<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1998
REGISTRATION NO. 333-63803
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
REPUBLIC BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
---------------------
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FLORIDA 6711 59-3347653
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
111 SECOND AVENUE, N.E., SUITE 300
ST. PETERSBURG, FL 33701
(727) 823-7300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------
CHRISTOPHER M. HUNTER, ESQ.
GENERAL COUNSEL AND CORPORATE SECRETARY
111 SECOND AVENUE, N.E., SUITE 300
ST. PETERSBURG, FL 33701
(727) 823-7300
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
---------------------
COPIES TO:
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JOHN A. BUCHMAN, ESQ. JOHN P. GREELEY, ESQ.
HOLLAND & KNIGHT LLP SMITH, MACKINNON, GREELEY,
2100 PENNSYLVANIA AVENUE, N.W., SUITE 400 BOWDOIN & EDWARDS, P.A.
WASHINGTON, D.C. 20037-3202 CITRUS CENTER, SUITE 800
(202) 955-3000 255 SOUTH ORANGE AVENUE
ORLANDO, FL 32801
(407) 843-7300
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), SHALL
DETERMINE.
==============================================================================
<PAGE> 2
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION
2410 NORTH ORANGE BLOSSOM TRAIL
ORLANDO, FLORIDA 32804
October 5, 1998
Dear Lochaven Federal Savings and Loan Association Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders
(the "Special Meeting") of Lochaven Federal Savings and Loan Association
("Lochaven") to be held at 2410 North Orange Blossom Trail, Orlando, Florida
32804 on November 4, 1998, at 9:00 a.m., local time, notice of which is
enclosed.
At the Special Meeting, you will be asked to consider and vote on a
proposal to approve an Agreement and Plan of Merger, dated as of May 6, 1998
(the "Agreement"), by and among Republic Bancshares, Inc. ("Bancshares"), its
wholly-owned subsidiary, Republic Bank ("Republic"), and Lochaven, pursuant to
which Lochaven will merge (the "Merger") with and into Republic. Upon
consummation of the Merger, each share of Lochaven's common stock issued and
outstanding (except for certain shares held by Lochaven or Bancshares or its
subsidiaries, in each case other than shares held in a fiduciary capacity or in
satisfaction of debts previously contracted, and excluding shares held by
Lochaven stockholders who perfect their dissenters' rights of appraisal) will be
converted into and exchanged for 0.2776 of a share of Bancshares' common stock
in accordance with the terms of the Agreement.
The accompanying Proxy Statement/Prospectus includes a description of the
proposed Merger and provides other information concerning Bancshares, Republic,
Lochaven and the Special Meeting. Please read these materials carefully and
consider thoughtfully the information set forth in them.
The Agreement and the Merger have been approved unanimously by your Board
of Directors and are recommended by the Board to you for approval. Each member
of the Board of Directors of Lochaven has indicated his or her intent to vote
all of the shares of Lochaven's common stock beneficially owned by such member
in favor of the Agreement. Consummation of the Merger is subject to certain
conditions, including approval of the Agreement by Lochaven's stockholders. All
required regulatory approvals for the Merger have already been obtained.
Stockholders of Lochaven who perfect their dissenters' rights of appraisal
prior to the proposed Merger and comply with all required procedures will be
entitled to receive the fair value of their Lochaven shares in cash, as provided
by applicable law. A copy of Section 552.14 of the Rules and Regulations of the
Office of Thrift Supervision is attached to the Proxy Statement/Prospectus.
It is important to understand that approval of the Agreement requires the
affirmative vote by holders of two-thirds of the shares of common stock of
Lochaven outstanding and entitled to vote at the Special Meeting. Accordingly,
whether or not you plan to attend the Special Meeting, you are urged to
complete, sign and return promptly the enclosed proxy card. If you attend the
Special Meeting, you may vote in person if you wish, even if you previously have
returned your proxy card. The proposed Merger is a significant step for
Lochaven, and your vote on this matter is of great importance. ON BEHALF OF THE
BOARD OF DIRECTORS, I URGE YOU TO VOTE FOR APPROVAL OF THE AGREEMENT BY MARKING
THE ENCLOSED PROXY CARD "FOR" ITEM ONE.
Sincerely,
/s/ Robert O. Smedley
Robert O. Smedley
President and
Chief Executive Officer
<PAGE> 3
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION
2410 NORTH ORANGE BLOSSOM TRAIL
ORLANDO, FLORIDA 32804
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 4, 1998
Notice is hereby given that a Special Meeting of Stockholders (the "Special
Meeting") of Lochaven Federal Savings and Loan Association ("Lochaven"), will be
held at 2410 North Orange Blossom Trail, Orlando, Florida 32804 on November 4,
1998, at 9:00 a.m., local time, for the following purposes:
1. Merger. To consider and vote on the approval of an Agreement and
Plan of Merger, dated as of May 6, 1998 (the "Agreement"), by and among
Republic Bancshares, Inc. ("Bancshares"), Republic Bank, a wholly-owned
subsidiary of Bancshares ("Republic"), and Lochaven, pursuant to which (i)
Bancshares will acquire all of the issued and outstanding common stock of
Lochaven in connection with the merger of Lochaven with and into Republic
(the "Merger") and (ii) each share of Lochaven's common stock issued and
outstanding (except for certain shares held by Lochaven or Bancshares or
its subsidiaries, in each case other than shares held in a fiduciary
capacity or in satisfaction of debts previously contracted, and excluding
shares held by Lochaven stockholders who perfect their dissenters' rights
of appraisal) will be converted into and exchanged for 0.2776 of a share of
Bancshares' common stock in accordance with the terms of the Agreement, all
as described more fully in the accompanying Proxy Statement/Prospectus; and
2. Other Business. To transact such other business as may properly
come before the Special Meeting, or any adjournment or postponement
thereof.
Only stockholders of record at the close of business on September 24, 1998,
are entitled to receive notice of and to vote at the Special Meeting or any
adjournment or postponement thereof.
Stockholders of Lochaven have a right to dissent from the Merger and obtain
payment of the fair or appraised value of their shares in cash by complying with
the applicable provisions of Section 552.14 of the Rules and Regulations of the
Office of Thrift Supervision (the "OTS Regulations"), which are attached to the
accompanying Proxy Statement/Prospectus as Appendix C. DISSENTING STOCKHOLDERS
WHO COMPLY WITH THE PROCEDURAL REQUIREMENTS OF SECTION 552.14 OF THE OTS
REGULATIONS WILL BE ENTITLED TO RECEIVE PAYMENT IN CASH OF THE FAIR OR APPRAISED
VALUE OF THEIR SHARES.
The Board of Directors of Lochaven unanimously recommends that holders of
Lochaven common stock vote to approve the Agreement.
We urge you to complete, sign and return the enclosed proxy card as
promptly as possible, whether or not you plan to attend the Special Meeting in
person. The proxy may be revoked by the person executing the proxy by filing
with the Secretary of Lochaven an instrument of revocation or a duly executed
proxy bearing a later date or by electing to vote in person at the Special
Meeting.
By Order of the Board of Directors
/s/ Robert O. Smedley
Robert O. Smedley
President and Chief Executive Officer
Orlando, Florida
October 5, 1998
<PAGE> 4
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LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION REPUBLIC BANCSHARES, INC.
PROXY STATEMENT PROSPECTUS
169,084
SHARES OF COMMON STOCK
(PAR VALUE $2.00 PER SHARE)
</TABLE>
Republic Bancshares, Inc. ("Bancshares") has filed a registration statement
with the Securities and Exchange Commission (the "Commission"), covering up to a
maximum of 169,084 newly-issued shares of common stock of Bancshares, par value
$2.00 per share ("Bancshares Common Stock"), to be issued pursuant to the merger
(the "Merger") of Lochaven Federal Savings and Loan Association ("Lochaven")
with and into Republic Bank, a wholly-owned subsidiary of Bancshares
("Republic"). At the effective time of the Merger (the "Effective Time"), (i)
Bancshares will acquire all of the issued and outstanding common stock of
Lochaven, par value $0.01 per share ("Lochaven Common Stock"), and (ii) each
share of Lochaven Common Stock (except for certain shares held by Lochaven or
Bancshares or its subsidiaries, in each case other than shares held in a
fiduciary capacity or in satisfaction of debts previously contracted, and
excluding shares held by Lochaven stockholders who perfect their dissenters'
rights of appraisal) will be converted into and exchanged for 0.2776 of a share
of Bancshares Common Stock (the "Exchange Ratio") in accordance with the terms
of an Agreement and Plan of Merger, dated as of March 6, 1998, by and among
Bancshares, Republic and Lochaven (the "Agreement"). See "Description of the
Transaction."
The registration statement includes this Proxy Statement/Prospectus, which
constitutes both the prospectus for the Bancshares Common Stock to be issued
upon consummation of the Merger and the proxy statement that is being furnished
to the stockholders of Lochaven in connection with the solicitation by the Board
of Directors of Lochaven of proxies from holders of Lochaven Common Stock for
use at the special meeting of stockholders of Lochaven (the "Special Meeting").
At the Special Meeting, only stockholders of record as of the close of business
on September 24, 1998, will be eligible to consider and vote upon a proposal to
approve the Agreement.
This Proxy Statement/Prospectus and the accompanying proxy form are first
being mailed to stockholders of Lochaven on or about October 5, 1998.
---------------------
THE SHARES OF BANCSHARES COMMON STOCK OFFERED HEREBY ARE NOT DEPOSITS, SAVINGS
ACCOUNTS OR OTHER OBLIGATIONS OF A DEPOSITORY INSTITUTION AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS
ASSOCIATION INSURANCE FUND OR ANY OTHER INSURER OR GOVERNMENT AGENCY.
THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS REFERS HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS OCTOBER , 1998.
<PAGE> 5
We have not authorized anyone to give any information or make any
representation about the Merger or our companies that differs from, or adds to,
the information in this Proxy Statement/Prospectus or in the documents that are
publicly filed by Bancshares with the Commission. Therefore, if anyone does give
you different or additional information, you should not rely on it.
If you are in a jurisdiction where it is unlawful to offer to exchange or
sell, or to ask for offers to exchange or buy, the securities offered by this
Proxy Statement/Prospectus or to ask for proxies, or if you are a person to whom
it is unlawful to direct such activities, then the offer presented by this Proxy
Statement/Prospectus does not extend to you.
The information contained in this Proxy Statement/Prospectus speaks only as
of its date unless the information specifically indicates that another date
applies.
Information in this Proxy Statement/Prospectus about Bancshares and
Republic has been supplied by Bancshares, and information about Lochaven, except
such information described under "Description of the Transaction -- Opinion of
Lochaven's Financial Advisor," has been supplied by Lochaven.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
Bancshares and Lochaven make forward-looking statements in this document,
and Bancshares makes forward-looking statements in the Bancshares public
documents to which we refer, that are subject to risks and uncertainties. These
forward-looking statements include information about possible or assumed future
results of our operations or the performance of the combined company after the
Merger. Also, when we use any of the words "believes," "expects," "anticipates"
or similar expressions, we are making forward-looking statements. Many possible
events or factors could affect the future financial results and performance of
each of our companies and the combined company after the Merger. This could
cause results or performance to differ materially from those expressed in our
forward-looking statements. You should consider these risks when you vote on the
Merger. These possible events or factors include the following:
1. Our revenues after the Merger are lower than we expect, our
restructuring charges are higher than we expect, we lose more deposits,
customers or business than we expect, or our operating costs after the
Merger are greater than we expect;
2. Competition among depository and other financial institutions
increases significantly;
3. We have more trouble integrating our businesses or retaining key
personnel than we expect;
4. Our costs savings from the Merger are less than we expect, or we
are unable to obtain those cost savings as soon as we expect;
5. Changes in the interest rate environment reduce our margins;
6. Conditions in the overall real estate market and the market for
high loan-to-value and other mortgage loans are worse than we expect;
7. General economic or business conditions are worse than we expect;
8. Legislative or regulatory changes adversely affect our business;
9. Technological changes and systems integration, including becoming
year 2000 compliant, are harder to make or more expensive than we expect;
and
10. Adverse changes occur in the securities markets, including the
markets for asset-backed securities.
<PAGE> 6
TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION....................................... iii
DOCUMENTS INCORPORATED BY REFERENCE......................... iv
SUMMARY..................................................... 1
The Parties............................................... 1
Special Meeting of Lochaven Stockholders.................. 5
The Merger; Exchange Ratio................................ 5
Dissenting Stockholders................................... 6
Reasons for the Merger; Recommendation of Lochaven's Board
of Directors........................................... 6
Opinion of Lochaven's Financial Advisor................... 6
Effective Time............................................ 6
Exchange of Stock Certificates............................ 7
Regulatory Approvals...................................... 7
Waiver, Amendment and Termination of the Agreement........ 7
Interests of Certain Persons in the Merger................ 7
Certain Federal Income Tax Consequences of the Merger..... 7
Accounting Treatment...................................... 7
Certain Differences in Stockholders' Rights............... 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 9
RECENT DEVELOPMENTS......................................... 14
RISK FACTORS................................................ 15
COMPARATIVE MARKET PRICES OF BANCSHARES AND LOCHAVEN COMMON
STOCK..................................................... 27
COMPARATIVE PER SHARE DATA.................................. 28
SELECTED FINANCIAL AND OTHER DATA OF BANCSHARES AND
LOCHAVEN.................................................. 29
THE SPECIAL MEETING OF LOCHAVEN STOCKHOLDERS................ 38
General................................................... 38
Record Date; Vote Required................................ 38
DESCRIPTION OF THE TRANSACTION.............................. 40
General................................................... 40
Exchange Ratio............................................ 40
Treatment of Lochaven Options............................. 40
Background of and Reasons for the Merger.................. 41
Opinion of Lochaven's Financial Advisor................... 44
Effective Time of the Merger.............................. 47
Distribution of Bancshares' Stock Certificates and Payment
for Fractional Shares.................................. 47
Conditions to Consummation of the Merger.................. 48
Regulatory Approvals...................................... 48
Waiver, Amendment and Termination of the Agreement........ 49
Conduct of Business Pending the Merger.................... 50
Management of Bancshares and Republic Following the
Merger................................................. 51
Interests of Certain Persons in the Merger................ 51
Dissenting Stockholders................................... 52
Certain Federal Income Tax Consequences of the Merger..... 53
Accounting Treatment...................................... 54
Expenses and Fees......................................... 55
Resales of Bancshares Common Stock........................ 55
EFFECT OF THE MERGER ON RIGHTS OF STOCKHOLDERS.............. 56
Authorized Capital Stock.................................. 56
Amendment of Articles of Incorporation and Bylaws......... 57
Classified Board of Directors and Absence of Cumulative
Voting................................................. 57
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i
<PAGE> 7
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Removal of Directors...................................... 58
Indemnification........................................... 58
Special Meetings of Stockholders.......................... 59
Actions of Stockholders Without a Meeting................. 59
Stockholder Nominations and Proposals..................... 59
Mergers, Consolidation and Sales of Assets................ 60
Dissenters' Rights of Appraisal........................... 60
Stockholders' Rights to Examine Books and Records......... 61
Dividends................................................. 61
COMPARATIVE MARKET PRICES................................... 62
UNAUDITED COMBINED FINANCIAL DATA........................... 63
CERTAIN INFORMATION CONCERNING BANCSHARES................... 71
CERTAIN INFORMATION CONCERNING LOCHAVEN..................... 75
DESCRIPTION OF BANCSHARES COMMON AND PREFERRED STOCK........ 101
LEGAL OPINIONS.............................................. 102
EXPERTS..................................................... 102
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A -- Agreement and Plan of Merger
APPENDIX B -- Opinion of McAllen Capital Partners, Inc.
APPENDIX C -- Provisions of the Rules and Regulations of the
Office of Thrift Supervision Applicable to Dissenting
Stockholders
</TABLE>
ii
<PAGE> 8
AVAILABLE INFORMATION
Bancshares is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information concerning
Bancshares may be inspected and copied at the Commission's Public Reference
Section, Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, where copies may be obtained at prescribed rates, as well as at the
following regional offices: Northeast Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048; and Midwest Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The Commission also
maintains an internet site that contains reports, proxy and information
statements and other information regarding Bancshares. The address of the
internet site is http://www.sec.gov. Bancshares Common Stock is listed on the
Nasdaq Stock Market's National Market (the "Nasdaq National Market"). Copies of
reports, proxy statements and other information concerning Bancshares may also
be inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
This Proxy Statement/Prospectus constitutes part of the Registration
Statement on Form S-4 of Bancshares (including any exhibits and amendments
thereto, the "Registration Statement") filed with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
securities offered hereby. This Proxy Statement/Prospectus does not include all
of the information in the Registration Statement, certain portions of which have
been omitted pursuant to the rules and regulations of the Commission. For
further information about Bancshares and the securities offered hereby,
reference is made to the Registration Statement. The Registration Statement may
be inspected and copied, at prescribed rates, at the Commission's public
reference facilities at the addresses set forth above.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
iii
<PAGE> 9
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed with the Commission by Bancshares
pursuant to the Exchange Act are hereby incorporated by reference herein:
1. Bancshares' Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
2. Bancshares' Proxy Statement for its annual meeting of stockholders
held on April 28, 1998;
3. Bancshares' Quarterly Reports on Form 10-Q for the three-month
periods ended March 31 and June 30, 1998.
All documents filed by Bancshares pursuant to Sections 13(a), 13(c), 14, or
15(d) of the Exchange Act after the date of this Proxy Statement/Prospectus and
prior to the date of the Special Meeting shall be deemed to be incorporated by
reference in this Proxy Statement/Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes hereof to the extent that a
statement contained herein or in any subsequently filed document that also is,
or is deemed to be, incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part hereof, except as so modified or superseded.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THOSE DOCUMENTS ARE AVAILABLE
UPON REQUEST, WITHOUT CHARGE (EXCEPT FOR THE EXHIBITS THERETO), FROM
BANCSHARES-STAN BLAKEY, DIRECTOR OF INVESTOR RELATIONS & COMMUNICATIONS,
REPUBLIC BANCSHARES, INC., 111 SECOND AVENUE, N.E., ST. PETERSBURG, FLORIDA
33701 (TELEPHONE (727) 823-7300). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY OCTOBER 19, 1998.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
iv
<PAGE> 10
SUMMARY
The following is a summary of certain information relating to Bancshares,
Lochaven, the Special Meeting, the proposed Merger, and the offering of shares
of Bancshares Common Stock to be issued in connection therewith. This summary
does not purport to be complete and is qualified in its entirety by the more
detailed information appearing elsewhere or incorporated by reference in this
Proxy Statement/ Prospectus. Stockholders are urged to read carefully the entire
Proxy Statement/Prospectus, including the Appendices. As used in this Proxy
Statement/Prospectus, the terms "Bancshares" and "Lochaven" refer to those
entities, respectively, and, where the context requires, "Bancshares" refers to
that entity and its subsidiaries. The term "Combined Company" refers to
Bancshares and Lochaven after consolidation.
THE PARTIES
Bancshares
General. Bancshares is a registered bank holding company whose principal
subsidiary is Republic, a Florida-chartered commercial bank headquartered in St.
Petersburg, Florida. As a result of the sale of several Florida-based banking
organizations to out-of-state bank holding companies in January 1998, Bancshares
is now the largest independent commercial bank holding company headquartered in
Florida, based on its June 30, 1998 assets of $2.2 billion. Bancshares, through
Republic, provides a broad range of traditional commercial banking services,
emphasizing real estate and business lending. Republic is also active in
mortgage banking through its Flagship Mortgage Services ("Flagship") division,
which originates first-lien residential mortgages and high loan-to-value debt
consolidation and home improvement loans ("High LTV Loans") for sale and
securitization. Flagship's High LTV Loans are secured by junior liens on
residential real estate where the combined amount of indebtedness secured by the
residence may be up to 125% of the value of the residence and often exceeds
100%. Currently, Bancshares' branch network consists of 55 branches in Brevard,
Broward, Columbia, Hernando, Manatee, Marion, Monroe, Orange, Osceola, Pasco,
Pinellas, Sarasota, Seminole and Suwannee Counties, Florida and one branch in
Glynn County, Georgia. At June 30, 1998, Bancshares' consolidated assets totaled
$2.2 billion, loans held in portfolio totaled $1.4 billion, deposits totaled
$1.7 billion and stockholders' equity was $170.3 million. Bancshares is
regulated by the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), and Republic is regulated by the Florida Department of Banking and
Finance (the "Department") and the Federal Deposit Insurance Corporation (the
"FDIC"). Bancshares' other depository institution subsidiary, Republic Bank, FSB
(the "Savings Bank"), is a federally chartered savings bank headquartered in St.
Petersburg with an interstate branch located in Brunswick, Georgia that
commenced operations on August 21, 1998. The Savings Bank is regulated by the
Office of Thrift Supervision ("OTS") and the FDIC. Republic's and the Savings
Bank's deposits are insured by the FDIC up to applicable limits, and both
institutions are members of the Federal Home Loan Bank of Atlanta ("FHLB").
In May 1993, William R. Hough and John W. Sapanski (together, the
"Principal Stockholders") acquired from Republic's prior controlling stockholder
more than 99.0% of Republic's outstanding common stock (the "Change in
Control"). Mr. Hough is a member of Bancshares' and Republic's Boards of
Directors and Mr. Sapanski serves as Bancshares' and Republic's Chairman of the
Board, Chief Executive Officer and President.
In May 1998, Bancshares completed a public offering of 2,642,150 shares of
Bancshares Common Stock at price to the public of $29.50 per share (the "May
1998 Offering"). The number of common equivalent shares outstanding as of that
date increased to 9,713,035. Net proceeds from the May 1998 Offering were $72.9
million after deducting underwriting discounts and commissions and expenses. Of
the net proceeds, $70.2 million were used to increase the common equity of
Republic Bank while $2.7 million were retained by Bancshares to be used for the
capitalization of the Savings Bank.
The principal executive offices of Bancshares are located at 111 Second
Avenue, N.E., Suite 300, St. Petersburg, Florida 33701, and its telephone number
is (727) 823-7300.
1
<PAGE> 11
Acquisitions and Branch Expansion. Following the Change in Control,
Republic began to implement a program of expanding its branches and lines of
business. In December 1993, Republic acquired 12 branches from CrossLand Savings
FSB, a federal stock savings bank ("CrossLand"), and assumed deposit liabilities
of $327.7 million and purchased loans secured by real estate and other real
estate owned ("ORE") amounting to $201.6 million from CrossLand (the "CrossLand
Purchase and Assumption"). The CrossLand Purchase and Assumption almost tripled
Republic's size, increasing total assets to $531.3 million and total deposits to
$494.3 million at December 31, 1993. Additionally, the 12 CrossLand branches
expanded Republic's market coverage to include Manatee and Sarasota Counties and
more than doubled Republic's branch network to a total of 19 branches.
During the latter part of 1994 and throughout 1995, Republic continued to
pursue a strategy of increasing its retail banking presence on the west central
coast of Florida. Republic opened 13 additional new branches, expanding its
market coverage in existing counties and providing entry into Pasco County.
In January 1996, Republic organized Bancshares and became its wholly-owned
subsidiary. Throughout 1997, Bancshares continued its geographic expansion
strategy. In January 1997, Bancshares opened a new branch in Hernando County. In
April 1997, Bancshares acquired Firstate Financial, F.A. ("Firstate"), a federal
savings association headquartered in Orlando, Florida, for a cash purchase price
of $5.5 million (the "Firstate Acquisition"). The Firstate Acquisition increased
Bancshares' presence in central Florida, where Bancshares previously operated a
loan production office ("LPO") but had no branches. On the date of acquisition,
Firstate had total assets of $71.1 million and total deposits of $67.9 million.
The Firstate Acquisition was accounted for using purchase accounting rules.
On September 19, 1997, F.F.O. Financial Group, Inc., St. Cloud, Florida
("FFO"), the holding company parent of First Federal Savings and Loan
Association of Osceola County, which was also majority-controlled by Mr. Hough,
was merged into Bancshares in a stock-for-stock transaction (the "FFO Merger").
The FFO Merger expanded Bancshares' presence in central Florida by adding 11
branches in Brevard, Orange and Osceola Counties. On the date of the FFO Merger,
FFO had total assets of $328.4 million, total loans of $233.3 million and total
deposits of $303.4 million. The FFO Merger was accounted for as a corporate
reorganization in which Mr. Hough's interests in FFO and Bancshares were
combined at historical cost in a manner similar to a pooling of interests, while
the minority interests in FFO were combined with Bancshares at fair market value
using purchase accounting rules.
On June 19, 1998, Bancshares acquired three branch offices of NationsBank,
N.A. ("NationsBank") and four branch offices of NationsBank's affiliate, Barnett
Bank, N.A. ("Barnett"), including the loans and other assets recorded at such
offices (collectively, the "NationsBank Florida Branches"). The NationsBank
Florida Branches are located throughout the State of Florida and include three
in Monroe County (Key West, Marathon and Plantation Key), two in Marion County
(Ocala and Silver Springs) and one each in Columbia County (Lake City) and
Suwannee County (Live Oak). When acquired, the NationsBank Florida Branches had
deposit liabilities of $199.9 million and loans of $114.4 million. On August 20,
1998, Bancshares acquired an additional branch (the "Georgia Branch" and,
together with the NationsBank Florida Branches, the "NationsBank Branches") of
Barnett located in Brunswick (Glynn County), Georgia, with the office becoming
an interstate branch of Bancshares's newly-chartered Savings Bank. At the time
of acquisition, the Georgia Branch had deposit liabilities of $16.9 million and
loans of $7.5 million. Bancshares paid a combined deposit and loan premium of
$27.2 million for the NationsBank Branches. Bancshares' acquisitions of the
eight NationsBank Branches were both accounted for using purchase accounting
rules, with the deposit premiums being amortized using the straight-line method
over a 10-year period.
On August 13, 1998, Bancshares purchased a branch office (the "Dime
Branch") in Deerfield Beach (Broward County), Florida from The Dime Savings
Bank, F.S.B. Pursuant to the transaction, Bancshares assumed $209.5 million of
deposits and purchased $60,900 of loans and $100,000 of personal property and
equipment assigned to the Dime Branch. Bancshares' purchase price for the Dime
Branch was $9.8 million, and the transaction was accounted for using purchase
accounting rules and a 10-year straight-line amortization of the deposit
premium.
2
<PAGE> 12
On March 2, 1998, Bancshares and Republic entered into an Agreement and
Plan of Merger, dated as of March 2, 1998 (as amended and restated as of
September 4, 1998, the "BSB Agreement") with Bankers Savings Bank, Coral Gables,
Florida ("BSB"), providing for the merger of BSB with and into Republic (the
"BSB Merger" and with the proposed Merger, the "Proposed Mergers"). BSB is a
federally-chartered savings and loan association headquartered in Coral Gables,
Florida, with two offices located in Dade County in the cities of Coral Gables
and Miami, Florida. As of June 30, 1998, BSB had total assets of approximately
$68.3 million, total loans and loans held for sale of approximately $49.4
million, total deposits of approximately $60.7 million, and total stockholders'
equity of approximately $4.4 million. Upon consummation of the BSB Merger, each
share of BSB common stock issued and outstanding will be exchanged for and
automatically converted into shares of Bancshares Common Stock as determined in
accordance with the exchange ratio formula set forth in the BSB Agreement. It is
anticipated that the BSB Merger will be accounted for as a pooling of interests.
The transaction may be terminated by either BSB or Bancshares if it is not
consummated by December 1, 1998. All required regulatory approvals for the BSB
Merger have been received. See "Unaudited Combined Financial Data" and "Certain
Information Concerning Bancshares -- Recent and Proposed Acquisitions."
If consummated, the Proposed Mergers will increase the total assets of
Bancshares to approximately $2.5 billion (based on most recent available data)
and expand Republic's branch network from 55 to 58 branches in Florida, located
in Brevard, Broward, Columbia, Dade, Hernando, Manatee, Marion, Monroe, Orange,
Osceola, Pasco, Pinellas, Sarasota, Seminole and Suwannee counties, and one
branch in Georgia, located in Glynn County. There can be no assurance that
Bancshares will be able to consummate the Proposed Mergers or, if consummated,
successfully integrate the operations and management of the Proposed Mergers and
its other branch acquisitions this year. See "Risk Factors -- Current
Acquisitions and Ability to Manage Growth and Integrate Operations."
Bancshares anticipates continuing its strategy of geographic expansion for
the foreseeable future through a combination of whole bank and thrift
acquisitions, branch acquisitions and de novo branching, depending upon various
factors, including whether: (i) the transaction will be accretive to Bancshares'
earnings per share no later than one year following consummation; (ii) the
transaction will provide Bancshares with a new or additional location in a
desirable market area; (iii) the transaction will close an existing gap in
Bancshares' Florida branch network; or (iv) the transaction will present
competitive opportunities, such as branches becoming available due to branch
closings, bank mergers and other consolidations.
Mortgage Banking and Lending Activities. During 1996 and 1997, Bancshares
focused on increasing its residential lending capabilities. In conjunction with
the establishment of Flagship in April 1996 and its internal growth, Bancshares
added eight residential LPOs in Florida, one residential LPO in Boston,
Massachusetts, as well as wholesale LPOs in St. Petersburg, Florida and in
Irvine, California. These offices expanded Bancshares product line to include
government-insured first mortgage loans, and, beginning in the fourth quarter of
1996, High LTV Loans. At the same time, Bancshares also began purchasing
residential mortgage loans from mortgage brokers and other third-party
originators for resale. The strategy of Bancshares is to sell or securitize
substantially all of the loans it originates and purchases through Flagship.
Until late 1997, Bancshares sold all of the High LTV Loans and other
mortgage loans originated by Flagship in whole loan sales. In December 1997,
however, Bancshares consummated its first mortgage loan securitization, in which
it securitized $60.0 million of High LTV Loans in a private placement offering.
Bancshares retained servicing rights with respect to the loans that were
securitized.
In June 1998, Bancshares and its wholly owned subsidiary, Republic SPCI
Corp. ("SPC") sold $240.0 million securities backed by $240.0 million of its
High LTV Loans in a private placement securitization (the "June
Securitization"), while retaining the Class B-2 Certificates, a $12.0 million
subordinated interest in the pool of loans that were securitized. Bancshares
retained servicing rights and the residual interest in excess spread with
respect to the loans that were securitized. In September 1998, Bancshares sold
$221 million of its High LTV Loans to the First National Bank of Keystone
("Keystone"). In connection with the transaction, Bancshares paid a servicing
fee to Keystone for the right to service the loans sold to Keystone as well as
other Keystone loans that were subject to a securitization transaction.
Bancshares currently anticipates further
3
<PAGE> 13
whole loan sales or securitizations with respect to the mortgage loans
originated by Flagship on a quarterly or other periodic basis, depending on
then-prevailing market conditions and other factors such as Republic's
capitalization and liquidity.
Business Strategy. Bancshares' business strategy entails: (i) originating
and purchasing real estate-secured loans for portfolio and sale; (ii)
originating business and consumer loans for portfolio; (iii) improving market
share and expanding market coverage through a combination of acquisitions of
other financial institutions, branch purchases and de novo branching; (iv)
increasing non-interest income through expanded mortgage banking activities and
increased emphasis on commercial and retail checking relationships; and (v)
increasing its range of products and services. While pursuing this strategy,
management remains committed to improving asset quality, managing interest rate
risk, enhancing profitability and maintaining its status as a well-capitalized
institution for regulatory capital purposes.
The results of the Bancshares' business strategy include:
- Expanded Branch Network -- Since the Change in Control in 1993,
Bancshares has expanded its retail banking presence from seven branches
in northern Pinellas County to its current 55 branches in Brevard,
Broward, Columbia, Hernando, Manatee, Marion, Monroe, Orange, Osceola,
Pasco, Pinellas, Sarasota, Seminole and Suwanee Counties and one branch
in Glynn County, Georgia. The Proposed Mergers, if consummated, will
provide Bancshares with a two branch presence in Dade County and an
additional branch in Orange County, bringing its total branch network to
58 branches in Florida and one branch in Georgia.
- Substantial Asset Growth -- Since the Change in Control, Bancshares has
increased in asset size from approximately $168.7 million to
approximately $2.2 billion at June 30, 1998. The Proposed Mergers, if all
are consummated, will increase the total asset size of Bancshares to
approximately $2.5 billion. This asset growth is largely attributable to
the opening of new branches and internally-generated deposit and loan
growth, bulk purchases of loan portfolios and deposit assumptions such as
the CrossLand Purchase and Assumption, acquisitions of other financial
institutions such as Firstate, FFO, BSB and Lochaven and branch purchases
such as the NationsBank and Dime Branch purchases.
- Increased Mortgage Banking and Other Fee-Generating
Activities -- Bancshares has increased its non-interest income through
improved revenue from an expanded line of deposit products, and through
the establishment of Flagship, with its emphasis on mortgage banking
activities, both in absolute terms and as a relative percentage of its
net income. In 1997, Flagship contributed approximately $15.3 million in
non-interest income (over 60% of total non-interest income). As a result
of Bancshares having expanded its sources and amounts of fee income,
total non-interest income was 1.85% of average assets in 1997, as
compared to 0.63% in 1994, the first full year after the Change in
Control.
- Improved Asset Quality Ratios -- A significant portion of the assets of
Republic at the time of the Change in Control and the assets acquired in
the CrossLand Purchase and Assumption were nonperforming. As a result,
Republic's nonperforming assets were $44.2 million, or 5.66% of total
assets, at year-end 1993. At June 30, 1998, nonperforming assets of
Bancshares had been reduced to $38.5 million, or 1.79% of total assets,
primarily through the implementation of consistent loan underwriting
policies and procedures, centralization of all credit decision functions,
increasing the size of the loan portfolio, write-offs and sales of ORE.
However, the level of Bancshares' nonperforming assets continues to be
higher than that of peer group institutions. See "Risk
Factors -- Nonperforming Assets."
- Management of Financial Risks -- One of Bancshares' primary objectives is
to reduce fluctuations in net interest income caused by changes in market
interest rates and changes in the value of its mortgage loans held for
sale. To manage this interest rate risk, Bancshares generally limits
holding loans in its portfolio to those that have variable interest rates
tied to interest-sensitive indices and actively manages the maturities
within its investment portfolio. Bancshares also engages in various
hedging activities to reduce its exposure to the interest rate risks
attributable to mortgage loans held pending subsequent sale or
securitization.
4
<PAGE> 14
Lochaven
Lochaven's principal business is to attract deposits, primarily in the form
of retail savings accounts, and to invest these funds, together with borrowings
and other funds, in loans, mortgage-backed securities and other investments.
Lochaven's lending activities focus primarily on single-family residential
lending. Lochaven presently operates a main office in Orlando, Florida and two
LPOs in Central Florida. As of June 30, 1998, Lochaven had total assets of $59.6
million, total loans of $52.3 million, total deposits of $49.8 million and total
stockholders' equity of $2.8 million. The principal office and mailing address
of Lochaven is 2410 North Orange Blossom Trail, Orlando, Florida 32804, and its
telephone number is (407) 426-7622.
Lochaven is regulated by the OTS and the FDIC. Its deposits are insured by
the FDIC up to applicable limits, and Lochaven is a member of the FHLB. See
"Certain Information Concerning Lochaven."
SPECIAL MEETING OF LOCHAVEN STOCKHOLDERS
The Special Meeting of Lochaven will be held at 9:00 a.m., local time, on
November 4, 1998, at 2410 North Orange Blossom Trail, Orlando, Florida 32804,
for the purpose of considering and voting on approval of the Agreement and to
transact such other business as may properly come before the meeting. See "The
Special Meeting of Lochaven Stockholders."
Only holders of record of Lochaven Common Stock at the close of business on
September 24, 1998 (the "Record Date"), will be entitled to vote at the Special
Meeting. The affirmative vote of two-thirds of the shares of the Lochaven Common
Stock outstanding and entitled to be voted at the Special Meeting will be
required to approve the Agreement. As of the Record Date, there were 609,094
shares of Lochaven Common Stock issued and outstanding.
The directors and executive officers of Lochaven and their affiliates and
associates beneficially owned, as of the Record Date, 271,104 shares (or
approximately 42.0% of the outstanding shares) of Lochaven Common Stock. Each
member of the Board of Directors of Lochaven has indicated his or her intent to
vote all of the shares of Lochaven Common Stock beneficially owned by such
member in favor of the Agreement and the Merger contemplated thereby. As of the
Record Date, neither Bancshares nor Lochaven held any shares of Lochaven Common
Stock in a fiduciary capacity for others. See "The Special Meeting of Lochaven
Stockholders -- Record Date; Vote Required."
Approval of the Agreement and the Merger by the Bancshares shareholders is
not required under Florida or other applicable law.
THE MERGER; EXCHANGE RATIO
The Agreement provides for the acquisition of Lochaven by Bancshares
pursuant to the Merger of Lochaven with and into Republic. At the Effective Time
set forth in the related Certificate of Merger to be filed with the Department,
each share of Lochaven Common Stock then issued and outstanding (except for
certain shares held by Lochaven or Bancshares or its subsidiaries, in each case
other than shares held in a fiduciary capacity or in satisfaction of debts
previously contracted, and excluding shares held by Lochaven stockholders who
perfect their dissenters' rights of appraisal) will be converted into and
exchanged for 0.2776 of a share of Bancshares Common Stock in accordance with
the terms of the Agreement. Each of the options to purchase Lochaven Common
Stock issued and outstanding at the Effective Time (the "Lochaven Options"),
will also be converted into options to acquire Bancshares Common Stock with each
option to acquire one share of Lochaven Common Stock providing the holder the
right to acquire 0.2776 of a share of Bancshares Common Stock (rounded to the
nearest whole share to the extent a fractional interest arises). The exercise
price for the acquisition of Bancshares Common Stock will be the exercise price
for each share of Lochaven Common Stock subject to the Lochaven Options divided
by the Exchange Ratio, adjusted appropriately for any rounding to whole shares
that may be required. See "Description of the Transaction -- Treatment of
Lochaven Options."
No fractional shares of Bancshares Common Stock will be issued. Rather,
cash will be paid in lieu of any fractional share issued to which any Lochaven
stockholder would otherwise be entitled upon consummation of
5
<PAGE> 15
the Merger, based on the Market Value (as defined herein) of one share of
Bancshares Common Stock at the Effective Time. See "Description of the
Transaction -- General" and "-- Exchange Ratio."
DISSENTING STOCKHOLDERS
Holders of Lochaven Common Stock entitled to vote on the approval of the
Agreement have the right to dissent from the Merger and, upon consummation of
the Merger and the satisfaction of certain required procedures and conditions,
to receive the fair or appraised value of such holders' shares of Lochaven
Common Stock in cash in accordance with the applicable provisions of the OTS
Regulations. The procedures to be followed by Lochaven stockholders who may wish
to dissent from the Merger are summarized under "Description of the
Transaction -- Dissenting Stockholders," and the applicable provisions of the
OTS Regulations are reproduced as Appendix C.
REASONS FOR THE MERGER; RECOMMENDATION OF LOCHAVEN'S BOARD OF DIRECTORS
Lochaven's Board of Directors has unanimously approved the Merger and the
Agreement and has determined that the Merger is in the best interests of
Lochaven and its stockholders. In approving the Agreement, Lochaven's Board
considered a number of different factors, including the financial terms of the
Merger, Lochaven's financial condition, the income tax consequences of the
Merger, the likelihood of the Merger being approved by regulatory authorities
without undue conditions or delay and other information. The Board also took
into account an opinion received from McAllen Capital Partners, Inc.
("McAllen"), Lochaven's financial advisor, that the terms of the Agreement are
fair, from a financial point of view, to the stockholders of Lochaven.
Accordingly, Lochaven's Board unanimously recommends that Lochaven's
stockholders vote FOR approval of the Agreement. EACH MEMBER OF THE BOARD OF
DIRECTORS OF LOCHAVEN HAS INDICATED HIS OR HER INTENTION TO VOTE THOSE SHARES OF
LOCHAVEN COMMON STOCK OVER WHICH SUCH MEMBER HAS VOTING AUTHORITY (OTHER THAN IN
A FIDUCIARY CAPACITY) IN FAVOR OF THE AGREEMENT. See "Description of the
Transaction -- Background of and Reasons for the Merger."
OPINION OF LOCHAVEN'S FINANCIAL ADVISOR
McAllen has rendered an opinion to Lochaven that the terms of the Agreement
are fair, from a financial point of view, to the stockholders of Lochaven. The
opinion of McAllen is attached as Appendix B to this Proxy Statement/Prospectus.
Lochaven stockholders are urged to read the opinion in its entirety for a
description of the procedures followed, assumptions made, matters considered and
limitations on the review undertaken in connection therewith. For additional
information regarding McAllen's opinion, see "Description of the
Transaction -- Opinion of Lochaven's Financial Advisor."
EFFECTIVE TIME
Subject to the conditions to the obligations of the parties to effect the
Merger, the Effective Time will occur on the date and at the time set forth in
the Certificate of Merger to be filed by Republic and Lochaven with the
Department. Unless otherwise agreed upon by Bancshares and Lochaven, and subject
to the conditions to the obligations of the parties to effect the Merger, the
parties will use their reasonable best efforts to cause the Effective Time to
occur by the tenth business day (as determined by Bancshares) following the last
to occur of: (i) the effective date (including the expiration of any applicable
waiting period) of the last federal or state regulatory approval or consent
required for the Merger (which has already occurred); or (ii) the date on which
the Agreement is approved by the requisite vote of Lochaven's stockholders. The
parties expect that all conditions to consummation of the Merger will be
satisfied so that the Merger can be consummated during the fourth quarter of
1998, although there can be no assurance as to whether or when the Merger will
occur. See "Description of the Transaction -- Effective Time of the Merger,"
"-- Conditions to Consummation of the Merger" and "-- Waiver, Amendment and
Termination of the Agreement."
6
<PAGE> 16
EXCHANGE OF STOCK CERTIFICATES
Promptly after the Effective Time, Bancshares will cause its exchange
agent, ChaseMellon Shareholders Services (the "Exchange Agent"), to mail to the
former stockholders of Lochaven appropriate transmittal materials, which will
include instructions for the exchange of such stockholders' certificates
representing shares of Lochaven Common Stock for certificates representing
shares of Bancshares Common Stock. LOCHAVEN STOCKHOLDERS SHOULD NOT SEND IN
THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE THE FORM LETTER OF TRANSMITTAL AND
INSTRUCTIONS FROM THE EXCHANGE AGENT. See "Description of the
Transaction -- Distribution of Bancshares Stock Certificates."
REGULATORY APPROVALS
The Merger is subject to approval by the FDIC, the Federal Reserve and the
Department. All required regulatory approvals for the Merger have been obtained
by Bancshares. See "Description of the Transaction -- Conditions to Consummation
of the Merger" and "-- Regulatory Approvals."
WAIVER, AMENDMENT AND TERMINATION OF THE AGREEMENT
The Agreement may be terminated, and the Merger abandoned, at any time
prior to the Effective Time by mutual action of the Boards of Directors of both
Bancshares and Lochaven, or by action of the Board of Directors of either party
under certain circumstances, including if the Merger is not consummated by
December 1, 1998, unless the failure to consummate by such time is due to a
breach of the Agreement by the party seeking to terminate. If for any reason the
Merger is not consummated, Lochaven will continue to operate as a separate
financial institution under its present management. See "Description of the
Transaction -- Waiver, Amendment and Termination of the Agreement."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Bancshares' and Lochaven's management and Board of
Directors have interests in the Merger in addition to their interests as
stockholders generally. These interests relate to, among other things,
provisions in the Agreement regarding indemnification, eligibility for certain
employee benefits, existing employment and change of control agreements and the
payments to be made thereunder as a consequence of the Merger and the treatment
of outstanding stock options. See "Description of the Transaction -- Interests
of Certain Persons in the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). An
opinion of counsel as to the federal income tax consequences will be obtained,
but no ruling will be requested from the Internal Revenue Service. It is
anticipated that Bancshares will receive an opinion from its special counsel
Holland & Knight LLP, that, among other things, a stockholder of Lochaven who
exchanges shares of Lochaven Common Stock for Bancshares Common Stock in the
Merger will not recognize gain, provided that stockholders of Lochaven will
recognize gain to the extent such stockholders receive cash in lieu of
fractional shares of Bancshares Common Stock or upon perfection of their
dissenters' rights. Holders of Lochaven Common Stock should consult with their
own tax advisors regarding the federal, state, local and foreign tax
consequences of the Merger to them individually. See "Description of the
Transaction -- Certain Federal Income Tax Consequences of the Merger."
ACCOUNTING TREATMENT
It is anticipated that the acquisition of Lochaven will be treated as a
"pooling of interests" transaction by Bancshares for accounting purposes. See
"Description of the Transaction -- Accounting Treatment."
7
<PAGE> 17
CERTAIN DIFFERENCES IN STOCKHOLDERS' RIGHTS
At the Effective Time, Lochaven stockholders, whose rights are governed by
the Home Owners' Loan Act of 1933, as amended ("HOLA"), the OTS Regulations and
Lochaven's Charter and Bylaws, will automatically become Bancshares
stockholders, and their rights as Bancshares stockholders will be determined by
the Florida Business Corporation Act ("FBCA") and Bancshares' Articles of
Incorporation and By-Laws.
The rights of Bancshares stockholders differ from the rights of Lochaven
stockholders in certain important respects. See "Effect of the Merger on Rights
of Stockholders."
8
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth Bancshares' unaudited selected consolidated
financial and other data at the dates and for the periods indicated. The data at
June 30, 1998 and 1997, and for the six months ended June 30, 1998 and 1997, are
unaudited and, in the opinion of Bancshares' management, contain all adjustments
(none of which were other than normal recurring entries) necessary for a fair
presentation of the results for such unaudited periods. The selected operations
data for the three and six months ended June 30, 1998 are not necessarily
indicative of the results of operations for the entire fiscal year. This
information should be read in conjunction with "Selected Financial and Other
Data of Bancshares and Lochaven" and the discussion under the headings
"Comparison of Results of Operations for the Three Months Ended June 30, 1998
and 1997," "Comparison of Results of Operations for the Six Months Ended June
30, 1998 and 1997" and "Comparison of Balance Sheets at June 30, 1998 and
December 31, 1997" included elsewhere herein.
UNAUDITED SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
OPERATING DATA:
Interest income............................................. $ 71,893 $ 49,221
Interest expense............................................ 36,972 24,963
---------- ----------
Net interest income......................................... 34,921 24,258
Loan loss provision......................................... 1,525 1,639
---------- ----------
Net interest income after loan loss provision............... 33,396 22,619
Other noninterest income.................................... 23,747 6,453
General and administrative (G&A) expenses................... 52,828 22,707
Other noninterest expense................................... 690 617
---------- ----------
Net income before income taxes and minority interest........ 3,625 5,748
Income tax provision........................................ (1,375) (2,178)
Minority interest in income from subsidiary trust........... (842) --
Minority interest in FFO (net of tax)....................... -- (415)
---------- ----------
Net income.................................................. $ 1,408 $ 3,155
========== ==========
PER SHARE DATE:
Earnings per share -- diluted............................... $ 0.16 $ 0.47
---------- ----------
Weighted average shares outstanding -- diluted.............. 8,712,367 7,002,356
========== ==========
Earnings per share -- basic................................. $ 0.18 $ 0.54
========== ==========
Weighted average shares outstanding -- basic................ 7,786,911 5,853,633
========== ==========
BALANCE SHEET DATA (AT PERIOD END):
Total assets................................................ $2,155,025 $1,321,573
Investment and mortgage backed securities................... 109,760 140,899
Loans held for sale......................................... 410,113 72,487
Portfolio loans, net of unearned income..................... 1,374,797 995,864
Allowance for loan losses................................... 20,296 19,328
Goodwill and premium on deposits............................ 28,765 397
Deposits.................................................... 1,741,377 1,165,042
Stockholders' equity........................................ 170,347 71,254
Book value per share........................................ 16.26 10.79
</TABLE>
9
<PAGE> 19
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
SELECTED FINANCIAL RATIOS:
Return on average assets.................................... 0.16% 0.50%
Return on average equity.................................... 2.61 8.99
Equity to assets............................................ 7.90 5.39
Equity and minority interest in preferred subsidiary to
assets.................................................... 9.24 --
Portfolio loans/deposit ratio............................... 78.95 85.48
Net interest spread......................................... 3.85 3.52
Net interest margin......................................... 4.18 4.10
G&A expense to average assets(1)............................ 3.11 3.17
G&A efficiency ratio(1)..................................... 67.30 69.30
Nonperforming loans to portfolio loans...................... 2.13 1.99
Nonperforming assets to total assets........................ 1.79 2.08
Loan loss allowance to portfolio loans(2)................... 1.48 1.94
Loan loss allowance to nonperforming loans(2)
Originated portfolio...................................... 90.92 90.96
July 1997 bulk purchase of loans.......................... 27.64 --
March 1995 bulk purchase of loans......................... 263.80 441.82
CrossLand loan portfolio.................................. 409.57 106.60
Other purchased loan portfolios........................... 17.82 46.67
Total............................................. 69.19 97.32
OTHER DATA (AT PERIOD END):
Number of branch banking offices............................ 53 45
Number of full-time equivalent employees.................... 1,439 856
</TABLE>
- ---------------
(1) Commercial banking segment only.
(2) See "Note 6 -- Allowance for Loan Losses" for a discussion of the allocation
and availability of loan loss allowance among portfolio of loans within
Republic.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
1997
Overview
Bancshares incurred a net loss of $1.7 million or $0.23 per share on a
diluted basis for the three months ended June 30, 1998, compared with a gain of
$1.2 million or $0.17 per share for the same period in 1997. During the second
quarter of 1998, Bancshares expensed approximately $10.8 million of indirect
loan production costs associated with loans held for sale at period-end. Also, a
$3.0 million portion of the gain on the June Securitization was required to be
deferred for recognition until the third quarter of 1998.
Business Segment Information
Bancshares' operations are divided into two business segments, commercial
banking and mortgage banking. Commercial banking activities include Bancshares'
lending for portfolio purposes, deposit gathering through the retail branch
network, investment and liquidity management. Mortgage banking activities, which
operate through Flagship, a separate division of Republic, include originating
and purchasing mortgage loans for sale or securitization. Republic provides
support for its mortgage banking division in areas such as secondary marketing,
data processing and financial management. All funding for the mortgage banking
division is provided through Republic. The following are the business segment
results of operation for the three months ended June 30, 1998 and 1997.
Bancshares has elected to report its business segments without allocation of
income taxes and minority interests.
10
<PAGE> 20
BUSINESS SEGMENT DATA
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ----------------------------------
COMMERCIAL MORTGAGE COMPANY COMMERCIAL MORTGAGE COMPANY
BANKING BANKING TOTAL BANKING BANKING TOTAL
---------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
TOTAL ASSETS (AT
PERIOD-END)................. $1,731,591 $423,434 $2,155,025 $1,249,086 $72,487 $1,321,573
OPERATING DATA:
Interest income............. $ 28,619 $ 9,496 $ 38,115 $ 23,810 $ 1,534 $ 25,344
Interest expense............ 14,170 5,687 19,857 12,240 582 12,822
---------- -------- ---------- ---------- ------- ----------
Net interest
income............ 14,449 3,809 18,258 11,570 952 12,522
Loan loss provision........... 1,032 -- 1,032 501 -- 501
---------- -------- ---------- ---------- ------- ----------
Net interest income after loan
loss provision.............. 13,417 3,809 17,226 11,069 952 12,021
Noninterest income............ 2,531 8,687 11,218 2,024 725 2,749
General and administrative
(G&A) expenses.............. 12,067 17,829 29,896 10,057 2,167 12,224
Merger expenses............... 294 -- 294 -- -- --
Provision for losses on ORE... 120 -- 120 120 -- 120
Other noninterest expense..... 15 -- 15 59 -- 59
Amortization of goodwill and
premium on deposits......... 160 -- 160 124 -- 124
---------- -------- ---------- ---------- ------- ----------
Net income (loss)
before taxes &
minority
interest.......... $ 3,292 $ (5,333) (2,041) $ 2,733 $ (490) 2,243
========== ======== ========== =======
Income tax benefit
(expense)................... 800 (863)
Minority interest in income
from subsidiary trust (net
of tax)..................... (422) --
Minority interest in FFO (net
of tax)..................... -- (227)
---------- ----------
Net income (loss)... $ (1,663) $ 1,153
========== ==========
</TABLE>
Commercial Banking Activities
Income from commercial banking activities in the second quarter of 1998 was
$3.3 million compared with $2.7 million for the second quarter of 1997, an
increase of $559,000 or 20.5%. Net interest income after provision for loan
losses increased from $11.1 million to $13.4 million, and noninterest income
increased by $507,000. This increase more than offset the $2.0 million increase
in G&A expenses, which were $12.1 million during the second quarter of 1998
compared with $10.1 million for the same period a year ago. The earnings
improvements were primarily the result of continued growth in Bancshares'
commercial banking loan portfolio and expense savings from Bancshares' 1997
acquisitions.
Mortgage Banking Activities
Residential first- and second-lien loans closed for the quarter ended June
30, 1998 were $357.5 million compared with $97.6 million for the same period of
1997. Bancshares sold $227.5 million of loans during the second quarter of 1998,
$130.0 million less than the amount of loans closed during the second quarter of
1998. Consequently, loans held for sale increased to $410.1 million at June 30,
1998. Bancshares expensed approximately $10.8 million in indirect loan
production costs in the second quarter of 1998 that relate to loans held for
sale.
11
<PAGE> 21
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1997
Overview
Net income for the six months ended June 30, 1998 was $1.4 million or $0.16
per share on a diluted basis compared with $3.2 million or $0.47 per share for
the second quarter of 1997. Return on average assets for the first half of 1998
was 0.16%, while return on average equity was 2.61%.
Business Segment Information
The following are the business segment results of operation for the six
months ended June 30, 1998 and 1997.
BUSINESS SEGMENT DATA
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ----------------------------------
COMMERCIAL MORTGAGE COMPANY COMMERCIAL MORTGAGE COMPANY
BANKING BANKING TOTAL BANKING BANKING TOTAL
---------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
TOTAL ASSETS (AT
PERIOD-END)................. $1,731,591 $423,434 $2,155,025 $1,249,086 $72,487 $1,321,573
OPERATING DATA:
Interest income............. $ 54,518 $ 17,375 $ 71,893 $ 46,662 $ 2,559 $ 49,221
Interest expense............ 27,662 9,310 36,972 23,904 1,059 24,963
---------- -------- ---------- ---------- ------- ----------
Net interest
income............ 26,856 8,065 34,921 22,758 1,500 24,258
Loan loss provision........... 1,525 -- 1,525 1,639 -- 1,639
---------- -------- ---------- ---------- ------- ----------
Net interest income after loan
loss provision.............. 25,331 8,065 33,396 21,119 1,500 22,619
Noninterest income............ 4,555 19,192 23,747 4,742 1,711 6,453
General and administrative
(G&A) expenses.............. 21,718 31,110 52,828 19,086 3,621 22,707
Merger expenses............... 294 -- 294 -- -- --
Provision for losses on ORE... 40 -- 40 290 -- 290
Other noninterest expense..... 37 -- 37 80 -- 80
Amortization of goodwill and
premium on deposits......... 319 -- 319 247 -- 247
---------- -------- ---------- ---------- ------- ----------
Net income (loss)
before taxes &
minority
interest.......... $ 7,478 $ (3,853) 3,625 $ 6,158 $ (410) 5,748
========== ======== ========== =======
Income tax expense............ (1,375) (2,178)
Minority interest in income
from subsidiary trust (net
of tax)..................... (842) --
Minority interest in FFO (net
of tax)..................... -- (415)
---------- ----------
Net income.......... $ 1,408 $ 3,155
========== ==========
</TABLE>
Commercial Banking Activities
Income from commercial banking activities was $7.5 million for the six
months ended June 30, 1998, compared to $6.2 million for the same period of
1997. Net interest income increased by $4.1 million while G&A expenses increased
by $2.6 million. This earnings improvement was largely the result of the
additional income and operating efficiencies from Bancshares' 1997 acquisitions.
12
<PAGE> 22
Mortgage Banking Activities
First- and second-lien residential loans closed during the first six months
of 1998 totaled $680.8 million, a $513.4 million increase over the same period
last year. Loans held for sale at June 30, 1998 were $410.1 million or 60.2% of
total loan production for Flagship during the first six months of 1998. A
majority of the expenses associated with that increased loan production was
charged to operations during the first half of 1998. Any revenues associated
with loans held for sale will not be recognized until the quarters in which such
loans are sold.
COMPARISON OF BALANCE SHEETS AT JUNE 30, 1998 AND DECEMBER 31, 1997
Overview
Total assets were $2.2 billion at June 30, 1998, compared to $1.6 billion
at December 31, 1997, an increase of $602.6 million or 38.8%. This increase
included $155.6 million in assets from the acquisition of the NationsBank
Florida Branches in June 1998. Also, during the second quarter of 1998,
Bancshares completed a public offering of 2,642,150 shares of Bancshares Common
Stock, realizing net proceeds of $72.9 million, which provided the capital
necessary to support Bancshares' 1998 acquisitions. On June 25, 1998, Bancshares
completed a private placement of $240.0 million of securities backed by $240.0
million of High LTV Loans.
Trading Assets
Bancshares records all mortgage-related securities resulting from
securitization of Bancshares' loans held for sale as trading assets. In the June
Securitization, Bancshares retained a $12.0 million subordinate tranche of the
securities from the securitization and the residual interest in cash flows. All
of the assets retained from the June Securitization have been recorded as
trading assets at their fair value. The fair value assigned to the residual
interest from the June Securitization was based on an evaluation of the present
value of expected future cash flows using a 15% discount rate, a cumulative
default rate equivalent to 10.7% of the face amount of the loans and prepayment
rate resulting in an average expected life of the pool of loans of 4.2 years.
Management reviews the fair value determination of its trading assets quarterly
and any valuation adjustments are reflected in current period results of
operations.
Loans and Loans Held for Sale
Total loans held in portfolio increased $225.1 million from $1.1 billion at
the prior year-end to $1.4 billion at June 30, 1998. A $114.4 million portion of
the increase was attributable to loans purchased in Bancshares' acquisition of
the NationsBank Florida Branches. Real estate-secured loans increased during the
period by $203.4 million to $1.3 billion or 93.8% of total portfolio loans.
Loans held for sale increased by $258.7 million to $410.1 million, with
residential loans secured by first liens increasing by $169.2 million to $270.7
million and High LTV Loans increasing by $88.1 million to $135.2 million.
Allowance for Loan Losses
The allowance for loan losses amounted to $20.3 million (1.5% of portfolio
loans) at June 30, 1998, compared with $20.8 million (1.8% of portfolio loans)
at December 31, 1997. At June 30, 1998, the allowance for loan losses included
$14.4 million allocated to loans originated by Bancshares, $2.4 million
allocated to the loans in a March 1995 bulk purchase, $951,000 allocated to the
loans in a July 1997 bulk purchase, $942,000 allocated to the CrossLand loan
portfolio and $1.6 million allocated to other loan purchases. For a discussion
of discounts on purchased loans and the use of amounts allocated to the
allowance for loan losses, see the notes to Bancshares' Consolidated Financial
Statements included elsewhere herein. Other activity relating to the allowance
in 1998 included provisions for loan losses of $1.5 million, part of which was a
$0.5 million charge to provision for the originated portfolio, offset by the
transfer of allowances from the March 1995 bulk loan purchase to loan discount
of $1.0 million. Loan charge-offs (net of recoveries) were $964,000.
13
<PAGE> 23
Nonperforming Assets
Nonperforming assets amounted to $38.5 million or 1.79% of total assets at
June 30, 1998, compared with $34.2 million or 2.2% of total assets at December
31, 1997. Nonperforming loans totaled $29.3 million at June 30, 1998, an
increase of $3.5 million from the prior year-end total of $25.8 million. This
was primarily due to a $5.2 million increase in nonperforming residential loans.
Commercial real estate loans and commercial (business) nonperforming loans
decreased by $1.5 million. ORE balances were generally unchanged.
Stockholders' Equity
Stockholders' equity was $170.3 million at June 30, 1998, or 7.9% of total
assets, compared to $95.5 million or 6.15% of total assets at December 31, 1997.
At June 30, 1998, Republic's tier 1 ("leverage") capital ratio was 7.33%, its
tier 1 risk-based capital ratio was 9.4%, and its total risk-based capital ratio
was 10.49%, all in excess of minimum FDIC capital guidelines for an institution
to be considered a "well-capitalized" bank. Bancshares' tier 1 ("leverage")
ratio, tier 1 risk-based capital ratio and total risk-based capital ratios were
7.55%, 9.66% and 10.76%, respectively. In May 1998, Bancshares completed a
public offering of 2,642,150 shares of Bancshares Common Stock at an offering
price of $29.50 per share, realizing net proceeds of $72.9 million after
deducting underwriters' discounts and offering expenses.
RECENT DEVELOPMENTS
Republic National Bank of Miami v. Republic Bank
On August 7, 1998, Republic National Bank of Miami brought an action
against Republic in the United States District Court for the Southern District
of Florida seeking to enjoin Republic from using the term "REPUBLIC" or
"REPUBLIC BANK" in connection with any business that Republic conducts in the
State of Florida. Given Republic's long-standing use of the name "REPUBLIC BANK"
and the existence of other financial institutions in the State of Florida also
using the name "Republic," Bancshares believes the lawsuit filed by Republic
National Bank of Miami to be entirely without merit and intends to defend itself
vigorously in any ensuing litigation.
Suntrust Bank Loan Agreement/Trust Preferred Offering
On September 24, 1998, Bancshares entered into a loan agreement ("Loan
Agreement") with SunTrust Bank, Central Florida, National Association
("SunTrust"), pursuant to which SunTrust extended a non-revolving line of credit
for up to $25.0 million to Bancshares. Interest on the loans made pursuant to
the line of credit ("Loans") is payable monthly, and the maturity date for the
Loans is September 25, 1999. Certain terms of the loan agreement, including the
interest rate to be paid, are contingent upon Bancshares reducing its investment
in assets related to High LTV Loans. On September 25, 1998, Bancshares received
the full $25.0 million in advances under the line of credit.
Bancshares contributed the proceeds of the Loans to Republic in order to
maintain the regulatory capital of Republic at "well-capitalized" levels and to
support Republic's planned branch expansion activities. It is currently
anticipated that the Loans will be repaid with the proceeds of an offering of
cumulative trust preferred securities by a statutory business trust that will be
affiliated with Bancshares. The offering is expected to take place during the
fourth quarter of 1998.
NationsBank and Barnett Branch Lease Assumptions
Republic and NationsBank and Barnett have recently entered into a series of
lease assumption and sublease agreements providing for Republic to lease space
and operate its own branch offices at the sites of up to 23 former branches of
NationsBank and Barnett Bank that were or are being closed in connection with
the merger of NationsBank and Barnett. These branch offices are located
throughout the State of Florida in Broward, Clay, Collier, Dade, Marion, Palm
Beach, Pinellas, Polk and Volusia Counties. In addition to assuming
NationsBank's and Barnett's lease obligations, Republic has agreed to pay
approximately $3.0 million to NationsBank (for furniture, fixtures and equipment
and certain real estate and as a premium) in connection with these lease
assumption transactions. Regulatory approval for Republic to establish branch
offices at the NationsBank and Barnett branch locations is pending.
14
<PAGE> 24
RISK FACTORS
LOCHAVEN STOCKHOLDERS SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER
INFORMATION CONTAINED AND INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS, THE FOLLOWING FACTORS IN EVALUATING BANCSHARES BEFORE
DECIDING HOW TO VOTE ON THE PROPOSALS CONTAINED HEREIN. CERTAIN OF THESE FACTORS
ARE DISCUSSED IN MORE DETAIL ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS,
INCLUDING, WITHOUT LIMITATION, UNDER THE CAPTIONS "SUMMARY," "DESCRIPTION OF THE
TRANSACTION," "CERTAIN INFORMATION CONCERNING BANCSHARES" AND "CERTAIN
INFORMATION CONCERNING LOCHAVEN." LOCHAVEN STOCKHOLDERS SHOULD ALSO NOTE, IN
PARTICULAR, THAT THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT, AND SECTION
21E OF THE EXCHANGE ACT, THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. WHEN
USED IN THIS PROXY STATEMENT/PROSPECTUS, OR IN THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "MAY," INTEND"
AND "EXPECT" AND SIMILAR EXPRESSIONS IDENTIFY CERTAIN OF SUCH FORWARD-LOOKING
STATEMENTS. ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY
FROM THOSE CONTEMPLATED, EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN. THE CONSIDERATIONS LISTED BELOW REPRESENT CERTAIN IMPORTANT
FACTORS BANCSHARES BELIEVES COULD CAUSE SUCH RESULTS TO DIFFER. THESE
CONSIDERATIONS ARE NOT INTENDED TO REPRESENT A COMPLETE LIST OF THE GENERAL OR
SPECIFIC RISKS THAT MAY AFFECT BANCSHARES. IT SHOULD BE RECOGNIZED THAT OTHER
RISKS, INCLUDING GENERAL ECONOMIC FACTORS AND BUSINESS STRATEGIES, MAY BE
SIGNIFICANT, PRESENTLY OR IN THE FUTURE, AND THE RISKS SET FORTH BELOW MAY
AFFECT BANCSHARES TO A GREATER EXTENT THAN INDICATED.
THE EXCHANGE RATIO; POSSIBLE CHANGES IN STOCK PRICE
Under the terms of the Agreement, stockholders of Lochaven (except for
certain shares held by Lochaven or Bancshares or its subsidiaries, in each case
other than shares held in a fiduciary capacity or in satisfaction of debts
previously contracted, and excluding shares held by Lochaven stockholders who
perfect their dissenters' rights of appraisal) will receive 0.2776 of a share of
Bancshares Common Stock for each share of Lochaven Common Stock held by them.
The price of the Bancshares Common Stock is dependent upon a number of factors
such as general economic conditions and conditions in the securities markets,
that are, to a large extent, beyond the control of Bancshares and Lochaven. The
market price of Bancshares Common Stock at the Effective Time, or on the date on
which certificates representing such shares are received by Lochaven
stockholders, may vary from its price at the date of this Proxy
Statement/Prospectus and at the date of the Special Meeting, possibly by a
material amount. See "-- Volatility of Share Price." Such variations may be the
result of changes in the business, operations or prospects of Bancshares,
Bancshares' quarterly earnings reports, market assessments of the likelihood
that the Merger will be consummated and the timing thereof, regulatory
considerations, general market and economic conditions, factors affecting the
banking industry in general and other factors. Because the Effective Time will
occur at a date later than the Special Meeting, and the date on which Lochaven
stockholders will receive certificates for shares of Bancshares Common Stock
will occur after the Effective Time, there can be no assurance that the price of
Bancshares Common Stock on the date of the Special Meeting will be indicative of
its price at the Effective Time.
The Effective Time will occur as soon as practicable following the Special
Meeting and the satisfaction or waiver of the conditions set forth in the
Agreement. Stockholders of Lochaven are urged to obtain current market
quotations for Bancshares Common Stock. See "Comparative Market Prices of
Bancshares and Lochaven Common Stock" and "Comparative Per Share Data."
15
<PAGE> 25
BENEFITS ACCRUING TO MANAGEMENT OF LOCHAVEN
Certain members of Lochaven's management and Board of Directors have
interests in the Merger in addition to their interests as stockholders
generally. These interests relate to, among other things, provisions in the
Agreement regarding indemnification, eligibility for certain employee benefits,
existing employment and severance agreements and the payments to be made
thereunder as a consequence of the Merger and the treatment of outstanding stock
options. See "Description of the Transaction -- Interests of Certain Persons in
the Merger."
SECURITIES ARE NOT INSURED
The shares of Bancshares Common Stock to be issued to Lochaven stockholders
upon consummation of the Merger are not insured by any depository institution,
the Bank Insurance Fund ("BIF"), the Savings Association Insurance Fund ("SAIF")
or the FDIC or by any other insurer or government agency.
CURRENT ACQUISITIONS AND ABILITY TO MANAGE GROWTH AND INTEGRATE OPERATIONS
Since the Change in Control, Bancshares has rapidly expanded its operations
through acquisitions, loan purchases, the opening of LPOs and de novo branches
and the establishment of Flagship, its mortgage banking division. It is possible
that Bancshares may encounter unforeseen difficulties and complications in
integrating expanded operations and new employees, resulting in the disruption
of overall operations. In addition, such rapid growth may adversely affect
Bancshares' operating results because of many factors, including unforeseen
start-up costs, diversion of management resources, deterioration of asset
quality and required operating adjustments. There can be no assurance that
Bancshares will successfully achieve the anticipated benefits of its growth or
expanded operations.
In connection with its acquisitions of the NationsBank and Dime Branches,
and following consummation of the Proposed Mergers, Bancshares may encounter
unanticipated operational or organizational difficulties. The successful
integration of the recent branch acquisitions and the Proposed Mergers has
and/or will require, among other things, consolidation of certain operations,
elimination of duplicative corporate and administrative expense, elimination of
certain positions and the chartering by Bancshares of the Savings Bank, which
operates the Georgia Branch. There can be no assurance that integration will be
accomplished effectively or in a timely manner. Additionally, there can be no
assurance that the branches purchased in the recent branch acquisitions and the
Proposed Mergers will be able to retain existing customers or deposits. In
addition, the integration of certain operations following the recent branch
acquisitions and the Proposed Mergers will require the dedication of management
resources, which may temporarily distract attention from the day-to-day business
of Bancshares. Failure to accomplish effectively the integration of operations
could have a material adverse effect on Bancshares' regulatory capital,
business, financial condition and results of operations following the Proposed
Mergers. See "Certain Information Concerning Bancshares -- Recent and Proposed
Acquisitions."
IMPACT OF CHANGES IN REAL ESTATE VALUES
A significant portion of Bancshares' loan portfolio consists of residential
mortgage loans and commercial real estate loans. At June 30, 1998, 53.55% of
Bancshares' loans were secured by one-to-four family residential real estate,
30.67% were secured by commercial and multifamily residential real estate and
6.17% were real estate-secured construction loans, and Bancshares had ORE with a
book value of $6.9 million, or 0.32% of assets. Further, a substantial portion
of the properties securing Bancshares' loans are located in Florida. Real estate
values and real estate markets generally are affected by, among other things,
changes in national, regional or local economic conditions, fluctuations in
interest rates and the availability of loans to potential purchasers, changes in
the tax laws and other governmental statutes, regulations and policies,
demographic trends and acts of nature. Any decline in real estate prices,
particularly in Florida, could significantly reduce the value of the real estate
collateral securing Bancshares' loans, increase the level of Bancshares'
nonperforming loans, require write-downs in the book value of its ORE, and have
a material adverse effect on Bancshares' regulatory capital, business, financial
condition and results of operations.
16
<PAGE> 26
In recent years, Bancshares has increased its level of construction and
commercial real estate loans, which are generally considered to involve a higher
degree of credit risk than that for one-to-four family residential mortgage
loans. Further, Bancshares' retention of High LTV Loans in portfolio in
anticipation of later sale or securitization, increases its credit risk and
vulnerability to changes in real estate values.
DEPENDENCE ON EXISTING MANAGEMENT
Bancshares' ability to operate as a profitable enterprise has depended, and
will continue to depend in large part, upon the management and banking abilities
of Bancshares' senior management, including John W. Sapanski, the Chairman,
Chief Executive Officer and President of Bancshares and Republic. Bancshares
does not currently have a Chief Operating Officer. If, for any reason, the
services of Mr. Sapanski were to become unavailable to Bancshares, such event
would likely have an adverse impact upon the future results of operations of
Bancshares in light of Mr. Sapanski's experience and reputation in the banking
industry, his stature within Bancshares, his extensive knowledge of and
familiarity with Bancshares' operations, and the critical role played by Mr.
Sapanski within Bancshares. Mr. Sapanski is 67 years old. Neither Bancshares nor
Republic maintains a key man life insurance policy for Mr. Sapanski.
Additionally, neither Mr. Sapanski nor any other member of senior management has
an employment or noncompetition agreement with Bancshares.
Bancshares believes that its results will also depend in part upon its
ability to attract and retain highly skilled and qualified management, sales and
marketing personnel. Competition for such personnel is intense, and there can be
no assurance that Bancshares will be successful in attracting and retaining such
personnel. Departures and additions of key personnel may be disruptive to
Bancshares' business and could have a material adverse effect on Bancshares'
business, financial condition and results of operations.
INCREASED EMPHASIS ON MORTGAGE BANKING ACTIVITIES AND HIGH LTV LOANS
In 1996, Bancshares began its emphasis on mortgage banking, both as the
primary focus of its residential mortgage lending activities and as the key
business strategy to increase substantially its levels of non-interest income.
As a result, Bancshares' mortgage banking operations represented approximately
9.8% of Bancshares' assets at year-end 1997 and 17.5% of its pre-tax profits in
1997. Bancshares continues to devote significant resources and to incur
significant expenses operating Flagship and expanding its mortgage loan
origination, purchase and servicing capabilities.
Mortgage banking is fundamentally different from other traditional kinds of
real estate-secured residential and commercial lending in that substantially all
of the mortgage loans directly originated or purchased from mortgage brokers are
re-sold into the secondary market instead of being held in portfolio until
maturity. Such sales may take the form of either whole loan sales or
securitizations. While indirect loan production costs are expensed in the period
when incurred, revenues other than mortgage loan servicing fees, if any, are
only recognized when and to the extent that the originated loans are
subsequently sold.
Approximately 50.0% of the dollar amount of mortgage loans originated or
purchased by Flagship in 1997 were High LTV Loans made to borrowers who may have
had historical credit problems but are now considered by Bancshares to be
acceptable credit risks. These borrowers generally have little or no equity in
their homes. Because High LTV Loans generally pose a higher credit risk to the
lender, they normally carry significantly higher interest rates and origination
fees than conventional mortgage loans. Moreover, overhead and origination costs
incurred by Flagship are substantially higher on a per loan basis than the costs
incurred in Bancshares' other lending operations due to the nationwide scope of
Flagship's mortgage banking activities and the substantial amount of
advertising, direct mail and other marketing expenses that it incurs.
In a securitization of High LTV Loans, an entity such as a trust or special
purpose corporation is typically organized to purchase directly or through an
intermediate conduit a pool of mortgage loans from the financial institution.
The entity funds its purchase of the loans by selling tiered levels or
"tranches" of debt securities that entitle the holders to receive, in order of
priority, payments at a set percentage rate until all principal is repaid.
Payments are made to the debt holders out of the entity's collection of interest
payments and principal repayments on the loans. Because there is generally no
recourse to the financial institution in a securitization transaction,
third-party investors typically require "overcollateralization" such that the
principal amount of the
17
<PAGE> 27
loans in the pool exceeds the total amount of indebtedness issued by the entity.
The selling financial institution may retain a subordinated debt interest in the
pool of securitized High LTV Loans as well as an "interest-only,"
"principal-only" or other type of residual interest in the pool. Any such
interest retained by the financial institution will be valued in accordance with
SFAS No. 125.
Certain aspects of Bancshares' mortgage banking that distinguish it from
other traditional forms of lending pose risks that are unique to this type of
business. Set forth below are certain risks to Bancshares associated with
Flagship's mortgage banking activities:
Dependence on Origination and Purchase of Mortgage Loans
The future profitability of Flagship's mortgage banking operations will
depend upon the extent to which Bancshares is able to originate and/or purchase
and sell and/or securitize High LTV Loans and other mortgage loans. Bancshares'
ability to do so is affected by a number of factors beyond its control,
including general economic conditions, conditions and values in residential real
estate and mortgage-backed securities markets, interest rates, competition and
changes in applicable regulatory requirements. For example, periods of economic
slowdown or recession and high interest rates may be accompanied by decreased
demand for consumer credit and declining real estate and other asset values. Any
material decline in real estate values, in turn, reduces the ability of
borrowers to use home equity to support borrowings. Moreover, the OTS recently
issued regulatory guidelines in which it warned of the risks involved in making
High LTV Loans. While Flagship is not subject to OTS regulation and the agency's
guidelines arguably would not apply in any event due to Bancshares' practice of
selling or securitizing substantially all of its High LTV Loan production, it is
possible that the FDIC could act in the future to limit or restrict Flagship's
High LTV Loan origination activities.
Bancshares' ability to originate and purchase mortgage loans will also
depend upon its own financial condition. In this regard, Flagship's mortgage
loan production could be constrained or sharply limited if Bancshares were to
lack sufficient regulatory capital or liquidity to support Flagship's
operations. Bancshares' regulatory capital and liquidity position, in turn, will
be substantially affected by its mortgage loan sales and securitization
activities and the extent to which it retains subordinated and residual
interests in packages of securitized loans. If, for whatever reason, Bancshares
is unable to sell or securitize mortgage loans in an efficient manner and on a
timely basis, or finds it necessary to retain a larger-than-anticipated
subordinated and residual interest in loans that are securitized, Flagship's
future loan origination and purchase activities could be significantly impaired
and financial results could be adversely affected.
Liquidity and Capital Constraints on High LTV Lending as a result, in part,
of Flagship's expanded High LTV Loan operations during the first half of 1998,
the level of Bancshares' liquid assets, as well as the amount of funds available
for borrowing from the FHLB, have declined. As of June 30, 1998, Bancshares had
$125.0 million in advances from and $225.0 million remaining on its $350.0
million credit line with the FHLB, as compared to $35.0 million and $215.0
million, respectively, at December 31, 1997. At the same time, (i) the recent
growth in Bancshares' asset size and loan production costs attributable to
Flagship's High LTV Loan operations and (ii) Bancshares' recent High LTV Loan
securitizations, in which it has retained both subordinated and residual
interests, have significantly increased Bancshares' regulatory capital
requirements. As of December 31, 1997, it was necessary for Bancshares to have
at least $73.0 million in total capital in order to qualify as a
"well-capitalized institution" for regulatory purposes. (Bancshares' actual
total capital at year-end 1997 was $101.0 million.) By June 30, 1998,
Bancshares' minimum regulatory capital requirements had increased to $145.0
million, as compared to its actual total capital of $159.0 million. The combined
effect of these two factors is such that Bancshares' current capital and
liquidity levels will not be able to support a continuation of Flagship's High
LTV Loan operations as currently conduct or future securitization transactions
of its High LTV Loan operations in which Bancshares retains a substantial
subordinate and/or residual interest. Among the options that Bancshares is
currently considering are: (i) disposition of Flagship's High LTV Loan
production exclusively through whole loan sales or securitizations in which
Bancshares retains no interest; (ii) future capital- and liquidity-raising
transactions, including additional FHLB borrowings; (iii) a substantial
reduction in or termination of Flagship's High LTV Loan operations; and/or (iv)
disposition by Bancshares of all or a portion of its interest in Flagship such
that the Financial results of such operations are no longer consolidated with
those of Bancshares. In the event of such disposition, it is anticipated that
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Bancshares would be likely to incur personnel and occupancy termination costs
related to its High LTV Loan operations.
Should events arise in the future that prevent or otherwise adversely
affect Flagship's ability to originate or purchase mortgage loans, sales and
securitizations of loans, gains derived therefrom and revenues from Bancshares'
servicing of securitized loans will be reduced accordingly. Moreover, since
Bancshares would continue to incur ongoing expenses associated with its mortgage
banking activities during such a period, Bancshares' diminished revenues from
Flagship may not be sufficient to offset the expenses (primarily, salary,
occupancy, advertising and mailing costs) associated with Flagship's operations,
causing Bancshares to incur operating losses therefrom. In addition, if
Flagship's loan origination and purchase activities are reduced or eliminated,
Bancshares may not be able to recover its investment in Flagship.
Dependence on Loan Securitizations and Sales and Mismatch of Expenses and
Sales
Mortgage loans originated and purchased by Flagship are generally sold as
whole loans or securitized as market conditions permit. While a majority of the
expenses associated with loan origination and production are charged to
operations as they are incurred, any offsetting revenues are not recognized
until the periods in which such loans are sold or securitized. A significantly
greater volume of loan originations than sales in a particular period, either
due to growth in Flagship's loan production or reduced loan sales, could cause a
mismatch of expenses and revenues that would render Flagship's operations
unprofitable and, in turn, adversely affect Bancshares' financial results. In
the second quarter of 1998, Bancshares originated substantially more mortgage
loans than it was able to sell in its June Securitization. Although Bancshares
did recognize a gain on the sale of loans that were securitized, these revenues
were not sufficient to offset the approximately $10.8 million of indirect loan
production costs that were incurred with respect to loans that had not been sold
by quarter end. The combination of these factors contributed to the net loss
reported by Bancshares during the second quarter. To the extent that Flagship's
future loan production costs exceed or increase more rapidly than future loan
sales, a similar mismatch in the timing and relative levels of revenues and
expenses could result.
Several factors affect (i) Bancshares' ability to complete and (ii) the
timing of loan sales or securitizations, including general economic conditions,
conditions in the securities markets and secondary mortgage markets generally,
conditions in the asset-based securities market specifically, perceptions of the
credit quality of the mortgage loans Bancshares offers for sale or
securitization, changes in interest rates and the effect of such factors as
mortgage loan refinancings, delinquencies, defaults and foreclosures. If
Bancshares fails to securitize or sell a sufficient number of loans in a
particular financial reporting period at or near its historical profit levels
for such sales, Bancshares' gain on sale of loans and other related income may
not offset Flagship's overhead and origination costs, particularly the costs
associated with originating High LTV Loans, resulting in Bancshares reporting
lower net income or a net loss for such period. Bancshares' costs and risks
associated with carrying its loans, including hedging costs, interest rate risk
and credit risk could also increase if loan sales or securitizations fail to
occur or are delayed. The ability of Bancshares to sell or securitize loans in
the secondary market is essential for the continuation of Flagship's mortgage
banking activities, and any event adversely affecting Bancshares' ability to
complete securitizations or loan sales on a regular basis could have a material
adverse effect on Bancshares' regulatory capital, business, financial condition
and results of operations.
Valuation of Capitalized Excess Interest-Only Spread and Mortgage Related
Securities
At June 30, 1998, Bancshares' statement of financial condition reflected an
excess interest-only spread of $2.7 million, mortgage-related securities of
$15.5 million, which resulted from the securitizations of Bancshares' loan
production, and a residual interest in the cash flows from the securitizations
valued at $17.3 million. Bancshares derives an increasingly larger portion of
its income by realizing gains upon the sale of loans due to the excess
interest-only spread associated with such loans recorded at the time of sale and
the capitalization of mortgage servicing rights recorded at sale. Excess
interest-only spread as capitalized on Bancshares' statement of financial
condition represents the present value of the excess of the interest rate
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payable by an obligor on a loan over the interest rate passed through to the
purchaser acquiring an interest in such loan, less Bancshares' contracted
servicing fee and other applicable recurring fees.
Bancshares records gains on sale of loans through securitizations and whole
loan sales based in part on the estimated fair value of the mortgage-related
securities (residual interest and interest-only spread) retained by Bancshares
and on the estimated fair value of retained mortgage servicing rights related to
such loans. When loans are sold, Bancshares recognizes as a gain the present
value of the excess cash flow expected to be realized after the payment of all
principal and interest to the security holders. These present values are
computed using prepayment, default and interest rate assumptions that Bancshares
believes are reasonable. The amount of gain recognized upon the sale of loans
will vary depending on the assumptions utilized. The weighted average discount
rate used to determine the present value of the excess cash flows reflected on
Bancshares' statement of financial condition at June 30, 1998 was approximately
15.0%.
Although Bancshares believes that it has made reasonable estimates of the
fair values of the residual interest, mortgage servicing rights and excess
interest-only spread likely to be realized, the rate of prepayment and the
amount of defaults utilized by Bancshares are estimates and actual experience
may vary from its estimates. Bancshares periodically reviews its prepayment and
default assumptions in relation to current rates of prepayment and default and,
if necessary, reduces the remaining excess interest-only spread, residual
interest and mortgage servicing rights assets to the net present value of the
estimated remaining future net cash flows, resulting in a charge to earnings in
the period of adjustment.
Increases in interest rates, competitive pressures, higher than anticipated
rates of loan prepayments or credit losses on the underlying loans in a
securitization could result in a reduction in the estimated value of Bancshares'
residual interest, mortgage servicing rights and excess interest-only spread and
may require Bancshares to write down the value of these assets, which in turn
could have a material adverse impact on Bancshares' results of operations and
financial condition. Bancshares is not aware of any active market for
Bancshares' residual interest, mortgage servicing rights and excess
interest-only spread. No assurance can be given that the residual interest,
mortgage servicing rights and excess interest-only spread could in fact be sold
at their carrying value, if at all.
Contingent Risks Relating to Bancshares' Beneficial Interest in the Loans
Although Bancshares intends to sell or securitize substantially all High
LTV Loans and other residential mortgage loans that Flagship originates or
purchases, Bancshares retains some degree of risk on most of these mortgage
loans. During the period of time that loans are held pending sale or
securitization, Bancshares is subject to the various business risks associated
with lending, including the risk of borrower delinquency, default or loss and
the risk that an increase in interest rates would reduce the value of loans to
potential purchasers. In May 1998, Bancshares recorded a pre-tax charge against
earnings of $252,000 for an equivalent principal amount of High LTV Loans held
for sale that had been delinquent 90 days or more at March 31, 1998.
Although whole loans are sold on a non-recourse basis, Bancshares continues
to be subject to the risks of delinquency, default and loss following the
securitization of mortgage loans. The agreements governing Bancshares'
securitizations generally require the initial principal amount of the pool of
mortgage loans that is securitized to exceed the aggregate principal amount of
the senior interests sold to third-party investors. Thereafter, the trustee of
the securitization is required to maintain overcollateralization levels through
retention of cash otherwise payable to the interest-only spread and residual
interest owners. Such excess amounts serve as credit enhancement for the related
senior interests and are available to fund losses realized on loans in the pool.
Because the residual interest in the pool retained by Bancshares is subordinated
to the senior interests in the loans purchased by third-party investors,
Bancshares continues to have a first-loss exposure with respect to the loans to
the extent of the overcollateralization amount. Bancshares also continues to be
subject to the risks of delinquency, default and loss insofar as interest-only
spread distributions are reduced by loan losses. In addition, its whole loan
sales and securitization agreements require Bancshares to commit to repurchase
or replace loans that do not conform to the representations and warranties made
by Bancshares at the time of transfer. In May 1998, a private investor that had
purchased from Bancshares $36.1
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million of subprime loans put back $20.1 million of the loans that did not
satisfy the investor's pre-established purchase criteria. It is possible that in
the future Bancshares may be required to repurchase or replace loans previously
sold or securitized. Any higher than expected loan losses or repurchases could
have a material adverse effect on Bancshares' regulatory capital, business,
financial condition and results of operation.
Loss of Right to Service Securitized Loans
The agreements entered into in connection with Bancshares' sale and/or
securitization of High LTV Loans generally set forth certain conditions under
which the insurer or the trustee of the loan securitization can terminate
Bancshares' right to act as servicer. If, at any measuring date, the loss and
delinquency performance of the mortgage loans in a particular pool of loans
exceeds certain levels, servicing rights may be terminated. Bancshares'
servicing rights can also be terminated with respect to a loan securitization
(i) if Bancshares were to breach its obligations under the related servicing
agreement, (ii) if losses on foreclosures of loans included in the pool were to
exceed specified limits, (iii) if the insurer were required to make payments
under its policy, or (iv) if Bancshares failed to meet certain financial tests,
including a minimum net worth test. It is possible that Bancshares' servicing
rights with respect to mortgage loans included in any securitization may be
terminated in the future. In addition, if any loan included in a securitization
is prepaid, Bancshares will no longer be entitled to loan servicing fees with
respect to such loan. Any termination or reduction of Bancshares' right to act
as servicer with respect to securitized loans would result in a loss of
servicing revenue and could adversely affect its ability to participate in
future securitizations.
Borrowers With Limited Home Equity
In the High LTV Loan market and certain other markets, Bancshares targets
borrowers with little equity in their homes. Loans made to such borrowers may
entail a higher risk of delinquency, default and loss than other types of
mortgage loans due to their substantially unsecured nature, especially during
periods of economic downturn. While Bancshares believes that the underwriting
policies and collection methods it employs enable it to control the higher risks
inherent in High LTV Loans, no assurance can be given that such criteria or
methods will afford adequate protection against such risks. Additionally,
because of Bancshares' recent entrance into the High LTV Loan market, there is
limited performance history on which to base various assumptions by Bancshares
with respect to defaults and prepayments of such loans. If loans originated or
purchased by Bancshares experience higher delinquencies, defaults or losses than
anticipated, Bancshares' regulatory capital, business, financial condition or
results of operation could be adversely affected.
Risks Relating to Growth Strategy
Bancshares' strategic plan contemplates the continued expansion of its
Flagship operations. Bancshares' implementation of its expansion strategy
depends on its ability to increase the volume of loans it originates and
purchases while maintaining credit quality and managing its resulting growth.
Bancshares' ability to increase its loan production will depend on, among other
factors, its ability to (i) obtain and maintain increasingly larger amounts of
funding and liquidity in the form of federally-insured deposits, FHLB advances
and other borrowings and proceeds from loan sales and securitizations, (ii)
effectively sell or securitize pools of loans that it originates, (iii) offer
attractive products to prospective borrowers, (iv) attract and retain qualified
underwriting, servicing and other personnel, (v) market its loan products
successfully and (vi) establish and maintain relationships with correspondents
and mortgage brokers in states in which Bancshares is currently active and in
additional states. Bancshares' ability to manage growth as it pursues its
Flagship expansion strategy will be dependent upon, among other things, its
ability to (i) maintain appropriate procedures, policies and systems to ensure
that Bancshares' loan portfolio does not have an unacceptable level of credit
risk and loss, (ii) satisfy its need for additional capital, funding and
liquidity on reasonable terms, (iii) manage the costs associated with expanding
its infrastructure, (iv) retain key personnel and (v) continue operating in
competitive, economic, regulatory and judicial environments that are conducive
to Bancshares' business activities. There can be no assurance that Bancshares
will be able to expand Flagship's mortgage lending operations successfully.
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Possible Adjustment of Compensation Levels of Mortgage Banking Personnel
As a Florida-chartered commercial bank, Republic is subject to the
regulatory oversight, examination and supervision of both the FDIC and the
Department. As part of their regular examinations of Republic, the FDIC and the
Department review, among other things, the compensation arrangements for
Republic's executive officers and other employees to ensure that they are
commensurate with such employees' responsibilities and duties performed, and
that Republic's overall compensation levels are consistent with such levels at
other similarly-sized financial institutions.
The FDIC has recently expressed its concerns to Republic regarding the high
levels of compensation being received by the executive officers and certain
employees of Republic's Flagship mortgage banking division in relation to
Republic's earnings. In response, Republic's Board of Directors has reviewed and
analyzed the current compensation arrangements for its mortgage banking
personnel and, to the extent deemed appropriate, made adjustments in such
compensation. It is possible that the personnel affected may pursue employment
opportunities with other mortgage lenders or companies that are not regulated as
extensively as Republic, given that such other entities would not be subject to
the same degree of compensation constraints as those that prevail in a highly
regulated industry such as banking.
Republic is not currently aware of any plans that any of its mortgage
banking staff may have to seek other employment. However, no assurance can be
given that the executive officers or other employees of its mortgage banking
division will not leave Republic or that any such departure would not have a
material adverse effect on Republic's mortgage banking activities or its
financial condition and earnings. In addition, if Flagship's loan origination
and purchase activities are reduced or eliminated as a result of such
departures, Bancshares may not be able to recover its investment in Flagship.
Competition
The home equity loan market, and particularly the High LTV Loan market, is
highly competitive. Bancshares faces competition from commercial banks, savings
and loan associations, consumer finance lenders, mortgage lenders and mortgage
brokers. Many of these competitors and potential competitors are substantially
larger, have more capital and other resources, have lower cost structures and
are subject to less regulatory requirements than Bancshares. Competition can
take many forms, including convenience in obtaining a loan, customer service,
marketing and distribution channels and interest rates charged to borrowers. In
addition, the current level of gains realized by Bancshares and its competitors
on High LTV Loans could attract additional competitors into this market, with
the possible effect of lowering the interest rates and origination fees that
Bancshares can charge borrowers as well as gains that may be realized on
Bancshares' future loan sales. To the extent that existing competitors
significantly expand their operations or new competitors enter this segment of
the mortgage lending market, Bancshares' results of operations and financial
condition could be materially adversely affected.
Nonperforming Assets
At the time of the Change in Control, Republic had a relatively high ratio
of nonperforming assets to total assets. In addition, Bancshares has purchased,
at a discount, certain loans that it placed in non-performing status shortly
after purchase. Although Bancshares has reduced its nonperforming assets ratio
from 5.66% at year-end 1993 to 1.79% at June 30, 1998, its current level of
nonperforming assets is still significantly above 0.95%, which is the average
level for all commercial banks with assets between $1.0 billion and $3.0
billion, according to the most recently available data from the Uniform
Performance Banking Report issued by federal bank regulators. There is no
assurance that this ratio will continue to decline, particularly if general
economic conditions or Florida real estate values deteriorate.
Adequacy of Loan Loss Allowance
Industry experience indicates that a portion of Bancshares' loans will
become delinquent and will be partially or completely charged-off. Regardless of
the underwriting criteria utilized by Bancshares, losses may be experienced as a
result of various factors beyond Bancshares' control, including, among other
things, changes in market conditions affecting the value of properties and
problems affecting the credit of the
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borrower. Bancshares' determination of the adequacy of its allowance for loan
losses is based on various considerations, including an analysis of the risk
characteristics of various classifications of loans, previous loan loss
experience, specific loans that would have loan loss potential, delinquency
trends, the estimated fair market value of the underlying collateral, current
economic conditions, the view of Bancshares' regulators, and geographic and
industry loan concentration. However, if delinquency levels were to increase as
a result of adverse general economic conditions, especially in Florida where
Bancshares' exposure is greatest, the loan loss allowance so determined by
Bancshares may not be adequate. A substantial portion of Bancshares' loan loss
allowances are allocated to specific portfolios or pools of loans purchased by
Bancshares. Accordingly, such allocations would not be available to cover losses
related to originated loans or other purchased loans. To the extent that losses
in certain pools or portfolios of loans exceed the loan loss allowances and
unamortized loan discount allocated to such pool or portfolio, or available as a
general reserve, Bancshares' results of operations would be adversely affected.
There can be no assurance that Bancshares' allowance for loan losses will be
adequate to cover its future loan losses or that Bancshares will not experience
significant losses in its loan portfolios that may require significant increases
to the allowance for loan losses in the future. Additionally, Bancshares' policy
is to record its loans held for sale at the lower of cost or market.
Accordingly, no allowances are allocated to loans that are held for sale or
securitization.
Potential Impact of Changes in Interest Rates
Bancshares' profitability is dependent to a large extent on its net
interest income, which is the difference between its interest income on
interest-earning assets and its interest expense on interest-bearing
liabilities. Bancshares, like most financial institutions, is affected by
changes in general interest rate levels, which are currently relatively low, and
by other economic factors beyond its control. Interest rate risk arises from
mismatches (i.e., the interest rate sensitivity gap) between the dollar amount
of repricing or maturing assets and liabilities, and is measured in terms of the
ratio of the interest rate sensitivity gap to total assets. More assets
repricing or maturing than liabilities over a given time frame is considered
asset-sensitive and is reflected as a positive gap, and more liabilities
repricing or maturing than assets over a given time frame is considered
liability-sensitive and is reflected as a negative gap. An asset-sensitive
position (i.e., a positive gap) will generally enhance earnings in a rising
interest rate environment and will negatively impact earnings in a falling
interest rate environment, while a liability-sensitive position (i.e., a
negative gap) will generally enhance earnings in a falling interest rate
environment and negatively impact earnings in a rising interest rate
environment. Fluctuations in interest rates are not predictable or controllable.
Bancshares has attempted to structure its asset and liability management
strategies to mitigate the impact on net interest income of changes in market
interest rates. Bancshares believes that, based on certain assumptions and
experience, its one-year cumulative gap was positive at December 31, 1997.
Regulatory Oversight
Republic is subject to extensive regulation, supervision and examination by
the Department as its chartering authority and primary regulator, and by the
FDIC as its federal regulator and administrator of the insurance fund that
insures Republic's deposits up to applicable limits. Republic is a member of the
FHLB and is subject to certain limited regulation by the Federal Reserve. In
connection with its acquisition of the Georgia Branch, Bancshares chartered the
Savings Bank. After it was organized, the Savings Bank became subject to
regulation, supervision and examination by the OTS as its chartering authority
and primary regulator and by the FDIC as the administrator of the Savings Bank's
insurance fund. As a federally-chartered thrift, the Savings Bank automatically
became a member of the FHLB. As the holding company of Republic and the Savings
Bank, Bancshares is also subject to regulation and oversight by the Federal
Reserve. Such regulation and supervision governs the activities in which an
institution may engage and is intended primarily for the protection of the FDIC
insurance funds and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities, and regulations have been adopted that have increased capital
requirements, commercial bank insurance premiums and administrative,
professional and compensation expenses. Any change in the regulatory structure
or the applicable statutes or regulations, such as the recently-issued OTS
guidelines regarding High LTV Loans, could have a material adverse impact on
Bancshares, Republic, the Savings Bank and their respective operations.
Additional
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legislation and regulations may be enacted or adopted in the future which could
significantly affect the powers, authority and operations of Republic and the
Savings Bank and their competitors, which in turn could have a material adverse
effect on both institutions and their regulatory capital, business, financial
condition and results of operations.
In the course of a recent review of Republic's operations by the FDIC,
issues arose as to the software and procedures used by Republic to record and
calculate the charges and other information for certain types of mortgage loans,
and the amounts of interest due on one class of deposit accounts. Management
believes Republic has taken the necessary actions to address these issues,
including the payment of refunds or additional interest as appropriate.
CONTROL BY THE PRINCIPAL STOCKHOLDERS AND RELATED PARTY TRANSACTIONS
As of June 30, 1998, Bancshares' Principal Stockholders, William R. Hough
and John W. Sapanski (and their respective affiliates and immediate family
members) owned shares of Bancshares' capital stock representing approximately
40.2% and 4.8%, respectively, of the total voting rights of Bancshares.
Following the consummation of the Merger, Messrs. Hough and Sapanski will own
approximately 38.3% and 4.6% of the total voting rights of Bancshares,
respectively. On the basis of such ownership, the Principal Stockholders will
likely still be able to exert a controlling influence over the affairs of
Bancshares and Republic. Bancshares has engaged in numerous transactions with
affiliates of Mr. Hough, and it is likely that Bancshares will in the future
continue to engage in such transactions. Generally, transactions with affiliates
can involve conflicts of interests. However, Bancshares believes that its
transactions with its affiliates were on terms as or more favorable as those
that could have been obtained in arm's-length transactions. See Note 17 to
Bancshares' Consolidated Financial Statements included elsewhere herein.
CAPITAL LIMITATIONS ON FUTURE GROWTH
Since the Change in Control, one of Bancshares' primary business objectives
has been to increase its total asset size, expand into new market areas and
increase market share in its existing markets. Bancshares has sought to
accomplish this goal through a combination of internal growth, loan and other
asset purchases, deposit assumptions, the opening of de novo branches and
acquisitions of other financial institutions and branches. Bancshares' ability
to continue to grow is constrained by, among other things, its regulatory
capital levels. See Note 16 to Bancshares' Consolidated Financial Statements
included elsewhere herein. Most recently, in May 1998, Bancshares sold 2,642,150
shares of Bancshares Common Stock in a public offering and raised $72.9 million
in additional capital. The primary purposes of the offering were to increase
Bancshares' regulatory capital to permit it to consummate the recent branch
acquisitions and the Proposed Mergers and to continue to expand Flagship's
mortgage banking activities while maintaining its "well capitalized" status.
Bancshares intends to continue its current growth strategy for the foreseeable
future. Since the Change in Control, Bancshares has raised capital five times to
accommodate its growth. There can be no assurance that Bancshares will in the
future have sufficient capital or the ability to obtain additional sufficient
capital on acceptable terms to continue to pursue its growth strategy.
YEAR 2000 ISSUES
In the next two years, many companies, including financial institutions
such as Bancshares, will face potentially serious risks associated with the
inability of existing data processing hardware and software to appropriately
recognize calendar dates beginning in the year 2000. Many computer programs that
can only distinguish the final two digits of the year entered may 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. If a company's critical internal systems do not
correctly recognize and process data information beyond the year 1999, there
could be a material adverse impact on business and operations.
In 1997, Bancshares began the process of identifying the many software
applications and hardware devices expected to be impacted by this issue.
Bancshares formed a Year 2000 Committee, consisting of
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Republic's senior management and key data processing employees to address the
year 2000 compliance project. The Board of Directors is updated on Bancshares'
progress towards compliance on a monthly basis. Also, as Republic's primary
federal regulator, the FDIC conducts periodic examinations of Republic's
readiness for year 2000 operations.
Additional staff for year 2000 compliance, including a full-time project
coordinator and other technically-proficient employees, have been hired to
monitor the daily activities of the project for Republic. Non-compliant vendors
have been and continue to be contacted for project progress reports.
Communication with compliant vendors to develop testing plans is also ongoing.
Bancshares has set a target date of December 31, 1998 to complete testing of
vendor systems other than its main client loan and deposit application systems
that are processed by ALLTEL Information Services, Inc. ("ALLTEL"). As ALLTEL
tests and certifies applications as year 2000 compliant, the test results are
being forwarded to Republic for verification. All main client applications are
expected to be compliant and installed by year-end 1998 with Republic and ALLTEL
performing future date testing during the fourth quarter of 1998 to verify
system compliance. Republic's vendors will be able to perform tests with ALLTEL
during this time also. Bancshares anticipates that the critical internal systems
of Lochaven and Lochaven will be converted to the ALLTEL loan and deposit
application systems by December 31, 1998, and that the day-to-day activities of
Lochaven and Lochaven will thereafter be fully integrated into Republic.
In the event that Republic and ALLTEL's efforts are unsuccessful and/or
that one or more of Republic's critical internal systems are not year 2000
compliant by December 31, 1999, the following could occur, any of which could
have a material adverse impact on the operations of Republic and Bancshares:
(a) Client service could deteriorate to the point that a substantial
number of Republic's clients move their account relationships to another
financial institution;
(b) Bancshares and Republic may be unable to provide the public and
the applicable regulatory authorities with timely and accurate financial
information; or
(c) Bancshares and Republic may be unable to fulfill on a timely basis
their various contractual obligations.
Republic expects to formulate a contingency plan by September 30, 1998 for
the remote possibility that ALLTEL will not be year 2000 compliant. Republic
will continue its efforts toward year 2000 compliance with a goal of January 1,
1999 for completion of all testing and implementation of compliant systems.
Bancshares estimates that the costs associated with replacing non-compliant
hardware and software will be approximately $1.4 million, the majority of which
will be incurred in the normal course of upgrading Bancshares' computer systems.
COMPETITION
Bancshares competes with various types of financial institutions, including
other commercial banks, savings institutions, finance companies, mortgage
banking companies, money market funds and credit unions, many of which have
substantially greater financial resources than Bancshares and, in some cases,
operate with fewer regulatory costs and constraints. Bancshares not only
competes with other financial institutions that operate in Florida but, through
Flagship, also competes nationwide with a number of finance companies, mortgage
banking companies and other financial institutions located throughout the United
States. As Bancshares expands its retail banking operations to additional
markets in Florida and Georgia and its mortgage banking activities to additional
states, it will encounter other larger and well-established financial
institutions in those markets. While Bancshares believes that it has been able
to compete successfully with larger financial institutions in its current
geographic and product markets, there can be no assurance that it will be able
to compete effectively in the new markets it is entering.
VOLATILITY OF SHARE PRICE
The market price of the Bancshares Common Stock has and may continue to
experience fluctuations that are both related and unrelated to the operating
performance of Bancshares. In particular, the price of the
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Bancshares Common Stock may be affected by general market price movements as
well as changes in interest rates. In addition, increases in Bancshares' loan
production costs or the inability of Bancshares to complete significant loan
sale transactions or securitizations in a particular quarter have had and may in
the future have a material adverse impact on Bancshares' results of operations
for that quarter and could, therefore, negatively impact the price of the Common
Stock.
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<PAGE> 36
COMPARATIVE MARKET PRICES OF BANCSHARES AND LOCHAVEN COMMON STOCK
Bancshares Common Stock is traded in the over-the-counter market and quoted
on the Nasdaq National Market. There is no established public trading market for
the Lochaven Common Stock. The shares of Lochaven Common Stock are not actively
traded, and such trading activity, as it occurs, takes place in privately
negotiated transactions. The following table sets forth, as of the indicated
dates, (i) the last sale price of Bancshares Common Stock, (ii) the sale price
in the last known transaction of purchase and sale of Lochaven Common Stock,
which occurred on February 28, 1998, and (iii) equivalent per share price (as
explained below) of Lochaven Common Stock. The indicated dates of February 9,
1998 and August 31, 1998 represent, respectively, the last trading day
immediately preceding public announcement that Bancshares and Lochaven had
executed a letter of intent for the combination of the two companies and the
latest practical date prior to mailing of this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
EQUIVALENT PER
BANCSHARES LOCHAVEN SHARE PRICE OF
COMMON STOCK COMMON STOCK LOCHAVEN COMMON STOCK
------------ ------------ ---------------------
<S> <C> <C> <C>
Market Price Per Share at:
February 9, 1998............................. $ 28.63 $5.00 $7.95
September 30, 1998........................... $ 22.13 $5.00 $6.14
</TABLE>
The equivalent per share price of Lochaven Common Stock at each specified
date represents the closing price of a share of Bancshares Common Stock on such
date as quoted on the Nasdaq National Market multiplied by the Exchange Ratio of
0.2776. Stockholders are advised to obtain current market quotations for
Bancshares Common Stock. No assurance can be given as to the market price of
Bancshares Common Stock at or after the Effective Time.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
27
<PAGE> 37
COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative per share data relating
to net income and book value on (i) a historical basis for Bancshares and
Lochaven, (ii) a pro forma combined basis per share of Bancshares Common Stock
(taking into effect conversion of each share of Bancshares' noncumulative
convertible perpetual preferred stock, $20.00 par value ("Bancshares Preferred
Stock") into ten (10) shares of Bancshares Common Stock), giving effect to the
Merger, (iii) an equivalent pro forma basis per share of Lochaven Common Stock,
giving effect to the Merger, (iv) a pro forma combined basis per share of
Bancshares Common Stock, giving effect to the Proposed Mergers, and (v) an
equivalent pro forma basis per share of Lochaven Common Stock, giving effect to
the Proposed Mergers. The Bancshares and Lochaven pro forma combined information
and the Bancshares pro forma Merger equivalent information give effect to the
Merger on a pooling of interests basis and an Exchange Ratio of 0.2776 of a
share of Bancshares Common Stock for each share of Lochaven Common Stock. See
"Description of the Transaction -- Accounting Treatment." The Bancshares and
Lochaven pro forma combined information and the Bancshares pro forma Merger and
Lochaven equivalent information give effect to (i) the Merger as described in
the preceding sentence and (ii) Bancshares' other Proposed Merger. Bancshares
did not pay dividends during the periods presented. The pro forma data are
presented for information purposes only and are not necessarily indicative of
the results of operations or combined financial position that would have
resulted had the Merger been consummated at the dates or during the periods
indicated, nor are they necessarily indicative of future results of operations
or combined financial position.
The information shown below should be read in conjunction with, and is
qualified in its entirety by, the historical financial statements of Bancshares
and Lochaven, including the respective notes thereto, included elsewhere herein.
See "Documents Incorporated by Reference" and "Selected Financial and Other Data
of Bancshares and Lochaven."
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
--------------- -----------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ -----
(UNAUDITED) (UNAUDITED, EXCEPT FOR
BANCSHARES AND LOCHAVEN
HISTORICAL)
<S> <C> <C> <C> <C> <C>
NET INCOME PER COMMON SHARE (DILUTED BASIS):
Bancshares historical................................ $ 0.16 $ 0.47 $ 1.21 $ 0.74 $1.10
Lochaven historical.................................. 0.12 (0.18) (1.54) (0.57) --
Bancshares and Lochaven pro forma combined........... 0.16 -- 1.05 0.70 1.19
Lochaven pro forma equivalent(1)..................... 0.04 -- 0.29 0.19 0.33
Bancshares, Lochaven and proposed merger pro forma
combined(2)....................................... 0.16 -- 1.02 0.53 0.94
Lochaven pro forma equivalent(1)..................... 0.04 -- 0.28 0.15 0.26
BOOK VALUE PER COMMON SHARE:
Bancshares historical................................ 16.26 10.79 12.27 10.32 9.65
Lochaven historical.................................. 4.65 5.90 4.53 6.08 6.65
Bancshares and Lochaven pro forma combined........... 16.27 -- -- -- --
Lochaven pro forma equivalent(1)..................... 4.52 -- -- -- --
Bancshares, Lochaven and proposed merger pro forma
combined(2)....................................... 16.13 -- -- -- --
Lochaven pro forma equivalent........................ 4.48 -- -- -- --
</TABLE>
- ---------------
(1) Represents pro forma combined information multiplied by the assumed Exchange
Ratio of 0.2776 of a share of Bancshares Common Stock for each share of
Lochaven Common Stock.
(2) Represents the combined results of Bancshares and Lochaven, as if all such
acquisitions were consummated on January 1, 1997.
28
<PAGE> 38
SELECTED FINANCIAL AND OTHER DATA OF BANCSHARES AND LOCHAVEN
The following tables present certain selected historical financial
information for Bancshares and Lochaven. The data should be read in conjunction
with the historical financial statements, related notes and other financial
information concerning Bancshares and Lochaven incorporated by reference or
included herein. Interim unaudited data of Bancshares and Lochaven for the three
months and six months ended June 30, 1998 and 1997 reflect, in the opinion of
the respective managements of Bancshares and Lochaven, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. Results for the three months and six months ended
June 30, 1998 are not necessarily indicative of results that may be expected for
any other interim period or for the year as a whole. See "Documents Incorporated
by Reference."
Selected consolidated operating data, per share data, balance sheet data
and selected financial ratios for Bancshares as of and for each of the years
ended December 31, 1997, 1996, 1995 and 1994, the seven-month period ended
December 31, 1993, and the five-month period ended May 31, 1993, were derived
from the consolidated financial statements which have been audited by Arthur
Andersen LLP, independent certified public accountants. The selected
consolidated operating data, per share data, balance sheet data, selected
financial ratios and other data for Bancshares as of and for the three- and
six-month periods ended June 30, 1998 and 1997, were derived from unaudited
consolidated financial statements. Financial data for those interim periods
include all adjustments, consisting of normal accruals, that Bancshares'
management considers necessary for a fair presentation of financial condition
and results of operations for such interim periods. In light of the significant
mark-to-market adjustments and other adjusting entries to Bancshares' financial
statements that were made following the Change in Control on May 28, 1993,
management of Bancshares believes that the usefulness of comparisons between (i)
the financial statements and the financial data derived therefrom as of the
dates and for the periods prior to June 1, 1993, and (ii) the financial
statements and the financial data derived therefrom as of the dates and for the
periods since June 1, 1993, may be limited. In addition, since (i) Republic's
initial public offering and (ii) the CrossLand Purchase and Assumption in
December 1993, Bancshares has operated in a significantly different manner from
that which it had previously operated. Accordingly, the financial results for
periods prior to the CrossLand Purchase and Assumption differ significantly from
periods since then.
Selected operating data, per share data and balance sheet data for Lochaven
as of and for each of the years ended December 31, 1997, 1996, 1995, 1994 and
1993, were derived from the financial statements that have been audited by
Hacker, Johnson, Cohen and Grieb PA, independent auditors. The selected
consolidated operating data, per share data, balance sheet data, selected
financial ratios and other data for Lochaven as of and for the three- and
six-month periods ended June 30, 1998 and 1997, were derived from unaudited
consolidated financial statements. Financial data for those interim periods
include all adjustments, consisting of normal accruals, that Lochaven's
management considers necessary for a fair presentation of financial condition
and results of operations for such interim periods.
The following information should be read in conjunction with "Recent
Developments," "Certain Information Concerning Lochaven -- Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements, related notes and other financial
information included elsewhere herein by Bancshares and Lochaven.
29
<PAGE> 39
SELECTED HISTORICAL FINANCIAL DATA OF BANCSHARES
SELECTED FINANCIAL AND OTHER DATA -- TABLE 1
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Interest income................................. $ 38,115 $ 25,344 $ 71,893 $ 49,221
Interest expense................................ 19,857 12,822 36,972 24,863
---------- ---------- ---------- ----------
Net interest income............................. 18,258 12,522 34,921 24,258
Loan loss provision............................. 1,032 501 1,525 1,639
---------- ---------- ---------- ----------
Net interest income after loan loss provision... 17,226 12,021 33,396 22,619
Other noninterest income........................ 11,218 2,749 23,747 6,453
General and administrative (G&A) expense........ 29,896 12,224 52,828 22,707
Other noninterest expense....................... 589 303 690 617
---------- ---------- ---------- ----------
Net income (loss) before income taxes & minority
interest...................................... (2,041) 2,241 3,625 5,748
Income tax (provision) benefit.................. 800 (863) (1,375) (2,178)
Minority interest in income from subsidiary
trust......................................... (422) -- (842) --
Minority interest in FFO........................ -- (227) -- (415)
---------- ---------- ---------- ----------
Net income (loss)..................... $ (1,663) $ 1,151 $ 1,408 $ 3,155
========== ========== ========== ==========
PER SHARE DATA:
Earnings per share -- diluted................... $ (0.23) $ 0.17 $ 0.16 $ 0.47
========== ========== ========== ==========
Weighted average shares outstanding --diluted... 8,522,623 7,017,181 8,712,367 7,002,356
========== ========== ========== ==========
Earnings per share -- basic..................... $ (0.26) $ 0.20 $ 0.18 $ 0.54
========== ========== ========== ==========
Weighted average shares outstanding -- basic.... 8,522,623 5,852,861 7,786,911 5,853,633
========== ========== ========== ==========
BALANCE SHEET DATA (AT PERIOD-END):
Total assets.................................... $2,155,025 $1,321,573 $2,155,025 $1,321,573
Investment & mortgage backed securities......... 109,760 140,899 109,760 140,899
Loans held for sale............................. 410,113 72,487 410,113 72,487
Portfolio loans, net of unearned income......... 1,374,797 995,864 1,374,797 995,864
Allowance for loan losses....................... 20,296 19,328 20,296 19,328
Goodwill & premium on deposits.................. 28,765 397 28,765 397
Deposits........................................ 1,741,377 1,165,042 1,741,377 1,165,042
Stockholders' equity............................ 170,341 71,254 170,341 71,254
Book value per share............................ 16.26 10.79 16.26 10.79
</TABLE>
30
<PAGE> 40
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Return on average assets........................ (0.35)% 0.35% 0.16% 0.50%
Return on average equity........................ (5.29) 6.33 2.61 8.99
Equity to assets................................ 7.90 5.39 7.90 5.39
Equity and minority interest in preferred
subsidiary to assets.......................... 9.24 -- 9.24 --
Portfolio loans/deposit ratio................... 78.95 85.48 78.95 85.48
Net interest spread............................. 3.85 3.52 3.85 3.52
Net interest margin............................. 4.14 4.10 4.18 4.10
G&A expenses to average assets(1)............... 3.16 3.29 3.11 3.17
G&A efficiency ratio(1)......................... 71.07 73.79 67.30 69.30
Nonperforming loans to portfolio loans.......... 2.13 1.99 2.13 1.99
Nonperforming assets to total assets............ 1.79 2.08 1.79 2.08
Loan loss allowance to portfolio loans(2)....... 1.48 1.94 1.48 1.94
Loan loss allowance to nonperforming loans(2)
Originated portfolio.......................... 90.92 90.96 90.92 90.96
July 1997 bulk purchase of loans.............. 27.64 -- 27.64 --
March 1995 bulk purchase of loans............. 263.80 441.82 263.80 441.82
CrossLand loan portfolio...................... 409.57 106.60 409.57 106.60
Other purchased loan portfolios............... 17.82 46.67 17.82 46.67
Total................................. 69.19 97.32 69.19 97.32
OTHER DATA (AT PERIOD-END):
Number of branch banking offices................ 53 45 53 45
Number of full-time equivalent employees........ 1,439 856 1,439 856
</TABLE>
- ---------------
(1) Commercial banking segment only.
(2) See "Note 6 -- Allowance for Loan Losses" for a discussion of the allocation
and availability of loan loss allowance amount portfolio of loans within
Republic.
31
<PAGE> 41
SELECTED HISTORICAL FINANCIAL DATA OF BANCSHARES
SELECTED FINANCIAL AND OTHER DATA -- TABLE 2
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Interest income................................. $ 108,457 $ 88,944 $ 77,593 $ 53,997
Interest expense................................ 54,923 44,949 40,112 24,423
---------- ---------- ---------- ----------
Net interest income............................. 53,534 43,995 37,481 29,574
Loan loss provision............................. 2,628 2,582 2,162 172
---------- ---------- ---------- ----------
Net interest income after loan loss provision... 50,906 41,413 35,319 29,402
Other noninterest income........................ 25,031 6,745 5,353 5,099
Gain on sale of ORE held for investment......... -- 1,207 -- --
General and administrative (G&A) expense........ 57,484 36,829 30,963 23,678
Merger expenses................................. 1,144 -- -- --
SAIF special assessment......................... -- 4,005 -- --
Provision for losses on ORE..................... 530 111 -- --
Other noninterest expense....................... 273 (490) 902 4,216
Amortization of goodwill & premium on
deposits...................................... 464 491 450 1,269
---------- ---------- ---------- ----------
Net income before income taxes, negative
goodwill...................................... 16,042 8,419 8,357 5,338
accretion & minority interest
Accretion of negative goodwill.................. -- -- 1,578 2,705
---------- ---------- ---------- ----------
Net income before income taxes & minority
interest...................................... 16,042 8,419 9,935 8,043
Income tax (expense) benefit.................... (6,096) (3,035) (2,516) (702)
Minority interest in income from subsidiary
trust......................................... (701) -- -- --
Minority interest in FFO Financial, Inc......... (674) (505) (503) (131)
---------- ---------- ---------- ----------
Net income............................ $ 8,571 $ 4,879 $ 6,916 $ 7,210
========== ========== ========== ==========
Earnings per share -- diluted................... $ 1.21 $ 0.74 $ 1.10 $ 1.28
========== ========== ========== ==========
Weighted average shares outstanding --diluted... 7,301,499 6,626,604 6,261,368 5,632,437
========== ========== ========== ==========
Earnings per share -- basic..................... $ 1.40 $ 0.83 $ 1.26 $ 1.48
========== ========== ========== ==========
Weighted average shares outstanding -- basic.... 6,128,014 5,857,174 5,491,250 4,868,211
========== ========== ========== ==========
BALANCE SHEET DATA (AT PERIOD-END):
Total assets.................................... $1,552,405 $1,224,357 $1,103,480 $ 879,873
Investment & mortgage backed securities......... 108,593 161,357 155,345 101,028
Loans held for sale............................. 151,404 46,593 27,476 7,930
Loans held in portfolio, net of unearned
income........................................ 1,149,731 920,782 831,033 680,604
Allowance for loan losses....................... 20,776 18,747 20,048 15,272
Goodwill & premium on deposits.................. 4,855 527 1,017 820
Deposits........................................ 1,361,312 1,114,907 992,041 794,717
Stockholders' equity............................ 95,531 68,178 63,833 47,618
Book value per share............................ 12.27 10.32 9.65 8.16
SELECTED FINANCIAL RATIOS:
Return on average assets........................ 0.63% 0.43% 0.68% 0.90%
Return on average equity........................ 11.44 7.41 12.62 16.73
Equity to assets................................ 6.15 5.57 5.78 5.41
Equity and minority interest in preferred
subsidiary.................................... 8.01 5.57 5.78 5.41
Net interest spread............................. 3.71 3.63 3.65 3.87
Net interest margin............................. 4.18 4.02 3.95 4.06
</TABLE>
32
<PAGE> 42
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
G&A expenses to average assets.................. 4.26 3.21 3.06 2.95
G&A efficiency ratio............................ 73.17 72.58 72.29 68.29
Loan/deposit ratio.............................. 84.46 82.59 83.77 85.64
Nonperforming loans to loans.................... 2.36 2.12 2.18 2.44
Nonperforming assets to total assets............ 2.20 2.27 2.78 3.96
Loan loss allowance to loans.................... 1.81 2.04 2.40 2.24
Loan loss allowance to nonperforming loans
Originated portfolio.......................... 93.66 73.15 106.51 177.30
March 1995 bulk purchase of loans............. 373.91 488.78 647.83 N/A
CrossLand loan portfolio...................... 421.88 126.12 41.77 23.73
Other purchased loan portfolios............... 22.28 89.80 41.84 82.99
Total portfolio loans......................... 76.51 96.03 110.73 91.98
OTHER DATA (AT PERIOD-END):
Number of branch banking offices................ 45 43 43 31
Number of full-time equivalent employees........ 1,045 795 573 45
</TABLE>
33
<PAGE> 43
SELECTED HISTORICAL FINANCIAL DATA OF BANCSHARES
SELECTED FINANCIAL AND OTHER DATA -- TABLE 3
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED FIVE MONTHS ENDED
DECEMBER 31, 1993 MAY 31, 1993
---------------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
OPERATING DATA:
Interest income.......................................... $ 11,885 $ 4,848
Interest expense......................................... 5,120 1,970
---------- ----------
Net interest income...................................... 6,765 2,878
Loan loss provision...................................... 3,222 379
---------- ----------
Net interest income after loan loss provision............ 3,543 2,499
Other noninterest income................................. 1,677 743
General and administrative (G&A) expense................. 6,481 2,699
Provision for losses on ORE.............................. -- 1,214
Other noninterest expense................................ 331 443
---------- ----------
Net income before income taxes, negative................. (1,592) (1,114)
goodwill accretion & minority interest
Accretion of negative goodwill........................... 1,578 --
Net income before income taxes & minority interest....... (14) (1,114)
Income tax (expense) benefit............................. 2,844 --
Minority interest in FFO Financial, Inc.................. (197) --
---------- ----------
Net income..................................... $ 2,633 $ (1,114)
========== ==========
Earnings per share -- diluted............................ $ 1.01 $ (1.00)
========== ==========
Weighted average shares outstanding -- diluted........... 2,594,923 1,117,192
========== ==========
Earnings per share -- basic.............................. $ 1.10 $ (1.11)
========== ==========
Weighted average shares outstanding -- basic............. 2,398,066 1,002,794
========== ==========
BALANCE SHEET DATA (AT PERIOD-END):
Total assets............................................. $ 780,711 $ 168,741
Investment & mortgage backed securities.................. 74,042 27,433
Loans held for sale...................................... 11,346 --
Loans held in portfolio, net of unearned income.......... 479,600 111,292
Allowance for loan losses................................ 15,872 1,866
Goodwill & premium on deposits........................... 705,584 153,660
Deposits................................................. 4,283 5,861
Stockholders' equity..................................... 34,003 8,058
Book value per share..................................... 6.11 N/A
SELECTED FINANCIAL RATIOS:
Return on average assets................................. 0.97% (1.61)%
Return on average equity................................. 36.97 (21.75)
Equity to assets......................................... 4.36 4.78
Equity and minority interest in preferred................ 3.88 4.21
subsidiary
Net interest spread...................................... 4.30 4.66
Net interest margin...................................... 2.38 6.28
</TABLE>
34
<PAGE> 44
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED FIVE MONTHS ENDED
DECEMBER 31, 1993 MAY 31, 1993
---------------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
G&A expenses to average assets........................... 76.77 74.54
G&A efficiency ratio..................................... 67.97 72.43
Loan/deposit ratio....................................... 4.03 2.27
Nonperforming loans to loans............................. 5.66 5.89
Nonperforming assets to total assets..................... 3.31 1.68
Loan loss allowance to loans
Loan loss allowance to nonperforming loans
Originated portfolio................................... 129.06 73.03
CrossLand portfolio.................................... 39.88 N/A
Total portfolio loans.................................. 82.20 73.03
OTHER DATA (AT PERIOD-END):
Number of branch banking offices......................... 29 7
Number of full-time equivalent employees................. 373 96
</TABLE>
35
<PAGE> 45
SELECTED HISTORICAL FINANCIAL DATA OF LOCHAVEN
SELECTED FINANCIAL AND OTHER DATA -- TABLE 4
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Interest income................................... $ 1,151 $ 1,190 $ 2,291 $ 2,474
Interest expense.................................. 657 664 1,287 1,336
-------- -------- -------- --------
Net interest income..................... 494 526 1,004 1,138
Loan loss provision............................... 25 15 49 37
-------- -------- -------- --------
Net interest income after loan loss
provision............................. 469 511 955 1,101
Total noninterest income.......................... 1,339 996 2,442 2,233
Total noninterest expenses........................ 1,641 1,737 3,284 3,507
-------- -------- -------- --------
Net income (loss) before income taxes... 167 (230) 113 (173)
Income tax provision (credit)..................... 63 (88) 43 (66)
-------- -------- -------- --------
Net income (loss)....................... $ 104 $ (142) $ 70 $ (107)
======== ======== ======== ========
PER SHARE DATA:
Earnings (loss) per share....................... $ 0.17 $ (0.23) $ 0.12 $ (0.18)
======== ======== ======== ========
Weighted average shares outstanding............. 609,094 609,094 609,094 609,094
======== ======== ======== ========
BALANCE SHEET DATA (AT PERIOD-END):
Total assets...................................... $ 59,618 $ 60,172 $ 59,618 $ 60,172
Loans, net of unearned income..................... 53,131 43,496 53,131 43,496
Allowance for loan losses......................... 791 608 791 608
Deposits.......................................... 50,576 56,797 50,576 56,797
Stockholders' equity.............................. 2,831 3,594 2,831 3,594
Book value per share.............................. 4.65 5.90 4.65 5.90
SELECTED FINANCIAL RATIOS:
Return on average assets.......................... 0.71% (0.85)% 0.24% (0.32)%
Return on average equity.......................... 14.60 (15.89) 5.01 (5.87)
Net interest spread............................... 3.39 3.54 3.49 3.66
Net interest margin............................... 3.62 3.68 3.71 3.84
Noninterest expenses to average assets............ 11.15 10.38 11.18 10.51
Efficiency ratio.................................. 89.47 114.13 95.30 104.03
Non-accrual loans to loans........................ 2.76 6.26 2.76 6.26
Nonperforming assets to total assets.............. 3.53 5.14 3.53 5.14
Loan loss allowance to loans...................... 1.49 1.45 1.49 1.40
Loan loss allowance to non-performing loans....... 53.96% 22.41% 53.96% 22.41%
OTHER DATA (AT PERIOD-END):
Number of full service offices.................... 1 1 1 1
Number of full-time equivalent employees.......... 64 84 64 84
</TABLE>
36
<PAGE> 46
SELECTED HISTORICAL FINANCIAL DATA OF LOCHAVEN
SELECTED FINANCIAL AND OTHER DATA -- TABLE 5
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income.............................. $ 4,654 $ 5,831 $ 6,164 $ 7,391 $ 6,896
Interest expense............................. 2,652 3,369 3,403 3,897 3,874
-------- -------- -------- ------- --------
Net interest income................ 2,002 2,462 2,761 3,494 3,022
Loan loss provision.......................... 518 45 141 367 721
-------- -------- -------- ------- --------
Net interest income after loan loss
provision........................ 1,484 2,417 2,620 3,127 2,301
Total noninterest income..................... 3,394 3,018 3,341 3,109 6,859
Total noninterest expenses................... 5,749 5,587 5,958 8,721 7,396
-------- -------- -------- ------- --------
Net (loss) income before income
taxes............................ (871) (557) 3 (2,485) 1,764
Income tax provision (credit)................ 69 (209) 1 (938) 670
-------- -------- -------- ------- --------
Net (loss) income.................. $ (940) $ (348) $ 2 $(1,547) $ 1,094
======== ======== ======== ======= ========
PER SHARE DATA:
(Loss) earnings per share.................... $ (1.54) $ (0.57) $ -- $ (2.54) $ 1.80
======== ======== ======== ======= ========
Weighted average shares outstanding.......... 609,094 609,094 609,094 609,094 609,094
======== ======== ======== ======= ========
BALANCE SHEET DATA (AT PERIOD-END):
Total assets................................. $ 59,366 $ 75,149 $ 75,357 $75,605 $122,911
Loans, net of unearned income................ 50,503 57,951 65,215 63,243 109,566
Allowance for loan losses.................... (871) (699) (766) (861) (1,150)
Deposits..................................... 54,351 66,020 67,278 64,751 83,636
Borrowed funds............................... -- -- -- -- 23,997
Stockholders' equity......................... 2,762 3,701 4,049 4,047 5,594
Book value per share......................... 4.53 6.08 6.65 6.64 9.18
SELECTED FINANCIAL RATIOS:
Return on average assets..................... (1.47)% (.46)% --% (1.67)% 1.05%
Return on average equity..................... (29.08) (8.98) 0.05 (32.09) 21.72
Net interest spread.......................... 3.55 3.54 3.83 4.16 3.49
Net interest margin.......................... 3.50 3.58 4.13 4.19 3.31
Noninterest expenses to average assets....... 8.98 7.87 8.16 9.39 7.09
Efficiency ratio............................. 106.52 109.34 97.64 132.06 74.85
Non-accrual loans to loans................... 4.95 3.23 2.04 3.94 2.22
Nonperforming assets to total assets......... 4.94 3.10 2.77 3.51 2.82
Loan loss allowance to loans................. 1.72 1.20 1.17 1.36 1.03
Loan loss allowance to non-performing
loans...................................... 34.85% 37.24% 57.64% 34.50% 46.28%
OTHER DATA (AT PERIOD-END):
Number of full service offices............... 1 1 1 1 1
Number of full-time equivalent employees..... 87 99 92 114 224
</TABLE>
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<PAGE> 47
THE SPECIAL MEETING OF LOCHAVEN STOCKHOLDERS
GENERAL
This Proxy Statement/Prospectus is being furnished to the holders of
Lochaven Common Stock in connection with the solicitation by the Board of
Directors of proxies for use at the Special Meeting, at which Lochaven
stockholders will be asked to vote upon a proposal to approve the Agreement and
the Merger contemplated thereby. The Special Meeting for Lochaven will be held
at 9:00 a.m. local time, on November 4, 1998, at 2410 North Orange Blossom
Trail, Orlando, Florida 32804.
Stockholders of Lochaven are requested to promptly complete, sign, date and
return the accompanying proxy card in the enclosed postage-paid, addressed
envelope. A Lochaven stockholder's failure to return a properly executed proxy
card or to vote at the Special Meeting will have the same effect as a vote
against the Agreement.
Any stockholder of Lochaven who has delivered a proxy may revoke it at any
time before it is voted by giving notice of revocation in writing or submitting
a signed proxy card bearing a later date, provided that such notice or proxy
card is actually received at or before the stockholders' Special Meeting. Any
notice of revocation should be sent to the President and Chief Executive Officer
of Lochaven. A proxy will not be revoked by death or supervening incapacity of
the stockholder executing the proxy unless, before the vote, notice of such
death or incapacity is filed with the Secretary. The shares of Lochaven Common
Stock represented by properly executed proxies received at or prior to the
Special Meeting unless subsequently revoked will be voted as directed in such
proxies.
IF INSTRUCTIONS ARE NOT GIVEN, SHARES REPRESENTED BY PROXIES RECEIVED WILL
BE VOTED FOR APPROVAL OF THE AGREEMENT AND IN THE DISCRETION OF THE PROXY HOLDER
AS TO ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE SPECIAL MEETING.
As of the date of this Proxy Statement/Prospectus, Lochaven is unaware of
any other matter to be presented at either Special Meeting.
Solicitation of proxies will be made by mail but also may be made by
telephone or telegram or in person by the directors, officers and employees of
Lochaven, who will receive no additional compensation for such solicitation but
may be reimbursed for out-of-pocket expenses. Brokerage houses, nominees,
fiduciaries and other custodians will be requested to forward solicitation
materials to beneficial owners and will be reimbursed for their reasonable
out-of-pocket expenses.
LOCHAVEN STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
RECORD DATE; VOTE REQUIRED
Lochaven's Board of Directors have established the close of business on
September 24, 1998, as the Record Date for determining stockholders entitled to
notice of and to vote at the Special Meeting. Only Lochaven stockholders of
record as of the Record Date will be entitled to vote at the Special Meeting.
The affirmative votes by holders of two-thirds of the issued and outstanding
shares of Lochaven are required in order to approve the Agreement. Therefore, in
the case of Lochaven, an abstention or failure by an Lochaven stockholder to
return a properly executed proxy card will have the same effect as a vote
against the Agreement, as will a broker submitting a proxy card without
exercising discretionary voting authority with respect to the Agreement. As of
the Record Date, there were approximately 161 holders of 609,094 shares of
Lochaven Common Stock issued and outstanding.
The presence, in person or by proxy, of holders of Lochaven Common Stock,
in the case of the Special Meeting, representing a majority of the outstanding
votes are necessary to constitute a quorum of the stockholders required to take
action at such special meeting. For these purposes, shares of Lochaven Common
Stock that are present, or represented by proxy, at the Special Meeting, will be
counted for quorum purposes regardless of whether the holder of the shares or
proxy fails to vote on the Agreement or whether a broker with discretionary
authority fails to exercise its discretionary voting authority with respect to
the Agreement.
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<PAGE> 48
The directors and executive officers of Lochaven and their affiliates
beneficially owned, as of the Record Date, 271,104 shares (or approximately
42.0% of the outstanding shares) of Lochaven Common Stock. The directors and
executive officers of Bancshares and their affiliates did not beneficially own,
as of the Record Date, any shares of Lochaven Common Stock. As of that date, no
subsidiary of either Lochaven or Bancshares held any shares of Lochaven Common
Stock in a fiduciary capacity for others. The members of the Board of Directors
of Lochaven (who in the aggregate own approximately 40.0% of the outstanding
shares of Lochaven Common Stock) have indicated their intent to vote all of the
shares of Lochaven's Common Stock beneficially owned by them in favor of the
Agreement.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 49
DESCRIPTION OF THE TRANSACTION
The following material describes certain aspects of the Merger. This
description does not purport to be complete and is qualified in its entirety by
reference to the Appendices hereto, including the Agreement, which is attached
as Appendix A to this Proxy Statement/Prospectus and incorporated herein by
reference, and certain sections of the OTS Regulations relating to rights of
dissenting stockholders, which sections are attached as Appendix C to this Proxy
Statement/Prospectus and incorporated herein by reference. All Lochaven
stockholders are urged to read the Appendices in their entirety.
GENERAL
Each share of Lochaven Common Stock (except for certain shares held by
Lochaven or Bancshares, or their respective subsidiaries, in each case other
than shares held in a fiduciary capacity or in satisfaction of debts previously
contracted, and excluding shares held by Lochaven's stockholders who perfect
their dissenters' rights) issued and outstanding at the Effective Time will
cease to be outstanding and will be converted into and exchanged for 0.2776 of a
share of Bancshares Common Stock in accordance with the terms of the Agreement,
as described below. Each share of Bancshares Common and Preferred Stock
outstanding immediately prior to the Effective Time will remain outstanding and
unchanged as a result of the Merger. No fractional shares of Bancshares Common
Stock will be issued in connection with the Merger.
EXCHANGE RATIO
The Agreement provides for the acquisition of Lochaven by Bancshares
pursuant to the Merger of Lochaven with and into Republic. At the Effective Time
set forth in the related Certificate of Merger to be filed with the Department,
each share of Lochaven Common Stock then issued and outstanding (except for
certain shares held by Lochaven or Bancshares, or their respective subsidiaries,
in each case other than shares held in a fiduciary capacity or in satisfaction
of debts previously contracted, and excluding shares held by Lochaven's
stockholders who perfect their dissenters' rights) will be converted into and
exchanged for 0.2776 of a share of Bancshares Common Stock in accordance with
the terms of the Agreement.
No fractional shares of Bancshares Common Stock will be issued in
connection with the Merger. In lieu of issuing fractional shares, Bancshares
will make a cash payment (without interest) equal to the fractional part of a
share of Bancshares Common Stock that the Lochaven stockholder would otherwise
have received multiplied by the "Market Value" of a share of Bancshares Common
Stock. The Market Value of one share of Bancshares Common Stock at the Effective
Time shall be determined by calculating the average of the closing prices of
Bancshares Common Stock on the Nasdaq National Market (as reported by The Wall
Street Journal or, if not reported thereby, any other authoritative source
selected by Bancshares) on each of the 20 consecutive trading days ending on the
third business day immediately preceding the Effective Time. No Lochaven
stockholder will be entitled to dividends, voting rights or any other rights as
a stockholder with respect to any fractional share.
TREATMENT OF LOCHAVEN OPTIONS
The Lochaven Options, will cease to be outstanding and will be converted
into and exchanged for the right to acquire Bancshares Common Stock on
substantially the same terms applicable to the Lochaven Options. The number of
shares of Bancshares Common Stock to be issued pursuant to the exercise of such
options will equal the number of shares of Lochaven Common Stock subject to such
options multiplied by the Exchange Ratio of 0.2776, provided that no fractions
of options for shares of Bancshares Common Stock will be issued, and the number
of shares of Bancshares Common Stock to be issued upon the exercise of the
Lochaven Options, if a fractional share exists, will equal the number of whole
shares obtained by rounding to the nearest whole number, giving account to such
fraction. The exercise price for the acquisition of Bancshares Common Stock will
be the exercise price for each share of Lochaven Common Stock subject to such
options divided by the Exchange Ratio of 0.2776, adjusted as appropriate for any
rounding to whole shares that may be done.
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<PAGE> 50
BACKGROUND OF AND REASONS FOR THE MERGER
Background of the Merger
Over the past several years, Lochaven has incurred losses and realized a
decrease in its capital, primarily attributable to the operations of its
mortgage business. As a result of these and related issues, the OTS required in
1995 that Lochaven enter into an agreement governing certain aspects of its
operations. Among other things, the agreement with the OTS required Lochaven to
increase its capital. In November 1996, Robert O. Smedley (President and Chief
Executive Officer of Lochaven) met with the principals of a Tennessee mortgage
company for an initial discussion as to whether it might be beneficial to
explore the merits of a combination of the two organizations through a
transaction which would yield more economies of scale for Lochaven's mortgage
operations and also provide additional capital to Lochaven. In December 1996,
Mr. Smedley advised the chairman of Lochaven and the Lochaven Board at its
December meeting, of his discussions with the Tennessee company representatives.
The discussions included Lochaven's possible acquisition of the Tennessee
company in a transaction whereby shares of Lochaven would be issued in exchange
for shares of the Tennessee company. In January 1997, representatives of the
Tennessee company met with the Lochaven Board to discuss the opportunity for
combining the two institutions and, as a part of that process, recapitalizing
Lochaven to increase its capital. Informal discussions continued during January
and into February, 1997. At its February 20, 1997 meeting, the Lochaven
directors reviewed the status of the discussions with the Tennessee company
representatives. The Lochaven Board held a special meeting on February 24, 1997
to further consider the terms of additional information regarding the Tennessee
company and the terms of a possible transaction with that organization.
Following the meeting, Lochaven issued a draft proposal to the Tennessee company
regarding its possible acquisition by Lochaven. Thereafter, the parties held
additional discussions, entered into a confidentiality agreement, exchanged
information regarding their respective organizations and conducted certain due
diligence reviews of the other. At a special meeting of the Board held on March
20, 1997, the Lochaven directors reviewed the status of the meetings with the
Tennessee company representatives and decided to continue discussions regarding
a possible transaction. The Board discussed the possible transaction further at
meetings held on April 7, 1997, April 16, 1997 and May 19, 1997. At the May 19,
1997 meeting, the Lochaven Board approved a proposal for an exchange of Lochaven
stock for ownership of the Tennessee company. Additional discussion was held
between the parties thereafter with no agreement reached as to an acceptable
exchange ratio for a combination transaction.
In June 1997, Mr. Smedley was contacted by principals of a Kentucky
financial institution and also another group of investors representing a
financial institution interested in opening discussion for a possible
acquisition or combination with Lochaven. Thereafter, Lochaven entered into
confidentiality agreements with the two groups and provided summary financial
information regarding Lochaven and its business. In July and September 1997,
representatives of the two institutions met with Lochaven representatives. In
October 1997, one of the institutions advised Lochaven that it was not
interested in continuing negotiations regarding a possible acquisition of
Lochaven.
During the remainder of 1997, Lochaven continued its efforts to increase
its capital. In October 1997, Lochaven's chairman instructed Mr. Smedley to
contact the principals of the Tennessee company with which Lochaven had prior
discussions to determine if the individuals were interested in reopening
discussions regarding a possible combination with Lochaven. In addition, in
October 1997, Mr. Smedley was contacted by representatives of the Kentucky
financial institution, who indicated a renewed interest in discussing an
opportunity to acquire Lochaven through an infusion of capital primarily through
the issuance of convertible preferred stock by Lochaven. In the latter part of
1997, one of Lochaven's directors also held discussions with an owner of a
mortgage company in Central Florida regarding a possible combination of that
mortgage company with Lochaven. Lochaven had previously held similar discussions
with the owner of this mortgage company in 1996. The discussions in 1996 and
1997 ended without the parties entering into any agreement for a combination or
other transaction.
In November 1997, the principals of the Tennessee company presented a new
proposal for a combination transaction with Lochaven. The proposal was reviewed
by the Lochaven directors at a special meeting held on November 12, 1997. The
Board decided to defer taking any action on the proposal at that time until
after the
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<PAGE> 51
Board had an opportunity to further review the proposal and discuss other
alternatives that might be available to Lochaven. Also at the November 12, 1997
special meeting, the President of a Central Florida savings and loan association
which was in the final phase of a stock offering to increase its capital met
with the Lochaven directors to discuss that transaction as a part of the Board's
assessment as to whether a similar stock offering should be pursued by Lochaven.
Mr. Alan Carruthers of Carruthers & Company (who had served as a financial
advisor to the Central Florida savings and loan association) also participated
in the discussion. Following the presentation, the Lochaven Board decided to
engage Carruthers & Company to perform an evaluation of Lochaven and its
strategic alternatives, including ways of increasing its capital. Following the
November 12, 1997 special meeting of the Board, Lochaven received a proposal
from the Kentucky institution to acquire a controlling interest in Lochaven
through a sale of convertible preferred stock by Lochaven to principals of the
Kentucky financial institution. At a meeting of the Lochaven Board on November
25, 1997, the directors discussed the prior meeting with Mr. Carruthers, as well
as the proposals received from the Tennessee company and the Kentucky financial
institution. So as not to bias Mr. Carruthers' analysis, the terms of the
proposals received by Lochaven were not conveyed by Lochaven to Mr. Carruthers.
The directors requested that representatives of the Tennessee company and the
Kentucky financial institution be advised in writing that Lochaven had retained
the services of a financial advisor to assess Lochaven and its alternatives and,
pending receipt of that report, the Lochaven Board was deferring any action on
the proposals received.
At a December 18, 1997 meeting of the Board, Mr. Carruthers presented an
analysis of Lochaven and recommended that the Board consider selling Lochaven in
lieu of pursuing alternatives for raising capital. Among other things, Mr.
Carruthers noted that, given Lochaven's financial performance and results of
operations, the share value that Lochaven could anticipate achieving in a stock
offering would likely substantially dilute the value and ownership of the
current Lochaven stockholders, and may result in a lesser value to Lochaven
stockholders than could be obtained in a sale transaction. The directors also
discussed the objective of trying to maximize value for Lochaven in any sale
transaction by conducting a process which would allow other financial
institutions an opportunity to express an interest in acquiring Lochaven. The
directors authorized the issuance of letters to the principals of the Tennessee
company and the Kentucky financial institution advising them that Lochaven was
interested in undertaking a process through a financial advisor which would
provide other financial institutions an opportunity to express an interest in
acquiring Lochaven. At the December 18, 1997 meeting of the Board, the directors
also requested that a second investment banking company be contacted to discuss
submitting a proposal to Lochaven (in addition to the proposal received from
Carruthers & Company) to represent Lochaven as financial advisor in soliciting
indications of interest from other parties. The Board expressed a desire to hire
a financial advisor during the first part of January 1998. In December 1997,
Lochaven also advised the OTS of the status of its efforts to increase capital
and that Lochaven anticipated hiring a financial advisor in the early part of
January 1998, with the objective of bringing to the Lochaven Board within the
first several months of 1998 an alternative to increase Lochaven's capital.
At a special meeting of the Lochaven directors held on January 7, 1998, the
Board received separate presentations from McAllen and another investment
banking firm which specializes in the sale and purchase of financial
institutions in Florida and the Southeast. Mr. Carruthers (the principal of
Carruthers & Company) advised the Lochaven directors that he had become
associated with McAllen and that any services he might render to Lochaven would
be through McAllen. The Board requested McAllen and the other investment banking
firm to submit final engagement proposals to Lochaven. The directors deferred
retaining a financial advisor at that time pending receipt of the formal
proposals from each of the companies.
On January 9, 1998, the Lochaven directors reviewed the proposals received
from McAllen and the other investment banking firm. While not making any final
decision whether any transaction involving a sale of Lochaven should be entered
into, the Board of Directors authorized Lochaven to retain the service of
McAllen in soliciting indications of interest that might warrant serious
consideration and potentially result in an agreement to merge or Lochaven
otherwise being acquired. Subsequent to this meeting, Lochaven entered into an
agreement with McAllen on January 16, 1998. During the following weeks, McAllen,
in conjunction with management of Lochaven, completed a confidential memorandum
overviewing, among other things, Lochaven's history and financial information.
The memorandum was prepared for distribution to select
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<PAGE> 52
financial institutions to explore more formally their possible interest in
acquiring Lochaven. At a January 22, 1998 meeting of the Board, the Lochaven
directors reviewed a proposal received from the Central Florida savings and loan
association that had previously made a presentation to the Lochaven directors at
the meeting held on November 12, 1997, regarding a possible combination
transaction with Lochaven. The Board directed that Lochaven's chairman advise
the President of the Central Florida savings and loan association that any
interest that association might have in a transaction with Lochaven be directed
to McAllen as a part of its process to assess indications of interest from other
parties. McAllen never received any proposal from the Central Florida savings
and loan association.
McAllen contacted over 40 financial institutions during January and
February, 1998 regarding their interest in pursuing a possible acquisition of
Lochaven. Nineteen of the institutions/groups signed confidentiality agreements
and received the confidential memorandum. At meetings held on January 30, 1998
and February 6, 1998, the Lochaven directors discussed the status of McAllen's
solicitation process. Representatives of McAllen also participated in the
meetings. The Lochaven directors authorized McAllen to continue discussions
regarding a possible acquisition of Lochaven. On March 19, 1998, McAllen
overviewed for the Lochaven directors proposals received from two Florida
financial institutions (including Bancshares), as well as a proposal received
from representatives of the Kentucky financial institution and a proposal
received from representatives of the Tennessee company. The Board authorized
McAllen to continue discussions with these and any other interested parties. The
other Florida financial institution subsequently withdrew its proposal during a
period when its stock was experiencing a decrease in market value.
At a meeting of the Board held on April 9, 1998, McAllen presented an
update of its discussions and also indicated that due diligence had been
completed by Bancshares and the Kentucky group. McAllen also reviewed for the
directors the results of McAllen's due diligence review of Bancshares and the
Kentucky financial institution, whose proposals represented the highest value to
Lochaven shareholders. The Board authorized McAllen to continue discussions with
Bancshares to finalize terms of a proposed letter of intent, since the
Bancshares proposal represented a value higher than the values of the other
proposals received. On April 21, 1998, the Board reviewed a letter of intent
from Bancshares with McAllen and Lochaven's legal counsel. The Board continued
to discuss the Bancshares interest as well as other information relating to
Bancshares. The Board authorized Lochaven management to enter into the letter of
intent with Bancshares. The letter of intent was signed on April 22, 1998.
Following the discussion, the Lochaven Board also directed legal counsel to
commence negotiation of a definitive agreement that would be brought back to
Lochaven's directors for review and consideration.
During the last week of April and the first week of May 1998, Lochaven and
Bancshares representatives negotiated the terms of a definitive agreement. The
Agreement was reviewed and approved by the Board of Directors of Lochaven at a
meeting on May 6, 1998. At the meeting, legal counsel reviewed generally for
Lochaven's directors the fiduciary obligations of directors in sales of
financial institutions and commented on the form of definitive agreements and
related issues. Also, at the meeting, Mr. Carruthers of McAllen advised the
Lochaven Board that McAllen was rendering an opinion that the terms of the
Agreement are fair, from a financial point of view, to the Lochaven
stockholders. Lochaven's Board then unanimously approved the Agreement and the
transactions contemplated thereby. Lochaven's management also was authorized to
execute the Agreement which was signed by Bancshares and Lochaven effective May
6, 1998.
Bancshares' Reasons for the Merger
The Bancshares Board of Directors has approved the Agreement and determined
that the Merger is in the best interests of Bancshares and its stockholders. In
approving the Agreement, Bancshares' Board considered a number of factors.
Without assigning any relative or specific weights to the factors, Bancshares'
Board considered the following material factors:
(a) The information presented to Bancshares' Board by its executive
officers concerning the business, operations, earnings and financial
condition, including the capital levels and asset quality, of Lochaven on
an historical, prospective and pro forma basis and in comparison to other
financial institutions in the area;
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<PAGE> 53
(b) The demographic, economic and financial characteristics of the
markets in which Lochaven operates, including existing competition, history
of the market areas with respect to financial institutions and average
demand for credit, on an historical and prospective basis;
(c) The results of Bancshares' due diligence review of Lochaven;
(d) A variety of factors affecting and relating to the overall
strategic focus of Bancshares, including Bancshares' desire to increase its
presence in the central Florida market; and
(e) The legal advice of Bancshares' counsel.
Based upon the consideration of the foregoing factors, the Board of
Directors of Bancshares concluded that the Merger is in the best interest of
Bancshares' stockholders.
Lochaven's Reasons for the Merger
Lochaven's Board of Directors believes that the Merger is in the best
interests of Lochaven and its stockholders. The Board of Directors of Lochaven
considered a number of factors in deciding to approve and recommend the terms of
the Agreement to Lochaven stockholders, including the terms of the proposed
transaction; the financial condition, results of operations, and future
prospects of Lochaven; the value of the consideration to be received by Lochaven
stockholders relative to the book value and earnings per share of Lochaven
Common Stock; the competitive and regulatory environment for financial
institutions generally; the fact that the Merger will enable Lochaven
stockholders to exchange their shares of Lochaven Common Stock (for which there
is no established public trading market) for shares of common stock of a larger
and more diversified entity, the stock of which is more widely held and more
actively traded; the likelihood of receiving the requisite regulatory approval;
that it is expected that the Merger will be a tax-free transaction (except in
respect of cash received for Lochaven Common Stock) for federal income tax
purposes; and other information. The Board of Directors also took into account
an opinion received from McAllen that the terms of the Agreement are fair, from
a financial point of view, to the stockholders of Lochaven. See "Opinion of
Lochaven's Financial Advisor." The foregoing discussion of the information and
factors considered by the Lochaven Board of Directors is not intended to be
exhaustive of the factors considered by the Board of Directors. The Lochaven
Board of Directors did not assign any relative or specific weights to the
foregoing factors, and individual directors may have given different weights to
different factors.
THE LOCHAVEN BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT LOCHAVEN
STOCKHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT.
OPINION OF LOCHAVEN'S FINANCIAL ADVISOR
Lochaven retained McAllen to advise the Lochaven Board of Directors as to
its "fair" sale value and the fairness to its stockholders of the financial
terms of the Bancshares offer to acquire Lochaven. McAllen is regularly engaged
in the valuation of banks, bank holding companies, and thrifts in connection
with mergers, acquisitions, and other securities transactions; and has knowledge
of, and experience with, the Southeastern banking markets and banking
organizations operating in those markets. McAllen was selected by Lochaven
because of its knowledge of, expertise with, and reputation in the financial
services industry.
In such capacity, McAllen reviewed the Agreement with respect to the
pricing and other terms and conditions of the Merger, but the decision as to
accepting the offer was ultimately made by the Board of Directors of Lochaven.
McAllen rendered its written and oral opinion to the Lochaven Board of Directors
that, as of May 6, 1998, the terms of the Agreement were fair, from a financial
point of view, to Lochaven stockholders. McAllen also provided an updated
opinion that as of September 30, 1998, the terms of the Agreement were fair,
from a financial point of view, to Lochaven stockholders. No limitations were
imposed by the Lochaven Board of Directors upon McAllen with respect to the
investigation made or procedures followed by it in arriving at its opinions.
In reaching its original opinion, McAllen analyzed the respective financial
positions, both current and historical, of Bancshares and Lochaven. McAllen
reviewed: (1) the Agreement; (2) the annual reports to
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<PAGE> 54
stockholders of Bancshares, including audited financial statements for the five
years ended December 31, 1997; (3) audited financial statements of Lochaven for
the five years ended December 31, 1997; (4) the unaudited interim financial
statements of Bancshares for the two months ended February 28, 1998; (5) the
unaudited interim financial statements of Lochaven for the two months ended
February 28, 1998; and (6) certain financial and operating information with
respect to the business, operations and prospects for Bancshares and Lochaven.
McAllen also: (1) held discussions with members of the senior management of
Bancshares and Lochaven regarding historical and current business operations,
financial condition and future prospects of their respective companies; (2)
reviewed the historical market prices and trading activity for the common stocks
of Bancshares and Lochaven and compared them with those of certain publicly
traded companies which McAllen deemed to be relevant; (3) compared the results
of operations of Bancshares and Lochaven with those of certain banking companies
which McAllen deemed to be relevant; (4) compared the proposed financial terms
of the Merger with the financial terms, to the extent publicly available, of
certain other business combinations of thrift institutions; (5) analyzed the pro
forma financial impact of the Merger on Bancshares; and (6) conducted such other
studies, analyses, inquiries and examinations as McAllen deemed appropriate,
including, but not limited to, the impact of Bancshares' then prospective public
offering of Common Stock.
In reaching its updated opinion, McAllen analyzed the respective financial
positions, both current and historical, of Bancshares and Lochaven. McAllen
reviewed: (1) the Registration Statement; (2) the unaudited interim financial
statements of Bancshares for the quarters ended March 31, 1998 and June 30,
1998; (3) the unaudited interim financial statements of Lochaven for the periods
ended March 31, 1998, June 30, 1998 and July 31, 1998; and (4) certain financial
and operating information with respect to the business, operations and prospects
for Bancshares and Lochaven. McAllen also: (1) held discussions with members of
the senior management of Lochaven regarding historical and current business
operations, financial condition and future prospects of Lochaven; (2) reviewed
the historical market prices and trading activity for the Bancshares Common
Stock as compared with those of certain publicly traded companies which McAllen
deemed to be relevant; (3) compared the results of operations of Bancshares and
Lochaven with those of certain banking companies which McAllen deemed to be
relevant; (4) compared the proposed financial terms of the Merger with the
financial terms, to the extent publicly available, of certain other business
combinations of thrift institutions; (5) analyzed the pro forma financial impact
of the Merger on Bancshares; and (6) conducted such other studies, analyses,
inquiries and examinations as McAllen deemed appropriate.
McAllen did not obtain any independent appraisal of assets or liabilities
of Lochaven or Bancshares or their respective subsidiaries. Further, McAllen did
not independently verify the information provided by Lochaven or Bancshares and
assumed the accuracy and completeness of all such information.
In arriving at its opinions, McAllen performed a variety of financial
analyses. McAllen believes that its analyses must be considered as a whole and
that consideration of portions of such analyses and the factors considered
therein, without considering all the factors and analyses, could create an
incomplete view of the analyses and the process underlying McAllen's opinion.
The preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis and summary
description.
In its analyses, McAllen made certain assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
were beyond Lochaven's or Bancshares's control. Any estimates contained in
McAllen's analyses are not necessarily indicative of future results of value,
which may be significantly more or less favorable than such estimates. Estimates
of the value of companies do not purport to be appraisals or necessarily reflect
the prices at which companies or their securities may actually be sold.
The following is a summary of selected analyses considered by McAllen in
connection with its updated opinion letter.
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Pro Forma Merger Analyses
McAllen analyzed the changes in the amount of earnings and book value
represented by the receipt of about $3.6 million for all of the outstanding
shares of Lochaven Common Stock, which will be paid in Bancshares Common Stock
based upon such share price as of September 30, 1998. The analysis evaluated,
among other things, possible dilution in earnings and capital per share for
Bancshares Common Stock.
Comparable Companies
The general operations of Lochaven has changed dramatically since the date
of the original opinion. Among other things, the vast majority of Lochaven's
mortgage production/service personnel have either resigned from Lochaven or been
effectively transferred to Bancshares. Given the magnitude and recency of these
developments, McAllen could not perform a suitable "comparable" or "market"
valuation analysis.
McAllen also compared Bancshares' (a) stock price as of September 8, 1998
equal to 24.0 times earnings, 128% of book value and 156% of tangible book
value, (b) leverage capital ratio as June 30, 1998 of 7.55%, (c) nonperforming
assets as of June 30, 1998 equal to 1.79% of total assets, (d) return on average
assets during the trailing four quarters ended December 31, 1997 of 0.43% and
(e) return on average equity during the same period of 7.05%, with the medians
for selected banks and bank holding companies that McAllen deemed to be
comparable to Bancshares. This comparable included 11 commercial banks that were
headquartered in the Middle-Atlantic or Southeastern United States. The selected
institutions included: ABC Bancorp, Georgia; Carolina First Corporation, South
Carolina; Center Bancorp, New Jersey; Community First Banking, Georgia; FNB
Rochester Corp., New York; Fidelity National, Georgia; Patriot Bank,
Pennsylvania; Republic Security, Florida; Seacoast Banking, Florida; Vista
Bancorp, New Jersey; and Yardville National, New Jersey. The comparable medians
were (a) stock price equal to 18.3 times earnings , 158% of book value and 173%
of tangible book value, (b) leverage capital of 7.95%, (c) nonperforming assets
equal to 0.70% of total assets, (d) return on average assets of 0.88% and (e)
return on average equity of 9.70%. McAllen also compared other income, expense,
and balance sheet information of such companies with similar information about
Bancshares.
Comparable Transaction Analysis
McAllen compared the consideration to be paid in the Merger to the latest
twelve months' earnings and equity capital (June 30, 1998) of Lochaven with
earnings and capital multiples paid in acquisitions of lower performance
Southeastern thrifts from 1989 through the announced transaction. This
comparable group included 14 transactions, with the median ratios as follows:
total assets of $68 million, return on average assets of 0.05%, nonperforming
assets to total assets of 3.17% and tangible capital to total assets of 5.49%.
As of June 30, 1998, Lochaven's total assets were $59 million, year-to-date
return on average assets was 0.24%, nonperforming assets to total assets was
3.55% and tangible capital to total assets was 4.63%. At the time McAllen made
its updated analysis, the consideration to be paid in the Merger was 129% of
Lochaven's June 30, 1998 book value. Given the substantial losses incurred by
Lochaven during the twelve months ended June 30, 1998, no deal value to earnings
multiple is available. This compares to the median multiple of 137% of book
value for the comparable group transactions.
Consideration of Recent Events/Extraordinary Items
Since McAllen's original opinion, Bancshares Common Stock has declined 37%
to $21.625 as of September 8, 1998. This price decline reflects several possible
factors, including a general decline in the stock prices of commercial banks,
Bancshares' net losses of $1.7 million for the quarter ended June 30, 1998 and
the issuance by Bancshares of approximately $77.9 million in additional
Bancshares Common Stock in May 1998.
Concurrently, the vast majority of Lochaven's mortgage production/servicing
staff has either resigned or been effectively transferred to Bancshares. Given
the recency of these events, the full impact on Lochaven's future financial
performance cannot be determined. Furthermore, Lochaven continues to operate
under several regulatory restrictions and any opportunities to pursue
alternative strategies at the time of the updated opinion appeared remote.
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Other Analysis
In addition to performing the analyses summarized above, McAllen also
considered the general market for bank and thrift mergers, the historical
financial performance of Lochaven and Bancshares, the deposit market shares of
both banks, and the general economic conditions and prospects of those banks.
No company or transaction used in the analysis is identical to Lochaven or
Bancshares. Accordingly, an analyses of the results of the foregoing is not
mathematical; rather it involves complex consideration and judgments concerning
differences in financial and operating characteristics of the companies and
other factors that could affect the public trading values of the company or
companies to which they are being compared.
The summary set forth above does not purport to be a complete description
of the analyses and procedures performed by McAllen in the course of arriving at
its opinions. The full text of the opinion of McAllen dated as of September 30,
1998, which sets forth assumptions made and matters considered, is attached
hereto as Appendix B of this Proxy Statement/Prospectus. Lochaven stockholders
are urged to read this opinion in its entirety. McAllen's opinion is directed
only to the consideration to be received by Lochaven stockholders in the Merger
and does not constitute a recommendation to any Lochaven stockholder as to how
such stockholder should vote at the Special Meeting.
EFFECTIVE TIME OF THE MERGER
Subject to the conditions to the obligations of the parties to effect the
Merger, the Effective Time will occur on the date and at the time set forth in
the Certificate of Merger to be filed with the Department. Unless otherwise
agreed upon by Bancshares and Lochaven, and subject to the conditions to the
obligations of the parties to effect the Merger, the parties will use their
reasonable efforts to cause the Effective Time to occur on or before the tenth
business day (as designated by Bancshares) following the last to occur of (i)
the effective date (including expiration of any applicable waiting period) of
the last required consent of any regulatory authority having authority over and
approving or exempting the Merger (which has already occurred); or (ii) the date
on which the stockholders of Lochaven approve the Agreement.
No assurance can be provided that the necessary stockholder approval can be
obtained or that other conditions precedent to the Merger can or will be
satisfied. Bancshares and Lochaven anticipate that all conditions to
consummation of the Merger will be satisfied so that the Merger can be effected
during the fourth quarter of 1998. However, delays in the consummation of the
Merger could occur.
The Board of Directors of either Bancshares or Lochaven generally may
terminate the Agreement if the Merger is not consummated by December 1, 1998.
See "-- Conditions to Consummation of the Merger" and "-- Waiver, Amendment and
Termination of the Agreement."
DISTRIBUTION OF BANCSHARES' STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
Promptly after the Effective Time, Bancshares will cause the Exchange Agent
to mail to the former stockholders of Lochaven a form letter of transmittal,
together with instructions for the exchange of such stockholders' certificates
theretofore representing shares of Lochaven Common Stock for new certificates
representing shares of Bancshares Common Stock.
LOCHAVEN STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE THE FORM LETTER OF TRANSMITTAL AND INSTRUCTIONS.
Upon surrender to the Exchange Agent of certificates for Lochaven Common
Stock, together with a properly completed letter of transmittal, there will be
issued and mailed to each holder of Lochaven Common Stock surrendering such
items a certificate or certificates representing the number of shares of
Bancshares Common Stock to which such holder is entitled, as well as payment, by
check, for any resulting fractional shares of Bancshares Common Stock. The
amount of the payment to be received by the holder will equal the product of the
fractional share amount multiplied by the Market Value of Bancshares Common
Stock. After the Effective Time, to the extent permitted by law, Lochaven
stockholders of record as of the Effective Time will be entitled to vote at any
meeting of holders of Bancshares Common and Preferred Stock the number of
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whole shares of Bancshares Common Stock into which their Lochaven Common Stock
has been converted, regardless of whether such stockholders have surrendered
their Lochaven Common Stock certificates. No dividend or other distribution
payable after the Effective Time with respect to Bancshares Common Stock,
however, will be paid to the holder of any unsurrendered Lochaven Common Stock
certificate until the holder duly surrenders such certificate. Upon such
surrender, all undelivered dividends and other distributions will be delivered
to such former Lochaven stockholder, in each case without interest.
The stock transfer books of Lochaven shall be closed at the Effective Time.
After the Effective Time, there will be no transfers of shares of Lochaven
Common Stock on Lochaven's stock transfer books. If certificates representing
shares of Lochaven Common Stock are presented for transfer after the Effective
Time, they will be canceled and exchanged for the shares of Bancshares Common
Stock deliverable in respect thereof.
CONDITIONS TO CONSUMMATION OF THE MERGER
Consummation of the Merger is subject to a number of conditions, including,
but not limited to:
(a) Approvals from the FDIC, the Federal Reserve and the Department
without any conditions or restrictions that would, in the reasonable
judgment of Bancshares' Board of Directors, so materially adversely impact
the economic or business benefits of the transactions contemplated by the
Agreement that had such condition or requirement been known, Bancshares
would not, in its reasonable respective judgments, have entered into the
Agreement, and the expiration of all applicable waiting and notification
periods. All required regulatory approvals for the Merger have been
obtained, and all applicable waiting periods have expired;
(b) The approval of the Agreement by the holders of two-thirds of the
outstanding shares of Lochaven Common Stock;
(c) The absence of any action by any court or governmental authority
restraining, prohibiting, restricting or making illegal consummation of the
Merger;
(d) The receipt of a satisfactory opinion of counsel that the Merger
qualifies for federal income tax treatment as a reorganization under
Section 368(a) of the Code and that the exchange of Lochaven Common Stock
for Bancshares Common Stock will not give rise to recognition of gain or
loss to Lochaven stockholders, except to the extent of any cash received.
Such opinion has already been rendered by counsel to Bancshares; and
(e) The Registration Statement of which this Proxy
Statement/Prospectus is a part shall have become effective under the
Securities Act, no stop orders suspending the effectiveness of the
Registration Statement shall have been issued, no action, suit, proceeding
or investigation by the Commission to suspend the effectiveness thereof
shall have been initiated and be continuing, and all necessary approvals
under state securities laws or the Securities Act relating to the issuance
or trading of the shares of Bancshares Common Stock issuable pursuant to
the Merger shall have been received. The Registration Statement was
declared effective by the Commission on October , 1998.
Consummation of the Merger also is subject to the satisfaction or waiver of
various other conditions specified in the Agreement, including, among others:
(i) the delivery by Bancshares and Lochaven of opinions of their respective
counsel and certificates executed by their respective duly authorized officers
as to compliance with the Agreement; and (ii) as of the Closing Date, the
accuracy of certain representations and warranties and the compliance in all
material respects with the agreements and covenants of each party.
REGULATORY APPROVALS
As noted above, the Merger required the approval of the FDIC, the Federal
Reserve and the Department prior to consummation. On July 3, 1998, the Federal
Reserve issued its approval, which is due to expire on October 3, 1998.
Bancshares anticipates that it will need to obtain an extension of Federal
Reserve's approval in order to consummate the Merger and is in the process of
obtaining an additional three-month extension. On
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July 17, 1998, the Department issued its final order approving the Merger
conditional on Lochaven stockholder approval. The Department's approval expires
in six months unless an extension of time is requested and granted. Also, on
August 17, 1998, the FDIC issued its approval, which expires in six months.
Approval by the OTS is not required, but notification of the Merger by Lochaven
to the OTS has been provided and the requisite 30-day notification period will
expire on October 16, 1998.
Under the FDI Act, the Merger may not be consummated until the 30th day
following the date of FDIC approval, which may be shortened to the 15th day by
the FDIC, during which time the United States Department of Justice may
challenge the transaction on antitrust grounds. The commencement of any
antitrust action would stay the effectiveness of the FDIC's approval, unless a
court specifically orders otherwise. The applicable waiting period for the
Merger expired on September 1, 1998.
WAIVER, AMENDMENT AND TERMINATION OF THE AGREEMENT
Prior to the Effective Time, and to the extent permitted by law, any
provision of the Agreement generally may be: (i) waived by the party benefitted
by the provision; or (ii) amended by a written agreement between Bancshares and
Lochaven approved by their respective Boards of Directors; provided, however,
after Lochaven stockholder approval of the Agreement, no amendment relating to
the manner or basis in which Lochaven Common Stock shall be exchanged for
Bancshares Common Stock may be made without the further approval of such
stockholders.
The Agreement may be terminated, and the Merger abandoned, at any time
prior to the Effective Time, either before or after approval by Lochaven
stockholders, under the following circumstances:
(a) By mutual consent of the Boards of Directors of Bancshares and
Lochaven;
(b) By the Board of Directors of either Bancshares or Lochaven in the
event of an inaccuracy of any representation or warranty of the other party
contained in the Agreement (provided that the terminating party is not then
in breach of any representation or warranty or in material breach of any
covenant or other agreement contained in the Agreement) that cannot be or
has not been cured within 30 days after the giving of written notice to the
other party;
(c) By the Board of Directors of either Bancshares or Lochaven in the
event of a material breach by the other party of any covenant contained in
the Agreement that cannot be or has not been cured within 30 days after the
giving of written notice to the breaching party of such breach;
(d) By the Board of Directors of Bancshares or Lochaven in the event
(i) any application filed with any regulatory authority required for
consummation of the Merger and the other transactions contemplated by the
Agreement is denied by final nonappealable action of such authority or if
any action taken by such authority is not appealed within the time limit
for appeal, or (ii) the stockholders of Lochaven fail to vote their
approval of the matters submitted for the approval by such stockholders at
the Special Meeting where the transactions will be presented to such
stockholders for approval and voted upon;
(e) By the Board of Directors of either Bancshares or Lochaven in the
event that the Merger shall not have been consummated by December 1, 1998;
provided that such failure to consummate is not caused by any breach of the
Agreement by the party electing to terminate; or
(f) By the Board of Directors of either Bancshares or Lochaven in the
event that any of the conditions precedent to the obligations of such party
to consummate the Merger cannot be satisfied or fulfilled by the date
specified in the Agreement; provided that the terminating party is not then
in breach of any representation or warranty or in material breach of any
covenant or other agreement contained in the Agreement.
If the Agreement is terminated, the parties will have no further
obligations, except with respect to certain provisions, including those
providing for payment of expenses and restricting disclosure of confidential
information. Further, termination will not relieve the parties from the
consequences of any uncured willful breach of the Agreement giving rise to such
termination.
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CONDUCT OF BUSINESS PENDING THE MERGER
Each of Bancshares and Lochaven has generally agreed, unless the prior
consent of the other party is obtained, and except as otherwise contemplated by
the Agreement, to operate its business only in the ordinary course, preserve
intact in all material respects its business organizations and assets, maintain
its rights and franchises, and take no action that would materially adversely
affect the ability of either party to perform its covenants and agreements under
the Agreement or to obtain any consent or approval required for the consummation
of the transactions contemplated by the Agreement. In addition, the Agreement
contains certain other restrictions applicable to the conduct of the business of
Lochaven and Bancshares prior to consummation of the Merger, as described below.
Lochaven
Lochaven has agreed not to take certain actions relating to the operation
of its business pending consummation of the Merger without the prior approval of
Bancshares. Those actions generally include, without limitation: (i) amending
the Charter or Bylaws or other governing instrument of Lochaven; (ii) becoming
responsible for any obligation for borrowed money in excess of an aggregate
amount outstanding at any time of $50,000 (except in the ordinary course of
business consistent with past practices); (iii) repurchasing, redeeming,
acquiring or exchanging, directly or indirectly, any shares or any securities
convertible into shares of its capital stock (other than exchanges in the
ordinary course under employee benefits plans) or declaring or paying any
dividend or making any other distribution in respect of its capital stock; (iv)
except pursuant to the exercise of outstanding options to purchase Lochaven
Common Stock, issuing or selling any additional shares of any Lochaven capital
stock, any rights to acquire any such stock or any security convertible into
such stock; (v) adjusting, splitting, combining or reclassifying any of its
capital stock; (vi) except for U.S. Treasury or federal agency securities or
Freddie Mac, Fannie Mae, Ginnie Mae or other investment-grade securities,
purchasing any securities of or making any material investment in any entity
other than a wholly-owned subsidiary or otherwise acquiring control over any
other entity; (vii) except in accordance with past practice or as previously
approved by the Board of Directors of Lochaven, granting any increase in
compensation or benefits to employees, officers or directors, paying any
severance pay or bonus (except pursuant to any existing written policies or
contracts), entering into or amending any severance agreements with officers
(except as provided by the Agreement), or voluntarily accelerating the vesting
of any employee benefits; (viii) granting any increase in fees or other
increases in compensation or other benefits to the directors of Lochaven except
in accordance with past practice; (ix) entering into or amending (except for any
amendment required by law) any employment contract that it does not have the
unconditional right to terminate without liability (other than liability for
services already rendered); (x) adopting any new employee benefit plan or
program or materially changing any existing plan or program (except for any
change required by law or advisable to maintain the tax qualified status of any
such plan); (xi) making any significant change in tax or accounting methods or
systems of internal accounting controls (except in conformity to changes in tax
laws or generally accepted accounting principles); (xii) commencing any
litigation (except in accordance with past practices), or settling any
litigation for material money damages or restrictions upon the operations of
Lochaven; or (xiii) modifying or terminating any material contract.
The Agreement also provides that neither Lochaven nor any of its affiliates
or representatives may directly or indirectly solicit any tender offer or
exchange offer or any proposal for a merger, acquisition of all of the stock or
assets of, or other business combination involving, Lochaven, or a substantial
portion of its assets (an "Acquisition Proposal"). Except to the extent
necessary to comply with their fiduciary duties as advised by counsel, neither
Lochaven nor any affiliate or representative may furnish any non-public
information that it is not legally obligated to furnish, or negotiate with
respect to, or enter into any contract with respect to, any Acquisition
Proposal, but Lochaven may communicate information about such Acquisition
Proposal to its stockholders if and to the extent that it is required to do so
in order to comply with its legal obligations as advised by counsel. Lochaven is
required to promptly notify Bancshares in the event that it receives any inquiry
or proposal relating to any such transaction. Lochaven is required pursuant to
the Agreement to use its reasonable efforts to cause all of its representatives
not to engage in any of the foregoing activities.
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Bancshares
Bancshares has agreed (a) to continue to conduct its business in a manner
designed to enhance the long-term value of the Bancshares Common Stock and the
business prospects of Bancshares and (b) to take no action that would adversely
affect the ability of either Bancshares or Lochaven (i) to obtain any regulatory
approvals required for the Merger or (ii) to perform its covenants and
agreements under the Agreement.
MANAGEMENT OF BANCSHARES AND REPUBLIC FOLLOWING THE MERGER
Consummation of the Merger will not alter the present directors and
officers of Bancshares or Republic. Information concerning the management of
Bancshares and Republic is included in the documents incorporated herein by
reference. See "Documents Incorporated by Reference."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The Agreement generally provides that Bancshares will, to full extent
provided by the OTS Regulations, to the extent not inconsistent with Florida
law, and by Lochaven's Charter and Bylaws, indemnify, defend and hold harmless
the present and former directors, officers, employees and agents of Lochaven
against all liabilities arising out of actions or omissions occurring at or
prior to the Effective Time.
The Agreement also provides that, after the Effective Time, Bancshares will
provide generally to officers and employees of Lochaven who become officers or
employees of Bancshares or its subsidiaries employee benefits under employee
benefit plans on terms and conditions that, taken as a whole, are substantially
similar to those currently provided by Bancshares and its subsidiaries to their
similarly situated officers and employees. For purposes of participation and
vesting (but not benefit accrual) under such employee benefit plans, service
with Lochaven prior to the Effective Time will be treated as service with
Bancshares or its subsidiaries. The Agreement further provides that Bancshares
will honor all provisions for vested amounts earned or accrued through the
Effective Time under Lochaven's benefit plans. The Agreement also provides that
for a period of one year following the Effective Time, Bancshares shall make a
severance payment to any former Lochaven employee terminated by Bancshares
without cause during such period in an amount equal to the product of such
employee's salary or base pay for two weeks multiplied by the number of whole
years such employee was employed with Lochaven.
Lochaven also has entered into an employment agreement with Mr. Smedley
(its President and Chief Executive Officer), which will be assumed by Bancshares
in the Merger. The agreement provides for Mr. Smedley to receive an annual
salary of $106,000 (which includes automobile allowance) until January 1, 1999,
subject to termination by either party upon 120 days' prior written notice. The
agreement also includes reimbursement for moving expenses incurred if Mr.
Smedley establishes permanent residence in Orlando prior to termination of
employment. The agreement also provides for Mr. Smedley to receive options
exercisable for 35,000 shares of Lochaven Common Stock at option exercise prices
ranging from $4.53 to $6.65 per share. Bancshares also has agreed to pay certain
Lochaven employees a "stay premium" to the extent that the employees remain
employed with Lochaven through the Effective Time. Substantially all of the stay
premiums provide for a payment equal to two or three months of the employee's
base salary (nine months in the case of Lochaven's Chief Financial Officer). The
stay premiums are in addition to any severance payment to be received by the
employees pursuant to the Agreement.
As described above under "-- Treatment of Lochaven Options," the Agreement
also provides that all rights with respect to Lochaven Common Stock pursuant to
stock options granted by Lochaven under its stock option plans that are
outstanding at the Effective Time, whether or not then exercisable, will be
converted into and will become options with respect to Bancshares Common Stock,
and Republic will assume each of such options in accordance with its terms and
the Exchange Ratio in the Agreement.
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DISSENTING STOCKHOLDERS
General
If the Merger and the transactions contemplated thereby are consummated,
any Lochaven stockholder who properly perfects his or her dissenters' rights of
appraisal will be entitled to receive in cash the fair or appraised value of
such stockholder's shares of Lochaven Common Stock determined immediately prior
to the Effective Time, excluding any appreciation or depreciation in
anticipation of the Merger, as provided in Section 552.14 of the OTS
Regulations, a copy of which is included as Appendix C to this Proxy
Statement/Prospectus. FAILURE TO STRICTLY COMPLY WITH THE PROCEDURES PRESCRIBED
BY THE APPLICABLE OTS REGULATIONS WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
Regulatory Requirements
The following is a summary of the steps to be taken by a Lochaven
stockholder who is interested in perfecting such holder's dissenters' rights and
should be read in conjunction with the full text of Appendix C. Each of the
steps enumerated below must be taken in strict compliance with the applicable
provisions of the OTS Regulations in order for holders of Lochaven Common Stock
to perfect their dissenters' rights.
Any written objection, demand or notice required by the OTS Regulations in
connection with the exercise of dissenters' rights should be sent to Lochaven at
2410 North Orange Blossom Trail, Orlando, Florida 32804, Attention: President
and Chief Executive Officer. It is recommended that all required documents to be
delivered by mail be sent by registered or certified mail with return receipt
requested.
Any stockholder of Lochaven entitled to vote on the Agreement has the right
to receive payment of the fair or appraised value of his or her shares of
Lochaven Common Stock upon compliance with the applicable provisions of the OTS
Regulations. A stockholder may dissent as to all or less than all of the shares
that are registered in his or her name. Any Lochaven stockholder intending to
enforce the right to dissent (i) must not vote in favor of the Agreement, and
(ii) must file a written notice of intent to demand appraisal of and payment for
his or her shares (the "Objection Notice") with Lochaven before the vote on the
proposal to approve the Agreement and the transactions contemplated thereby is
taken at the Special Meeting. The Objection Notice must identify the stockholder
and state that the stockholder intends to demand appraisal of and payment for
his or her shares of Lochaven Common Stock if the Merger is effected. Such
demand must be in addition to and separate from any proxy or vote against the
Agreement submitted by the stockholder. A VOTE AGAINST APPROVAL OF THE
AGREEMENT, IN AND OF ITSELF, WILL NOT CONSTITUTE AN OBJECTION NOTICE SATISFYING
THE REQUIREMENTS OF THE OTS REGULATIONS.
If the Agreement is approved by Lochaven's stockholders at the Special
Meeting, each stockholder who has properly filed an Objection Notice and has not
voted in favor of the Agreement will be notified by Republic of the Merger
within ten days of the Effective Time. In such notice Republic will make a
written offer to the dissenting Lochaven stockholder to pay a specified price
that it deems to be the fair value for their shares of Lochaven Common Stock.
The notice will also set forth the steps that must be taken by a dissenting
stockholder in order to perfect his or her dissenter's rights. The Republic
notice and offer will be accompanied by certain Lochaven financial statements.
If the fair value for the shares is agreed upon within 60 days following the
Effective Time of the Merger, the dissenting stockholder shall receive payment
for his or her shares within 90 days of the Effective Time of the Merger. At any
time within 60 days after the Effective time, any stockholder shall have the
right to withdraw his or her demand for appraisal and to accept the terms
offered pursuant to the Agreement.
If Republic and any dissenting stockholder are unable to agree as to the
fair value of the stockholder's shares of Lochaven Common Stock, the stockholder
must to file a petition with the OTS demanding a determination of the fair
market value of the stock of all dissenting stockholders, with a copy of the
petition sent by registered or certified mail to Republic, within 60 days
following the Effective Time of the Merger. Also within such 60-day period, the
stockholder must submit to Republic's transfer agent, ChaseMellon
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Shareholders Services, his or her Lochaven Common Stock certificates for
notation thereon that (i) an appraisal and payment have been demanded with
respect to such stock and (ii) appraisal proceedings are pending. ANY LOCHAVEN
STOCKHOLDER WHO EITHER FAILS TO FILE TIMELY A PETITION WITH THE OTS DEMANDING AN
APPRAISAL OR FAILS TO SUBMIT HIS OR HER LOCHAVEN COMMON STOCK CERTIFICATES FOR
NOTATION WILL NO LONGER BE ENTITLED TO APPRAISAL RIGHTS AND WILL BE DEEMED TO
HAVE ACCEPTED THE TERMS SET FORTH IN THE AGREEMENT.
After receiving a properly filed petition, the OTS will conduct an
appraisal and will make a determination as to the fair value of the dissenting
stockholders' shares. The OTS will then direct Republic to pay such amount upon
surrender of the Lochaven Common Stock certificates. Any payment made by
Republic will include interest from the Effective Time of the Merger at a rate
deemed equitable by the OTS. The agency may also apportion and assess costs and
expenses against all or some of the parties to the appraisal proceeding as it
deems equitable, taking into consideration whether any party has acted
arbitrarily, vexatiously or not in good faith in exercising its rights.
THE FOREGOING SUMMARY OF THE APPLICABLE PROVISIONS OF SECTION 552.14 OF THE
OTS REGULATIONS IS NOT INTENDED TO BE A COMPLETE STATEMENT OF SUCH PROVISIONS,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SECTION, WHICH IS
REPRODUCED IN FULL AS APPENDIX C HEREOF. THE PROVISIONS OF THE OTS REGULATIONS
ARE TECHNICAL IN NATURE AND COMPLEX. IT IS RECOMMENDED THAT ANY LOCHAVEN
STOCKHOLDER WHO DESIRES TO EXERCISE THE RIGHT TO DISSENT TO THE AGREEMENT
CONSULT HIS OR HER COUNSEL. FAILURE TO STRICTLY COMPLY WITH THE PROVISIONS OF
THE OTS REGULATIONS MAY DEFEAT A STOCKHOLDER'S RIGHT TO DISSENT.
Any dissenting Lochaven stockholder who perfects such holder's right to be
paid the value of such holder's shares in cash under the foregoing procedures
for dissent and appraisal will recognize taxable gain or loss for federal income
tax purposes upon receipt of cash for such shares. See "-- Certain Federal
Income Tax Consequences of the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
THE FOLLOWING IS A SUMMARY OF CERTAIN ANTICIPATED FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER. THIS SUMMARY IS BASED ON THE FEDERAL INCOME TAX LAWS
NOW IN EFFECT AND AS CURRENTLY INTERPRETED; IT DOES NOT TAKE INTO ACCOUNT
POSSIBLE CHANGES IN SUCH LAWS OR INTERPRETATIONS, INCLUDING AMENDMENTS TO
APPLICABLE STATUTES OR REGULATIONS OR CHANGES IN JUDICIAL OR ADMINISTRATIVE
RULINGS, SOME OF WHICH MAY HAVE RETROACTIVE EFFECT. THIS SUMMARY ASSUMES THAT
STOCKHOLDERS HOLD STOCK AS A CAPITAL ASSET. THIS SUMMARY DOES NOT PURPORT TO
ADDRESS ALL ASPECTS OF THE POSSIBLE FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER AND IS NOT INTENDED AS TAX ADVICE TO ANY PERSON. IN PARTICULAR, AND
WITHOUT LIMITING THE FOREGOING, THIS SUMMARY DOES NOT ADDRESS THE FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES OR STATUS (FOR EXAMPLE, AS FOREIGN PERSONS, TAX-EXEMPT ENTITIES,
DEALERS IN SECURITIES, INSURANCE COMPANIES AND CORPORATIONS, STOCKHOLDERS WHO
ACQUIRED STOCK THROUGH THE EXERCISE OF OPTIONS OR AS COMPENSATION, THROUGH A TAX
QUALIFIED RETIREMENT PLANS, OR AS PART OF A "STRADDLE" OR "CONVERSION
TRANSACTION," AMONG OTHERS). NOR DOES THIS SUMMARY ADDRESS ANY CONSEQUENCES OF
THE MERGER UNDER ANY STATE, LOCAL, ESTATE OR FOREIGN TAX LAWS. STOCKHOLDERS,
THEREFORE, ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS,
THE
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APPLICATION AND EFFECT OF FEDERAL, FOREIGN, STATE, LOCAL AND OTHER TAX LAWS AND
THE IMPLICATIONS OF ANY PROPOSED CHANGES IN THE TAX LAWS.
A federal income tax ruling with respect to this transaction was not
requested from the Internal Revenue Service. Instead, Holland & Knight LLP,
special counsel to Bancshares, will render an opinion to Bancshares concerning
certain federal income tax consequences of the proposed Merger under federal
income tax law. Provided that the Merger qualifies as a statutory merger under
applicable law and is consummated in accordance with the Agreement and based on
customary assumptions and factual representations of Bancshares and Lochaven
regarding matters germane to such opinion, it is anticipated by such firm that
the material federal income tax consequences of the Merger would be as follows:
(a) The Merger will be a reorganization within the meaning of Section
368(a) of the Code, and Lochaven, Republic and Bancshares will each be "a
party to a reorganization" within the meaning of Section 368(b) of the
Code.
(b) The stockholders of Lochaven will recognize no gain or loss upon
the exchange of their Lochaven Common Stock solely for shares of Bancshares
Common Stock (except with respect to any cash received in lieu of a
fractional share interest in Bancshares Common Stock).
(c) The aggregate tax basis of the Bancshares Common Stock received by
the Lochaven stockholders in the proposed transaction will be the same as
the basis of the Lochaven Common Stock surrendered in exchange therefor,
less the basis of any fractional share of Bancshares Common Stock settled
by cash payment.
(d) The holding period of the Bancshares Common Stock received by the
Lochaven stockholders, who exchange all of their Lochaven Common Stock
solely for Bancshares Common Stock in the Merger, will include the period
during which the Lochaven Common Stock surrendered in exchange therefor was
held, provided that the Lochaven Common Stock was held as a capital asset
at the Effective Time.
(e) The payment of cash to Lochaven stockholders in lieu of fractional
share interests of Bancshares Common Stock will be treated for federal
income tax purposes as if the fractional shares were distributed as part of
the exchange and then were redeemed by Bancshares. These cash payments will
be treated as having been received as distributions in full payment in
exchange for the stock redeemed. Generally, any gain or loss recognized
upon such exchange will be capital gain or loss, provided the fractional
share would constitute a capital asset in the hands of the exchanging
stockholder.
(f) Where solely cash is received by a Lochaven stockholder in
exchange for his Lochaven Common Stock pursuant to the exercise of
dissenters' rights, such cash will be treated as having been received in
redemption of his Lochaven Common Stock, subject to the provisions and
limitations of Section 302 of the Code.
THE TAX OPINION DOES NOT ADDRESS ANY STATE, LOCAL OR OTHER TAX CONSEQUENCES
OF THE MERGER. LOCHAVEN STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES OF THE PROPOSED TRANSACTION TO THEM
INDIVIDUALLY, INCLUDING TAX CONSEQUENCES UNDER STATE OR LOCAL LAW.
ACCOUNTING TREATMENT
The Merger will be accounted for as a pooling of interests in which
Lochaven's assets will be carried forward at their historical cost. No charge to
goodwill will be made following the Merger. The equity of the Combined Company
will be increased by $2.8 million, based on data as of June 30, 1998.
Following the Merger, the Combined Company will restate its historical
financial and other data necessary for a fair presentation of financial
condition and results of operations "as if" Bancshares and Lochaven had been
combined during the current and four preceding fiscal years.
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EXPENSES AND FEES
The Agreement provides, in general, that each of the parties will bear and
pay its own expenses in connection with the transactions contemplated by the
Agreement, including fees and expenses of its own financial or other
consultants, investment bankers, accountants and counsel, except that the
parties will each bear and pay one half of the printing costs incurred in
connection with the printing and filing of this Proxy Statement/Prospectus.
RESALES OF BANCSHARES COMMON STOCK
The Bancshares Common Stock to be issued to stockholders of Lochaven in
connection with the Merger will be registered under the Securities Act. All
shares of Bancshares Common Stock received by holders of Lochaven Common Stock,
and all shares of Bancshares Common Stock issued and outstanding immediately
prior to the Effective Time, upon consummation of the Merger, will be freely
transferable by those stockholders of Lochaven and Bancshares not deemed to be
"Affiliates" of Lochaven or Bancshares. "Affiliates" generally are defined as
persons or entities who control, are controlled by or are under common control
with Lochaven or Bancshares at the Effective Time of the Merger.
Rules 144 and 145 promulgated under the Securities Act restrict the sale of
Bancshares Common Stock received in the Merger by Affiliates and certain of
their family members and related interests. Generally speaking, during the
one-year period following the Effective Time, Affiliates of Lochaven or
Bancshares may resell publicly the Bancshares Common Stock received by them in
the Merger within certain limitations as to the amount of Bancshares Common
Stock sold in any three-month period and as to the manner of sale. After this
one-year period, such Affiliates of Lochaven who are not Affiliates of
Bancshares may resell their shares without restriction. This Proxy
Statement/Prospectus does not cover any resales of Bancshares Common Stock
received by persons who may be deemed to be Affiliates of Lochaven or
Bancshares. Section 201.01 of the Commission's Codification of Financial
Reporting Policies requires each affiliate of Lochaven to agree not to sell or
otherwise reduce risk relative to any shares of Bancshares Common Stock received
in the Merger until financial results concerning at least 30 days of post-Merger
combined operations have been published by Bancshares within the meaning of such
policies.
Lochaven has agreed to use its reasonable efforts to cause each person who
Lochaven reasonably believes will be an Affiliate of Lochaven to execute and
deliver to Bancshares a written agreement providing that such person generally
will not sell, pledge, transfer or otherwise dispose of any Bancshares Common
Stock to be received by such person upon consummation of the Merger, except in
compliance with the Securities Act and the rules and regulations of the
Commission promulgated thereunder.
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EFFECT OF THE MERGER ON RIGHTS OF STOCKHOLDERS
As a result of the Merger, holders of Lochaven Common Stock will be
exchanging their shares of Lochaven, a federal savings association governed by
the HOLA, the OTS Regulations, Lochaven's Charter (the "Charter") and Lochaven's
Bylaws, for shares of Bancshares, a Florida corporation governed by the FBCA,
Bancshares' Articles of Incorporation (the "Bancshares Articles") and
Bancshares' By-Laws. Certain differences exist between the rights of Lochaven
stockholders and those of Bancshares stockholders. Certain of these differences
are summarized below. The following discussion is necessarily general; it is not
intended to be a complete statement of all differences affecting the rights of
stockholders and their respective entities, and it is qualified in its entirety
by reference to the FBCA and the OTS Regulations as well as to the Bancshares
Articles and By-Laws and the Lochaven Charter and By-laws.
AUTHORIZED CAPITAL STOCK
Bancshares
The Bancshares Articles authorize the issuance of up to 20,000,000 shares
of Bancshares Common Stock, and 100,000 shares of Bancshares Preferred Stock, of
which 9,724,325 and 75,000 shares, respectively, were issued and outstanding as
of June 30, 1998. Each share of Bancshares Preferred Stock is convertible into
ten shares of Bancshares Common Stock and is redeemable by Bancshares upon 30
days prior written notice at a price of $96.80 per share.
Unless otherwise required by law or the Bancshares Articles, holders of
Bancshares Common and Preferred Stock vote together as a single class on all
matters presented to Bancshares' stockholders. Each share of Bancshares
Preferred Stock is entitled to ten votes for all purposes, and each share of
Bancshares Common Stock is entitled to one vote. No cash dividend may be
declared or paid on shares of Bancshares Common Stock unless, simultaneously
therewith or prior thereto, there is or has been declared or paid the quarterly
dividend payable on Bancshares Preferred Stock.
In any liquidation or dissolution of the corporation, the holders of
Bancshares Preferred Stock will be entitled to receive, out of the assets
available for distribution to stockholders, an amount equal to $88.00 per share
before any amount is paid to holders of Bancshares Common Stock. After the above
preference amount has been paid to the holders of Bancshares Preferred Stock,
such holders will not be entitled to any further distributions. The holders of
Bancshares Common Stock will then be entitled to participate, pro rata in
accordance with the number of shares owned by them, in the distribution of
Bancshares' remaining assets.
Bancshares' Board of Directors may authorize the issuance of additional
authorized but unissued shares of Bancshares Common and Preferred Stock without
further action by Bancshares' stockholders, unless such action is required in a
particular case by applicable laws or regulations or by any stock exchange upon
which Bancshares' capital stock may be listed. The Bancshares Articles do not
provide any preemptive rights to Bancshares' stockholders.
The authority to issue additional shares of Bancshares Common Stock
provides Bancshares with the flexibility necessary to met its future needs
without the delay resulting from seeking stockholder approval. The authorized
but unissued shares of Bancshares Common and Preferred Stock will be issuable
from time to time for any corporate purpose, including, without limitation,
stock splits, stock dividends, employee benefit and compensation plans,
acquisitions and public or private sales for cash as a means of raising capital.
Lochaven
As of the Record Date, Lochaven's authorized capital stock consisted of
4,600,000 shares of Lochaven Common Stock, $0.01 par value, of which 609,094
shares were issued and outstanding. Lochaven's Board of Directors may authorize
the issuance of additional shares of Lochaven Common Stock without the approval
of its stockholders, except to the extent that such approval is required by
governing law, rule or regulation. The holders of the Lochaven Common Stock
exclusively possess all voting power. Each holder of shares of Lochaven Common
Stock is entitled to one vote for each share held by such holder, except as to
the
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cumulation of votes for the election of directors. Lochaven's Charter does not
provide the stockholders of Lochaven with preemptive rights with respect to any
shares of Lochaven which may be issued.
Subject to any provision for a liquidation account, in the event of any
liquidation, dissolution or winding up of Lochaven, the holders of the common
stock would be entitled, after payment or provision for payment of all debts and
liabilities of Lochaven, to receive the remaining assets of Lochaven available
for distribution, in cash or in kind. Each share of Lochaven Common Stock has
the same relative rights as and is identical in all respects with all the other
shares of Lochaven Common Stock.
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS
Bancshares
The Bancshares Articles provide that such articles may be amended as
provided by law. The FBCA generally requires that the approval of a
corporation's board of directors and the affirmative vote of a majority of (i)
all shares entitled to vote thereon and (ii) the shares of each class of stock
entitled to vote thereon as a class, to amend a corporation's articles of
incorporation, unless the corporation's articles specify a greater voting
requirement. A majority of the Bancshares Board of Directors has the power to
adopt, amend or repeal the Bancshares By-Laws. Neither the Bancshares Articles
nor By-Laws expressly permit the Bancshares stockholders to make, alter or
rescind any By-Laws.
Lochaven
The Lochaven Charter generally provides that such charter may be amended
pursuant to a proposal by the Lochaven's Board of Directors, then a preliminary
approval by the Lochaven Board, which may be granted pursuant to regulations
specifying preapproved Charter amendments and an approval by the stockholders by
the affirmative vote of a majority of the outstanding shares of Lochaven Common
Stock. Any amendment, addition, alteration, change or repeal so acted upon shall
be effective upon filing with the Lochaven Board in accordance with regulatory
procedures or on such date as the Lochaven Board may specify in its preliminary
approval.
The Lochaven Bylaws may be amended in a manner consistent with the
regulations of the Federal Home Loan Bank Board at any time by a majority of the
Board of Directors, or by two-thirds of the outstanding shares of Lochaven
Common Stock.
CLASSIFIED BOARD OF DIRECTORS AND ABSENCE OF CUMULATIVE VOTING
Bancshares
Bancshares' By-Laws generally provide that the number of directors
constituting the Bancshares Board shall be not less than five nor more than 25
directors as fixed from time to time by resolution of Bancshares' Board of
Directors. Currently, the number of Bancshares directors is fixed at six. The
Bancshares directors are elected to one-year terms, and the Bancshares Board is
not classified. Bancshares' stockholders do not have cumulative voting rights
with respect to the election of directors. All elections for directors are
decided by a plurality vote.
Lochaven
Lochaven's Bylaws provide that Lochaven's Board of Directors is divided
into three classes (Class 1, Class 2, and Class 3), with each class to be as
nearly equal in number as the total number of directors constituting the whole
board permits, with the term of one class expiring each year. The Board of
Directors determines by majority vote the number of directors and the class to
which each director is assigned. Each annual meeting after the first annual
meeting, elections will be held to replace those whose terms have expired and to
fill any new seats created by the Board of Directors. All directors will
continue to hold office after the expiration of their term until their
successors are elected or appointed and have qualified, except in the event of
earlier resignation, removal or disqualification.
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REMOVAL OF DIRECTORS
Bancshares
Pursuant to Bancshares' By-Laws, any or all of the directors may be removed
with or without cause by the affirmative vote of the holders of at least a
majority of the outstanding shares then entitled to vote.
Lochaven
Under the Lochaven Bylaws, any or all of the directors may be removed only
for cause and only by the affirmative vote of the holders of at least two-thirds
of Lochaven's Common Stock then entitled to vote at an election of directors.
The Lochaven stockholders face a more restrictive voting requirement to remove
Lochaven directors than Bancshares stockholders do with respect to Bancshares
directors. The effect of this difference in voting requirements is that the
directors of Lochaven are afforded greater protection against their removal by
the vote of the Lochaven stockholders than are the directors of Bancshares.
INDEMNIFICATION
Bancshares
The Bancshares By-Laws essentially provide that Bancshares will indemnify
its officers, directors, employees and agents to the full extent permitted by
the FBCA. Under the FBCA, other than in actions brought by or in the right of
Bancshares, such indemnification would apply if it were determined in the
specific case that the proposed indemnitee acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests of
Bancshares and, with respect to any criminal proceeding, if such person had no
reasonable cause to belief that the conduct was unlawful. In actions brought by
or in the right of Bancshares, such indemnification would apply if it were
determined in the specific case that the proposed indemnitee acted in good faith
and in a manner such person reasonably believed to be in or not opposed to the
best interests of Bancshares, except that no indemnification may be made with
respect to any matter as to which such person is adjudged liable to Bancshares,
unless, and only to the extent that, the court determines upon application that,
in view of all the circumstances of the case, the proposed indemnitee is fairly
and reasonably entitled to indemnification for such expenses as the court deems
proper. To the extent that any director, officer, employee or agent of
Bancshares has been successful on the merits or otherwise in defense of any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, such person must be indemnified against reasonable expenses
incurred by such person in connection with the action.
The Bancshares By-Laws also provide that a director of Bancshares will have
no indemnification rights for liability for (i) willful misconduct or a
conscious disregard for the best interests of Bancshares or its stockholders,
(ii) acts or omissions constituting a violation of criminal law, (iii) the
payment of certain unlawful dividends and the making of certain unlawful stock
purchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit.
Expenses, including attorneys' fees, incurred by a Bancshares director or
officer in defending a civil or criminal action, suit or proceeding must be paid
by Bancshares in advance of the final disposition of the action upon receipt of
an undertaking by the director or officer to repay such amounts if he is
ultimately found not to be entitled to indemnification by Bancshares.
Lochaven
The Lochaven Bylaws provide that Lochaven will, to the extent permitted by
the OTS Regulations, indemnify any director, officer, employee or agent of
Lochaven.
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SPECIAL MEETINGS OF STOCKHOLDERS
Bancshares
Under the Bancshares By-Laws, a special meeting of Bancshares stockholders
may be called at any time by the Chairman of the Board, the President or the
Board of Directors of Bancshares, or as otherwise required by the FBCA.
Lochaven
Lochaven's Bylaws provide that special meetings of stockholders, unless
otherwise prescribed by the regulations of the Federal Home Loan Bank Board, may
be called at any time by the Chairman of the Board, the President or a majority
of the Board of Directors and shall be called by the Chairman of the Board, the
President or the secretary upon the written request of the holders of not less
than 40% of the outstanding shares of Lochaven Common Stock.
Special meetings of the Board of Directors may be called by or at the
request of the Chairman of the Board, the President or one-half of the
directors. The persons authorized to call special meetings of the Board of
Directors, may fix any place, within Lochaven's normal lending territory, as the
place for holding any special meeting of the Board of Directors.
Members of the Board of Directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other.
ACTIONS OF STOCKHOLDERS WITHOUT A MEETING
Bancshares
The Bancshares By-Laws provide that any action required or permitted to be
taken by Bancshares stockholders at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if a written consent signed by the holders of outstanding stock of each
group having not less than the minimum number of votes necessary to take such
action at a meeting at which all voting groups were present and voted is
delivered to Bancshares.
Lochaven
Pursuant to the Lochaven Bylaws, any action required to be taken or may be
taken at a meeting of the Lochaven stockholders, may be taken without a meeting
if a consent in writing, setting forth the actions so taken, is signed by all of
the stockholders entitled to vote with respect to the subject matter thereof.
STOCKHOLDER NOMINATIONS AND PROPOSALS
Bancshares
Bancshares' Articles, By-Laws and the FBCA are silent as to the procedures
to be followed for stockholders' director nominations and the submission of
stockholder proposals.
Lochaven
The Lochaven Bylaws provide that nominations for the election of directors
may be made by the Board of Directors or by any stockholder entitled to vote in
the election of directors. All nominations made by any stockholder must be made
in writing, delivered to the secretary of Lochaven at least five days prior to
the date of the annual meeting.
Any new business to be taken at the annual meeting must be stated in
writing and filed with the secretary of Lochaven at least 15 days before the
date of the annual meeting. Any stockholder may make any other proposal at the
annual meeting, but unless stated in writing and filed with the secretary at
least five days before the annual meeting, such proposal will be laid over for
action at an adjourned, special or annual meeting taking place 30 days or more
thereafter.
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MERGERS, CONSOLIDATION AND SALES OF ASSETS
Bancshares
Neither the Bancshares Articles nor its By-Laws contain provisions
regarding business combination transactions. Under the FBCA, such transactions
generally must be approved by Bancshares' Board of Directors and by the holders
of each class of voting securities by a majority of the total outstanding votes
entitled to be cast by the class unless, in the case of a surviving corporation
in a business combination, (i) its articles of incorporation will not differ
from its articles before the combination and, (ii) each stockholder whose shares
were outstanding immediately prior to the combination will hold the same number
of shares with identical designations, preferences, limitations and relative
rights immediately after the business combination.
Lochaven
Lochaven's Charter and Bylaws are silent as to business combinations, and
sales, leases or other dispositions of assets. For such transactions, the Board
of Directors and stockholder approval provisions set forth in the OTS
Regulations would apply. Under the OTS Regulations, such transactions generally
must be approved by at least two-thirds of the directors and holders of
two-thirds of the outstanding voting stock of Lochaven.
DISSENTERS' RIGHTS OF APPRAISAL
Bancshares
Under Section 1302 of the FBCA, a stockholder of a corporation generally
has the right to dissent from and to obtain payment of the fair value of his or
her shares in the event of a number of corporate actions, including: (i) a
merger that the stockholder has the right to vote on; (ii) a sales of all or
substantially all of a corporation's assets; (iii) a control share acquisition
or share exchange that the stockholder has the right to vote on; (iv) an
amendment to the articles of incorporation that would adversely affect the
stockholder in certain respects; or (v) any other corporate action to the extent
provided for in the corporation's articles of incorporation.
In order to receive payment of the fair value of his or her shares in the
foregoing situations, a stockholder must comply with all of the applicable
provisions of the FBCA. Any stockholder intending to enforce the right to
dissent (i) must not vote in favor of the corporate action, and (ii) must file a
written notice of intent to demand payment for his or her shares (the "Objection
Notice") with the corporation before the vote on the action. The Objection
Notice must state that the stockholder intends to demand payment for his or her
shares if the action is effected.
If the action is subsequently approved by the corporation's stockholders,
each stockholder who has properly filed an Objection Notice and has not voted in
favor of the action will be notified by the corporation within ten days of the
stockholder approval. Within 20 days following receipt of such notice, any
stockholder electing to dissent must file a notice of his or her election to
exercise dissenters' rights, stating the stockholder's name, address, the
number, classes and series of shares as to which the stockholder dissents, and a
demand for payment of the fair value of such shares (the "Election Notice"), and
simultaneously deposit the certificates representing the shares with the
corporation.
Within the later to occur of ten days following the expiration of the
period in which stockholders may file their Election Notices and ten days after
the corporate action is taken, the corporation must make a written offer to each
stockholder who has properly filed an Election Notice to pay what it deems to be
a fair value for the shares. Any stockholder who accepts such offer within 30
days shall receive payment for his or her shares within 90 days of such offer to
pay or the corporate action, whichever is later.
In the event the corporation fails to make any payment offer within the
time period set forth above or any dissenting stockholder fails to accept such
offer within 30 days and demands payment within 60 days following the corporate
action, the corporation must institute proceedings in state circuit court
requesting that the fair value of such dissenting stockholder's shares be
determined. The court may, in its discretion, appoint an appraiser to receive
evidence and recommend a decision on the question of fair value. The judgment
may, in
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the discretion of the court, include a fair rate of interest. Each dissenting
stockholder will be entitled to payment as determined by the court, within ten
days following final determination by the court as to the fair value of such
stockholder's stock.
Lochaven
The rights of appraisal of dissenting stockholders of Lochaven in business
combination transactions are governed by Section 552.14 of the OTS Regulations.
See "Description of the Transaction -- Dissenting Stockholders" and "Appendix
C".
STOCKHOLDERS' RIGHTS TO EXAMINE BOOKS AND RECORDS
Bancshares
Bancshares' Articles and By-Laws are silent with respect to the
stockholders' rights to examine books and records. In the absence of such a
provision, the FBCA provides that a stockholder may inspect books and records
upon written demand at least five days before the date on which he wishes to
inspect such records. Such inspection is to occur during regular business hours
at the corporation's principal office. The corporation may deny any demand for
inspection if the demand was made for an improper purpose, which means a purpose
not reasonably related to such person's interest as a stockholder.
Lochaven
Lochaven's Charter and Bylaws are silent with respect to the stockholders'
rights to examine books and records. In the absence of such a provision, the OTS
Regulations provide that any stockholder or group of stockholders holding of
record either (i) voting shares having a cost of not less than $100,000 or
constituting at least one percent of the total outstanding voting shares for a
period of at least six months or (ii) at least five percent of the total
outstanding voting shares may inspect the books and records of a federal savings
association and make extracts therefrom.
DIVIDENDS
Bancshares
The Bancshares Articles provide that Bancshares Preferred Stock shall pay a
noncumulative annual dividend of $3.52 per share payable in quarterly increments
from legally available funds prior to payment of any dividend on Bancshares
Common Stock for the dividend period. No dividend may be paid on Bancshares
Common Stock unless holders of Bancshares Preferred Stock have received their
dividend for that quarter. Under the FBCA, no dividend or other distribution to
stockholders may be made by Bancshares if, after giving effect to the
distribution, (i) Bancshares would not be able to pay its debts as they come due
in the usual course of business, or (ii) its total assets would be less than the
sum of its liabilities.
Lochaven
The Lochaven Bylaws provide that dividends may be declared, from time to
time, by the Lochaven Board of Directors and Lochaven may pay dividends and
other distributions with respect to its outstanding shares of capital stock.
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COMPARATIVE MARKET PRICES
BANCSHARES
Since April 24, 1995, Bancshares Common Stock (and, prior to March 1, 1996
Republic's common stock) has been listed on the Nasdaq National Market under the
symbol "REPB." From January 1, 1995 through April 23, 1995, Republic's common
stock was listed on the Nasdaq Small-Cap Market under the same symbol. To date
Bancshares has not declared any dividends on the Bancshares Common Stock. The
high, low and closing bids per share of Bancshares Common Stock on the Nasdaq
National Market for the indicated periods, were as follows:
<TABLE>
<CAPTION>
HIGH LOW CLOSING
------ ------ -------
<S> <C> <C> <C>
Quarter ended March 31, 1996................................ $14.25 $12.25 $12.31
Quarter ended June 30, 1996................................. 14.94 12.25 12.31
Quarter ended September 30, 1996............................ 12.88 11.75 12.88
Quarter ended December 31, 1996............................. 15.50 13.63 15.31
Quarter ended March 31, 1997................................ 16.00 14.00 15.50
Quarter ended June 30, 1997................................. 18.50 17.25 17.25
Quarter ended September 30, 1997............................ 27.63 16.88 26.38
Quarter ended December 31, 1997............................. 27.88 23.75 26.50
Quarter ended March 31, 1998................................ 31.75 25.00 29.25
Quarter ended June 30, 1998................................. 34.75 25.81 27.13
Quarter ended September 30, 1998............................ 27.06 17.75 22.13
</TABLE>
LOCHAVEN
There is no established public trading market for the Lochaven Common
Stock. The shares of Lochaven Common Stock are not actively traded, and such
trading activity, as it occurs, takes place in privately negotiated
transactions. Management of Lochaven is aware of certain transactions in shares
of Lochaven that have occurred since January 1, 1996, although the trading
prices of all stock transactions are not known. For which transactions since
January 1, 1996, 200 shares were sold at $4.50 per share on December 23, 1996;
100 shares were sold for $5.50 per share on February 28, 1997; 100 shares were
sold for $5.00 per share on January 14, 1998; and 1,000 shares were sold for
$4.44 per share on April 15, 1998.
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UNAUDITED COMBINED FINANCIAL DATA
UNAUDITED PRO FORMA COMBINED BALANCE SHEET FOR
BANCSHARES, BSB AND LOCHAVEN
The following unaudited pro forma combined balance sheet presents (i) the
historical unaudited consolidated balance sheet of Bancshares at June 30, 1998,
(ii) the pro forma combined balance sheet of Bancshares at June 30, 1998 giving
effect to the Proposed Mergers, as if it had occurred on that date, and (iii)
the pro forma combined balance sheet of Bancshares at June 30, 1998, giving
effect to the Proposed Mergers, as if they had occurred as of that date.
The Proposed Mergers will be accounted for as a pooling of interests in
which the assets of Lochaven will be combined with those of Republic at
historical cost. No goodwill will be created in the Proposed Mergers.
The pro forma adjustments are based upon available information and upon
certain assumptions that Bancshares believes are reasonable under the
circumstances. Pro forma adjustments consist solely of the issuance of
Bancshares Common Stock. The unaudited pro forma combined balance sheet should
be read in conjunction with the historical consolidated financial statements of
Bancshares and Lochaven, including the respective notes thereto, which are set
forth at pages F-2 through F-62, respectively, of this Proxy Statement/
Prospectus, and the unaudited financial information appearing elsewhere herein.
See "Comparative Per Share Data." The pro forma combined balance sheet is not
necessarily indicative of Bancshares' future financial position.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
63
<PAGE> 73
UNAUDITED PROFORMA COMBINED BALANCE SHEET
FOR BANCSHARES, BSB AND LOCHAVEN
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
LOCHAVEN BSB COMBINED
ADJUSTMENTS BANCSHARES ADJUSTMENTS COMPANY
BANCSHARES LOCHAVEN INC. (DEC) W/LOCHAVEN BSB INC. (DEC) W/BSB
---------- -------- ----------- ---------- ------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks............. $ 39,095 $ 1,012 $ -- $ 40,107 $ 1,767 $ -- $ 41,874
Interest bearing deposits in
banks............................. 29,356 1,546 -- 30,902 -- -- 30,902
Investment and MBS securities....... 109,760 -- -- 109,760 6,068 -- 115,828
FHLB stock.......................... 10,247 368 -- 10,615 393 -- 11,008
Federal funds sold.................. 73,500 -- -- 73,500 4,804 -- 78,304
Loans held for sale................. 410,113 24,513 -- 434,626 7,036 -- 441,662
Loans, net.......................... 1,354,501 27,795 -- 1,382,296 42,372 -- 1,424,668
Premises and equipment, net......... 50,856 654 -- 51,510 4,326 -- 55,836
Other real estate owned............. 6,944 641 -- 7,585 876 -- 8,461
Goodwill............................ 28,765 -- -- 28,765 -- -- 28,765
Other assets........................ 41,888 3,089 -- 44,977 700 -- 45,677
---------- ------- ---- ---------- ------- ------- ----------
Total assets............... $2,155,025 $59,618 $ -- $2,214,643 $68,342 $ -- $2,282,985
========== ======= ==== ========== ======= ======= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits--
Noninterest-bearing checking.... $ 135,441 $ 6,351 $ -- $ 141,792 $ 3,874 $ -- $ 145,666
Interest checking............... 160,762 16,545 -- 177,307 2,312 -- 179,619
Savings & money market.......... 417,705 941 -- 418,646 8,468 -- 427,114
Time deposits................... 1,027,469 25,941 -- 1,053,410 46,047 -- 1,099,457
---------- ------- ---- ---------- ------- ------- ----------
Total deposits............. 1,741,377 49,778 -- 1,791,155 60,701 -- 1,851,856
Securities sold under agreements
to repurchase................... 40,745 1,358 -- 42,103 -- -- 42,103
Other borrowed funds.............. 125,000 3,792 -- 128,792 1,800 -- 130,592
Other liabilities................. 48,806 1,859 -- 50,665 1,456 -- 52,121
---------- ------- ---- ---------- ------- ------- ----------
Total liabilities.......... 1,955,928 56,787 -- 2,012,715 63,957 -- 2,076,672
Company obligated mandatorily
redeemable preferred securities of
subsidiary trust solely holding
junior subordinated debentures of
Bancshares........................ 28,750 -- -- 28,750 -- -- 28,750
Stockholders' Equity:
Perpetual preferred convertible
stock............................. 1,500 -- 1,500 -- -- 1,500
Common stock........................ 19,449 6 332 19,787 2,813 (2,089) 20,511
Capital surplus..................... 118,937 3,365 (332) 121,970 1,256 2,089 125,315
Retained earnings (Accumulated
deficit).......................... 30,429 (540) -- 29,889 316 -- 30,205
Net unrealized gains on
available-for-sale securities, net
of tax effect..................... 32 -- -- 32 -- -- 32
---------- ------- ---- ---------- ------- ------- ----------
Total stockholders'
equity................... 170,347 2,831 -- 173,178 4,385 -- 177,563
---------- ------- ---- ---------- ------- ------- ----------
Total liabilities and
stockholders' equity..... $2,155,025 $59,618 $ -- $2,214,643 $68,342 $ -- $2,282,985
========== ======= ==== ========== ======= ======= ==========
</TABLE>
64
<PAGE> 74
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR BANCSHARES, LOCHAVEN AND BSB
The following unaudited pro forma combined condensed statements of
operations have been prepared for the years ended December 31, 1997, 1996 and
1995 and for the six months ended June 30, 1998 and 1997, giving effect to the
Merger, as if it had occurred at the beginning of the respective periods. The
pro forma adjustments are based upon available information and upon certain
assumptions that Bancshares believes are reasonable under the circumstances. The
pro forma adjustments to the combined condensed statements of operations do not
include the effect of operating cost savings or revenue enhancements that may be
realized after the Merger is completed. The pro forma combined condensed
statements of operations are not necessarily indicative of the results that
actually would have occurred if the Proposed Mergers had been consummated at the
dates indicated or that may be obtained in the future. The unaudited pro forma
combined condensed statements of operations should be read in conjunction with
the historical consolidated financial statements of Bancshares and Lochaven,
including the respective notes thereto, which are set forth at pages F-2 through
F-62 respectively, of this Proxy Statement/Prospectus, and the unaudited
financial information appearing elsewhere herein. See "Comparative Per Share
Data."
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
65
<PAGE> 75
UNAUDITED PROFORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR BANCSHARES, BSB AND LOCHAVEN
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
LOCHAVEN BANCSHARES BSB COMBINED
ADJUSTMENTS WITH ADJUSTMENTS COMPANY
BANCSHARES LOCHAVEN INC. (DEC) LOCHAVEN BSB INC. (DEC) W/BSB
---------- -------- ------------ ---------- -------- ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income...... $ 71,893 $ 2,291 $ -- $ 74,184 $ 2,384 $ -- $ 76,568
Interest expense..... 36,972 1,287 -- 38,259 1,603 -- 39,862
---------- -------- -------- ---------- -------- -------- ----------
Net
interest
income... 34,921 1,004 -- 35,925 781 -- 36,706
Loan loss
provision.......... 1,525 49 -- 1,574 42 -- 1,616
---------- -------- -------- ---------- -------- -------- ----------
Net interest income
after loan loss
provision.......... 33,396 955 -- 34,351 739 -- 35,090
Noninterest income... 23,747 2,442 -- 26,189 794 -- 26,983
General &
administrative
(G&A) expenses..... 52,828 3,284 -- 56,112 1,460 -- 57,572
Other noninterest
expenses........... 690 -- -- 690 -- -- 690
---------- -------- -------- ---------- -------- -------- ----------
Net income
before
taxes.... 3,625 113 -- 3,738 73 -- 3,811
Income tax (expense)
benefit............ (1,375) (43) -- (1,418) -- -- (1,418)
Minority interest in
income from
subsidiary trust,
net of tax......... (842) -- -- (842) -- -- (842)
Minority interest in
FFO, net of tax.... -- -- -- -- -- -- --
---------- -------- -------- ---------- -------- -------- ----------
Net
income... $ 1,408 $ 70 $ -- $ 1,478 $ 73 $ -- $ 1,551
========== ======== ======== ========== ======== ======== ==========
Earnings per share --
diluted............ $ 0.16 $ 0.41 $ 0.17 $ 0.17 $ 0.17
========== ======== ========== ======== ==========
Weighted average
shares
outstanding --
diluted............ 8,712,367 169,106 8,881,473 419,137 9,300,610
========== ======== ========== ======== ==========
Earnings per share --
basic.............. $ 0.18 $ 0.41 $ 0.19 $ 0.21 $ 0.19
========== ======== ========== ======== ==========
Weighted average
shares
outstanding --
basic.............. 7,786,911 169,084 7,955,995 354,321 8,310,316
========== ======== ========== ======== ==========
</TABLE>
66
<PAGE> 76
UNAUDITED PROFORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR BANCSHARES, BSB AND LOCHAVEN
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
LOCHAVEN BANCSHARES BSB COMBINED
ADJUSTMENTS WITH ADJUSTMENTS COMPANY
BANCSHARES LOCHAVEN INC. (DEC) LOCHAVEN BSB INC. (DEC) W/BSB
---------- -------- ----------- ---------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income........ $ 49,221 $ 2,474 $-- $ 51,695 $ 2,294 $-- $ 53,989
Interest expense....... 24,936 1,336 -- 26,299 1,532 -- 27,831
---------- -------- --- ---------- -------- --- ----------
Net interest
income..... 24,258 1,138 -- 25,396 762 -- 26,158
Loan loss provision.... 1,639 37 -- 1,676 34 -- 1,710
---------- -------- --- ---------- -------- --- ----------
Net interest income
after loan loss
provision............ 22,619 1,101 -- 23,720 728 -- 24,448
Noninterest income..... 6,453 2,233 -- 8,686 682 -- 9,368
General and
administrative (G&A)
expenses............. 22,707 3,507 -- 26,214 1,345 -- 27,559
Other noninterest
expenses............. 617 -- -- 617 -- -- 617
---------- -------- --- ---------- -------- --- ----------
Net income loss before
income taxes......... 5,748 (173) -- 5,575 65 -- 5,640
Income tax (expense)
benefit.............. (2,178) 66 (2,112) -- -- (2,112)
Minority interest in
income from
subsidiary trust, net
of tax............... -- -- -- -- -- -- --
Minority interest in
FFO, net of tax...... (415) -- -- (415) -- -- (415)
---------- -------- --- ---------- -------- --- ----------
Net income
(loss)..... $ 3,155 $ (107) $-- $ 3,048 $ 65 $-- $ 3,113
========== ======== === ========== ======== === ==========
Earnings per share --
diluted.............. $ 0.47 $ (0.63) $ 0.43 $ 0.18 $ 0.41
========== ======== ========== ======== ==========
Weighted average shares
outstanding -- diluted.. 7,002,356 169,303 7,171,659 366,418 7,538,077
========== ======== ========== ======== ==========
Earnings per share --
basic................ $ 0.54 $ (0.63) $ 0.51 $ 0.18 $ 0.49
========== ======== ========== ======== ==========
Weighted average shares
outstanding -- basic... 5,853,633 169,084 6,022,717 354,278 6,376,995
========== ======== ========== ======== ==========
</TABLE>
67
<PAGE> 77
UNAUDITED PROFORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR BANCSHARES, BSB AND LOCHAVEN
TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
LOCHAVEN BANCSHARES BSB COMBINED
ADJUSTMENTS WITH ADJUSTMENTS COMPANY
BANCSHARES LOCHAVEN INC. (DEC) LOCHAVEN BSB INC. (DEC) W/BSB
---------- -------- ----------- ---------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income........ $ 108,457 $ 4,654 $-- $ 113,111 $ 4,724 $-- $ 117,835
Interest expense....... 54,923 2,652 -- 57,575 3,167 -- 60,742
---------- -------- --- ---------- -------- --- ----------
Net interest
income..... 53,534 2,002 -- 55,536 1,557 -- 57,093
Loan loss provision.... 2,628 518 -- 3,146 101 -- 3,247
---------- -------- --- ---------- -------- --- ----------
Net interest income
after loan loss
provision............ 50,906 1,484 -- 52,390 1,456 -- 53,846
Noninterest income..... 25,031 3,394 -- 28,425 1,459 -- 29,884
General and
administrative (G&A)
expenses............. 57,484 5,614 -- 63,098 2,759 -- 65,857
Other noninterest
expenses............. 2,411 135 -- 2,546 -- -- 2,546
---------- -------- --- ---------- -------- --- ----------
Net income
(loss)
before
taxes...... 16,042 (871) -- 15,171 156 -- 15,327
Income tax expense..... (6,096) (69) -- (6,165) -- -- (6,165)
Minority interest in
income from
subsidiary trust, net
of tax............... (701) -- (701) -- -- (701)
Minority interest in
FFO, net of tax...... (674) -- -- (674) -- -- (674)
---------- -------- --- ---------- -------- --- ----------
Net income
(loss)..... $ 8,571 $ (940) $-- $ 7,631 $ 156 $-- $ 7,787
========== ======== === ========== ======== === ==========
Earnings per share --
diluted.............. $ 1.21 $ (5.56) $ 1.05 $ 0.41 $ 1.02
========== ======== ========== ======== ==========
Weighted average shares
outstanding -- diluted.. 7,301,499 169,084 7,470,583 376,732 7,847,315
========== ======== ========== ======== ==========
Earnings per share --
basic................ $ 1.40 $ (5.56) $ 1.21 $ 0.44 $ 1.17
========== ======== ========== ======== ==========
Weighted average shares
outstanding -- basic... 6,128,014 169,084 6,297,098 354,278 6,651,376
========== ======== ========== ======== ==========
</TABLE>
68
<PAGE> 78
UNAUDITED PROFORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR BANCSHARES, BSB AND LOCHAVEN
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
LOCHAVEN BANCSHARES BSB COMBINED
ADJUSTMENTS WITH ADJUSTMENTS COMPANY
BANCSHARES LOCHAVEN INC. (DEC) LOCHAVEN BSB INC. (DEC) W/BSB
---------- -------- ----------- ---------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income...... $ 88,944 $ 5,831 $ -- $ 94,775 $ 4,283 $ -- $ 99,058
Interest expense..... 44,949 3,369 -- 48,318 2,927 -- 51,245
---------- -------- ------- ---------- -------- ------- ----------
Net interest
income........ 43,995 2,462 -- 46,457 1,356 -- 47,813
Loan loss provision.. 2,582 44 -- 2,626 131 -- 2,757
---------- -------- ------- ---------- -------- ------- ----------
Net interest income
after loan loss
provision.......... 41,413 2,418 -- 43,831 1,225 -- 45,056
Noninterest income... 7,952 3,017 -- 10,969 1,376 -- 12,345
General &
administrative
(G&A) expenses..... 36,829 5,382 -- 42,211 3,388 -- 45,599
Other noninterest
expenses........... 4,117 610 -- 4,727 -- -- 4,727
---------- -------- ------- ---------- -------- ------- ----------
Net income
(loss) before
taxes......... 8,419 (557) -- 7,862 (787) -- 7,075
Income tax (expense)
benefit............ (3,035) 209 -- (2,826) 54 -- (2,772)
Minority interest in
FFO, net of tax.... (505) -- -- (505) -- -- (505)
---------- -------- ------- ---------- -------- ------- ----------
Net income
(loss)........ $ 4,879 $ (348) $ -- $ 4,531 $ (733) $ -- $ 3,798
========== ======== ======= ========== ======== ======= ==========
Earnings per
share -- diluted... $ 0.74 $ (2.06) $ 0.70 $ (2.07) $ 0.53
========== ======== ========== ======== ==========
Weighted average
shares
outstanding --
diluted............ 6,626,604 169,084 6,795,688 354,278 7,149,966
========== ======== ========== ======== ==========
Earnings per
share -- basic..... $ 0.83 $ (2.06) $ 0.75 $ (2.07) $ 0.60
========== ======== ========== ======== ==========
Weighted average
shares
outstanding --
basic.............. 5,857,174 169,084 6,026,258 354,278 6,380,536
========== ======== ========== ======== ==========
</TABLE>
69
<PAGE> 79
UNAUDITED PROFORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR BANCSHARES, BSB AND LOCHAVEN
TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
LOCHAVEN BANCSHARES BSB COMBINED
ADJUSTMENTS WITH ADJUSTMENTS COMPANY
BANCSHARES LOCHAVEN INC. (DEC) LOCHAVEN BSB INC. (DEC) W/BSB
---------- -------- ----------- ---------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income...... $ 77,593 $ 6,164 $ -- $ 83,757 $ 5,091 $ -- $ 88,848
Interest expense..... 40,112 3,403 -- 43,515 3,717 -- 47,232
---------- -------- ------- ---------- -------- ------- ----------
Net interest
income........ 37,481 2,761 -- 40,242 1,374 -- 41,616
Loan loss
provision.......... 2,162 141 -- 2,303 121 -- 2,424
---------- -------- ------- ---------- -------- ------- ----------
Net interest income
after loan loss
provision.......... 35,319 2,620 -- 37,939 1,253 -- 39,192
Noninterest income... 5,353 3,341 -- 8,694 735 -- 9,429
General &
administrative
(G&A) expenses..... 30,963 5,767 -- 36,730 2,830 -- 39,560
Other noninterest
expenses........... 1,352 191 -- 1,543 -- -- 1,543
---------- -------- ------- ---------- -------- ------- ----------
Net income
(loss) before
taxes......... 8,357 3 -- 8,360 (842) -- 7,518
Income tax (expense)
benefit............ (2,516) (1) -- (2,517) 286 -- (2,231)
Goodwill amortization
(accretion)........ 1,578 -- -- 1,578 -- -- 1,578
Minority interest in
FFO, net of tax.... (503) -- -- (503) -- -- (503)
---------- -------- ------- ---------- -------- ------- ----------
Net income
(loss)........ $ 6,916 $ 2 $ -- $ 6,918 $ (556) $ -- $ 6,362
========== ======== ======= ========== ======== ======= ==========
Earnings per share --
diluted............ $ 1.10 $ 0.01 $ 1.11 $ (1.57) $ 0.94
========== ======== ========== ======== ==========
Weighted average
shares
outstanding --
diluted............ 6,261,368 169,084 6,430,452 354,278 6,784,730
========== ======== ========== ======== ==========
Earnings per share --
basic.............. $ 1.26 $ 0.61 $ 1.22 $ (1.57) $ 1.06
========== ======== ========== ======== ==========
Weighted average
shares
outstanding --
basic.............. 5,491,250 169,084 5,660,334 354,278 6,014,612
========== ======== ========== ======== ==========
</TABLE>
70
<PAGE> 80
CERTAIN INFORMATION CONCERNING BANCSHARES
Bancshares is a registered bank holding company formed in February 1996
under the laws of the State of Florida, whose principal subsidiary is Republic,
a Florida-chartered, FDIC-insured commercial bank headquartered in St.
Petersburg, Florida. As a result of the sale of several Florida-based banking
organizations to out-of-state bank holding companies in January 1998, Bancshares
is now the largest independent commercial bank holding company in Florida, based
on its June 30, 1998 assets of $2.2 billion. Bancshares, through Republic,
provides a broad range of traditional commercial banking services, emphasizing
real estate and business lending. Republic is also active in mortgage banking
through its mortgage banking division, Flagship, which originates first-lien
residential mortgages and High LTV Loans. Currently, Bancshares' branch network
consists of 55 branches in Brevard, Broward, Columbia, Hernando, Manatee,
Marion, Monroe, Orange, Osceola, Pasco, Pinellas, Sarasota, Seminole and
Suwannee Counties and Florida and one branch in Glynn County, Georgia. At June
30, 1998, Bancshares' consolidated assets totaled $2.2 billion, loans held in
portfolio totaled $1.4 billion, deposits totaled $1.7 billion and stockholders'
equity was $170.3 million. Bancshares is regulated by the Federal Reserve, and
Republic is regulated by the Department and the FDIC. The Savings Bank is a
federally chartered savings bank headquartered in St. Petersburg with an
interstate branch located in Brunswick, Georgia that commenced operations on
August 21, 1998. The Savings Bank is regulated by the OTS and the FDIC.
Republic's and the Saving Bank's deposits are insured by the FDIC up to
applicable limits, and both institutions are members of the FHLB.
BACKGROUND AND PRIOR OPERATING HISTORY
In May 1993, the Principal Stockholders, William R. Hough and John W.
Sapanski, acquired from the prior controlling stockholder more than 99.0% of
Republic's outstanding common stock. As of June 30, 1998, the Principal
Stockholders (and their respective affiliates and immediate family members)
owned shares of Bancshares' voting stock representing approximately 40.2% and
4.8%, respectively, of the total voting rights of Bancshares. Following the
consummation of the Merger, and after taking into account the May 1998 Offering,
Messrs. Hough and Sapanski will own approximately 38.3% and 4.6%, respectively,
of the total voting rights of Bancshares. Mr. Hough is a member of Bancshares'
and Republic's Board of Directors and Mr. Sapanski serves as Bancshares' and
Republic's Chairman of the Board, Chief Executive Officer and President.
Following the Change in Control, Republic began to implement a program of
expanding its branches and lines of business. In December 1993, Republic
purchased 12 branches in Pinellas, Manatee and Sarasota Counties from CrossLand,
assumed deposit liabilities of $327.7 million, and purchased performing and non-
performing loans secured by real estate and ORE amounting to $201.6 million.
Republic paid CrossLand $11.5 million for the branches and related furniture,
fixtures, equipment and other assets, plus a $1.9 million premium on the dollar
amount of the deposits assumed. The CrossLand Purchase and Assumption almost
tripled Republic's size, increasing total assets to $531.3 million and total
deposits to $494.3 million at December 31, 1993. Additionally, the 12 CrossLand
branches expanded Republic's market coverage to include Manatee and Sarasota
Counties and more than doubled Republic's branch network to a total of 19
branches.
Also in December 1993, Republic sold 1,398,200 shares of its common stock
in an initial public offering at a price of $8.00 per share. The net proceeds
from the offering totaled $10.3 million. In addition, Republic sold 75,000
shares of its preferred stock for a purchase price of $6.6 million (or $88.00
per share). In June 1995, Republic sold 800,000 shares of its common stock in a
combined subscription rights and public offering at $12.50 per share, with net
proceeds totaling $9.1 million.
During the latter part of 1994 and throughout 1995, Republic continued to
pursue a strategy of increasing its retail banking presence on the west central
coast of Florida. Republic opened 13 additional new branches, expanding its
market presence in existing counties and providing entry into Pasco County.
In January 1996, Republic's stockholders approved a reorganization under
which Republic became a wholly-owned subsidiary of Bancshares. All holders of
shares of Republic's common and preferred stock received one share of Bancshares
Common Stock or Bancshares Preferred Stock, as appropriate, for each share of
Republic's common or preferred stock held of record. Holders of outstanding
options to purchase or
71
<PAGE> 81
acquire Republic's common stock received options to purchase an equal number of
shares of Bancshares Common Stock.
Bancshares also continued its geographic expansion strategy throughout
1997. In January 1997, Bancshares opened a new branch in Hernando County. In
April 1997, Bancshares acquired Firstate for a cash purchase price of $5.5
million. The Firstate Acquisition increased Bancshares' presence in central
Florida, where Bancshares previously operated an LPO but had no branches. On the
date of acquisition, Firstate had total assets of $71.1 million and total
deposits of $67.9 million. The Firstate Acquisition was accounted for using
purchase accounting rules.
In July 1997, Bancshares and its wholly-owned subsidiary, RBI Capital Trust
I ("RBI Capital") completed an offering by RBI Capital of $28.8 million of
Cumulative Trust Preferred Securities ("Preferred Securities"). The proceeds
from the Preferred Securities were used to purchase an equivalent amount of
Bancshares' 9.1% junior subordinated debentures. The net proceeds from the sale
of the junior subordinated debentures were contributed by Bancshares to the
regulatory capital of Republic. See Note 1 of Bancshares' Consolidated Financial
Statements included elsewhere herein.
On September 19, 1997, FFO was merged into Bancshares in the FFO Merger.
The FFO Merger further increased Bancshares' presence in central Florida by
adding 11 branches in Brevard, Orange and Osceola counties. On the date of FFO
Merger, FFO had total assets of $328.4 million, total loans of $222.4 million
and total deposits of $281.3 million. The FFO Merger was accounted for as a
corporate reorganization in which Mr. Hough's interests in FFO and Bancshares
were combined at historical cost in a manner similar to a pooling of interests,
while the minority interests in FFO were combined with Bancshares using purchase
accounting rules.
In May 1998, Bancshares completed the May 1998 Offering of 2,642,150 shares
of Bancshares Common Stock at price to the public of $29.50 per share. The
number of common equivalent shares outstanding as of that date increased to
9,713,035. Net proceeds from the May 1998 Offering were $72.9 million after
deducting underwriting discounts and commissions and expenses. Of the net
proceeds, $70.2 million were used to increase the common equity of Republic Bank
while $2.7 million was retained by Bancshares to be used for the capitalization
of the Savings Bank.
MORTGAGE BANKING AND LENDING ACTIVITIES
During 1996 and 1997, Bancshares focused on increasing its residential
lending capabilities. In conjunction with the establishment of Flagship in April
1996 and its internal growth, Bancshares added eight residential LPOs in
Florida, one residential LPO in Boston, Massachusetts, as well as wholesale LPOs
in St. Petersburg, Florida and in Irvine, California. These offices expanded
Bancshares' product line to include government-insured first mortgage loans,
and, beginning in the fourth quarter of 1996, High LTV Loans. At the same time,
Bancshares also began purchasing residential mortgage loans from mortgage
brokers and other third-party originators for resale. The strategy of Bancshares
is to sell or securitize substantially all of the loans it originates and
purchases through Flagship.
Until late 1997, Bancshares sold all of the High LTV Loans and other
mortgage loans originated by Flagship in whole loan sales. In December 1997,
however, Bancshares consummated its first mortgage loan securitization, in which
it securitized $60.0 million of High LTV Loans in a private placement offering.
Bancshares retained servicing rights with respect to the loans that were
securitized.
In June 1998, Bancshares and SPC sold $240.0 million securities backed by
$240.0 million of its High LTV Loans in a private placement securitization while
retaining the Class B-2 Certificates, a $12.0 million subordinated interest in
the pool of loans that were securitized. Bancshares retained servicing rights
and the residual interest in excess spread with respect to the loans that were
securitized. In September 1998, Bancshares sold $221 million of its High LTV
Loans to the First National Bank of Keystone ("Keystone"). In connection with
the transaction, Bancshares paid a servicing fee to Keystone for the right to
service the loans sold to Keystone as well as other Keystone loans that were
subject to a securitization transaction. Bancshares currently anticipates
further whole loan sales or securitizations with respect to the mortgage loans
originated by Flagship on a quarterly or other periodic basis, depending on
then-prevailing market conditions and other factors such as Republic's
capitalization and liquidity.
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RECENT AND PROPOSED ACQUISITIONS
On June 19, 1998, Bancshares acquired three branch offices of NationsBank
and four branch offices of Barnett, including the loans and other assets
recorded at the Florida Branches. These branches are located throughout the
State of Florida and include three in Monroe County (Key West, Marathon and
Plantation Key), two in Marion County (Ocala and Silver Springs) and one each in
Columbia County (Lake City) and Suwannee County (Live Oak). When acquired, the
NationsBank Florida Branches had deposit liabilities of $199.9 million and loans
of $114.4 million. On August 20, 1998, Bancshares acquired the Georgia Branch of
Barnett located in Brunswick (Glynn County), Georgia, with the office becoming
an interstate branch of the Savings Bank. At the time of acquisition, the
Georgia Branch had deposit liabilities of $16.9 million and loans of $7.5
million. Bancshares paid a combined deposit and loan premium of $27.2 million
for the NationsBank Branches. Bancshares' acquisitions of the eight NationsBank
Branches were both accounted for using purchase accounting rules, with the
deposit premiums being amortized using the straight-line method over a ten year
period.
On August 13, 1998, Bancshares purchased the Dime Branch in Deerfield Beach
(Broward County), Florida from The Dime Savings Bank, F.S.B. Pursuant to the
transaction, Bancshares assumed $206.7 million of deposits and purchased $60,900
of loans and $100,000 of personal property and equipment assigned to the Dime
Branch. Bancshares' purchase price for the Dime Branch was $9.8 million, and the
transaction was accounted for using purchase accounting rules and a ten year
straight-line amortization of the deposit premium.
On March 2, 1998, Bancshares and Republic entered into the BSB Agreement
with BSB, providing for the merger of BSB with and into Republic. BSB has two
offices located in Dade County in the cities of Coral Gables and Miami, Florida.
As of June 30, 1998, BSB had total assets of approximately $68.3 million, total
loans and loans held for sale of approximately $49.4 million, total deposits of
approximately $60.7 million, and total stockholders' equity of approximately
$4.4 million. Upon consummation of the BSB Merger, each share of BSB common
stock issued and outstanding will be exchanged for and automatically converted
into shares of Bancshares Common Stock as determined in accordance with the
exchange ratio formula set forth in the BSB Agreement. It is anticipated that
the BSB Merger will be accounted for as a pooling of interests. The transaction
may be terminated by either BSB or Bancshares if it is not consummated by
December 1, 1998. All required regulatory approvals for the BSB Merger have been
received. See "Unaudited Combined Financial Data."
If consummated, the Proposed Mergers, including the Merger, will increase
the total assets of Bancshares to approximately $2.5 billion (based on most
recent available data) and expand Bancshares' branch network from 55 to 58
branches in Florida, in addition to its one branch in Georgia. There can be no
assurance that Bancshares will be able to consummate the Proposed Mergers, or,
if consummated, successfully integrate the operations and management of the
Proposed Mergers. See "Risk Factors -- Current Acquisitions and Ability to
Manage Growth and Integrate Operations."
Bancshares anticipates continuing its strategy of geographic expansion for
the foreseeable future through a combination of whole bank and thrift
acquisitions, branch acquisitions and de novo branching, depending upon various
factors, including whether: (i) the transaction will be accretive to earnings no
later than one year following consummation; (ii) the transaction will provide
Bancshares with a new or additional location in a desirable market area; (iii)
the transaction will close an existing gap in Bancshares' branch network; or
(iv) the transaction will present competitive opportunities, such as branches
becoming available due to branch closings or bank mergers and other
consolidations.
BUSINESS STRATEGY
Bancshares' business strategy entails: (i) originating and purchasing real
estate-secured loans for portfolio and sale, (ii) originating business and
consumer loans for portfolio; (iii) improving market share and expanding its
market coverage through a combination of acquisitions of other financial
institutions, branch purchases and de novo branching; (iii) increasing
non-interest income through expanded mortgage banking activities and increased
emphasis on commercial and retail checking relationships; and (v) increasing its
range
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of products and services. While pursuing this strategy, management remains
committed to improving asset quality, managing interest rate risk, enhancing
profitability and maintaining its status as a well-capitalized institution for
regulatory capital purposes.
The results of Bancshares' business strategy include:
- Expanded Branch Network -- Since the Change in Control, Bancshares has
expanded its retail banking presence from seven branches in northern
Pinellas County to its current 55 branches in Brevard, Broward, Columbia,
Hernando, Manatee, Marion, Monroe, Orange, Osceola, Pasco, Pinellas,
Sarasota, Seminole and Suwanee Counties and one branch in Glynn County,
Georgia. The Proposed Mergers, if consummated, will provide Bancshares
with a two branch presence in Dade County and an additional branch in
Orange County, bringing its total branch network to 58 branches in
Florida and one branch in Georgia.
- Substantial Asset Growth -- Since the Change in Control, Bancshares has
increased in asset size from approximately $168.7 million to
approximately $2.2 billion at June 30, 1998. The Proposed Mergers, if all
are consummated, will increase the total asset size of Bancshares to
approximately $2.5 billion. This asset growth is largely attributable to
bulk purchases of loan portfolios and deposit assumptions such as the
CrossLand Purchase and Assumption, acquisitions of other financial
institutions such as Firstate, FFO, Lochaven and Lochaven, branch
purchases such as the NationsBank and Dime Branch purchases, the opening
of new branches and internally-generated deposit and loan growth.
- Increased Mortgage Banking and Other Fee-Generating
Activities -- Bancshares has increased its non-interest income through
improved revenue from an expanded line of deposit products and through
the establishment of Flagship, with its emphasis on mortgage banking
activities, both in absolute terms and as a relative percentage of its
net income. In 1997, Flagship contributed approximately $15.3 million in
non-interest income (over 60% of total non-interest income). Bancshares
has also increased its non-interest income through improved revenue from
an expanded line of deposit products. As a result of Bancshares having
expanded its sources and amounts of fee income, total non-interest income
was 1.85% of average assets in 1997, as compared to 0.63% in 1994, the
first full year after the Change in Control.
- Improved Asset Quality Ratios -- A significant portion of the assets of
Republic at the time of the Change in Control and the assets acquired in
the CrossLand Purchase and Assumption were nonperforming. As a result,
Republic's nonperforming assets were $44.2 million, or 5.66% of total
assets, at year-end 1993. At June 30, 1998, nonperforming assets of
Bancshares had been reduced to $38.5 million, or 1.79% of total assets,
primarily through the implementation of consistent loan underwriting
policies and procedures, centralization of all credit decision functions,
increasing the size of the loan portfolio, write-offs and sales of ORE.
However, the level of Bancshares' nonperforming assets continues to be
higher than that of peer group institutions. See "Risk
Factors -- Nonperforming Assets."
- Management of Financial Risks -- One of Bancshares' primary objectives is
to reduce fluctuations in net interest income caused by changes in market
interest rates and changes in the value of its mortgage loans held for
sale. To manage this interest rate risk, Bancshares generally limits
holding loans in its portfolio to those that have variable interest rates
tied to interest-sensitive indices and actively manages the maturities
within its investment portfolio. Bancshares also engages in various
hedging activities to reduce its exposure to the interest rate risks
attributable to mortgage loans held pending subsequent sale or
securitization.
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CERTAIN INFORMATION CONCERNING LOCHAVEN
GENERAL
Lochaven was organized under the laws of the United States in December
1985. As of June 30, 1998, Lochaven had total assets of $59.6 million, total
deposits of $49.8 million and total stockholders' equity of $2.8 million.
Lochaven's main office is located at 2415 North Orange Avenue, Orlando, Florida
32804, and its telephone number is (407) 898-0022. Its mortgage and
administrative office is located at 2410 North Orange Blossom Trail, Orlando,
Florida 32804, and its telephone number is (407) 426-7622.
Lochaven is a federally chartered savings and loan association which
conducts business from its headquarters and main office in Orlando, Florida, and
two LPOs in Florida. Lochaven was founded in December 1985 as a federally
chartered stock savings and loan association. Lochaven's deposits are insured by
the FDIC through the SAIF. Until recently, Lochaven conducted a mortgage banking
operation consisting primarily of originating government-insured first mortgage
loans from mortgage brokers and other third-party originators for resale. This
operation was conducted through a wholly-owned subsidiary, Independence Mortgage
Corporation of America ("IMCA"), which was acquired by Lochaven from First
Federal Savings & Loan of South Carolina in 1989. Over the past several years,
IMCA has incurred net losses which have contributed to a decrease in Lochaven's
earnings and capital. In August 1997, in an effort to reduce expenses and
consolidate responsibilities, IMCA's operations and personnel were transferred
to Lochaven. Following the signing by Lochaven and Bancshares of the Agreement
on March 6, 1998, Bancshares and Lochaven entered into an agreement which
transitioned from Lochaven to Bancshares a significant portion of Lochaven's
mortgage banking offices and personnel. Accordingly, as of the date of this
Proxy Statement, Lochaven primarily conducts a business as a savings bank,
although it still retains two LPOs to assist in the generation of mortgage loans
for retention by Lochaven or resale.
The principal business of Lochaven is to attract deposits, primarily in the
form of savings deposits from the general public, and to invest these funds,
together with borrowings and other funds, in loans, securities and other
investments. Loans are primarily made to enable borrowers to purchase,
refinance, construct or improve residential and other real estate and are
secured by mortgages on the real estate. Funds are also provided for the
operations of Lochaven through proceeds from the sale of loans, repayment of
outstanding loans, and borrowings from the FHLB. Lochaven's operating results
depend substantially on (i) net interest income (the difference between its
interest income and interest expense), (ii) origination and sale of loans and
loan servicing, (iii) provisions for losses on loans and foreclosed real estate,
(iv) noninterest income, (v) noninterest expenses and (vi) income taxes. Net
interest income is determined primarily by interest rate spread and the relative
amounts of interest-earning assets (primarily loans, securities and other
investments) and interest-bearing liabilities (primarily deposits and
borrowings).
LENDING ACTIVITIES
At June 30, 1998, Lochaven's loans held for sale and net loan portfolio
totaled $52.3 million, representing approximately 87.7% of its $59.6 million of
total assets at that date. The principal categories of loans include
conventional residential mortgage loans, nonresidential real estate loans, loans
which are insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Department of Veterans Affairs ("VA"), residential
construction loans, and consumer loans.
As a federally chartered savings and loan association, Lochaven has general
authority to originate and purchase loans secured by real estate located
throughout the United States. Notwithstanding this nationwide lending authority,
substantially all of the mortgage loans in Lochaven's portfolio are secured by
properties located in Florida. Moreover, substantially all of Lochaven's
nonmortgage loan portfolio consists of loans made to residents and businesses
located in the Florida counties of Osceola, Lake, Seminole, and Orange.
For additional information on Lochaven's lending activities, particularly
the composition of its loan portfolio, see "Lochaven Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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Origination and Sale of Loans
Applications for residential mortgage loans are taken at Lochaven's LPOs.
Residential loan applications are primarily attributable to referrals from
builders and real estate brokers, existing customers and, to a lesser extent,
walk-in customers.
Applications are obtained by full-time employees located at Lochaven LPOs.
Mortgage loan applications are processed, and all underwriting is done at
Lochaven's administrative office or its LPOs.
Lochaven has established various levels of review and approval of loans.
Under current loan policies, most first mortgage loans are approved by certain
designated officers or Lochaven's underwriters. Mortgage loans on commercial
real estate, nonconforming residential loans, loans to employees, and loans to a
single borrower of $500,000 or more (individually or in the aggregate) require
approval by the Loan Committee of the Board of Directors.
Substantially, all of Lochaven's nonconstruction one-to-four family
residential first mortgage loans are originated under terms and conditions which
will facilitate their sale in the secondary mortgage market. Generally, such
loans are sold as whole loans or through securitization. Although such sales
have in the past consisted primarily of fixed-rate loans, Lochaven has on
occasion sold adjustable-rate loans ("ARMs"). Such loan sales are intended to
increase Lochaven's income and assist Lochaven in better matching the maturities
and interest-rate sensitivity of its assets and liabilities or to improve its
cash position.
As of June 30, 1998, Lochaven serviced $2.1 million of loans for others.
Lochaven's portfolio of loans serviced for others generally, consists of loans
on one-to-four family residential properties located in the State of Florida. In
addition, as of June 30, 1998, Lochaven serviced $1.3 million in loans sold with
agreements to repurchase.
For additional information regarding the total loans originated, sold and
repaid (including loans held for sale) during the three months ended June 30,
1998 and each of the years in the three year period ended December 31, 1997, see
"Lochaven Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Residential Real Estate Loans
Historically, savings institutions such as Lochaven have concentrated their
lending activities on the origination of permanent loans secured primarily by
first mortgage liens on existing residential real estate. At June 30, 1998,
$48.0 million or 90.3% of Lochaven's total loan portfolio consisted of such
loans. Of this amount, $20.9 million consisted of one-to-four family residential
loans (excluding $24.6 million which were deemed held for sale at such date).
Residential ARMs currently originated by Lochaven have up to 30-year terms
and an interest rate which adjusts annually based upon changes in an index, plus
a margin. Such indices are based on the weekly average yield of the one-year,
three-year, or five-year U.S. Treasury securities adjusted to a constant
maturity, as made available by the Federal Reserve. There is generally a 1.0% to
2.0% cap on any increase or decrease in the interest rate per annum, and there
is generally a limit of 4.0% to 6.0% on the amount that the interest rate can
adjust over the life of the loan. Although Lochaven generally offers discounts
of 1.0% to 3.0% on the interest rate on its ARMs during the first year of the
mortgage loan for competitive reasons, Lochaven determines a borrower's ability
to pay at the higher of 200 basis points above the initial interest rate or a
minimum of 7.0%.
ARMs decrease the risks associated with changes in interest rates, but
involve other risks because as interest rates increase the underlying payments
by the borrower increase, thus increasing the potential for default. At the same
time, the marketability of the underlying collateral may be adversely affected
by higher interest rates.
Lochaven continues to originate fixed-rate residential mortgage loans with
terms up to 30 years in order to provide a full range of products to its
customers. Substantially, all such loans are originated under terms, conditions
and documentation which make them eligible for sale to FHLMC, FNMA and other
secondary market investors. Although these loans generally provide for
repayments of principal over a fixed period of 15
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to 30 years, it has been Lochaven's experience that because of prepayments and
due-on-sale clauses, such loans generally remain outstanding for a substantially
shorter period of time.
FHA and VA Lending
Lochaven originates single-family loans made pursuant to the FHA insurance
programs under the National Housing Act, and loans made pursuant to the VA
program under the Serviceman's Loan Guaranty Readjustment Act of 1944. Lochaven
originated an aggregate of $25.8 million and $50.7 million of FHA and VA loans
for the six months ending June 30, 1998, and the year ended December 31, 1997,
respectively. The addition of these single-family lending programs has enabled
Lochaven to continue to expand the product range offered to its customers.
Substantially, all of such loans originated are sold in the secondary market.
Loans Secured by Other Properties
Nonresidential real estate loans and multifamily real estate loans
originated by Lochaven are primarily secured by strip shopping centers, office
buildings, duplexes and apartments, unimproved land and building lots and
churches located within Lochaven's primary market area. Although terms are
determined and may vary on a case-by-case basis, loans secured by other
properties generally have amortization schedules of 20 to 25 years, some require
a balloon payment after periods of three to five years and may have either fixed
or adjustable interest rates.
Loans secured by other properties are generally considered to involve a
higher level of risk than single-family residential lending due to the
concentration of principal in a limited number of loans and borrowers, and the
dependency on income production or future development of the real estate. Loans
secured by other properties amounted to $7.3 million or 13.8% of Lochaven's
total loan portfolio at June 30, 1998.
Construction Loans
Construction loans (net of loans in process) for the construction of
single-family residential properties amounted to $10.6 million or 19.9% of
Lochaven's total loan portfolio at June 30, 1998. Lochaven provides fixed-rate
and adjustable-rate residential construction loans to selected developers with
whom Lochaven is familiar and who have a record of successfully completing
projects and, to a lesser extent, to individuals building their primary or
secondary residence. Generally, loans to both individuals and developers are
made with terms of six to eighteen months, depending on the magnitude of the
project. With respect to individuals the construction loan is generally made in
connection with the granting of the permanent financing on the property. Such
loans convert to permanent loans at maturity or upon completion of construction,
whichever occurs first.
Lochaven offers adjustable-rate loans with terms of up to seven years for
the construction of commercial properties such as office buildings and shopping
centers. Advances on these loans are generally made on a percentage of
completion basis, usually consisting of four or more draws. Such construction
loans totaled $581,000 at June 30, 1998.
Construction loans afford Lochaven the opportunity to increase the interest
rate sensitivity of its loan portfolio and with respect to nonresidential
properties, to receive higher yields than those obtainable on single-family
residential loans. These higher yields correspond to the higher risks associated
with construction loans. Construction lending is generally considered to involve
a higher degree of risk than long-term financing on improved, owner-occupied
real estate. Risk of loss on construction loans is dependent largely upon the
accuracy of the initial appraisal of the property's projected value at
completion of construction as well as the estimated cost of construction,
including interest. During the construction phase, a number of factors could
result in delays and cost overruns. If either estimate proves to be inaccurate
and the borrower is unable to provide additional funds, the lender may be
required to advance funds beyond the amount originally committed to permit
completion of the project and/or be confronted at the maturity of the
construction loan with a project whose value is insufficient to assure full
payment.
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Consumer and Commercial Loans
Lochaven offers certain types of consumer and commercial loans in order to
provide a full range of financial services to its customers. Consumer and
commercial loans, which totaled $160,000 at June 30, 1998, generally have
shorter terms and higher interest rates than mortgage loans and generally
involve more risk than single-family residential mortgage loans because of the
type and nature of the collateral and, in certain cases, the absence of
collateral.
The consumer and other loans offered by Lochaven include loans for the
purchase of both new and used automobiles and boats, deposit account loans, home
improvement and home equity loans. Lochaven also makes unsecured consumer and
commercial loans to individuals and businesses who are established customers.
Credit lines are also offered on a secured (usually by real estate) basis.
LOAN FEE INCOME
In addition to interest earned on loans, Lochaven receives income from fees
in connection with loan originations, loan modifications, late payments,
prepayments and for miscellaneous services related to its loans. Income from
such activities varies with the volume and type of loans made as well as
competitive conditions.
Lochaven charges loan origination fees which are calculated as a percentage
of the amount borrowed. Loan origination fees generally amount to 1.0% to 2.0%
of the amount borrowed in the case of a mortgage loan. Loan origination fees are
not obtained in connection with consumer loans.
Lochaven accounts for loan fees in accordance with Statement of Financial
Accounting Standards No. 91 ("SFAS 91"), "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." SFAS 91 requires that loan fees, net of certain specific incremental
direct loan origination costs, be deferred and accreted into income over the
estimated life of each loan as a yield adjustment. However, upon sale of a loan,
the remaining unamortized deferred fees related thereto are recognized into
income.
NONPERFORMING LOANS AND FORECLOSED REAL ESTATE
When a borrower fails to make a required payment on a loan, Lochaven
attempts to cure the deficiency by contacting the borrower and seeking payment.
Initial contact is generally made on the fifteenth day after a payment is due.
If a delinquency extends beyond 30 days, the loan and payment history is
reviewed and measures may be instituted to remedy the default. While Lochaven
generally prefers to work with borrowers to resolve such problems, it does
institute foreclosure proceedings, as necessary, to minimize any potential loss.
Loans are placed on nonaccrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on nonaccrual status, previously accrued
but unpaid interest is deducted from interest income. Lochaven generally does
not accrue interest on loans more than 90 days past due.
Property acquired by Lochaven as a result of foreclosure is classified as
foreclosed real estate. When a property is taken back, it is recorded at the
lower of fair value (less estimated selling costs) or the principal balance of
the loan at the date of acquisition. Costs incurred for the improvement or
development of such property are capitalized, while costs relating to holding
the property are charged to operations.
For additional information regarding nonaccrual loans, loans which were 90
days or more delinquent but on which Lochaven was accruing interest, loans which
have been restructured due to financial difficulties with the borrower, and
foreclosed real estate held by Lochaven, as well as interest income that would
have been recorded under the original terms of such loans and the interest
income actually recognized, see "Lochaven Management's Discussion and Analysis
of Financial Condition and Results of Operations."
At June 30, 1998, loans on nonaccrual status totaled $1.5 million,
including $1.4 million in single family residential loans. During the six months
ending June 30, 1998, and the full year of 1997, approximately $45,000 and
$131,000, respectively, in interest income would have been recorded on loans
accounted for on a nonaccrual basis and troubled debt restructurings if each
loan had been current in accordance with its original
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contract and had been outstanding throughout the period. These amounts were not
included in the Lochaven interest income in the respective periods. There were
no loans which were 90 or more days past due and continued to accrue interest at
June 30, 1998.
Foreclosed real estate includes property acquired by foreclosure. Total
foreclosed real estate at June 30, 1998 and December 31, 1997 was $641,000 and
$431,000, respectively. As of June 30, 1998, Lochaven's inventory of foreclosed
real estate was comprised of eight single-family residences.
When a loan is transferred to foreclosed real estate, a new appraisal of
the underlying property is ordered. Lochaven calculates the estimated fair value
of the collateral (that is, the proceeds anticipated from the sale of the
collateral, less estimated selling costs), and the asset is carried at the lower
of the balance of the loan transferred or the estimated fair value. While the
property is held, management evaluates on at least a quarterly basis whether the
estimated fair value should be adjusted due to changes in the real estate market
or other factors which may in the opinion of management affect the ultimate
sales price. Such evaluation may consider, among other things, current operating
information available on the properties, changes in the disposition or marketing
plan of individual properties, and changes in management's assessment of local
real estate market values. If the revised fair value is below the current
carrying value of the property, the carrying value is adjusted by a change to
earnings, and a corresponding increase in the allowance for losses on real
estate owned. Lochaven does not generally update the appraisal unless requested
by the regulatory authorities or unless management otherwise believes that an
updated appraisal would be beneficial in assisting it in evaluating fair value.
Lochaven's practice of not updating appraisals on a more frequent periodic basis
may increase the risk that Lochaven will experience delays or discrepancies in
recognizing and providing for adverse changes in the valuation of its foreclosed
real estate or other nonperforming assets. The adjustments, if any, required
upon the receipt of updated appraisals could have a material adverse effect on
the results of operations and financial and capital positions of Lochaven.
As to new loans, current appraisals are ordered for all real estate
mortgages at the time of loan submission. Otherwise, Lochaven does not generally
order an updated appraisal unless the loan has a call or a balloon provision, in
which case a new appraisal may be requested prior to reviewing the renewal,
depending upon the type of property, its location and physical condition.
ALLOWANCE FOR LOSSES ON LOANS AND FORECLOSED REAL ESTATE
It is Lochaven's policy to establish and maintain adequate reserves for
losses on loans and foreclosed real estate. At June 30, 1998, Lochaven had
reserves for losses on loans and foreclosed real estate amounting to $791,000.
The management of Lochaven periodically reviews the adequacy of the allowance
for losses on loans and foreclosed real estate. Such review includes an analysis
of Lochaven's historical experience, the volume and type of lending conducted by
Lochaven, industry standards, the status of past due principal and interest
payments, directives of the OTS, general economic conditions, particularly as
they relate to Lochaven's market area, the credit condition of the borrowers,
current fair market values of collateral and foreclosed real estate and other
factors related to the collectibility of Lochaven's loan portfolio.
Pursuant to applicable regulations, the OTS has the authority to require
Lochaven to increase its loss allowances if the agency determines that the
allowances are inadequate. The estimation of appropriate levels of loss
allowances is a process that involves a high degree of subjectivity, and the
regulatory authorities may arrive at conclusions that differ from management's
regarding the adequacy of loss allowance levels. Although management believes
that Lochaven's loss allowances were adequate as of June 30, 1998, Lochaven is
unable to predict whether the OTS will propose that Lochaven increase its loss
allowances. Future events, such as increased interest rates, a downturn in the
Florida economy, or adverse developments with respect to specific loans or other
assets could also require adjustments to Lochaven's loss allowances. Such
adjustments would likely have a material adverse effect on Lochaven's operating
results and could have a material adverse effect on its financial condition.
For additional information regarding activity in Lochaven's allowance for
loan losses during the three months ended June 30, 1998 and each of the years in
the three-year period ended December 31, 1997, see "Lochaven Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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SECURITIES
Lochaven held no investment securities at June 30, 1998 or December 31,
1997.
SOURCES OF FUNDS
Deposits obtained through Lochaven's office have traditionally been the
principal source of Lochaven's funds for use in lending and for other general
business purposes. To a lesser extent, Lochaven also derives funds from
amortization and prepayments of outstanding loans, sales of loans, and
borrowings from the FHLB.
DEPOSITS
Lochaven currently offers deposit products including passbook and statement
savings and demand accounts, NOW accounts, money market accounts, and
certificates of deposit ranging in terms from three months to ten years.
Included among these deposit products are Individual Retirement Account ("IRA")
certificates. Substantially all of Lochaven's deposits are obtained from
individual and business residents of Orange County, Florida. The principal
methods used by Lochaven to attract deposits include offering a wide variety of
products and services, competitive interest rates and a convenient office
location and hours. Lochaven is a member of the HONOR ATM network.
For additional information regarding the distribution of Lochaven's
deposits by type of deposit as of June 30, 1998 and December 31, 1997, see
"Lochaven Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Lochaven has been required by market conditions to rely increasingly on
money market accounts and other types of deposit accounts that are more
responsive to market interest rates than passbook accounts and fixed-rate,
fixed-term certificates that were historically primary sources of deposits. In
recent years, Lochaven has priced its deposits to be competitive with other
financial institutions conducting business in its market area, but has not
attempted to match the highest rates paid by competing institutions. The ability
of Lochaven to attract and maintain deposits and Lochaven's cost of funds have
been and will continue to be significantly affected by economic and competitive
conditions.
For additional information regarding the net deposit flows of Lochaven
during the six months ended June 30, 1998 and each of the years in the two-year
period ended December 31, 1997, see "Lochaven Management's Discussion and
Analysis of Financial Condition and Results of Operations." The decrease in
deposits during 1997 and in the first six months of 1998 was primarily
attributable to management's efforts to improve Lochaven's capital ratios by
reducing its assets to meet restrictions imposed on Lochaven's growth by Federal
regulatory authorities.
For additional information on Lochaven's deposits, including time deposits
by interest rate and jumbo (over $100,000) time deposits, see "Lochaven
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
As of June 30, 1998, Lochaven had no deposits of public funds.
BORROWINGS
Lochaven may obtain advances from the FHLB utilizing certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending, as well as to
assist the efforts of members to establish better asset and liability management
through the extension of maturities of liabilities. As of June 30, 1998,
Lochaven had outstanding FHLB advances totaling $3.8 million. In addition,
Lochaven had $1.3 million in other borrowings at June 30, 1998, which
represented loans sold with agreements to repurchase.
80
<PAGE> 90
COMPETITION
Lochaven faces intense competition in its market areas from major banking
and financial institutions, including many which have substantially greater
resources, name recognition and market presence than Lochaven. Particularly
intense competition exists for attracting and retaining deposits and lending
funds. Lochaven competes for deposits principally by offering depositors a
variety of deposit programs. Lochaven does not rely upon any individual group or
entity for a material portion of its deposits.
Lochaven's competition for real estate loans comes primarily from mortgage
banking companies, other savings institutions and commercial banks, many of
which have higher legal lending limits than Lochaven. Lochaven competes for loan
originations primarily through the interest rates and loan fees it charges, and
the efficiency and quality of services it provides borrowers, real estate
brokers and builders. Factors which affect competition include the general and
local economic conditions, current interest rate levels and volatility in the
mortgage markets.
LITIGATION
Lochaven is periodically a party to or otherwise involved in legal
proceedings arising in the normal course of business, such as claims to enforce
liens, claims involving the making and servicing of real property loans, and
other issues incident to its business. Lochaven management does not believe that
the amount of ultimate liability with respect to legal actions would have a
material adverse effect on the financial position of Lochaven.
EMPLOYEES
Lochaven had 63 full-time employees and one part-time employee as of June
30, 1998. None of these employees is represented by a collective bargaining
agent, and Lochaven believes that it enjoys good relations with its personnel.
81
<PAGE> 91
MANAGEMENT
BOARD OF DIRECTORS: Lochaven has three classes of Director, with staggered
terms of three years each. The Board of Directors of Lochaven currently consists
of six directors. The following table sets forth certain information with
respect to the directors of Lochaven.
<TABLE>
<CAPTION>
DIRECTOR OR OFFICER TERM PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
NAME AND AGE OF LOCHAVEN SINCE EXPIRES DURING PAST FIVE YEARS
- ------------ ------------------- ------- --------------------------------------------
<S> <C> <C> <C>
Class I Directors:
Patricia A. Schwartz,
67...................... 1985 1999 Chairman of the Board of Directors, Lochaven
Federal Savings & Loan, Former Orlando City
Commissioner, and a real estate investor
J. Michael Murphy, 58..... 1988 1999 President, Drum Service Co. of Florida,
Zellwood, Florida
Joseph Wittenstein, 84.... 1985 1999 Retired CPA and self-employed business
consultant
Class II Directors:
Robert O. Smedley, 52..... 1995 2000 President & CEO, Lochaven Federal Savings &
Loan Association
Frances S. Pignone, 57.... 1985 2000 Personal Investments -- Real Estate, Former
Orange County Commissioner, Former Board
Member and Chairman of the St. Johns Water
Management District and East Central Florida
Regional Planning Council
Class III Directors:
Richard H. Adams, 59...... 1985 2001 Attorney, Adams & Spears, P.A., Orlando
</TABLE>
EXECUTIVE OFFICERS: The following sets forth information regarding the
executive officers of Lochaven. The officers of Lochaven serve at the pleasure
of the Board of Directors.
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS
- ------------ -----------------------------------------------------------------------
<S> <C>
Robert O. Smedley, 52..... President & CEO, Lochaven Federal Savings & Loan Association, 1995 to
present, Chairman and CEO, Independence Mortgage Corporation of
America, 1995 to 1997 (Merged into Lochaven), Supervisory Managing
Agent, Resolution Trust Corp, 1990-1995
Thomas B. Hury, 48........ CFO, Lochaven Federal Savings & Loan Association, 1987 to present
</TABLE>
ASSET/LIABILITY MANAGEMENT
Lochaven, like most other savings institutions, is engaged primarily in the
business of investing funds obtained from deposits, borrowings and other
sources, in loans, securities and other investments. Consequently, the Company's
earnings depend to a significant extent on its net interest income, which is the
difference between the interest earned on loans, securities and other
investments, and the interest paid on deposits and borrowings. Lochaven is
subject to interest rate risk, and corresponding fluctuations in its net
interest income, to the extent that its interest-earning assets and
interest-bearing liabilities do not mature or reprice at the same time.
Asset/Liability management policies are employed in an effort to reduce the
Company's exposure to interest rate risk and thereby reduce the volatility of
net interest income. The primary goal of these policies is to achieve a
reasonable interest rate spread while reducing the repricing imbalance by
increasing the interest rate sensitivity and shortening the repricing period of
the Company's interest-earning assets and lengthening the repricing period of
its interest-bearing liabilities.
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<PAGE> 92
In order to increase the interest-rate sensitivity of its interest-earning
assets, Lochaven has emphasized the origination of residential mortgage loans
with adjustable interest rates and loans with short-term maturities. Lochaven
also has sought in recent years to diversify and increase the interest-rate
sensitivity of its loan portfolio by emphasizing the origination of construction
loans for residential properties within its primary market area. Such loans
generally provide for contractual maturities within one year. Although
competitive pressures require Lochaven to offer long-term, fixed-rate mortgage
loans, most such loans are originated under terms and conditions intended to
permit their sale in the secondary market.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
83
<PAGE> 93
LOCHAVEN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Lochaven is a federally-chartered SAIF-insured savings and loan association
which specializes in mortgage lending. It operates one banking office in
Orlando, Florida and has two LPOs in Central Florida. Lochaven conducts general
thrift banking business which consists of taking deposits from the general
public and applying those funds to the origination of loans, which are primarily
mortgage loans. Through its mortgage banking division, the majority of these
loans are sold into the secondary market. Lochaven's profitability depends
primarily upon fees associated with the origination of loans, servicing release
premiums from the sale of servicing, and net interest income, which is the
difference between interest income generated from interest-earning assets less
the interest expense incurred on interest-bearing liabilities. Net interest
income is affected by the relative amounts of these interest-earning assets and
interest-bearing liabilities and the interest rate on these balances.
Net interest income is dependent upon Lochaven's interest rate spread,
which is the difference between the average yield earned on its interest-earning
assets and the average rate paid on its interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. During the six
months ended June 30, 1998 and the year ended December 31, 1997, Lochaven's
return on average assets was 0.24% and (1.41)% respectively.
Lochaven's profitability is affected by several factors, including the
level of noninterest income and expenses, the provision for loan losses, and the
effective tax rate. Noninterest income consists primarily of loan service
charges and other fees. Lochaven's noninterest expenses primarily consists of
salary and employee benefits, occupancy expense, deposit insurance premium, and
other operating expenses.
As of June 30, 1998, total assets of Lochaven were $59.6 million, an
increase of 0.42% compared to total assets of $59.4 million as of December 31,
1997. During the six months ended June 30, 1998, net loans receivable increased
$10.1 million or 56.7%. During the same period, loans held for sale decreased
$7.4 million or 23.2%. Lochaven's cash and cash equivalents decreased from $7.0
million at December 31, 1997 to $2.6 million at June 30, 1998. Lochaven's
deposits decreased from $54.4 million as of December 31, 1997 to $49.8 million
as of June 30, 1998. Lochaven's net income was $70,000 for the six months ended
June 30, 1998 compared to a net loss of $(107,000) for the same period in 1997.
The increase in net earnings is primarily due to an increase in noninterest
income and a decrease in noninterest expense.
REGULATION AND LEGISLATION
As a federally-chartered savings and loan association, Lochaven is subject
to extensive regulation by the OTS and the FDIC, and it files reports with those
regulators concerning its activities and financial condition, in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as mergers with or acquisitions of other financial institutions. Periodic
examinations are performed by the OTS to monitor Lochaven's compliance with the
various regulatory requirements. During 1995, the Board of Directors of Lochaven
signed a Supervisory Agreement with the OTS ("Supervisory Agreement") which
provides that Lochaven is restricted from taking the following action without
prior OTS approval: (i) increasing its asset size (as reported on Lochaven's
quarterly thrift financial report) during a calendar quarter in excess of the
amount of interest credited on deposit liabilities during that quarter; (ii)
modifying any employment agreement with any senior officer or director; (iii)
entering into any contract for goods or services outside the normal operations
of its business; and (iv) making any capital distributions. In addition,
Lochaven was required to reduce its level of classified assets to a specified
level of regulatory capital and to maintain sufficient regulatory capital to
meet the prompt corrective action requirements of a well capitalized
institution. As set forth in the table at "-- Regulatory Capital Requirements"
below, Lochaven's capital levels at December 31, 1997 did not meet the prompt
corrective action requirements for a well capitalized institution. In addition,
Lochaven was not in compliance with the requirement to maintain a level of
classified assets of less than 75.0% of regulatory capital. In response to these
instances of noncompliance with the Supervisory
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<PAGE> 94
Agreement, Lochaven filed a capital plan and operating budget with OTS which set
forth management's proposed actions to rectify the deficiencies. On April 23,
1998, the OTS notified Lochaven that it considered the pending merger with
Bancshares acceptable compliance with the requirement of the Supervisory
Agreement for plans and strategies for improving Lochaven's capital position. In
addition, pending consummation of the Merger, the OTS lowered the minimum
capital requirements set forth in the Supervisory Agreement, such that Lochaven
is required to maintain regulatory capital equal to the adequately capitalized,
versus well capitalized, prompt corrective action capital standards.
Lochaven management believes, as of June 30, 1998, subject to the
foregoing, that Lochaven was substantially in compliance with the provisions of
the Supervisory Agreement.
YEAR 2000 ISSUES
In the next two years, many companies, including financial institutions
such as Lochaven, will face potentially serious issues associated with the
inability of existing data processing hardware and software to appropriately
recognize the calendar dates beginning in the year 2000. Many computer programs
that can only distinguish the final two digits of the year entered may 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. In late 1997, Lochaven began the process of
identifying the many software applications and hardware devices expected to be
impacted by this issue. Lochaven has also formatted and begun implementation of
a plan to address issues related to its "Mission Critical" computer hardware,
software, and applications which complies with Federal Financial Institutions
Examination Council Year 2000 Compliance Guidelines as promulgated by the OTS.
Lochaven outsources its principal data processing activities to a third party
and purchases most of its software applications from third party vendors.
Lochaven believes that its vendors and its significant customers are actively
addressing the problems associated with the Year 2000 issues. Lochaven, in
cooperation with its service providers and vendors, has met all applicable
regulatory deadlines and intends to meet the remaining regulatory deadlines
promulgated by the OTS. Management has met with representatives of Bancshares
and has formulated a plan to convert to Bancshares' data processing system on or
immediately after the date of merger. Accordingly, Lochaven's year 2000 plan
incorporates the expected conversion to Bancshares' system prior to December 31,
1998. However, there can be no assurance that Lochaven will not be adversely
affected by the failure of third party vendors or significant customers of
Lochaven to become year 2000 compliant.
CREDIT RISK
Generally, interest on loans is accrued and credited to income based upon
the principal balance outstanding. It is management's policy to discontinue the
accrual of interest income and classify a loan as nonaccrual when principal or
interest is past due 90 days or more and the loan is not adequately
collateralized, or when in the opinion of management, principal or interest is
not likely to be paid in accordance with the terms of the obligation. If a loan
or a portion of a loan is classified as doubtful or partially charged-off, the
loan will be classified as nonaccrual. Loans that are on a current payment
status or past due less than 90 days also may be classified as nonaccrual if
repayment in full of principal, interest, or both is in doubt. Consumer
installment loans will be charged-off after 90 days of delinquency unless
adequately collateralized and in the process of collection.
Loans will not be returned to accrual status until principal and interest
payments are brought current and future payments appear certain. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. While a loan is classified as nonaccrual and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal outstanding.
When the future collectibility of the recorded loan balance is expected,
interest income may be recognized on a cash basis. In the case where a
nonaccrual loan had been partially charged off, recognition of interest on a
cash basis is limited to that which would have been recognized on the recorded
loan balance at the contractual interest rate. Cash interest receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
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<PAGE> 95
Real estate acquired by Lochaven as a result of foreclosure or acceptance
of deeds in lieu of foreclosure is classified as foreclosed real estate. These
properties are recorded on the date acquired at fair value. If the fair value
after deducting the estimated selling costs of the acquired property is less
than the recorded investment in the related loan, the estimated loss is charged
to the allowance for loan losses. The resulting carrying value established at
the date of foreclosure becomes the new cost basis for subsequent accounting.
After foreclosure, if the fair value less estimated selling costs of the
property becomes less than its new cost basis, the deficiency is charged to the
provision for losses on foreclosed real estate. Costs relating to the
development and improvement of the property are capitalized, whereas those
relating to holding the property for sale are charged as an expense.
NONPERFORMING LOANS
The following table sets forth certain information regarding nonaccrual
loans, nonperforming loans, and foreclosed real estate, including the ratio of
such loans and foreclosed real estate to total assets as of the dates indicated,
and certain other related information.
<TABLE>
<CAPTION>
AT
--------------------------
DECEMBER 31,
JUNE 30, ---------------
1998 1997 1996
-------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
Residential real estate loans............................. $1,364 $2,499 $1,877
Consumer loans and other.................................. 102 -- --
------ ------ ------
Total nonaccrual loans............................ 1,466 2,499 1,877
------ ------ ------
Total nonperforming loans(1)...................... 1,466 2,499 1,877
Foreclosed real estate...................................... 641 431 455
------ ------ ------
Total nonperforming loans and foreclosed real
estate.......................................... $2,107 $2,930 $2,332
====== ====== ======
Total nonperforming loans to total assets......... 2.46% 4.21% 2.50%
====== ====== ======
Total nonperforming loans and foreclosed real
estate to total assets.......................... 3.53% 4.94% 3.10%
====== ====== ======
</TABLE>
- ---------------
(1) There were no accruing loans which are contractually past due 90 days or
more as to principal and interest.
Interest income that would have been recorded under the original terms of
nonaccrual loans and the interest income actually recognized are summarized
below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------- -------------------
1998 1997 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income that would have been
recognized.................................. $ 61,713 $120,400 $199,523 $155,825
Interest income recognized.................... (17,080) (12,921) (68,345) (84,335)
-------- -------- -------- --------
Interest income foregone...................... $ 44,633 $107,479 $131,178 $ 71,490
======== ======== ======== ========
</TABLE>
In originating loans, Lochaven recognizes that loan 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 collateralized loan, the quality of the
collateral for the loan as well as general economic conditions. It is
management's policy to maintain an adequate allowance for loan losses based on,
among other things, Lochaven's historical loan loss experience, evaluation of
economic conditions and regular reviews of delinquencies and loan portfolio
quality.
The allowance for loan losses has been established through charges to
earnings in the form of a provision for loan losses. Increases and decreases in
the allowance due to changes in the measurement of the impaired loans are
included in the provision for loan losses. Loans continue to be classified as
impaired unless they are brought fully current and the collection of scheduled
interest and principal is considered probable. When a
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<PAGE> 96
loan or portion of a loan is determined to be uncollectible, the portion deemed
uncollectible is charged against the allowance.
Although management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, there can be no
assurances that such allowances will be adequate if economic conditions differ
from the economic conditions in the assumptions used in making the initial
determinations.
During 1997, Lochaven experienced an increase in expenses related to the
repurchase of loans previously sold to third parties. In the fourth quarter of
1997, Lochaven established $300,000 of reserves for estimated future costs on
repurchased loans. Those reserves are included in Lochaven's allowance for loan
losses. At June 30, 1998, the allowance for loan losses included $266,000 of
reserves for estimated costs related to repurchased loans.
The following table sets forth information with respect to activity in
Lochaven's allowance for loan losses during the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ ----------------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of
period.................... $ 871 $ 699 $ 699 $ 766 $ 861
Charge-offs................. (129) (128) (346) (112) (251)
Recoveries.................. -- -- -- -- 15
Provision for loan losses... 49 37 518 45 141
------- ------- ------- ------- -------
Allowance at end of
period.................... $ 791 $ 608 $ 871 $ 699 $ 766
======= ======= ======= ======= =======
Ratio of allowance to
period-end loans.......... 1.49% 1.40% 1.72% 1.20% 1.17%
Ratio of allowance to
nonperforming loans....... 53.96% 22.41% 34.85% 37.24% 57.64%
Period end total loans...... $53,148 $43,322 $50,529 $58,031 $65,254
======= ======= ======= ======= =======
Nonperforming loans......... $ 1,466 $ 2,713 $ 2,499 $ 1,877 $ 1,329
======= ======= ======= ======= =======
</TABLE>
The following table presents information regarding Lochaven's total
allowance for loan losses as well as the allocation of such amounts to the
various categories of loans:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
-------------------- --------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
% OF LOANS % OF LOANS % OF LOANS
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential real
estate................. $ 442 72.12% $ 510 68.23% $ 602 59.41%
Commercial real estate,
land & construction
loans.................. 80 27.32 59 30.72 44 38.42
Commercial............... 1 0.49 1 0.78 52 1.27
Consumer Loans and
other.................. 2 0.07 1 0.27 1 0.90
Repurchase of loans...... 266 -- 300 -- -- --
------- ------ ------- ------ ------- ------
Total allowance for loan
losses................. $ 791 100.00% $ 871 100.00% $ 699 100.00%
======= ====== ======= ====== =======
Total gross loans........ $53,148 $50,529 $58,031
======= ======= =======
</TABLE>
87
<PAGE> 97
RESULTS OF OPERATIONS
The operating results of Lochaven depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. Net interest income
is determined by the difference between yields earned on interest-earning assets
and rates paid on interest-bearing liabilities ("interest-rate spread") and the
relative amounts of interest-earning assets and interest-bearing liabilities.
Lochaven's interest-rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. In addition, Lochaven's net earnings are also affected by the level of
nonperforming loans and foreclosed real estate, as well as the level of its
noninterest income, and its noninterest expenses, such as salaries and employee
benefits, occupancy expense and provision for losses on foreclosed real estate
and income taxes.
The following tables set forth for the period indicated, information
regarding (i) the total dollar amount of interest and dividend income of
Lochaven from interest-earning assets and the resultant average yields; (ii) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest/dividend income; (iv) interest-rate
spread; (v) net interest margin; and (vi) the ratio of average interest-earning
assets to average interest-bearing liabilities.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
AVERAGE INTEREST AND AVERAGE AVERAGE INTEREST AND AVERAGE
BALANCE DIVIDENDS YIELD/RATE BALANCE DIVIDENDS YIELD/RATE
------- ------------ ---------- ------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.......................... $51,070 $2,166 8.48% $44,367 $2,034 9.17%
Other interest-earning
assets...................... 3,011 125 8.30 14,979 440 5.87
------- ------ ------- ------
Total interest-earning
assets............... 54,081 2,291 8.47 59,346 2,474 8.34
------ ------
Noninterest-earning assets....... 4,678 7,415
------- -------
Total assets........... $58,759 $66,761
======= =======
Interest-bearing assets:
Savings, NOW and money-market
accounts.................... $24,280 511 4.21 $31,938 656 4.11
Time deposits.................. 25,062 710 5.67 25,144 680 5.41
Borrowings..................... 2,306 66 5.72 -- -- --
------- ------ ------- ------
Total interest-bearing
liabilities.......... 51,648 1,287 4.98 57,082 1,336 4.68
------ ------
Demand Deposits.................. 2,520 2,463
Noninterest-bearing
liabilities.................... 1,794 3,568
Stockholders' equity............. 2,797 3,648
------- -------
Total liabilities and
stockholders'
equity............... $58,759 $66,761
======= =======
Net interest income.............. $1,004 $1,138
====== ======
Interest rate spread............. 3.49 3.66
Net interest margin.............. 3.71 3.84
Ratio of average interest-earning
assets to average
interest-bearing liabilities... 1.05 1.04
</TABLE>
88
<PAGE> 98
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
AVERAGE INTEREST AND AVERAGE AVERAGE INTEREST AND AVERAGE
BALANCE DIVIDENDS YIELD/RATE BALANCE DIVIDENDS YIELD/RATE
------- ------------ ---------- ------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.......................... $44,639 $3,884 8.70% $59,687 $5,187 8.69%
Other interest-earning
assets...................... 12,531 770 6.14 9,079 644 7.09
------- ------ ------- ------
Total interest-earning
assets............... 57,170 4,654 8.14 68,766 5,831 8.48
------ ------
Noninterest-earning assets....... 6,812 7,371
------- -------
Total assets........... $63,982 $76,137
======= =======
Interest-bearing assets:
Savings, NOW and money-market
accounts.................... $32,150 1,235 3.84 $41,202 1,869 4.54
Time deposits.................. 25,644 1,417 5.53 26,612 1,482 5.57
Borrowings..................... -- -- -- 291 18 6.19
------- ------ ------- ------
Total interest-bearing
liabilities.......... 57,794 2,652 4.59 68,105 3,369 4.95
------ ------
Demand Deposits.................. 2,309 2,781
Noninterest-bearing
liabilities.................... 647 1,376
Stockholders' equity............. 3,232 3,875
------- -------
Total liabilities and
stockholders'
equity............... $63,982 $76,137
======= =======
Net interest income.... $2,002 $2,462
====== ======
Interest rate spread............. 3.55 3.53
Net interest margin.............. 3.50 3.58
Ratio of average interest-earning
assets to average
interest-bearing liabilities... 0.99 1.01
</TABLE>
89
<PAGE> 99
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in
interest income and interest expense of Lochaven for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (change
in rate multiplied by prior volume), (2) changes in volume (change in volume
multiplied by prior rate) and (3) changes in rate-volume (change in rate
multiplied by change in volume).
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 V. 1997
INCREASE (DECREASE) DUE TO
----------------------------------------
RATE VOLUME RATE/VOLUME TOTAL
------ ------- ------------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest earning assets
Loans.................................................... $(153) $ 308 $ (23) $ 132
Other interest-earning assets............................ 181 (352) (144) (315)
----- ----- ----- -----
Total............................................ 28 (44) (167) (183)
----- ----- ----- -----
Interest-bearing liabilities
Savings, NOW & money-market accounts..................... 16 (157) (4) (145)
Time Deposits............................................ 33 (2) (1) 30
Borrowings............................................... -- -- 66 66
----- ----- ----- -----
Total............................................ 49 (159) 61 (49)
----- ----- ----- -----
Net change in net interest income.......................... $ (21) $ 115 $(228) $(134)
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 V. 1996
INCREASE (DECREASE) DUE TO
---------------------------------------
RATE VOLUME RATE/VOLUME TOTAL
----- ------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest earning assets:
Loans................................................. $ 6 $(1,208) $ (1) $(1,303)
Other interest-earning assets......................... (86) 245 (33) 126
----- ------- ---- -------
Total......................................... (80) (1,063) (34) (1,177)
----- ------- ---- -------
Interest-bearing liabilities:
Savings, NOW & money-market accounts.................. (286) (411) 63 (634)
Time Deposits......................................... (12) (54) 1 (65)
Borrowing............................................. -- -- (18) (18)
----- ------- ---- -------
Total......................................... (298) (465) 46 717
----- ------- ---- -------
Net change in net interest income....................... $ 218 $ (598) $(80) $ (460)
===== ======= ==== =======
</TABLE>
90
<PAGE> 100
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 V. 1995
INCREASE (DECREASE) DUE TO
------------------------------------
RATE VOLUME RATE/VOLUME TOTAL
----- ------ ----------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest earning assets:
Loans.................................................... $(402) $(222) $ 16 $(608)
Other interest-earning assets............................ (33) 339 (31) 275
----- ----- ----- -----
Total............................................ (435) 117 (15) (333)
----- ----- ----- -----
Interest-bearing liabilities
Savings, NOW & money-market accounts..................... (207) 327 (37) 83
Time Deposits............................................ 12 42 -- 54
Borrowings............................................... 41 (166) 36 (171)
----- ----- ----- -----
Total............................................ (236) (203) (1) (34)
----- ----- ----- -----
Net change in net interest income.......................... $(199) $ (86) $ (14) $(299)
===== ===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
A federally-chartered savings and loan association is required to maintain
an average liquidity reserve of at least 4.0% of its total transaction accounts.
The liquidity reserve may consist of cash on hand, cash on demand with other
correspondent banks and other investments and short-term marketable securities
as determined by the rules of the Federal Reserve Bank, such as federal funds
sold and United States securities guaranteed by the United States. As of June
30, 1998 and December 31, 1997, Lochaven had liquidity of approximately $2.5
million and $6.1 million respectively, or approximately 4.8% and 11.3% of total
deposits, respectively.
During the six months ended June 30, 1998, Lochaven's primary source of
cash was from the sale of loans as part of mortgage banking and an increase in
other borrowings. Cash was used during this period to fund net loan
disbursements of $80.0 million and cover deposit outflow of $4.6 million. This
resulted in a net decrease in cash and cash equivalents of $4.4 million from
December 31, 1997 to June 30, 1998. At June 30, 1998, Lochaven had approved
commitments to fund $3.6 million in loans. It is expected that these commitments
will be funded from the sale of loans held for sale.
During the year ended December 31, 1997, Lochaven's primary source of cash
was from the sale of loans as a result of its mortgage banking operations. Cash
was used during this period to fund net loan disbursements of $178.9 million and
cover deposit outflow of $11.7 million. This resulted in a net decrease in cash
and cash equivalents of $7.9 million from December 31, 1996 to December 31,
1997. At December 31, 1997, Lochaven had approved commitments to fund $12.5
million in loans. It is expected that these commitments will be funded from the
sale of loans held for sale.
INVESTMENT ACTIVITIES
At June 30, 1998 and December 31, 1997, Lochaven held no investment
securities. While Lochaven does securitize loans for sale, these securities are
sold simultaneously with their formation.
REGULATORY CAPITAL REQUIREMENTS
Lochaven is subject to various regulatory capital requirement administered
by various regulatory authorities, as well as the provisions of the Supervisory
Agreement with OTS (as defined). 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 Lochaven's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Lochaven must meet specific
capital guidelines that involve quantitative measures of Lochaven's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. Lochaven's
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<PAGE> 101
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 Lochaven to maintain minimum amounts (set forth in the table below) of
total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined).
During 1995, the Board of Directors of Lochaven signed a Supervisory
Agreement with the OTS which provides that Lochaven is restricted from taking
the following action without prior OTS approval: (i) increasing its asset size
(as reported on Lochaven's quarterly thrift financial report) during a calendar
quarter in excess of the amount of interest credited on deposit liabilities
during that quarter; (ii) modifying any employment agreement with any senior
officer or director; (iii) entering into any contract for goods or services
outside the normal operations of its business; and (iv) making any capital
distributions. In addition, Lochaven was required to reduce its level of
classified assets to a specified level of regulatory capital and to maintain
sufficient regulatory capital to meet the prompt corrective action requirements
of a well capitalized institution. As set forth in the table below, Lochaven's
capital levels at December 31, 1997 did not meet the prompt corrective action
requirements for a well capitalized institution. In addition, Lochaven was not
in compliance with the requirement to maintain a level of classified assets of
less than 75.0% of regulatory capital. In response to these instances of
noncompliance with the Supervisory Agreement, Lochaven filed a capital plan and
operating budget with OTS which set forth management's proposed actions to
rectify the deficiencies. On April 23, 1998, the OTS notified Lochaven that it
considered the pending merger with Bancshares acceptable compliance with the
requirement of the Supervisory Agreement for plans and strategies for improving
Lochaven's capital position. In addition, pending the closing of the Merger, the
OTS lowered the minimum capital requirements set forth in the Supervisory
Agreement, such that Lochaven is required to maintain regulatory capital equal
to the adequately capitalized, versus well capitalized, prompt corrective action
capital standards.
Management believes, as of June 30, 1998, that Lochaven is substantially in
compliance with the provisions of the Supervisory Agreement and meets all
capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from OTS categorized
Lochaven as adequately capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately capitalized, Lochaven must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the following table. There are no conditions or events since
that notification that management believes have changed Lochaven's category.
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<PAGE> 102
Lochaven's actual capital amounts and ratios are presented in the following
table (Dollars in thousands).
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- --------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
AT JUNE 30, 1998:
Tangible capital, and ratio to adjusted total
assets......................................... $2,738 4.63% $ 888 1.50% $ -- --%
Tier 1 (core) capital, and ratio to adjusted
total assets................................... 2,738 4.63 1,776 3.00 2,960 5.00
Tier 1 capital, and ratio to risk-weighted
assets......................................... 2,738 7.04 1,556 4.00 2,334 6.00
Total risk-based capital, and ratio to
risk-weighted assets.................. 3,228 8.30 3,112 8.00 3,890 10.00
AT DECEMBER 31, 1997
Tangible capital, and ratio to adjusted total
assets......................................... 2,628 4.53 871 1.50 -- --
Tier 1 (core) capital, and ratio to adjusted
total assets................................... 2,628 4.53 1,742 3.00 2,903 5.00
Tier 1 capital, and ratio to risk-weighted
assets......................................... 2,628 7.25 1,450 4.00 2,175 6.00
Total risk-based capital, and ratio to
risk-weighted assets.................. 3,086 8.51 2,900 8.00 3,625 10.00
AT DECEMBER 31, 1996
Tangible capital, and ratio to adjusted total
assets......................................... 3,685 5.12 1,080 1.50 -- --
Tier 1 (core) capital, and ratio to adjusted
total assets................................... 3,685 5.12 2,161 3.00 3,601 5.00
Tier 1 capital, and ratio to risk-weighted
assets......................................... 3,685 11.42 1,290 4.00 1,935 6.00
Total risk-based capital, and ratio to
risk-weighted assets.................. 4,090 12.68 2,580 8.00 3,224 10.00
</TABLE>
ASSET AND LIABILITY MANAGEMENT
As part of its asset and liability management, Lochaven has emphasized
establishing and implementing internal asset-liability processes, as well as
communications and control procedures to aid in managing Lochaven's earnings.
Management believes that these processes and procedures provide Lochaven with
better capital planning, asset mix and volume controls, loan-pricing guidelines,
and deposit interest-rate guidelines which should result in tighter controls and
less exposure to interest rate risk.
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 interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period.
The gap ratio is computed by dividing rate-sensitive assets by rate-sensitive
liabilities. A gap ratio of 1.0% represents perfect matching. A gap is
considered positive when the amount of interest-rate sensitive assets exceeds
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would adversely
affect net interest income, while a positive gap would result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would result in an increase in net interest income, while a positive gap would
adversely affect net interest income.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the results of operations. Lochaven's
management continues to monitor asset and liability management policies to
better match the maturities and repricing terms of its interest-earning assets
and interest-bearing liabilities. Such policies have consisted primarily of
selling loans originated and maintaining a stable core deposit base.
Lochaven also seeks to maintain a large stable core deposit base by
providing quality service to its customers without significantly increasing its
cost of funds. The success of Lochaven's deposit strategy is demonstrated by the
stability of its core deposit accounts, which totaled $23.8 million and $28.9
million representing 47.9% and 53.2% of total deposits at June 30, 1998 and
December 31, 1997 respectively.
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<PAGE> 103
The following table sets forth certain information relating to Lochaven's
interest-earning assets and interest-bearing liabilities at June 30, 1998 and
December 31, 1997 that are estimated to mature or are scheduled to reprice
within the period shown.
<TABLE>
<CAPTION>
ONE MORE
YEAR THAN ONE MORE
OR YEAR TO THAN
LESS FIVE YEARS FIVE YEARS TOTAL
------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AT JUNE 30, 1998:
Loans receivable........................................ $38,770 $ 5,197 $ 9,181 $53,148
Other rate-sensitive assets............................. 1,914 -- -- 1,914
------- ------- ---------- -------
Total rate-sensitive assets................... 40,684 5,197 9,181 55,062
------- ------- ---------- -------
Deposit accounts:
Savings, NOW and money-market accounts................ 23,837 -- -- 23,837
Time deposits......................................... 20,511 5,430 -- 25,941
Other borrowings...................................... 5,150 -- -- 5,150
------- ------- ---------- -------
Total rate-sensitive liabilities.............. 49,498 5,430 -- 54,928
------- ------- ---------- -------
Gap (repricing differences)............................. $(8,634) $ (233) $ 9,181 314
======= ======= ==========
Cumulative GAP.......................................... $(8,634) $(8,867) $ 314
======= ======= ==========
Cumulative Ratio of rate-sensitive assets to
rate-sensitive........................................ 0.82 0.84 1.00
======= ======= ==========
Cumulative GAP/total assets............................. (14.5)% (14.9)% 0.53%
======= ======= ==========
AT DECEMBER 31, 1997:
Loans receivable........................................ $37,826 $ 3,956 $ 8,747 $50,529
Other rate-sensitive assets............................. 6,516 -- -- 6,516
------- ------- ---------- -------
Total rate-sensitive assets................... 44,342 3,956 8,747 57,045
------- ------- ---------- -------
Deposit accounts:
Savings, NOW and money-market accounts................ 28,893 -- -- 28,893
Time deposits......................................... 19,538 5,920 -- 25,458
------- ------- ---------- -------
Total rate-sensitive liabilities.............. 48,431 5,920 -- 54,351
------- ------- ---------- -------
Gap (repricing differences)............................. $(4,089) $(1,964) $ 8,747 $ 2,694
======= ======= ========== =======
Cumulative GAP.......................................... $(4,089) $ 6,053 $ 2,694
======= ======= ==========
Cumulative Ratio of rate-sensitive assets to
rate-sensitive........................................ 0.92 0.89 1.05
======= ======= ==========
Cumulative GAP/total assets............................. (6.9)% 10.2% 4.5%
======= ======= ==========
</TABLE>
- ---------------
(1) In preparing the table above, adjustable-rate loans are included in the
period in which the interest rates are next scheduled to adjust rather than
in the period in which the loans mature. Fixed rate loans are scheduled,
including repayment, according to their contractual maturities.
(2) NOW, savings, and money-market accounts are regarded as readily accessible
withdrawable accounts. All other deposit accounts are scheduled according to
their respective maturity dates.
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<PAGE> 104
The following table reflects the contractual principal repayments by period
of Lochaven's loan portfolio as of June 30, 1998.
<TABLE>
<CAPTION>
COMMERCIAL RESIDENTIAL
COMMERCIAL REAL ESTATE REAL ESTATE CONSUMER
YEAR ENDED JUNE 30, LOANS LOANS LOANS LOANS TOTAL
- ------------------- ---------- ----------- ----------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999........................................ $ -- $ 195 $15,316 $19 $15,530
2000........................................ -- 713 578 -- 1,291
2001........................................ -- 235 570 -- 805
2002-2003................................... 39 442 1,235 -- 1,716
2004-2008................................... 102 1,421 3,841 -- 5,364
Thereafter.................................. -- 1,966 26,476 -- 28,442
---- ------ ------- --- -------
Total............................. $141 $4,972 $48,016 $19 $53,148
==== ====== ======= === =======
</TABLE>
Of the $37.6 million of loans due after June 30, 1999, 49.4% of such loans
have fixed interest rates and 50.6% have adjustable rates.
The following table displays loan origination by type of loan and principal
reductions during the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ ---------------------
1998 1997 1997 1996
------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Total loans originated....................... $95,941 $ 79,660 $ 171,708 $ 272,567
Principal reductions & proceeds from sales... (93,322) (94,369) (179,210) (279,790)
------- -------- --------- ---------
Increase (decrease) in gross loans......... $ 2,619 $(14,709) $ (7,502) $ (7,223)
======= ======== ========= =========
</TABLE>
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
95
<PAGE> 105
The following table sets forth information concerning Lochaven's loan
portfolio by type of loan at the dates indicated:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
---------------- --------------------------------------
1998 1997 1996
---------------- ----------------- -----------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HELD FOR INVESTMENT:
Mortgage loans:
Secured by one to four
family residences........ $20,864 72.12% $ 12,956 68.23% $ 7,335 59.41%
Secured by other
properties............... 4,972 17.18 4,524 23.83 3,880 31.43
Construction loans.......... 581 2.00 581 3.06 10 0.08
Land........................ 2,356 8.14 727 3.83 853 6.91
------- -------- --------
Total mortgage
loans............. 28,773 18,788 12,078
------- -------- --------
Nonmortgage loans:
Consumer.................... 11 0.04 37 0.19 28 0.23
Commercial.................. 141 0.49 147 0.78 157 1.27
Deposit account loans....... 8 0.03 16 0.08 83 0.67
------- -------- --------
Total nonmortgage
loans............. 160 200 268
------- -------- --------
Total loans......... 28,933 100.00 18,988 100.00 12,346 100.00
Allowance for loan losses..... (791) (871) (699)
Deferred loan fees............ (49) (26) (80)
Undisbursed portion of loans
in process.................. (298) (357) --
------- -------- --------
Loans receivable,
net............... $27,795 $ 17,734 $ 11,567
======= ======== ========
LOANS HELD FOR SALE:
Secured by one to four family
residences.................. $13,987 34.70 $ 23,698 53.89 $ 29,105 46.92
Construction loans............ 26,326 65.30 20,280 46.11 32,924 53.08
------- -------- --------
Total............... 40,313 100.00 43,978 100.00 62,029 100.00
Undisbursed portion of loans
in process.................. (15,757) (12,037) (16,301)
Unrealized losses on loans
held for sale............... (43) (43) (43)
------- -------- --------
Total loans held for
sale.............. $24,513 $ 31,898 $ 45,685
======= ======== ========
</TABLE>
Deposits are the major source of Lochaven's funds for lending and other
investment purposes. In addition to deposits, Lochaven derives funds from
interest payments, loan principal payments, loan sales, and funds provided from
operations. Scheduled loan repayments are a relatively stable source of funds,
while deposit inflows are significantly influenced by general interest rates and
market conditions. Lochaven may use borrowings on a short-term basis if
necessary to compensate for reductions in the availability of other sources of
funds. They also may be used on a long-term basis for general business purposes.
Deposits are attracted principally from within Lochaven's market area
through the offering of a broad variety of deposit instruments including
checking accounts, money-market accounts, regular savings accounts, term
certificate accounts (including "jumbo" certificates in denominations of
$100,000 or more) and retirement savings plans. As of June 30, 1998, jumbo
certificates accounted for approximately $9.8 million of Lochaven's deposits. Of
this amount, $8.0 million had a term of one year or less.
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<PAGE> 106
Maturity terms, service fees and withdrawal penalties are established by
Lochaven on a periodic basis. The determination of rates and terms is predicated
on funds acquisition and liquidity requirements, rates paid by competitors,
growth goals and federal regulations.
Regulations promulgated by the FDIC pursuant to the FDICIA placed
limitations on the ability of insured depository institutions to accept, renew,
or roll-over deposits by offering rates of interest which are significantly
higher than the prevailing rates of interest on deposits offered by other
insured depository institutions having the same type of charter in such
depository institution's normal market area. Under these regulations, "well
capitalized" depository institutions may accept, renew, or roll-over such
deposits over without restriction, "adequately capitalized" and
"undercapitalized" will be the same as the definitions adopted by the agencies
to implement the corrective action provisions of the FDICIA. As of June 30, 1998
and December 31, 1997, Lochaven met the definition of an "adequately
capitalized" depository institution.
The following table shows the distribution of, and certain information
relating to Lochaven deposit accounts by type:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
---------------------- -----------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
AMOUNT % OF DEPOSIT AMOUNT % OF DEPOSIT AMOUNT % OF DEPOSIT
------- ------------ ------- ------------ ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NOW and money market
accounts............... $22,896 46.00% $27,639 50.85% $39,801 60.29%
Savings accounts......... 941 1.89 1,254 2.31 1,010 1.53
------- ------- -------
Subtotal................. 23,838 47.89 28,893 53.16 40,811 61.82
------- ------- -------
Time deposits by rate:
3.00-3.99%............. 10 10 119
4.00-4.99%............. 1,585 1,166 3,328
5.00-5.99%............. 16,818 19,604 17,009
6.00-6.99%............. 4,831 2,927 2,950
7.00-7.99%............. 2,660 1,716 1,751
8.00-8.99%............. -- -- 20
9.00-9.99%............. 37 35 32
------- ------- -------
Total time deposits...... 25,941 52.11 25,458 46.84 25,209 38.18
------- ------ ------- ------ ------- ------
Total
deposits..... $49,778 100.00% $54,351 100.00% $66,020 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
Jumbo certificates ($100,000 and over) mature as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT DECEMBER 31, 1997
---------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Due three months or less............................. $3,221 $2,233
Due over three months to six months.................. 1,073 1,732
Due over six months to one year...................... 3,750 1,791
Due over one year.................................... 1,734 2,261
------ ------
$9,778 $8,017
====== ======
</TABLE>
The following table sets forth the net deposit flows of Lochaven during the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ ------------------
1998 1997 1997 1996
------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net decrease before interest credited........... $(5,793) $(11,023) $(14,321) $(4,609)
Net interest credited........................... 1,220 1,336 2,652 3,351
------- -------- -------- -------
Net deposit decrease.................. $(4,573) $ (9,687) $(11,669) $(1,258)
======= ======== ======== =======
</TABLE>
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<PAGE> 107
The following table shows the average amount of and the average rate paid
on each of the following interest-bearing deposit account categories during the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------- -------------------------------------
1998 1997 1997 1996
----------------- ----------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings, NOW & money-
market.................... $24,280 4.21% $31,938 4.11% $32,150 3.84% $41,202 4.54%
Time deposits............... 25,062 5.67 25,144 5.41 25,644 5.53 26,612 5.57
------- ---- ------- ---- ------- ---- ------- ----
Total
interest-bearing
deposits........ $49,342 4.95% $57,082 4.68% $57,794 4.59% $67,814 4.94%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30 1998 AND 1997
General
Net income for the six months ended June 30, 1998 was $70,000 or $0.12 per
share compared to a loss of $(107,000) or $(0.18) per share for the six months
ended June 30, 1997. The increase in net earnings for the 1998 period was due
primarily to a reduction in noninterest expenses related to the relocation and
consolidation of the mortgage operations administrative offices in August 1997,
as well as reductions in consulting costs and foreclosed real estate expenses.
Subsequent to the announcement of the proposed merger with Bancshares, Lochaven
closed two of its LPOs. The Miami office was closed in May 1998, and the
Melbourne office was closed in late June 1998. During 1997 and the first six
months of 1998, those offices were responsible for approximately 40.0% of
Lochaven's residential mortgage loan production. The closure of these offices is
expected to reduce Lochaven's loan production levels for the remainder of 1998,
and have a corresponding effect on Lochaven's future income from mortgage
production activities. In addition, in anticipation of the proposed merger with
Bancshares', Lochaven transferred its loan production operations for four LPOs
(in St. Petersburg, Sarasota, Orange City, and West Palm Beach, Florida) in
August, 1998. Those transfers were accomplished by Bancshares hiring the
personnel of those offices and assuming the lease and related obligations
related to those offices.
Interest Income and Expense
Interest income decreased by $183,000 from $2.5 million for the six months
ended June 30, 1997 to $2.3 million for the six months ended June 30, 1998. This
decrease in interest income was primarily caused by a decrease in average
interest-earning assets from $59.3 million during the 1997 period to $54.1
million during the comparable period in 1998. Interest expense decreased $49,000
for the six months ended June 30, 1998 as compared to the six months ended June
30, 1997. The primary cause for this decrease was a decrease in the average
interest-bearing liabilities from $57.1 million during the 1997 period to $51.6
million during the comparable period in 1998.
Provision for Loan Loss
Provision for loan losses is charged to earnings to bring total allowances
to a level deemed appropriate by management and is based on historical
experience, the volume and type of lending conducted by Lochaven, industry
standards, the amounts of nonperforming loans, general economic conditions,
particularly as they relate to Lochaven's market areas, and other factors
related to the collectibility of Lochaven's loan portfolio. Lochaven recorded a
provision for loan losses during the six months ended June 30, 1998 in the
amount of $49,000 compared to a provision recorded for the six months ended June
30, 1997 of $37,000. Management believes that the allowance for loan losses of
$871,000 was adequate at June 30, 1998.
Noninterest Income
Noninterest income increased $209,000, from $2.2 million for the six months
ended June 30, 1997 to $2.4 million for the six months ended June 30, 1998. The
primary reason for this increase was an increase in gain on sales of loans of
$170,000 during the 1998 period versus the comparable period in 1997.
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<PAGE> 108
Noninterest Expense
Total noninterest expense decreased by $223,000 from $3.5 million for the
six months ending June 30, 1997 to $3.3 million for the six months ending June
30, 1998. The decrease in noninterest expenses was primarily attributable to the
relocation and consolidation of the mortgage operations administrative offices
in August 1997 as well as reductions in consulting costs and foreclosed real
estate expenses in the 1998 period.
Income Taxes
The income tax provision increased from a credit of $66,000 for the six
months ended June 30, 1997 (an effective tax rate of 38.2%) to a provision of
$43,000 for the six months ended June 30, 1998 (an effective tax rate of 38.1%).
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
General
During the calendar year 1997, Lochaven made a transition from being a
wholesale lender to being a retail lender. A wholesale lender is a lender who
acquires loans from other parties such as mortgage brokers, mortgage bankers,
and other financial institutions. A retail lender is a lender who acquires
mortgages through their own offices staffed with their own personnel. Lochaven
found that a retail loan is more profitable than a wholesale loan and it has
more control over the quality of the loan. As a result of this transition, loan
volume decreased from $255.5 million in 1996 to $168.2 million in 1997. Net loss
for the year ended December 31, 1997 was $(940,000) or $(1.54) per share
compared to a net loss of $(348,000) or $(0.57) per share for the year ended
December 31, 1996. The increase in the net loss was primarily due to an increase
of $473,000 in provision for loan losses, a decrease of $461,000 in net interest
income, partially offset by an increase of $377,000 in noninterest income and a
decrease of $244,000 in noninterest expense.
Interest Income and Expense
Interest income decreased by $1.2 million from $5.8 million for the year
ended December 31, 1996 to $4.7 million for the year ended December 31, 1997.
This decrease was primarily due to the decrease in the average interest-earning
assets from $68.8 million during the period ended December 31, 1996 to $57.2
million during the period ended December 31, 1997.
Interest expense decreased $717,000 from $3.4 million for the period ending
December 31, 1996 to $2.7 million for the year ending December 31, 1997. This
was primarily caused by a decrease in the average interest-bearing liabilities
from $68.1 million during 1996 to $57.8 million during 1997.
Provision for Loan Loss
A provision for loan losses is charged to earnings to bring the total
allowances to a level deemed appropriate by management and is based on
historical experience, the volume and type of lending conducted by Lochaven,
industry standards, the amounts of nonperforming loans, general economic
conditions, particularly as they relate to Lochaven's market areas, and other
factors related to the collectibility of Lochaven's loan portfolio. Lochaven
recorded provision for loan losses in the amount of $518,000 for the year ended
December 31, 1997 as compared to $45,000 for the year ended December 31, 1996.
The provision for loan losses for 1997 included the establishment of a $300,000
reserve for potential losses on future repurchases of loans sold. During 1997,
Lochaven experienced an increase in expenses related to the repurchase of loans
previously sold to investors. In the fourth quarter of 1997, Lochaven
established the $300,000 reserve for estimated future costs on repurchased loans
through a charge to the provision for loan losses and an increase in the
allowance for loan losses.
Noninterest Income
Noninterest income increased $377,000 from the year ended December 31, 1996
to December 31, 1997. The increase was primarily due to an increase in gain on
sale of loans of $285,000.
99
<PAGE> 109
Noninterest Expense
Total noninterest expenses decreased $244,000, to $5.7 million for the year
ended December 31, 1997 from $6.0 million for the year ended December 31, 1996.
The decrease was primarily due to the one-time SAIF reapitalization assessment
of $405,000 during 1996, partially offset by an increase of $347,000 in salaries
and employee benefits.
Income Taxes
Lochaven's income tax expense for the year ended December 31, 1997 was
$69,000 (an effective tax rate of 7.97%) compared to a tax credit of $209,000
(an effective tax rate of 37.5%) for the year ended December 31, 1996. The
income tax provision for 1997 included the establishment of a deferred tax
valuation allowance of $339,000 during the fourth quarter of 1997. Realization
of deferred tax assets is dependent on the ability to generate sufficient future
taxable income during the period that temporary difference and carry forwards
are expected to be available to reduce taxable income. With respect to the
resulting net deferred tax asset of $270,000 at December 31, 1997, management
believes that Lochaven will have sufficient future income tax to recover this
asset.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
100
<PAGE> 110
DESCRIPTION OF BANCSHARES COMMON AND PREFERRED STOCK
BANCSHARES COMMON STOCK
Bancshares is authorized to issue 20,000,000 shares of Bancshares Common
Stock, of which 9,724,325 shares were issued and outstanding as of June 30,
1998. Each holder of Bancshares Common Stock has the same relative rights as
each other holder of Bancshares Common Stock, and each share of Bancshares
Common Stock is identical in all respects with each other share of Bancshares
Common Stock. Bancshares Common Stock does not constitute a deposit account of
any savings association or bank, is not guaranteed by either Bancshares or
Republic and is not insured by the FDIC.
Holders of shares of Bancshares Common Stock are entitled to dividends,
when, as and if declared by Bancshares Board of Directors, from funds legally
available therefor, but only after payment of all required dividends on any
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
Bancshares, the holders of Bancshares Common Stock are entitled to share ratably
in all assets remaining after payment of all liabilities, subject to the
liquidation preferences of any preferred stock that may be issued and
outstanding. Shares of Bancshares Common Stock are not redeemable and do not
have any conversion rights.
The holders of shares of Bancshares Common Stock do not have preemptive
rights to subscribe to a pro-rata share of any future offers of shares of
Bancshares Common Stock. Accordingly, shares may be offered to the public,
stockholders or to both at the discretion of the Bancshares Board of Directors.
In addition, holders do not have the right to cumulate their votes for the
election of directors. In certain circumstances, cumulative voting rights allow
the holders of less than a majority of the voting shares to elect one or more
directors when such holders would not be able to elect any directors if
cumulative voting were not allowed. The holders of Bancshares Common Stock have
voting powers on all matters requiring approval of stockholders, subject to the
voting rights of the holders of any preferred stock that may be issued and
outstanding. Each holder of Bancshares Common Stock is entitled to one vote for
each share held.
BANCSHARES PERPETUAL PREFERRED CONVERTIBLE STOCK
There are 100,000 authorized shares of Bancshares Preferred Stock, of which
75,000 shares were issued and outstanding as of June 30, 1998. The Bancshares
Board of Directors, without further action by the stockholders, may issue shares
of Bancshares Preferred Stock in one or more series and with such terms, at such
times and for such consideration as the Board may determine. The Board's
authority includes the determination or fixing of the following matters with
respect to the shares or any series thereof: (i) the number of shares and
designation thereof; (ii) rights as to dividends; (iii) voting rights, if any;
(iv) the terms upon which shares will be redeemable; (v) the amount payable on
the shares in the event of dissolution, liquidation or winding-up of the affairs
of Bancshares; (vi) the sinking fund provisions, if any, for the redemption or
purchase of the shares; and (vii) whether and upon what terms the shares will be
convertible. The Board of Directors may determine that any shares that are
issued would rank prior to shares of Bancshares Common Stock as to dividend and
liquidation rights. The Bancshares Preferred Stock is non-cumulative, perpetual
preferred stock and qualifies as Tier 1 Capital for bank regulatory purposes.
Holders of shares of Bancshares Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available for payment, non-cumulative cash dividends, payable quarterly in
arrears, at the rate of $3.52 per share per annum, which is equivalent to $0.88
per share per quarter. Declared dividends accrue from the date of issuance or
the most recent date on which dividends were payable and are payable quarterly
on the first day of March, June, September and December of each year (each, a
"Dividend Payment Date"). The rights of holders of Bancshares Preferred Stock to
receive dividends is non-cumulative. Accordingly, if the Board of Directors
fails to declare a dividend payable on a Dividend Payment Date, then holders
will have no right to receive a dividend in respect of the dividend period
ending on such Dividend Payment Date, and Bancshares will have no obligation to
pay the dividend for such period, whether or not dividends are declared payable
on any future Dividend Payment Dates.
No full dividends shall be declared and paid or set apart for payment on
Bancshares Preferred Stock of any series ranking, as to dividends, on a parity
with Bancshares Preferred Stock during any calendar quarter
101
<PAGE> 111
unless full dividends on Bancshares Preferred Stock for the dividend period
ending during such calendar quarter have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof is set apart
for such payment. Unless full dividends have been declared and paid or set apart
for payment for the Dividend Payment Date falling in the then-current dividend
period, no dividend or distribution may be declared, set aside or paid on any
shares of Bancshares Common Stock or on any series of preferred stock ranking,
as to dividends, junior to Bancshares Preferred Stock.
In the event of any liquidation, dissolution or winding up of Bancshares,
voluntary or involuntary, the holders of Bancshares Preferred Stock will be
entitled to receive out of the assets of Bancshares available for distribution
to stockholders, before any distribution of assets is made to the holders of
Bancshares Common Stock or any other shares of stock ranking junior to
Bancshares Preferred Stock as to such distribution, liquidating distributions in
the amount of $88.00 per share plus dividends declared but unpaid for the then-
current dividend period (without accumulation of unpaid dividends for prior
dividend periods) to the date fixed for such liquidation, dissolution or winding
up. After payment of the full amount of the liquidating distribution to which
they are entitled, the holders of Bancshares Preferred Stock will not be
entitled to any further participation in any distribution of assets. All
distributions made with respect to Bancshares Preferred Stock in connection with
such liquidation, dissolution or winding up of Bancshares shall be made pro rata
to the holders entitled thereto.
Bancshares Preferred Stock is redeemable, subject to any required bank
regulatory approvals, out of funds of Bancshares legally available therefor, at
the option of Bancshares for cash, in whole at any time or in part, from time to
time, at $96.80 per share, plus declared but unpaid dividends for the
then-current dividend period to the date fixed for redemption (without
accumulation of unpaid dividends for prior dividend periods) without interest.
In order to exercise the right of redemption, Bancshares must give 30 days prior
written notice to the holders, during which time period the holders may convert
Bancshares Preferred Stock into Bancshares Common Stock as described below.
Except as described below or otherwise required by the FBCA, the holders of
Bancshares Preferred Stock are entitled to vote on all matters submitted to a
vote of the holders of Bancshares Common Stock, voting together with the holders
of Bancshares Common Stock as one class. Each share of Bancshares Preferred
Stock is entitled to a number of votes equal to the number of shares of
Bancshares Common Stock into which such share could be converted on the record
date for determining the stockholders entitled to vote. Currently, each share of
Bancshares Preferred Stock is entitled to ten votes. Bancshares Preferred Stock
is entitled to vote as a separate class with respect to any proposal to (i)
alter or change any of the powers, preferences, privileges or rights of
Bancshares Preferred Stock, (ii) amend the provisions of the Bancshares Articles
relating to Bancshares Preferred Stock, (iii) create any new class or series of
stock having preferences prior to or being on a parity with the Bancshares
Preferred Stock as to dividends or assets, (iv) sell, lease, convey, exchange,
transfer or otherwise dispose of all or substantially all of the assets of
Bancshares, or (v) merge or consolidate with or into any other corporation
except into or with a wholly-owned subsidiary.
Each share of Bancshares Preferred Stock is convertible at the option of
the holder into ten shares of Bancshares Common Stock, subject to adjustment in
the event of a stock split, stock dividend or similar recapitalization.
LEGAL OPINIONS
The legality of Bancshares Common Stock to be issued in the Merger and
certain tax matters will be passed upon by the law firm of Holland & Knight LLP,
Washington, D.C. and Tampa, Florida. Certain legal matters relating to the
Merger are being passed upon for Lochaven by the law firm of Smith, Mackinnon,
Greeley, Bowdoin & Edwards, P.A., Orlando, Florida.
EXPERTS
The audited consolidated financial statements of Bancshares have been
audited by Arthur Andersen LLP, independent public accountants, for the period
indicated in their report thereon that is included in
102
<PAGE> 112
Bancshares' Annual Report on Form 10-K. The financial statements audited by
Arthur Andersen LLP, have been included herein in reliance on their report given
on their authority as experts in accounting and auditing.
The audited financial statements of Lochaven have been audited by Hacker,
Johnson, Cohen & Grieb PA, independent auditors, for the period indicated in
their report thereon that is included in Lochaven's Annual Report to
Stockholders. The financial statements audited by Hacker, Johnson, Cohen & Grieb
PA, have been included herein in reliance on their report given on their
authority as experts in accounting and auditing.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
103
<PAGE> 113
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BANCSHARES
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets at December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996, and 1995............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-7
Notes to Consolidated Financial Statements.................. F-9
LOCHAVEN
For the Year Ended December 31, 1997
Independent Auditors' Report................................ F-38
Consolidated Balance Sheets at December 31, 1997 and
1996...................................................... F-39
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996................................ F-40
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997 and 1996.................... F-41
Statements of Consolidated Cash Flows for the years ended
December 31, 1997 and 1996................................ F-42
Notes to Consolidated Financial Statements.................. F-43
For the Six Months Ended June 30, 1998
Condensed Balance Sheet at June 30, 1998 (unaudited)........ F-57
Condensed Statements of Operations for the three and six
months ended June 30, 1998 and 1997 (unaudited)........... F-58
Condensed Statements of Stockholders' Equity for the six
months ended June 30, 1998 (unaudited).................... F-59
Condensed Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited)........................ F-60
Notes to Unaudited Condensed Financial Statements........... F-61
</TABLE>
All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in the
financial statements and related notes.
F-1
<PAGE> 114
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Republic Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of Republic
Bancshares, Inc. (a Florida corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements of F.F.O. Financial Group, Inc.,
a company acquired during 1997 in a transaction accounted for as a corporate
reorganization, as discussed in Note 1. Such statements are included in the
consolidated financial statements of Republic Bancshares, Inc. and reflect total
assets and total revenues of 27% and 25%, respectively, of the related
consolidated totals. These statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to
amounts included for F.F.O. Financial Group, Inc., is based solely upon the
report of the other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Republic Bancshares, Inc. and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida
March 13, 1998
F-2
<PAGE> 115
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -DECEMBER 31, 1997 AND 1996
($ IN THOUSANDS, EXCEPT PAR VALUES)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 45,998 $ 34,109
Interest bearing deposits in banks.......................... 671 11,783
Federal funds sold.......................................... 33,000 8,000
Investment securities:
Available for sale........................................ 16,080 74,397
Trading................................................... -- 4,032
Mortgage-backed securities:
Held to maturity.......................................... -- 15,343
Available for sale........................................ 55,467 62,037
Trading................................................... 37,046 5,548
FHLB stock.................................................. 8,148 7,209
Loans held for sale......................................... 151,404 46,593
Loans, net of allowance for loan losses..................... 1,128,955 902,035
Premises and equipment, net................................. 33,303 25,039
Other real estate owned acquired through foreclosure, net... 6,997 8,162
Accrued interest receivable................................. 9,611 7,160
Goodwill and premium on deposits............................ 4,855 527
Other assets................................................ 20,870 12,383
---------- ----------
Total assets....................................... $1,552,405 $1,224,357
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits --
Noninterest-bearing checking............................ $ 93,843 $ 64,363
Interest checking....................................... 137,240 87,639
Money market............................................ 30,389 32,665
Savings................................................. 291,604 303,932
Time deposits........................................... 808,236 626,308
---------- ----------
Total deposits..................................... 1,361,312 1,114,907
---------- ----------
Securities sold under agreements to repurchase............ 19,654 15,372
FHLB advances............................................. 35,000 7,000
Subordinated debt......................................... -- 6,000
Other liabilities......................................... 12,158 6,479
---------- ----------
Total liabilities.................................. 1,428,124 1,149,758
---------- ----------
Company-obligated mandatorily redeemable capital securities
of subsidiary trust holding solely junior subordinated
debentures of the Company................................. 28,750 --
---------- ----------
Minority interest in F.F.O. Financial Group, Inc............ -- 6,421
---------- ----------
Stockholders' equity:
Perpetual preferred convertible stock ($20.00 par, 100,000
shares authorized, 75,000 shares issued and outstanding.
Liquidation preference $6,600 at December 31, 1997 and
1996.).................................................. 1,500 1,500
Common stock ($2.00 par, 20,000,000 shares authorized,
7,035,886 and 5,854,414 shares issued and outstanding at
December 31, 1997 and 1996, respectively)............... 14,072 11,708
Capital surplus........................................... 50,322 34,225
Retained earnings......................................... 29,155 20,847
Net unrealized gain (losses) on available-for-sale
securities, net of tax effect........................... 482 (102)
---------- ----------
Total stockholders' equity......................... 95,531 68,178
---------- ----------
Total liabilities and stockholders' equity......... $1,552,405 $1,224,357
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 116
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans............................... $ 97,810 $ 78,955 $ 67,746
Interest on investment securities........................ 2,155 2,097 3,171
Interest on mortgage-backed securities................... 5,252 5,375 2,869
Interest on trading securities........................... 59 -- --
Interest on federal funds sold........................... 2,447 1,714 3,117
Interest on other investments............................ 734 803 690
---------- ---------- ----------
Total interest income............................ 108,457 88,944 77,593
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits..................................... 52,311 44,136 39,822
Interest on FHLB advances................................ 1,169 365 163
Interest on subordinated debt............................ 392 5 --
Interest on other borrowings............................. 1,051 443 127
---------- ---------- ----------
Total interest expense........................... 54,923 44,949 40,112
---------- ---------- ----------
Net interest income.............................. 53,534 43,995 37,481
PROVISION FOR LOAN LOSSES.................................. 2,628 2,582 2,162
---------- ---------- ----------
Net interest income after provision for possible loan
losses................................................ 50,906 41,413 35,319
---------- ---------- ----------
NONINTEREST INCOME:
Income from mortgage banking activities.................. 15,159 852 --
Gain on sale of loans.................................... 1,491 144 210
Service charges and fees on deposits..................... 3,358 2,847 2,644
Loan fee income.......................................... 1,394 1,327 1,019
Gain on sale of ORE -- held for investment............... -- 1,207 --
Gain on sale of securities, net.......................... 1,308 261 322
Other operating income................................... 2,321 1,314 1,138
---------- ---------- ----------
Total noninterest income......................... $ 25,031 $ 7,952 $ 5,353
</TABLE>
F-4
<PAGE> 117
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
NONINTEREST EXPENSES:
Salaries and employee benefits........................... $ 27,253 $ 18,505 $ 15,294
Net occupancy expense.................................... 8,118 6,381 5,025
Data processing fees..................................... 2,605 2,119 1,716
FDIC and state assessments............................... 824 1,606 2,212
Other operating expense.................................. 18,684 8,218 6,716
---------- ---------- ----------
Total general and administrative expenses........ 57,484 36,829 30,963
Merger expenses.......................................... 1,144 -- --
SAIF special assessment.................................. -- 4,005 --
Provisions for losses on ORE............................. 530 111 240
ORE expense, net of ORE income........................... 273 (490) 662
Amortization of goodwill & premium on deposits........... 464 491 450
---------- ---------- ----------
Total noninterest expenses....................... 59,895 40,946 32,315
---------- ---------- ----------
Income before negative goodwill accretion, income taxes and
minority interest........................................ 16,042 8,419 8,357
Negative goodwill accretion................................ -- -- 1,578
Income tax provision....................................... (6,096) (3,035) (2,516)
Minority interest in income from subsidiary trust.......... (701) -- --
Minority interest in F.F.O................................. (674) (505) (503)
---------- ---------- ----------
NET INCOME....................................... $ 8,571 $ 4,879 $ 6,916
========== ========== ==========
PER SHARE DATA:
Net income per common and common equivalent
share-diluted......................................... $ 1.21 $ .74 $ 1.10
========== ========== ==========
Weighted average common and common equivalent shares
outstanding -- diluted................................ 7,301,499 6,626,604 6,261,368
========== ========== ==========
Net income per common share-basic........................ $ 1.40 $ .83 $ 1.26
========== ========== ==========
Weighted average common shares outstanding-basic........... 6,128,014 5,857,174 5,491,250
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 118
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NET UNREALIZED
PERPETUAL PREFERRED GAINS
CONVERTIBLE STOCK COMMON STOCK (LOSSES)
-------------------- ------------ ON AVAILABLE
SHARES SHARES CAPITAL RETAINED FOR SALE
ISSUED AMOUNT ISSUED AMOUNT SURPLUS EARNINGS SECURITIES TOTAL
-------- --------- ------------ ------- ------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994........ $75,000 $ 1,500 5,082,782 $10,166 $26,843 $ 9,577 $(549) $47,537
Net income........................ -- -- -- -- -- 6,918 -- 6,918
Net unrealized gains on
available-for-sale securities,
net of tax effect............... -- -- -- -- -- -- 651 651
Issuance of common stock.......... -- -- 800,000 1,600 7,537 -- -- 9,137
Exercise of stock options......... -- -- 3,170 6 23 -- -- 29
Dividends on preferred stock...... -- (263) -- (263)
Net change in minority interest... -- -- (23,200) (47) (129) -- -- (176)
------- -------- --------- ------- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1995........ 75,000 1,500 5,862,752 11,725 34,274 16,232 102 63,833
Net income........................ -- -- -- -- -- 4,879 -- 4,879
Net unrealized loss on
available-for-sale securities,
net of tax effect............... -- -- -- -- -- -- (204) (204)
Dividends on preferred stock...... -- -- -- -- -- (264) -- (264)
Net change in minority interest... -- -- (8,338) (17) (49) -- -- (66)
------- -------- --------- ------- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1996........ 75,000 1,500 5,854,414 11,708 34,225 20,847 (102) 68,178
Net income........................ -- -- -- -- -- 8,571 -- 8,571
Net unrealized gains on
available-for-sale securities,
net of tax effect............... -- -- -- -- -- -- 584 584
Exercise of stock options......... -- -- 21,300 43 197 -- -- 240
Net change in minority interest... -- -- (2,537) (5) (487) -- -- (492)
Issuance of common stock in merger
transaction..................... -- -- 826,709 1,654 11,211 -- -- 12,865
Conversion of subordinated
debentures...................... -- -- 336,000 672 5,176 -- -- 5,848
Dividends on preferred stock...... -- -- -- -- -- (263) -- (263)
------- -------- --------- ------- ------- ------- ----- -------
BALANCE, DECEMBER 31, 1997........ 75,000 $ 1,500 7,035,886 $14,072 $50,322 $29,155 $ 482 $95,531
======= ======== ========= ======= ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 119
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
1997 1996 1995
--------- ------------ ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................. $ 8,571 $ 4,879 $ 6,916
Reconciliation of net income to net cash (used in) provided
by operating activities:
Provision for loan and ORE losses................ 3,235 2,693 2,402
Depreciation and amortization, net............... 5,297 (1,165) 592
Amortization of premium (accretion) of fair
value, net..................................... 918 712 (1,111)
Gain on sale of loans............................ (16,500) (996) (210)
Gain on sale of investment securities............ (724) (457) (93)
Gain on sale of other real estate owned.......... (27) (1,810) (39)
Capitalization of mortgage servicing............. (6,826) (1,741) --
Loss (gain) on disposal of premises and
equipment...................................... 14 (2) --
Net decrease (increase) in deferred tax
benefit........................................ (3,768) (755) (12)
Net (increase) decrease in other assets.......... (4,339) 1,803 (4,027)
Net increase (decrease) in other liabilities..... 4,554 (1,248) 1,800
--------- --------- ---------
Net cash (used in) provided by operating
activities..................................... (11,430) 1,919 6,218
--------- --------- ---------
INVESTING ACTIVITIES:
Proceeds from excess of deposit liabilities assumed on
assets acquired, net of cash acquired............... 7,223 -- --
Proceeds from sales and maturities of:
Investment securities held to maturity........... -- 7,000 36,526
Investment securities available for sale......... 126,544 109,218 11,727
Mortgage-backed securities held to maturity...... -- 15,455 --
Mortgage-backed securities available for sale.... 50,627 6,393 9,732
Mortgage-backed securities in trading
portfolio...................................... 2,764 13,496 --
Purchase of investment securities available for
sale........................................... (66,771) (156,036) (68,187)
Purchase of mortgage backed securities in trading
portfolio...................................... (4,468) (20,105) (16,106)
Principal repayment on mortgage backed
securities..................................... 9,809 25,606 3,073
Purchase of FHLB stock........................... (131) (1,155) (2,248)
Net increase in loans............................ (324,605) (118,650) (203,262)
Purchase of premises and equipment............... (9,993) (2,379) (6,783)
Proceeds from sale of other real estate owned.... 4,739 10,271 10,623
Investments in other real estate owned (net)..... 2,276 101 315
--------- --------- ---------
Net cash used in investing activities............ $(201,986) $(110,785) $(224,590)
--------- --------- ---------
</TABLE>
F-7
<PAGE> 120
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
1997 1996 1995
--------- ------------ ---------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits......................... $ 177,540 $ 122,866 $ 197,316
Net increase in repurchase agreements............ 4,282 12,301 991
Proceeds from issuance of subordinated debt...... -- 6,000 --
Net change of minority interest in FFO........... 645 -- --
Proceeds from issuance of common stock........... 240 -- 9,166
Proceeds from issuance of minority interest in
trust subsidiary............................... 28,750 -- --
Proceeds from FHLB advances...................... 28,000 (23,000) 8,600
Dividends on perpetual preferred stock........... (264) (264) (263)
--------- --------- ---------
Net cash provided by financing activities........ 239,193 117,903 215,810
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................................... 25,777 9,037 (2,562)
CASH AND CASH EQUIVALENTS, beginning of year............... 53,892 44,855 47,417
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year..................... $ 79,669 $ 53,892 $ 44,855
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for interest........... $ 47,342 $ 45,080 $ 39,376
Cash paid during the year for income taxes....... 5,674 4,010 2,066
Noncash transactions: Conversion of subordinated
debt........................................... 5,888 -- --
Stock issued for minority interest in FFO........ 5,307 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 121
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS
BASIS OF PRESENTATION AND ORGANIZATION
The consolidated financial statements of Republic Bancshares, Inc. (the
Company) include the accounts of the Company, RBI Capital Trust I, Republic
Insurance Agency, Inc., and Republic Bank (the "Bank") and the Bank's
wholly-owned subsidiaries, RBREO, Inc., Tampa Bay Equities, Inc., and VQH
Development, Inc. restated for the acquisition of FFO Financial Group, Inc. as
discussed below. All significant intercompany accounts and transactions have
been eliminated. On November 21, 1995, the Bank's Board of Directors approved
for shareholder consideration an Amended and Restated Plan of Share Exchange and
Reorganization (the "Reorganization") under which the Bank became a wholly-owned
subsidiary of Company. On the effective date and time of the Reorganization, all
holders of shares of the Bank's Common and Preferred Stock -- at the November
30, 1995, record date -- received one share of Company Common Stock for each
share of the Bank's Common Stock held and one share of Company Preferred Stock
for each share of the Bank's Preferred Stock held. Holders of outstanding
options to purchase or acquire the Bank's Common Stock received options to
purchase an equal number of shares of Company Common Stock. All necessary
governmental and shareholder approvals for the Reorganization were received. The
Company's primary source of income is from its banking subsidiary which operates
46 branches throughout west central Florida. The Bank's primary source of
revenue is derived from net interest income on loans and investments and income
from mortgage banking activities.
NEGATIVE GOODWILL
On May 28, 1993 (the "Purchase Date"), 99 percent of the Company's
outstanding common stock was acquired for $4,450,000 (the "Purchase Price").
Also, on May 28, 1993, 583,334 additional shares of common stock were issued for
$3,500,000. The acquisition was accounted for by the purchase method of
accounting. Assets and liabilities were adjusted based upon their fair value as
of the Purchase Date. The excess of the adjusted net book value over the
Purchase Price was recorded as a reduction of the non current assets, to the
extent available. The remaining difference was recorded as excess of fair value
over purchase price ("negative goodwill").
The negative goodwill was accreted into income on a straight-line basis
over 26 months beginning May 28, 1993, and ending July 31, 1995, which was based
on the estimated life of the loans, investments and deposits acquired. The
premiums on loans and investment securities and the discount on demand and other
time deposits were amortized into income on a straight-line basis over periods
based on the estimated life of the related loans, securities or deposits ranging
from 12 to 30 months.
BUSINESS COMBINATIONS
Firstate Financial, F.A.
On April 18, 1997, the Company acquired Firstate Financial, F.A.
("Firstate"), a thrift institution headquartered in Orlando, Florida, for a cash
purchase of $5.5 million. At April 18, 1997, Firstate had total assets of $71.1
million, total deposits of $67.9 million and operated a branch in each of Orange
and Seminole counties. The acquisition was accounted for using the purchase
accounting rules which do not require prior period restatement. The amount of
goodwill recorded was $130,000. Accordingly, the consolidated results of
operations only reflect activity subsequent to the acquisition data.
F-9
<PAGE> 122
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F.F.O. Financial Group, Inc.
On September 19, 1997, F.F.O. Financial Group, Inc. ("FFO"), St. Cloud,
Florida, the parent company for First Federal Savings and Loan Association of
Osceola County ("First Federal"), was merged into the Company in a stock
transaction (the "FFO Merger"). William R. Hough, one of the Company's
controlling stockholders, also owned a majority interest in FFO.
The FFO Merger was accounted for as a corporate reorganization in which the
controlling stockholder's interest in FFO was combined at historical cost in a
manner similar to a pooling of interests while the minority interest in FFO was
combined using purchase accounting rules. The excess of the purchase price of
the minority interest over the market value was first assigned to individual
assets and liabilities with the remaining $4.5 million considered unidentifiable
goodwill, which will be amortized over 10 years. The Company issued 1,668,370
shares of common stock to the controlling interest and 826,709 shares of common
stock to the minority interest.
The pooling of interests method of accounting, which is used to account for
the controlling interest in the FFO merger, requires the restatement of
financial results for all prior periods presented. The Company's previously
reported components of consolidated income and the amounts reflected in the
accompanying consolidated statements of operations for the two years ended
December 31, 1996 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
Net Interest Income:
As previously reported:
Republic Bancshares, Inc.................................. $34,021 $27,862
F.F.O. Financial Group, Inc............................... 9,974 9,619
------- -------
Combined as restated...................................... $43,995 $37,481
======= =======
Net Income:
As previously reported:
Republic Bancshares, Inc.................................. $ 3,784 $ 5,773
F.F.O. Financial Group, Inc............................... 1,600 1,646
Minority interest decrease................................ (505) (503)
------- -------
Combined as restated...................................... $ 4,879 $ 6,916
======= =======
</TABLE>
RBI Capital Trust I ("RBI Capital")
RBI Capital is a wholly-owned subsidiary of the Company which was formed on
May 29, 1997, to issue Cumulative Trust Preferred Securities (the "Preferred
Security or Securities") to the public. The Preferred Securities, issued through
an underwritten public offering on July 28, 1997, were sold at their $10 par
value. RBI Capital issued 2,875,000 shares of the Preferred Securities bearing a
dividend rate of 9.10% for net proceeds of $27.4 million, after deducting
underwriting commissions and other costs. RBI Capital invested the proceeds in
junior subordinated debt of the Company which also has an interest rate of
9.10%. The Company used the proceeds from the junior subordinated debt to
increase the equity capital of the Bank. Interest on the junior subordinated
debentures and distributions on the Preferred Securities are payable quarterly
in arrears, with the first payment having been paid on September 30, 1997.
Distribution on the Preferred Securities are cumulative and based upon the
liquidation value of $10 per Preferred Security. The Company has the right, at
any time, so long as no event of default has occurred and is continuing, to
defer payments of interest on the Junior Subordinated Debentures, which will
require deferral of distribution on the preferred securities, for a period not
exceeding 20 consecutive quarters, provided, that such deferral may not extend
beyond the stated
F-10
<PAGE> 123
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maturity of the Junior Subordinated Debentures. If payments are deferred, the
Company will not be permitted to declare cash dividends. The Preferred
Securities are subject to mandatory redemption, in whole or in part, upon
repayment of the Junior Subordinated Debentures at maturity or their earlier
redemption. The Company has the right to redeem the Junior Subordinated
Debentures in whole (but not in part) within 180 days following certain events
whether occurring before or after June 30, 2002. The exercise of such right is
subject to the Company having received regulatory approval to do so if then
required under applicable capital guidelines or regulatory policies. In addition
to the above right, the Company has the right, at any time, to shorten the
maturity of the Junior Subordinated Debentures to a date not earlier than June
30, 2002. Exercise of this right is also subject to the Company having received
regulatory approval to do so if then required under applicable capital
guidelines or regulatory policies.
The Company has reported its obligation, with respect to the holders of the
Preferred Securities, as a separate line item on its audited consolidated
balance sheet under the caption "Company-obligated mandatorily redeemable
capital securities of subsidiary trust holding solely junior subordinated
debentures of the Company". The related dividend expense, net of the tax
benefit, is reported as a separate line item on the statement of operations
under the caption "minority interest in income from subsidiary trust."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES, APPRAISALS AND EVALUATIONS
The financial statements include, in conformity with generally accepted
accounting principles, estimates, appraisals and evaluations of loans, other
real estate owned and other assets and liabilities, and disclosure of contingent
assets and liabilities. Changes in such estimates, appraisals and evaluations
might be required because of rapidly changing economic conditions, changing
economic prospects of borrowers and other factors. Actual results may differ
from those estimates.
INVESTMENT SECURITIES
Securities that the Company has both the positive intent and ability to
hold to maturity are classified as Held to Maturity and are carried at
historical cost, adjusted for amortization of premiums and accretion of
discounts. Securities Available for Sale, which are those securities that may be
sold prior to maturity as part of asset/liability management or in response to
other factors, are carried at fair value with any valuation adjustment reported
in a separate component of stockholders' equity, net of tax effect.
Investments identified as trading securities, include mortgage backed
securities resulting from the securitization of residential and High LTV loans,
the resulting residual interest in cash flows from those securitizations, where
applicable, and the excess spread on mortgage servicing rights. Trading
securities are carried at market value with any unrealized gains or losses
included in the statement of operations under "Gain on sale of securities, net."
Interest and dividends on investment securities and amortization of
premiums and accretion of discounts are reported in interest on investment
securities. Gains (losses) realized on sales of investment securities are
generally determined on the specific identification method and are reported as a
component of other noninterest income.
LOANS
Interest on commercial and real estate loans and substantially all
installment loans is recognized monthly on the loan balance outstanding. The
Company's policy is to discontinue accruing interest on loans 90 days or more
delinquent and restructured loans that have not yet demonstrated a sufficient
payment history, which, in the opinion of management, may be doubtful as to the
collection of interest or principal. These loans are
F-11
<PAGE> 124
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
designated as "non-accrual" and any accrued but unpaid interest previously
recorded is reversed against current period interest revenue.
Loan origination and commitment fees net of certain costs are deferred, and
the amount is amortized as an adjustment to the related loan's yield, generally
over the contractual life of the loan. Unearned discounts and premiums on loans
purchased are deferred and amortized as an adjustment to interest income on a
basis that approximates level rates of return over the terms of the loan.
HEDGING CONTRACTS AND LOANS HELD FOR SALE
The Company manages its interest rate market risk on the loans held for
sale and its estimated future commitments to originate and close mortgage loans
for borrowers at fixed prices ("Locked Loans") through hedging techniques which
include listed options and fixed price forward delivery commitments ("Forward
Commitments") to sell mortgage-backed securities or specific whole loans to
investors on a mandatory or best efforts basis. The Company records the
inventory of loans held for sale at the lower of cost or market on an aggregate
basis after considering any market value changes in the loans held for sale,
Locked Loans, and Forward Commitments.
MORTGAGE SERVICING RIGHTS
On July 1, 1995, SFAS No. 122, "Accounting for Mortgage Servicing Rights,
an amendment of FASB Statement No. 65," was adopted. SFAS No. 122 permits an
allocation of a portion of the cost of loan origination to the rights to service
mortgage loans. Approximately $5.5 million, $1.9 million, and $117,000 was
capitalized relating to mortgage servicing rights ("MSRs") during 1997, 1996 and
1995, respectively. Also included in the balance of mortgage servicing rights is
approximately $225,000 of rights acquired through the Firstate acquisition. As
of December 31, 1997, 1996 and 1995, the unamortized portion of these MSRs were
$7.1 million, $2.0 million, and $113,000, respectively. For purposes of
measuring impairment, MSRs are stratified based on the loan type, interest rate
and maturity of the underlying loans.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT
OF LIABILITIES
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," which was effective for
the Company's fiscal year beginning January 1, 1997. SFAS 125 provides standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. In addition to providing further guidance related
to the recording of mortgage servicing rights, SFAS 125 required that the
Company classify loans held for sale which are securitized and retained in the
Company's portfolio, residual interest retained and excess spread interest only
strip receivable as trading assets. As a result, the Company is required to
carry these assets at their current market value as of the balance sheet date
with the resulting valuation adjustment recorded in the statement of operations.
The Company uses an automated portfolio analysis system to value its
mortgage servicing rights at the individual loan level. The model uses current
market assumptions to determine default probabilities and prepayment speed
assumptions based upon current factors to include interest rate, age, loan type,
geography and demographic factors. The automated foreclosure probabilities also
take into consideration the regional, demographic and behavioral
characteristics. These factors are applied to each loan based on its own
individual characteristics. The following table shows the amount of servicing
assets which were capitalized and
F-12
<PAGE> 125
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized, and the fair value of those assets as of December 31, for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Balance, beginning of year.................................. $1,968 $ 113 $ --
Rights acquired through Firstate acquisition................ 225 -- --
Capitalized servicing assets................................ 5,504 1,923 117
Amortization................................................ (572) (68) (4)
------ ------ ----
Balance, end of year........................................ $7,125 $1,968 $113
====== ====== ====
Fair Value of assets........................................ $7,505 $2,289 $113
====== ====== ====
</TABLE>
During December, 1997, the Company completed a securitization of $60
million of High LTV home equity loans. The assets were sold to Republic Bank
Home Loan Owner Trust 1997-1 and the trust then issued $57.6 million of asset
backed notes and certificates. As part of that transaction the Company recorded
$5.7 million of residual interest on these securities. The calculation used to
determine the value of the residual interest assumed a 14% discount rate, a
default rate of 2.25%, and a prepayment rate ranging from 12% through 15%.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses provides for risks of losses inherent in the
credit extension process. Losses and recoveries are either charged or credited
to the allowance. The Company's allowance is an amount that management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay.
The evaluations are periodically reviewed and adjustments are recorded in
the period in which changes become known.
ACCOUNTING FOR IMPAIRMENT OF LOANS
The Company's measurement of impaired loans includes those loans which are
nonperforming and have been placed on non-accrual status and those loans which
are performing according to all contractual terms of the loan agreement but may
have substantive indication of potential credit weakness. As of December 31,
1997, $22.8 million of loans were considered impaired by the Company. Of this
amount, $2.7 million were carried on a non-accrual basis. Approximately 12.6% of
these loans were measured for impairment using the fair value of collateral,
while the remaining 87.4% were measured using the present value of the expected
future cash flows discounted at the loan's effective rate. As a result of these
measurements, approximately $16.0 million of these loans required valuation
allowances, totaling $2.8 million, which are included within the overall
allowance for loan losses at December 31, 1997. Residential mortgages and
consumer loans and leases outside the scope of SFAS 114 are collectively
evaluated for impairment. Average impaired loans during 1997 were approximately
$25.2 million and the amount of cash basis interest income recognized on these
loans was $2.1 million.
As of December 31, 1996, $19.9 million of loans were considered impaired by
the Company. Of this amount, $11.8 million were carried on a non-accrual basis.
Approximately 42.3% of these loans were measured for impairment using the fair
value of collateral, while the remaining 57.7% were measured using the present
value of the expected future cash flows discounted at the loan's effective rate.
As a result of these measurements, approximately $25.3 million of these loans
required valuation allowances, totaling $4.0 million,
F-13
<PAGE> 126
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which were included within the overall allowance for loan losses at December 31,
1996. Average impaired loans during 1996 were approximately $25.9 million, and
the amount of cash basis interest income recognized on these loans was $1.2
million.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets,
except for leasehold improvements for which the lesser of the estimated useful
life of the asset or the term of the lease is used. The useful lives used in
computing depreciation and amortization are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements.................................. 39
Furniture and equipment..................................... 7
Leasehold improvements...................................... 5-15
</TABLE>
Gains and losses on routine dispositions are reflected in current
operations. Maintenance, repairs and minor improvements are charged to operating
expenses, and major replacements and improvements are capitalized.
OTHER REAL ESTATE
Other real estate owned ("ORE") represents property acquired through
foreclosure proceedings held for sale and real estate held for investment. ORE
is net of a valuation allowance established to reduce cost to fair value. Losses
are charged to the valuation allowance and recoveries are credited to the
allowance. Declines in market value and gains and losses on disposal are
reflected in current operations in ORE expense. Recoverable costs relating to
the development and improvement of ORE are capitalized whereas routine holding
costs are charged to expense. The sales of these properties are dependent upon
various market conditions. Management is of the opinion that such sales will
result in net proceeds at least equal to present carrying values.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which was effective for the
Company's fiscal year beginning January 1, 1996. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used be
reviewed for impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. If the sum of the expected
future cash flows from the use of the asset and its eventual disposition is less
than the carrying amount of the asset, an impairment loss is recognized. SFAS
No. 121 also requires that certain assets to be disposed of be measured at the
lower of carrying amount or the net realizable value. The impact of adopting
SFAS No. 121 upon the results of operations of the Company was not material.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," SFAS
No. 128 simplifies the method for computing and presenting earnings per share
("EPS") previously required by APB Opinion No. 15, "Earnings Per Share", and
makes them comparable to international EPS standards. SFAS No. 128 is effective
for periods ending after December 15, 1997, and requires restatement of all
prior period EPS data and has been implemented by the Company. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
F-14
<PAGE> 127
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," SFAS No. 130 establishes standards for reporting and display of
comprehensive income. A specific reporting format is not required, provided the
financial statements show the amount of total comprehensive income for the
period. Those items which are not included in net income are required to be
shown in the financial statements with appropriate footnote disclosure and the
aggregate balance of such items must be shown separately from retained earnings
and additional paid-in-capital in the equity section of the balance sheet. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods is required. SFAS
No. 130 will have no material effect on the Company's financial statements.
DISCLOSURES ABOUT BUSINESS SEGMENTS
In June 1997, the FASB adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way the Company reports information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial reports. SFAS No. 131 is effective for
periods beginning after December 15, 1997. Management has implemented SFAS No.
131 in the year ended December 31, 1997, and believes its commercial banking and
mortgage banking activities constitute operating segments which require
additional disclosure about their respective assets, revenues, profit or loss
and other operating data.
DISCLOSURES ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Retirement Benefits," (SFAS No. 132). SFAS No. 132 revises
the disclosure requirements for employees' pensions and other post-retirement
benefit plans. SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997, earlier application is encouraged. Management has implemented
SFAS No. 132 in the year ended December 31, 1997.
INCOME TAXES
The Company follows the liability method which establishes deferred tax
assets and liabilities for the temporary differences between the financial
reporting bases and the tax bases of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled. Net deferred tax assets, whose realization is dependent on taxable
earnings of future years, are recognized when a more-likely-than-not criterion
is met, that is, unless a greater than 50% probability exists that the tax
benefits will not actually be realized sometime in the future.
Effective April 1, 1995, federal regulations restricted the amount of
deferred tax assets that can be used to meet regulatory capital requirements to
an amount that the institution expects to realize within one year, or 10% of
Tier 1 capital, whichever is less.
The Company and its subsidiaries file consolidated tax returns with the
federal and state taxing authorities. A tax sharing agreement exists between the
Company and its subsidiaries whereby taxes for the subsidiaries are computed as
if the subsidiaries were separate entities. Amounts to be paid or credited with
respect to current taxes are paid to or received from the Company.
PREMIUM ON DEPOSITS
A premium on deposits is recorded for the difference between cash received
and the carrying value of deposits acquired in purchase transactions. This
premium is being amortized on a straight-line basis over three to four years.
Approximately $202,000 and $527,000 was included in other assets in the
accompanying financial statements, as of December 31, 1997, and 1996.
F-15
<PAGE> 128
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Effective in 1996, the Company adopted the disclosure option of SFAS
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which
requires that companies not electing to account for stock-based compensation as
prescribed by the statement, disclose the pro forma effects on earnings and
earnings per share as if SFAS No. 123 had been adopted. Additionally, certain
other disclosures are required with respect to stock compensation and the
assumptions used are to determine the pro forma effects of SFAS No. 123.
CASH EQUIVALENTS
For purposes of preparing the Consolidated Statements of Cash Flows, cash
equivalents are defined to include cash and due from banks, interest-bearing
deposits in banks, and federal funds sold.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial
statements to conform with the 1997 financial statement presentation.
3. INVESTMENT SECURITIES
The Company's investment securities consisted primarily of U.S. Treasury
Bills, Notes, and Agencies. The investment securities of the Company at December
31, 1997 and 1996, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1997:
Available-for-sale securities:
U.S. Government Treasuries................... $10,512 $ 9 $ -- $10,521
U.S. Agencies................................ 4,000 14 -- 4,014
Revenue bond................................. 1,545 -- -- 1,545
------- --- ---- -------
Total U.S. Treasuries & Federal
Agency Notes....................... $16,057 $23 $ $16,080
======= === ==== =======
AT DECEMBER 31, 1996:
Available-for-sale securities:
U.S. Government Treasuries................... $72,905 $-- $(53) $72,852
Revenue Bond................................. 1,545 -- -- 1,545
------- --- ---- -------
Total available for sale............. 74,450 -- (53) 74,397
Trading securities:
U.S. Agencies................................ 4,000 32 -- 4,032
------- --- ---- -------
Total U.S. Treasuries & Federal
Agency Notes....................... $78,450 $32 $(53) $78,429
======= === ==== =======
</TABLE>
<TABLE>
<CAPTION>
BOOK VALUE AT DECEMBER 31: 1997 1996
- -------------------------- ------- -------
<S> <C> <C>
Available-for-sale securities:.............................. $16,080 $74,397
Trading Securities........................................ -- 4,032
------- -------
Total U.S. Treasuries & Federal Agency Notes...... $16,080 $78,429
======= =======
</TABLE>
F-16
<PAGE> 129
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of investment securities at
December 31, 1997, by contractual maturity are shown below (in thousands):
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
--------------------------------
ESTIMATED WEIGHTED
AMORTIZED MARKET AVERAGE
COST VALUE YIELD
--------- --------- --------
<S> <C> <C> <C>
Due in 1 year or less.................................... $10,512 $10,521 5.68%
Due after 1 year through 5 years......................... 1,545 1,545 8.60
Due after 5 years........................................ 4,000 4,014 7.45
------- ------- ----
Total.......................................... $16,057 $16,080 6.40%
======= ======= ====
</TABLE>
Proceeds from sales of U.S. Treasury and Federal Agency Notes during the
years ended 1997, 1996 and 1995, were $55,092,000, $7,545,000, and $2,972,000,
respectively. Gross losses of $7,109, $0, and $27,891 were realized for the
years ended December 31, 1997, 1996 and 1995. Gross gains of $193,218, $45,404,
and $0, were realized during the years ended December 31, 1997, 1996 and 1995,
respectively. U.S. Treasuries and Federal Agency Notes with a par value of
$10,500,000 and $19,000,000 at December 31, 1997 and 1996, respectively, were
pledged to secure public deposits and for other purposes. Net unrealized holding
gains on trading securities of $764,000, $26,000, and $101,000 were included in
income during 1997, 1996, and 1995, respectively.
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities ("MBS"), sometimes referred to as pass-through
certificates, represent an interest in a pool of loans. The securities are
issued by three government agencies or corporations: (i) the Government National
Mortgage Association ("GNMA"), (ii) the Federal Home Loan Mortgage Corporation
("FHLMC") and (iii) the Federal National Mortgage Association ("FNMA"). During
1997 and 1996 the Company securitized loans with a carrying value of $17,923,000
and $6,282,000, respectively. MBS securities held to maturity are recorded at
amortized cost, while securities available-for-sale and trading are recorded at
estimated market value. Mortgage-backed securities are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
GAINS GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
At December 31, 1997:
Available for sale securities:
GNMA securities........................... $41,395 $648 $ -- $42,043
FHLMC securities.......................... 5,963 -- (9) 5,954
FNMA securities........................... 6,644 104 (2) 6,746
Other MBS securities...................... 716 8 -- 724
------- ---- ------- -------
Total MBS available for sale......... $54,718 $760 $ (11) $55,467
======= ==== ======= =======
</TABLE>
F-17
<PAGE> 130
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
GAINS GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Trading securities:
GNMA securities.............................. $16,346 $478 $ -- $16,824
FNMA Title 1 securities...................... 1,200 -- -- 1,200
Republic Bank Owner Trust 1997-1 M2.......... 4,350 -- -- 4,350
Republic Bank Owner Trust 1997-1 B........... 4,350 -- -- 4,350
Republic Bank Owner Trust 1997-1-
Overcollateralization........................ 2,400 -- -- 2,400
Residual interest............................ 5,845 -- -- 5,845
Excess servicing interest only strip......... 2,077 -- -- 2,077
------- ---- ------- -------
Total MBS trading securities......... $36,568 $478 $ -- $37,046
======= ==== ======= =======
At December 31, 1996:
Available for sale securities:
Mortgage-backed securities................... $61,560 $108 $ (219) $61,449
Collateralized mortgage backed obligations... -- -- -- --
Excess servicing interest only strip......... 588 -- -- 588
------- ---- ------- -------
Total MBS available for sale......... $62,148 $108 $ (219) $62,037
======= ==== ======= =======
Trading Securities:
Mortgage-backed securities................... $ -- $ -- $ -- $ --
Collateralized mortgage backed obligations... 5,554 -- (6) 5,548
Excess servicing interest only strip......... -- -- -- --
------- ---- ------- -------
Total MBS trading securities......... $ 5,554 $ -- $ (6) $ 5,548
======= ==== ======= =======
Held to maturity securities:
Mortgage-backed securities................... $15,343 $218 $ (47) $15,514
Collateralized mortgage backed obligations... -- -- -- --
Excess spread interest only strip
receivable................................ -- -- -- --
------- ---- ------- -------
Total MBS securities held to
maturity........................... $15,343 $218 $ (47) $15,514
======= ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Book Value At December 31:
Held to maturity securities............................... $ -- $15,343
Available for sale securities............................. 55,467 62,037
Trading securities........................................ 37,046 5,548
------- -------
Total MBS......................................... $92,513 $82,928
======= =======
</TABLE>
The trading asset category at December 31, 1997, included $2.1 million in
excess spread on mortgage servicing rights, $8.7 million of securities purchased
from the Company's securitization of High LTV Loans in December 1997 and the
$8.2 million residual interest in cash flows from that securitization. The
Company has recorded these assets at what it believes to be their fair market
value, however, there is no ready market for residuals in cash flows from
securitization of High Loan-to-Value Loans.
At December 31, 1997, all MBS securities available for sale were scheduled
to reprice in one year or less. The amortized cost and estimated market value of
the MBS portfolio at December 31, 1997, by contractual maturity are shown below
(in thousands). Actual maturities may differ from contractual maturities as a
result of prepayments of the underlying mortgages:
F-18
<PAGE> 131
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED WEIGHTED
AMORTIZED MARKET AVERAGE
COST VALUE YIELD
--------- --------- --------
<S> <C> <C> <C>
Due 5-10 years........................................... $ 716 $ 724 7.39%
Due after 10 years....................................... 90,570 91,789 6.86%
------- -------
Total.......................................... $91,286 $92,513 6.87%
======= =======
</TABLE>
Proceeds from sales of MBS securities during the years ended December 31,
1997, 1996 and 1995 were $59,111,000, $47,750,000 and $17,487,000, respectively.
Gross gains of $359,511, $495,837 and $130,038 and gross losses of $1,890,
$85,845 and $9,000, respectively, were realized on these sales. Mortgage backed
securities with a par value of $29.3 million and a market value of $30.0 million
were pledged to secure repurchase agreements at December 31, 1997.
5. LOANS AND LOANS HELD FOR SALE
Loans and loans held for sale at December 31, 1997 and 1996, are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Real estate mortgage loans:
One-to-four family residential............................ $ 644,235 $494,955
Multi-family residential.................................. 86,835 90,745
Commercial real estate.................................... 265,153 224,715
Construction/land development............................. 50,203 42,206
Home equity loans......................................... 44,389 23,622
Commercial loans............................................ 36,515 37,626
Consumer loans.............................................. 26,072 21,845
Other loans................................................. 442 1,294
---------- --------
Total gross portfolio loans....................... 1,154,031 937,008
Less -- allowance for loan losses........................... (20,776) (18,747)
Less -- undisbursed loans in process........................ -- (10,824)
Less -- premiums and unearned discounts on loans
purchased................................................. (3,273) (4,731)
Less -- unamortized loan fees............................... (1,027) (671)
---------- --------
Total loans held for portfolio.................... 1,128,955 902,035
Residential loans held for sale............................. 151,404 46,593
---------- --------
Total loans....................................... $1,280,359 $948,628
========== ========
</TABLE>
Mortgage loans serviced for others as of December 31, 1997 and 1996, were
$370,106,000 and $224,311,000, respectively. Loans on which interest was not
being accrued totaled approximately $26,959,000, $19,409,000, and $16,229,000 at
December 31, 1997, 1996 and 1995, respectively. Had interest been accrued on
these loans at their originally contracted rates, interest income would have
been increased by approximately $2,138,000, $1,661,000, and $1,729,000 in the
years ended December 31, 1997, 1996 and 1995, respectively. Loans past due 90
days or more and still accruing interest at December 31, 1997 and 1996, totaled
approximately $196,000 and $113,000, respectively. The Company restructured
loans totaling $0 and $2,516,000 during 1997 and 1996, respectively.
F-19
<PAGE> 132
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
BALANCE, beginning of year.................................. $18,747 $20,048 $15,272
Provision for possible loan losses........................ 2,628 2,582 2,162
Allowance from Firstate acquisition....................... 132 -- --
Discount on purchased loans allocated to (from) allowance
for loan losses........................................ 39 (1,732) 7,658
Loans charged off......................................... (1,003) (2,448) (5,536)
Recoveries of loans charged off........................... 223 297 492
------- ------- -------
BALANCE, end of year........................................ $20,776 $18,747 $20,048
======= ======= =======
</TABLE>
While management believes that the allowance for loan losses is adequate at
December 31, 1997, based on currently available information, future additions to
the allowance may be necessary due to changes in economic conditions,
deterioration of creditworthiness of the borrower, the value of underlying
collateral or other factors. Additionally, the Florida Department of Banking and
Finance, the FDIC, and the Federal Reserve, as an integral part of their regular
examination process, periodically review the allowance for loan losses. These
agencies may require additions to the allowance based on their judgments about
information available to them at the time of examination.
The portion of the allowance for loan losses which arose due to the
allocation of discounts on purchased loans may only be used to absorb losses on
the related acquired loans. As of December 31, 1997 and 1996, approximately
$6,197,000 and $7,150,000 of the allowance had arisen through an allocation of
discounts on purchased loans.
7. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996, included (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Land........................................................ $ 7,202 $ 6,249
Buildings and improvements.................................. 19,354 14,370
Furniture and equipment..................................... 16,008 12,634
Leasehold improvements...................................... 2,279 1,051
Construction in progress.................................... 1,137 268
-------- -------
Total premises and equipment...................... 45,980 34,572
Less-accumulated depreciation and amortization.............. (12,677) (9,533)
-------- -------
Premises and equipment, net....................... $ 33,303 $25,039
======== =======
</TABLE>
8. OTHER REAL ESTATE (ORE)
State banking regulations require the Company to dispose of all ORE
acquired through foreclosure within five years of acquisition, with a
possibility for additional extensions, each of up to five years. Failure to
receive additional extensions could result in losses on ORE. There were three
ORE properties totaling approximately $3,451,000 at December 31, 1997, which
were required to be disposed of by year end. The Company has been granted an
extension on these properties by the State of Florida. The largest piece of
these properties is a tract of land carried at $2.6 million acquired through
foreclosure in 1988 that has partially been developed as a shopping center site.
The FDIC has also granted an extension of the holding period on this property.
The Bank
F-20
<PAGE> 133
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
currently has a firm commitment to sell a substantial portion of the second
largest property, with a book value of approximately $597,000, for an amount in
excess of the current book value. While the current appraisal on this property
indicates that the market value of the tract exceeds its book value, a sale to a
party other than an end-user could result in proceeds below the current book
value.
During 1995, the former headquarter building was vacated and that space was
leased to a third party. Since that building was no longer used for banking
purposes, approximately $2,498,000 was transferred from premises and equipment
to ORE held for investment. During 1996, this building was sold and a gain of
$1,207,000 was recorded.
Loans converted to ORE through foreclosure proceedings totaled $6,471,000,
and $7,249,000, for the years ended December 31, 1997 and 1996, respectively.
Sales of ORE that were financed by the Company totaled $113,000 and $6,572,000
for the years ended December 31, 1997 and 1996, respectively.
Changes in the valuation allowance for ORE were as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- ------------- -------
<S> <C> <C> <C>
BALANCE, beginning of year.............................. $ 2,672 $2,090 $4,043
Provision............................................. 530 111 240
Charge-offs, net...................................... 77 471 (2,193)
------- ------ ------
BALANCE, end of year.................................... $ 3,279 $2,672 $2,090
======= ====== ======
</TABLE>
9. INCOME TAXES
Income taxes are comprised of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- ------------- -------
<S> <C> <C> <C>
Current provision..................................... $ 7,991 $3,728 $2,528
Deferred benefit...................................... (1,895) (693) (12)
------- ------ ------
$ 6,096 $3,035 $2,516
======= ====== ======
</TABLE>
At December 31, 1997, the Company had approximately $7,061,000 of remaining
federal and $8,784,000 of state net operating loss carryforwards. These
carryforwards expire in the years 2005 through 2012.
Following the change of ownership in 1993, and the two acquisitions in
1997, recognition of net operating loss carryforwards are limited to
approximately $571,000 each year under the rules of IRC Section 382. If the full
amount of the limitation is not used in any years, the amount not used increases
the allowable limit in the subsequent year.
F-21
<PAGE> 134
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities were comprised of the following at
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Gross deferred tax assets:
Tax bases over financial bases for loans (loan loss
allowance and discounts)............................... $ 6,091 $ 3,643
Financial amortization of premium over tax amortization... 701 646
Interest on non-accrual loans............................. 522 452
Tax bases over financial bases for ORE.................... 1,516 1,346
Net operating losses and tax credit carryforward.......... 2,717 2,039
Market-to-market-loans held for sale...................... 1,268 232
Other..................................................... 457 149
------- -------
Gross deferred tax assets......................... 13,272 8,507
Gross deferred tax liabilities.................... (3,315) (2,318)
------- -------
Net deferred tax asset............................ $ 9,957 $ 6,189
======= =======
</TABLE>
There were no valuation allowances against the deferred tax asset as
management has determined that it is more likely than not that all of the
deferred tax asset recorded will be realized. The net deferred tax asset
increased during 1997 and 1996 by approximately $352,000 and $63,000,
respectively, relating to the unrealized gain on available for sale securities
which is recorded directly to stockholders' equity.
Through the merger of FFO, the Company acquired an unrecognized deferred
tax liability of approximately $2,700,000 related to base year reserves
calculated under the thrift bad debt percentage method. If during any taxable
year, the Company ceases to be a bank, these reserves shall be taken into
account ratably over the six taxable year period beginning with such taxable
year.
The Company's effective tax rate varies from the statutory rate of 34%. The
reasons for this difference are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax provision................ $5,454 $2,862 $3,377
Increase (reduction) of taxes:
Tax-exempt interest income.................. (20) (22) (27)
Valuation allowance....................... -- -- (355)
Goodwill amortization....................... 122 -- --
Amortization of excess of fair value over
purchase price............................ -- -- (536)
State taxes.................................... 578 304 298
Other.......................................... (38) (109) (241)
------ ------ ------
Total.................................. $6,096 $3,035 $2,516
====== ====== ======
</TABLE>
10. OTHER BORROWINGS
At December 31, 1997, the Company was required by its collateral agreement
with the FHLB to maintain qualifying first mortgage loans in an amount equal to
at least 100% of the FHLB advances outstanding as collateral. The FHLB advances
at December 31, 1997 and 1996, were collateralized by such loans and securities
totaling $35.0 million and $32.2 million, respectively. In addition, all of the
Company's FHLB stock is pledged as collateral for such advances.
F-22
<PAGE> 135
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities and average interest rates of advances from the FHLB as of
December 31, 1997 and 1996, were as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT
DECEMBER 31,
WEIGHTED ------------------
MATURITIES IN YEAR ENDING DECEMBER 31, AVERAGE RATE 1997 1996
- -------------------------------------- ------------ ------- ------
<S> <C> <C> <C>
1997.................................................. 6.95% $ -- $7,000
1998.................................................. 6.50 35,000 --
------- ------
Total....................................... $35,000 $7,000
======= ======
</TABLE>
On December 27, 1996, the Company issued $6,000,000 in convertible
subordinated debentures at a fixed interest rate of 6.00%, interest payable
semi-annually, with a maturity of December 1, 2011. The Company had the right to
redeem the debentures beginning in 2001 at 106% of face value, with the premium
declining 1% per year thereafter and without any premium if the price of the
Company's common stock equals or exceeds 130% of the conversion price for not
less than 20 consecutive trading days. During 1997, the Company's common stock
exceeded 130% of the conversion price of $17.85714 for more than 20 consecutive
days. As a result, the Company notified the trustee of its intention to redeem
the debentures as of December 1, 1997. All of the holders converted their
debentures prior to this date into a total of 336,000 shares of common stock.
11. OFF-BALANCE-SHEET RISK, COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK
The Company's core customer loan origination base is located along the west
coast and in central Florida. The majority of the Company's purchased loan
portfolio is concentrated in the states of Florida, California, Texas, and in
the northeastern United States. At December 31, 1997 and 1996, approximately 95%
and 94%, respectively, of the Company's loan portfolio was secured by real
estate. Mortgage loans secured by 1-4 family properties comprised approximately
56% and 53%, respectively, of total mortgage loans at December 31, 1997 and
1996.
OFF-BALANCE-SHEET ITEMS
The Company enters into financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to limit exposure to changes in the value of loans held for sale.
These financial instruments include commitments to extend credit,
commercial and standby letters of credit, and forward contracts for the delivery
of loans. These instruments involve, to varying degrees, elements of credit and
interest-rate risk that are not recognized in the accompanying consolidated
balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments discussed above is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
F-23
<PAGE> 136
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of financial instruments with off-balance-sheet risk at December
31, 1997, is as follows (in thousands):
<TABLE>
<CAPTION>
CONTRACTUAL
AMOUNT
-----------
<S> <C>
Commitments to extend credit................................ $ 76,698
Unfunded lines of credit.................................. 156,013
Commercial and standby letters of credit.................. 12,168
--------
Total............................................. $244,879
========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the agreement.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary upon extension of credit is based on management's credit
evaluation of the counter party. Collateral held varies but may include premises
and equipment, inventory and accounts receivable. Unfunded lines of credit
represent the undisbursed portion of lines of credit which have been extended to
customers.
Commercial and standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a third party which
typically do not extend beyond one year. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Company typically holds certificates of deposit as
collateral supporting those commitments, depending on the strength of the
borrower. Outstanding unsecured standby letters of credit at December 31, 1997,
totaled approximately $3,269,000.
At December 31, 1997, in connection with managing the interest rate market
risk on its loans held for sale of $151,404,000 and locked loans (without
consideration for any fallout) of $56,097,000, the Company had outstanding
$32,040,000 (estimated fair value of $31,910,000) of Forward Commitments which
expire over the next two months, the period when the loans are expected to be
sold and locked loans are expected to close.
The Company reduces its risk of nonperformance under the hedging contracts
by entering into those contracts with reputable security dealers and investors
and evaluating their financial condition. However, there is a risk that certain
of the locked loans do not close or are renegotiated in a declining interest
rate market and close at lower prices. The Company reduces this risk by
collecting nonrefundable commitment fees on certain of the locked loans and
enters into forward commitments to deliver loans to investors primarily on a
best efforts basis.
F-24
<PAGE> 137
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMITMENTS
The Company has entered into a number of noncancelable operating leases
primarily for branch banking locations. At December 31, 1997, minimum rental
commitments based on the remaining noncancelable lease terms were as follows (in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 3,077
1999........................................................ 2,895
2000........................................................ 2,403
2001........................................................ 2,197
2002........................................................ 1,891
Thereafter.................................................. --
-------
Gross operating lease commitments......................... 12,463
-------
Less-sublease rentals....................................... (1,620)
-------
Net operating lease commitments........................... $10,843
=======
</TABLE>
Total rent expense for the years ended December 31, 1997, 1996 and 1995,
was $2,546,000, $2,031,000, and $1,372,000, respectively. Total rental income
from subleases for the years ended December 31, 1997, 1996 and 1995, was
$582,000, $1,031,000, and $1,190,000, respectively.
During 1994 a capital lease obligation of approximately $981,000 was
incurred related to the leasing of data processing equipment with an implicit
rate of 7.49%. Minimum lease payments under this capital lease are approximately
$214,000 in 1998 and $107,000 in 1999. In addition, the Company is obligated to
make processing payments in relation to its computer facilities of approximately
$1,545,000 in 1998, $1,653,000 in 1999, $1,759,000 in 2000, and $293,000 in
2001.
CONTINGENCIES
The Company is subject to various other legal proceedings and claims which
arise in the normal course of business. In the opinion of management, the amount
of liability with respect to these other proceedings would not have a material
effect on the financial statements.
12. EMPLOYEE BENEFIT PLANS
On January 1, 1987, a retirement plan was adopted, covering substantially
all employees, which includes a 401(k) arrangement. The Company's contributions
were $437,200, $186,900, and $107,200 in the years ended December 31, 1997, 1996
and 1995, respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Generally, the Company's practice and intent is to hold its financial
instruments to maturity, unless otherwise designated. Where available, quoted
market prices are used to determine fair value. However, many of the Company's
financial instruments lack quoted market prices. Although the Company has
incorporated what it considers to be appropriate estimation methodologies for
those financial instruments which lack quoted market prices, a significant
number of assumptions must be used in determining such estimated fair values.
Such assumptions include subjective assessments of current market conditions,
perceived risks associated with these financial instruments and other factors.
Different assumptions might be considered by the user of the financial
statements to be more appropriate, and the use of alternative assumptions or
estimation methodologies could have a significant effect on the resulting
estimated fair values. The estimated fair values presented neither include nor
give effect to the values associated with the Company's business, existing
customer relationships, and branch banking network, among other things.
F-25
<PAGE> 138
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following estimates of the fair value of certain financial instruments
held by the Company include only instruments that could reasonably be evaluated.
The investment and mortgage backed securities portfolio was evaluated using
market quotes, where available, or fair market value calculations as of December
31, 1997 and 1996. The fair value of the loan portfolio was evaluated using
market quotes for similar financial instruments, where available. Otherwise,
discounted cash flows at current market, after adjusting for credit
deterioration and an average prepayment assumption, were used based upon current
rates the Company would use in extending credit with similar characteristics.
These rates may not necessarily be the same as those which might be used by
other financial institutions for similar loans. Cash and due from banks and
federal funds sold were valued at cost. The fair values disclosed for checking
accounts, savings accounts, securities sold under agreements to repurchase, and
certain money market accounts are, by definition, equal to the amount payable on
demand at the reporting date, i.e., their carrying amounts. Fair values for time
deposits are estimated using a discounted cash flow calculation that applies
current interest rates to aggregated expected maturities. Standby letters of
credit and commitments to extend credit were valued at book value as the
majority of these instruments are based on variable rates. The value of the
Company's mortgage servicing rights was determined using the net discounted cash
flows from servicing.
These evaluations may incorporate specific value to the Company in
accordance with its asset/liability strategies, interest rate projections and
business plans at a specific point in time and therefore, should not necessarily
be viewed as liquidation value. They should also not be used in determining
overall value of the Company due to undisclosed and intangible aspects such as
business and franchise value, and due to changes to assumptions of interest
rates and expected cash flows which might need to be made to reflect
expectations of returns to be earned on instruments with higher credit risks.
The table below illustrates the estimated fair value of the Company's
financial instruments as of December 31 using the assumptions described above
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash and due from banks..................................... $ 45,998 $ 34,109
========== ==========
Interest bearing deposits in banks.......................... 671 11,783
========== ==========
Federal funds sold.......................................... 33,000 8,000
========== ==========
Investment and mortgage backed securities................... 108,593 161,304
========== ==========
Loans and loans held for sale (net of allowance for loan
losses)................................................... 1,306,678 991,635
========== ==========
Mortgage servicing rights................................... 269 1,690
========== ==========
Deposits.................................................... 1,365,824 1,119,888
========== ==========
Securities sold under agreements to repurchase.............. 19,654 15,372
========== ==========
FHLB stock.................................................. 35,000 7,000
========== ==========
Subordinated debt........................................... -- 6,000
========== ==========
Standby letters of credit................................... 12,168 7,415
========== ==========
Commitments to extend credit and unfunded lines of credit... 232,711 121,420
========== ==========
</TABLE>
14. STOCKHOLDERS' EQUITY
PERPETUAL PREFERRED CONVERTIBLE STOCK
The Company has 75,000 outstanding shares of perpetual preferred
convertible stock. The preferred stock has a liquidation preference of $88 per
share and carries a noncumulative dividend of $3.52 per year, payable quarterly.
Dividends on the preferred stock must be paid before any dividends on common
stock can be paid.
F-26
<PAGE> 139
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Beginning December 16, 1994, and thereafter, the preferred stock can be
converted by the holders into 10 shares of common stock for each share of
preferred stock. The holders of the preferred stock vote with the holders of the
common stock and are entitled to 10 votes per share of preferred stock.
DIVIDENDS
Florida Statutes limit the amount of dividends the Bank can pay in any
given year to that year's net income plus retained net income from the two
preceding years. Additionally, the Bank and the Company cannot pay dividends
which would cause either to be undercapitalized as defined by federal
regulations.
1993 NON-QUALIFIED STOCK OPTION PLAN
On May 28, 1993, the Company adopted a non-qualified stock option plan (the
Option Plan) which reserved 80,000 shares of common stock for future issuance
under the Option Plan to eligible employees of the Company. As of December 31,
1997, 60,000 options were granted under the Option Plan and 30,000 were
outstanding. The per share exercise price of each stock option is determined by
the Board of Directors at the date of grant. The plan terminates in 2003 or at
the discretion of the Board of Directors.
1995 INCENTIVE STOCK OPTION PLAN
On April 29, 1994, the shareholders approved a qualified incentive stock
option plan to certain key employees. In connection with the Company's holding
company reorganization and share exchange in which all of the Company's
stockholders became stockholders of the Company, the Company adopted the
Republic Bancshares, Inc. 1995 Stock Option Plan (the "Plan") as a replacement
for the Company's 1994 Stock Option Plan. The Plan was approved by the
stockholders of the Bank at the Bank's Special Meeting held on February 27,
1996. On April 23, 1996, the shareholders approved certain amendments to the
Plan (the "Amendment"). Under the Amendment, the total number of shares that may
be purchased pursuant to the plan cannot exceed 525,000 over the life of the
plan and provides that the maximum number of options granted to any one
individual in any fiscal year under the plan cannot exceed 62,000. There is no
limitation on the annual aggregate number of options to be granted in any fiscal
year. Each option granted under the plan will be exercisable by the grantee
during a term, not to exceed 10 years, fixed by the compensation committee of
the Board of Directors ("the Committee"). However, no more than 20% of the
shares subject to such options shall vest annually beginning at date of grant.
However, in the event of a change in control, or termination of employment
without cause, all options granted become exercisable immediately. Options under
the plan, which have been granted to the employees of the Flagship/Capital
mortgage banking division of the Company, vest at the rate of 20% at the end of
each 12-month period over five years, contingent upon that division meeting
specified net income performance goals as set by the Board of Directors. If the
performance goal for each year is not met, then the options that would have
become exercisable at the end of the 12-month period shall expire and be null
and void. In addition, options granted to employees of this division shall not
vest and become exercisable if there is a change in control or a termination of
employment without cause, until the performance goal for at least one year has
been met.
Upon the grant of an option to a key employee, the Committee will fix the
number of shares of common stock that the grantee may purchase upon exercise of
the option, and the price at which the shares may be purchased. The exercise
price for all options shall not be less than the fair market value. During 1997,
1996 and 1995, options to purchase 80,500, 270,900 and 59,700 shares,
respectively, under the incentive stock option plan were granted. Of the options
previously granted, 59,380 shares have expired, thereby making these options
available for future grants. As of December 31, 1997, 408,750 options remained
outstanding under this plan, with 116,250 available to be granted at a future
time.
F-27
<PAGE> 140
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 STOCK APPRECIATION RIGHTS PLAN
On October 21, 1997, the Board of Directors of the Company approved a Stock
Appreciation Rights Plan (the "SAR Plan"). Under the SAR Plan, certain key
employees have been granted the right to receive cash equal to the excess of the
fair market value of a share of the Company's common stock at the time of
exercise, over the fair market value of a share of the Company's common stock at
date of grant, times the number of rights exercised. As of December 31, 1997,
40,250 SAR's had been granted at the then current market value of $26.675. No
more than 20% of the shares may vest annually by beginning at date of grant. The
term of an SAR may vary, but shall not be less than one year nor more than 10
years from the date of grant.
The Company records compensation expense equal to the appreciation of the
fair market value of the stock times the number of outstanding stock
appreciation rights. As of December 31, 1997, there had been no appreciation of
the Company's common stock over the fair market value at date of grant.
Therefore, no compensation expense had been recorded.
AGGREGATE STOCK OPTION ACTIVITY
The Company adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS
No. 123 purposes, the fair value of each option grant has been estimated as of
the date of grant using the Black-Scholes option pricing model with the
following assumptions (weighted averages) for 1997, 1996 and 1995: risk-free
interest rate of 5.35%, 6.50% and 6.03%, respectively, expected life of seven
years, dividend rate of zero percent, and expected volatility of 30.9% for 1997
and 25% for 1996 and 1995. The approximate fair value of the stock options
granted in 1997, 1996, and 1995 is $959,000, $1,583,000 and $347,000,
respectively, which would be amortized as compensation expense over the vesting
period of the options. Options vest equally over five years. Had compensation
cost been determined consistent with SFAS No. 123, utilizing the assumptions
detailed above, the Company's net income and earnings per share as reported
would have been the following pro forma amounts (in thousands except share
data):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Income
As reported............................................... $8,571 $4,879 $6,916
Pro forma................................................. 8,210 4,683 6,873
Earnings per share-diluted
As reported............................................... 1.21 .74 1.10
Pro forma................................................. 1.16 .71 1.10
Earnings per share-basic
As reported............................................... 1.40 .83 1.26
Pro forma................................................. 1.34 .80 1.25
</TABLE>
F-28
<PAGE> 141
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years. A summary of
the status of the Company's stock option plans at December 31, 1997, 1996 and
1995, and for the years then ended is presented in the table below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
FIXED OPTIONS
Outstanding -- beg. of year........... 196,470 $11.87 131,810 $11.00 81,500 $ 8.75
Granted............................... 82,999 25.94 70,900 13.63 59,700 14.00
Exercised............................. (21,300) 11.80 -- -- (3,170) 9.58
Forfeited/Expired..................... (6,920) 13.04 (6,240) 13.42 (6,220) 11.06
------- ------- -------
Outstanding -- end of year............ 251,249 16.38 196,470 11.87 131,810 11.00
======= ======= =======
Exercisable -- end of year............ 118,979 12.52 92,530 10.29 45,112 9.07
Wtd. avg. fair value of options
granted............................ 11.91 5.84 5.81
PERFORMANCE OPTIONS
Outstanding -- beg. of year........... 200,000 13.63 200,000 13.63 -- --
Granted............................... -- -- -- -- -- --
Exercised............................. -- -- -- -- -- --
Forfeited/Expired..................... (40,000) 13.63 -- -- -- --
------- ------- -------
Outstanding -- end of year............ 160,000 13.63 200,000 13.63 -- --
======= ======= =======
Exercisable -- end of year............ -- -- -- -- -- --
Wtd. avg. fair value of options
granted............................ -- 5.84 --
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------- -------------------------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER EXERCISABLE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE AT WEIGHTED-AVERAGE
EXERCISE PRICE AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
- -------------- ---------------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
2.13 2,499 1.00 years $ 2.13 2,499 $ 2.13
5.40-10.50 61,610 5.89 years 8.02 54,040 7.67
13.63-14.00 266,640 8.19 years 13.69 46,340 13.83
26.68 80,500 9.79 years 26.68 61,100 26.68
</TABLE>
15. EARNINGS PER SHARE
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Diluted earnings per common and common equivalent share has been computed
by dividing net income by the weighted average common and common equivalent
shares outstanding during the periods. The weighted average common and common
equivalent shares outstanding has been adjusted to include the number of shares
that would have been outstanding if the stock options granted had been
exercised, at the average market price for period, with the proceeds being used
to buy shares from the market (i.e., the treasury stock method) and the
perpetual preferred stock and the convertible subordinated debentures had been
converted to common stock at the earlier of the beginning of the year or the
issue date (i.e., the if-converted method). Basic earnings per common share was
computed by dividing net income by the weighted average
F-29
<PAGE> 142
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
number of shares of common stock outstanding during the year. The table below
reconciles the calculation of diluted and basic earnings per share (dollars in
thousands, except share data):
<TABLE>
<CAPTION>
1997
-------------------------------
WEIGHTED EARNINGS
NET SHARES PER
INCOME OUTSTANDING SHARE
------ ----------- --------
<S> <C> <C> <C>
Net Income................................................ $8,571 6,128,014
Basic earnings per share................................ $1.40
Options exercised during the period -- incremental
effect prior to exercise............................. -- 5,198
Options outstanding at end of period.................... -- 117,835
Convertible perpetual preferred stock................... -- 750,000
Convertible subordinated debentures -- incremental
effect prior to conversion........................... 245 300,452
------ --------- -----
Diluted earnings per share.............................. $8,816 7,301,499 $1.21
====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------
WEIGHTED EARNINGS
NET SHARES PER
INCOME OUTSTANDING SHARE
------ ----------- --------
<S> <C> <C> <C>
Net Income................................................ $4,879 5,857,174
Basic earnings per share................................ $0.83
Options exercised during the period -- incremental
effect prior to exercise............................. -- --
Options outstanding at end of period.................... -- 19,430
Convertible perpetual preferred stock................... -- 750,000
Convertible subordinated debentures -- incremental
effect prior to conversion........................... -- -- --
------ --------- -----
Diluted earnings per share................................ $4,879 6,626,604 $0.74
====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------
WEIGHTED EARNINGS
NET SHARES PER
INCOME OUTSTANDING SHARE
------ ----------- --------
<S> <C> <C> <C>
Net income................................................ $6,916 5,491,250
Basic earnings per share................................ $1.26
Options exercised during the period -- incremental
effect prior to exercise............................. -- 388
Options outstanding at end of period.................... -- 19,730
Convertible perpetual preferred stock................... -- 750,000
Convertible subordinated debentures -- incremental
effect prior to conversion........................... -- -- --
------ --------- -----
Diluted earnings per share................................ $6,916 6,261,368 $1.10
====== ========= =====
</TABLE>
F-30
<PAGE> 143
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1997, the Company adopted SFAS No. 128, "Earnings per Share," effective
December 15, 1997. As a result, the Company's reported earnings per share for
1996 and 1995 were restated. The effect of this accounting change on previously
reported earnings per share ("EPS") data was as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Primary EPS as Reported..................................... $0.74 $1.10
Effect of SFAS No. 128...................................... 0.09 0.16
----- -----
Basic EPS as restated....................................... $0.83 $1.26
===== =====
Fully diluted EPS as Reported............................... $0.74 $1.10
Effect of SFAS No. 128...................................... -- --
----- -----
Diluted EPS as restated..................................... $0.74 $1.10
===== =====
</TABLE>
16. REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve (for the Company) and the FDIC (for
the Bank). There are three basic measures of capital adequacy for banks that
have been promulgated by the Federal Reserve; two risk-based measures and a
leverage measure. All applicable capital standards must be satisfied for a bank
holding company to be considered in compliance.
The minimum guidelines for the ratio ("Risk-Based Capital Ratio") of total
capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8.0%. At least
half of Total Capital (i.e., 4.0% of risk-weighted assets) must comprise common
stock, minority interests in the equity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less goodwill and certain other intangible assets
("Tier 1 Capital"). The remainder may consist of subordinated debt, other
preferred stock, and a limited amount of loan loss reserves ("Tier 2 Capital").
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3.0% for banks that meet certain
specified criteria, including having the highest regulatory rating. All other
bank holding companies generally are required to maintain a Leverage Ratio of at
least 3.0%, plus an additional cushion of 100 to 200 basis points. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the Federal Reserve has indicated that it
will consider a "tangible Tier I Capital leverage ratio" (deducting all
intangibles) and other indicators of capital strength in evaluating proposals
for expansion or new activities. The Bank had previously undertaken in writing
to the FDIC to achieve a Leverage Ratio of at least 5.50% by September 30, 1995,
which it did, and will consider raising additional capital or reducing internal
growth should the ratio fall below that level in the future. The Company's
leverage ratio requirement remains at 5.00%. Other than the foregoing
commitment, the Bank has not been advised by the FDIC of any specific minimum
capital ratio requirement applicable to it.
Failure to meet capital guidelines could subject a bank or a bank holding
company to a variety of enforcement remedies, including issuance of a capital
directive, the termination of deposit insurance by the FDIC, a prohibition on
the taking of brokered deposits, and certain other restrictions on its business.
Substantial additional restrictions can be imposed upon FDIC-insured depository
institutions that fail to meet applicable capital requirements under the federal
prompt corrective action regulations.
F-31
<PAGE> 144
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997 and 1996, the Company and the Bank were considered
"well capitalized" under the federal banking agencies for prompt corrective
action regulations. Regulatory capital ratios for 1996 have not been restated to
include FFO, as the accounting methodology for a pooling of interest does not
apply under regulatory guidelines. The table which follows sets forth the
amounts of capital and capital ratios of the Company and the Bank as of December
31, 1997 and 1996, and the applicable regulatory minimums (in thousands):
<TABLE>
<CAPTION>
COMPANY BANK
---------------- ----------------
AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- -----
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Risk-Based Capital:
Tier 1 Capital
Actual........................................ $101,350 10.05% $103,162 10.25%
Minimum required to be "Adequately
Capitalized"................................ 40,329 4.00 40,265 4.00
Excess over minimum to be "Adequately
Capitalized"................................ 61,021 6.05 62,897 6.25
To be "Well Capitalized"...................... 60,494 6.00 60,398 6.00
Excess over "Well Capitalized" requirements... 40,856 4.05 42,764 4.25
Total Capital
Actual........................................ 117,603 11.66 115,983 11.52
Minimum required to be "Adequately
Capitalized"................................ 80,658 8.00 80,530 8.00
Excess over minimum to be "Adequately
Capitalized"................................ 36,945 3.66 35,453 3.52
To be "Well Capitalized"...................... 100,823 10.00 100,663 10.00
Excess over "Well Capitalized" requirements... 16,780 1.66 15,320 1.52
Tier 1 Capital to Total Assets (Leverage):
Actual........................................... 101,350 6.94 103,162 7.07
Minimum required to be "Adequately
Capitalized".................................. 58,456 4.00 58,392 4.00
Excess over minimum to be "Adequately
Capitalized".................................. 42,894 2.94 44,770 3.07
To be "Well Capitalized"......................... 73,070 5.00 72,990 5.00
Excess over "Well Capitalized" requirements...... 28,280 1.94 30,172 2.07
AS OF DECEMBER 31, 1996:
Risk-Based Capital:
Tier 1 Capital
Actual........................................ $ 51,325 8.82% $ 57,113 9.82%
Minimum required to be "Adequately
Capitalized"................................ 23,268 4.00 23,260 4.00
Excess over minimum to be "Adequately
Capitalized"................................ 28,057 4.82 33,853 5.82
To be "Well Capitalized"...................... 34,902 6.00 34,890 6.00
Excess over "Well Capitalized" requirements... 16,423 2.82 22,223 3.82
Total Capital
Actual........................................... 64,630 11.11 64,418 11.08
Minimum required to be "Adequately
Capitalized".................................. 46,536 8.00 46,519 8.00
Excess over minimum to be "Adequately
Capitalized".................................. 18,094 3.11 17,899 3.08
To be "Well Capitalized"......................... 58,170 10.00 58,149 10.00
Excess over "Well Capitalized" requirements...... 6,460 1.11 6,269 1.08
Tier 1 Capital to Total Assets (Leverage):
Actual........................................... 51,325 5.90 57,113 6.57
Minimum required to be "Adequately
Capitalized".................................. 34,807 4.00 34,798 4.00
Excess over minimum to be "Adequately
Capitalized".................................. 16,518 1.90 22,315 2.57
To be "Well Capitalized"......................... 43,509 5.00 47,848 5.50
Excess over "Well Capitalized" requirements...... 7,816 0.90 9,265 1.07
</TABLE>
F-32
<PAGE> 145
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. RELATED PARTY TRANSACTIONS
William R. Hough, a director and one of the two controlling shareholders,
is President and the controlling shareholder of William R. Hough & Co. ("WRHC"),
an NASD-member investment banking firm. As part of the normal course of business
the Company solicits competitive bids for the sales of mortgage securities from
approved broker/dealers, including William R. Hough & Company. During 1997, the
Company placed $115,410,000 of forward sales on mortgage backed securities
through William R. Hough & Company. Additionally, the Company periodically
purchased securities under agreement to repurchase at a rate based on the
prevailing federal funds rate plus 1/8 of 1% per an agreement entered into on
August 15, 1995.
In addition, WRH Mortgage, Inc., a related interest of William R. Hough,
acted as the Company's agent in the purchase of two loan pools from the
Resolution Trust Corporation on May 23, 1995, and was paid due diligence fees
totaling $39,997.
In June 1995, in connection with a rights offering of the Company Common
Stock conducted by the Company, William R. Hough & Co. participated as a
soliciting dealer, and as such was entitled to receive solicitation fees in an
amount equal to approximately $11,900. William R. Hough & Co. also participated
in the selling group for the public offering of the Company Common Stock that
took place in conjunction with the rights offering. In connection with the
public offering, William R. Hough & Co. received approximately $18,000 in
discounts and other fees.
In July 1996, William R. Hough & Co. began offering sales of insurance and
mutual fund products and investment advisory services on the premises of the
Company. The Company was paid a monthly fee of $300 for each banking office
participating in the program plus a fee of 15% of the gross commissions earned
from sales of non-insurance products. On January 1, 1997, this agreement was
terminated and replaced with a new agreement where the Company will be paid 50%
of the net profits earned from sales of investment products on the Company's
premises.
In December 1996, the Company offered $6,000,000 of convertible
subordinated debentures through a private placement on a "best efforts" basis
exclusively through William R. Hough & Co. as "Sales Agent" for the Company. The
sales agent agreement provided for the payment to William R. Hough & Co. of a
fee of 1.50% for each $1,000 principal amount of debentures sold to directors of
the Company or their spouses and 3% for each $1,000 of debentures sold to all
others. The total amount of fees paid to William R. Hough & Company for the sale
of the debentures was $162,000. In addition, the Company agreed to indemnify the
sales agent against and contribute toward certain liabilities, including
liabilities under the Securities Act, and to reimburse William R. Hough & Co.
for certain expenses and legal fees related to the sale of the debentures of
approximately $51,000.
During the years ended December 31, 1996 and 1995, FFO purchased
approximately $53.3 million, and $69.5 million of securities through WRHC,
respectively. During the years ended December 31, 1996 and 1995, FFO sold
approximately $46.0 million and $19.7 million of securities through WRHC,
respectively. In connection with such transactions, FFO paid WRHC an aggregate
of $118,000 and $92,000, in commissions during the years ended December 31, 1996
and 1995, respectively.
In July 1997, in connection with an offering of trust preferred securities,
William R. Hough & Company participated as co-manager, and as such was entitled
to receive one-half of an underwriting fee of 3.75% of the dollar amount of
preferred stock issued in an amount equal to approximately $539,063. In
addition, the Company agreed to reimburse William R. Hough & Company for certain
expenses and legal fees not to exceed $65,000.
In December 1997, the Company completed a securitization of $60 million of
high loan-to-value home equity loans. William R. Hough & Company participated as
co-underwriters and was paid one-half of an amount equal to 1.5% of the
principal amount of senior securities; 1.5% of the principal amount of
F-33
<PAGE> 146
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subordinated securities; and 2.5% of the gross proceeds from the sale of
interest only securities totaling $450,000. The Company also reimbursed William
R. Hough & Company for reasonable out-of-pocket expenses. Certain directors and
executive officers of the Company and Bank, members of their immediate families,
and entities with which such persons are associated are customers of the Bank.
As such, they had transactions in the ordinary course of business with the Bank
during 1997. All loans and commitments to lend included in those transactions
were made in the ordinary course of business, upon substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and, in the opinion of management,
have not involved more than the normal risk of collectibility or presented other
unfavorable features.
18. BANK HOLDING COMPANY FINANCIAL STATEMENTS:
Condensed financial statements of the Company (Republic Bancshares, Inc.)
at December 31 are presented below. Amounts shown as investment in the
wholly-owned subsidiaries and equity in earnings of subsidiaries are eliminated
in consolidation.
REPUBLIC BANCSHARES, INC.
PARENT-ONLY CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1997 1996
-------- -------
<S> <C> <C>
Assets
Cash...................................................... $ -- $ --
Investment in wholly-owned subsidiaries................... 124,307 80,391
Prepaid issuance costs -- subordinated debt............... -- 212
-------- -------
Total............................................. $124,307 $80,603
======== =======
Liabilities
Subordinated debt......................................... $ -- $ 6,000
Junior subordinated debt to subsidiary.................... 28,750 --
Intercompany payable to subsidiary........................ 26 --
Accrued interest on subordinated debt..................... -- 4
-------- -------
Total liabilities................................. -- 4
Minority interest......................................... -- 6,421
Stockholders' Equity
Perpetual preferred convertible stock..................... 1,500 1,500
Common stock.............................................. 14,072 11,708
Capital surplus........................................... 50,322 34,225
Retained earnings......................................... 29,155 20,847
Unrealized gains (losses) on available-for sale
securities............................................. 482 (102)
Total stockholders' equity........................ 95,531 68,178
-------- -------
$124,307 $80,603
======== =======
</TABLE>
F-34
<PAGE> 147
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Income
Dividends from bank....................................... $ 828 $ 264
Interest expense on subordinated debt..................... (392) (5)
Interest on borrowings from subsidiary.................... (1,090) --
Equity in undistributed net income of subsidiary.......... 9,225 4,620
------- ------
Net income........................................ $ 8,571 $4,879
======= ======
</TABLE>
REPUBLIC BANCSHARES, INC.
PARENT-ONLY CONDENSED CASH FLOW STATEMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Operating Activities:
Net income................................................ $ 8,571 $ 4,879
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Equity in undistributed net income of subsidiary....... (9,225) (4,620)
Net decrease (increase) in other assets................ 212 --
Net increase (decrease) in other liabilities........... 22 5
-------- --------
Net cash (used in) provided by operating
activities:...................................... (420) 264
-------- --------
Investment Activities:
Equity investment in banking subsidiary................... (33,322) (56,648)
Equity investment in trust subsidiary..................... (889) --
Equity investment in insurance subsidiary................. (10) --
-------- --------
Net cash used in investing activities:............ (34,221) (56,648)
-------- --------
Financing Activities:
Issuance of stock in merger............................... 12,374 50,860
Decrease in minority interest............................. (6,421) --
Increase in retained earnings from merger................. 1 --
Conversion/Issuance of subordinated debt.................. (152) 5,788
Proceeds from exercise of stock options................... 240 --
Proceeds of borrowings from subsidiary.................... 28,750 --
Dividend payments on perpetual preferred stock............ (264) (264)
-------- --------
Net cash provided by financing activities......... 34,528 56,384
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........ -- --
-------- --------
Cash balance beginning...................................... -- --
-------- --------
Cash balance ending......................................... $ -- $ --
======== ========
</TABLE>
19. BUSINESS SEGMENTS
The Company's operations are divided into two business segments; commercial
banking and mortgage banking. Commercial banking activities include the
Company's lending for portfolio purposes, deposit
F-35
<PAGE> 148
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
gathering through the retail branch network, investment and liquidity
management. Mortgage banking activities, which began in 1996, operate through a
separate division of the Bank, include originating and purchasing mortgage loans
for sale as well as selling those loans. The Company provides support for its
mortgage banking division in areas such as secondary marketing, data processing
and financial management. All funding for the mortgage banking division is
provided through the Bank. The following are business segment results of
operation for the years ended December 31, 1997 and 1996. The Company has
elected to report its business segments without allocation of income taxes and
minority interests.
REPUBLIC BANCSHARES, INC.
BUSINESS SEGMENT DATA
YEARS ENDED DECEMBER 31, 1997 AND 1996
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
COMMERCIAL MORTGAGE COMPANY COMMERCIAL MORTGAGE COMPANY
BANKING BANKING TOTAL BANKING BANKING TOTAL
---------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Assets (at year end).... $1,401,001 $151,404 $1,552,405 $1,177,764 $46,593 $1,224,357
Operating Data
Interest income............. 99,327 9,130 108,457 87,473 1,471 88,944
Interest expense............ 55,772 4,151 54,923 43,986 963 44,949
---------- -------- ---------- ---------- ------- ----------
Net interest income........... 48,555 4,979 53,534 43,487 508 43,949
Provision for loan losses..... 2,628 -- 2,628 2,582 -- 2,582
---------- -------- ---------- ---------- ------- ----------
Net interest income after
provision for loan losses... 45,927 4,979 50,906 40,904 508 41,413
Other noninterest income...... 9,728 15,303 25,031 5,671 1,074 6,745
Gain on sale of ORE held for
investment.................. -- -- -- 1,207 -- 1,207
General and administrative
(G & A) expenses............ 40,002 17,482 57,484 34,773 2,056 36,829
Merger expenses............... 1,144 -- 1,144 -- -- --
SAIF special assessment....... -- -- -- 4,005 -- 4,005
Provision for losses on ORE... 530 -- 530 111 -- 111
ORE expense, net of ORE
income...................... 273 -- 273 (490) -- (490)
Amort. of goodwill & prem. on
deposits.................... 464 -- 464 491 -- 491
Income before income taxes &
minority interest........... $ 13,242 $ 2,800 16,042 $ 8,893 $ (474) 8,419
========== ======== ========== =======
Income tax provision.......... (6,096) (3,035)
Minority interest in income
subsidiary trust............ (701) --
Minority interest in F.F.O.... (674) (505)
---------- ----------
Net income.................... $ 8,571 $ 4,879
========== ==========
</TABLE>
F-36
<PAGE> 149
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. PROPOSED MERGERS AND ACQUISITIONS (UNAUDITED)
NationsBank and Barnett Branches
In December 1997, the Company entered into two purchase and assumption
agreements with NationsBank Corporation ("NationsBank"), to acquire three
branches of NationsBank's subsidiary bank, NationsBank, N.A. ("NationsBank
Subsidiary"), and five branches of Barnett Bank, N.A. ("Barnett Subsidiary"), a
wholly-owned subsidiary of Barnett Banks, Inc. ("BBI"), including the loans and
other assets recorded at those branches, and to assume the deposits and other
liabilities assigned to such branches for a purchase price of approximately
$37.5 million, based on the most recent data available (the "NationsBank
Subsidiary Acquisition"). The first purchase and assumption agreement (the
"Florida Agreement") is for three NationsBank Subsidiary and four Barnett
Subsidiary branches located throughout Florida (the "Florida Branches"),
consisting of three in Monroe County (Key West, Marathon and Plantation Key),
two in Marion County (Ocala and Silver Springs), one in Columbia County (Lake
City) and one in Suwannee County (Live Oak). The second purchase and assumption
agreement (the "Georgia Agreement" and with the Florida Agreement, collectively,
the "NationsBank Subsidiary Agreements") is for a Barnett Subsidiary branch
located in Glynn County, Georgia (the "Georgia Branch" and with the "Florida
Branches," collectively, the "NationsBank Subsidiary Branches"). At August 31,
1997, the Florida Branches had deposit liabilities of $225.5 million and loans
of $163.9 million, and the Georgia Branch had deposit liabilities of $24.2
million and loans of $19.4 million. The NationsBank Subsidiary Acquisition will
be accounted for using purchase accounting rules.
Bankers Savings Bank
In February 1998, the Company and Bankers Savings Bank, Inc. ("BSB"), Coral
Gables, Florida, entered into a definitive agreement (the "BSB Agreement") for
the merger of BSB into the Bank stock by the Company (the "BSB Acquisition") at
an exchange ratio of 0.54 of a share of the Company's Common Stock for each
share of BSB's Common Stock, subject to certain changes in the price of the
Company's Common Stock and a final valuation of BSB's headquarters building. BSB
has two branches in Dade County and, as of December 31, 1997, had total assets
of $67.1 million, total loans of $47.4 million and total deposits of $56.0
million. It is anticipated that the BSB Acquisition will be accounted for as a
pooling of interests. The BSB Acquisition may be terminated by either BSB or the
Company if it is not consummated by November 1, 1998.
Dime Savings Bank
In March 1998, the Company entered into an agreement with Dime Savings
Bank, F.S.B. (the "DSB Agreement" and "DSB", respectively), to acquire a DSB
branch in Deerfield Beach, Florida (Broward County) and to assume the deposits
and other liabilities of approximately $192.5 million, assume the leasehold on
the branch property and purchase the personal property and equipment of the
branch for $100,000. The transaction will be accounted for using purchase
accounting rules and must be consummated within 30 days of receiving regulatory
approval.
F-37
<PAGE> 150
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Lochaven Federal Savings and
Loan Association
Orlando, Florida:
We have audited the accompanying consolidated balance sheets of Lochaven
Federal Savings and Loan Association and Subsidiary ("Lochaven") as of December
31, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of Lochaven'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.
As discussed in Note 12 of the Notes to Consolidated Financial Statements,
Lochaven continues to operate under a Supervisory Agreement with its primary
regulator, the Office of Thrift Supervision (the "OTS"). As of and during the
year ended December 31, 1997, Lochaven was not in compliance with all of the
terms and conditions of the Supervisory Agreement. In addition, Lochaven has
suffered recurring losses from operations. Lochaven has filed a capital plan
with OTS outlining its plans to bring the institution into compliance with the
Supervisory Agreement, and to maintain the minimum required levels of regulatory
capital. In addition, as discussed in Note 13 of the Notes to Consolidated
Financial Statements, on April 21, 1998 Lochaven executed a Letter of Intent to
merge with a subsidiary of Republic Bancshares, Inc. ("Republic"). The proposed
merger is subject to several conditions, including completion of a definitive
agreement, approval by shareholders of Lochaven, and approval by applicable
regulatory authorities (including the OTS). On April 23, 1998, the OTS notified
Lochaven that it had accepted Lochaven's capital plan, contingent upon timely
progress toward consummation of the proposed merger and upon Lochaven's ability
to remain adequately capitalized under the prompt corrective action capital
standards.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lochaven at
December 31, 1997 and 1996 and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ HACKER, JOHNSON, COHEN & GRIEB PA
Orlando, Florida
February 20, 1998, except for Notes 12 and 13,
as to which the date is April 23, 1998
F-38
<PAGE> 151
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 817,415 $ 1,682,053
Interest-bearing deposits with banks........................ 6,146,497 13,211,161
----------- -----------
Cash and cash equivalents......................... 6,963,912 14,893,214
Loans held for sale, net of unrealized losses of $43,325 in
1997 and $42,631 in 1996.................................. 31,898,038 45,684,676
Loans receivable, net of allowance for loan losses of
$870,840 in 1997 and $699,394 in 1996..................... 17,734,406 11,566,939
Accrued interest receivable................................. 251,392 299,897
Foreclosed real estate...................................... 430,843 455,388
Restricted securities -- Federal Home Loan Bank stock, at
cost...................................................... 367,500 367,500
Premises and equipment...................................... 741,571 750,295
Refundable income taxes..................................... 146,415 71,172
Deferred tax asset.......................................... 269,701 414,313
Other assets................................................ 562,313 645,674
----------- -----------
Total assets...................................... $59,366,091 $75,149,068
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
NOW and money-market accounts............................. $27,639,446 $39,800,585
Savings accounts.......................................... 1,253,592 1,010,393
Time deposits............................................. 25,458,413 25,209,103
----------- -----------
Total deposits.................................... 54,351,451 66,020,081
Accrued interest on deposits.............................. 36,626 49,863
Due to banks and official checks.......................... 1,692,703 4,642,965
Advance payments by borrowers for taxes and insurance..... 124,817 152,345
Accrued expenses and other liabilities.................... 398,818 582,386
----------- -----------
Total liabilities................................. 56,604,415 71,447,640
----------- -----------
Commitments and contingencies (Notes 3, 7, 11 and 12)
Stockholders' equity:
Common stock, $.01 par value; 4,600,000 shares authorized;
609,094 shares issued and outstanding.................. 6,091 6,091
Additional paid-in capital................................ 3,365,260 3,365,260
(Accumulated deficit) retained earnings................... (609,675) 330,077
----------- -----------
Total stockholders' equity........................ 2,761,676 3,701,428
----------- -----------
Total liabilities and stockholders' equity........ $59,366,091 $75,149,068
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-39
<PAGE> 152
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Interest income:
Loans receivable.......................................... $3,883,788 $5,187,061
Other interest-earning assets............................. 769,744 644,347
---------- ----------
Total interest income............................. 4,653,532 5,831,408
---------- ----------
Interest expense:
Deposits.................................................. 2,652,368 3,351,178
Borrowed funds............................................ -- 17,940
---------- ----------
Total interest expense............................ 2,652,368 3,369,118
---------- ----------
Net interest income......................................... 2,001,164 2,462,290
Provision for loan losses................................... 517,500 44,595
---------- ----------
Net interest income after provision for loan
losses.......................................... 1,483,664 2,417,695
---------- ----------
Noninterest income:
Gain on sale of loans..................................... 3,113,900 2,828,510
Other service charges and fees............................ 171,594 184,703
Other..................................................... 108,885 4,474
---------- ----------
Total noninterest income.......................... 3,394,379 3,017,687
---------- ----------
Noninterest expenses:
Salaries and employee benefits............................ 3,234,411 2,887,160
Occupancy expense......................................... 1,221,582 1,208,453
Deposit insurance premium................................. 135,463 204,952
SAIF recapitalization assessment.......................... -- 405,469
Professional fees......................................... 300,848 359,840
Data processing........................................... 231,291 243,149
Telephone................................................. 215,317 297,098
Printing and office supplies.............................. 112,377 118,305
Postage................................................... 73,744 83,767
Marketing and advertising................................. 64,292 64,476
Other..................................................... 159,100 119,653
---------- ----------
Total noninterest expenses........................ 5,748,425 5,992,322
---------- ----------
Loss before income taxes.................................... (870,382) (556,940)
Provision (credit) for income taxes......................... 69,370 (209,099)
---------- ----------
Net loss.................................................... $ (939,752) $ (347,841)
========== ==========
Loss per share:
Basic..................................................... $ (1.54) $ (.57)
========== ==========
Dilutive.................................................. $ (1.54) $ (.57)
========== ==========
Weighted-average number of shares of common stock........... 609,094 609,094
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-40
<PAGE> 153
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT) TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995..................... $6,091 $3,365,260 $ 677,918 $4,049,269
Net loss for 1996................................ -- -- (347,841) (347,841)
------ ---------- --------- ----------
Balance at December 31, 1996..................... 6,091 3,365,260 330,077 3,701,428
Net loss for 1997................................ -- -- (939,752) (939,752)
------ ---------- --------- ----------
Balance at December 31, 1997..................... $6,091 $3,365,260 $(609,675) $2,761,676
====== ========== ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-41
<PAGE> 154
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (939,752) $ (347,841)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation........................................... 386,533 375,722
Provision for loan losses.............................. 517,500 44,595
Provision (credit) for deferred income taxes........... 144,612 (242,813)
(Gain) loss on sale of foreclosed real estate.......... (53,374) 17,568
Gain on sale of loans.................................. (3,113,900) (2,828,510)
Originations of loans held for sale.................... (171,708,034) (272,567,940)
Proceeds from sales and principal repayments on loans
held for sale........................................ 188,608,572 280,603,483
Decrease in accrued interest receivable................ 48,505 132,048
(Increase) decrease in refundable income taxes......... (75,243) 858,087
Decrease in other assets............................... 83,361 126,463
(Decrease) increase in due to banks and official
checks............................................... (2,950,262) 1,208,046
(Decrease) increase in accrued interest on deposits,
accrued expenses and other liabilities............... (196,805) 220,620
------------- ------------
Net cash provided by operating activities......... 10,751,713 7,599,528
------------- ------------
Cash flows from investing activities:
Net (increase) decrease in loans receivable............... (7,189,340) 1,606,131
Proceeds from sales of foreclosed real estate............. 582,292 622,310
Net purchases of premises and equipment................... (377,809) (42,165)
------------- ------------
Net cash (used in) provided by investing
activities...................................... (6,984,857) 2,186,276
------------- ------------
Cash flows from financing activities:
Net decrease in NOW, money-market and savings accounts.... (11,917,940) (385,163)
Net increase (decrease) in time deposits.................. 249,310 (872,839)
Decrease in advance payments by borrowers for taxes and
insurance.............................................. (27,528) (30,977)
------------- ------------
Net cash used in financing activities............. (11,696,158) (1,288,979)
------------- ------------
Net (decrease) increase in cash and cash equivalents........ (7,929,302) 8,496,825
Cash and cash equivalents at beginning of year.............. 14,893,214 6,396,389
------------- ------------
Cash and cash equivalents at end of year.................... $ 6,963,912 $ 14,893,214
============= ============
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest expense....................................... $ 2,665,605 $ 3,375,195
============= ============
Tax refund received.................................. $ -- $ (829,373)
============= ============
Noncash investing activities:
Transfer from loans held for sale to foreclosed real
estate................................................. $ -- $ 340,141
============= ============
Transfer from loans held for investment to foreclosed real
estate................................................. $ 669,173 $ --
============= ============
Loans originated on sales of foreclosed real estate....... $ 164,800 $ --
============= ============
Transfer from loans held for sale to loans held for
investment............................................. $ -- $ 1,362,612
============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-42
<PAGE> 155
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The accounting and reporting policies of Lochaven Federal Savings and Loan
Association (the "Savings Bank") and its wholly-owned subsidiary, Independence
Mortgage Corporation of America ("Independence") conform to generally accepted
accounting principles and to general practices within the savings and loan
industry. The Savings Bank, through its banking branch office in Orlando,
Florida, and its nine loan production offices located throughout Florida
provides a variety of banking services to individuals and businesses primarily
in Florida. During 1997, substantially all of the assets and liabilities of
Independence were transferred to Lochaven, and Independence is currently
inactive. The deposits of the Savings Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Savings
Bank and Independence (together, "Lochaven"). All significant intercompany
transactions and balances have been eliminated in consolidation.
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 amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses and any deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on Lochaven's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral and current economic conditions.
F-43
<PAGE> 156
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LOAN SERVICING
Mortgage loans serviced for others are not included in the consolidated
balance sheets. The unpaid principal balances of these loans were $2.6 million
and $3.0 million at December 31, 1997 and 1996, respectively.
FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in the
consolidated statements of operations.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. Deferred tax assets are
reduced by a valuation allowance when in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
PREMISES AND EQUIPMENT
Lochaven's leasehold improvements and furniture and equipment are carried
at cost, less accumulated depreciation and amortization computed principally by
the straight-line method.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") establishes a "fair value" based method
of accounting for stock-based compensation plans and encourages all entities to
adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Lochaven has elected to follow APB Opinion 25 and related interpretations in
accounting for its employee stock options.
OFF-BALANCE SHEET INSTRUMENTS
In the ordinary course of business, Lochaven has entered into
off-balance-sheet instruments consisting of commitments to extend credit,
standby letters of credit and unused lines of credit. In addition, as part of
its secondary mortgage market operations, Lochaven enters into off-balance sheet
agreements to sell loans to individual investors, or to deliver loans for
securitization into mortgage-backed securities. These forward commitments are
intended as a risk management device to limit Lochaven's exposure to interest
rate risk inherent in accepting loan applications for loans held for sale. The
terms of such forward commitments ranges from 30 to 120 days. All such financial
instruments discussed above are recorded in the financial statements when they
are funded.
F-44
<PAGE> 157
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by Lochaven in estimating
fair values of financial instruments:
Cash and Cash Equivalents. The carrying amounts of cash and short-term
instruments approximate their fair value.
Loans Held For Sale. Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate.
Loans Receivable. For variable rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying values.
Fair values for certain fixed-rate mortgage (e.g. one-to-four family
residential), commercial real estate and commercial loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
Accrued Interest Receivable. The carrying amounts of accrued interest
receivable approximate their fair values.
Federal Home Loan Bank Stock. Fair value of the Savings Bank's investment
in FHLB stock is based on its redemption value, which is its cost of $100 per
share.
Deposits. The fair values disclosed for NOW, money-market and savings
accounts are, by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Off-Balance-Sheet Instruments. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
GOODWILL
The excess of cost over the acquired net assets of Independence was
recorded as an intangible asset, and was being amortized using the straight-line
method over a period of ten years. The unamortized balance at December 31, 1996
was $16,317 and was included in other assets. During 1997, the remaining
unamortized balance of goodwill was written off, since all of the assets and
liabilities of Independence were transferred to Lochaven and Independence is
currently inactive.
FUTURE ACCOUNTING REQUIREMENTS
The FASB has recently issued the following statement of financial
accounting standards which is relevant to the Savings Bank:
Financial Accounting Standards 130 -- Reporting Comprehensive Income
establishes standards for reporting comprehensive income. The Standard defines
comprehensive income as the change in equity of an enterprise except those
resulting from stockholder transactions. All components of comprehensive income
are required to be reported in a new financial statement that is displayed with
equal prominence as existing financial statements. Lochaven will be required to
adopt this Standard effective January 1, 1998. As the Statement addresses
reporting and presentation issues only, there will be no impact on operating
results from the adoption of this Standard.
F-45
<PAGE> 158
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
Earnings per share ("EPS") of common stock has been computed on the basis
of the weighted-average number of shares of common stock outstanding. There were
no dilutive securities during the periods presented.
RECLASSIFICATION
Certain reclassifications have been made to the 1996 financial statements
to conform with the 1997 presentation.
2. LOANS RECEIVABLE
The components of loans receivable and loans held for sale in the
consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
HELD FOR INVESTMENT:
Mortgage loans:
Secured by one-to-four family residences.............. $12,956,102 $ 7,334,970
Secured by other properties........................... 4,523,824 3,879,723
Construction loans.................................... 580,680 9,812
Land.................................................. 727,150 853,202
----------- ------------
Total mortgage loans............................. 18,787,756 12,077,707
Nonmortgage loans:
Consumer.............................................. 37,664 28,670
Commercial............................................ 147,259 156,931
Deposit account loans................................. 16,000 83,000
----------- ------------
Total nonmortgage loans.......................... 200,923 268,601
Total loans...................................... 18,988,679 12,346,308
Allowance for loan losses................................ (870,840) (699,394)
Deferred loan fees....................................... (26,037) (79,975)
Undisbursed portion of loans in process.................. (357,396) --
----------- ------------
Loans receivable, net............................ $17,734,406 11,566,939
=========== ============
LOANS HELD FOR SALE:
Secured by one-to-four family residences................. 23,698,255 29,105,165
Construction loans....................................... 20,280,423 32,923,754
----------- ------------
Total............................................ 43,978,678 62,028,919
Undisbursed portion of loans in process.................. (12,037,315) (16,301,612)
Unrealized losses on loans held for sale................. (43,325) (42,631)
----------- ------------
Total loans held for sale........................ $31,898,038 $ 45,684,676
=========== ============
</TABLE>
F-46
<PAGE> 159
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
--------- ----------
<S> <C> <C>
Balance at January 1........................................ $699,394 $ 765,883
Provision for loan losses................................... 517,500 44,595
Loans charged-off........................................... (346,054) (111,084)
-------- ---------
Balance at December 31...................................... $870,840 $ 699,394
======== =========
</TABLE>
The following summarizes the amounts of impaired loans, all of which were
collateral dependent:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Loans identified as impaired:
Gross loans with related allowances for losses recorded... $386,868 $270,269
Less: Allowances on these loans........................... (58,030) (40,540)
-------- --------
Net investment in impaired loans............................ $328,838 $229,729
======== ========
</TABLE>
The average net investment in impaired loans and interest income recognized
and received on impaired loans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Average investment in impaired loans........................ $254,412 $465,703
======== ========
Interest income recognized on impaired loans................ $ 30,718 $ 57,439
======== ========
Interest income received on impaired loans.................. $ 30,718 $ 57,439
======== ========
</TABLE>
3. PREMISES AND EQUIPMENT
Premises and equipment were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cost:
Leasehold improvements.................................... $ 541,789 $ 318,700
Furniture and equipment................................... 1,896,067 1,992,801
----------- -----------
Total cost........................................ 2,437,856 2,311,501
Less accumulated depreciation............................... (1,696,285) (1,561,206)
----------- -----------
Net book value.................................... $ 741,571 $ 750,295
=========== ===========
</TABLE>
Lochaven leases a building in which it conducts its banking operations. The
lease is an operating lease and the lease term, which commenced March 1, 1985,
is for eighteen years. The base annual minimum rental was $42,000 for the first
two years. For each succeeding two-year period thereafter, the minimum annual
base rental is adjusted by the greater of the change in the Consumer Price Index
or 8%.
Under the terms of the lease, the landlord has the unqualified right to
cancel the lease upon one year's written notice to Lochaven if the landlord
wishes to develop the leased premises and surrounding areas. If the landlord
exercises his right to cancel the lease, Lochaven would be forced to relocate
its principal banking
F-47
<PAGE> 160
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
office. This would entail not only the disruption of business and the expenses
caused by moving, but also the write-off of the unamortized portion of the
leasehold improvements paid for by Lochaven (which approximates $109,000 at
December 31, 1997).
Lochaven also leases office space for its nine loan production offices,
under operating leases with remaining lease terms ranging from one month to
three years. Total rental expense under operating leases for all of Lochaven's
offices was approximately $390,000 and $406,000 for the years ended December 31,
1997 and 1996, respectively.
Future minimum rental commitments under noncancelable leases were as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ --------
<S> <C>
1998...................................................... $235,485
1999...................................................... 218,024
2000...................................................... 157,261
2001...................................................... 140,688
2002...................................................... 133,725
Thereafter................................................ 112,689
--------
Total............................................. $997,872
========
</TABLE>
4. DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with
a minimum denomination of $100,000, was approximately $2.8 million and $5.8
million at December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit
were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ -----------
<S> <C>
1998...................................................... $19,538,085
1999...................................................... 3,352,341
2000...................................................... 601,599
2001...................................................... 1,121,278
2002 and thereafter....................................... 845,110
-----------
Total............................................. $25,458,413
===========
</TABLE>
5. ADVANCES FROM FEDERAL HOME LOAN BANK
Lochaven did not have any advances from the Federal Home Loan Bank of
Atlanta ("FHLB") at December 31, 1997 or 1996. At December 31, 1997, Lochaven
had an approved borrowing capability of $4.7 million in advances from the FHLB.
Lochaven is required by its specific collateral pledge and security agreement
with the FHLB to pledge as collateral for its advances, specific first mortgage
loans having a current market value equal to at least 125% of the amount of
advances outstanding. Furthermore, at December 31, 1997, Lochaven had a $20.0
million warehouse line of credit agreement with the FHLB under which advances
may be drawn provided sufficient specific first mortgage loans are pledged as
collateral by Lochaven. The warehouse line of credit, for which Lochaven had no
outstanding borrowings or assets pledged at December 31, 1997, was canceled in
February, 1998.
F-48
<PAGE> 161
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The provision (credit) for income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
--------- ----------
<S> <C> <C>
Federal:
Current................................................... $(75,242) $ 33,714
Deferred.................................................. 58,213 (213,799)
-------- ---------
(17,029) (180,085)
State:
Current................................................... -- --
Deferred.................................................. 86,399 (29,014)
-------- ---------
86,399 (29,014)
-------- ---------
Total............................................. $ 69,370 $(209,099)
======== =========
</TABLE>
The provision (credit) for income taxes is different than that computed by
applying the federal statutory rate of 34% as indicated in the following
analysis:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996
------------------ ------------------
1997 % 1996 %
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Tax at federal income tax rate.............. $(281,243) (34.0)% $(189,360) (34.0)%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit... (28,124) (3.4) (19,149) (3.4)
Valuation allowance on deferred tax
assets................................. 383,700 46.4 -- --
Other, net................................ (4,963) (.6) (590) (.1)
--------- ----- --------- -----
Total............................. $ 69,370 8.4% $(209,099) (37.5)%
========= ===== ========= =====
</TABLE>
F-49
<PAGE> 162
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses and foreclosed real estate...... $319,432 $167,737
Net operating loss carryforwards.......................... 249,993 299,004
Alternative minimum tax and general business credits...... 68,429 35,037
Accrued vacation pay...................................... 12,469 --
Interest income from nonaccrual loans..................... 9,537 --
Other..................................................... 20,057 3,722
-------- --------
Total gross deferred tax assets................... 679,917 505,500
Less valuation allowance.................................. (383,700) --
-------- --------
Total net deferred tax assets..................... 296,217 505,500
-------- --------
Deferred tax liabilities:
Deferred loan fees........................................ (4,972) (22,909)
Federal Home Loan Bank stock dividends.................... (3,896) (3,896)
Accumulated depreciation on furniture, fixtures and
equipment.............................................. (17,648) (64,382)
-------- --------
Total gross deferred tax liabilities.............. (26,516) (91,187)
-------- --------
Net deferred tax asset............................ $269,701 $414,313
======== ========
</TABLE>
During the year ended December 31, 1997, Lochaven recorded a valuation
allowance of $383,700 on the deferred tax assets to reduce the total to an
amount that management believes will ultimately be realized. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that temporary differences and carryforwards are expected to be
available to reduce taxable income. With respect to the resulting net deferred
tax asset of $269,701 at December 31, 1997, management believes that it is more
likely than not that Lochaven will have sufficient future taxable income to
recover this asset. However, for purposes of calculating regulatory capital,
Office of Thrift Supervision ("OTS") regulations limit the amount of deferred
tax assets that can be included in regulatory capital to the lesser of (i) 10%
of Tier 1 capital or (ii) the amount the institution expects to realize within
the subsequent twelve-month period. Accordingly, Lochaven has excluded
approximately $177,000 of its net deferred tax assets from the calculation of
regulatory capital as of December 31, 1997. OTS guidelines require Lochaven to
recalculate this capital component on a quarterly basis.
At December 31, 1997, Lochaven's net operating loss carryforwards for
federal income tax purposes of approximately $390,000 are available to offset
future federal taxable income and expire in 2012. For state tax purposes,
Lochaven's net operating loss carryforwards of approximately $3,238,000 will
expire in the years 2009 through 2012.
7. FINANCIAL INSTRUMENTS
Lochaven is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, unused lines of credit and
standby letters of credit and may involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of these instruments reflect
the extent of involvement Lochaven has in these financial instruments.
F-50
<PAGE> 163
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lochaven's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. Lochaven uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Lochaven evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained by
Lochaven upon extension of credit is based on management's credit evaluation of
the counterparty.
Standby letters of credit are conditional commitments issued by the Savings
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Savings Bank holds collateral supporting those commitments for which
collateral is deemed necessary.
Lochaven was committed to sell loans through a combination of forward
commitments to sell loans to permanent investors and mandatory forward
commitments to deliver loans for securitization totaling $6.5 million and $8.5
million at December 31, 1997 and 1996, respectively.
Repurchase clauses exist with investors to whom loans are sold by Lochaven.
These repurchase clauses commit Lochaven to repurchase loans that become over 90
days delinquent during a specified period of up to 12 months following the loan
sale. Repurchased loans amounted to approximately $3.1 million and $1.6 million
in 1997 and 1996, respectively. As instructed by the OTS, repurchased loans were
considered in management's evaluation of potential losses when determining the
allowances for loan losses. The face amount of loans previously sold which
remain subject to these contract provisions was approximately $5.9 million and
$3.7 million at December 31, 1997 and 1996, respectively.
The estimated fair values of Lochaven's financial instruments were as
follows (in thousands)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1997 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents....................... $ 6,964 $ 6,964 $14,893 $14,893
Loans held for sale............................. 31,898 31,898 45,685 45,685
Loans receivable................................ 17,734 18,357 11,567 11,726
Accrued interest receivable..................... 251 251 300 300
Federal Home Loan Bank stock.................... 368 368 368 368
Financial liabilities --
Deposits........................................ $54,351 $54,986 $66,020 $66,083
</TABLE>
F-51
<PAGE> 164
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notional amount, which approximates fair value, of Lochaven's financial
instruments with off-balance-sheet risk at December 31, 1997 was as follows (in
thousands):
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
--------
<S> <C>
Commitments to extend credit................................ $12,510
=======
Unused lines of credit...................................... $ 316
=======
Standby letters of credit................................... $ 259
=======
</TABLE>
8. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
Lochaven grants real estate and consumer loans to customers primarily in
the State of Florida with the majority of such loans in the Orange, Seminole and
Osceola County area. Therefore, Lochaven's exposure to credit risk is
significantly affected by changes in the economy of the Orange, Seminole and
Osceola County area.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit represent the amounts of potential accounting loss
should the contract be fully drawn upon, the customer default and the value of
any existing collateral become worthless.
9. STOCK OPTIONS
On April 30, 1986, the Savings Bank adopted and the stockholders approved
stock option plans for directors and for officers and full-time employees (the
"Option Plans"), under which stock options for 280,000 common shares were
authorized to be granted. All options granted under the option plans expired
during 1997 and no options had been exercised and no options for shares remain
authorized to be granted under the Option Plans. Shares granted under the Option
Plans were exercisable immediately at the estimated market price at the date of
the grant, but not less than $5.50 per share. All options expired at the earlier
of ten years from the date of the grant or 90 days (180 days in the case of
death or disability) following the date which the director, officer or employee
ceases to serve in such capacity.
During 1995, the Savings Bank entered into an employment agreement with its
President which provides for granting of options to purchase up to 35,000 common
shares. Under the terms of the employment agreement, the Savings Bank agreed to
grant options to purchase common shares at the current market value at the date
of the grant, for 5,000 shares upon the execution of the agreement and for
10,000 shares each in December, 1995, 1996 and 1997. Options granted are
exercisable immediately, and expire at the earlier of five years from the date
of the grant, or one year following the date which the President ceases to be
employed by the Savings Bank. During each of the years ended December 31, 1997
and 1996, the options to purchase 10,000 shares, respectively, were granted as
set forth in the agreement. No such options have been exercised at December 31,
1997.
F-52
<PAGE> 165
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The option transactions for 1996 and 1997 were as follows ($in thousands,
except per share amounts):
<TABLE>
<CAPTION>
OPTION PLANS EMPLOYMENT AGREEMENT WEIGHTED-
------------------------ ------------------------ AVERAGE
NUMBER OF OPTION PRICE NUMBER OF OPTION PRICE PRICE
SHARES PER SHARE SHARES PER SHARE PER SHARE
--------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1995... 22,300 $5.50 15,000 $6.31 - 6.65 $5.92
Granted.......................... -- -- 10,000 6.09 6.09
Canceled or expired.............. (6,000) 5.50 -- -- 5.50
------ ------
Outstanding, December 31, 1996... 16,300 5.50 25,000 6.09 - 6.65 6.02
Granted.......................... -- -- 10,000 4.53 4.53
Canceled or expired.............. 16,300 5.50 -- -- --
------ ------
Outstanding, December 31, 1997... -- $ -- 35,000 $4.53 - 6.65 $5.84
====== ===== ====== ============ =====
</TABLE>
The weighted-average remaining contractual life of the outstanding stock
options at December 31, 1997, all of which were exercisable, was 3.8 years.
SFAS 123 requires pro forma fair value disclosures if the intrinsic value
method is being utilized. In order to calculate the estimated fair value of the
options, it was assumed that the risk-free interest rate was 6.0%, there would
be no dividends paid by the Savings Bank over the exercise period, the expected
life of the options would be the entire exercise period and stock volatility
would be zero due to the lack of an active market for the stock. The following
information pertains to the estimated fair value of the options granted to
purchase common stock in 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1997 1996
----- -----
<S> <C> <C>
Weighted-average grant-date fair value of options issued
during the year........................................... $ 11 $ 15
===== =====
Proforma net loss........................................... $(947) $(357)
===== =====
</TABLE>
10. RELATED PARTIES
Loans to directors and executive officers of Lochaven, which were made at
market rates, were made in the ordinary course of business and did not involve
more than normal risk of collectibility or present other unfavorable features.
Activity in loans to directors and executive officers was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Balance at January 1........................................ $313,917 $318,403
Loans originated............................................ 450,000 --
Principal repayments........................................ (9,167) (4,486)
-------- --------
Balance at December 31...................................... $754,750 $313,917
======== ========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, Lochaven has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, Lochaven 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 consolidated financial condition of Lochaven.
F-53
<PAGE> 166
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. REGULATORY MATTERS
During 1995, the Board of Directors of the Savings Bank signed a
Supervisory Agreement with the Office of Thrift Supervision ("OTS") which
provides that Lochaven is restricted from taking the following action without
prior OTS approval: (i) increasing its assets size (as reported on the Savings
Bank's quarterly thrift financial report) during a calendar quarter in excess of
the amount of interest credited on deposit liabilities during that quarter, (ii)
modifying any employment agreement with any senior officer or director, (iii)
entering into any contract for goods or services outside the normal operations
of its business, and (iv) making any capital distributions. In addition, the
Savings Bank was required to reduce its level of classified assets to a
specified level of regulatory capital and to maintain sufficient regulatory
capital to meet the prompt corrective action requirements of a well capitalized
institution. As shown in the table below, the Savings Bank's capital levels at
December 31, 1997 did not meet the prompt corrective action requirements for a
well capitalized institution. In addition, the Savings Bank was not in
compliance with the requirement to maintain a level of classified assets of less
than 75% of regulatory capital. In response to these instances of noncompliance
with the Supervisory Agreement, the Savings Bank filed a capital plan and
operating budget with OTS which set forth management's proposed actions to
rectify the deficiencies. On April 23, 1998, the OTS notified Lochaven that it
considered the pending merger (discussed in Note 13) acceptable compliance with
the requirement of the Supervisory Agreement for plans and strategies for
improving Lochaven's capital position. In addition, the OTS lowered the minimum
capital requirements set forth in the Supervisory Agreement, such that Lochaven
is required to maintain regulatory capital equal to the adequately capitalized,
versus well capitalized, prompt corrective action capital standards.
Except as discussed above, management believes, as of December 31, 1997,
that the Savings Bank is in compliance with the provisions of the Supervisory
Agreement.
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF member institutions, including the
Savings Bank, to recapitalize the SAIF and spread the obligations for payments
of Financing Corporation ("FICO") bonds across all SAIF and Bank Insurance Fund
("BIF") members. That legislation eliminated the substantial disparity between
the amount that BIF and SAIF members had been paying for deposit insurance
premiums. The FDIC special assessment levied amounted to 65.7 basis points on
SAIF-assessable deposits held as of March 31, 1995. The Savings Bank's special
assessment of $405,469 before taxes was recognized in the third quarter of 1996
and was tax deductible.
The Savings 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 Lochaven's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Savings Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Savings Bank's
capital amounts and classification are also subject to qualitative judgements by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts (set forth in the table
below) of tangible and core capital to adjusted assets (as defined in the
regulations) and risk-based capital to risk-weighted assets (as defined). As
discussed above, the Savings Bank did not meet all capital adequacy requirements
to which it was subject as of December 31, 1997.
As of December 31, 1997, the most recent notification from the OTS
categorized the Savings Bank as adequately capitalized under the regulatory
framework for prompt corrective action; however, the Savings Bank was required
by its Supervisory Agreement with OTS to meet the capital requirements for a
well
F-54
<PAGE> 167
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capitalized institution. To be categorized as well capitalized, the Savings Bank
must maintain minimum Tier I (core), Tier I (risk-based) and total risk-based
capital ratios as set forth in the table.
The Savings Bank's actual capital amounts and ratios at December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
MINIMUM TO BE WELL
FOR CAPITAL CAPITALIZED FOR
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- ------------- ------------------
% AMOUNT % AMOUNT % AMOUNT
---- ------- --- ------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1997:
Stockholders' equity, and ratio to
total assets...................... 4.8% $ 2,805
Less-intangible assets............... (177)
-------
Tangible capital, and ratio to
adjusted total assets............. 4.5% $ 2,628 1.5% $ 871
======= ======
Tier 1 (core) capital, and ratio to
adjusted total assets............. 4.5% $ 2,628 3.0% $1,742 5.0% $2,903
======= ====== ======
Tier 1 capital, and ratio to
risk-weighted assets.............. 7.2% 2,628 4.0% $1,450 6.0% $2,175
====== ======
Tier 2 capital (allowance for loan
losses)........................... 458
-------
Total risk-based capital, and
ratio to risk-weighted
assets..................... 8.5% $ 3,086 8.0% $2,900 10.0% $3,625
======= ====== ======
Total assets per regulatory
reports.................... $58,239
=======
Adjusted total assets................ $58,062
=======
Risk-weighted assets................. $36,251
=======
AT DECEMBER 31, 1996:
Stockholders' equity, and ratio to
total assets...................... 5.1% $ 3,701
Less-intangible assets............... (16)
-------
Tangible capital, and ratio to
adjusted total assets............. 5.1% $ 3,685 1.5% $1,080
======= ======
Tier 1 (core) capital, and ratio to
adjusted total assets............. 5.1% $ 3,685 3.0% $2,161 5.0% $3,601
======= ====== ======
Tier 1 capital, and ratio to
risk-weighted assets.............. 11.4% 3,685 4.0% $1,290 6.0% $1,935
====== ======
Tier 2 capital (allowance for loan
losses)........................... 405
-------
Total risk-based capital, and
ratio to risk-weighted
assets..................... 12.7% $ 4,090 8.0% $2,580 10.0% $3,224
======= ====== ======
Total assets per regulatory
reports.................... $72,039
=======
Adjusted total assets.................. $72,023
=======
Risk-weighted assets................... $32,244
=======
</TABLE>
F-55
<PAGE> 168
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENT -- PENDING MERGER
On April 21, 1998, Lochaven executed a Letter of Intent to merge with a
subsidiary of Republic Bancshares, Inc. ("Republic"). Under the terms of the
Letter of Intent, Republic will exchange shares of its common stock for all of
the outstanding shares of Lochaven's common stock at an exchange ratio of .2776
share of Republic common stock for each share of Lochaven's common stock.
Outstanding options for Lochaven's common stock will be converted into options
for Republic common stock on the same terms. The transaction is expected to be
accounted for as a pooling-of-interests, and is expected to be completed in
1998. The proposed merger is subject to several conditions, including completion
of a definitive agreement, approval by the shareholders of Lochaven, and
approval by applicable regulatory authorities.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
F-56
<PAGE> 169
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONDENSED BALANCE SHEET
($ IN THOUSANDS)
<TABLE>
<CAPTION>
AT JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
ASSETS
Cash and due from banks..................................... $ 1,012
Interest-bearing deposits with banks........................ 1,546
-------
Cash and cash equivalents................................. 2,558
Loans held for sale, net of unrealized losses of $43........ 24,513
Loans receivable, net of allowance for loan losses of
$791...................................................... 27,795
Accrued interest receivable................................. 300
Foreclosed real estate...................................... 641
Restricted securities -- Federal Home Loan Bank stock, at
cost...................................................... 368
Premises and equipment...................................... 654
Deferred tax asset.......................................... 270
Other assets................................................ 2,519
-------
Total............................................. $59,618
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
NOW and money-market accounts............................. $22,896
Savings accounts.......................................... 941
Time deposits............................................. 25,941
-------
Total deposits.................................... 49,778
Other borrowings.......................................... 5,150
Accrued interest on deposits.............................. 24
Due to banks and official checks.......................... 798
Advance payments by borrowers for taxes and insurance..... 402
Accrued expenses and other liabilities.................... 635
-------
Total liabilities................................. 56,787
-------
Stockholders' equity:
Common stock.............................................. 6
Additional paid-in capital................................ 3,365
Accumulated deficit....................................... (540)
-------
Total stockholders' equity........................ 2,831
-------
Total............................................. $59,618
=======
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements.
F-57
<PAGE> 170
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONDENSED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable.......................................... $1,098 $ 949 $2,166 $2,034
Other interest-earning assets............................. 53 241 125 440
------ ------ ------ ------
Total interest income............................. 1,151 1,190 2,291 2,474
------ ------ ------ ------
Interest expense:
Deposits.................................................. 609 664 1,221 1,336
Borrowed funds............................................ 48 -- 66 --
------ ------ ------ ------
Total interest expense............................ 657 664 1,287 1,336
------ ------ ------ ------
Net interest income......................................... 494 526 1,004 1,138
Provision for loan losses................................. 25 15 49 37
------ ------ ------ ------
Net interest income after provision for loan losses......... 469 511 955 1,101
------ ------ ------ ------
Noninterest income:
Gain on sale of loans..................................... 1,151 831 2,068 1,898
Other service charges and fees............................ 159 165 310 335
Other..................................................... 29 -- 64 --
------ ------ ------ ------
Total noninterest income.......................... 1,339 996 2,442 2,233
------ ------ ------ ------
Noninterest expenses:
Salaries and employee benefits............................ 1,049 970 2,132 2,113
Occupancy expense......................................... 300 345 579 633
Deposit insurance premium................................. 32 39 65 68
Professional fees......................................... 36 46 80 97
Data processing expense................................... 41 58 90 125
Telephone................................................. 66 54 125 133
Printing and office supplies.............................. 24 29 52 52
Postage................................................... 21 23 41 49
Marketing and advertising................................. 13 10 34 19
Other..................................................... 59 163 86 218
------ ------ ------ ------
Total noninterest expenses........................ 1,641 1,737 3,284 3,507
------ ------ ------ ------
Earnings (loss) before income taxes......................... 167 (230) 113 (173)
Provision (credit) for income taxes......................... 63 (88) 43 (66)
------ ------ ------ ------
Net earnings (loss)......................................... $ 104 $ (142) $ 70 $ (107)
====== ====== ====== ======
Earnings (loss) per share:
Basic..................................................... $ 0.17 $(0.23) $ 0.12 $(0.18)
====== ====== ====== ======
Fully diluted............................................. $ 0.17 $(0.23) $ 0.12 $(0.18)
====== ====== ====== ======
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements.
F-58
<PAGE> 171
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997......................... $6 $3,365 $(610) $2,761
Net earnings (unaudited)............................. -- -- 70 70
-- ------ ----- ------
Balance at June 30, 1998 (unaudited)................. $6 $3,365 $(540) $2,831
== ====== ===== ======
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements.
F-59
<PAGE> 172
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997
-------- -------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ 70 $ (107)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation......................................... 151 185
Provision for loan losses............................ 49 37
Gain on sale of loans................................ (2,068) (1,898)
Origination for loans held for sale.................. (69,377) (59,538)
Proceeds from sale of loans held for sale............ 78,830 80,807
Net proceeds from sales of foreclosed real estate.... 301 186
(Increase) decrease in accrued interest receivable... (49) 58
Decrease (increase) refundable income taxes.......... 146 (80)
(Increase) decrease in other assets.................. (1,957) 255
Decrease in due to banks and official checks......... (895) (4,178)
Increase (decrease) in accrued interest on demand,
accrued expenses and other liabilities.............. 223 (395)
-------- -------
Net cash used in operating activities............. 5,424 15,332
-------- -------
Cash flows from investing activities:
Net increase in loans..................................... (10,621) (4,913)
Net purchase of premises and equipment.................... (63) (33)
-------- -------
Net cash used in investing activities............. (10,684) (4,946)
-------- -------
Cash flows from financing activities:
Net decrease in demand, NOW, money-market and savings
deposits............................................... (5,056) (10,347)
Net increase in time deposits............................. 483 660
Increase in other borrowings.............................. 5,150 --
Increase in advance payments by borrowers for taxes and
insurance.............................................. 277 191
-------- -------
Net cash provided by (used in) financing
activities....................................... 854 (9,496)
-------- -------
Net (decrease) increase in cash and cash equivalents........ (4,406) 890
Cash and cash equivalents at beginning of period............ 6,964 14,893
-------- -------
Cash and cash equivalents at end of period.................. $ 2,558 $15,783
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes paid.................................... $ -- $ --
======== =======
Interest expense..................................... $ 1,300 $ 1,359
======== =======
Noncash investing and financing activities --
Transfer of loans held for investment to foreclosed
real estate......................................... $ 557 $ 112
======== =======
Loans originated on sales of foreclosed real
estate.............................................. $ 46 $ --
======== =======
</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements.
F-60
<PAGE> 173
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of the management of Lochaven Federal Savings and Loan
Association (the "Savings Bank"), the accompanying condensed financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position at June 30, 1998 and 1997 and
the results of operations for the three- and six-month periods ended June 30,
1998 and cash flows for the six-month periods ended June 30, 1998 and 1997. The
results of operations and cash flows for the six months ended June 30, 1998, are
not necessarily indicative of results that may be expected for the year ending
December 31, 1998.
2. LOAN IMPAIRMENT AND LOAN LOSSES
The Bank prepares a quarterly review of the adequacy of the allowance for
loan losses to also identify and value impaired loans in accordance with
guidance in the Statements of Financial Accounting Standards No. 114 and 118.
Impaired loans identified by the Company at June 30, 1998 and 1997 were $102,000
and $168,000, net of loan loss allowance of $15,000 and $25,000, respectively.
An analysis of the change in the allowance for loan losses follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- --------------
1998 1997 1998 1997
---- ----- ----- -----
<S> <C> <C> <C> <C>
Beginning balance.................................. $846 $ 714 $ 871 $ 699
Provision for loan losses.......................... 25 15 49 37
Loans charged-off.................................. (80) (121) (129) (128)
---- ----- ----- -----
Ending balance..................................... $791 $ 608 $ 791 $ 608
==== ===== ===== =====
</TABLE>
3. IMPACT OF NEW ACCOUNTING ISSUES
In September 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). That Statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities. That
Statement also provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
No. 125 was effective for transfers and servicing of financial assets as well as
extinguishments of liabilities occurring in 1997. The adoption of SFAS No. 125
had no significant effect on the Bank's financial position at June 30, 1998 or
1997 or results of operations for the six-month periods then ended.
On January 1, 1998, the Bank adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income. Comprehensive income is a
more inclusive financial reporting methodology that includes disclosure of
certain financial information that historically has not been recognized in the
calculation of net earnings. The Standard defines comprehensive income as the
change in equity of an enterprise except those resulting from stockholder
transactions. All components of comprehensive income are required to be reported
in a new financial statement that is displayed with equal prominence as existing
financial statements. As the Statement addresses reporting and presentation
issues only, there was no impact on operating results from the adoption of this
Standard.
F-61
<PAGE> 174
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
4. EARNINGS PER SHARE
Earnings (loss) per share ("EPS") of common stock has been computed on the
basis of the weighted-average number of shares of common stock outstanding. For
purposes of calculating diluted EPS, because there is no active trading market
for the Bank's common stock, the average book value per share was used ($in
thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------
1998 1997
----------------------------- --------------------------
WEIGHTED- PER WEIGHTED- PER
AVERAGE SHARE AVERAGE SHARE
EARNINGS SHARES AMOUNT LOSS SHARES AMOUNT
-------- --------- ------ ----- --------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net earnings (loss) available to
common stockholders........... $104 609,094 $.17 $(142) 609,094 $(.23)
==== =====
Effect of dilutive securities --
Incremental shares from assumed
exercise of options........... 53 841
------- -------
Diluted EPS:
Net earnings (loss) available to
common stockholders and
assumed conversions........... $104 609,147 $.17 $(142) 609,935 $(.23)
==== ======= ==== ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------
1998 1997
----------------------------- --------------------------
WEIGHTED- PER WEIGHTED- PER
AVERAGE SHARE AVERAGE SHARE
EARNINGS SHARES AMOUNT LOSS SHARES AMOUNT
-------- --------- ------ ----- --------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net earnings (loss) available to
common stockholders........... $70 609,094 $.12 $(107) 609,094 $(.18)
==== ===== =====
Effect of dilutive securities --
Incremental shares from assumed
exercise of options........... 78 788
------- -------
Diluted EPS:
Net earnings (loss) available to
common stockholders and
assumed conversions........... $70 609,172 $.12 $(107) 609,882 $(.18)
=== ======= ==== ===== ======= =====
</TABLE>
5. SUBSEQUENT EVENT -- PENDING MERGER
On April 21, 1998, Lochaven executed a Letter of Intent to merge with a
subsidiary of Republic Bancshares, Inc. ("Republic"). Under the terms of the
Letter of Intent, Republic will exchange shares of its common stock for all of
the outstanding shares of Lochaven's common stock at an exchange ratio of .2776
share of Republic common stock for each share of Lochaven's common stock.
Outstanding options for Lochaven's common stock will be converted into options
for Republic common stock on the same terms. The transaction is expected to be
accounted for as a pooling-of-interests, and is expected to be completed in
1998. The proposed merger is subject to several conditions, including completion
of a definitive agreement, approval by the shareholders of Lochaven, and
approval by applicable regulatory authorities.
F-62
<PAGE> 175
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of May 6, 1998, by and among REPUBLIC BANCSHARES, INC. ("Republic"), a
corporation organized and existing under the laws of the State of Florida, with
its principal office located in St. Petersburg, Florida; Republic's wholly-owned
subsidiary Republic Bank (the "Bank"), a commercial bank organized and existing
under the laws of the State of Florida, with its principal office located in St.
Petersburg, Florida; and Lochaven Federal Savings and Loan Association
("Lochaven"), a Federal savings and loan association organized and existing
under the laws of the United States, with its principal office located in
Orlando, Florida.
PREAMBLE
The Boards of Directors of Republic, the Bank and Lochaven are of the
opinion that the transactions described herein are in the best interests of the
parties to this Agreement and their respective stockholders and, accordingly,
have approved this Agreement and the transactions contemplated hereby.
This Agreement provides for the merger of Lochaven with and into the Bank
(the "Merger"). At the effective time of the Merger, the outstanding shares of
the capital stock of Lochaven shall be converted into shares of the common stock
of Republic (except as provided herein). The transactions described in this
Agreement are subject to the approvals of Republic, as sole stockholder of the
Bank, and the stockholders of Lochaven, the Board of Governors of the Federal
Reserve System, the FDIC, and the Department, and the satisfaction of certain
other conditions described in this Agreement.
The parties to this Agreement intend (i) that the Merger for federal income
tax purposes shall qualify as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii)
that this Agreement constitute the agreement and plan of merger prescribed by
Section 658.42 of the Florida Statutes.
Certain terms used in this Agreement are defined in Section 11.1 of this
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants and agreements set forth herein, the Parties agree as
follows:
ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER
1.1 Constituent Banks. The Bank is a commercial bank organized and
existing under the laws of the State of Florida, with its principal office at
111 Second Avenue, N.E., St. Petersburg, Florida. A listing of each branch
office of the Bank is attached hereto as Exhibit A. Lochaven is a savings
association organized and existing under the laws of the United States of
America, with its principal office at 2410 North Orange Blossom Trail, Winter
Park, Florida. A listing of each branch office of Lochaven is attached hereto as
Exhibit B.
1.2 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time (as defined below), Lochaven shall be merged with and into the
Bank in accordance with the provisions of Section 655.412 of the Florida
Statutes and, to the extent not inconsistent therewith, Part 552 of the Rules
and Regulations of the Office of Thrift Supervision (the "OTS Regulations"), and
all outstanding shares of Lochaven Common Stock shall be exchanged into shares
of Republic Common Stock, with the effect provided in Section 655.417 of the
Florida Statutes and Section 552.13 of the OTS Regulations. The Bank shall be
the Surviving Corporation resulting from the Merger and shall continue to be
governed by the Laws of the State of Florida. The Merger shall be consummated
pursuant to the terms of this Agreement, which has been approved and adopted by
the respective Boards of Directors of Lochaven, Republic and the Bank.
A-1
<PAGE> 176
1.3 Time and Place of Closing. The closing for the Merger (the "Closing")
will take place at 9:00 A.M. on the date that the Effective Time occurs (or the
immediately preceding day if the Effective Time is earlier than 9:00 A.M.), or
at such other time as the parties, acting through their duly authorized
officers, may mutually agree. The place of Closing shall be at such location as
may be mutually agreed upon by the parties.
1.4 Effective Time. The Merger contemplated by this Agreement shall become
effective on the date and at the time set forth in the certificate of merger
filed with the Department (the "Certificate of Merger") pursuant to Section
658.45 of the Florida Statutes (the "Effective Time"). The parties shall request
that the Certificate of Merger have as the Effective Time the date and time set
forth in the filing made with the Department pursuant to Section 548.44(9) of
the Florida Statutes. Subject to the terms and conditions hereof, unless
otherwise mutually agreed upon in writing by the duly authorized officers of
each party, the parties shall use their reasonable efforts to cause the
Effective Time to occur on or before the tenth business day (as designated by
Republic) following the last to occur of: (i) the effective date (including
expiration of any applicable waiting period) of the last required Consent of any
Regulatory Authority having authority over and approving or exempting the
Merger; or (ii) the date on which the stockholders of Lochaven approve the
matters relating to this Agreement required to be approved by such stockholders
by applicable Law.
ARTICLE 2
CORPORATE GOVERNANCE
2.1 Surviving Corporation. The name of the Surviving Corporation shall be
Republic Bank and the specific location of the proposed main office will be 111
Second Avenue, N.E., St. Petersburg, Florida 33701. A list of each existing and
proposed branch office of the Surviving Corporation is attached hereto as
Exhibit C.
2.2 Articles of Incorporation. The Articles of Incorporation of Republic
as in effect immediately prior to the Effective Time shall continue in effect
following the Effective Time, and the Articles of Incorporation of the Bank in
effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation until otherwise amended or repealed.
A copy of the Articles of Incorporation of the Bank is attached hereto as
Exhibit D.
2.3 Bylaws. The By-laws of Republic as in effect immediately prior to the
Effective Time shall continue in effect following the Effective Time, and the
By-laws of the Bank in effect immediately prior to the Effective Time shall be
the By-laws of the Surviving Corporation until otherwise amended or repealed.
2.4 Directors and Officers. The directors of Republic in office
immediately prior to the Effective Time shall continue in office following the
Effective Time, and the directors of the Bank in office immediately prior to the
Effective Time, together with such additional Persons as may thereafter be
elected, shall serve as the directors of the Surviving Corporation from and
after the Effective Time in accordance with the By-laws of the Surviving
Corporation. A list of the names and addresses of each of the directors of the
Surviving Corporation immediately following the Effective Time is attached
hereto as Exhibit E. The officers of Republic in office immediately prior to the
Effective Time shall continue in office following the Effective Time, and the
officers of the Bank, together with such additional Persons as may thereafter be
elected, shall serve as the officers of the Surviving Corporation from and after
the Effective Time in accordance with the By-laws of the Surviving Corporation.
A list of the names and addresses of each of the executive officers of the
Surviving Corporation immediately following the Effective Time is attached
hereto as Exhibit F.
2.5 Capital Stock and Retained Earnings. Republic currently has 20,000,000
shares of Republic Common Stock authorized, of which 7,035,886 shares are
outstanding as of the date hereof. Republic also has 100,000 shares of Republic
Preferred Stock authorized, of which 75,000 shares are outstanding as of the
date hereof. As of December 31, 1997, the Bank had retained earnings of
$29,155,000.00.
2.6 Trust Powers. The Bank, as the Surviving Corporation, will have trust
powers. Currently, the Bank's trust powers are inactive with the Department,
subject to activation upon the filing of an appropriate application and notice
therefor.
A-2
<PAGE> 177
2.7 Nonconforming Activities. From and after the Effective Time, the Bank
will not engage in any nonconforming activities, except to the extent necessary
to fulfill obligations existing prior to the Merger pursuant to the provisions
of Section 655.418(4) of the Florida Statutes.
ARTICLE 3
MANNER OF CONVERTING SHARES
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Merger and without any action on the part
of Republic, the Bank or Lochaven, or the stockholders of any of the foregoing,
the shares of the constituent corporations shall be converted as follows:
(a) Each share of Republic Common Stock and Republic Preferred Stock
issued and outstanding immediately prior to the Effective Time shall remain
issued and outstanding from and after the Effective Time.
(b) Each share of Bank Common Stock and Bank Preferred Stock issued
and outstanding immediately prior to the Effective Time shall remain issued
and outstanding from and after the Effective Time.
(c) Each share of Lochaven Common Stock (excluding shares held by any
Lochaven Company or any Republic Company, in each case other than in a
fiduciary capacity or as a result of debts previously contracted or shares
held by stockholders who perfect their dissenters' rights of appraisal)
issued and outstanding at the Effective Time shall cease to be outstanding
and shall be converted into and exchanged for 0.2776 of a share of Republic
Common Stock (the "Exchange Ratio").
(d) Each of the options to purchase Lochaven Common Stock issued and
outstanding at the Effective Time, which options were granted pursuant to
Lochaven's customary arrangements consistent with past practice and are
disclosed in Section 3.1 of the Lochaven Disclosure Memorandum (the
"Lochaven options"), shall cease to be outstanding and shall be converted
into and exchanged for the Right to acquire Republic Common Stock on
substantially the same terms applicable to the Lochaven options. The number
of shares of Republic Common Stock to be issued pursuant to the exercise of
such options shall equal the number of shares of Lochaven Common Stock
subject to such options multiplied by the Exchange Ratio, provided that no
fractions of shares of Republic Common Stock shall be issued, and the
number of shares of Republic Common Stock to be issued upon the exercise of
the Lochaven options, if a fractional share exists, shall equal the number
of whole shares obtained by rounding to the nearest whole number, giving
account to such fraction. The exercise price for the acquisition of
Republic Common Stock shall be the exercise price for each share of
Lochaven common stock subject to such options divided by the Exchange
Ratio, adjusted as appropriate for any rounding to whole shares that may be
done.
3.2 Anti-Dilution Provisions. In the event Republic changes the number of
shares of Republic Common Stock issued and outstanding prior to the Effective
Time as a result of a stock split, stock dividend or similar recapitalization
with respect to such stock and the record date therefor (in the case of a stock
dividend) or the effective date thereof (in the case of a stock split or similar
recapitalization for which a record date is not established) shall be prior to
the Effective Time, the Exchange Ratio shall be proportionately adjusted.
3.3 Shares Held by Lochaven or Republic. Each of the shares of Lochaven
Common Stock held by any Lochaven Company or by any Republic Company, in each
case other than in a fiduciary capacity or as a result of debts previously
contracted, shall be canceled and retired at the Effective Time and no
consideration shall be issued in exchange therefor.
3.4 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of Lochaven Common Stock exchanged pursuant to
the Merger who would otherwise have been entitled to receive a fraction of a
share of Republic Common Stock (after taking into account all certificates
delivered by such holder) shall receive, in lieu thereof, cash (without
interest) in an amount equal to such fractional part of
A-3
<PAGE> 178
a share of Republic Common Stock multiplied by the Market Value of one share of
Republic Common Stock at the Effective Time. The Market Value of one share of
Republic Common Stock at the Effective Time shall be determined by calculating
the average of the closing prices of Republic Common Stock on the National
Market (as reported by The Wall Street Journal or, if not reported thereby, any
other authoritative source selected by Republic) on each of the twenty (20)
consecutive trading days ending on the third business day immediately preceding
the Effective Time. No such holder will be entitled to dividends, voting Rights
or any other Rights as a stockholder in respect of any fractional shares.
3.5 Dissenting Stockholders. Any holder of shares of Lochaven Common Stock
who perfects such holder's dissenters' rights of appraisal in accordance with
and as contemplated by Section 552.14 of the OTS Regulations and, to the extent
not inconsistent therewith, Section 658.44 of the Florida Statutes, shall be
entitled to receive the value of such shares in cash as determined pursuant to
such provision of Law; provided, that no such payment shall be made to any
dissenting stockholder unless and until such dissenting stockholder has complied
with the applicable provisions of the OTS Regulations and the Florida Statutes
and surrendered to Lochaven the certificate or certificates representing the
shares for which payment is being made. In the event that after the Effective
Time a dissenting stockholder of Lochaven fails to perfect, or effectively
withdraws or loses, such holder's Right to appraisal and of payment for such
holder's shares, Republic shall issue and deliver the consideration to which
such holder of shares of Lochaven Common Stock is entitled under this Article 3
(without interest) upon surrender by such holder of the certificate or
certificates representing shares of Lochaven Common Stock held by such holder.
ARTICLE 4
EXCHANGE OF SHARES
4.1 Exchange Procedures. Promptly after the Effective Time, Republic and
Lochaven shall cause the exchange agent selected by Republic (the "Exchange
Agent") to mail to the former stockholders of Lochaven appropriate transmittal
materials (which shall specify that delivery shall be effected, and risk of loss
and title to the certificates theretofore representing shares of Lochaven Common
Stock shall pass, only upon proper delivery of such certificates to the Exchange
Agent). After the Effective Time, each holder of shares of Lochaven Common Stock
(other than shares to be canceled pursuant to Section 3.3 of this Agreement or
as to which dissenters' rights have been perfected as provided in Section 3.5 of
this Agreement) issued and outstanding at the Effective Time shall surrender the
certificate or certificates representing such shares to the Exchange Agent and
shall promptly upon surrender thereof receive in exchange therefor the
consideration provided in Section 3.1(c) of this Agreement, together with all
undelivered dividends or distributions in respect of such shares (without
interest thereon) pursuant to Section 4.2 of this Agreement. To the extent
required by Section 3.4 of this Agreement, each holder of shares of Lochaven
Common Stock issued and outstanding at the Effective Time also shall receive,
upon surrender of the certificate or certificates representing such shares, cash
in lieu of any fractional share of Republic Common Stock to which such holder
may be otherwise entitled (without interest). Republic shall not be obligated to
deliver the consideration to which any former holder of Lochaven Common Stock is
entitled as a result of the Merger until such holder surrenders such holder's
certificate or certificates representing the shares of Lochaven Common Stock for
exchange as provided in this Section 4.1, or otherwise complies with the
procedures of the Exchange Agent with respect to lost, stolen or destroyed
certificates. The certificate or certificates of Lochaven Common Stock so
surrendered shall be duly endorsed as the Exchange Agent may require. Any other
provision of this Agreement notwithstanding, neither Republic, Lochaven nor the
Exchange Agent shall be liable to a holder of Lochaven Common Stock for any
amounts paid or property delivered in good faith to a public official pursuant
to any applicable abandoned property Law.
4.2 Rights of Former Lochaven Stockholders. At the Effective Time, the
stock transfer books of Lochaven shall be closed as to holders of Lochaven
Common Stock immediately prior to the Effective Time and no transfer of Lochaven
Common Stock by any such holder shall thereafter be made or recognized. Until
surrendered for exchange in accordance with the provisions of Section 4.1 of
this Agreement, each certificate theretofore representing shares of Lochaven
Common Stock (other than shares to be canceled pursuant to
A-4
<PAGE> 179
Section 3.3 of this Agreement or as to which dissenters' rights have been
perfected as provided in Section 3.5 of this Agreement) shall from and after the
Effective Time represent for all purposes only the Right to receive the
consideration provided in Sections 3.1 and 3.4 of this Agreement in exchange
therefor, subject, however to the Surviving Corporation's obligation to pay any
dividends or make any other distributions with a record date prior to the
Effective Time which have been declared or made by Lochaven in respect of share
shares of Lochaven Common Stock in accordance with the terms of this Agreement
and which remain unpaid at the Effective Time. To the extent permitted by Law,
former stockholders of record of Lochaven shall be entitled to vote after the
Effective Time at any meeting of Republic stockholders the number of whole
shares of Republic Common Stock into which their respective shares of Lochaven
Common Stock are converted, regardless of whether such holders have exchanged
their certificates representing Lochaven Common Stock for certificates
representing Republic Common Stock in accordance with the provisions of this
Agreement. Whenever a dividend or other distribution is declared by Republic on
the Republic Common Stock, the record date for which is at or after the
Effective Time, the declaration shall include dividends or other distributions
on all shares issuable pursuant to this Agreement, but no dividend or other
distribution payable to the holders of record of Republic Common Stock as of any
time subsequent to the Effective Time shall be delivered to the holder of any
certificate representing shares of Lochaven Common Stock issued and outstanding
at the Effective Time until such holder surrenders such certificate for exchange
as provided Section 4.1 of the Agreement. However, upon surrender of such
Lochaven Common Stock certificate, both the Republic Common Stock certificate
(together with all such undelivered dividends or other distributions without
interest) and any undelivered dividends and cash payments to be paid for
fractional share interests (without interest) shall be delivered and paid with
respect to each share represented by such certificate.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF LOCHAVEN
Lochaven hereby represents and warrants to Republic:
5.1 Organization, Standing and Power. (a) Lochaven is a federal savings
and loan association duly organized, validly existing, and in good standing
under the Laws of the United States, and has the corporate power and authority
to carry on its business as now conducted and to own, lease and operate its
Material Assets. Lochaven is duly qualified or licensed to transact business as
a foreign corporation in good standing in the states of the United States and
foreign jurisdictions where the character of its Assets or the nature or conduct
of its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Lochaven.
(b) Lochaven is an "insured institution," as defined in the Federal Deposit
Insurance Act and applicable regulations thereunder, is a member of the Savings
Association Insurance Fund and is a member in good standing of the Federal Home
Loan Bank of Atlanta ("FHLB").
5.2 Authority; No Breach by Agreement. (a) Lochaven has the corporate
power and authority necessary to execute, deliver and perform its obligations
under this Agreement and to consummate the transactions contemplated hereby. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein, including the Merger, have been duly and
validly authorized by all necessary corporate action in respect thereof on the
part of Lochaven, subject to the approval of this Agreement by the required vote
of the holders of outstanding shares of Lochaven Common Stock, which is the only
stockholder vote required for approval of this Agreement and consummation of the
Merger by Lochaven. Subject to such requisite stockholder approval, this
Agreement represents a legal, valid and binding obligation of Lochaven,
enforceable against Lochaven in accordance with its terms (except in all cases
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar Laws affecting the enforcement of
creditors' Rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
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(b) Neither the execution and delivery of this Agreement by Lochaven, the
consummation by Lochaven of the transactions contemplated hereby, nor compliance
by Lochaven with any of the provisions hereof, will (i) conflict with or result
in a breach of any provision of Lochaven's Charter or Bylaws; or (ii) constitute
or result in a Default under, or require any Consent pursuant to, or result in
the creation of any Lien on any Asset of any Lochaven Company under, any
Contract or Permit of any Lochaven Company, where such Default or Lien, or any
failure to obtain such Consent, is reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on Lochaven; or (iii) subject to
receipt of the requisite Consents referred to in Section 9.1(b) of this
Agreement, violate any Law or Order applicable to any Lochaven Company or any of
their respective Material Assets.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and Securities Laws, and rules of
the NASD, and other than Consents required from Regulatory Authorities, and
other than notices to or filings with the Internal Revenue Service or the
Pension Benefit Guaranty Corporation with respect to any employee benefit plans,
or under the HSR Act, and other than Consents, filings or notifications which,
if not obtained or made, are not reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on Lochaven, no notice to, filing with,
or Consent of, any public body or authority is necessary for the consummation by
Lochaven of the Merger and the other transactions contemplated in this
Agreement.
5.3 Capital Stock. (a) The authorized capital stock of Lochaven consists
of (i) 4,600,000 shares of Lochaven Common Stock, of which 609,094 shares are
issued and outstanding as of the date of this Agreement and not more than 35,000
shares will be issued and outstanding at the Effective Time. All of the issued
and outstanding shares of capital stock of Lochaven are duly and validly issued
and outstanding and are fully paid and nonassessable under the Laws of the
United States. None of the outstanding shares of capital stock of Lochaven has
been issued in violation of any preemptive Rights of the current or past
stockholders of Lochaven.
(b) Except as set forth in Section 5.3(a) of this Agreement, or as provided
pursuant to the Stock Option Agreement, there are no shares of capital stock or
other equity securities of Lochaven outstanding and no outstanding Rights
relating to the capital stock of Lochaven.
5.4 Lochaven Subsidiaries. Lochaven has disclosed in Section 5.4 of the
Lochaven Disclosure Memorandum all of the Lochaven Subsidiaries as of the date
of this Agreement. Lochaven or one of its Subsidiaries owns all of the issued
and outstanding shares of capital stock of each Lochaven Subsidiary. No equity
securities of any Lochaven Subsidiary are or may become required to be issued
(other than to another Lochaven Company) by reason of any Rights, and there are
no Contracts by which any Lochaven Subsidiary is bound to issue (other than to
another Lochaven Company) additional shares of its capital stock or Rights or by
which any Lochaven Company is or may be bound to transfer any shares of the
capital stock of any Lochaven Subsidiary (other than to another Lochaven
Company). There are no Contracts relating to the Rights of any Lochaven Company
to vote or to dispose of any shares of the capital stock of any Lochaven
Subsidiary. All of the shares of capital stock of each Lochaven Subsidiary held
by an Lochaven Company are fully paid and nonassessable under the applicable
corporation Law of the jurisdiction in which such Subsidiary is incorporated or
organized and are owned by the Lochaven Company free and clear of any lien. Each
Lochaven Subsidiary is either a Federal savings association or a corporation,
and is duly organized, validly existing, and (as to corporations) in good
standing under the Laws of the jurisdiction in which it is incorporated or
organized, and has the corporate power and authority necessary for it to own,
lease and operate its Assets and to carry on its business as now conducted. Each
Lochaven Subsidiary is duly qualified or licensed to transact business as a
foreign corporation in good standing in the states of the United States and
foreign jurisdictions where the character of its Assets or the nature or conduct
of its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Lochaven. Each Lochaven Subsidiary that is a depository institution is
an "insured institution" as defined in the Federal Deposit Insurance Act and
applicable regulations thereunder, and the deposits in which are insured by the
Savings Association Insurance Fund.
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5.5 OTS Filings; Financial Statements. (a) Lochaven has filed and made
available to Republic all forms, reports and documents required to be filed by
Lochaven with the SEC and/or the OTS since December 31, 1993 (collectively, the
"Lochaven OTS Reports"). The Lochaven OTS Reports (i) at the time filed,
complied in all Material respects with the applicable requirements of the OTS
Regulations; and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a Material fact or omit to state a
Material fact required to be stated in such Lochaven OTS Reports or necessary in
order to make the statements in such Lochaven OTS Reports, in light of the
circumstances under which they were made, not misleading. Except for Lochaven
Subsidiaries that are registered as a broker, dealer or investment advisor, none
of Lochaven's Subsidiaries is required to file any forms, reports or other
documents with the SEC.
(b) Each of the Lochaven Financial Statements (including, in each case, any
related notes) contained in the Lochaven OTS Reports, including any Lochaven OTS
Reports filed after the date of this Agreement until the Effective Time, was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes to such financial
statements, or in the case of unaudited statements, as permitted by regulatory
accounting principles, and fairly presented the consolidated financial position
of Lochaven and its Subsidiaries as at the respective dates and the consolidated
results of its operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be Material
in amount.
5.6 Absence of Undisclosed Liabilities. No Lochaven Company has any
liabilities that are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Lochaven, except liabilities which are
accrued or reserved against in the consolidated balance sheets of Lochaven as of
December 31, 1997 included in the Lochaven Financial Statements or reflected in
the notes thereto. No Lochaven Company has incurred or paid any Liability since
December 31, 1997, except for such liabilities incurred or paid in the ordinary
course of business consistent with past business practice and which are not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Lochaven.
5.7 Absence of Certain Changes or Events. Since December 31, 1997, except
as disclosed in Section 5.7 of the Lochaven Disclosure Memorandum, (i) there
have been no events, changes or occurrences which have had, or are reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Lochaven; and (ii) the Lochaven Companies have not taken any action, or failed
to take any action, prior to the date of this Agreement, which action or
failure, if taken after the date of this Agreement, would represent or result in
a Material breach or violation of any of the covenants and agreements of
Lochaven provided in Article 7 of this Agreement.
5.8 Tax Matters. (a) All Tax returns required to be filed by or on behalf
of any of the Lochaven Companies have been timely filed or requests for
extensions have been timely filed, granted and have not expired for periods
ended on or before December 31, 1996, and on or before the date of the most
recent fiscal year end immediately preceding the Effective Time, except to the
extent that all such failures to file, taken together, are not reasonably likely
to have a Material Adverse Effect on Lochaven, and all Tax returns filed are
complete and accurate in all Material respects. All Taxes shown on filed Tax
returns have been paid. There is no audit examination, deficiency or refund
Litigation with respect to any Taxes that is reasonably likely to result in a
determination that would have, individually or in the aggregate, a Material
Adverse Effect on Lochaven, except as reserved against in the Lochaven Financial
Statements delivered prior to the date of this Agreement. All Taxes and other
liabilities due with respect to completed and settled examinations or concluded
Litigation have been paid.
(b) None of the Lochaven Companies has executed an extension or waiver of
any statute of limitations on the assessment or collection of any Tax due that
is currently in effect.
(c) Adequate provision for any Taxes due or to become due for any of the
Lochaven Companies for the period or periods through and including the date of
the respective Lochaven Financial Statements has been made and is reflected on
such Lochaven Financial Statements.
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(d) Deferred Taxes of the Lochaven Companies have been adequately provided
for in the Lochaven Financial Statements.
(e) Each of the Lochaven Companies is in compliance with, and its records
contain all information and documents (including properly completed IRS Forms
W-9) necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Code, except for such instances of noncompliance and
such omissions as are not reasonably likely to have individually or in the
aggregate, a Material Adverse Effect on Lochaven.
(f) None of the Lochaven Companies has made any payments, is obligated to
make any payments, or is a party to any Contract, agreement or other arrangement
that could obligate it to make any payments that would be disallowed as a
deduction under Section 380G or 162(m) of the Code.
(g) Except as set forth in Section 5.8 of the Lochaven Disclosure
Memorandum there are no liens with respect to Taxes upon any of the Assets of
the Lochaven Companies.
(h) There has not been an ownership change, as defined in Code Section
382(g), of the Lochaven Companies that occurred during or after any taxable
period in which the Lochaven Companies incurred a net operating loss that
carries over to any Taxable Period ending after December 31, 1995.
(i) No Lochaven Company has filed any Consent under Section 341(f) of the
Code concerning collapsible corporations.
(j) All Material elections with respect to Taxes affecting the Lochaven
Companies as of the date of this Agreement have been or will be timely made as
set forth in Section 5.8 of the Lochaven Disclosure Memorandum. After the date
hereof, no election with respect to Taxes will be made without the prior written
consent of Republic, which consent will not be unreasonably withheld.
(k) No Lochaven Company has or has had a permanent establishment in any
foreign country, as defined in any applicable Tax treaty or convention between
the United States and such foreign country.
5.9 Assets. Except as disclosed in Section 5.9 of the Lochaven Disclosure
Memorandum, the Lochaven Companies have good and marketable title, free and
clear of all liens, to all of their respective Assets. All tangible properties
used in the businesses of the Lochaven Companies are in good condition,
reasonable wear and tear excepted, and are usable in the ordinary course of
business consistent with Lochaven's past practices. All Assets that are Material
to Lochaven's business on a consolidated basis, held under leases or subleases
by any of the Lochaven Companies, are held under valid Contracts enforceable in
accordance with their respective terms (except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other Laws
affecting the enforcement of creditors' Rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceedings
may be brought), and each such Contract is in full force and effect. The
Lochaven Companies currently maintain insurance similar in amounts, scope and
coverage to that maintained by other peer banking organizations. None of the
Lochaven Companies has received notice from any insurance carrier that (i) such
insurance will be canceled or that coverage thereunder will be reduced or
eliminated; or (ii) premium costs with respect to such policies of insurance
will be substantially increased. There are presently no claims pending under
such policies of insurance and no notices have been given by an Lochaven Company
under such policies. The Assets of the Lochaven Companies include all Assets
required to operate the business of the Lochaven Companies as presently
conducted.
5.10 Environmental Matters. (a) To the Knowledge of Lochaven, each
Lochaven Company, its Participation Facilities and its Loan Properties are and
have been in compliance with all Environmental Laws, except for violations which
are not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Lochaven.
(b) There is no Litigation pending or to the Knowledge of Lochaven,
threatened before any court, governmental agency or authority or other forum in
which any Lochaven Company or any of its Loan Properties or Participation
Facilities (or any Lochaven Company in respect of any such Loan Property or
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Participation Facility) has been or, with respect to threatened Litigation, may
be named as a defendant or potentially responsible party (i) for alleged
noncompliance (including by any predecessor) with any Environmental Law; or (ii)
relating to the release into the environment of any Hazardous Material, whether
or not occurring at, on, under or involving a site owned, leased or operated by
any Lochaven Company or any of its Loan Properties or Participation Facilities,
except for such Litigation pending or threatened that is not reasonably likely
to have, individually or in the aggregate, a Material Adverse Effect on
Lochaven.
(c) To the Knowledge of Lochaven, there have been no releases of Hazardous
Material in, on, under or affecting any Participation Facility or Loan Property
of an Lochaven Company, except such as are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Lochaven.
5.11 Compliance with Laws. Each Lochaven Company has in effect all Permits
necessary for it to own, lease or operate its Material Assets and to carry on
its business as now conducted, except for those Permits the absence of which are
not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Lochaven, and there has occurred no default under any such
Permit, other than defaults which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Lochaven. None of
the Lochaven Companies:
(a) is in violation of any Laws, Orders or Permits applicable to its
business or employees conducting its business, except for violations which
are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Lochaven; and
(b) has received any notification or communication from any agency or
department of federal, state or local government or any Regulatory
Authority or the staff thereof (i) asserting that any Lochaven Company is
not in compliance with any of the Laws or Orders which such governmental
authority or Regulatory Authority enforces, where such noncompliance is
reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Lochaven; (ii) threatening to revoke any Permits, the
revocation of which is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Lochaven; or (iii) requiring any
Lochaven Company to enter into or consent to the issuance of a cease and
desist Order, formal agreement, directive, commitment or memorandum of
understanding, or to adopt any Board resolution or similar undertaking,
which restricts materially the conduct of its business, or in any manner
relates to its capital adequacy, its credit or reserve policies, its
management or the payment of dividends.
5.12 Labor Relations. No Lochaven Company is the subject of any Litigation
asserting that it or any other Lochaven Company has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state Law) or seeking to compel it or any other Lochaven Company to bargain with
any labor organization as to wages or conditions of employment, nor is there any
strike or other labor dispute involving any Lochaven Company, pending or
threatened, or to the Knowledge of Lochaven, is there any activity involving any
Lochaven Company's employee's seeking to certify a collective bargaining unit or
engaging in any other organization activity.
5.13 Employee Benefit Plans. (a) Lochaven has disclosed in Section 5.13 of
the Lochaven Disclosure Memorandum, and has delivered or made available to
Republic prior to the execution of this Agreement copies in each case of, all
pension, retirement, profit-sharing, deferred compensation, stock option,
employee stock ownership, severance pay, vacation, bonus or other incentive
plan, all other written employee programs, arrangements or agreements, all
medical, vision, dental or other health plans, all life insurance plans and all
other employee benefit plans or fringe benefit plans, including "employee
benefit plans" as that term is defined in Section 3(3) of ERISA, currently
adopted, maintained by, sponsored in whole or in part by, or contributed to by
any Applied Company or ERISA Affiliate (as defined below) thereof for the
benefit of employees, retirees, dependents, spouses, directors, independent
contractors or other beneficiaries and under which employees, retirees,
dependents, spouses, directors, independent contractors or other beneficiaries
are eligible to participate (collectively, the "Lochaven Benefit Plans"). Any of
the Lochaven Benefit Plans which is an "employee pension benefit plan," as that
term is defined in Section 3(2) of ERISA, is referred to herein as an "Lochaven
ERISA Plan." Each Lochaven ERISA Plan which is also a "defined benefit plan" (as
defined in
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Section 414(j) of the Code) is referred to herein as an "Lochaven Pension Plan."
No Lochaven Pension Plan is or has been a multiemployer plan within the meaning
of Section 3(37) of ERISA.
(b) All Lochaven Benefit Plans are in compliance with the applicable terms
of ERISA, the Code, and any other applicable Laws the breach or violation of
which are reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Lochaven, and each Lochaven ERISA Plan which is
intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service, and Lochaven
is not aware of any circumstances likely to result in revocation of any such
favorable determination letter. To the knowledge of Lochaven, no Lochaven
Company has engaged in a transaction with respect to any Lochaven Benefit Plan
that, assuming the taxable period of such transaction expired as of the date
hereof, would subject any Lochaven Company to a Tax imposed by either Section
4975 of the Code or Section 502(i) of ERISA in amounts which are reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Lochaven.
(c) No Lochaven Pension Plan has any "unfunded current liability," as that
term is defined in Section 302(d)(8)(A) of ERISA, and the fair market value of
the Assets of any such plan exceeds the plan's "benefit liabilities," as that
term is defined in Section 4001(a)(16) of ERISA, when determined under actuarial
factors that would apply if the plan terminated in accordance with all
applicable legal requirements. Since the date of the most recent actuarial
valuation, there has been (i) no Material change in the financial position of
any Lochaven Pension Plan; (ii) no change in the actuarial assumptions with
respect to any Lochaven Pension Plan; and (iii) no increase in benefits under
any Lochaven Pension Plan as a result of plan amendments or changes in
applicable Law which is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Lochaven or materially adversely affect
the funding status of any such plan. Neither any Lochaven Pension Plan nor any
"single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any Lochaven Company, or the single-
employer plan of any entity which is considered one employer with Lochaven under
Section 4001 of ERISA or Section 414 of the Code or Section 302 of ERISA
(whether or not waived) (an "ERISA Affiliate") has an "accumulated funding
deficiency" within the meaning of Section 412 of the Code or Section 302 of
ERISA, which is reasonably likely to have a Material Adverse Effect on Lochaven.
No Lochaven Company has provided or is required to provide, security to an
Lochaven Pension Plan or to any single-employer plan of an ERISA Affiliate
pursuant to Section 401(a)(29) of the Code.
(d) Within the six-year period preceding the Effective Time, no liability
under Subtitle C or D of Title IV of ERISA has been or is expected to be
incurred by any Lochaven Company with respect to any ongoing, frozen or
terminated single-employer plan or the single-employer plan of any ERISA
Affiliate, which liability is reasonably likely to have a Material Adverse
Effect on Lochaven. No Lochaven Company has incurred any withdrawal Liability
with respect to a multiemployer plan under Subtitle B of Title IV of ERISA
(regardless of whether based on contributions of an ERISA Affiliate), which
Liability is reasonably likely to have a Material Adverse Effect on Lochaven. No
notice of a "reportable event," within the meaning of Section 4043 of ERISA for
which the 30-day reporting requirement has not been waived, has been required to
be filed for any Lochaven Pension Plan or by any ERISA Affiliate within the
12-month period ending on the date hereof.
(e) No Lochaven Company has any Liability for retiree health and life
benefits under any of the Lochaven Benefit Plan and there are no restrictions on
the Rights of such Lochaven Company to amend or terminate any such Plan without
incurring any liability thereunder, which liability is reasonably likely to have
a Material Adverse Effect on Lochaven.
(f) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute or
otherwise) becoming due to any director or any employee of any Lochaven Company
from any Lochaven Company under any Lochaven Benefit Plan or otherwise; (ii)
increase any benefits otherwise payable under any Lochaven Benefit Plan; or
(iii) result in any acceleration of the time of payment or vesting of any such
benefit, where such payment, increase or acceleration is reasonably likely to
have, individually or in the aggregate, a Material Adverse Effect on Lochaven.
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(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement or employment agreement) of employees and former
employees of any Lochaven Company and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Code or Section 302 of ERISA, have been fully
reflected on the Lochaven Financial Statements to the extent required by and in
accordance with GAAP.
5.14 Material Contracts. Except as otherwise reflected in the Lochaven
Financial Statements, none of the Lochaven Companies, nor any of their
respective Assets, businesses or operations is a party to or is bound or
affected by or receives benefits under (i) any employment, severance,
terminating, consulting or retirement Contract providing for aggregate payments
to any Person in any calendar year in excess of $100,000; (ii) any Contract
relating to the borrowing of money by any Lochaven Company or the guarantee by
any Lochaven Company of any such obligation (other than Contracts evidencing
deposit Liabilities, purchases of federal funds, fully-secured repurchase
agreements and Federal Home Loan Bank advances of depository institution
subsidiaries, trade payables and Contracts relating to borrowings or guarantees
made in the ordinary course of business); and (iii) any other Contract or
amendment thereto that would be required to be filed as an exhibit to a Form
10-K filed by Lochaven with the OTS as of the date of this Agreement or in any
Form 10-K filed for the fiscal year ended December 1996 or any subsequent fiscal
year if Lochaven had been required to make such filings with the OTS, or in
another SEC document and identified to Republic (together with all Contracts
referred to in Section 5.8 and 5.13(a) of this Agreement, the "Lochaven
Contracts"). With respect to each Lochaven Contract: (i) the Contract is in full
force and effect; (ii) no Lochaven Company is in default thereunder, other than
defaults which are not reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Lochaven; (iii) no Lochaven Company has
repudiated or waived any Material provision of any such Contract; and (iv) no
other party to any such Contract is, to the Knowledge of Lochaven, in default in
any respect, other than defaults which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Lochaven or has
repudiated or waived any Material provision thereunder. Except for FHLB
advances, all of the indebtedness of any Lochaven Company for money borrowed is
prepayable at any time by such Lochaven Company without penalty or premium.
5.15 Legal Proceedings. (a) Except as disclosed in Section 5.15(a) of the
Lochaven Disclosure Memorandum, there is no Litigation instituted or pending or,
to the knowledge of Lochaven, threatened (or unasserted but considered probable
of assertion and which if asserted would have at least a reasonable probability
of an unfavorable outcome) against any Lochaven Company, or against any Asset,
employee benefit plan, interest or Right of any of them, that is reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect on
Lochaven, nor are there any Orders of any Regulatory Authorities, other than
governmental authorities, or arbitrators outstanding against any Lochaven
Company, that are reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Lochaven.
(b) Section 5.15(b) of the Lochaven Disclosure Memorandum includes a
summary report of all Litigation as of the date of this Agreement to which any
Lochaven Company is a party and which names an Lochaven Company as a defendant
or cross-defendant and where the maximum exposure is estimated to be $100,000 or
more.
5.16 Reports. Since January 1, 1993, or the date of organization if later,
each Lochaven Company has timely filed all reports and statements, together with
any amendments required to be made with respect thereto, that it was required to
file with any Regulatory Authorities (except, in the case of state securities
authorities, failures to file which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Lochaven). As of
their respective dates, each of such reports and documents, including the
financial statements, exhibits and schedules thereto, complied in all Material
respects with all applicable Laws. As of its respective date, each such report
and document did not, in all Material respects, contain any untrue statement of
a Material fact or omit to state a Material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
5.17 Statements True and Correct. None of the information supplied or to
be supplied by any Lochaven Company or any Affiliate thereof for inclusion in
the Registration Statement to be filed by Republic with the
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SEC will, when the Registration Statement becomes effective, be false or
misleading with respect to any Material fact, or omit to state any Material fact
necessary to make the statements therein not misleading. None of the information
supplied or to be supplied by any Lochaven Company or any Affiliate thereof for
inclusion in the Proxy Statements to be mailed to Republic's and Lochaven's
stockholders in connection with the irrespective Stockholders' Meetings, and any
other documents to be filed by an Lochaven Company or any Affiliate thereof with
the SEC or any other Regulatory Authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed, and
with respect to the Proxy Statements, when first mailed to the stockholders of
Republic and Lochaven, be false or misleading with respect to any Material fact,
or omit to state any Material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading or, in the
case of the Proxy Statements or any amendment thereof or supplement thereto, at
the time of the Stockholders' Meetings, be false or misleading with respect to
any Material fact, or omit to state any Material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Stockholders' Meetings. All documents that any Lochaven Company or
any Affiliate thereof is responsible for filing with any regulatory authority in
connection with the transactions contemplated hereby will comply as to form in
all Material respects with the provisions of applicable Law.
5.18 Tax and Regulatory Matters. Except as specifically contemplated by
this Agreement, no Lochaven Company or any Affiliate thereof has taken or agreed
to take any action or has any knowledge of any fact or circumstance that is
reasonably likely to (i) prevent the transactions contemplated hereby, including
the Merger, from qualifying as a reorganization within the meaning of Section
368(a) of the Code; or (ii) materially impede or delay receipt of any Consents
of Regulatory Authorities referred to in Section 9.1(b) of this Agreement or
result in the imposition of a condition or restriction of the type referred to
in the last sentence of such section.
5.19 Charter Provisions. Each Lochaven Company has taken all action so
that the entering into of this Agreement and the consummation of the Merger and
the other transactions contemplated by this Agreement do not and will not result
in the grant of any Rights to any Person under the Charter or Articles of
Incorporation, Bylaws or other governing instruments of any Lochaven Company or
restrict or impair the ability of Republic or any of its Subsidiaries to vote or
otherwise to exercise the Rights of a stockholder with respect to shares of any
Lochaven Company that may be directly or indirectly acquired or controlled by
it.
5.20 Derivatives Contracts. Except as disclosed in Section 5.20 of the
Lochaven Disclosure Memorandum, neither Lochaven nor any of its Subsidiaries is
a party to or has agreed to enter into an exchange-traded or over-the-counter
swap, forward, future, option, cap, floor or collar financial Contract, or any
other interest rate or foreign currency protection Contract not included on its
balance sheet which is a financial derivative Contract (including various
combinations thereof).
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF REPUBLIC
Republic hereby represents and warrants to Lochaven as follows:
6.1 Organization, Standing and Power. Republic is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida and has the corporate power and authority to carry on its business as
now conducted and to own, lease and operate its Material Assets. The Bank is a
commercial bank duly organized, validly existing and in good standing under the
laws of the State of Florida and has the corporate power and authority to carry
on its business as now conducted and to own, lease and operate its Materials
Assets. Republic and the Bank is each duly qualified or licensed to transact
business as a foreign corporation in good standing in the states of the United
States and foreign jurisdictions where the character of its Assets or the nature
or conduct of its business requires it to be so qualified or licensed, except
for such jurisdictions in which the failure to be so qualified or licensed is
not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Republic.
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6.2 Authority; No Breach by Agreement. (a) Republic and the Bank each has
the corporate power and authority necessary to execute, deliver and perform its
obligations under this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein, including the Merger, have
been duly and validly authorized by all necessary corporate action in respect
thereof on the part of Republic and the Bank. This Agreement represents a legal,
valid and binding obligation of Republic and the Bank, enforceable against
Republic and the Bank in accordance with its terms (except in all cases as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar Laws affecting the enforcement of
creditors' Rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by Republic or the
Bank nor the consummation by Republic or the Bank of the transactions
contemplated hereby nor compliance by Republic or the Bank with any of the
provisions hereof will (i) conflict with or result in a breach of any provision
of Republic's or the Bank's Articles of Incorporation or By-laws; or (ii)
constitute or result in a default under, or require any Consent pursuant to or
result in the creation of any lien or any asset of any Republic Company under
any Contract or Permit of any Republic Company, where such default or lien or
any failure to obtain such Consent is reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on Republic; or (iii) subject to
receipt of the requisite Consents referred to in Section 9.1(b) of this
Agreement, violate any Law or Order applicable to any Republic Company or any of
their respective Material Assets.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and Securities Laws and rules of the
NASD and other than Consents required from Regulatory Authorities, and other
than notices to or filings with the Internal Revenue Service or the Pension
Benefit Guaranty Corporation with respect to any employee benefit plans, or
under the HSR Act and other Consents, filings or notifications which, if not
obtained or made, are not reasonably likely to have, individually or in the
aggregate a Material Adverse Effect on Republic, no notice to, filing with or
Consent of any public body or authority is necessary for the consummation by
Republic of the Merger and the other transactions contemplated in this
Agreement.
6.3 Capital Stock. The authorized capital stock of Republic consists of
20,000,000 shares of Republic Common Stock, of which 7,035,886 shares were
issued and outstanding as of the date of this Agreement, and 100,000 shares of
Republic Preferred Stock, of which 75,000 shares were issued and outstanding as
of the date of this Agreement. All of the issued and outstanding shares of
Republic Common Stock and Republic Preferred Stock are, and all of the shares of
Republic Common Stock to be issued in exchange for shares of Lochaven Common
Stock upon consummation of the Merger, when issued in accordance with the terms
of this Agreement, will be, duly and validly issued and outstanding and fully
paid and nonassessable under the Florida Business Corporation Act. None of the
outstanding shares of Republic Common Stock has been, and none of the shares of
Republic Common Stock to be issued in exchange for shares of Lochaven Common
Stock upon consummation of the Merger will be issued in violation of any
preemptive Rights of the current or past stockholders of Republic.
6.4 Republic Subsidiaries. Republic or one of its Subsidiaries owns all of
the issued and outstanding shares of capital stock of the Bank and each other
Republic Subsidiary. No equity securities of any Republic Subsidiary are or may
become required to be issued (other than to another Republic Company) by reason
of any Rights, and there are no Contracts by which any Republic Subsidiary is
bound to issue (other than to another Republic Company) additional shares of its
capital stock or Rights or by which any Republic Company is or may be bound to
transfer any shares of the capital stock of any Republic Subsidiary (other than
to another Republic Company). There are no Contracts relating to the Rights of
any Republic Company to vote or to dispose of any shares of the capital stock of
any Republic Subsidiary. All of the shares of capital stock of each Republic
Subsidiary held by a Republic Company are fully paid and nonassessable under the
applicable corporation Law of the jurisdiction in which such Subsidiary is
incorporated or organized and are owned by the Republic Company free and clear
of any Lien. Each Republic Subsidiary is either a bank or a corporation, and is
duly organized, validly existing, and (as to corporations) in good standing
under the Laws of the jurisdiction in which it is incorporated or organized, and
has the corporate power and authority
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necessary for it to own, lease and operate its Assets and to carry on its
business as now conducted. Each Republic Subsidiary is duly qualified or
licensed to transact business as a foreign corporation in good standing in the
States of the United States and foreign jurisdictions where the character of its
Assets or the nature or conduct of its business requires it to be so qualified
or licensed, except for such jurisdictions in which the failure to be so
qualified or licensed is not reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Republic. Each Republic Subsidiary that
is a depository institution is an "insured institution" as defined in the
Federal Deposit Insurance Act and applicable regulations thereunder, and the
deposits in which are insured by the Bank Insurance Fund or Savings Association
Insurance Fund.
6.5 SEC Filings; Financial Statements. (a) Republic has filed and made
available to Lochaven all forms, reports and documents required to be filed by
Republic and the Bank with the FDIC and the SEC since December 31, 1994, other
than registration statements on Forms S-4 and S-8 (collectively, the "Republic
SEC Reports"). The Republic SEC Reports (i) at the time filed, complied in all
Material respects with the applicable requirements of the 1933 Act and the 1934
Act, as the case may be; and (ii) did not at the time they were filed (or if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing) contain any untrue statement of a Material fact or omit
to state a Material fact required to be stated in such Republic SEC Reports or
necessary in order to make the statements in such Republic SEC Reports, in light
of the circumstances under which they were made, not misleading.
(b) Each of the Republic Financial Statements (including, in each case, any
related notes) contained in the Republic SEC Reports, including any Republic SEC
Reports filed after the date of this Agreement until the Effective Time,
complied as to form in all Material respects with the applicable published rules
and regulations of the SEC with respect thereto, was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in the case of
unaudited statements, as permitted by Form 10-Q of the SEC), and fairly
presented the consolidated financial position of Republic and its subsidiaries
as at the respective dates and the consolidated results of its operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be Material in amount.
6.6 Absence of Undisclosed Liabilities. To the Knowledge of Republic, no
Republic Company has any Liabilities that are reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Republic, except
Liabilities which are accrued or reserved against in the consolidated balance
sheets of Republic as of December 31, 1997 included in the Republic Financial
Statements or reflected in the notes thereto. Except as disclosed in Section 6.6
of the Republic Disclosure Memorandum, no Republic Company has incurred or paid
any Liability since December 31, 1997, except for such Liabilities incurred or
paid in the ordinary course of business consistent with past business practice
and which are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Republic.
6.7 Absence of Certain Changes or Events. Since December 31, 1997, except
as disclosed in the Republic Financial Statements delivered prior to the date of
this Agreement or in Section 6.7 of the Republic Disclosure Memorandum, (i)
there have been no events, changes or occurrences which have had, or are
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Republic; and (ii) the Republic Companies have not taken any action,
or failed to take any action, prior to the date of this Agreement, which action
or failure, if taken after the date of this Agreement, would represent or result
in a Material breach or violation of any of the covenants and agreements of
Republic provided in Article 7 of this Agreement.
6.8 Tax Matters. (a) All Tax Returns required to be filed by or on behalf
of any of the Republic Companies have been timely filed or requests for
extensions have been timely filed, granted and have not expired for periods
ended on or before December 31, 1997, and on or before the date of the most
recent fiscal year end immediately preceding the Effective Time, except to the
extent that all such failures to file, taken together, are not reasonably likely
to have a Material Adverse Effect on Republic, and all Tax Returns filed are
complete and accurate in all Material respects. All Taxes shown on filed Tax
Returns have been paid. There is no audit examination, deficiency or refund
Litigation with respect to any Taxes that is reasonably
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likely to result in a determination that would have, individually or in the
aggregate, a Material Adverse Effect on Republic, except as reserved against in
the Republic Financial Statements delivered prior to the date of this Agreement.
All Taxes and other Liabilities due with respect to completed and settled
examinations or concluded Litigation have been paid.
(b) Adequate provision for any Taxes due or to become due for any of the
Republic Companies for the period or periods through and including the date of
the respective Republic Financial Statements has been made and is reflected on
such Republic Financial Statements.
(c) Deferred Taxes of the Republic Companies have been adequately provided
for in the Republic Financial Statements.
6.9 Environmental Matters. (a) To the Knowledge of Republic, each Republic
Company, its Participation Facilities and its Loan Properties are and have been
in compliance with all Environmental Laws, except for violations which are not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Republic.
(b) There is no Litigation pending or, to the Knowledge of Republic,
threatened before any court, governmental agency or authority or other forum in
which any Republic Company or any of its Loan Properties or Participation
Facilities has been or, with respect to threatened Litigation, may be named as a
defendant or potentially responsible party (i) for alleged noncompliance
(including by any predecessor) with any Environmental Law; or (ii) relating to
the release into the environment of any Hazardous Material, whether or not
occurring at, on, under or involving any of its Loan Properties or Participation
Facilities, except for such Litigation pending or threatened that is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on Republic.
(c) To the Knowledge of Republic, there have been no releases of Hazardous
Material in, on, under or affecting any Participation Facility or Loan Property
of a Republic Company, except such as are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Republic.
6.10 Compliance with Laws. Republic is duly registered as a bank holding
company under the BHC Act. Each Republic Company has in effect all Permits
necessary for it to own, lease or operate its Material Assets and to carry on
its business as now conducted, except for those Permits the absence of which are
not reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Republic, and there has occurred no Default under any such
Permit, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Republic. No
Republic Company:
(a) is in violation of any Laws, Orders or Permits applicable to its
business or employees conducting its business, except for violations which
are not reasonably likely to have, individually or in the aggregate, a
Material Adverse Effect on Republic; and
(b) has received any notification or communication from any agency or
department of federal, state or local government or any Regulatory
Authority or the staff thereof (i) asserting that any Republic Company is
not in compliance with any of the Laws or Orders which such governmental
authority or Regulatory Authority enforces, where such noncompliance is
reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Republic; (ii) threatening to revoke any Permits, the
revocation of which is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Republic; or (iii) requiring any
Republic Company to enter into or consent to the issuance of a cease and
desist Order, formal agreement, directive, commitment or memorandum of
understanding, or to adopt any Board resolution or similar undertaking,
which restricts materially the conduct of its business, or in any manner
relates to its capital adequacy, its credit or reserve policies, its
management or the payment of dividends.
6.11 Legal Proceedings. Except as set forth in Section 6.11 of the
Republic Disclosure Memorandum, there is no Litigation instituted or pending or,
to the Knowledge of Republic, threatened (or unasserted but considered probable
of assertion and which if asserted would have at least a reasonable probability
of an unfavorable outcome) against any Republic Company, or against any Asset,
interest or Right of any of them,
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that is reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on Republic, nor are there any Orders of any Regulatory
Authorities, other governmental authorities or arbitrators outstanding against
any Republic Company, that are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on Republic.
6.12 Reports. Since January 1, 1993, or the date of organization if later,
each Republic Company has filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with Regulatory Authorities (except, in the case of state securities
authorities, failures to file which are no reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on Republic). As of
their respective dates, each of such reports and documents, including the
financial statements, exhibits and schedules thereto, complied in all Material
respects with all applicable Laws. As of its respective date, each such report
and document did not, in all Material respects, contain any untrue statement of
a Material fact or omit to state a Material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
6.13 Statements True and Correct. None of the information supplied or to
be supplied by any Republic Company or any Affiliate thereof for inclusion in
the Registration Statement to be filed by Republic with the SEC will, when the
Registration Statement becomes effective, be false or misleading with respect to
any Material fact or omit to state any Material fact necessary to make the
statements therein not misleading. None of the information supplied or to be
supplied by any Republic Company or any Affiliate thereof for inclusion in the
Proxy Statement/Prospectus to be mailed to Lochaven's stockholders in connection
with its Stockholders' Meeting, and any other documents to be filed by any
Republic Company or any Affiliate thereof with the SEC or any other Regulatory
Authority in connection with the transactions contemplated hereby will, at the
respective time such documents are filed, and with respect to the Proxy
Statement/Prospectus, when first mailed to the stockholders of Lochaven, be
false or misleading with respect to any Material fact or omit to state any
Material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or, in the case of the
Proxy Statement/Prospectus or any amendment thereof or supplement thereto, at
the time of the Stockholders' Meeting, be false or misleading with respect to
any Material fact, or omit to state any Material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Stockholders' Meeting. All documents that any Republic Company or
any Affiliate thereof is responsible for filing with any Regulatory Authority in
connection with the transactions contemplated hereby will comply as to form in
all Material respects with the provisions of applicable Law.
6.14 Tax and Regulatory Matters. Except as specifically contemplated by
this Agreement, no Republic Company or any Affiliate thereof has taken or agreed
to take any action or has any Knowledge of any fact or circumstance that is
reasonably likely to (i) prevent the transactions contemplated hereby, including
the Merger, from qualifying for treatment as a reorganization within the meaning
of Section 368(a) of the Code; or (ii) materially impede or delay receipt of any
Consents of Regulatory Authorities referred to in Section 9.1(b) of this
Agreement or result in the imposition of a condition or restriction of the type
referred to in the last sentence of such Section.
ARTICLE 7
CONDUCT OF BUSINESS PENDING CONSUMMATION
7.1 Affirmative Covenants of Lochaven. Unless the prior written consent of
Republic shall have been obtained and, except as otherwise expressly
contemplated herein, Lochaven shall and shall cause each of its Subsidiaries to
(i) operate its business only in the usual, regular and ordinary course; (ii)
preserve intact its business organization and Assets and maintain its Rights and
franchises; (iii) use its reasonable efforts to maintain its current employee
relationships; and (iv) take no action which would (a) adversely affect the
ability of any party to obtain any Consents required for the transactions
contemplated hereby without imposition of a condition or restriction of the type
referred to in the last sentence of Section 9.1(b) of this Agreement; or (b)
adversely affect the ability of any party to perform its covenants and
agreements under this Agreement.
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7.2 Negative Covenants of Lochaven. From the date of this Agreement until
the earlier of the Effective Time or the termination of this Agreement, Lochaven
covenants and agrees that it will not do or agree or commit to do, or permit any
of its Subsidiaries to do or agree or commit to do, any of the following without
the prior written consent of an authorized officer of Republic:
(a) amend the Charter or Articles of Incorporation, Bylaws or other
governing instruments of any Lochaven Company; or
(b) incur any additional debt obligation or other obligation for
borrowed money (other than indebtedness of an Lochaven Company to another
Lochaven Company) in excess of an aggregate of $50,000 (for the Lochaven
Companies on a consolidated basis) except in the ordinary course of the
business of Lochaven or the Lochaven Subsidiaries consistent with past
practices (which shall include, for Lochaven and the Lochaven Subsidiaries
that are depository institutions, creation of deposit liabilities,
purchases of federal funds, advances from the Federal Reserve Bank or
Federal Home Loan Bank, and entry into repurchase agreements fully secured
by U.S. government or agency securities), or impose or suffer the
imposition on any Asset of any Lochaven Company of any Lien or permit any
such Lien to exist (other than in connection with deposits, repurchase
agreements, bankers acceptances, "treasury tax and loan" accounts
established in the ordinary course of business, the satisfaction of legal
requirements in the exercise of trust powers, and Liens in effect as of the
date hereof that are disclosed in the Lochaven Disclosure Memorandum); or
(c) repurchase, redeem or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans), directly or
indirectly, any shares, or any securities convertible into any shares, of
the capital stock of any Lochaven Company, or declare or pay any dividend
or make any other distribution in respect of Lochaven's capital stock;
provided that, notwithstanding the provisions of Section 1.3 of this
Agreement, the parties shall cooperate in selecting the Effective Time to
ensure that, with respect to the quarterly period in which the Effective
Time occurs, the holders of Lochaven Common Stock do not receive both a
dividend in respect of their Lochaven Common Stock and a dividend in
respect of Republic Common Stock or fail to receive any dividend; or
(d) except for this Agreement or pursuant to the terms of the Lochaven
options, issue, sell, pledge, encumber, authorize the issuance of, enter
into any Contract to issue, sell, pledge, encumber or authorize the
issuance of or otherwise permit to become outstanding any additional shares
of Lochaven Common Stock or any other capital stock of any Lochaven
Company, or any stock appreciation Rights, or any option, warrant,
conversion or other Right to acquire any such stock or any security
convertible into any such stock; or
(e) adjust, split, combine or reclassify any capital stock of any
Lochaven Company or issue or authorize the issuance of any other securities
in respect of or in substitution for shares of Lochaven Common Stock, or
sell, lease, mortgage or otherwise dispose of or otherwise encumber (x) any
shares of capital stock of any Lochaven Subsidiary (unless any such shares
of stock are sold or otherwise transferred to another Lochaven Company) or
(y) any Asset other than in the ordinary course of business for reasonable
and adequate consideration; or
(f) except for purchases of U.S. Treasury securities or U.S.
Government agency securities, which in either case have maturities of three
years of less, purchase any securities or make any Material investment,
either by purchase of stock or securities, contributions to capital, Asset
transfers, or purchase of any Assets, in any Person other than a
wholly-owned Lochaven Subsidiary, or otherwise acquire direct or indirect
control over any Person, other than in connection with (i) foreclosures in
the ordinary course of business; (ii) acquisitions of control by a
depository institution Subsidiary in its fiduciary capacity; or (iii) the
creation of new wholly-owned Subsidiaries organized to conduct or continue
activities otherwise permitted by this Agreement; or
(g) grant any increase in compensation or benefits to the employees or
officers of any Lochaven Company, except in accordance with past practice
disclosed in Section 7.2(g) of the Lochaven Disclosure Memorandum or as
required by Law; pay any severance or termination pay or any bonus other
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than pursuant to written policies or written Contracts in effect on the
date of this Agreement; except as authorized by Section 8.13 of this
Agreement, enter into or amend any severance agreements with officers of
any Lochaven Company; grant any Material increase in fees or other
increases in compensation or other benefits to directors of any Lochaven
Company, except in accordance with past practice disclosed in Section
7.2(g) of the Lochaven Disclosure Memorandum; or voluntarily accelerate the
vesting of any stock options or other stock-based compensation or employee
benefits; or
(h) except as authorized by Section 8.13 of this Agreement, enter into
or amend any employment Contract between any Lochaven Company and any
Person (unless such amendment is required by Law) that the Lochaven Company
does not have the unconditional Right to terminate without Liability (other
than Liability for services already rendered), at any time on or after the
Effective Time; or
(i) adopt any new employee benefit plan of any Lochaven Company or
make any Material change in or to any existing employee benefit plans of
any Lochaven Company other than any such change that it required by Law or
that, in the opinion of counsel, is necessary or advisable to maintain the
Tax qualified status of any such plan; or
(j) make any significant change in any Tax or accounting methods or
systems of internal accounting controls, except as may be appropriate to
conform to changes in Tax Laws or regulatory accounting requirements or
GAAP; or
(k) commence any Litigation other than in accordance with past
practice or settle any Litigation involving any Liability of any Lochaven
Company for Material money damages or restrictions upon the operations of
any Lochaven Company; or
(l) except in the ordinary course of business, modify, amend or
terminate any Material Contract or waive, release, compromise or assign any
Material Contract or waive, release, compromise or assign any Material
Rights or claims.
7.3 Covenants of Republic. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, Republic
covenants and agrees that it shall (i) continue to conduct its business and the
business of its Subsidiaries in a manner designed in its reasonable judgment, to
enhance the long-term value of the Republic Common Stock and the business
prospects of the Republic Companies; and (ii) take no action which would (a)
materially adversely affect the ability of any party to obtain any Consents
required for the transactions contemplated hereby without imposition of a
condition or restriction of the type referred to in the last sentence of Section
9.1(b) of this Agreement; or (b) materially adversely affect the ability of any
party to perform its covenants and agreements under this Agreement; provided,
that the foregoing shall not prevent any Republic Company from discontinuing or
disposing of any of its Assets or business if such action is, in the judgment of
Republic, desirable in the conduct of the business of Republic and its
Subsidiaries.
7.4 Adverse Changes in Condition. Each party agrees to give written notice
promptly to the other party upon becoming aware of the occurrence or impending
occurrence of any event or circumstance relating to it or any of its
Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on it; or (ii) would cause or constitute a
Material breach of any of its representations, warranties or covenants contained
herein, and to use its reasonable effects to prevent or promptly to remedy the
same.
7.5 Reports. Each party and its Subsidiaries shall file all reports
required to be filed by it with Regulatory Authorities between the date of this
Agreement and the Effective Time and shall deliver to the other party copies of
all such reports promptly after the same are filed. If financial statements are
contained in any such reports filed with the SEC, such financial statements will
fairly present the consolidated financial position of the entity filing such
statements as of the dates indicated and the consolidated results of operations,
changes in stockholders' equity and cash flows for the periods then ended in
accordance with GAAP (subject in the case of interim financial statements to
normal recurring year-end adjustments that are not Material). As of their
respective dates, such reports filed with the SEC will comply in all Material
respects with the Securities Laws and will not contain any untrue statement of a
Material fact or omit to state a Material fact
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required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Any financial statements contained in any other reports to another
Regulatory Authority shall be prepared in accordance with Laws applicable to
such reports.
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 Registration Statement; Proxy Statement; Stockholder Approval. As soon
as reasonably practicable after execution of this Agreement, Republic shall file
the Registration Statement with the SEC and shall use its reasonable efforts to
cause the Registration Statement to become effective under the 1933 Act and take
any action required to be taken under the applicable state Blue Sky or
Securities Laws in connection with the issuance of the shares of Republic Common
Stock upon consummation of the Merger. Lochaven shall furnish all information
concerning it and the holders of its capital stock as Republic may reasonably
request in connection with such action. Lochaven shall call the Stockholders'
Meeting, to be held as soon as reasonably practicable after the Registration
Statement is declared effective by the SEC, for the purpose of voting upon
approval of this Agreement and such other related matters as Lochaven deems
appropriate. In connection with the Stockholders' Meeting, (i) Lochaven shall
mail the Proxy Statement/Prospectus to its stockholders; (ii) the parties shall
furnish to each other all information concerning them that they may reasonably
request in connection with such Proxy Statement/Prospectus; (iii) the Board of
Directors of Lochaven shall recommend (subject to compliance with its fiduciary
duties as advised by counsel) to Lochaven's stockholders the approval of the
matters submitted for approval; and (iv) the Board of Directors and officers of
Lochaven shall (subject to compliance with its fiduciary duties as advised by
counsel) use its reasonable efforts to obtain such stockholders' approval.
8.2 Exchange Listing. Republic shall use its reasonable efforts to list,
prior to the Effective Time, on the National Market, subject to official notice
of issuance, the shares of Republic Common Stock to be issued to the holders of
Lochaven Common Stock pursuant to the Merger.
8.3 Applications. Republic shall promptly prepare and file, and Lochaven
shall cooperate in the preparation and, where appropriate, filing of,
applications with all Regulatory Authorities having jurisdiction over the
transactions contemplated by this Agreement seeking the requisite Consents
necessary to consummate the transactions contemplated by this Agreement.
8.4 Filings with State Offices. Upon the terms and subject to the
conditions of this Agreement, Republic and Lochaven shall execute and file a
Certificate of Merger with the Department.
8.5 Agreement as to Efforts to Consummate. Subject to the terms and
conditions of this Agreement, each party agrees to use, and to cause its
Subsidiaries to use, its reasonable best efforts to take, or cause to be taken,
all actions and to do or cause to be done all things necessary, proper or
advisable under applicable Laws to consummate and make effective, as soon as
reasonably practicable after the date of this Agreement, the transactions
contemplated by this Agreement, including using its reasonable best efforts to
lift or rescind any Order adversely affecting its ability to consummate the
transactions contemplated herein and to cause to be satisfied the conditions
referred to in Article 9 of this Agreement; provided that nothing herein shall
preclude either party from exercising its Rights under this Agreement. Each
party shall use, and shall cause each of its Subsidiaries to use, its reasonable
best efforts to obtain all Consents necessary or desirable for the consummation
of the transactions contemplated by this Agreement.
8.6 Investigation and Confidentiality. (a) Prior to the Effective Time,
each party shall keep the other party advised of all Material developments
relevant to its business and to consummation of the Merger and shall permit the
other party to make or cause to be made such investigation of the business and
properties of its and its Subsidiaries and of their respective financial and
legal conditions as the other party reasonably requests, provided that such
investigation shall be reasonably related to the transactions contemplated
hereby and shall not interfere unnecessarily with normal operation. No
investigation by a party shall affect the representations and warranties of the
other party.
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(b) Each party shall, and shall cause its advisers and agents to, maintain
the confidentiality of all confidential information furnished to it by the other
party concerning its and its Subsidiaries' businesses, operations and financial
positions ("Confidential Information") and shall not use such information for
any purpose except in furtherance of the transactions contemplated by this
Agreement. Each party shall maintain the confidentiality of all Confidential
Information obtained in connection with this Agreement or the transactions
contemplated hereby unless (i) such information becomes publicly available
through no fault of such party, or was, is or becomes available to that party
from a source other than the other party or its Representatives, which source
was itself not bound by a confidentiality agreement with, or other contractual,
legal or fiduciary obligation of confidentiality with respect to that
information; or (ii) the furnishing or use of such information is required by
proper judicial, administrative or other legal proceeding, provided that the
other party is promptly notified in writing of such request, unless such
notification is not, in the opinion of counsel, permitted by Law. Each party and
its Representatives will hold and maintain all Confidential Information in
confidence and will not disclose to any third party or permit any third party
access to any Confidential Information or the substance thereof; provided that a
party may disclose Confidential Information to such of its Representatives who
need to know such information in connection with the transactions contemplated
hereby. If this Agreement is terminated prior to the Effective Time, each party
shall promptly return or certify the destruction of all documents and copies
thereof, and all work papers containing confidential information received from
the other party.
(c) Each party agrees to give the other party notice as soon as practicable
after any determination by it of any fact or occurrence relating to the other
party which it has discovered through the course of its investigation and which
represents, or is reasonably likely to represent, either a Material breach of
any representation, warranty, covenant or agreement of the other party or which
has had or is reasonably likely to have a Material Adverse Effect on the other
party.
8.7 Press Releases. Prior to the Effective Time, Republic and Lochaven
shall mutually agree upon and jointly issue any press release or other public
disclosure materially related to this Agreement or any other transaction
contemplated hereby; provided that nothing in this Section 8.7 shall be deemed
to prohibit any party from making any disclosure which its counsel deems
necessary or advisable in order to satisfy such party's disclosure obligations
imposed by Law.
8.8 Certain Actions. Except with respect to this Agreement and the
transactions contemplated hereby, no Lochaven Company nor any Affiliate thereof
nor any Representatives thereof retained by any Lochaven Company shall directly
or indirectly solicit any Acquisition Proposal by any Person. Except to the
extent necessary to comply with the fiduciary duties of Lochaven's Board of
Directors as advised by counsel, no Lochaven Company or any Affiliate or
Representative thereof shall furnish any non-public information that it is not
legally obligated to furnish, or negotiate with respect to, or enter into any
Contract with respect to, any Acquisition Proposal, but Lochaven may communicate
information about such an Acquisition Proposal to its stockholders if and to the
extent that it is required to do so in order to comply with its legal
obligations as advised by counsel. Lochaven shall promptly notify Republic
orally and in writing in the event that it receives any inquiry or proposal
relating to any such transaction. Lochaven shall (i) immediately cease and cause
to be terminated any existing activities, discussions or negotiations with any
Persons conducted heretofore with respect to any of the foregoing; and (ii)
direct and use its reasonable efforts to cause all of its Representatives not to
engage in any of the foregoing.
8.9 Tax Treatment. Each of the parties undertakes and agrees to use its
reasonable efforts to cause the Merger, and to take no action which would cause
the Merger not, to qualify for treatment as a "reorganization" within the
meaning of Section 368(a) of the Code for federal income Tax purposes.
8.10 State Takeover Laws. Each Lochaven Company shall take all necessary
steps to exempt the transactions contemplated by this Agreement from, or if
necessary challenge the validity or applicability of, any applicable state or
federal "moratorium", "control share", "fair price", "business combination" or
other anti-takeover statute or regulation ("Takeover Laws").
8.11 Charter Provisions. Each Lochaven Company shall take all necessary
action to ensure that the entering into of this Agreement and the consummation
of the Merger and the other transactions contemplated
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hereby do not and will not result in the grant of any Rights to any Person under
the Charter or Articles of Incorporation, Bylaws, or other governing instruments
of any Lochaven Company or restrict or impair the ability of Republic or any of
its Subsidiaries to vote, or otherwise to exercise the Rights of a stockholder
with respect to, shares of any Lochaven Company that may be directly or
indirectly acquired or controlled by it.
8.12 Agreement of Affiliates. Lochaven has disclosed in Section 8.12 of
the Lochaven Disclosure Memorandum each Person whom it reasonably believes is an
"affiliate" of Lochaven for purposes of Rule 145 under the 1933 Act. Lochaven
shall use its reasonable efforts to cause each such Person to deliver to
Republic not later than 30 days prior to the Effective Time, a written
agreement, in substantially the form of Exhibit 2, providing that such Person
will not sell, pledge, transfer, or otherwise dispose of the shares of Lochaven
Common Stock held by such Person except as contemplated by such agreement or by
this Agreement and will not sell, pledge, transfer, or otherwise dispose of the
shares of Republic Common Stock to be received by such Person upon consummation
of the Merger except in compliance with applicable provisions of the 1933 Act
and the rules and regulations thereunder and until such time as financial
results covering at least 30 days of combined operations of Republic and
Lochaven have been published within the meaning of Section 201.01 of the SEC's
Codification of Financial Reporting Policies Shares of Republic Common Stock
issued to such affiliates of Lochaven in exchange for shares of Lochaven Common
Stock shall not be transferable until such time as financial results covering at
least 30 days of combined operations of Republic and Lochaven have been
published within the meaning of Section 201.01 of the SEC's Codification of
Financial Reporting Policies, regardless of whether each such affiliate has
provided the written agreement referred to in this Section 8.12 (and Republic
shall be entitled to place restrictive legends upon certificates for shares of
Republic Common Stock issued to affiliates of Lochaven pursuant to this
Agreement to enforce the provisions of this Section 8.12). Republic shall not be
required to maintain the effectiveness of the Registration Statement under the
1933 Act for the purposes of resale of Republic Common Stock by such affiliates.
8.13 Employee Benefits and Contracts. (a) Following the Effective Time,
Republic shall provide generally to officers and employees of the Lochaven
Companies, who at or after the Effective Time become employees of a Republic
Company, employee benefits under employee benefits under employee benefit plans
(other than stock option or other plans involving the potential issuance of
Republic Common Stock except as set forth in this Section 8.13), on terms and
conditions which when taken as a whole are substantially similar to those
currently provided by the Republic Companies to their similarly situated
officers and employees. For purposes of participation and vesting (but not
accrual of benefits) under such employee benefit plan, (i) service under any
qualified defined benefit plans of Lochaven should be treated as service under
Republic's qualified defined benefit plans, (ii) service under any qualified
defined contribution plans of Lochaven shall be treated as service under
Republic's qualified defined contribution plans, and (ii) service under any
other employee benefit plans maintained by Republic.
(b) Following the Effective Time, Republic shall honor on terms reasonably
agreed upon by the parties all employment, severance, consulting and other
compensation Contracts disclosed in Section 8.13 of the Lochaven Disclosure
Memorandum to Republic between any Lochaven Company and any current or former
director, officer or employee thereof, and all provisions for vested benefits or
other vested amounts earned or accrued through the Effective Time under the
Lochaven Benefit Plans.
(c) For a period of one year following the Effective Time, Republic shall
make a severance payment to any former Lochaven employee terminated by Republic
without cause during such period in an amount equal to the product of such
employee's salary or base pay for two weeks multiplied by the number of whole
years such employee was employed with Lochaven.
8.14 Indemnification. (a) Republic shall indemnify, defend, and hold
harmless the present and former directors, officers, employees and agents of the
Lochaven Companies (each, an "Indemnified Party") against all Liabilities
arising out of actions or omissions occurring at or prior to the Effective Time
(including the transactions contemplated by this Agreement) to the full extent
permitted under the OTS Regulations, to the extent not inconsistent with the
Florida Business Corporation Act, and by Lochaven's Charter and Bylaws as in
effect on the date hereof, including provisions relating to advances of expenses
incurred in the defense of any Litigation. Without limiting the foregoing, in
any case in which approval by Republic is required to
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effectuate any indemnification, Republic shall direct, at the election of the
Indemnified Party, that the determination of any such approval shall be made by
independent counsel mutually agreed upon between Republic and the Indemnified
Party.
(b) If Republic or any of its successors or assigns shall consolidate with
or merge into any other Person and shall not be the continuing or surviving
Person of such consolidation or merger or shall transfer all or substantially
all of its Assets to any Person, then and in each case, proper provision shall
be made so that the successors and assigns of Republic shall assume the
obligations set forth in this Section 8.14.
(c) The provisions of this Section 8.14 are intended to be for the benefit
of and shall be enforceable by, each Indemnified Party, his or her heirs and
representatives.
8.15 Certain Modifications. Republic and Lochaven shall consult with
respect to their loan, Litigation and real estate valuation policies and
practices (including loan classifications and levels of reserves) and Lochaven
shall make such modifications or changes to its policies and practices, if any,
prior to the Effective Time, as may be mutually agreed upon. Republic and
Lochaven also shall consult with respect to the character, amount and timing of
restructuring and Merger-related expense charges to be taken by each of the
parties in connection with the transactions contemplated by this Agreement and
shall take such charges in accordance with GAAP, prior to the Effective Time, as
may be mutually agreed upon by the parties. Neither parties' representations,
warranties and covenants contained in this Agreement shall be deemed to be
inaccurate or breached in any respect as a consequence of any modifications or
charges undertaken solely on account of this Section 8.15.
ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
9.1 Conditions to Obligations of each Party. The respective obligations of
each party to perform this Agreement and to consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both parties pursuant to Section 11.6 of
this Agreement:
(A) Stockholder Approval. The stockholders of Lochaven shall have
approved this Agreement, and the consummation of the transactions
contemplated hereby, including the Merger, as and to the extent required by
Law, by the provisions of any governing instrument, or by the rules of the
NASD.
(B) Regulatory Approvals. All Consents of, filings and registration
with, and notifications to, all Regulatory Authorities required for
consummation of the Merger shall have been obtained or made and shall be in
full force and effect and all waiting periods required by Law shall have
expired. No Consent obtained from any Regulatory Authority that is
necessary to consummate the transactions contemplated hereby shall be
conditioned or restricted in a manner (including requirements relating to
the raising of additional capital or the disposition of Assets) that in the
reasonable judgment of the Board of Directors of Republic would so
materially adversely impact the economic or business benefits of the
transactions contemplated by this Agreement that, had such condition or
requirement been known, Republic would not, in its reasonable judgement,
have entered into this Agreement.
(C) Consents and Approvals. Each party shall have obtained any and
all Consents required for consummation of the Merger (other than those
referred to in Section 9.1(b) of this Agreement) or for the preventing of
any Default under any Contract or Permit of such party that, if not
obtained or made, is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on such party. No Consent so obtained
that is necessary to consummate the transactions contemplated hereby shall
be conditioned or restricted in a manner which in the reasonable judgment
of the Board of Directors of Republic would so materially adversely impact
the economic or business benefits of the transactions contemplated by this
Agreement so as to render inadvisable the consummation of the Merger.
(D) Legal Proceedings. No court or governmental or regulatory
authority of competent jurisdiction shall have enacted, issued,
promulgated, enforced, or entered any Law or Order (whether temporary,
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preliminary or permanent) or taken any other action which prohibits,
restricts, or makes illegal consummation of the transactions contemplated
by this Agreement.
(E) Registration Statement. The Registration Statement shall have
become effective under the 1933 Act, no stop Orders suspending the
effectiveness of the Registration Statement shall have been issued, no
action, suit, proceeding, or investigation by the SEC to suspend the
effectiveness thereof shall have been initiated and be continuing, and all
necessary approvals under state Securities Laws or the 1933 Act relating to
the issuance or trading of the shares of Republic Common Stock issuable
pursuant to the Merger shall have been received.
(F) Tax Matters. Each party shall have received a written opinion or
opinions from Holland & Knight LLP in a form reasonably satisfactory to
such parties (the "Tax Opinion"), to the effect that (i) the Merger will
constitute a reorganization within the meaning of Section 368(a) of the
Code and (ii) the exchange in the Merger of Lochaven Common Stock for
Republic Common Stock will not give rise to gain or loss to the
stockholders of Lochaven with respect to such exchange (except to the
extent of any cash received). In rendering such Tax Opinion, such counsel
shall be entitled to rely upon representations of officers of Lochaven and
Republic reasonably satisfactory in form and substance to such counsel.
9.2 Conditions to Obligations of Republic. The obligations of Republic to
perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following conditions,
unless waived by Republic pursuant to Section 11.6(a) of this Agreement:
(A) Representations and Warranties. For purposes of this Section
9.2(a), the accuracy of the representations and warranties of Lochaven set
forth in this Agreement shall be assessed as of the date of this Agreement
and as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties that are confined to a
specified date shall speak only as of such date). The representations and
warranties of Lochaven set forth in Section 5.3 of this Agreement shall be
true and correct (except for inaccuracies which are de minimis in amount).
The representations and warranties of Lochaven set forth in Sections 5.18,
5.19, and 5.20 of this Agreement shall be true and correct in all Material
respects. There shall not exist in this Agreement (including the
representations and warranties set forth in Sections 5.3, 5.18, 5.19, and
5.20) any inaccuracies such that the aggregate effect of such inaccuracies
has, or is reasonably likely to have, a Material Adverse Effect on
Lochaven; provided that, for purposes of this sentence only, those
representations and warranties which are qualified by reference to
"Material" or "Material Adverse Effect" or to the "Knowledge" of Lochaven
or to a matter being "known" by Lochaven shall be deemed not to include
such qualifications.
(B) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of Lochaven to be performed and complied with
pursuant to this Agreement and the other agreements contemplated hereby
prior to the Effective Time shall have been duly performed and complied
with in all Material respects.
(C) Certificates. Lochaven shall have delivered to Republic (i) a
certificate, dated as of the Closing Date and signed on its behalf by its
duly authorized officers, to the effect that the conditions of its
obligations set forth in Sections 9.2(a) and 9.2(b) of this Agreement have
been satisfied, and (ii) certified copies of resolutions duly adopted by
Lochaven's Board of Directors and stockholders evidencing the taking of all
corporate action necessary to authorize the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby, all in such reasonable detail as Republic and its
counsel shall request.
(D) Legal Opinion. Republic shall have received the opinions of
Smith, Mackinnon, Greeley, Bowdoin & Edwards, P.A., counsel to Lochaven,
dated as of the Closing Date or such earlier date as may be agreed to by
the parties, with respect to such matters related to Lochaven and the
Merger as Republic may reasonably request. As to certain matters of fact,
such counsel may rely on certificates of public
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officials and senior officers of Lochaven knowledgeable and having
responsibility with respect to the matters covered by such certificate.
9.3 Conditions to Obligations of Lochaven. The obligations of Lochaven to
perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following conditions,
unless waived by Lochaven pursuant to Section 11.6(b) of this Agreement.
(A) Representations and Warranties. For purposes of this Section
9.3(a), the accuracy of the representations and warranties of Republic set
forth in this Agreement shall be assessed as of the date of this Agreement
and as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to a
specified date shall speak only as of such date). The representations and
warranties of Republic set forth in Section 6.3 of this Agreement shall be
true and correct (except for inaccuracies which are de minimis in amount).
The representations and warranties of Republic set forth in Section 6.14 of
this Agreement shall be true and correct in all Material respects. There
shall not exist any inaccuracies such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a Material Adverse
Effect on Republic; provided that, for purposes of this sentence only,
those representations and warranties which are qualified by references to
"Material" to "Material Adverse Effect" or to the "Knowledge" of Republic
or to a matter being "known" by Republic shall be deemed not to include
such qualifications.
(B) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of Republic to be performed and complied with
pursuant to this Agreement and the other agreements contemplated hereby
prior to the Effective Time shall have been duly performed and complied
with in all Material respects.
(C) Certificates. Republic shall have delivered to Lochaven (i) a
certificate, dated as of the Closing Date and signed on its behalf by its
duly authorized officers, to the effect that the conditions of its
obligations set forth in Sections 9.3(a) and 9.3(b) of this Agreement have
been satisfied, and (ii) certified copies of resolutions duly adopted by
Republic's Board of Directors evidencing the taking of all corporate action
necessary to authorize the execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated hereby,
all in such reasonable detail as Lochaven and its counsel shall request.
(D) Legal Opinion. Lochaven shall have received the opinions of
Holland & Knight LLP, special counsel to Republic, dated as of the Closing
Date or such earlier date as may be agreed to by the parties, with respect
to such matters related to Republic and the Merger as Lochaven may
reasonably request. As to certain matters of fact, such counsel may rely on
certificates of public officials and senior officers of Lochaven
knowledgeable and having responsibility with respect to the matters covered
by such certificate.
ARTICLE 10
TERMINATION
10.1 Termination. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement by the stockholders of
Lochaven, this Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time:
(a) By mutual consent of the Board of Directors of Republic and the
Board of Directors of Lochaven; or
(b) By the Board of Directors of either party (provided that the
terminating party is not then in breach of any representation or warranty
contained in this Agreement under the applicable standard set forth in
Section 9.2(a) of this Agreement in the case of Lochaven and Section 9.3(a)
of this Agreement in the case of Republic or in Material breach of any
covenant or other agreement contained in this Agreement) in the event of an
inaccuracy of any representation or warranty of the other party contained
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in this Agreement which cannot be or has not been cured within 30 days
after the giving or written notice to the breaching party of such
inaccuracy and which inaccuracy would provide the terminating party the
ability to refuse to consummate the Merger under the applicable standard
set forth in Section 9.2(a) of this Agreement in the case of Lochaven and
Section 9.3(a) of this Agreement in the case of Republic; or
(c) By the Board of Directors of either party in the event of a
Material breach by the other party of any covenant or agreement contained
in this Agreement that cannot be or has not been cured within 30 days after
the giving of written notice to the breaching party of such breach; or
(d) By the Board of Directors of either party in the event (i) any
Consent of any Regulatory Authority required for consummation of the Merger
and the other transactions contemplated hereby shall have been denied by
final nonappealable action of such authority or if any action taken by such
authority is not appealed within the time limit for appeal, or (ii) the
stockholders of Lochaven fail to vote their approval of the matters
submitted for the approval at the Stockholders' Meeting where the
transactions were presented to such stockholders for approval and voted
upon; or
(e) By the Board of Directors of either party in the event that the
Merger shall not have been consummated by December 1, 1998, if the failure
to consummate the transactions contemplated hereby on or before such date
is not caused by any breach of this Agreement by the party electing to
terminate pursuant to this Section 10.1(e); or
(f) By the Board of Directors of either party (provided that the
terminating party is not then in breach of any representation or warranty
contained in this Agreement under the applicable standard set forth in
Section 9.2(a) of this Agreement in the case of Lochaven and Section 9.3(a)
of this Agreement in the case of Republic or in Material breach of any
covenant or other agreement contained in this Agreement) in the event that
any of the conditions precedent to the obligations of such party to
consummate the Merger cannot be satisfied or fulfilled by the date
specified in Section 10.1(e) of this Agreement.
10.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 10.1 of this Agreement, this
Agreement shall become void and have no effect, except that (i) the provisions
of this Section 10.2 and Section 8.6(b) and Article 11 of this Agreement shall
survive any such termination and abandonment, and (ii) a termination pursuant to
Section 10.1(b), 10.1(c), or 10.1(f) of this Agreement shall not relieve the
breaching party from Liability for an uncured willful breach of a
representation, warranty, covenant or agreement giving rise to such termination.
10.3 Non-Survival of Representations and Covenants. The respective
representations, warranties, obligations, covenants and agreements of the
parties shall not survive the Effective Time except this Section 10.3 and
Articles 2, 3, 4 and 11 and Sections 8.12, 8.13 and 8.14 of this Agreement.
ARTICLE 11
MISCELLANEOUS
11.1 Definitions. (a) Except as otherwise provided herein, the capitalized
terms set forth below shall have the following meanings:
"Acquisition Proposal" with respect to a party shall mean any tender
offer or exchange offer or any proposal for a merger, acquisition of all of
the stock or Assets of, or other business combination involving such party
or any of its Subsidiaries or the acquisition of a substantial equity
interest in, or a substantial portion of the Assets of, such party or any
of its Subsidiaries.
"Affiliate" of a Person shall mean: (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by
or under common control with such Person; (ii) any officer, director,
partner, employer, or direct or indirect beneficial owner of any 10% or
greater equity or voting interest of such Person; or (iii) any other Person
for which a Person described in clause (ii) acts in any such a capacity.
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"Agreement" shall mean this Agreement and Plan of Merger, including
the Exhibits delivered pursuant hereto and incorporated herein by
reference.
"Assets" of a Person shall mean all of the assets, properties,
businesses, and Rights of such Person of every kind, nature, character, and
description, whether real, personal, or mixed, tangible or intangible,
accrued or contingent, or otherwise relating to or utilized in such
Person's business, directly or indirectly, in whole or in part, whether or
not carried on the books and records of such Person, and whether or not
owned in the name of such Person or any Affiliate of such Person and
wherever located.
"Bank Common Stock" shall mean the $2.00 par value common stock of the
Bank.
"Bank Preferred Stock" shall mean the $20.00 par value noncumulative
convertible perpetual preferred stock of the Bank.
"BHC Act" shall mean the Bank Holding Company Act of 1956, as amended.
"Closing Date" shall mean the date on which the Closing occurs.
"Consent" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order or Permit.
"Contract" shall mean any written or oral agreement, arrangement,
authorization, commitment, contract, indenture, instrument, lease,
obligation, plan, practice, restriction, understanding or undertaking of
any kind or character, or other document to which any Person is a party or
that is binding on any Person or its capital stock, Assets or business.
"Default" shall mean (i) any breach or violation of or default under
any Contract, Order or Permit, (ii) any occurrence of any event that with
the passage of time or the giving of notice or both would constitute a
breach or violation of or default under any Contract, Order or Permit, or
(iii) any occurrence of any event that with or without the passage of time
or the giving of notice would give rise to a Right to terminate or revoke,
change the current terms of or renegotiate, or to accelerate, increase or
impose any Liability under, any Contract, Order or Permit, where, in any
such event, such Default is reasonably likely to have, individually or in
the aggregate, a Material Adverse Effect on a party.
"Department" shall mean the Florida Department of Banking and Finance.
"Environmental Laws" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air,
surface water, ground water, land surface or subsurface strata) and that
are administered, interpreted or enforced by the United States
Environmental Protection Agency and state and local agencies with
jurisdiction over, and including common Law in respect of, pollution or
protection of the environment, including the Comprehensive Environmental
Response Compensation and Liability Act, as amended, 42 U.S.C. 9601 et seq.
U.S.C. 6901 et seq. ("RCRA"), and other Laws relating to emissions,
discharges, releases or threatened releases of any Hazardous Material, or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of any Hazardous
Material.
"ERISA" shall mean the Employee Retirement Income Security Act or
1974, as amended.
"Exhibits", inclusive, shall mean the Exhibits so marked, copies of
which are attached to this Agreement. Such Exhibits are hereby incorporated
by reference herein and made a part hereof, and may be referred to in this
Agreement and any other related instrument or document without being
attached hereto.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"GAAP" shall mean generally accepted accounting principles,
consistently applied during the periods involved.
"Hazardous Material" shall mean (i) any hazardous substance, hazardous
material, hazardous waste, regulated substance or toxic substance (as those
terms are defined by any applicable Environmen-
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tal Laws) and (ii) any chemicals, pollutants, contaminants, petroleum,
petroleum products or oil (and specifically shall include asbestos
requiring abatement, removal or encapsulation pursuant to the requirements
of governmental authorities and any polychlorinated biphenyls).
"HOLA" shall mean the Home Owners' Loan Act of 1933, as amended.
"HSR Act" shall mean Section 7A of the Clayton Act, as added by Title
II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the rules and regulations promulgated thereunder.
"Knowledge" as used with respect to a Person (including references to
such Person being aware of a particular matter) shall mean the personal
knowledge of the chairman, president, chief financial officer, chief
accounting officer, chief credit officer, general counsel, and any
assistant or deputy general counsel or any senior or executive vice
president of such Person and the knowledge of any such Persons obtained or
which would have been obtained from a reasonable investigation.
"Law" shall mean any code, law, ordinance, regulation, reporting or
licensing requirement, rule or statute applicable to a Person or its
Assets, Liabilities or business, including those promulgated, interpreted
or enforced by any Regulatory Authority.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including
costs of investigation, collection and defense), claim, deficiency,
guaranty or endorsement of or by any Person (other than endorsements of
notes, bills, checks and drafts presented for collection or deposit in the
ordinary course of business) of any type, whether accrued, absolute or
contingent, liquidated or unliquidated, matured or unmatured, or otherwise.
"Lien" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title
retention or other security arrangement, or any adverse Right or interest,
charge or claim of any nature whatsoever of, on, or with respect to any
property or property interest, other than (i) Liens for current property
Taxes not yet due and payable, and (ii) for depository institution
Subsidiaries of a party, pledges to secure deposits, and other Liens
incurred in the ordinary course of the banking business.
"Litigation" shall mean any action, arbitration, cause of action,
claim, complaint, criminal prosecution, demand letter, governmental or
other examination or investigation, hearing, inquiry, administrative or
other proceeding or notice (written or oral) by any Person alleging
potential Liability or requesting information relating to or affecting a
party, its business, its Assets (including Contracts related to it), or the
transactions contemplated by this Agreement, but shall not include regular,
periodic examinations of depository institutions and their Affiliates by
Regulatory Authorities.
"Loan Property" shall mean any property owned, leased, or operated by
the party in question or by any of its Subsidiaries or in which such party
or Subsidiary holds a security or other interest (including an interest in
fiduciary capacity), and, where required by the context, includes the owner
or operator of such property, but only with respect to such property.
"Lochaven Common Stock" shall mean the $.01 par value common stock of
Lochaven.
"Lochaven Companies" shall mean, collectively, Lochaven and all
Lochaven Subsidiaries.
"Lochaven Disclosure Memorandum" shall mean the written information
entitled "Lochaven Federal Savings and Loan Association Disclosure
Memorandum" delivered prior to 5:00 p.m., Eastern time, on the seventh day
after the date of this Agreement, to Republic describing in reasonable
detail the matters contained therein and, with respect to each disclosure
made therein, specifically referencing each Section or subsection of this
Agreement under which such disclosure is being made. Information disclosed
with respect to one Section or subsection shall not be deemed to be
disclosed for purposes of any other Section or subsection not specifically
referenced with respect thereto.
"Lochaven Financial Statements" shall mean (i) the consolidated
balance sheets (including related notes and schedules, if any) of Lochaven
as of December 31, 1997, 1996, 1995 and the related statements
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of income, changes in stockholders' equity, and cash flows (including
related notes and schedules, if any) for each of the three fiscal years
ended December 31, 1997, 1996 and 1995, as filed by Lochaven in SEC
Documents, and (ii) the consolidated balance sheets of Lochaven (including
related notes and schedules, if any) and related statements of income,
changes in stockholders' if any) included in SEC Documents filed with
respect to periods ended subsequent to December 31, 1997.
"Lochaven Subsidiaries" shall mean the Subsidiaries of Lochaven, which
shall include the Lochaven Subsidiaries described in Section 5.4 of this
Agreement and any corporation, bank, savings association or other
organization acquired as a Subsidiary of Lochaven in the future and owned
by Lochaven at the Effective Time.
"Material" for purposes of this Agreement shall be determined in light
of the facts and circumstances of the matter in question; provided that any
specific monetary amount stated in this Agreement shall determine
materiality in that instance.
"Material Adverse Effect" on a party shall mean an event, change, or
occurrence which, individually or together with any other event, change or
occurrence, has a material adverse impact on (i) the financial position,
business or results of operations of such party and its Subsidiaries, taken
as a whole, or (ii) the ability of such party to perform its obligations
under this Agreement or to consummate the Merger or the other transactions
contemplated by this Agreement, provided that "Material Adverse Effect"
shall not be deemed to include the impact of (a) changes in banking and
similar Laws of general applicability or interpretations thereof by courts
or governmental authorities, (b) changes in GAAP or regulatory accounting
principles generally applicable to banks and their holding companies, (c)
actions and omissions of a party (or any of its Subsidiaries) taken with
the prior informed consent of the other party in contemplation of the
transactions contemplated hereby, and (d) the Merger and compliance with
the provisions of this Agreement on the operating performance of the
parties.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"National Market" shall mean The Nasdaq National Market.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling or
writ of any federal, state, local or foreign or other court, arbitrator,
mediator, tribunal, administrative agency or Regulatory Authority.
"OTS" shall mean the Office of Thrift Supervision.
"Participation Facility" shall mean any facility or property in which
the party in question or any of its Subsidiaries participates in the
management and, where required by the context, said term means the owner or
operator of such facility or property, but only with respect to such
facility or property.
"Permit" shall mean any federal, state, local, and foreign
governmental approval, authorization, certificate, easement, filing,
franchise, license, notice, permit or Right to which any Person is a party
or that is or may be binding upon or inure to the benefit of any Person or
its securities, Assets or business.
"Person" shall mean a natural person or any legal, commercial, or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting
in a representative capacity.
"Proxy Statement" shall mean the proxy statement used by and Lochaven
to solicit the approval of its stockholders of the transactions
contemplated by this Agreement, which shall include the prospectus of
Republic relating to the issuance of the Republic Common Stock to holders
of Lochaven Common Stock.
"Republic Common Stock" shall mean the $2.00 par value common stock of
Republic.
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"Republic Companies" shall mean, collectively, Republic and all
Republic Subsidiaries.
"Republic Disclosure Memorandum" shall mean the written information
entitled "Republic Bancshares, Inc. Disclosure Memorandum" delivered prior
to the date of this Agreement to Lochaven describing in reasonable detail
the matters contained therein and, with respect to each disclosure made
therein, specifically referencing each Section or subsection of this
Agreement under which such disclosure is being made. Information disclosed
with respect to one Section or subsection shall not be deemed to be
disclosed for purposes of any other Section or subsection not specifically
referenced with respect thereto.
"Republic Financial Statements" shall mean (i) the consolidated
statements of condition (including related notes and schedules, if any) of
Republic as of December 31, 1997, and the consolidated statements of
condition (including related notes and schedules, if any) of the Bank as of
December 31, 1996 and 1995, and the related restated statements of income,
changes in stockholders' equity, and cash flows (including related notes
and schedules, if any) for each of the three years ended December 31, 1997,
1996 and 1995, as filed by Republic or the Bank in SEC Documents and (ii)
the consolidated statements of condition of Republic (including related
notes and schedules, if any) and related statements of income, changes in
stockholders' equity and cash flows (including related notes and schedules,
if any) included in SEC Documents filed with respect to periods ended
subsequent to December 31, 1997.
"Republic Preferred Stock" shall mean the $20.00 par value
noncumulative convertible perpetual preferred stock of Republic.
"Republic Subsidiaries" shall mean the Subsidiaries of Republic and
any corporation, bank, savings association or other organization acquired
as a Subsidiary of Republic in the future and owned by Republic at the
Effective Time.
"Registration Statement" shall mean the Registration Statement on Form
S-4, or other appropriate form, including any pre-effective or
post-effective amendments or supplements thereto, filed with the SEC by
Republic under the 1933 Act with respect to the shares of Republic Common
Stock to be issued to the stockholders of Lochaven in connection with the
transactions contemplated by this Agreement.
"Regulatory Authorities" shall mean, collectively, the Federal Trade
Commission, the United States Department of Justice, the Board of the
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OTS, all state regulatory agencies having jurisdiction
over the parties and their respective Subsidiaries, the NASD and the SEC.
"Representative" shall mean any investment banker, financial advisor,
attorney, accountant, consultant or other representative of a Person.
"Rights" shall mean all arrangements, calls, commitments, Contracts,
options, Rights to subscribe to, scrip, understandings, warrants or other
binding obligations of any character whatsoever relating to, or securities
or Rights convertible into or exchangeable for, shares of the capital stock
of a Person or by which a Person is or may be bound to issue additional
shares of its capital stock or other Rights.
"SEC" shall mean the United States Securities and Exchange Commission.
"SEC Documents" shall mean all forms, proxy statements, registration
statements, reports, schedules and other documents filed or required to be
filed by a party or any of its Subsidiaries with any Regulatory Authority
pursuant to the Securities Laws or the OTS Regulations.
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the
Investment Company Act of 1940, as amended, the Investment Advisors Act of
1940, as amended, the Trust Indenture Act of 1939, as amended, and the
rules and regulations of any Regulatory Authority promulgated thereunder.
"Stockholders' Meeting" shall mean the meeting of the stockholders of
Lochaven to be held pursuant to Section 8.1 of this Agreement, including
any adjournment or adjournments thereof.
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"Subsidiaries" shall mean all those corporations, banks, associations
or other entities of which the entity in question owns or controls 50% or
more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 5% or more of the
outstanding equity securities is owned directly or indirectly by its
parent; provided, there shall not be included any such entity acquired
through foreclosure or any such entity the equity securities of which are
owned or controlled in a fiduciary capacity.
"Surviving Corporation" shall mean the Bank as the surviving
corporation resulting from the Merger.
"Tax" or "Taxes" shall mean all federal, state, local and foreign
taxes, charges, fees, levies, imposts, duties or other assessments,
including income, gross receipts, excise, employment, sales, use, transfer,
license, payroll, franchise, severance, stamp, occupation, windfall
profits, environmental, federal highway use, commercial rent, customs
duties, capital stock, paid-up capital, profits, withholding, Social
Security, single business and unemployment, disability, real property,
personal property, registration, ad valorem, value added, alternative or
add-on minimum, estimated or other tax or governmental fee of any kind
whatsoever, imposed or required to be withheld by the United States or any
state, local or foreign government or subdivision or agency thereof,
including any interest, penalties or additions thereto.
"Taxable Period" shall mean any period prescribed by any governmental
authority, including the United States or any state, local or foreign
government or subdivision or agency thereof for which a Tax Return is
required to be filed or Tax is required to be paid.
"Tax Return" shall mean any report, return, information return or
other information required to be supplied to a taxing authority in
connection with Taxes, including any return of an affiliated or combined or
unitary group that includes a party or its Subsidiaries.
(b) The terms set forth below shall have the meanings ascribed thereto in
the referenced sections:
<TABLE>
<S> <C>
Certificate of Merger................................... Section 1.4
Closing................................................. Section 1.3
Code.................................................... Preamble
Effective Time.......................................... Section 1.4
ERISA Affiliate......................................... Section 5.13(c)
Exchange Agent.......................................... Section 4.1
Exchange Ratio.......................................... Section 3.1(c)
FHLB.................................................... Section 5.1(b)
Indemnified party....................................... Section 8.14
Lochaven Benefit Plans.................................. Section 5.13(a)
Lochaven Contracts...................................... Section 5.14
Lochaven ERISA Plan..................................... Section 5.13(a)
Lochaven options........................................ Section 3.1(d)
Lochaven OTS Reports.................................... Section 5.5(a)
Lochaven Pension Plan................................... Section 5.13(a)
Market Value............................................ Section 3.4
Merger.................................................. Preamble
OTS Regulations......................................... Section 1.3
Republic SEC Reports.................................... Section 6.5(a)
Takeover Laws........................................... Section 8.10
Tax Opinion............................................. Section 9.1(f)
</TABLE>
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes," or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses. (a) Except as otherwise provided in this Section 11.2, each
of the parties shall bear and pay all direct costs and expenses incurred by it
or on its behalf in connection with the transactions
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contemplated hereunder, including filing, registration, and application fees,
printing fees, and fees and expenses of its own financial or other consultants,
investment brokers, accountants, and counsel, except that each of the parties
shall bear and pay one-half of the printing costs incurred in connection with
the printing of the Registration Statement and the Proxy Statement/Prospectus.
(b) Nothing contained in this Section 11.2 shall constitute or shall be
deemed to constitute liquidated damages for the willful breach by a party of the
terms of this Agreement or otherwise limit the Rights of the nonbreaching party.
11.3 Brokers and Finders. Except for McAllen Capital Partners, Inc. as to
Lochaven, each of the parties represents and warrants that neither it nor any of
its officers, directors employees, or Affiliates has employed any broker or
finder or incurred any Liability for any financial advisory fees, investment
bankers' fees, brokerage fees, commissions or finders' fees in connection with
this Agreement or the transactions contemplated hereby. In the event of a claim
by any broker or finder based upon his, her or its representing or being
retained by or allegedly representing or being retained by Lochaven or Republic,
each of Lochaven and Republic, as the case may be, agrees to indemnify and hold
the other party harmless of and from any Liability in respect of any such claim.
11.4 Entire Agreement. Except as otherwise expressly provided herein, this
Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral (except for the
Confidentiality Agreements). Nothing in this Agreement expressed or implied, is
intended to confer upon any Person, other than the parties or their respective
successors, any Rights, remedies, obligations or Liabilities under or by reason
of this Agreement, other than as provided in Sections 8.12, 8.13 and 8.14 of
this Agreement.
11.5 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the parties upon the approval
of the Boards of Directors of each of the parties, whether before or after
stockholder approval of this Agreement has been obtained; provided, that the
provisions of this Agreement relating to the manner or basis in which shares of
Lochaven Common Stock will be exchanged for Republic Common Stock shall not be
amended after the Stockholder's Meeting without the requisite approval of the
holders of the issued and outstanding shares of Lochaven Common Stock entitled
to vote thereon.
11.6 Waivers. (a) Prior to or at the Effective Time, Republic, acting
through its Board of Directors, chief executive officer, chief financial officer
or other authorized officer shall have the Right to waive any Default in the
performance of any term of this Agreement by Lochaven, to waive or extend the
time for the compliance or fulfillment by Lochaven of any and all of its
obligations under this Agreement, and to waive any or all of the conditions
precedent to the obligations of Republic under this Agreement, except any
condition which, if not satisfied, would result in the violation of any Law. No
such waiver shall be effective unless in writing signed by a duly authorized
officer of Republic.
(b) Prior to or at the Effective Time, Lochaven, acting through its Board
of Directors, chief executive officer, chief financial officer or other
authorized officer shall have the Right to waive any Default in the performance
of any term of this Agreement by Republic, to waive or extend the time for the
compliance or fulfillment by Republic of any and all of its obligations under
this Agreement, and to waive any or all of the conditions precedent to the
obligations of Lochaven under this Agreement, except any condition which, if not
satisfied, would result in the violation of any Law. No such waiver shall be
effective unless in writing signed by a duly authorized officer of Lochaven.
(c) The failure of any party at any time to require performance of any
provision hereof shall in no manner affect the Right of such party at a later
time to enforce the same or any other provision of this Agreement. No waiver of
any condition or of the breach of any term contained in this Agreement in one or
more instances shall be deemed to be or construed as a further or continuing
waiver of such condition or breach or a waiver of any other condition or of the
breach of any other term of this Agreement.
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11.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the Rights, interests or obligations hereunder shall be
assigned by any party hereto (whether by operation of Law or otherwise) without
the prior written consent of the other party. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable
by the parties and their respective successors and assigns.
11.8 Notices. All notices or other communications that are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage prepaid or by
courier or overnight carrier to the Persons at the addresses set forth below (or
at such other address as may be provided hereunder), and shall be deemed to have
been delivered as of the date so delivered:
Lochaven: Lochaven Federal Savings and
Loan Association
2410 North Orange Blossom Trail
Winter Park, Florida 32804
Telecopy No.: (407) 426-7622
Attention: Robert O. Smedley
Copy to Counsel: Smith, Mackinnon, Greeley,
Bowdoin & Edwards, P.A.
Citrus Center, Suite 800
255 South Orange Avenue
Orlando, Florida 32801
Telecopy No.: (407) 843-2448
Attention: John P. Greeley, Esq.
Bancshares or
Republic: Republic Bancshares, Inc.
111 Second Avenue, N.E., Suite 300
St. Petersburg, Florida 33701
Telecopy No.: (813) 825-0269
Attention: John W. Sapanski, Chairman of the
Board, Chief Executive Officer and
President
Copy to Counsel: Republic Bancshares, Inc.
111 Second Avenue, N.E., Suite 300
St. Petersburg, Florida 33701
Telecopy No.: (813) 895-5791
Attention: Christopher M. Hunter, Esq.
General Counsel
11.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of Florida, without regard to any
applicable conflicts of Laws.
11.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
11.11 Captions. The captions contained in this Agreement are for reference
purposes only and are part of this Agreement.
11.12 Interpretations. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against any party, whether under
any rule of construction or otherwise. No party to this Agreement shall be
considered the draftsman. The parties acknowledge and agree that this Agreement
has been reviewed, negotiated and accepted by all parties and their attorneys
and shall be construed and
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interpreted according to the ordinary meaning of the words used so as fairly to
accomplish the purposes and intentions of the parties.
11.13 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at Law or in equity.
11.14 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf and its corporate seal to be hereunto affixed and
attested by officers thereunto as of the day and year first above written.
<TABLE>
<S> <C>
ATTEST: REPUBLIC BANCSHARES, INC.
By: /s/ CHRISTOPHER M. HUNTER By: /s/ JOHN W. SAPANSKI
------------------------------------------------- -------------------------------------------------
Christopher M. Hunter John W. Sapanski
Corporate Secretary Chairman of the Board, Chief
Executive Officer and President
[CORPORATE SEAL]
ATTEST: REPUBLIC BANK
By: /s/ CHRISTOPHER M. HUNTER By: /s/ JOHN W. SAPANSKI
------------------------------------------------- -------------------------------------------------
Christopher M. Hunter John W. Sapanski
Corporate Secretary Chairman of the Board, Chief
Executive Officer and President
[CORPORATE SEAL]
ATTEST: LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION
By: /s/ BRENDA J. DETWILER By: /s/ ROBERT O. SMEDLEY
------------------------------------------------- -------------------------------------------------
Brenda J. Detwiler Robert O. Smedley
Secretary President and Chief Executive Officer
[CORPORATE SEAL]
</TABLE>
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APPENDIX B
September 30, 1998
Board of Directors
Lochaven Federal Savings and Loan Association
2410 North Orange Blossom Trail
Orlando, Florida 32804
Members of the Board:
You have requested our updated opinion as to the fairness, from a financial
point of view, to the shareholders of Lochaven Federal Savings and Loan
Association ("Lochaven Federal") of the terms of a certain Agreement and Plan of
Merger dated May 6, 1998 (the "Agreement") pursuant to which Lochaven Federal
will be merged into Republic Bank ("Republic Bank") (the "Merger"). Republic
Bank is a wholly owned subsidiary of Republic Bancshares, Inc. ("Republic").
Under the terms of the Agreement, each of the outstanding shares of Lochaven
Federal common stock shall be converted into the right to receive consideration
of 0.2776 of a share of Republic common stock. The foregoing summary of the
Merger is qualified in its entirety by reference to the Agreement.
McAllen Capital Partners, Inc. ("McAllen Capital") is a boutique financial
advisory firm providing a select range of financial, economic and management
services, as well as capital resources exclusively to the financial services
industry. Since 1988, the professionals of McAllen Capital have developed a
nationwide client base that includes commercial banks, bank holding companies,
thrift institutions, mortgage banks, consumer finance firms, and a variety of
other companies and investors interested in the financial services industry. One
of McAllen Capital's primary missions is to help evaluate and effect capital and
strategic transactions for its financial service clientele. As part of our
financial advisory practice, we are regularly engaged in the valuation of United
States financial institutions and transactions related to their securities. We
are familiar with the commercial banking and thrift industries in Florida and
the major financial institutions operating in that market. McAllen Capital has
been retained by Lochaven Federal in a financial advisory capacity to render our
opinion hereunder, for which we will receive compensation.
In preparing the original opinion, Lochaven Federal's and Republic's
markets were analyzed and each institution's business and prospects were
reviewed. We conducted such other financial analyses as we deemed appropriate
such as comparable company analyses, comparable transactions and pro forma
dilution. Any unique characteristics also were considered.
In reaching its updated opinion, McAllen Capital analyzed the respective
financial positions, both current and historical, of Bancshares and Lochaven. We
reviewed: (1) the Registration Statement; (2) the unaudited interim financial
statements of Republic for the quarters ended March 31, 1998 and June 30, 1998;
(3) the unaudited interim financial statements of Lochaven Federal for the
periods ended March 31, 1998, June 30, 1998 and July 31, 1998; and (4) certain
financial and operating information with respect to the business, operations and
prospects for Republic and Lochaven Federal.
McAllen Capital also: (1) held discussions with members of the senior
management of Lochaven regarding historical and current business operations,
financial condition and future prospects of Lochaven Federal; (2) reviewed the
historical market prices and trading activity for the Republic's common stock as
compared with those of certain publicly traded companies which McAllen Capital
deemed to be relevant; (3) compared the results of operations of Republic and
Lochaven Federal with those of certain banking companies which we deemed to be
relevant; (4) compared the proposed financial terms of the Merger with the
financial terms, to the extent publicly available, of certain other business
combinations of thrift institutions; (5) analyzed the pro forma financial impact
of the Merger on Republic; and (6) conducted such other studies, analyses,
inquiries and examinations as we deemed appropriate.
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<PAGE> 209
Board of Directors
Lochaven Federal Savings and Loan Association
September 30, 1998
Page 2
McAllen Capital did not obtain any independent appraisal of assets or
liabilities of Lochaven Federal or Republic or their respective subsidiaries.
Further, McAllen Capital did not independently verify the information provided
by Lochaven Federal or Republic and assumed the accuracy and completeness of all
such information.
In arriving at its opinions, McAllen Capital performed a variety of
financial analyses. We believe that our analyses must be considered as a whole
and that consideration of portions of such analyses and the factors considered
therein, without considering all the factors and analyses, could create an
incomplete view of the analyses and the process underlying McAllen Capital's
opinion. The preparation of a fairness opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analysis and
summary description.
In its analyses, McAllen Capital made certain assumptions with respect to
industry performance, business and economic conditions, and other matters, many
of which were beyond Lochaven Federal's or Republic's control. Any estimates
contained in McAllen Capital's analyses are not necessarily indicative of future
results of value, which may be significantly more or less favorable than such
estimates. Estimates of the value of companies do not purport to be appraisals
or necessarily reflect the prices at which companies or their securities may
actually be sold.
Since McAllen Capital's original opinion, Republic's stock has declined 38%
to $21.50 as of September 25, 1998. This price decline reflects several possible
factors, including a general decline in the stock prices of commercial banks,
Republic's net losses of $1.7 million for the quarter ended June 30, 1998, and
the issuance by Republic of approximately $77.9 million in additional Republic's
common stock in May 1998.
Concurrently, the vast majority of Lochaven Federal's mortgage
production/servicing staff has either resigned or been effectively transferred
to Republic. Given the recency of these events, the full impact on Lochaven
Federal's future financial performance cannot be determined. Furthermore,
Lochaven continues to operate under several regulatory restrictions and any
opportunities to pursue alternative strategies at the time of the update opinion
appear remote.
Based upon the foregoing, it is our opinion that the terms of the Agreement
remain fair, from a financial point of view, to the shareholders of Lochaven
Federal Savings and Loan Association.
Respectfully submitted,
MCALLEN CAPITAL PARTNERS, INC.
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<PAGE> 210
APPENDIX C
SECTION 552.14 Dissenter and Appraisal Rights. (a) Right to demand payment
of fair or appraised value. Except as provided in paragraph (b) of this section,
any stockholder of a Federal stock association combining in accordance with
sec. 552.13 of this part shall have the right to demand payment of the fair or
appraised value of his stock: Provided, That such stockholder has not voted in
favor of the combination and complies with the provisions of paragraph (c) of
this section.
(b) Exceptions. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section to
demand payment of the stock's fair or appraised value, if such stock was listed
on a national securities exchange or quoted on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the
meeting at which the combination was acted upon or stockholder action is not
required for a combination made pursuant to sec.. 552.13(h)(2) of this part.
"Qualified consideration" means cash, shares of stock of any association or
corporation which at the effective date of the combination will be listed on a
national securities exchange or quoted on NASDAQ, or any combination of such
shares of stock and cash.
(c) Procedure. 1. Notice. Each constituent Federal stock association
shall notify all stockholders entitled to rights under this section, not less
than twenty days prior to the meeting at which the combination agreement is to
be submitted for stockholder approval, of the right to demand payment of
appraised value of shares, and shall include in such notice a copy of this
section. Such written notice shall be mailed to stockholders of record and may
be part of management's proxy solicitation for such meeting.
2. Demand for appraisal and payment. Each stockholder electing to make a
demand under this section shall deliver to the Federal stock association, before
voting on the combination, a writing identifying himself or herself and stating
his or her intention thereby to demand appraisal of and payment for his or her
shares. Such demand must be in addition to and separate from any proxy or vote
against the combination by the stockholder.
3. Notification of effective date and written offer. Within ten days after
the effective date of the combination, the resulting association shall:
(i) Give written notice by mail to stockholders of constituent Federal
stock associations who have complied with the provisions of paragraph
(c)(2) of this section and have not voted in favor of the combination, of
the effective date of the combination;
(ii) Make a written offer to each stockholder to pay for dissenting
shares at a specified price deemed by the resulting association to be the
fair value thereof; and
(iii) Inform them that, within sixty days of such date, the respective
requirements of paragraphs (c)(5) and (c)(6) of this section (set out in
the notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and statement of
income of the association the shares of which the dissenting stockholder holds,
for a fiscal year ending not more than sixteen months before the date of notice
and offer, together with the latest available interim financial statements.
4. Acceptance of offer. If within sixty days of the effective date of the
combination the fair value is agreed upon between the resulting association and
any stockholder who has complied with the provisions of paragraph (c)(2) of this
section, payment therefor shall be made within ninety days of the effective date
of the combination.
5. Petition to be filed if offer not accepted. If within sixty days of the
effective date of the combination the resulting association and any stockholder
who has complied with the provisions of paragraph (c)(2) of this section do not
agree as to the fair value, then any such stockholder may file a petition with
the Office, with a copy by registered or certified mail to the resulting
association, demanding a determination of the fair market value of the stock of
all such stockholders. A stockholder entitled to file a petition under this
section who fails to file such petition within sixty days of the effective date
of the combination shall be deemed to have accepted the terms offered under the
combination.
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6. Stock certificates to be noted. Within sixty days of the effective date
of the combination, each stockholder demanding appraisal and payment under this
section shall submit to the transfer agent his certificates of stock for
notation thereon that an appraisal and payment have been demanded with respect
to such stock and that appraisal proceedings are pending. Any stockholder who
fails to submit his or her stock certificates for such notation shall no longer
be entitled to appraisal rights under this section and shall be deemed to have
accepted the terms offered under the combination.
7. Withdrawal of demand. Notwithstanding the foregoing, at any time within
sixty days after the effective date of the combination, any stockholder shall
have the right to withdraw his or her demand for appraisal and to accept the
terms offered upon the combination.
8. Valuation and payment. The Director shall, as he or she may elect,
either appoint one or more independent persons or direct appropriate staff of
the Office to appraise the shares to determine their fair market value, as of
the effective date of the combination, exclusive of any element of value arising
from the accomplishment or expectation of the combination. Appropriate staff of
the Office shall review and provide an opinion on appraisals prepared by
independent persons as to the suitability of the appraisal methodology and the
adequacy of the analysis and supportive data. The Director after consideration
of the appraisal report and the advice of the appropriate staff shall, if he or
she concurs in the valuation of the of the shares, direct payment by the
resulting association of the appraised fair market value of the shares, upon
surrender of the certificates representing such stock. Payment shall be made,
together with interest from the effective date of the combination, at a rate
deemed equitable by the Director.
9. Costs and expenses. The costs and expenses of any proceeding under this
section may be apportioned and assessed by the Director as he or she may deem
equitable against all or some of the parties. In making this determination the
Director shall consider whether any party has acted arbitrarily, vexatiously, or
not in good faith in respect to the rights provided by this section.
10. Voting and distribution. Any stockholder who has demanded appraisal
rights as provided in paragraph (c)(2) of this section shall thereafter neither
be entitled to vote such stock for any purpose nor be entitled to the payment of
dividends or other distributions on the stock (except dividends or other
distribution payable to, or a vote to be taken by stockholders of record at a
date which is on or prior to, the effective date of the combination): Provided,
That if any stockholder becomes unentitled to appraisal and payment of appraised
value with respect to such stock and accepts or is deemed to have accepted the
terms offered upon the combination, such stockholder shall thereupon be entitled
to vote and receive the distributions described above.
11. Status. Shares of the resulting association into which shares of the
stockholders demanding appraisal rights would have been converted or exchanged,
had they assented to the combination, shall have the status of authorized and
unissued shares of the resulting association.
C-2
<PAGE> 212
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The provisions of the Florida Business Corporation Act (the "FBCA") and
Bancshares' By-Laws (the "By-Laws") set forth the extent to which the
Registrant's directors and officers may be indemnified against liabilities they
may incur while serving in such capacities. The FBCA provisions for
indemnification are summarized below.
Section 607.0850(1) of the FBCA empowers a corporation to indemnify any
person who was or is a party to any proceeding (other than an action by, or in
right of, the corporation), by reason of the fact that he is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
liability incurred in connection with such proceeding, including any appeal
thereof, if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. This Subsection further provides that the termination of
proceeding by judgment, order, settlement or conviction or upon a plea of nolo
contender or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in, or not opposed to, the best interests of the corporation or, with respect
to any criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
Section 607.0850(2) empowers a corporation to indemnify any person who was
or is a party to any proceeding by or in the right of the corporation to procure
a judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses and amounts paid in settlement not exceeding, in the judgment of the
board of directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the corporation, except that no indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable unless, any only to the extent that, the court in which such proceeding
was brought, or any other court of competent jurisdiction shall determine upon
application that, despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
Section 607.0850(3) provides that to the extent that a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any proceeding referred to in the preceding
subparagraphs, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses actually and reasonably incurred by him in
connection therewith.
Section 607.0850(4) provides that any indemnification under subsections (1)
or (2), unless pursuant to a determination by a court, shall be made by the
corporation only as authorized in a specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard of conduct as
set forth in subsections (1) or (2). Such determination shall be made (a) by the
Board of Directors by a majority vote of a quorum consisting of directors who
are not parties to such proceeding; (b) if such a quorum is not obtaining or,
even if obtainable, by majority vote of a committee duly designated by the board
of directors (in which directors who are parties may participate) consisting
solely of two or more directors who are not at the time parties to the
proceeding; (c) by independent legal counsel selected by the board of directors
described in paragraph (a) or the committee described in paragraph (b), or if a
quorum of the directors cannot be obtained for paragraph (a) and the committee
cannot be designated under paragraph (b), selected by a majority vote of the
full board of directors (in which directors who are parties may participate); or
(d) by the shareholders by a majority vote
II-1
<PAGE> 213
of a quorum consisting of shareholders who are not parties to such proceeding
or, if no such quorum is obtainable, by a majority vote of shareholders who were
not parties to such proceeding.
Section 607.0850(5) provides that evaluation of the reasonableness of
expenses and authorization of indemnification shall be made in the same manner
as the determination that indemnification is permissible. However, if the
determination of permissibility is made by independent legal counsel, persons
specified by paragraph 4(c) shall evaluate the reasonableness of expenses and
may authorize indemnification.
Section 607.0850(6) provides that expenses incurred by an officer or
director in defending a civil or criminal proceeding may be paid by the
corporation in advance of the final disposition of such proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if he is ultimately found not to be entitled to indemnification by the
corporation. Expenses incurred by other employees and agents may be paid in
advance upon terms or conditions that the board of directors deems appropriate.
Section 607.0850(7) provides that the indemnification and advancement of
expenses provided pursuant to this section are not exclusive, and the
corporation is empowered to make any other or further indemnification or
advancement of expenses of any of its directors, officers, employees or agents,
under any bylaw, agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, unless a judgement or other final
adjudication establishes that such person's actions or omissions to act were
material to the cause of action so adjudicated and constitute (a) a violation of
the criminal law, unless such person had reasonable cause to believe that his
conduct was lawful or had no reasonable cause to believe that his conduct was
unlawful; (b) a transaction from which such person derived an improper personal
benefit; (c) in the case of a director, a circumstance under which the liability
provisions of Section 607.0834 of the FBCA are applicable; or (d) willful
misconduct or a conscious disregard for the best interests of the corporation in
a proceeding by or in the right of the corporation to procure a judgment in its
favor, or in a proceeding by or in the right of a shareholder.
Section 607.0850(8) provides that indemnification and advancement of
expenses shall continue as, unless otherwise provided when authorized or
ratified, to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of such person's heirs, executors and
administrators unless otherwise provided when authorized or ratified.
Section 607.0850(9) provides that unless the corporation's articles of
incorporation provide otherwise, notwithstanding the failure of a corporation to
provide indemnification and despite any contrary determination of the board or
of the shareholders of the specific case, a director, officer, employee or agent
who is or was a party to a proceeding may apply for indemnification or
advancement of expenses, or both, to the court conducting the proceeding, to the
circuit court or to another court of competent jurisdiction. On receipt of an
application, the court, after giving any notice that it considers necessary, may
order indemnification and advancement of expenses, including expenses incurred
in seeking court-ordered indemnification or advancement of expenses, if it
determines that (a) the director, officer, employee or agent is entitled to
mandatory indemnification under subsection (3), in which case the court shall
also order the corporation to pay the director reasonable expenses incurred in
obtaining court-ordered indemnification or advancement or expenses; (b) the
director, officer, employee or agent is entitled to indemnification or
advancement of expenses, or both, by virtue of the exercise by the corporation
of its power pursuant to subsection (7); or (c) the director, officer, employee
or agent is reasonably entitled to indemnification or advancement of expenses,
or both, in view of all the relevant circumstances, regardless of whether such
person meet the standard of conduct set forth in subsection (1), subsection (2)
or subsection (7).
Section 607.0850(12) provides that the corporation is empowered to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation or is or was a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or incurred by him
in any such capacity or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this section.
II-2
<PAGE> 214
The Registrant maintains an insurance policy insuring the Registrant and
directors and officers of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act").
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits (See exhibit index immediately preceding the exhibits for the
page number where each exhibit can be found).
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
2 -- Agreement and Plan of Merger, dated as of May 6, 1998, by
and among Bancshares, Republic and Lochaven (included as
Appendix A to the Proxy Statement/Prospectus and
incorporated by reference herein)
3.1 -- Amended and Restated Articles of Incorporation of Bancshares
(incorporated by reference from Exhibit 3.1 of Bancshares'
Registration Statement on Form S-4, File No. 33-808895,
dated December 28, 1995)
3.2 -- By-Laws of Bancshares (incorporated by reference from
Exhibit 3.2 of Bancshares Registration Statement on Form
S-4, File No. 33-808895, dated December 28, 1995)
4 -- Specimen Common Stock Certificate (incorporated herein by
reference from Exhibit 4.1 of Registrant's Registration
Statement on Form S-4, File No. 33-808895, dated December
28, 1995)
5 -- Opinion of Holland & Knight LLP, including consent*
8 -- Form of Opinion of Holland & Knight LLP regarding federal
income tax matters, including consent
23.1 -- Consent of Arthur Andersen LLP regarding use of report
23.2 -- Acknowledgement from Arthur Andersen LLP regarding
Bancshares' Form 10-Q for the quarter ended June 30, 1998
23.3 -- Consent of Hacker, Johnson, Cohen & Grieb PA
23.4 -- Consent of Holland & Knight LLP (included in Exhibit 5)*
23.5 -- Consent of McAllen Capital Partners, Inc.
23.6 -- Consent of Smith, Mackinnon, Greeley, Bowdoin & Edwards,
P.A.
24 -- Powers of Attorney (included in the signature page on page
II-5)*
99 -- Form of Proxy of Lochaven
</TABLE>
- ---------------
* Filed with Bancshares' Registration Statement on Form S-4 filed September 18,
1998, Registration No. 333-63803 and incorporated herein by reference.
(b) Financial Statement Schedules
Schedules are omitted because they are not required or are not applicable,
or the required information is shown in the financial statements or notes
thereto.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or
II-3
<PAGE> 215
in the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Registrant's Articles of Incorporation or By-Laws, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission (the "Commission") such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that are incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
Bancshares being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 216
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Pre-effective Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of St. Petersburg, State of Florida, on October 1, 1998.
REPUBLIC BANCSHARES, INC.
By: /s/ JOHN W. SAPANSKI
------------------------------------
John W. Sapanski
Chairman and
Chief Executive Officer
Date: October 1, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE TITLE
--------- ---- -----
<C> <C> <S>
/s/ JOHN W. SAPANSKI October 1, 1998 Chairman, Chief Executive
- ----------------------------------------------------- Officer and Director
John W. Sapanski (principal executive
officer
/s/ WILLIAM R. FALZONE October 1, 1998 Treasurer (principal
- ----------------------------------------------------- financial
William R. Falzone and accounting officer)
* October 1, 1998 Director
- -----------------------------------------------------
Fred Hemmer
/s/ MARLA HOUGH October 1, 1998 Director
- -----------------------------------------------------
Marla Hough
* October 1, 1998 Director
- -----------------------------------------------------
William R. Hough
/s/ ALFRED T. MAY October 1, 1998 Director
- -----------------------------------------------------
Alfred T. May
/s/ WILLIAM J. MORRISON October 1, 1998 Director
- -----------------------------------------------------
William J. Morrison
*By: /s/ JOHN W. SAPANSKI
----------------------------------------------
John W. Sapanski
Attorney-in-fact
</TABLE>
II-5
<PAGE> 217
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
2 -- Agreement and Plan of Merger, dated as of May 6, 1998, by
and among Bancshares, Republic and Lochaven (included as
Appendix A to the Proxy Statement/Prospectus and
incorporated by reference herein)
3.1 -- Amended and Restated Articles of Incorporation of Bancshares
(incorporated by reference from Exhibit 3.1 of Bancshares'
Registration Statement on Form S-4, File No. 33-808895,
dated December 28, 1995)
3.2 -- By-Laws of Bancshares (incorporated by reference from
Exhibit 3.2 of Bancshares Registration Statement on Form
S-4, File No. 33-808895, dated December 28, 1995)
4 -- Specimen Common Stock Certificate (incorporated herein by
reference from Exhibit 4.1 of Registrant's Registration
Statement on Form S-4, File No. 33-808895, dated December
28, 1995)
5 -- Opinion of Holland & Knight LLP, including consent*
8 -- Form of Opinion of Holland & Knight LLP regarding federal
income tax matters, including consent
23.1 -- Consent of Arthur Andersen LLP regarding use of report
23.2 -- Acknowledgement from Arthur Andersen LLP regarding
Bancshares' Form 10-Q for the quarter ended June 30, 1998
23.3 -- Consent of Hacker, Johnson, Cohen & Grieb PA
23.4 -- Consent of Holland & Knight LLP (included in Exhibit 5)*
23.5 -- Consent of McAllen Capital Partners, Inc.
23.6 -- Consent of Smith, Mackinnon, Greeley, Bowdoin & Edwards,
P.A.
24 -- Powers of Attorney (included in the signature page on page
II-5)*
99 -- Form of Proxy of Lochaven
</TABLE>
- ---------------
* Filed with Bancshares' Registration Statement on Form S-4 filed September 18,
1998, Registration No. 333-63803 and incorporated herein by reference.
II-6
<PAGE> 1
EXHIBIT 8
September , 1998
Republic Bancshares, Inc.
111 Second Avenue, N.E.
Suite 300
St. Petersburg, FL 33701
Re: Proposed Merger of Lochaven Federal Savings and Loan
Association with and into Republic Bank
Ladies and Gentlemen:
We have acted as special tax counsel to Republic Bancshares, Inc.
("Bancshares"), a corporation organized and existing under the laws of the State
of Florida, in connection with the federal income tax consequences of the
proposed merger of Lochaven Federal Savings and Loan Association ("Lochaven"), a
bank organized and existing under the laws of the State of Florida, with and
into Bancshares's wholly owned subsidiary, Republic Bank ("Republic"), a bank
organized and existing under the laws of the State of Florida. The Merger will
be effected pursuant to the Agreement and Plan of Merger, dated as of May 6,
1998, by and among Lochaven, Republic and Bancshares (the "Agreement"). All
shares, other than any held as treasury stock which will be cancelled and
retired, and those shares for which the holders have demanded and perfected the
demand for payment of the "fair or appraised value" in accordance with Section
658.44(4) and (5) and Section 655.414 (1)(e) of the Florida Statutes, shall be
converted into the right to receive Bancshares common stock in accordance with
the Exchange Ratio.
In rendering this opinion, we have examined (i) the Internal Revenue Code
of 1986, as amended (the "Code"), and Treasury Regulations, (ii) the legislative
history of applicable sections of the Code, and (iii) appropriate Internal
Revenue Service and court decisional authority. In addition, we have relied upon
certain information made known to us as more fully described below. All
capitalized terms used herein without definition shall have the respective
meanings specified in the Agreement, and unless otherwise specified, all section
references herein are to the Code.
In rendering the opinions expressed herein, we have examined such documents
as we have deemed appropriate, including:
(1) the Agreement;
(2) the Registration Statement on Form S-4 filed by Republic (the
"Registration Statement") with the Securities and Exchange Commission under the
Securities Act of 1933, on September 18, 1998, including the Proxy
Statement/Prospectus for the Special Meeting of the Stockholders of Lochaven
(the "Proxy Statement/Prospectus"); and
(3) such additional documents as we have considered relevant.
In our examination of such documents, we have assumed, with your consent,
that all documents submitted to us as photocopies faithfully reproduce the
originals thereof, that such originals are authentic, that all such documents
have been or will be duly executed by each of Republic, Bancshares and Lochaven
to the extent required, and that all statements set forth in such documents are
accurate.
We have also obtained such additional information and factual
representations as we have deemed relevant and necessary through consultation
with various officers and representatives of Bancshares, Republic and Lochaven
and through certificates provided by the management of Bancshares and Republic
and the management of Lochaven (the "Certificates"), the accuracy and
completeness of which we have neither investigated nor verified.
<PAGE> 2
Republic Bancshares, Inc.
September , 1998
Page 2
Based solely on the foregoing, and assuming that the Merger will take place
as described in the Agreement and in a manner qualifying as a statutory merger
under applicable law, and that the representations made by Bancshares, Republic
and Lochaven in the Certificates are true correct at the time of the
consummation of the Merger, we are of the opinion under presently applicable
federal income tax law that:
(1) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code and Republic, Lochaven and Bancshares will each be "a
party to a reorganization" within the meaning of Section 368(b) of the Code.
(2) No gain or loss will be recognized by the Lochaven stockholders upon
the receipt of Bancshares Common Stock solely in exchange for their shares of
Lochaven Common Stock (except with respect to any cash received in lieu of a
fractional share interest in Bancshares Common Stock).
(3) The aggregate tax basis of the Bancshares Common Stock received by the
Lochaven stockholders in the Merger will be the same as the basis of the
Lochaven Common Stock surrendered in exchange therefor less the basis of any
fractional share of Bancshares Common Stock settled by cash payment.
(4) The holding period of the Bancshares Common Stock received by the
Lochaven stockholders in the Merger will include the period during which the
Lochaven Common Stock surrendered in exchange therefor was held, provided that
the Lochaven Common Stock was held as a capital asset at the Effective Time.
(5) The payment of cash to Lochaven stockholders in lieu of fractional
share interest of Bancshares Common Stock will be treated for federal income tax
purposes as if the fractional shares were distributed as part of the exchange
and then were redeemed by Bancshares. These cash payments will be treated as
having been received as distributions in full payment in exchange for the stock
redeemed. Generally, any gain or loss recognized upon such exchange will be
capital gain or loss, provided the fractional share would constitute a capital
asset in the hands of the exchanging stockholder.
(6) Where solely cash is received by a Lochaven stockholder, in exchange
for Lochaven Common Stock pursuant to the exercise of dissenter's rights, such
cash will be treated as having been received in redemption of his Lochaven
Common Stock, subject to the provisions and limitations of Section 302 of the
Code.
The opinions expressed herein are based upon existing statutory,
regulatory, and judicial authority, any of which may be changed at any time with
retroactive effect. In addition, our opinions are based solely on the documents
that we have examined, the factual statements and representations contained in
the Certificates, the additional information that we have obtained, and the
statements set out herein, all of which we have assumed to be true on the date
hereof and will be true on the date on which the Merger is consummated. Our
opinions may not be relied on if any of the facts pertinent to the federal
income tax treatment of the Merger stated in the documents and Certificates is,
or later becomes, inaccurate. Our opinions are limited to the federal income tax
matters specifically covered thereby and are qualified and limited to the same
extent specified in the Proxy Statement/Prospectus under the caption
"Description of the Transaction -- Certain Federal Income Tax Consequences of
the Merger", and we have not been asked to address, nor have we addressed, any
other tax consequences of the proposed transaction, including for example
intercompany transactions, accounting methods, or changes in accounting methods
resulting from the Merger. This opinion is provided solely for the use and
benefit of Bancshares; no other person is entitled to rely on this opinion.
We consent to the use of this opinion and to the references made to the
firm in the Registration Statement under the captions "Summary -- Certain
Federal Income Tax Consequences of the Merger" and "Description of the
Transaction -- Certain Federal Income Tax Consequences of the Merger" and to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
HOLLAND & KNIGHT LLP
<PAGE> 1
EXHIBIT 23.1
ARTHUR ANDERSEN LLP
CONSENT TO USE OF REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
use of our report, and to all references to our firm, included in or made a part
of Registration Statement No. 333-63803.
ARTHUR ANDERSEN LLP
Tampa, Florida
October 1, 1998
<PAGE> 1
EXHIBIT 23.2
October 1, 1998
Republic Bancshares, Inc.
111 2nd Avenue NE, Suite 300
St. Petersburg, FL 33701
Republic Bancshares, Inc.
We are aware that Republic Bancshares, Inc. has incorporated, by reference
in its Registration Statement No. 333-63803 on Form S-4, its Form
10-Q for the quarter ended June 30, 1998, which includes our report dated August
13, 1998, covering the unaudited interim financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933 (the Act), that
report is not considered a part of the registration statement prepared or
certified by our firm or a report prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Pre-effective Amendment No. 1 to the
Registration Statement on Form S-4 of our report dated February 20, 1998, except
for Notes 12 and 13, as to which the date is April 23, 1998, on our audit of the
consolidated financial statements of Lochaven Federal Savings and Loan
Association and Subsidiary as of December 31, 1997 and 1996 and for the years
then ended, and to the reference to our firm under the caption "Experts."
HACKER, JOHNSON, COHEN & GRIEB PA
Orlando, Florida
September 30, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF MCALLEN CAPITAL PARTNERS, INC.
Board of Directors
Lochaven Federal Savings
and Loan Association
2410 North Orange Blossom Trail
Orlando, Florida 32804
Ladies and Gentlemen:
We hereby consent to the use of our firm's name in the Registration
Statement No. 333-63803 on Form S-4 of Republic Bancshares, Inc. and any
amendments thereto, and the inclusion of, summary and references to our fairness
opinion in such filings including the Prospectus of Republic Bancshares, Inc.
and the Proxy Statement for Lochaven Federal Savings and Loan Association.
MCALLEN CAPITAL PARTNERS, INC.
September 30, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT
We hereby consent to the reference made to the firm under the caption
"Legal Opinions" in the Proxy Statement/Prospectus constituting part of the
within Registration Statement. In giving such consent, we do not thereby admit
that we are within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
SMITH, MACKINNON, GREELEY, BOWDOIN
& EDWARDS, P.A.
September 30, 1998
Orlando, Florida
<PAGE> 1
EXHIBIT 99
PROXY
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION
SPECIAL MEETING OF STOCKHOLDERS
The undersigned hereby constitutes and appoints Patricia A. Schwartz
and Robert O. Smedley, Jr., or either of them, as proxies, each with full power
of substitution, to vote the number of shares of the $0.01 par value common
stock ("Lochaven Common Stock") of Lochaven Federal Savings and Loan
Association, a federally-chartered savings and loan association ("Lochaven"),
which the undersigned would be entitled to vote if personally present at the
Special Meeting of Lochaven stockholders to be held at 2410 North Orange Blossom
Trail, Orlando, Florida 32804, on November 4, 1998, at 9:00 a.m., local time,
and at any adjournment or postponement thereof (the "Special Meeting"), upon the
proposals described in the Proxy Statement/Prospectus dated , 1998
and the Notice of Special Meeting of Stockholders, dated October 5, 1998.
1. MERGER. To approve ratify, confirm and adopt the Agreement and Plan of
Merger, dated as of May 6, 1998 (the "Agreement"), by and among
Republic Bancshares, Inc., a Florida corporation ("Bancshares"),
Republic Bank, a commercial bank organized and existing under the laws
of the State of Florida that is a wholly-owned subsidiary of Bancshares
("Republic"), and Lochaven, pursuant to which (i) Lochaven will merge
(the "Merger") with and into Republic, and (ii) each share of Lochaven
Common Stock issued and outstanding at the effective time of the Merger
will be converted into and exchanged for 0.2776 of a share of the $2.00
par value common stock of Bancshares in accordance with the terms of
the Agreement, all as more fully described in the Proxy
Statement/Prospectus dated , 1998.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. OTHER BUSINESS. In the discretion of the proxies on such other matters
as may properly come before the Special Meeting or any adjournment
thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1 ABOVE.
Please sign this proxy exactly as your name appears below. When shares are held
jointly, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
DATED: , 1998
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Signature
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Signature if held jointly
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF LOCHAVEN FEDERAL SAVINGS
AND LOAN ASSOCIATION, AND MAY BE REVOKED PRIOR TO ITS EXERCISE.
