1
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-QSB
/ X / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
---------- ----------
Commission File Number: 0-25930
FLORIDA FIRST BANCORP, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3310686
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
144 Harrison Avenue
Panama City, Florida 32401
- -------------------- ----------------------
(Address of Principal (Zip Code)
Executive Office)
Registrant's telephone number, including area code: (904) 872-7000
Common Stock, $.01 par value
----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
The number of shares outstanding of the Registrant's common stock, as of the
latest practicable date is:
Class: Common Stock, par value $.01 per share
Outstanding at August 2, 1996: 3,393,095
Transitional Small Business Disclosure Format: YES NO X
----- -----
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INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements and Notes (Unaudited)
------------------------------------------
Condensed Consolidated Statements of Financial
Condition as of June 30, 1996 and December 31, 1995 1
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1996
and 1995 2
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996 and 1995 3-4
Notes to Condensed Consolidated Financial
Statements 5-11
Item 2 Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations 12-26
-----------------------------------
PART II OTHER INFORMATION
Item 1 Legal Proceedings 27
-----------------
Item 2 Changes in Securities 27
---------------------
Item 3 Defaults upon Senior Securities 27
-------------------------------
Item 4 Submission of Matters to a Vote of Security Holders 27
---------------------------------------------------
Item 5 Other Information 27
-----------------
Item 6 Exhibits and Reports on Form 8-K 27
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Signature Page 28
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FLORIDA FIRST BANCORP, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
June 30, 1996 December 31, 1995
------------- -----------------
(in thousands)
ASSETS
Cash $ 4,827 $ 5,686
Interest-bearing deposits 24,297 8,751
-------- --------
Cash and cash equivalents 29,124 14,437
Loans held for sale 3,263 3,304
Securities available for sale - net 41,070 32,543
Securities held to maturity - net
(approximate market values - $45,360 and
$68,640, respectively) 45,843 68,848
Loans receivable - net 170,295 171,379
Accrued interest receivable:
Loans 1,513 1,499
Securities 463 552
Real estate owned 324 317
Premises and equipment - net 4,374 4,401
Federal Home Loan Bank ("FHLB") stock - at cost 2,766 2,766
Deferred income taxes 2,034 1,852
Other assets 1,620 1,431
-------- --------
TOTAL $302,689 $303,329
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $245,652 $250,041
FHLB advances 32,521 30,721
Advances by borrowers for taxes and insurance 1,557 701
Income tax payable 82 45
Other liabilities 1,528 1,247
-------- --------
Total liabilities 281,340 282,755
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized;
none issued and outstanding
Common stock, 6,500,000 shares, $.01 par value
per share authorized; 3,384,645 and
3,358,245 shares issued and outstanding,
respectively 34 34
Additional paid-in capital 16,170 16,096
Unrealized gains (losses) on securities
available for sale - net of taxes (190) 112
Retained income, partially restricted 5,335 4,332
-------- --------
Total stockholders' equity 21,349 20,574
-------- --------
TOTAL $302,689 $303,329
======== ========
See accompanying notes to consolidated financial statements.
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FLORIDA FIRST BANCORP, INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ----------------------
1996 1995 1996 1995
----------- ---------- ---------- --------
(in thousands)
INTEREST INCOME:
Loans $3,876 $3,711 $7,694 $7,353
Securities 1,442 1,295 3,105 2,568
Other interest income 279 322 467 527
------ ------ ------ -------
Total interest income 5,597 5,328 11,266 $10,448
------ ------ ------ -------
INTEREST EXPENSE:
Deposits 2,737 2,789 5,540 5,294
Short-term borrowings 11 9 22 47
Long-term borrowings 429 429 868 859
------ ------ ------ -------
Total interest expense 3,177 3,227 6,430 6,200
------ ------ ------ -------
NET INTEREST INCOME 2,420 2,101 4,836 4,248
Provision for losses on loans 10
------ ------ ------ -------
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES ON LOANS 2,420 2,101 4,836 4,238
------ ------ ------ -------
OTHER INCOME:
Loan correspondent and servicing fees 155 118 301 247
Service charges 201 189 407 363
Gains (losses) on sales of:
Loans 36 77 77 94
Securities available for sale 17 30 (65)
Pair-off transactions and equity
securities 5 5
Real estate owned 108 61 109 214
Other operating income 96 134 245 250
------ ------ ------ -------
Total other income 613 584 1,169 1,108
------ ------ ------ -------
OPERATING EXPENSES:
Employee compensation and benefits 849 845 1,679 1,599
Occupancy and equipment 377 342 741 683
Advertising, promotion and training 157 61 222 153
Expenses related to reorganization
and name change 121 153
Federal deposit and other insurance
premiums 179 185 356 368
Professional fees 91 70 157 158
Other operating expenses 315 256 591 501
------ ------ ------ -------
Total operating expenses 1,968 1,880 3,746 3,615
------ ------ ------ -------
INCOME BEFORE INCOME TAXES 1,065 805 2,259 1,731
Provision for income taxes 403 302 852 617
------ ------ ------ -------
NET INCOME $ 662 $ 503 $1,407 $ 1,114
====== ====== ====== =======
EARNINGS PER SHARE:
PRIMARY AND FULLY DILUTED
INCOME PER SHARE:
NET INCOME $ .20 $ .15 $ .42 $ .33
====== ====== ====== =======
DIVIDENDS PER SHARE $ .06 $ $ .12 $
====== ====== ====== =======
See Notes to Condensed Consolidated Financial Statements.
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FLORIDA FIRST BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
------------------------------
1996 1995
----------- ----------
(in thousands)
Cash flows from operating activities:
Interest received from loans $ 7,680 $ 7,246
Interest received from securities
and interest-earning assets 3,661 3,151
Interest paid on deposits and borrowings (6,448) (6,225)
Loan fees received 464 380
Service charges received 407 363
Loans originated for sale (17,253) (13,594)
Proceeds from sales of loans held for sale 17,595 11,874
Cash paid to employees and vendors (3,648) (3,598)
Other, net (949) (468)
------- -------
Net cash (used in) provided by operating
activities 1,509 (871)
------- -------
Cash flows from investing activities:
Net loan activity other than purchases and sales 1,008 (563)
Principal collected on securities 13,121 7,295
Purchases of:
Loans and participations (2,024)
Securities held to maturity (6,733) (14,970)
Securities available for sale (3,981) (2,320)
Trading securities (116)
Premises and equipment (118) (284)
Proceeds from sales of:
Loans and participations 749
Securities available for sale 12,546 6,342
Trading securities 59
Real estate owned 306 481
Other, net 367 1,115
------- -------
Net cash (used in) provided by investing
activities 15,241 (2,961)
------- -------
Cash flows from financing activities:
Net increase (decrease) in:
Deposits (4,389) 15,265
FHLB advances 1,800 (3,736)
Advances by borrowers for taxes and insurance 856 958
Net proceeds from exercise of stock options 74 55
Dividends paid (404)
------- -------
Net cash provided by (used in) financing
activities (2,063) 12,542
------- -------
Net increase in cash and cash equivalents 14,687 8,710
Cash and cash equivalents at beginning of period 14,437 12,766
------- -------
Cash and cash equivalents at end of period $29,124 $21,476
======= =======
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Six Months Ended
June 30,
-----------------------------
1996 1995
------------- --------
(in thousands)
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 1,407 $ 1,114
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for losses on loans 10
Increase in deferred income taxes (182) (32)
Increase in income tax payable 37 14
Accretion of discounts/amortization of
premiums on mortgage loans and deferred
loan fees - net (154) (109)
Accretion of discounts/amortization of
premiums on securities - net 147 (12)
(Increase)decrease in interest receivable
on interest-earning assets 75 (51)
Decrease in accrued interest payable (18) (25)
Depreciation and amortization 146 172
Net (gains)losses on sales of:
Loans (77) (94)
Securities available for sale (30) 65
Pair-off transactions (1)
Trading securities (4)
Real estate owned (109) (214)
Write-off obsolete premises and equipment 32
(Increase)decrease in loans held for sale 41 (1,758)
Increase in accrued expenses and
other liabilities 281 239
(Increase)decrease in other assets (55) (217)
------- -------
Total adjustments 102 (1,985)
------- -------
Net cash provided by operating activities $ 1,509 $ (871)
======= =======
Income taxes paid $ 815 $ 635
======= =======
Supplemental schedule of noncash investing and
financing activities:
Loans settled by acquisition of
real estate $ 420 $ 157
======= =======
See accompanying notes to consolidated financial statements.
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FLORIDA FIRST BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions for Form 10-QSB and Article
10 of Regulation S-X and, therefore, do not include all the information or
footnotes necessary for a complete presentation of financial condition, results
of operations and cash flows in conformity with generally accepted accounting
principles. However, all adjustments which, in the opinion of management, are
necessary for a fair presentation have been included. Such adjustments
consisted of only normally recurring items. The results of operations for the
six-month period ended June 30, 1996 are not necessarily indicative of the
results which may be expected for the entire fiscal year ending December 31,
1996. The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Annual Report to Stockholders for the year ended
December 31, 1995 ("Annual Report").
Certain amounts in the prior year's condensed consolidated financial statements
have been reclassified for comparative purposes.
Cash and cash equivalents include cash on hand, interest-bearing deposits and
federal funds sold which are generally purchased and sold for one-day periods.
Primary earnings per share for the 1996 and 1995 periods were computed by
dividing applicable income amounts by the weighted average number of shares of
common stock outstanding during each period, including the effect of
unexercised (but exercisable) stock options using the treasury stock method.
The treasury stock method assumes that funds from the exercise of options would
be used to purchase common stock at the average market price. This method also
assumes that such common stock was purchased at the end-of-period price for
fully diluted earnings per share calculations (unless the average price during
the period exceeded the end-of-period price, in which case the average price
would be used). Fully diluted earnings per share for the 1996 and 1995 periods
were computed using the assumption that all outstanding and exercisable stock
options had been converted at the beginning of each period. During the three
and six months ended June 30, 1996 and 1995, outstanding options covering
82,025 and 125,700 shares, respectively, were used in the calculation of
primary and
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fully diluted earnings per share. Primary and fully diluted earnings per share
were calculated using the following information:
Weighted
Avg. Number Average
of Shares Stock
Outstanding Price
----------- ------
Primary Earnings Per Share:
For the quarter ended June 30, 1996 3,412,268 $9.65
For the quarter ended June 30, 1995 3,372,550 5.56
For the six months ended June 30, 1996 3,416,372 8.77
For the six months ended June 30, 1995 3,364,730 5.44
Weighted Period
Avg. Number End
of Shares Stock
Outstanding Price
------------ ------
Fully Diluted Earnings Per Share:
For the quarter ended June 30, 1996 3,416,606 $11.13
For the quarter ended June 30, 1995 3,372,550 5.56
For the six months ended June 30,1996 3,423,981 11.13
For the six months ended June 30, 1995 3,365,469 5.50
Note 2 - Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Florida First Bancorp, Inc., ("FFB" or the "Company"), its wholly
owned subsidiary, Florida FirstBank (the "Bank") and, during the 1995 periods,
the Bank's wholly owned subsidiary, Service First, Inc. ("Service First"),
(collectively referred to as the "Company"). The Company's consolidated
results of operations are primarily those of the Bank. Sales of the Bank's
real estate owned ("REO") was the principal activity of Service First. On
January 18, 1996, the Board of Directors of the Bank, being the sole
stockholder of Service First, elected to liquidate the subsidiary and
distribute its assets to the Bank. In consolidation, all significant
intercompany balances and transactions have been eliminated.
Note 3 - The Reorganization
On May 1, 1995, FFB became a unitary savings and loan holding company in
accordance with the terms of an Agreement and Plan of Reorganization, dated
February 16, 1995 (the "Reorganization Agreement"), by and among the Bank, FFB
Interim Federal Savings Association ("Interim") and FFB. Pursuant to the
Reorganization Agreement: (1) FFB was organized as a wholly owned subsidiary of
the Bank; (2) Interim was organized as a wholly owned subsidiary of FFB; (3)
Interim merged with and into the Bank, with the Bank as the surviving
institution; and (4) upon such merger, (i) the
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outstanding shares of common stock, par value $1.00 per share, of the Bank
became, by operation of law, on a one-for-one basis, common stock, par value
$.01 per share, of FFB, (ii) the common stock of Interim held by FFB was
converted into common stock of the Bank, and (iii) the common stock of FFB held
by the Bank was cancelled (such transactions collectively referred to herein as
the "Reorganization"). Accordingly, the Bank became a wholly owned subsidiary
of FFB and the stockholders of the Bank became stockholders of FFB.
The common stock of FFB has been registered with the Securities and Exchange
Commission ("SEC") under Section 12(g) of the Securities Exchange Act of 1934,
as amended, and has been substituted for the common stock of the Bank on the
Nasdaq National Market System under the symbol "FFPC." In addition, in
connection with the Reorganization the Bank made a capital distribution to FFB
in the amount of $500,000. During the second quarter of 1996, the Bank made an
additional capital distribution to FFB totalling $500,000. The Reorganization
was accounted for under the pooling of interests method of accounting which
treats the historical balance sheet and income statement accounts of the
combining companies as though the combination had occurred at the beginning of
the earliest period shown.
Note 4 - Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market or for
sale to correspondents are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income. At June 30, 1996, loans held for sale amounted
to $3.3 million which included a market adjustment of $10,000. At December 31,
1995, a market adjustment was not required on the $3.3 million of loans held
for sale since there would have been a gain in the aggregate. Mortgages with
established interest rates generally will decrease in value during periods of
increasing interest rates and increase in value during periods of decreasing
interest rates. Accordingly, fluctuations in prevailing interest rates may
result in a gain or loss to the Bank as a result of adjustments to the carrying
value of loans held for sale or upon the sale of loans to the extent that the
Bank has not obtained prior commitments by investors to purchase such loans at
agreed upon terms or otherwise hedged the value of the loans against changes in
interest rates. (The cost of forward commitments (see below) used by the Bank
is deducted from the net gain or loss on the sale of mortgage loans.)
The Bank currently employs forward commitments of 90 days or less as a hedging
technique to protect the value of its mortgage production from "pipeline risk"
(the risk created by offering and committing to agreed upon interest rates for
a future closing, generally within 60 days). Forward commitments are legal
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agreements between two parties to purchase and sell a specific quantity of a
financial instrument, at a specified price, with delivery and settlement at a
specified future date. The Bank has not used any other hedging techniques.
The Bank adjusts the amount of its unhedged loans in process based on market
conditions and loan closing rates. On June 30, 1996, the Bank had one
outstanding hedge contract to sell a $2.0 million Federal Home Loan Mortgage
Corporation ("FHLMC") 30-year 7.50% security. This trade was entered to
protect the Bank's mortgage loan commitments against rising interest rates.
This position will be settled on August 12, 1996. At June 30, 1996, the Bank
had a total pipeline of loans in process pending closing of approximately $2.3
million, all of which had locked in rates with commitments to fund as well as
loans of $3.3 million which had closed and were available for sale.
Note 5 - Mortgage-Backed and Other Securities
Mortgage-backed and other securities are classified into three categories as
required by Statement of Financial Accounting Standard ("SFAS") No. 115: (i)
securities held to maturity, (ii) trading securities, and (iii) securities
available for sale. Debt instruments that the Bank has the positive intent and
ability to hold to maturity are accounted for at amortized historical cost
while trading securities are reported at fair value with unrealized gains or
losses included in earnings. Securities available for sale are reported at fair
value but unrealized gains or losses are excluded from earnings and reported as
a separate component of stockholders' equity. Fair value is defined as the
amount which would be realized in a current transaction other than in a forced
or liquidation sale. The quoted market price is used when available to
determine the fair value. Anything not classified as held to maturity or a
trading security is to be treated as available for sale. Mortgage-backed and
other securities held for investment are carried at cost, adjusted for
amortization of premiums and accretion of discounts using a method that
approximates level yield. These securities are classified as held to maturity
based on management's intent and the Bank's ability to hold such securities to
maturity.
On November 15, 1995, the Financial Accounting Standards Board ("FASB") issued
a Special Report, "A Guide to Implementation of SFAS No. 115 on Accounting for
Certain Investments in Debt and Equity Securities." In addition, effective
November 15, 1995, the FASB permitted a one-time opportunity for institutions
to reassess the appropriateness of the designations of all securities held upon
the initial application of the Special Report. Any resulting redesignations
were to be made in conjunction with the implementation of the FASB's
supplemental guidance and had to occur no later than December 31, 1995.
Furthermore, redesignations had to be accounted for at fair value in accordance
with paragraph 15 of SFAS No. 115. This transition guidance meant
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that institutions were permitted to transfer debt securities from the held to
maturity portfolio before calendar year-end 1995, without calling into question
their intent to hold other debt securities to maturity. The Bank reassessed
the designations of its securities portfolio and subsequently transferred $13.2
million in mortgage-backed and other securities from the held to maturity
portfolio to the available for sale portfolio and also transferred $2.0 million
in other securities from available for sale to held to maturity.
On May 29, 1996, the Company entered into an Agreement and Plan of
Reorganization ("Agreement") with Regions Financial Corporation ("Regions")
pursuant to which Regions will acquire all of the issued and outstanding common
stock of the Company. Per the terms of the Agreement and as a condition to
Regions obligation to perform, the Company is required to dispose of certain
specified mortgage-related securities. As a consequence, during the second
quarter of 1996, the Company transferred $21.6 million of such securities from
the held for investment portfolio to the available for sale portfolio in order
to comply with the Agreement. At August 6, 1996, three such securities valued
at $4.8 million remained available for sale. See Note 10 hereto.
Note 6 - Mortgage Servicing Rights
On May 12, 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No. 122 amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities" in order to eliminate the accounting distinction
between rights to service mortgage loans that are acquired through loan
origination activities and those acquired through purchase transactions. When
an enterprise purchases or originates mortgage loans, the cost of acquiring
those loans includes the cost of the related mortgage servicing rights. If the
enterprise sells or securitizes the loans and retains the servicing rights, the
enterprise should allocate the total cost of the loans to the servicing rights
and the loans (without the servicing rights) based on their relative fair
values, if practicable. If it is not practicable to estimate fair values, the
entire cost of acquiring the loans should be allocated to the mortgage loans.
Any cost allocated to servicing rights should be recognized as a separate
asset. The Bank adopted SFAS No. 122 during the second quarter of 1995.
Servicing rights recorded under SFAS No. 122 amounted to $256,000 and $153,000
at June 30, 1996 and December 31, 1995, respectively. This amount is amortized
over the average expected life of the related loans and will effectively reduce
servicing fee income in the future. Servicing fee income was reduced by $19,000
due to the amortization of the servicing rights for the six months ended June
30, 1996.
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Note 7 - Regulatory Capital Requirements
At June 30, 1996 the Bank was in compliance with all existing applicable
regulatory capital standards and had the following regulatory capital and
capital ratios (dollars in thousands):
Actual Actual
Capital Required Excess Capital Required
Amount Amount Amount Ratio Ratio
------ ------ ------ ----- -----
Adjusted tangible capital
to adjusted total assets $20,988 $4,544 $16,444 6.9% 1.5%
Adjusted core capital to
adjusted total assets 20,988 9,088 11,900 6.9 3.0
Total risk-based capital to
total risk-weighted assets 22,842 12,042 10,800 15.2 8.0
See Note 15 in the Annual Report for further discussion of the regulatory
capital requirements applicable to the Bank.
Note 8 - Stock Compensation Program
The Bank adopted a stock compensation program ("Program") for key officers and
employees in connection with its stock conversion in 1986, which Program became
the Program of the Company pursuant to the terms of the Reorganization
Agreement. Under the Program, the option exercise price of FFB stock shall
equal at least the fair market value of the shares covered by such option on
the date the option is granted. In accordance with the Bank's plan of
conversion, 186,875 shares of Common Stock were reserved for issuance under the
Program. At June 30, 1996, options covering 200 shares remained unallocated.
Options granted under the Program are exercisable as determined by the Option
Committee of the Board of Directors and may have a term of up to ten years.
The schedule below summarizes the activity of officer and employee stock
options for the periods shown:
June 30,
-----------------------
1996 1995
--------- ---------
Balance, January 1, 1996 111,525 143,175
Granted 1,200 29,800
Exercised (29,400) (10,575)
Terminated (1,300) (27,500)
------- -------
Balance, end of period 82,025 134,900
======= =======
Weighted average price
at end of period $3.83 $2.90
===== =====
Options exercisable at
June 30, 1996 82,025 125,700
====== =======
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Note 9 - Income Taxes
The Company follows the guidelines in SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109, requires the Company to recognize the tax consequences
of an event under the asset and liability method at the same time such event is
recognized in the financial statements. As specifically related to financial
institutions, the statement also provides that a deferred tax liability
generally will not be recognized for "bad debt reserves" that arose in tax
years beginning before December 31, 1987. However, a deferred tax liability
shall be recognized for such reserves arising in tax years beginning after
December 31, 1987. The Company follows the practice of filing consolidated
federal and state income tax returns. Under SFAS No. 109, the Company had net
deferred tax assets of approximately $2.0 million as of June 30, 1996 which
were primarily related to tax bad debt reserves and excess taxable expense over
book expense related to certain investments.
Note 10 - Recent Developments
On May 29, 1996, the Company and Regions a bank holding company headquartered
in Birmingham, Alabama, entered into the Agreement under which Regions would
acquire the Company. Under the terms of the Agreement, the Company's
stockholders will receive $11.65 per share in cash for each share of common
stock held at the effective time of the acquisition subject to certain
adjustments which may increase or decrease the acquisition consideration by up
to $.29 per share. Such adjustments relate to the net gain or loss that may be
experienced or incurred on the sale of the mortgage-related securities
previously discussed in Note 5 hereto. The acquisition of the Company will be
accounted for as a purchase and is not expected to be completed until the first
quarter of 1997. Regions' acquisition of the Company is subject to customary
closing conditions, including the approval of the Company's stockholders and
all applicable regulatory authorities.
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FLORIDA FIRST BANCORP, INC.
AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(UNAUDITED)
GENERAL
The Company recorded consolidated net income of $662,000 and $1.4 million for
the three and six months ended June 30, 1996, respectively, compared to
$503,000 and $1.1 million, respectively, for the same periods in 1995. The
improvement in earnings, when comparing the three and six-month periods ended
June 30, 1996 to the same periods in 1995, reflects increased net interest
income, loan correspondent fees and service charge income as well as gains on
sales of securities available for sale. These increases were partially offset
by reduced gains on sales of REO combined with higher operating expenses and
increased provisions for income taxes.
FINANCIAL CONDITION
At June 30, 1996, total assets of the Company amounted to $302.7 million, a
decrease of $600,000 from the December 31, 1995 balance of $303.3 million,
primarily due to an aggregate decrease of $14.5 million in securities (both
held-to-maturity and available-for-sale) and a $1.1 million decrease in loans
receivable (including loans held for sale). These decreases were substantially
offset by a $14.7 million increase in cash and cash equivalents. During the
six months ended June 30, 1996, the Company purchased $10.7 million in
mortgage-backed and other securities, sold $12.5 million in securities
available for sale and received $13.1 million in principal repayments. Net
loans receivable decreased by $1.1 million due to loan sales and principal
repayments. Net deposits decreased by $4.4 million primarily due to
disintermediation into other investments and other financial institutions
offering higher yields.
Stockholders' equity at June 30, 1996 was $21.3 million or $6.31 per share
($6.25 on a fully diluted basis) compared to $20.6 million or $6.13 per share
($6.05 on a fully diluted basis) at December 31, 1995. The increase in
stockholders' equity reflected net income and to a lesser extent the issuance
of shares of common stock pursuant to options exercised during the six months
ended June 30, 1996. Partially offsetting this increase were unrealized
losses, net of income taxes, on securities available for sale totalling
$190,000 at June 30, 1996 compared to gains of $112,000 at December 31, 1995.
ASSET QUALITY. At June 30, 1996, the Bank held loans aggregating
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$1.7 million on which the accrual of interest had been discontinued. As a
general policy, all loans delinquent 90 days or more are placed on non-accrual
status. In addition, management reviews other loans which exhibit indications
of potential difficulty to determine which, if any, are impaired as to
collectibility and, therefore, should be placed on non-accrual status prior to
becoming 90 days delinquent. During the three and six months ended June 30,
1996, the difference between the amount of interest income which would have
been recorded had all delinquent loans been accruing throughout the respective
periods and the amount of interest income actually recorded was approximately
$25,000 and $54,000, respectively, compared to $45,000 and $87,000,
respectively, for the same periods in 1995. These amounts also include any
interest accrued through the date immediately preceding the reclassification of
any such loans as REO. The Bank did not have any loans at June 30, 1996 which
were contractually past due 90 days or more and which were still accruing
interest.
Total net non-performing assets (consisting of non-accrual loans, troubled debt
restructurings ("TDRs") and REO) decreased from $2.8 million at December 31,
1995 to $1.7 million at June 30, 1996. This decrease primarily reflects the
reclassification of one loan totalling $752,000 from a TDR to a performing
loan. Certain concessions were made for the borrower at the time the loan was
classified as a TDR, however, the loan is now subject to its original terms and
has performed as agreed under such terms for a significant period of time.
The following table shows comparative data on non-performing assets at the
dates indicated:
Total Non-Performing Assets at
---------------------------------------------------------
June 30, 1996 December 31, 1995 June 30, 1995
---------------------------------------------------------
(dollars in thousands)
Nature of Collateral:
Residential real estate $ 230 $ 190 $ 152
Commercial real estate 1,052 1,371 2,511
Land 186 264 186
Consumer and other 235 137 63
------ ------ ------
1,703 1,962 2,912
Specific valuation allowances (585) (596) (202)
------ ------ ------
1,118 1,366 2,710
Loans considered troubled
debt restructurings 595 1,371 1,399
Loans on properties
under contract to sell 41 42
-- --
Total - net $1,713 $2,778 $4,151
====== ====== ======
Percentage of total assets 0.6% 0.9% 1.4%
====== ====== ======
13
16
The Bank classifies certain loans as TDRs because such loans bear terms which
do not comply with the Bank's standard underwriting criteria and relate to
loans which were troubled or non-performing. Modifications to these loans have
primarily consisted of temporary payment deferrals and extensions of generally
two years or less of the maturity date. Interest earned on all restructured
loans for the three months ended March 31, 1996 was not materially different
from the interest that would have been earned if the modifications had not been
made. The Bank's restructured loans are actually performing loans but are
included in the calculation of non-performing assets because the terms have
been modified due to specific or anticipated difficulties on the part of the
borrower. The Bank has not restructured any loans since the implementation of
SFAS No. 114 and SFAS No. 118 which met the required definition of an impaired
loan. There were no valuation allowances established on the TDRs shown in the
table above.
The Bank's policy as it relates to general reserves uses the guidelines
prescribed by the "Interagency Policy Statement on the Allowance for Loan and
Lease Losses" dated December 21, 1993 ("Policy Statement") and issued by the
Federal Financial Institutions Examination Council ("FFIEC"). These
guidelines, which effectively supersede previous OTS proposals, provides
guidance (i) on the responsibilities of management for the assessment and
establishment of an adequate allowance and (ii) for the agencies' examiners to
use in evaluating the adequacy of such allowance and the policies utilized to
determine such allowance. The Policy Statement also sets forth quantitative
measures for analyzing the allowance with respect to assets classified
substandard and doubtful, described below, and with respect to the remaining
portion of an institution's loan portfolio. While the Policy Statement sets
forth quantitative measures, such guidance is not intended as a "floor" or
"ceiling." Management of the Bank has reviewed all of the factors and the
various quantitative measures to create a methodology that serves as the basis
for subjectively determining the necessary level for general reserves.
The general reserve is management's estimate of loss since there is no way to
measure with certainty all of the risks inherent in the Bank's loan portfolio.
In addition to the factors mentioned above, the subjective analysis includes,
among others, such factors as historical loss experience, identification of
adverse situations related to borrowers, current economic conditions and
collateral values. Using this formula and all available information,
management believes that its allowance for losses was adequate as of June 30,
1996; however, changing economic and market factors that affect real estate
values could result in the need to provide additions to the Bank's allowance in
the future. Such additional provisions would adversely affect net income. At
June 30, 1996 and December 31, 1995 specific loan loss reserves
14
17
amounted to $585,000 and $596,000, respectively, while general reserves
totalled approximately $3.1 million for both periods.
RESULTS OF OPERATIONS
As stated previously, the Company's consolidated results of operations are
primarily those of the Bank. The largest components of the Bank's total income
and total expense are interest items. As a result, the Bank's earnings are
largely dependent upon its net interest income, which is determined principally
by the Bank's interest rate spread (i.e., the difference between the yields
earned on its interest-earning assets, primarily loans and investments, and the
rates paid on its interest-bearing liabilities, primarily deposits and
borrowings) and the relative amounts of interest-earning assets and
interest-bearing liabilities. The interest rate spread is affected by economic
factors that generally affect interest rates, the level of loan demand, other
investment opportunities and deposit flows. When interest-earning assets equal
or exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income. However, to the extent interest-bearing
liabilities exceed interest-earning assets, the interest rate spread must be
increased in order to offset the excess of interest-bearing liabilities in
order to produce net interest income. The measurement of net interest income
divided by average interest-earning assets, called the net interest margin,
indicates the relationship between interest-earning assets and interest-bearing
liabilities. If interest-bearing liabilities exceed interest-earning assets,
the net interest margin will be less than the interest rate spread. If the
opposite situation exists, as it does for the Company, the net interest margin
will be greater than the interest rate spread.
NET INTEREST INCOME. The Company earned net interest income (before provision
for losses on loans) of $2.4 million and $4.8 million for the three and six
months ended June 30, 1996, respectively, compared to $2.1 million and $4.2
million, respectively, for the same periods in 1995. General market rates of
interest increased during the first part of 1995, declined during the remainder
of 1995 and began to increase again during the first half of 1996. Declining
market rates of interest had a positive affect on the Company's net interest
income since its liabilities during the period repriced more often than its
assets. Market rates began to increase during the middle of the first quarter
of 1996 and continued to trend upward during the second quarter of 1996 but
such changes had a limited effect on the Company's net interest income since
any adjustable-rate assets had not yet repriced upward.
The Company's net interest margins for the three and six month periods ended
June 30, 1996 were 3.38% and 3.37%, respectively, compared to 3.04% and 3.13%,
respectively, for the same periods
15
18
in 1995. The interest rate spreads for the three and six months ended June 30,
1996 were both 3.16%, compared to 2.84% and 2.90%, respectively, for the same
periods in 1995. Average interest-earning assets increased by $10.8 million
and $15.0 million, respectively, when comparing the three and six months ended
June 30, 1996 to the same periods in 1995, while average interest-bearing
liabilities only increased by $9.8 million and $14.1 million during the same
periods. The Company's net interest margin improved due to both increased net
interest income as well as, to a lesser degree, increases in net
interest-earning assets.
The following table sets forth for the periods indicated information regarding
(i) the average balances of interest-earning assets and interest-bearing
liabilities, (ii) the total dollar amount of interest income and interest
expense, and (iii) the resultant average yields and costs and the net interest
margins. Average balances are determined on a monthly basis unless otherwise
noted. The yields and costs at June 30, 1996 are also included.
16
19
Three Months Ended June 30
-------------------------------------------------------------------------
1996 1995
------------------------------- -------------------------------------
At
June 30, 1996 Average Average Average Average
Yield/Rate Balance Interest Yield/Rate(1) Balance Interest Yield/Rate(1)
---------- ------- -------- ---------- ------- -------- ----------
(Dollar Amounts in Thousands)
Interest-earning assets:
Loans 8.64% $174,319 $3,876 8.89% $174,454 $3,711 8.51%
Mortgage-backed
securities(3) 6.62 29,734 456 6.14 31,802 509 6.40
Other securities(3,4) 6.51 63,617 986 6.20 50,151 786 6.27
Other interest-earning
assets(3,5) 5.40 20,647 279 5.44 21,111 322 6.12
------ --- ------ ---
Total interest-earning
assets 7.70% 288,317 5,597 7.77 277,518 5,328 7.68
---- ------- ----- ---- ------- ----- ----
Interest-bearing
liabilities:
Deposits 4.42 248,216 2,737 4.44 238,033 2,789 4.70
FHLB advances(3,6) 6.08 28,963 440 6.11 29,324 438 5.99
------ --- ------ ---
Total interest-bearing
liabilities 4.61 277,179 3,177 4.61 267,357 3,227 4.84
---- ------- ----- ---- ------- ----- ----
Net earning balance and
interest rate spread 3.09% $ 11,138 3.16% $ 10,161 2.84%
==== ======== ==== ======== ====
Average interest-earning
assets, net interest income
and net interest margin on
average interest-earning
assets(7) $288,317 $2,420 3.38% $277,518 $2,101 3.04%
Six Months Ended June 30
-----------------------------------------------------------------------------------------
1996 1995
------------------------------------------------ --------------------------------------
Average Average Average Average
Balance Interest Yield/Rate(1) Balance Interest Yield/Rate(1)
------- -------- ---------- ------- -------- ----------
(Dollar Amounts in Thousands)
Interest-earning assets:
Loans $174,421 $ 7,694 8.82% $174,415 $7,353 8.43%
Mortgage-backed
securities(3) 32,265 1,024 6.35 31,822 1,006 6.32
Other securities(3,4) 65,461 2,081 6.36 50,400 1,562 6.20
Other interest-earning
assets(3,5) 16,710 467 5.61 17,192 527 6.19
------ --- ------ ---
Total interest-earning
assets 288,857 11,266 7.80 273,829 10,448 7.63
------- ------ ---- ------- ------ ----
Interest-bearing
liabilities:
Deposits 248,727 5,540 4.48 233,875 5,294 4.56
FHLB advances(3,6) 29,747 890 6.02 30,453 906 6.00
------ --- ------ ---
Total interest-bearing
liabilities 278,474 6,430 4.64 264,328 6,200 4.73
------- ----- ---- ------- ----- ----
Net earning balance and
interest rate spread $ 10,383 3.16% $ 9,501 2.90%
======== ==== ======== ====
Average interest-earning
assets, net interest income
and net interest margin on
average interest-earning
assets(7) $288,857 $4,836 3.37% $ 273,829 $ 4,248 3.13%
====
(1) Average yields and costs have been annualized using information for the
three- and six-month periods, respectively.
(2) Yield calculations at June 30, 1996 are based on note rates, and do not
consider non-accrual of interest for loans that are non-performing.
Management's estimate of the effect of loans on non-accrual would indicate
no material change in the yields stated.
(3) Average balances were calculated on a daily basis. Other securities
include those available for sale.
(4) Includes the cost of hedging activities. Without hedging activities, the
average yield on other securities would have been 6.23% and 6.39% for the
three and six months ended June 30, 1996, respectively, and 6.31% and
6.24% for the same respective periods in 1995. The average yield on
interest-earning assets would have been 7.77% and 7.81% for the three and
six months ended June 30, 1996, respectively, and 7.69% and 7.64% for the
same respective periods in 1995.
(5) Includes interest-bearing deposits and stock in the FHLB of Atlanta.
(6) Includes the cost of hedging activities. Without hedging activities, the
average cost of borrowings would have been 5.99% and 5.89% for the three
and six months ended June 30, 1996, respectively, and 5.87% and 5.88% for
the same respective periods in 1995. The average cost of total
interest-bearing liabilities would have been 4.60% and 4.63% for the three
and six months ended June 30, 1996, respectively, and 4.83% and 4.72% for
the same respective periods in 1995.
(7) Net interest margin is the net interest income divided by average
interest-earning assets.
17
20
INTEREST INCOME
INTEREST ON LOANS. For the three and six months ended June 30, 1996, interest
on loans increased $165,000 and $341,000, respectively, compared to the same
periods in 1995 primarily due to an increase in the average portfolio yield
from 8.51% and 8.43% for the three and six months ended June 30, 1995, to 8.89%
and 8.82% for the same periods in 1996. The increase in the average portfolio
yield when comparing the three and six month periods was due to generally
rising market rates of interest as well as an increase in the origination of
commercial and consumer loans which generally carry higher rates of interest
than residential loans. During the first quarter of 1996, the Company
purchased a $2.0 million credit card portfolio which also contributed to the
increase in the average portfolio yield. The gross average loan portfolio
balance for the 1995 and 1996 three and six month periods was approximately
$174.4 million.
INTEREST ON MORTGAGE-BACKED SECURITIES. For the three months ended June 30,
1996, interest on mortgage-backed securities decreased by $53,000 when compared
to the same period in 1995 primarily due to a decrease in the average balance
outstanding from $31.8 million for the three months ended June 30, 1995 to
$29.7 million for the same period in 1996. The average portfolio yield on
mortgage-backed securities also decreased from 6.40% to 6.14% when comparing
the three months ended June 30, 1995 to the same period in 1996. The decreases
in both the average portfolio balance and portfolio yield were primarily due to
sales of mortgage-backed securities during 1996. For the six months ended June
30, 1996, interest on mortgage-backed securities increased by $18,000 when
compared to the same period in 1995 due to a minimal increase in the average
portfolio yield from 6.32% to 6.35% for the six months ended June 30, 1995 and
1996, respectively, as well as an increase in the average balance outstanding
from $31.8 million to $32.3 million.
INTEREST AND DIVIDENDS ON OTHER SECURITIES. Interest and dividends on other
securities increased from $786,000 to $986,000 for the second quarter and from
$1.6 million to $2.1 million for the six months when comparing the same periods
in 1995 to 1996. The primary cause for such increases were increases in the
average portfolio balances from $50.2 million and $50.4 million for the three
and six months ended June 30, 1995 to $63.6 million and $65.5 million for the
same periods in 1995. During 1995 and 1996, proceeds from loan sales and
repayments were used to purchase securities (collateralized by mortgage loans)
carrying higher yields and increased interest-rate sensitivity. Also
contributing to the increase in interest and dividends on other securities for
the six month period was an increase in the average portfolio yield from 6.20%
to 6.36%. The Company purchased fixed-rate
18
21
securities with higher yields which caused the increase in the average portfolio
yield. The yield on securities declined however, from 6.27% to 6.20% when
comparing the quarter ended June 30, 1995 to June 30, 1996. This was caused by
negative adjustments to the premium amortizations due to updated analysis of the
respective prepayment assumptions and estimated remaining lives of these
securities.
During 1995, the Company purchased a five-year, $5.0 million notional amount
interest rate cap providing protection if the three-year Constant Maturity
Treasury index ("CMT") exceeds 9.00% The Company purchased the cap to hedge a
specific adjustable-rate security because it has a lifetime cap of 9.00%. The
amortization of the cap premium reduced interest earned on securities by
approximately $10,000 during the first half of both 1996 and 1995. See
"Interest Rate Sensitivity" included herein.
OTHER INTEREST INCOME. Other interest income, consisting of interest on
insured certificates of deposit and FHLB of Atlanta overnight deposits as well
as dividends on FHLB stock, decreased from $322,000 and $527,000 for the three
and six months ended June 30, 1995, respectively, to $279,000 and $467,000 for
the same periods in 1996, which decreases were primarily attributable to
decreases in the average yield earned from 6.12% and 6.19% for the three and
six months ended June 30, 1995 to 5.44% and 5.61% for the same periods in 1996.
During 1995, the majority of the certificates of deposit (which had somewhat
higher yields than the funds on deposit at the FHLB of Atlanta) matured and the
cash returned which contributed to the decrease in the average yield earned
when comparing the two periods. Also contributing to the decrease in other
interest income was the decrease in the average portfolio balance from $21.1
million and $17.2 million to $20.6 million and $16.7 million for the three and
six months ended June 30, 1995 and 1996, respectively. Available funds were
used to purchase mortgage-backed and other securities which caused this
reduction in the average portfolio balance when comparing the two periods.
INTEREST EXPENSE
INTEREST EXPENSE ON DEPOSITS. Deposit interest expense decreased from $2.8
million to $2.7 million for the three months ended June 30, 1996 compared to
the second quarter of 1995 and increased from $5.3 million to $5.5 million for
the six months ended June 30, 1996 compared to the first half of 1995. The
minimal decrease in deposit interest expense when comparing the three months
ended June 30, 1995 to the same period in 1996 was primarily due to a decrease
in the average cost of deposits from 4.70% to 4.44%. Although general market
rates of interest increased during much of the first half of 1996, they have
not reached levels experienced
19
22
in mid-1995 which occurred after five quarters of rising rates. All but
offsetting this decrease was the increase in the average balance of deposits
from $238.0 million to $248.2 million for the three months ended June 30, 1995
and 1996, respectively. The increase in interest expense experienced during
the six months ended June 30, 1995 and 1996 was primarily due to the increase
in the average balance of deposits from $233.9 million for the six months ended
June 30, 1995 to $248.7 million for the same period in 1996. Partially
offsetting the increase in interest expense on deposits was a decrease in the
average cost of deposits from 4.56% for the six months ended June 30, 1995, to
4.48% for the same period in 1996. The average balance of deposits increased
as a result of deposits received from the opening of a new branch during
January 1995 as well as to marketing promotions conducted by the Company to
encourage investment in core deposits such as NOW accounts and in certificates
of deposit with a term of less than one year. The Company also received an
additional $2.0 million in public deposits from the State of Florida during the
first quarter of 1996. The Company currently participates in the State of
Florida's public deposits program which allows the Company to accept deposits
from municipalities, schools and other state agencies in amounts that would not
be covered by federal deposit insurance. State law requires that the Bank
pledge securities to cover the uninsured portion of the deposits of the state.
INTEREST EXPENSE ON BORROWINGS. For the three months ended June 30, 1996,
interest expense on borrowings increased by $2,000 to $440,000 compared to the
same period in 1995 due primarily to an increase in the weighted average cost.
Although the weighted average cost of borrowings increased from 5.99% for the
three months ended June 30, 1995, to 6.11% for the same period in 1996, average
borrowings decreased from $29.3 million for the three months ended June 30,
1995, to $29.0 million for the three months ended June 30, 1996 which all but
offset the increase in interest expense on borrowings. For the six months
ended June 30, 1996, interest expense decreased by $16,000 to $890,000 compared
to the same period in 1995 primarily due to a decrease in the average balance
outstanding from $30.4 million to $29.7 million for the six months ended June
30, 1995 and 1996, respectively. The average cost of borrowings was 6.00% and
6.02% for the six months ended June 30, 1995 and 1996, respectively. The
average balance outstanding decreased during both periods primarily due to
repayments as the Company used deposits instead of higher cost borrowings to
fund its obligations.
During 1994, the Company purchased a five-year, $5.0 million notional amount
interest rate cap providing protection if the three-month London Interbank
Offering Rate ("LIBOR") exceeds 8.00%. This cap was purchased to lengthen the
Company's
20
23
liabilities and hedge its then current interest margin. The cap added
approximately $9,000 and $18,000 to the Bank's cost of funds for the three and
six months ended June 30, 1996 and 1995. See "Interest Rate Sensitivity"
included herein.
PROVISION FOR LOSSES ON INTEREST-EARNINGS ASSETS. For the six months ended
June 30, 1995, $10,000 was provided for estimated losses on one residential
loan involving flood damage. For the same period in 1996, no loan loss
provisions were established due to the low level of the Company's
non-performing assets. See "Asset Quality" included herein for further details
and a discussion of loss reserves.
OTHER INCOME. Other income increased from $584,000 to $613,000 for the three
months ended June 30, 1995 when compared to the same period in 1996 and also
increased from $1.1 million for the six months ended June 30, 1995 to $1.2
million for the six months ended June 30, 1996. The increase in other income
when comparing the first half of 1995 to the same period in 1996 resulted from
increases in loan correspondent and servicing fees and service charges, as well
as gains on securities available for sale. Partially offsetting these increases
was a decline in gains on sales of loans and REO.
Loan correspondent and servicing fees increased from $118,000 and $247,000 for
the three and six months ended June 30, 1995, respectively, to $155,000 and
$301,000 for the same periods in 1996, respectively. This increase resulted
from an improvement in the market value of loans sold to correspondents (on a
servicing released basis). For the three and six months ended June 30, 1995,
loans sold to correspondents amounted to $3.0 million and $5.7 million compared
to $3.0 million and $6.8 million for the same periods in 1996.
Service charges (deposit account fees and certain loan fees) increased by
$12,000 from $189,000 for the three months ended June 30, 1995 to $201,000 for
the same period in 1996 and increased by $44,000 from $363,000 for the six
months ended June 30, 1995 to $407,000 for the same period in 1996. This
increase resulted from an increased fee structure and increased activity
related to various service charges.
Gains on sales of loans amounted to $36,000 and $77,000 for the three and six
months ended June 30, 1996, compared to gains of $77,000 and $94,000 for the
same periods in 1995. During the three and six months ended June 30, 1996,
$5.7 million and $12.0 million in loans were sold to FHLMC and $209,000 and
$664,000 of loans were sold to the Student Loan Marketing Association ("SLMA").
The gains during the 1995 periods resulted from the increased value of loans in
the secondary market reflecting the
21
24
higher interest rates being borne on newly originated fixed-rate mortgages.
The Company sold $2.4 million and $5.7 million in loans to FHLMC as well as
$322,000 and $530,000 to SLMA during the three and six months ended June 30,
1995. Gains on sales of loans for the three and six month periods ended June
30, 1996 and 1995 consists of several components. These components include the
actual gain/loss on sale of loans to FHLMC and SLMA, the gains recorded under
the provisions of SFAS No. 122 (See Note 6 included herein), the market value
adjustment for the loans held for sale and the hedging transaction gain/loss
(See Note 4 included herein). The table below details the components discussed
above:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
----------- ------------- ------------ ------------
Gain/(loss) on sale
to FHLMC and SLMA $(70) $43 $(51) $90
Gain under SFAS No. 122 52 34 109 34
Market value adjustment on
loans held for sale - net 25 (10)
Hedging transactions 29 29 (30)
---- --- ---- ---
Gain/(loss) on sale of loans $ 36 $77 $ 77 $94
==== === ==== ===
Gains on sales of securities available for sale amounted to $17,000 and
$30,000, respectively, for the three and six months ended June 30, 1996. The
Company sold $4.8 million of mortgage-backed securities from its available for
sale portfolio and reinvested the funds in similar securities with higher
yields. In addition, the Company sold $7.6 million of private issue
mortgage-backed securities in order to comply with the terms of the Agreement
with Regions. See Notes 5 and 10 included herein. Losses on sales of
securities available for sale for the six months ended June 30, 1995 resulted
from sales recorded during the first quarter of 1995. The Company sold $6.3
million of U.S. Treasury securities from its available for sale portfolio at a
loss of $72,000. These securities were sold to obtain funds for reinvestment
in assets with higher yields. In addition, during the first quarter of 1995,
Service First sold its ownership in equity securities at a gain of $7,000 which
partially offset the losses recorded.
Gains on trading securities amounted to $3,500 for both the three and six
months ended June 30, 1995 due to the sale of 3,000 shares of stock held by FFB
during the second quarter of 1995. No such gains occurred for either the three
or six months ended June 30, 1996.
22
25
Gains on sales of REO amounted to $108,000 and $109,000 for the three and six
months ended June 30, 1996, respectively, compared to $60,000 and $214,000 for
the same periods in 1995. During the second quarter of 1996, the Company
recognized the deferred gain on the sale of one REO property sold in 1995 since
the loan has been performing and now has an appropriate loan-to-value ratio.
The gains during the first half of 1995 primarily resulted from the sale of one
REO property consisting of vacant gulf-front land.
OPERATING EXPENSES. For the three months ended June 30, 1996 and 1995, total
operating expenses were $2.0 million and $1.9 million, respectively, and were
$3.7 million and $3.6 million, for the six months ended June 30, 1996 and 1995,
respectively. When reviewing the six month comparison, compensation and
benefits increased by $80,000, occupancy and equipment increased by $58,000,
advertising, promotion and training increased by $69,000, and other operating
expenses reflected an increase of $90,000. These increases were partially
offset by a decrease in one-time expenses related to the Reorganization and the
Bank's name change totalling $153,000, as well as by a $12,000 decrease in
federal deposit and other insurance premiums.
Compensation and benefits reflected cost increases relating to additional staff
and other general increases in salaries for merit and promotion. In addition,
medical insurance costs for 1996 have increased 20% over the 1995 levels.
Occupancy and equipment expense increased due to expected increases related to
computer services as well as increased depreciation expense on branch
renovations made in 1995. During the first half of 1996, advertising,
promotion and training expense was higher than the first half of 1995 due to
promotional and marketing costs related to efforts to increase the Company's
market share in Bay County. Other operating expenses increased primarily as a
reflection of costs associated with the Company's credit card program as well
as various other consumer loan products. The remaining increase in other
operating expenses was due to normal increases in the cost of doing business;
however, none of the amounts related to these individual expenses was
considered material.
During 1995, the costs related to the Reorganization and name change were
one-time expenses. As a consequence, the Company experienced a decrease in
this expense category when compared to 1996. Decreased deposit insurance
premiums from .26% to .23% of average deposit balances caused the decrease in
federal deposit and other insurance expense which was partially offset by
increased average deposit balances.
INCOME TAXES. For the three and six month periods ended June 30, 1996 and
1995, tax expense of $403,000 and $302,000, respectively, and $852,000 and
$617,000, respectively, was recorded. The
23
26
provision for income tax expense was calculated through the use of the
estimated annual income tax rates based on the prior year's annual taxable
income. See Note 9 included herein for a discussion of SFAS No. 109 and its
effect on the Company's tax provisions for the periods.
INTEREST RATE SENSITIVITY
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that same time period. A gap is considered positive when the amount of
interest rate sensitive assets maturing within a specific time frame exceeds
the amount of interest rate sensitive liabilities maturing within that same
time frame. During a period of falling interest rates, a negative gap would
tend to result in an increase in net interest income while a positive gap would
tend to adversely affect net income. In a rising interest rate environment, an
institution with a positive gap would generally be expected, absent the effects
of other factors, to experience a greater increase in the yield of its assets
relative to the costs of its liabilities and thus an increase in the
institution's net interest income, whereas an institution with a negative gap
would be expected to experience the opposite results. At June 30, 1996, total
interest-bearing liabilities maturing or repricing within one year exceeded
total interest-earning assets maturing or repricing within the same time period
by $22.8 million, representing a negative cumulative one-year gap of 7.52% of
total assets compared to $4.9 million or a negative 1.76% of assets at December
31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Company's ability to generate sufficient cash to meet
the funding needs of current loan demand, savings deposit withdrawals, and to
pay operating expenses. The Company is required under applicable federal
regulations to maintain specified levels of "liquid" investments in qualifying
types of United States Treasury, federal agency and other securities having
maturities of five years or less. Regulations currently in effect require the
Company to maintain liquid assets of not less than 5% of its net withdrawable
accounts plus short-term borrowings, of
24
27
which short-term liquid assets must consist of not less than 1%. These levels
may be changed from time to time by the OTS to reflect economic conditions.
The Company's average regulatory liquidity ratios for the six months ended June
30, 1996 and 1995 were approximately 12.5% and 16.9%, respectively.
The Company's primary sources of funds have historically consisted of deposits,
amortization and prepayments of outstanding loans, borrowings from the FHLB of
Atlanta and other sources, including reverse repurchase agreements, and loans
or securities available for sale. At June 30, 1996, the total of approved loan
commitments amounted to $7.7 million, and the Company had $6.3 million of
undisbursed loan funds. Scheduled repayments of FHLB advances due for the
remainder of 1996 totalled $12.0 million at June 30, 1996. The amount of
savings certificates which mature during the remainder of 1996 totalled $73.5
million at June 30, 1996, a substantial portion of which management believes,
on the basis of prior experience, will remain in the Company.
The Company's consolidated stockholders' equity totalled $21.3 million or 7.1%
of total consolidated assets at June 30, 1996 while the Bank's equity equalled
$20.8 million or 6.9% of total consolidated assets at June 30, 1996 based on
generally accepted accounting principles ("GAAP"). Under OTS regulations, the
regulatory capital requirements are (i) tangible capital equal to 1.5% of
adjusted total assets, (ii) core capital equal to 3.0% of adjusted total
assets, and (iii) total risk-based capital equal to 8.0% of risk-weighted
assets. The Bank's actual capital ratios were 6.9% for tangible and core
capital and 15.2% for risk-based capital at June 30, 1996. The Bank is
currently in compliance with all existing applicable regulatory capital
standards. See Note 7 included herein and Note 15 in the Annual Report for
further information related to the Bank's capital compliance.
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IMPACT OF REGULATORY DEVELOPMENTS
The deposits of the Company are insured by the Savings Association Insurance
Fund ("SAIF") administered by the Federal Deposit Insurance Corporation
("FDIC"), which, due to the large number of failed savings institutions in
recent years, has been unable to attain a statutorily-required reserve ratio of
1.25% of insured deposits. Legislation has been proposed pursuant to which
SAIF members would pay a special one-time assessment on their deposits as of
March 31, 1995 in an amount which in the aggregate would be sufficient to bring
the reserve ratio in the SAIF Fund to the required level. Based on the level
of reserves maintained by the SAIF Fund, it was anticipated that the amount of
the special assessment required to recapitalize the SAIF was to be
approximately 80 to 85 basis points of SAIF-assessable deposits although such
legislation has not been adopted. A one-time special assessment of 85 basis
points would result in the Company incurring a pre-tax charge of approximately
$2.0 million, which management believes would not affect the Company's status
as a "well-capitalized" institution under applicable laws and regulations.
Management of the Company currently is unable to predict whether there will be
legislation to recapitalize the SAIF and, if so, the final form of such
legislation and whether and to what extent the Company may be assessed in order
to recapitalize the SAIF.
Unless and until the SAIF is recapitalized and the insurance premiums of
SAIF-insured institutions are reduced to levels which are comparable to those
currently being assessed members of the Bank Insurance Fund ("BIF")
administered by the FDIC, which insures the deposits of commercial banks and
has attained the reserve ratio required by law, SAIF-insured institutions will
have a significant, competitive disadvantage to BIF-insured institutions with
respect to the pricing of loans and deposits and the ability to achieve lower
operating costs. In order to reduce this competitive advantage, a number of
SAIF-insured institutions recently have filed applications to establish
affiliated BIF-insured institutions, which could attract deposits formerly
maintained at the related SAIF-insured institution, thus reducing the
institutions' overall effective rate for deposit insurance. The transfer of
insured deposits from SAIF-insured institutions to BIF-insured institutions
could materially reduce the deposits at SAIF-insured institutions, which could
reduce the insurance assessments obtained by the SAIF and, thus, adversely
affect the ability of the SAIF to resolve troubled savings institutions and to
meet its other obligations. Such reduction in the assessable deposit base of
SAIF could result in an increase in the amount of any one-time assessment of
SAIF-insured institutions which may be imposed in order to recapitalize the
SAIF.
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II. Other Information
1. Legal Proceedings
Other than the proceedings discussed in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995, (the
status of which has not materially changed) the Company is only
involved in routine legal proceedings occurring in the ordinary
course of business.
2. Changes in Securities - not applicable.
3. Defaults upon Senior Securities - not applicable.
4. Submission of Matters to a Vote of Security Holders - not
applicable.
5. Other Information - not applicable
6. Exhibits and Reports on Form 8-KSB
A. Exhibits: not applicable
B. Reports on Form 8-KSB
On June 10, 1996, the Company filed one report on Form 8-K
related to an announcement made on May 29, 1996 that the
Company had entered the Agreement with Regions.
No other reports on Form 8-K were filed during the quarter
ended June 30, 1996.
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30
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLORIDA FIRST BANCORP, INC.
Date: August 13, 1996 By: /s/ Andrew W. Stein
------------------------------
ANDREW W. STEIN
President and
Chief Executive Officer
Date: August 13, 1996 By: /s/ Barbara Larrabee Haag
------------------------------
BARBARA LARRABEE HAAG
Senior Vice President and
Chief Financial Officer
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