- -------
Total assets $ 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 0 364
Other liabilities 3,214 612
---------- -------
Total liabilities 382,934 433,177
---------- -------
Commitments and contingencies - -
Equity capital:
Retained income, restricted 35,887 33,502
Unrealized gain on investments available for sale, net of taxes 220 86
---------- -------
Total equity capital 36,107 33,588
---------- -------
Total liabilities and equity capital $ 419,041 466,765
========== =======
See accompanying notes to financial statements.
F-2
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Statements of Earnings
Years ended September 30, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
---- ---- ----
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 0 0
---------- -------- --------
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 0 0
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 0 0
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 0 0 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
========== ======== ========
See accompanying notes to financial statements.
F-3
FIRSFIRSTEFEDERALISAVINGS ANDNLOAN
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-4
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Statements of Cash Flows
Years ended September 30, 1998, 1997 and 1996
(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 0 (149) 0
Gain on sale of investments held to maturity 0 0 (2)
Gain on sale of branches (3,016) 0 0
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 0 1,123 0
Proceeds from the sale of loans available for sale 0 9,927 0
Proceeds from sales of investments available for sale 3,386 10,965 21,714
Proceeds from the sale of investments held to maturity 0 0 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 0 0 765
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) 0 0
Purchases of investment securities held to maturity 0 0 (1,000)
Dividends reinvested in mutual fund 0 0 (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 0 0
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
============ ========== =========
F-5 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Statements of Cash Flows, Continued
Years ended September 30, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
---- ---- ----
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 0 0
Premises and equipment 705 0 0
Deposits 55,498 0 0
============ ========= ========
Transfer of investments and mortgage-backed securities from
held to maturity to available for sale $ 0 0 39,167
============ ========= ========
Transfer of loans from held to maturity to available for sale $ 0 0 9,778
============ ========= ========
See accompanying notes to financial statements.
F-6
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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 loan 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 (Company). A
majority of the shares of stock of the Company will be owned by a
mutual holding company (MHC), 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.
Costs related to the minority stock offering are being capitalized
and will be netted against the proceeds received in the stock
offering if the offering is successful. If the offering is
unsuccessful, the costs will be expensed immediately. Total costs
incurred as of September 30, 1998 were $68,000
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.
The Office of Thrift Supervision imposes various restrictions or
requirements on the ability of savings institutions to make
capital distributions, including dividend payments. A federal
savings institution is prohibited from making a capital
distribution if, after making the distribution, the savings
institution would be undercapitalized. Further, a federal savings
institution cannot distribute regulatory capital that is needed
for its liquidation account.
F-7
(Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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 contractural maturities,
adjusted for anticipated prepayments as an adjustment to yield
using the level-yield method. For loans on non-accrual, such
amortization is ceased.
F-8 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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.
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 an 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 portion of the
allowance is calculated for inherent losses which management
believes 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.
Allowances are also provided in the event that the specific
collateral analysis on a loan indicates that the estimated 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.
F-9 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(f) 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.
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.
(g) 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.
(h) 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.
F-10 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(i) 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.
(j) 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.
(k) Discount and Premium on Investment Securities Purchased
Discount and premium on investment securities purchased are
amortized over the estimated remaining lives of the investment
securities using the level-yield method.
(l) 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.
F-11 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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.
(m) 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.
(n) 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 not material to the Bank.
(o) 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.
F-12 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(p) Self-Insurance
The Bank is partially self-insured for certain employee benefits,
namely medical and dental claims. The Bank has entered into a
reinsurance contract that limits the claims the Bank is liable for
in any plan year. 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.
The self-insured plan operates on a calendar year basis. For the
plan years ended December 31, 1997, 1996 and 1995, claims paid,
net of amounts received under the reinsurance contract and
premiums received from dependent and COBRA coverage, were
$356,000, $380,000 and $305,000, respectively. The plan covers
only active employees as defined in the plan.
(q) Reclassifications
Certain amounts in the 1997 and 1996 financial statements have
been reclassified to conform to the 1998 presentation.
(r) 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.
(s) 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.
F-13 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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.
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.
F-14 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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
============== ============ ============= ==============
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
============== ============ ============= ==============
All collateralized mortgage obligations ("CMOs") and mortgage-backed
securities ("MBS") as of September 30, 1998 and 1997 were issues of GNMA,
FNMA or FHLMC.
F-15 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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.
F-16 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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 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. All CMOs as of September 30, 1998 and 1997 were issues of
FNMA or FHLMC.
F-17 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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. At December 31,
1995, the Bank reclassified $39.2 million of investment and MBS
securities and $9.8 million in loans from the held to maturity category
to the available for sale category in accordance with the Special Report.
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
============== ==============
F-18 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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 1-4:
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%
============== =============
F-19 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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. The range of interest rates on the fixed rate loan
commitments as of September 30, 1998 was 6.25% to 7.25%.
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 these
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.
F-20 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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.
F-21 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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. Deposits in excess of $100,000 are not federally
insured.
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
========== ========== ==========
F-22 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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.
F-23 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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
Prepaid interest income 21 10
Pension asset 379 --
Self-insurance reserve 339 11
-------- ---------
Total deferred tax assets 1,566 802
Less valuation allowance -- --
-------- ---------
Net deferred tax assets 1,566 802
-------- ---------
F-24 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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 $ 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 rate $ 1,202 34% 1,301 34% 101 34%
Increase (decrease) in tax
resulting from:
Tax-exempt interest, net of
scaleback (17) (1%) (22) (1%) (45) (15%)
State income taxes, net of
Federal income tax
benefit 65 2% 78 2% (38) (13%)
Other, net (99) (2%) (58) (1%) 26 9%
-------- --------- ---------- ---------- ----------- --------
$ 1,151 33% 1,299 34% 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.
F-25 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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.
F-26 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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% $19,795 8.0% $24,744 10.0%
Tier I capital (to risk-
weighted assets) 35,887 14.5% 9,898 4.0% 14,846 6.0%
Tier I capital
(to average assets) 35,887 8.7% 16,599 4.0% 20,748 5.0%
========== ========= ========== ========= ========== ==========
F-27 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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% $26,710 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%
========== ========= ========== ========= ========== ==========
The following summary reconciles the Bank's equity capital as reflected
in the accompanying financial statements as of September 30, 1998 with
related amounts reported to the OTS:
Tangible Core Risk-based
-------- ---- ----------
Equity capital per financial statements $ 36,107 $ 36,107 $ 36,107
Unrealized gains on available for sale
securities, net of tax (220) (220) (220)
Allowance for loan losses 2,564
Other 119 119 119
----------- --------- -------------
Regulatory equity capital $ 36,006 $ 36,006 $ 38,570
=========== ========= =============
(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
F-28 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
may place the Bank at a competitive disadvantage to institutions whose
deposits are exclusively or primarily BIF insured (such as most commercial
banks).
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.
F-29 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
(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.
If a Director dies prior to retirement or prior to receipt of all monthly
payments under the plan, the Bank has no further finanical obligations to
the Director or his or her estate. For the year ended September 30, 1998,
the Bank has recognized expense of $410,000 related to this Retirement
Plan. The amount was determined by discounting the anticipated cash flow
required based on the services rendered by each covered director. 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.
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.
F-30 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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)
==========
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
========= =========
F-31 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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.
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.
F-32 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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.
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) 338,610 341,013
=========== ============
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
=========== ============
F-33 (Continued)
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF FLORIDA
Notes to Financial Statements
September 30, 1998, 1997 and 1996
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) 355,551 363,333
=========== ============
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
=========== ============
(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-34
[To be used in connection with the Syndicated Community Offering only]
PROSPECTUS SUPPLEMENT FOR SYNDICATED COMMUNITY OFFERING
[LOGO] FLORIDAFIRST BANCORP
(Proposed Holding Company for First Federal Florida)
205 E. Orange Street
Lakeland, Florida 33801-4611
(941) 688-6811
- --------------------------------------------------------------------------------
FloridaFirst Bancorp is offering for sale up to 2,351,175 shares of
common stock at $10.00 per share in First Federal Florida's reorganization into
the mutual holding company structure with a middle tier stock holding company
and minority stock offering. First Federal Florida will become a wholly owned
subsidiary of FloridaFirst Bancorp and FloridaFirst Bancorp will be majority
owned by a mutual holding company. FloridaFirst Bancorp has already received
subscriptions for the remaining __________ shares of the aggregate of up to
__________ shares to be sold in the reorganization. We will not sell any stock
unless we receive additional subscriptions for at least the minimum number of
shares in the offering. We will place all funds submitted to FloridaFirst
Bancorp to purchase shares of stock in a deposit account at First Federal
Florida until we issue the shares or the funds are returned.
No public market for the common stock currently exists. We expect the
common stock to be listed on the Nasdaq Stock Market, under the symbol "FFBK."
- --------------------------------------------------------------------------------
TERMS OF THE OFFERING
This offering will expire no later than 12:00 noon, Eastern time, on
__________, 1999, unless extended.
o Price Per Share $10.00
o Number of Shares ______
Minimum/Maximum
o Underwriting Commission and Other Expenses ______
Minimum/Maximum
o Net Proceeds to FloridaFirst Bancorp ______
in the Offering
Minimum/Maximum
o Net Proceeds per Share to FloridaFirst Bancorp ______
in the Offering
Minimum/Maximum
Please refer to "Risk Factors" beginning on page 10 of the attached prospectus.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, nor any other federal or state
securities regulator has approved or disapproved these securities or determined
if this prospectus is accurate or complete. Any representations to the contrary
is a criminal offense.
Sandler O'Neill & Partners, L.P.
The date of this Prospectus Supplement is __________ ____, 1999
THE SYNDICATED COMMUNITY OFFERING
The prospectus follows this supplement in the form used in the
subscription and community offerings. The purchase price for all shares sold in
this offering will be the same as the price paid by subscribers in the
subscription and community offerings.
We reserve the right, in our absolute discretion, to accept or reject,
in whole or in part, any or all subscriptions in this offering.
We have engaged Sandler O'Neill & Partners, L.P. as financial advisors
to assist us in the sale of the common stock in this offering. We anticipate
that Sandler O'Neill will use the services of other registered broker-dealers
and that fees to Sandler O'Neill and such selected dealers will not exceed 5% of
the sales price of the shares sold in this offering. Neither Sandler O'Neill nor
any selected dealer shall have any obligation to take or purchase any shares of
common stock in this offering.
================================================================================ =================================================
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
^ Summary ................................................................. 3
Risk Factors............................................................... 8
The Reorganization......................................................... 11
The Offering............................................................... 18
First Federal Florida ..................................................... 31
FloridaFirst Bancorp....................................................... 32
FloridaFirst Bancorp MHC................................................... 32
Use of Proceeds............................................................ 32
Dividend Policy............................................................ 33
Wavier of Dividends by the Mutual Holding Company.......................... 34 FloridaFirst Bancorp
Mutual Holding Company ^ Conversion to Stock Form.......................... 36
Market for the Stock....................................................... 36
Capitalization............................................................. 38
Pro Forma Data............................................................. 39
Historical and Pro Forma Capital Compliance................................ 43
Selected Financial and Other Data.......................................... 48
Management's Discussion and Analysis of ---------------------
Financial Condition and Results of Operations............................. 51
Business of FloridaFirst................................................... 66
Business of First Federal.................................................. 66 PROSPECTUS
Regulation ................................................................ 88
Taxation................................................................... 92
Management ................................................................ ^93 ---------------------
Restrictions on Acquisition of FloridaFirst................................ 103
Description of Capital Stock............................................... 105
Legal and Tax Opinions..................................................... 106
Experts.................................................................... 106 Sandler O'Neill & Partners, L.P.
Registration Requirements.................................................. 106
Where You Can Find Additional Information.................................. 106
Index to Financial Statements ............................................ 108 ^ February 12, 1999
Until the later of March 24, 1999 or 25 days after commencement of the offering,
all dealers effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is THESE SECURITIES ARE NOT DEPOSITS OR
in addition to the dealers' obligation to deliver a prospectus when acting as SAVINGS ACCOUNTS AND ARE NOT FEDERALLY
underwriters and with respect to their unsold allotments or subscriptions. INSURED OR GUARANTEED.
================================================================================ =================================================