<PAGE> 1
As filed with the Securities and Exchange Commission on September 18, 1998
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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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<S> <C> <C>
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, DC 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. [ ]_________________
<PAGE> 2
CALCULATION OF REGISTRATION FEE
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- ----------------------------------------------------------------------------------------------------------------------------
Title of each Amount Proposed Proposed Amount of
class of securities to be maximum offering maximum aggregate registration
to be registered registered(1) price per shares(2) offering price(2) fee
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 169,084 $16.74 $2,831,000 $835.15
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on an estimate of the number of shares of the common stock, $2.00
par value per share, of the Registrant to be issued in connection with
the merger ("Merger") of Lochaven Federal Savings and Loan Association
("Lochaven") with and into Registrant's wholly-owned subsidiary
Republic Bank, which is calculated by multiplying the maximum number of
shares of common stock, par value $0.01 per share, of Lochaven expected
to be cancelled in the Merger (609,094) by the exchange ratio for the
Merger, which is 0.2776.
(2) Pursuant to Rule 457(f)(2), and solely for the purpose of calculating
the registration fee, the proposed maximum offering price per share and
the proposed maximum aggregate offering price are based upon the total
stockholders' equity of Lochaven as of June 30, 1998.
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> 3
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION
2410 NORTH ORANGE BLOSSOM TRAIL
ORLANDO, FLORIDA 32804
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 _____________________ on __________, 1998, at
__________, 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 applicable law 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,
Robert O. Smedley
President and
Chief Executive Officer
<PAGE> 4
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION
2410 NORTH ORANGE BLOSSOM TRAIL
ORLANDO, FLORIDA 32804
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD __________, 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_______________________________ on __________, 1998, at ____________,
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 ________, 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
----------------------------------
Robert O. Smedley
President and Chief
Executive Officer
Orlando, Florida
______________, 1998
<PAGE> 5
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LOCHAVEN FEDERAL SAVINGS REPUBLIC BANCSHARES, INC.
AND LOAN ASSOCIATION PROSPECTUS
PROXY STATEMENT
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 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 of Lochaven stockholders, only stockholders of record as
of the close of business on September __, 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 September __, 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 SEPTEMBER __, 1998.
<PAGE> 6
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 LTV
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.
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
AVAILABLE INFORMATION...................................................................................................iii
DOCUMENTS INCORPORATED BY REFERENCE..................................................................................... iv
SUMMARY................................................................................................................. 1
The Parties....................................................................................................... 5
Special Meeting of Lochaven Stockholders.......................................................................... 6
The Merger; Exchange Ratio........................................................................................ 6
Dissenting Stockholders........................................................................................... 6
Reasons for the Merger; Recommendation of Lochaven's Board of Directors........................................... 6
Opinion of Financial Advisor...................................................................................... 7
Effective Time.................................................................................................... 7
Exchange of Stock Certificates.................................................................................... 7
Regulatory Approvals.............................................................................................. 7
Waiver, Amendment and Termination of the Agreement................................................................ 7
Interests of Certain Persons in the Merger........................................................................ 8
Certain Federal Income Tax Consequences of the Merger............................................................. 8
Accounting Treatment.............................................................................................. 8
Certain Differences in Stockholders' Rights....................................................................... 8
RECENT DEVELOPMENTS .................................................................................................... 9
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............................................................................ 35
General........................................................................................................... 35
Record Date; Vote Required........................................................................................ 35
DESCRIPTION OF THE TRANSACTION.......................................................................................... 37
General........................................................................................................... 37
Exchange Ratio.................................................................................................... 37
Treatment of Lochaven Options..................................................................................... 37
Background of and Reasons for the Merger.......................................................................... 38
Opinion of Lochaven's Financial Advisor........................................................................... 41
Effective Time of the Merger...................................................................................... 44
Distribution of Bancshares' Stock Certificates and Payment for Fractional Shares.................................. 45
Conditions to Consummation of the Merger.......................................................................... 45
Regulatory Approvals.............................................................................................. 46
Waiver, Amendment and Termination of the Agreement................................................................ 46
Conduct of Business Pending the Merger............................................................................ 47
Management of Bancshares and Republic Following the Merger........................................................ 48
Interests of Certain Persons in the Merger........................................................................ 48
Dissenting Stockholders........................................................................................... 49
Certain Federal Income Tax Consequences of the Merger............................................................. 51
Accounting Treatment.............................................................................................. 52
Expenses and Fees................................................................................................. 52
Resales of Bancshares Common Stock................................................................................ 52
EFFECT OF THE MERGER ON RIGHTS OF STOCKHOLDERS ......................................................................... 53
Authorized Capital Stock.......................................................................................... 53
Amendment of Articles of Incorporation and Bylaws................................................................. 54
Classified Board of Directors and Absence of Cumulative Voting.................................................... 54
</TABLE>
i
<PAGE> 8
TABLE OF CONTENTS
(CON'T)
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PAGE
<S> <C>
Removal of Directors.............................................................................................. 55
Indemnification................................................................................................... 55
Special Meetings of Stockholders.................................................................................. 56
Actions of Stockholders Without a Meeting......................................................................... 56
Stockholder Nominations and Proposals............................................................................. 56
Mergers, Consolidation and Sales of Assets........................................................................ 57
Dissenters' Rights of Appraisal................................................................................... 57
Stockholders' Rights to Examine Books and Records................................................................. 58
Dividends......................................................................................................... 58
COMPARATIVE MARKET PRICES .............................................................................................. 60
UNAUDITED COMBINED FINANCIAL DATA....................................................................................... 61
CERTAIN INFORMATION CONCERNING BANCSHARES............................................................................... 69
CERTAIN INFORMATION CONCERNING LOCHAVEN................................................................................. 74
DESCRIPTION OF BANCSHARES COMMON AND PREFERRED STOCK....................................................................102
LEGAL OPINIONS..........................................................................................................103
EXPERTS.................................................................................................................104
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> 9
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> 10
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 __, 1998.
[Balance of page intentionally left blank]
iv
<PAGE> 11
SUMMARY
The following is a summary of certain information relating to 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, to those entities and
their respective 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
currently 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> 12
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.
2
<PAGE> 13
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.
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 Lochaven 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 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.
3
<PAGE> 14
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
(the "June Securitization"), while retaining a $12.0 million subordinated
interest in the pool of loans that were securitized. Bancshares retained
servicing rights with respect to the loans that were securitized. 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.
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.
4
<PAGE> 15
- 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.
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 ______, local time, on
_________, 1998, at ____________________, 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 _____________ (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 outstanding and entitled to be voted.
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."
5
<PAGE> 16
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 Certificate of Merger relating to the 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 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 specified 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 dissenting stockholders
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."
6
<PAGE> 17
OPINION OF 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's 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."
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
willful 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."
7
<PAGE> 18
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 Holland & Knight LLP,
that, among other things, a stockholder of Lochaven who exchanges shares of
Lochaven Common Stock for Bancshares Common Stock 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."
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> 19
RECENT DEVELOPMENTS
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 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> 20
<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 9.24 -
to assets
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
A net loss of $1.7 million or $0.23 per share on a diluted basis was incurred
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> 21
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 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 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> 22
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 improvement was largely the result of the additional income and
operating efficiencies from Bancshares' 1997 acquisitions.
12
<PAGE> 23
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> 24
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.
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.
[Balance of page intentionally left blank]
14
<PAGE> 25
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, 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."
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."
15
<PAGE> 26
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 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 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 and
acquisitions 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.
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 anticipation of later
sale or securitization, increases its credit risk and vulnerability to changes
in real estate values.
16
<PAGE> 27
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 and
purchase 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 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.
17
<PAGE> 28
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 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.
As a result, in part, of Flagship's expanded mortgage banking activities 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 operations and (ii) Bancshares' recent 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
present rate of growth or future securitization transactions 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 loan
production exclusively through whole loan sales or securitizations in which
Bancshares retains no interest; (ii) a reduction in the current growth rate of
Flagship's mortgage origination operations; (iii) future capital- and
liquidity-raising transactions, including additional FHLB borrowings; and/or
(iv) disposition by Bancshares of all or a portion of its equity interest in
Flagship such that Flagship's operations are no longer consolidated with those
of Bancshares.
18
<PAGE> 29
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 1998 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
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.
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<PAGE> 30
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 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.
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Loss of Right to Service Securitized Loans
The agreements entered into in connection with Bancshares' 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. 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 and have lower cost structures
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.
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<PAGE> 33
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 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 was
automatically 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
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<PAGE> 34
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 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.
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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 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.
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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 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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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 $28.625 $5.00 $7.95
August 31, 1998 $19.50 $5.00 $5.41
</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]
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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 0.16 - 1.02 0.53 0.94
pro forma combined(2)
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 16.13 - - - -
pro forma combined(2)
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> 39
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> 40
SELECTED HISTORICAL FINANCIAL DATA OF BANCSHARES
SELECTED FINANCIAL AND OTHER DATA - TABLE 1
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<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
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.
30
<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
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>
31
<PAGE> 42
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 (14) (1,114)
interest
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
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>
32
<PAGE> 43
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>
33
<PAGE> 44
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 1,484 2,417 2,620 3,127 2,301
provision
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>
34
<PAGE> 45
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
__________ local time, on _________, 1998, at _________.
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 ______,
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 _______ holders of _______ shares of Lochaven
Common Stock, with each share entitled to one vote at the Special Meeting.
35
<PAGE> 46
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.
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]
36
<PAGE> 47
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 Certificate of Merger relating to the 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 twenty (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 options to
acquire 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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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.
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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 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
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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 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:
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(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;
(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 "AOpinion 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,
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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 __, 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 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.
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The following is a summary of selected analyses considered by McAllen in
connection with its updated opinion letter.
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 __, 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
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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.
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 __,
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."
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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 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 ____________ __, 1998.
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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 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
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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.
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
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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.
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 cause Lochaven to 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.
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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.
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
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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 Date. 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 Date of the Merger,
the dissenting stockholder shall receive payment for his or her shares within 90
days of the Effective Date 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 Date of the Merger. Also within such 60-day period, the stockholder
must submit to Republic's transfer agent, ChaseMellon 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 Date 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."
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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 OR THROUGH A
TAX QUALIFIED RETIREMENT PLANS, 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 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. Such opinion of counsel will be based on customary assumptions and factual
representations regarding matters germane to such opinion. It is anticipated by
such firm that:
(a) Provided the Merger qualifies as a statutory merger under applicable law,
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.
(c) The 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 will, in each instance, 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 on the date of the
exchange.
(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.
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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.
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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<PAGE> 63
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.
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<PAGE> 64
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 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.
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<PAGE> 65
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.
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.
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<PAGE> 66
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.
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.
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<PAGE> 67
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.
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
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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 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
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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 19.50 19.50
(through August 31, 1998)
</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-58, 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.
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UNAUDITED PROFORMA COMBINED BALANCE SHEET
FOR BANCSHARES, BSB AND LOCHAVEN
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
Combined
Lochaven Bancshares BSB Company
Adjustments with Adjustments with
Bancshares Lochaven Inc. (Dec) Lochaven BSB Inc.(Dec) 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>
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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-58 respectively, of this Proxy Statement/Prospectus, and the unaudited
financial information appearing elsewhere herein. See "Comparative Per Share
Data."
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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>
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64
<PAGE> 75
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 & 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>
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65
<PAGE> 76
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 & 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>
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66
<PAGE> 77
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>
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<PAGE> 78
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>
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<PAGE> 79
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.
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<PAGE> 80
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 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 and other mortgage loans
originated by Flagship in whole loan sales. In December 1997, however,
Bancshares consummated its first 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 a $12.0 million subordinated interest in the pool of
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<PAGE> 81
loans that were securitized. Bancshares retained servicing rights with respect
to the loans that were securitized. 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.
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 10-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 10-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.
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<PAGE> 82
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 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,
Cloumbia, 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) and $2.8
million in pre-tax income to Bancshares. 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."
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<PAGE> 83
- - 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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73
<PAGE> 84
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 Loan
Production Offices 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
loan production offices 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.
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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."
Origination and Sale of Loans
Applications for residential mortgage loans are taken at Lochaven's loan
production offices. 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 Loan
Production Offices. Mortgage loan applications are processed, and all
underwriting is done at Lochaven's administrative office or its loan production
offices.
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 Board. 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 % to 3 % 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%.
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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 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
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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.
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.
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Property acquired by Lochaven as a result of foreclosure is classified as
foreclosed real estate ("REO"). 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 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,
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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 the Company'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."
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 Federal Home Loan Bank of Atlanta.
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.
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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 Federal Home Loan Bank of Atlanta
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 Federal Home Loan Bank 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.
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 1 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.
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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 LFSL 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>
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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.
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.
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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 loan production offices 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
.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 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
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<PAGE> 94
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 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
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<PAGE> 95
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.
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
-----------------------------
June 30, December 31,
-------- ------------
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.
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<PAGE> 96
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 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. Those expenses, which
represent primarily the payment of delinquent interest to the purchaser, refund
of servicing release premiums to the purchaser and legal expenses, were
previously expensed as incurred. In the fourth quarter of 1997, Lochaven
established $300,000 of reserves for potential losses on future repurchases of
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
potential losses on future repurchases of loans.
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<PAGE> 97
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>
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.
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<PAGE> 98
<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
------- --------- ---------- ------- --------- ----------
(Dolllars 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>
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<PAGE> 99
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ---------------------------------------
Average Interest and Average Average Interest and Average
Balance Dividends Yield/Rate Balance Dividends Yield/Rate
------- --------- ---------- ------- --------- ----------
(Dolllars 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>
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<PAGE> 100
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
---- ------ ----------- -----
<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 vs. 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>
<TABLE>
<CAPTION>
Year Ended December 31, 1996 vs. 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>
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<PAGE> 101
LIQUIDITY AND CAPITAL RESOURCES
A federally-chartered savings and loan association is required to maintain an
average liquidity reserve of at least 5.0% 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. 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 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
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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%
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> 103
Lochaven's actual capital amounts and ratios are presented in the following
table (dollars in thousands).
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy 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
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 toal assets 2,628 4.53% 871 1.50% -- --
Tier 1 (c0re) 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
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<PAGE> 104
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> 105
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
Or Year to More 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.
95
<PAGE> 106
The following table reflects the contractual principal repayments by
period of Lochaven's loan portfolio as of June 30, 1998.
<TABLE>
<CAPTION>
Commercial Residential
Year Ended Commercial Real Estate Real Estate Consumer
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>
96
<PAGE> 107
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
97
<PAGE> 108
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.
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>
98
<PAGE> 109
The following table sets forth the net deposit flows of Lochaven during the
periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended 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>
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 $.12 per share
compared to a loss of $(107,000) or $(.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 loan production offices. 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%
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 loan
production offices (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.
99
<PAGE> 110
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.
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.
100
<PAGE> 111
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.
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.
101
<PAGE> 112
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 the 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 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
102
<PAGE> 113
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 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.
103
<PAGE> 114
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 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]
104
<PAGE> 115
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
<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 and 1995............................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995................................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995......................... F-6
Notes to Consolidated Financial Statements......................................................................... F-7
LOCHAVEN
For the Year Ended December 31, 1997
Independent Auditors' Report....................................................................................... F-33
Consolidated Balance Sheets at December 31, 1997 and 1996.......................................................... F-34
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996............................... F-35
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997 and 1996....................................................................................... F-36
Statements of Consolidated Cash Flows for the years ended December 31, 1997 and 1996............................... F-37
Notes to Consolidated Financial Statements......................................................................... F-38
For the Six Months Ended June 30, 1998
Condensed Balance Sheet at June 30, 1998 (unaudited)............................................................... F-53
Condensed Statements of Operations for the three and six months ended
June 30, 1998 and 1997 (unaudited)............................................................................... F-54
Condensed Statements of Shareholders' Equity for the six months ended June 30, 1998 (unaudited).................... F-55
Condensed Statements of Cash Flows for the six months ended June 30, 1998 and 1997 (unaudited)..................... F-56
Notes to Unaudited Condensed Financial Statements.................................................................. F-57
</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> 116
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> 117
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> 118
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
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-4
<PAGE> 119
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PERPETUAL PREFERRED NET UNREALIZED
CONVERTIBLE STOCK COMMON STOCK GAINS (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-5
<PAGE> 120
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)
--------- --------- ---------
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-6
<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.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
F-7
<PAGE> 122
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,
------------------------
Net Interest Income: 1996 1995
--------- --------
<S> <C> <C>
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 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.
F-8
<PAGE> 123
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 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
F-9
<PAGE> 124
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 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.
F-10
<PAGE> 125
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, 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
F-11
<PAGE> 126
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.
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.
F-12
<PAGE> 127
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.
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>
F-13
<PAGE> 128
<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>
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
========= ===== ========== =========
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
========= ===== ========== =========
</TABLE>
F-14
<PAGE> 129
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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>
BOOK VALUE AT DECEMBER 31: 1997 1996
------- -------
<S> <C> <C>
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:
<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.
F-15
<PAGE> 130
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.
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.
F-16
<PAGE> 131
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 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>
F-17
<PAGE> 132
9. INCOME TAXES:
Income taxes are comprised of the following (in thousands):
<TABLE>
<CAPTION>
For the
Year 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.
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
Mark-to-market-loans held for sale 1,268 232
Other 457 149
---------- ---------
Gross deferred tax asset 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):
F-18
<PAGE> 133
<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.
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
Maturities in December 31,
Year Ending Weighted -----------------------------------
December 31, Average Rate 1997 1996
------------- ------------ --------- ---------
<C> <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.
F-19
<PAGE> 134
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.
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-20
<PAGE> 135
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):
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
=======
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.
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,
F-21
<PAGE> 136
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. 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.
F-22
<PAGE> 137
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.
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.
F-23
<PAGE> 138
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>
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>
F-24
<PAGE> 139
<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 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>
F-25
<PAGE> 140
<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>
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:
1996 1995
-------------- ---------------
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
=============== ===============
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
F-26
<PAGE> 141
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.
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-27
<PAGE> 142
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
F-28
<PAGE> 143
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
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-29
<PAGE> 144
REPUBLIC BANCSHARES, INC.
PARENT-ONLY CONDENSED STATEMENTS OF OPERATIONS
(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>
F-30
<PAGE> 145
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 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 45,927 4,979 50,906 40,904 508 41,413
provision for loan losses
Other noninterest income 9,728 15,303 25,031 5,671 1,074 6,745
Gain on sale of ORE held for - - - 1,207 - 1,207
investment
General and administrative 40,002 17,482 57,484 34,773 2,056 36,829
(G & A) expenses
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 (701) -
subsidiary trust
Minority interest in F.F.O. (674) (505)
---------- --------
Net income $ 8,571 $ 4,879
========== ========
</TABLE>
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
F-31
<PAGE> 146
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-32
<PAGE> 147
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.
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-33
<PAGE> 148
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
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-34
<PAGE> 149
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-35
<PAGE> 150
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-36
<PAGE> 151
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-37
<PAGE> 152
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.
(continued)
F-38
<PAGE> 153
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
LOANSERVICING. 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.
FAIRVALUES 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.
(continued)
F-39
<PAGE> 154
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED.
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.
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.
(continued)
F-40
<PAGE> 155
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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>
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>
(continued)
F-41
<PAGE> 156
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) LOANS RECEIVABLE, CONTINUED
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%.
(continued)
F-42
<PAGE> 157
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) PREMISES AND EQUIPMENT, CONTINUED
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 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>
(continued)
F-43
<PAGE> 158
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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.
(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
------------------ ------------------
AMOUNT % AMOUNT %
------ - ------ -
<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>
(continued)
F-44
<PAGE> 159
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) INCOME TAXES, 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.
(continued)
F-45
<PAGE> 160
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) INCOME TAXES, CONTINUED
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.
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.
(continued)
F-46
<PAGE> 161
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) FINANCIAL INSTRUMENTS, CONTINUED
The estimated fair values of Lochaven's financial instruments were as
follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 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>
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 $5.50 per share. All options expired at the earlier of
ten years from the date of the grant or 90 days (180 days in the case
of death or disability) following the date which the director, officer
or employee ceases to serve in such capacity.
(continued)
F-47
<PAGE> 162
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) STOCK OPTIONS, CONTINUED
During 1995, the Savings Bank entered into an employment agreement with its
President which provides for granting of options to purchase up to
35,000 common shares. Under the terms of the employment agreement, the
Savings Bank agreed to grant options to purchase common shares at the
current market value at the date of the grant, for 5,000 shares upon
the execution of the agreement and for 10,000 shares each in December,
1995, 1996 and 1997. Options granted are exercisable immediately, and
expire at the earlier of five years from the date of the grant, or one
year following the date which the President ceases to be employed by
the Savings Bank. During each of the years ended December 31, 1997 and
1996, the options to purchase 10,000 shares, respectively, were granted
as set forth in the agreement. No such options have been exercised at
December 31, 1997.
The option transactions for 1996 and 1997 were as follows ($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>
(continued)
F-48
<PAGE> 163
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) RELATED PARTIES
Loansto 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.
(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.
(continued)
F-49
<PAGE> 164
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) REGULATORY MATTERS, CONTINUED
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 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.
(continued)
F-50
<PAGE> 165
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) REGULATORY MATTERS, CONTINUED
The Savings Bank's actual capital amounts and ratios at December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM CAPITALIZED
FOR CAPITAL FOR PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES 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
=======
</TABLE>
(continued)
F-51
<PAGE> 166
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) REGULATORY MATTERS, CONTINUED
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM CAPITALIZED
FOR CAPITAL FOR PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
------ ----------- -----------------
% AMOUNT % AMOUNT % AMOUNT
--- ------ --- ------ --- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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>
(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.
F-52
<PAGE> 167
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONDENSED BALANCE SHEET
($IN THOUSANDS)
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
1998
----
ASSETS (UNAUDITED)
<S> <C>
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-53
<PAGE> 168
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONDENSED STATEMENTS OF OPERATIONS
($IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS 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-54
<PAGE> 169
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-55
<PAGE> 170
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-56
<PAGE> 171
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 ENDED SIX MONTHS 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-57
<PAGE> 172
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
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 SIX 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-58
<PAGE> 173
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:
A-1
<PAGE> 174
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.
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.
A-2
<PAGE> 175
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.
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.
A-3
<PAGE> 176
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.
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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 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
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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 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
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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).
(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
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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.
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
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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.
(d) Deferred Taxes of the Lochaven Companies have been adequately
provided for in the Lochaven Financial Statements.
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(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
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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 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
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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 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
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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.
(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,
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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.
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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 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).
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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.
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
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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 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
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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 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.
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(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
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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, 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.
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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.
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
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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 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
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(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
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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 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
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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.
(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
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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 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.
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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 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.
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(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.
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(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, 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
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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 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
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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 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
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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.
"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.
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"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.
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"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
Environmental 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
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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 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
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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.
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"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.
"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.
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"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.
"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.
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"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 Section 5.13(a)
Plans
Lochaven Contracts Section 5.14
Lochaven ERISA Section 5.13(a)
Plan
Lochaven options Section 3.1(d)
Lochaven OTS Section 5.5(a)
Reports
Lochaven Pension Section 5.13(a)
Plan
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>
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(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 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.
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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.
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
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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.
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 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.
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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.
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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.
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
[CORPORATE SEAL] President
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
[CORPORATE SEAL] President
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]
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APPENDIX B
September xx, 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 7, 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 Republic and
Lochaven Federal. 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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Board of Directors
Lochaven Federal Savings and
Loan Association
September xx, 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
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, 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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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 ss. 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 ss. 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 approval 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
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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.
(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 or 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.
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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
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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 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
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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.
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").
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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).
EXHIBIT DESCRIPTION OF EXHIBITS
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 Opinion of Holland & Knight LLP regarding federal income tax
matters, including consent(1)
23.1 Consent of Arthur Andersen LLP regarding use of report
23.2 Consent of 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.
24 Powers of Attorney (included in the signature page on pages
II-7 and II-8)
99 Form of Proxy of Lochaven
- ---------------------------
(1) To be filed by amendment.
(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.
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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 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.
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(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.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of St. Petersburg, State of
Florida, on September 18, 1998.
REPUBLIC BANCSHARES, INC.
By: /s/ JOHN W. SAPANSKI
-----------------------
John W. Sapanski
Chairman and
Chief Executive Officer
Date: September 18, 1998
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John W. Sapanski and William R. Falzone,
and each of them, as true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to the Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all which said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do, or cause to be done by virtue
hereof.
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<PAGE> 228
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
<S> <C> <C>
/s/ JOHN W. SAPANSKI September 18, 1998 Chairman, Chief Executive
- --------------------------- Officer and Director (principal
John W. Sapanski executive officer
/s/ WILLIAM R. FALZONE September 18, 1998 Treasurer (principal financial
- --------------------------- and accounting officer)
William R. Falzone
/s/ FRED HEMMER September 18, 1998 Director
- ---------------------------
Fred Hemmer
/s/ MARLA HOUGH September 18, 1998 Director
- ---------------------------
Marla Hough
/s/ WILLIAM R. HOUGH September 18, 1998 Director
- ---------------------------
William R. Hough
/s/ ALFRED T. MAY September 18, 1998 Director
- ---------------------------
Alfred T. May
/s/ WILLIAM J. MORRISON September 18, 1998 Director
- ---------------------------
William J. Morrison
</TABLE>
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<PAGE> 229
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBITS
<S> <C> <C>
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 Opinion of Holland & Knight LLP regarding federal income tax
matters, including consent(1)
23.1 Consent of Arthur Andersen LLP regarding use of report
23.2 Consent of 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.
24 Powers of Attorney (included in the signature page on pages
II-7 and II-8)
99 Form of Proxy of Lochaven
</TABLE>
- ---------------------------
(1) To be filed by amendment.
<PAGE> 1
EXHIBIT 5
HOLLAND & KNIGHT LLP
September 18, 1998
Board of Directors
Republic Bancshares, Inc.
111 Second Avenue, N.E. Suite 300
St. Petersburg, Florida 33701
Gentlemen:
This opinion is given in connection with the filing by Republic
Bancshares, Inc., a corporation organized and existing under the laws of the
State of Florida ("Bancshares"), with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), of a Registration Statement on Form S-4 ("Registration Statement") with
respect to the shares of the $2.00 par value common stock of Bancshares
("Bancshares Common Stock") to be issued in connection with the proposed
acquisition of Lochaven Federal Savings and Loan Association ("Lochaven") by
Bancshares.
The proposed acquisition is intended to be effected pursuant to an
Agreement and Plan of Merger, dated as of May 6, 1998 (the "Agreement"), by and
among Bancshares, its wholly-owned subsidiary, Republic Bank ("Republic") and
Lochaven pursuant to which Lochaven will merge with and into Republic (the
"Merger"). Upon consummation of the Merger, each outstanding share of the common
stock of Lochaven ("Lochaven Common Stock") (excluding shares held by Lochaven
or Bancshares or its subsidiaries, in each case other than in a fiduciary
capacity or as a result of debts previously contracted, and excluding shares
held by shareholders 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.
In rendering this opinion, we have examined the corporate records and
documents, including the Agreement, as we have deemed relevant and necessary as
the basis for the opinion set forth herein. Except to the extent expressly set
forth herein, we have made no independent investigations with regard thereto,
and, accordingly, we do not express any opinion as to matters that have been
disclosed by independent verification.
Based upon the foregoing and subject to the limitations set forth
herein, it is our opinion that the shares of Bancshares Common Stock included in
the Registration Statement have been duly authorized by all requisite actions on
the part of Bancshares and, upon consummation of the Merger, such shares, when
issued to the holders of Lochaven Common Stock in connection with the Merger as
provided in the Agreement, will be validly issued, fully paid and
non-assessable.
Members of this firm are licensed to practice law in the States of
California, Florida, Georgia, Massachusetts, New York and Virginia and the
District of Columbia and before the federal courts in such jurisdictions and,
for purposes of this opinion, we express no opinion with regard to any law other
than the laws of the State of Florida.
<PAGE> 2
We hereby consent to the use of the opinions as Exhibits 5 and 8 of
this Registration Statement and to the reference made to the firm under the
caption "Legal Opinions" in the Proxy Statement/Prospectus constituting part of
the Registration Statement. In giving 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 or the rules and regulations of the Commission thereunder.
Sincerely yours,
HOLLAND & KNIGHT LLP
By:
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<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 this registration statement.
ARTHUR ANDERSEN LLP
Tampa, Florida
September 16, 1998
<PAGE> 1
EXHIBIT 23.2
September 16, 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 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 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 18, 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 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 17, 1998
<PAGE> 1
EXHIBIT 99
PROXY
LOCHAVEN FEDERAL SAVINGS AND LOAN ASSOCIATION
SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby constitutes and appoints
___________________________ and __________________________, 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 shareholders to be held at
__________________________________________________, on __________,
_____________, 1988, at _________, local time, and at any adjournment or
postponement thereof (the "Special Meeting"), upon the proposals described in
the Proxy Statement/Prospectus and the Notice of Special Meeting of
Shareholders, both dated September __, 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 the Bank, 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 September __, 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 SHAREHOLDER. 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.
