<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-17194
F.F.O. FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2899802
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2013 LIVE OAK BOULEVARD, ST. CLOUD, FLORIDA 34771-8462
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 892-1200
Securities registered pursuant to Section 12(b) of the Act: NONE Securities
registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [ X ]
AS OF MARCH 24, 1997, THE AGGREGATE VALUE OF THE 2,756,430 SHARES OF
COMMON STOCK OF THE REGISTRANT ISSUED AND OUTSTANDING AT SUCH DATE, EXCLUDING
5,673,570 SHARES HELD BY ALL DIRECTORS, OFFICERS AND AFFILIATES OF THE
REGISTRANT AS A GROUP, WAS APPROXIMATELY $11,370,274. THIS FIGURE IS BASED ON
THE CLOSING SALES PRICE OF $4.125 PER SHARE OF THE REGISTRANT'S COMMON STOCK ON
MARCH 21, 1997.
AS OF MARCH 24, 1997, THERE WERE 8,430,000 OUTSTANDING SHARES OF THE
REGISTRANT'S COMMON STOCK.
DOCUMENTS INCORPORATED BY REFERENCE
1. PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 1996 ARE INCORPORATED INTO PART II, ITEMS 5 - 8 OF THIS ANNUAL
REPORT ON FORM 10-K.
2. PORTIONS OF THE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 23, 1997, TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO REGULATION 14A WITHIN 120 DAYS OF THE REGISTRANT'S FISCAL
YEAR END ARE INCORPORATED INTO PART III, ITEMS 10-13 OF THIS ANNUAL REPORT ON
FORM 10-K.
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TABLE OF CONTENTS
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Page
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Part I
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Item 1. Business................................................................................. 1
F.F.O. Financial Group, Inc............................................................ 1
The Association........................................................................ 1
Lending Activities..................................................................... 2
Securities............................................................................. 15
Sources of Funds....................................................................... 17
Subsidiaries........................................................................... 20
Competition............................................................................ 21
Employees.............................................................................. 21
Regulation............................................................................. 21
Savings and Loan Holding Company Regulations........................................... 22
Savings Institution Regulations........................................................ 24
Taxation............................................................................... 29
Federal Taxation....................................................................... 29
Florida Taxation....................................................................... 31
Impact of New Accounting............................................................... 31
Statistical Profile and Other Data..................................................... 32
Item 2. Properties............................................................................... 32
Item 3. Legal Proceedings........................................................................ 33
Item 4. Submission of Matters to a Vote
of Security Holders.................................................................... 33
Part II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters................................................. 34
Item 6. Selected Financial Data.................................................................. 34
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................................................................... 34
Item 8. Financial Statements and Supplementary Data.............................................. 34
</TABLE>
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<TABLE>
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Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................................................................. 34
Part III
Item 10. Directors and Executive Officers
of the Registrant...................................................................... 35
Item 11. Executive Compensation................................................................... 35
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................................................. 35
Item 13. Certain Relationships and Related
Transactions........................................................................... 35
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 36
Signatures................................................................................................ 38
Exhibit Index............................................................................................. 39
</TABLE>
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<PAGE> 4
PART I
ITEM 1. BUSINESS
F.F.O. FINANCIAL GROUP, INC.
F.F.O. Financial Group, Inc. (the "Holding Company") was incorporated in
the State of Florida on June 6, 1988. On October 20, 1988, the Company became
the unitary savings and loan holding company for First Federal Savings and Loan
Association of Osceola County (the "Association") (together, the "Company"). The
Company's operations are limited to ownership of the Association. The Company's
executive office is located at 2013 Live Oak Boulevard, St. Cloud, Florida
34771, and its telephone number is (407) 892-1200.
On March 10, 1997, the Holding Company executed a letter of intent with
Republic Bancshares, Inc. ("Republic") providing for the merger of the Holding
Company with and into Republic. Mr. William R. Hough (a director of the Holding
Company) is a principal shareholder in each of Republic and the Holding Company.
Under the terms of the letter of intent, Republic will exchange shares of its
common stock for all of the outstanding shares of Holding Company Common Stock
at an exchange ratio of 0.29 share of Republic for each share of Holding Company
Common Stock. In certain circumstances the exchange ratio will adjust for
decreases in Republic's common stock price; however, in no event will the
exchange ratio exceed 0.30 share of Republic stock for each share of Holding
Company Common Stock. The Holding Company has the right to terminate the
transaction if the average of Republic's common stock price is less than $13.50
shortly before the closing of the transaction. Outstanding options for Holding
Company Common Stock will be converted into options for Republic common stock on
a basis equivalent to the exchange ratio. It is anticipated that the transaction
will be accounted for as a corporate reorganization under which Mr. Hough's
controlling interest in the Holding Company will be carried forward at its
historical cost while the minority interest in the Holding Company will be
recorded at fair value. The transaction is subject to the signing of a
definitive agreement by Republic and the Holding Company, shareholder approvals
by the parties, approval by various regulatory authorities, and the receipt of
an opinion as to the tax-free nature of the transaction.
THE ASSOCIATION
The Association is a federally chartered savings and loan association
which conducts business from its headquarters and main office in Kissimmee,
Florida and nine branch offices located in Central Florida. The Association was
founded in 1934 as a mutual savings and loan association. On October 20, 1988,
the Association converted to a federally chartered stock association. The
Association's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") up to applicable limits through the Savings Association Insurance Fund
("SAIF"). As of December 31, 1996, the Association had consolidated assets of
$316.9 million, consolidated deposits of $286.9 million, and consolidated
stockholders' equity of $20.3 million.
The principal business of the Association 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, mortgage-backed
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 the Association through proceeds from the sale of loans, repayment
of outstanding loans, proceeds from the sale and maturity of investment and
mortgage-backed securities and borrowings from the Federal Home Loan Bank of
Atlanta (the "FHLB of Atlanta"). The Association's operating results depend
substantially on its net interest income (i.e., the difference between its
interest income and interest expense), provisions for losses on loans and real
estate owned, other income (including gains and losses on the sale of investment
and mortgage-backed securities and loans, and fees from lending and deposit
operations), other expenses, and income taxes. Net interest income is determined
primarily by interest rate spread and the relative amounts of interest-earning
assets (primarily loans, mortgage-backed securities, and other investments) and
interest-bearing liabilities (primarily deposits and borrowings).
<PAGE> 5
The Association has one wholly-owned subsidiary, Gulf American Financial
Corporation, which is currently inactive.
LENDING ACTIVITIES
General. At December 31, 1996, the Company's loans held for sale and net
loan portfolio totaled $219.5 million, representing approximately 69.2% of its
$316.9 million of total assets at that date. The principal categories of loans
include conventional residential mortgage loans, multifamily residential 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, SBA-guaranteed loans, and
consumer loans.
As a federally chartered savings and loan association, the Association 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 the Association's portfolio are
secured by properties located in Florida, with the majority of such loans
secured by property located in Osceola, Brevard, and Orange Counties, Florida.
Moreover, substantially all of the Association's nonmortgage loan portfolio
consists of loans made to residents and businesses located in Florida.
The Association is permitted by law to invest without limitation in
residential mortgage loans and up to 400% of its total capital in loans secured
by nonresidential real estate. The Association may also invest in secured and
unsecured consumer loans in an amount not to exceed 35% of the Association's
total assets; however, such 35% limit may be exceeded for certain types of
consumer loans such as home equity, property improvement, mobile home loans and
education loans. In addition, the Association may invest up to 10% of its total
assets in secured and unsecured loans for commercial, corporate, business or
agricultural purposes.
From time to time, the Association engages in loan participation
transactions with other financial institutions. As a part of such participation
activity, the Association may participate loans to, or otherwise participate in
loans from, Republic Bank, a commercial bank headquartered in Clearwater,
Florida. Mr. William R. Hough (a director and principal shareholder of the
Company) is a director of Republic Bank and is its principal shareholder. Mr.
Alfred T. May (Chairman of the Board of the Company and the Association) is a
director of Republic Bank. See "Regulation -- Savings and Loan Holding Company
Regulations -- Transactions with Affiliates."
2
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Loan Portfolio Composition. The following table sets forth the composition
of the Association's loan portfolio at the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans:
Conventional 1-4 family
residential(1) $112,827 50.05% $ 78,680 45.37% $ 56,039 32.94%
FHA and VA 10,131 4.49 11,529 6.65 9,698 5.70
Multifamily residential 19,778 8.77 18,576 10.71 45,700 26.86
Land 8,279 3.67 6,476 3.74 6,397 3.76
Other nonresidential 34,138 15.15 26,927 15.53 26,789 15.74
Construction residential 15,156 6.72 10,288 5.93 9,469 5.56
-------- ------ -------- ------ -------- ------
Total mortgage loans 200,309 88.85 152,476 87.93 154,092 90.56
-------- ------ -------- ------ -------- ------
Deposit account loans 957 .42 868 .50 882 0.52
Credit cards 594 .26 2,637 1.52 4,085 2.40
Consumer loans 20,537 9.12 13,717 7.91 5,757 3.38
SBA loans (2) 3,009 1.33 3,633 2.10 5,226 3.08
Home improvement loans 55 .02 76 .04 102 0.06
-------- ------ -------- ------ -------- ------
Total other loans 25,152 11.15 20,931 12.07 16,052 9.44
-------- ------ -------- ------ -------- ------
Total loans 225,461 100.00% 173,407 100.00% 170,144 100.00%
======== ====== ======== ====== ======== ======
Deduct:
Loans in process 10,824 6,880 5,549
Deferred origination fees
and deferred gains on
sale of SBA loans 19 199 326
Allowance for loan losses 5,613 5,138 8,207
-------- -------- --------
Total deductions 16,456 12,217 14,082
-------- -------- --------
Loans receivable - net $209,005 $161,190 $156,062
======== ======== ========
</TABLE>
- ------------------------
(1) Excludes $9.9 million, $22.2 million, and $6.6 million in loans held for
sale as of December 31, 1996, 1995 and 1994, respectively.
(2) Excludes $600,000, $600,000, and $1.3 million in loans held for sale as of
December 31, 1996, 1995 and 1994, respectively.
3
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<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1993 1992
----------------- -----------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
<S> <C> <C> <C> <C>
First mortgage loans:
Conventional 1-4 family
residential(1) $ 53,208 32.39% $ 28,055 15.71%
FHA and VA 8,013 4.88 16,563 9.27
Multifamily residential 48,614 29.60 54,554 30.54
Land 7,776 4.73 14,442 8.08
Other nonresidential 28,644 17.44 38,008 21.28
Construction residential 2,081 1.27 6,926 3.88
Construction nonresidential -- -- -- --
-------- ------ -------- ------
Total mortgage loans 148,336 90.31 158,548 88.76
-------- ------ -------- ------
Deposit account loans 1,061 0.65 1,359 .76
Credit cards 4,894 2.98 5,788 3.24
Consumer loans 2,719 1.65 6,529 3.66
SBA loans (2) 7,119 4.33 6,124 3.43
Home improvement loans 132 0.08 272 .15
-------- ------ -------- ------
Total other loans 15,925 9.69 20,072 11.24
-------- ------ -------- ------
Total loans 164,261 100.00% 178,620 100.00%
-------- ====== -------- ======
Deduct:
Loans in process 656 2,310
Deferred origination fees
and deferred gains on
sale of SBA loans 488 1,326
Allowance for loan losses 9,333 6,427
-------- --------
Total deductions 10,477 10,063
-------- --------
Loans receivable - net $153,784 $168,557
======== ========
</TABLE>
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(1) Excludes $9.5 million and $59.9 million in loans held for sale as of
December 31, 1993 and 1992, respectively.
(2) Excludes $1.8 million and $2.8 million in loans held for sale as of
December 31, 1993 and 1992, respectively.
4
<PAGE> 8
Origination and Sale of Loans. Applications for all types of loans are
taken at the Association's branch 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. Consumer loans
are primarily obtained through existing customers.
Applications are obtained by full-time employees located at the
Association's branch offices. Mortgage loan applications are processed, and all
underwriting is done at the Association's main office or its loan production
office in Maitland, Florida. The Association believes that its centralized
approach to approving loan applications allows it to process and approve
applications faster and with greater efficiency.
The Association has established various levels of review and approval of
loans. Under current Association loan policies, most first mortgage loans are
approved by certain designated officers or the Association's underwriter.
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. Consumer loans may be approved by certain designated officers up to
$50,000 secured and $15,000 unsecured. Consumer loans in excess of these amounts
require approval by the Board of Directors' Loan Committee.
Substantially all of the Association'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. In recent years,
the Association has sold a portion of the fixed-rate residential loans in the
portfolio while retaining the servicing of such loans. In recent years the
Association has sold substantially all non-construction fixed-rate one-to-four
family residential loans originated to the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA"), and
other institutional purchasers. Generally, such loans are sold as whole loans or
through securitization. Although such sales have in the past consisted primarily
of fixed-rate loans, the Association has on occasion sold adjustable-rate loans
("ARMs"). Such loan sales are intended to increase the Association's noninterest
income and assist the Association in better matching the maturities and
interest-rate sensitivity of its assets and liabilities. As of December 31,
1996, the Association had $9.9 million in fixed-rate one-to-four family first
mortgage loans held for sale and $600,000 in SBA loans held for sale.
The Company's loan originations increased in 1996 compared to prior periods
primarily due to increased loan demand. In addition, the Association continued
to increase its holdings of fixed-rate residential mortgages to increase the
amount of its interest-earning assets. During the fourth quarter of 1994, in
consideration of the decision to hold increased levels of fixed-rate loans in
its portfolio, the level of residential origination volumes, and a capital
infusion of $5.2 million in September 1994, the Company modified its policy
regarding residential loans held- for-sale. Prior thereto, the Company included
all permanent fixed-rate one-to-four family residential loans (regardless of the
date of origination) in the held-for-sale portfolio. The possibility that such
loans could be sold provided an additional alternative for the Company to
increase its capital. Since the infusion of the $5.2 million in additional
capital in September 1994 and in order to reflect its intent to increase total
interest-earning assets, the Company modified its policy such that only loans
originated within the past 12 months are classified as held-for-sale. With
regard to the decision to increase holdings of fixed-rate residential mortgages,
although such fixed-rate loans in general tend to increase an institution's
sensitivity to interest rate risk, the Company anticipates that the increase in
the level of fixed-rate loans held will result in a more balanced overall
interest rate sensitivity for the Association.
As of December 31, 1996, the Association serviced $103.6 million of loans
for others. The Association's portfolio of loans serviced for others generally
consists of loans on one-to-four family residential properties located in the
State of Florida that have been sold to FHLMC, FNMA, and other institutional
lenders, and loans made on various types of commercial properties located
throughout the southeastern United States that are partially guaranteed by the
SBA. None of the loans were sold with recourse to the Association.
5
<PAGE> 9
The following table shows total loans originated, sold and repaid
(including loans held for sale) during each of the years in the three year
period ended December 31, 1996 (dollars in thousands).
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1996 1995 1994
<S> <C> <C> <C>
Originations:
Residential real estate loans $ 92,680 63,807 31,867
Nonresidential real estate loans 7,675 6,745 3,858
Consumer and other loans 11,998 11,328 5,273
--------- ------- -------
Total loans originated 112,353 81,880 40,998
--------- ------- -------
Sales and principal reductions:
Loans sold (26,405) (8,919) (10,008)
Loan principal reductions (33,894) (52,408 (30,978)
--------- ------- -------
Total loans sold and
principal reductions (60,299) (61,327) (40,986)
--------- ------- -------
Increase in loans receivable
(before net items) $ 52,054 20,553 12
========= ======= =======
</TABLE>
Residential Real Estate Loans. Historically, savings institutions such as
the Association have concentrated their lending activities on the origination of
permanent loans secured primarily by first mortgage liens on existing
residential real estate. At December 31, 1996, $142.7 million or 63.3% of the
Company's total loan portfolio consisted of such loans. Of this amount, $123.0
million consisted of one-to-four family residential loans (excluding $9.9
million which were deemed held for sale at such date) and $19.8 million
consisted of multifamily residential loans, including adult congregate living
facilities ("ACLFs").
Residential ARMs currently originated by the Association 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% to 2% cap on any increase or decrease in the interest rate per
annum, and there is generally a limit of 4% to 6% on the amount that the
interest rate can adjust over the life of the loan. Although the Association
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, the Association
determines a borrower's ability to pay at the higher of 200 basis points above
the initial interest rate or a minimum of 7.00%.
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.
The Association 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 the
Association's experience that because of prepayments and due-on-sale clauses,
such loans generally remain outstanding for a substantially shorter period of
time.
6
<PAGE> 10
Multifamily real estate loans totaled $19.8 million or 8.8% of the
Association's total loan portfolio at December 31, 1996. These loans possess a
greater risk of collectibility compared with one-to-four family residential
property lending due to the higher loan amounts relative to the number of
borrowers, and the dependency on income production of the real estate. These
loans generally are more costly to resolve or work out than one-to-four family
loans. The payments experienced on such loans also are typically dependent on
the successful operation of the real estate project. Further, multifamily loans
can be significantly impacted by supply and demand conditions in the market, and
as such, may be subject to a greater extent to adverse conditions in the general
economy. To minimize these risks, the Association generally originates
multifamily loans of no more than $500,000 secured by property in its primary
market area. In addition, the Association examines whether the property securing
the loan will generate sufficient cash flow to adequately cover operating
expenses and debt service payments. Permanent multifamily residential real
estate loans currently are made at a loan-to-value ratio of 75% or less.
FHA and VA Lending. In early 1991, the Association began to originate
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. The Association originated
an aggregate of $7.4 million and $10.4 million of FHA and VA loans during 1996
and 1995, respectively. The addition of these single-family lending programs has
enabled the Association to continue to expand the product range offered to its
customers. Substantially all of such loans originated are sold in the secondary
market. See " - Origination, Purchase and Sale of Loans."
Nonresidential Real Estate Loans. Nonresidential real estate loans
originated by the Association are primarily secured by strip shopping centers,
office buildings, unimproved land and building lots, warehouses, hotel/motel
properties and churches located within the Association's primary market area.
Although terms are determined and may vary on a case-by-case basis,
nonresidential real estate loans secured by existing properties generally have
amortization schedules of 25 to 30 years, but require a balloon payment after
either three or five years and may have either fixed or adjustable interest
rates. The Association originally became involved in such activity in order to
increase the yield and interest rate sensitivity of its loan portfolio. The
Association is originating commercial real estate loans (other than loans to
finance the sale of real estate acquired by the Association by foreclosure or
deed in lieu thereof).
Nonresidential real estate lending is 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. The
nature of these loans is also such that they are generally more difficult to
evaluate and monitor, and are more costly to resolve or work out than
residential real estate loans. Nonresidential loans amounted to $34.1 million or
15.2% of the Association's total loan portfolio at December 31, 1996.
Construction Loans. Construction loans amounted to $15.2 million or 6.7% of
the Association's total loan portfolio at December 31, 1996. Such amount was for
the construction of single-family residential properties. The Association has
historically provided fixed-rate and adjustable-rate residential construction
loans primarily to selected local developers with whom the Association 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.
The Association has in the past offered adjustable-rate loans with terms of
up to 18 months for the construction of commercial properties such as office
buildings and shopping centers. Advances on these loans
7
<PAGE> 11
were generally made on a percentage of completion basis, usually consisting of
four or more draws. There were no such construction loans outstanding at
December 31, 1996.
Construction loans afford the Association the opportunity to increase the
interest rate sensitivity of its loan portfolio and, with respect to
nonresidential properties, to receive higher yields than those obtainable on
single-family residential loans. These higher yields correspond to the higher
risks associated with construction loans. Construction lending (especially
commercial 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.
SBA-guaranteed Loans. At December 31, 1996, SBA loans amounted to $3.0
million or 1.3% of total loans (excluding $600,000 of SBA loans deemed held for
sale at such date). The Association may continue to originate, on a limited
basis, SBA loans.
Consumer and Other Loans. The Association offers certain types of consumer
loans in order to provide a full range of financial services to its customers.
Consumer and other loans, which totaled $22.1 million or 9.8% of total loans at
December 31, 1996, 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 the Association include credit
cards, loans for the purchase of both new and used automobiles and boats,
deposit account loans, home improvement and home equity loans. The Association
also makes unsecured consumer loans to individuals who are established customers
of the Association. Credit lines are also offered on a secured (usually by real
estate) basis.
Regulatory Requirements and Underwriting Policies. Under Federal
regulations, the Association was prohibited, after August 9, 1989, from making
real estate loans to one borrower including related entities in excess of 15% of
its unimpaired capital and surplus except for loans not to exceed $500,000. This
15% limitation resulted in a dollar limitation of approximately $3.1 million at
December 31, 1996. As of such date, the Association had two borrowers whose
total indebtedness exceeded that limit. While the Association is not required to
reduce or divest the loans because they existed on August 9, 1989, the
Association is unable to extend additional credit to these borrowers, and will
have very limited authority to amend or modify the existing terms on these
loans. As of December 31, 1996, loans to the Association's three largest
borrowers and related entities amounted to $5.0 million, $4.9 million and $3.7
million. The $5.0 million group of loans consists of two loans secured by
multifamily properties located in Central Florida. The $4.9 million consists of
one loan on a multifamily property located in Central Florida. The $3.7 million
group of loans consists of two loans for warehouse and office space in Central
Florida. All such loans are performing in accordance with their current
contracts.
The Association is permitted to lend up to 100% of the appraised value of
the real property securing a loan; however, if the amount of a residential loan
originated or refinanced exceeds 90% of the appraised value, the Association is
required by federal regulation to obtain private mortgage insurance on the
portion of the principal amount of the loan that exceeds 80% of the appraised
value of the secured property. Pursuant to underwriting guidelines adopted by
the Board of Directors, private mortgage insurance must be obtained on
residential loans for which loan-to-value ratios exceed 80%. The Association
generally lends up to 95% of the appraised value of one- to four-family,
owner-occupied residential dwellings when the required private mortgage
insurance is
8
<PAGE> 12
obtained. With respect to construction loans for owner-occupied properties made
in connection with permanent financing, the Association generally lends up to
95% of the appraised value (as completed). For residential construction loans
issued to developers, the loan-to-value ratio is limited to 75%. While no
statutory requirements are set out for SBA loan collateral, most of the
Association's SBA loans are secured by real estate.
All financial institutions are required to adopt and maintain comprehensive
written real estate lending policies consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies adopted by the Federal banking
agencies, including the OTS, in December 1992 ("Guidelines"). The Guidelines set
forth uniform regulations prescribing standards for real estate lending. Real
estate lending is defined as extensions of credit secured by liens on interests
in real estate or made for the purpose of financing the construction of a
building or other improvements to real estate, regardless of whether a lien has
been taken on the property.
The policies must address certain lending considerations set forth in the
Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with a LTV ratio being the
total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must combine all
senior liens when calculating this ratio. The Guidelines, among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%); construction (commercial, multifamily and nonresidential) (80%); improved
property (85%); and one- to four-family residential (owner occupied) (no maximum
ratio; however the Guidelines state that any LTV ratio in excess of 90% should
require appropriate insurance or readily marketable collateral).
Certain institutions can make real estate loans that do not conform with
the established LTV ratio limits up to 100% of the institution's total capital.
Within this aggregate limit, total loans for all commercial, agricultural,
multifamily and other non-one- to four-family residential properties should not
exceed 30% of total capital. An institution will come under increased
supervisory scrutiny as the total of such loans approaches these levels. Certain
loans are exempt from the LTV ratios (e.g. those guaranteed by a government
agency, loans to facilitate the sale of real estate owned and loans renewed,
refinanced or restructured by the original lender(s) to the same borrower(s)
where there is no advancement of new funds, etc.).
All of the Association's lending is subject to its written,
nondiscriminatory underwriting standards and to loan origination procedures
prescribed by the Association's Board of Directors. In the loan approval
process, the Association assesses both the borrower's ability to repay the loan
and the adequacy of the proposed security. In connection therewith, the
Association requires an appraisal of the secured property and information
concerning the income, financial condition, employment and credit history of the
applicant. Loans must be approved at various management levels, including by the
Loan Committee and the Board of Directors of the Association, depending on the
amount and type of the loan. Commercial construction loans and commercial real
estate loans as well as SBA loans are also evaluated based on debt service
coverage provided by existing or projected cash flows.
The Association requires title insurance insuring the priority of its lien,
as well as fire and extended coverage casualty insurance in order to protect the
developed properties securing its real estate loans. Borrowers must also obtain
flood insurance coverage when the property is in a flood plain as designated by
the Department of Housing and Urban Development. Borrowers may be required to
advance funds on a monthly basis together with each payment of principal and
interest to a mortgage loan account from which the Association makes
disbursements for items such as real estate taxes and hazard insurance premiums
as they become due.
9
<PAGE> 13
Loan Fee Income. In addition to interest earned on loans, the Association
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.
The Association charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination fees generally amount to 1%
to 2% of the amount borrowed in the case of a mortgage loan. Loan origination
fees are not obtained in connection with consumer loans.
The Association accounts for loan fees in accordance with Statement of
Financial Accounting Standards No. 91 ("FAS 91"), "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases." FAS 91 requires that loan fees, net of certain specific
incremental direct loan origination costs, be deferred and accreted into income
over the life of each loan as a yield adjustment. However, upon sale of a loan,
the 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, the Association 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 the Association generally prefers
to work with borrowers to resolve such problems, it does institute foreclosure
and other proceedings, including deed in lieu of foreclosure, 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.
The Association generally does not accrue interest on loans more than 90 days
past due unless the estimated fair value of the collateral and active collection
efforts ensure full recovery.
Property acquired by the Association as a result of foreclosure or by deed
in lieu of foreclosure is classified as foreclosed real estate ("REO"). When a
property interest is acquired, it is recorded at the lower of fair value (less
estimated selling costs) or the principal balance of the related loan on the
property 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.
10
<PAGE> 14
The following table sets forth information regarding nonaccrual loans,
loans which were 90 days or more delinquent but on which the Association was
accruing interest, loans which have been restructured due to financial
difficulties with the borrowers, and REO held by the Association as of each of
the dates shown (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans:
Single family residential $2,080 887 371 1,293 1,541
Multifamily residential -- -- -- 470 12,402
Improved and unimproved land 544 414 214 -- 211
Commercial real estate 1,434 623 2,178 305 1,015
SBA loans -- 751 588 382 66
Consumer loans -- -- 12 143 134
------ ------ ------ ------ ------
Total 4,058 2,675 3,363 2,593 15,369
------ ------ ------ ------ ------
Accruing Loans 90 Days
or more Past Due:
SBA loan -- -- -- -- 1,290
------ ------ ------ ------ ------
Total -- -- -- -- 1,290
------ ------ ------ ------ ------
Troubled Debt Restructured:
Multifamily residential 4,862 4,890 10,424 10,823 11,220
Construction properties and
improved and unimproved land -- -- -- -- --
------ ------ ------ ------ ------
Total 4,862 4,890 10,424 10,823 11,220
------ ------ ------ ------ ------
Total nonperforming loans 8,920 7,565 13,787 13,416 27,879
------ ------ ------ ------ ------
Foreclosed real estate:
Single family residential 57 38 86 1,687 2,706
Multifamily residential` -- 2,651 -- -- --
Improved and unimproved land 900 1,278 6,171 4,561 10,144
Commercial real estate -- 515 2,255 7,799 3,882
SBA loans -- -- 415 1,237 9,008
------ ------ ------ ------ ------
Total foreclosed real estate 957 4,482 8,927 15,284 25,740
------ ------ ------ ------ ------
Total nonperforming assets $9,877 12,047 22,714 28,700 53,619
====== ====== ====== ====== ======
Nonperforming Assets to Total Assets 3.12% 4.00% 8.96% 11.51% 17.36%
====== ====== ====== ====== ======
Allowance for Loan Losses 5,613 5,138 8,207 9,333 6,427
Allowance for REO Losses 158 1,124 2,873 62 1,470
------ ------ ------ ------ ------
Total allowance for losses $5,771 6,262 11,080 9,395 7,897
====== ====== ====== ====== ======
Total allowance for losses as a percentage
of total nonperforming assets 58.43% 51.98% 48.78% 32.74% 14.73%
Allowance for loan losses as a percentage
of nonperforming loans 62.93% 67.92% 59.53% 69.57% 23.05%
</TABLE>
11
<PAGE> 15
During 1996, 1995, and 1994, interest income that would have been recorded
under the original terms of such loans and the interest income actually
recognized are summarized below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income that would
have been recorded $ 863 742 971
Interest income recognized (340) (342) (383)
--- --- ---
Interest income foregone $ 523 400 588
=== === ===
</TABLE>
At December 31, 1996, loans on nonaccrual status totaled $4.1 million,
including 10 commercial loans totaling $1.4 million. During 1996 and 1995,
approximately $523,000 and $400,000, 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 Company's interest income in the respective periods.
There were no loans which were 90 or more days past due and continued to
accrue interest at December 31, 1996.
At December 31, 1996, the Association's troubled debt restructurings
totaled $4.9 million and consisted of one multifamily real estate loan. The loan
is collateralized by a 172-unit apartment complex located in Seminole County,
Florida. The apartment complex was appraised for $6.4 million as of the most
recent appraisal in 1988. During December 1992, while the loan was delinquent,
the Association allowed it to be assumed by a nonprofit organization, and
reduced the interest rate from 10.75% to 7.0%. Under the restructured terms, the
loan requires monthly principal and interest payments of approximately $31,000
plus a balloon payment of $4,361,000 in December 2007. The Association retained
the personal guarantees of two individuals who executed the note at the time of
origination. Subsequent to the date of modification, the loan has performed in
accordance with the restructured terms of the contract. In conjunction with the
quarterly evaluation of the reasonableness of the carrying value of this
property, management has considered, among other factors, the appraisal of the
property performed in 1988, the indicated valuation of the property by the
nonprofit organization which assumed the loan in 1992, the location of the
property and management's assessment of the current real estate valuation of
similar properties in the local real estate market, management's assessment of
the cash flow generated by the collateral property based on current operating
information provided by the borrower, and management's assessment of the
financial capacity of the two individuals whose personal guarantees also secure
the loan.
Foreclosed real estate includes property acquired by foreclosure or deed
in lieu of foreclosure. Total foreclosed real estate decreased from $8.9 million
at December 31, 1994 to $4.5 million at December 31, 1995 and $957,000 at
December 31, 1996. The decreases were due to sales of foreclosed real estate
properties, partially offset by foreclosures and transfers to foreclosed real
estate.
As of December 31, 1996, the Company had one single family residence in
its inventory of foreclosed real estate. Included in foreclosed real estate at
December 31, 1996 was approximately $900,000 of improved and unimproved land.
Such properties included one parcel of developed commercial property with an
approximate area of seven acres.
12
<PAGE> 16
When a loan is transferred to foreclosed real estate, a new appraisal of
the underlying property is ordered. The Association 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
charge to earnings, and a corresponding increase in the allowance for losses on
real estate owned. The Association 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. The Association's practice of not updating appraisals on
a more frequent periodic basis may increase the risk that the Association 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 the Company.
As to new loans, current appraisals are ordered for all real estate
mortgages at the time of loan submission. Otherwise, the Association 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 the
Association's policy to establish and maintain adequate reserves for losses on
loans and foreclosed real estate. At December 31, 1996, the Association had
reserves for losses on loans and foreclosed real estate amounting to $5.8
million. The management of the Association periodically reviews the adequacy of
the allowance for losses on loans and foreclosed real estate. Such review
includes an analysis of the Association's historical experience, the volume and
type of lending conducted by the Association, industry standards, the status of
past due principal and interest payments, directives of the OTS, general
economic conditions, particularly as they relate to the Association'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 the Association's loan portfolio.
Pursuant to applicable regulations, the OTS and the FDIC have the
authority to require the Association to increase its loss allowances if either
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 the Association's loss allowances were
adequate as of December 31, 1995, the Company is unable to predict whether the
FDIC or the OTS will propose that the Association 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 the Association'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.
13
<PAGE> 17
The following table summarizes activity in the Association's allowance for
loan losses during each of the years in the five year period ended December 31,
1996 (dollars in thousands).
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance at beginning of year $5,138 8,207 9,333 6,427 8,296
------ ------ ------ ------ ------
Charge-offs:
Single-family residential (36) -- (25) (745) (1,362)
Multifamily residential -- (3,147) -- -- (586)
Commercial real estate loans (120) -- (113) (472) (1,779)
SBA loans -- (442) (16) (409) (5,899)
Consumer loans (181) -- (141) (203) (258)
Land -- -- (27) (999) --
------ ------ ------ ------ ------
Total loans charged-off (337) (3,589) (322) (2,828) (9,884)
Recoveries 30 43 62 927 424
------ ------ ------ ------ ------
Net charge-offs (307) (3,546) (260) (1,901) (9,460)
Reclassification due to adoption
of SFAS 114 and 118 -- -- 537 -- --
Provision (credit) for loan losses
charged to operations 782 477 (1,403) 4,807 7,591
------ ------ ------ ------ ------
Allowance at end of year $5,613 5,138 8,207 9,333 6,427
====== ====== ====== ====== ======
Average loans outstanding (1) 206,755 174,203 167,192 217,167 269,082
Net charge-offs to average
loans outstanding (1) .15% 2.04% .16% .88% 3.52%
Period-end total loans (1) 235,923 196,172 175,619 175,607 241,363
Ratio of allowance to
period-end loans (1) 2.38% 2.62% 4.67% 5.31% 2.66%
</TABLE>
- -----------------
(1) Includes total loans held for sale.
14
<PAGE> 18
SECURITIES
The Association invests in mortgage-backed securities which are insured or
guaranteed by the Government National Mortgage Association ("GNMA"), FHLMC, and
FNMA. Although mortgage-backed securities generally have a lower yield than
loans, mortgage-backed securities increase the quality of the Association's
assets by virtue of the guarantees that back them, are more liquid than
individual mortgage loans, and may be used to collateralize borrowings or other
obligations of the Association. The Association also has the authority to invest
in various types of investment securities, including U.S. Treasury obligations
and securities of various federal agencies, certificates of deposit at insured
banks and thrift institutions, bankers' acceptances and federal funds. Subject
to various restrictions, federally chartered thrift institutions may also invest
a portion of their assets in commercial paper, corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
thrift institution is authorized to make directly. At December 31, 1996, the
Association's securities were classified as either trading, available for sale,
or held to maturity according to management's intent.
The Board of Directors has authorized the Company to purchase and sell,
from time to time, securities through third parties including through William R.
Hough & Co. ("WRHC"), an investment banking firm headquartered in St.
Petersburg, Florida. Mr. Hough (a director and principal shareholder of the
Company) is Chairman and principal shareholder of WRHC. During the years ended
December 31, 1996 and 1995, the Company purchased approximately $53.3 million
and $69.5 million of securities and sold $46.0 million and $19.7 million of
securities through WRHC. In connection with such transactions, the Company paid
WRHC an aggregate of $118,183 and $91,509 in commissions during the years ended
December 31, 1996 and 1995, respectively. See "Regulation -- Savings and Loan
Holding Company Regulations -- Transactions with Affiliates."
The accounting treatment for collateralized mortgage obligations ("CMO")
has been the subject of recent discussion among various regulatory agencies and
the accounting profession. Certain CMOs are considered to be high risk mortgage
derivatives because they have failed the Federal Financial Institutions
Examination Council ("FFIEC") low-risk mortgage derivative test. The FFIEC test
does not address credit risk, but rather indicates whether a particular CMO has
a high level of exposure to interest-rate risk (that is, the security's market
value may be particularly sensitive to increases or decreases in market interest
rates). If a CMO security is considered to be high-risk, the security cannot be
classified as held-to-maturity as the OTS or FDIC can direct that the security
be sold. Each of the CMOs purchased by the Association in 1996 passed the FFIEC
test at the date of acquisition and at December 31, 1996. At acquisition, all
CMOs were classified as trading securities by the Association.
15
<PAGE> 19
The following table sets forth the Company's securities portfolio at
December 31, 1996 and 1995 (in thousands).
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----
<S> <C> <C> <C> <C>
TRADING SECURITIES:
December 31, 1996:
Agency notes and debentures $ 4,000 32 -- 4,032
Collateralized mortgage-backed
obligations 5,554 -- (6) 5,548
-------- -------- -------- --------
$ 9,554 32 (6) 9,580
======== ======== ======== ========
December 31, 1995:
Agency notes and debentures 9,359 42 -- 9,401
Collateralized mortgage-backed
obligations 13,616 59 -- 13,675
-------- -------- -------- --------
$ 22,975 101 -- 23,076
======== ======== ======== ========
SECURITIES AVAILABLE FOR SALE:
December 31, 1996 -
Mortgage-backed securities $ 41,455 108 (118) 41,445
======== ======== ======== ========
December 31, 1995 -
U.S. Treasury Notes 9,996 23 -- 10,019
Mortgage-backed securities 39,686 127 -- 39,813
-------- -------- -------- --------
$ 49,682 150 -- 49,832
======== ======== ======== ========
SECURITIES HELD TO MATURITY:
December 31, 1996 -
Mortgage-backed securities $ 15,343 218 (47) 15,514
======== ======== ======== ========
December 31, 1995 -
Mortgage-backed securities $ 17,636 204 -- 17,840
======== ======== ======== ========
</TABLE>
16
<PAGE> 20
The scheduled maturities of securities (other than mortgage-backed
securities) at December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
TRADING
----------------------
AMORTIZED MARKET
COST VALUE
------ -----
<S> <C> <C>
Due from five years to ten years $4,000 4,032
------ -----
</TABLE>
SOURCES OF FUNDS
Deposits obtained through the Association's branch offices have
traditionally been the principal source of the Association's funds for use in
lending and for other general business purposes. To a lesser extent, the
Association also derives funds from amortization and prepayments of outstanding
loans, sales of securities and loans, and borrowings from the FHLB of Atlanta.
Deposits. The Association currently offers deposit products including
passbook and statement savings and club accounts, demand accounts, NOW 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 the Association's deposits are obtained from
individual and business residents of the State of Florida. The principal methods
used by the Association to attract deposits include offering a wide variety of
products and services, competitive interest rates and convenient office
locations and hours. The Association is a member of the HONOR and CIRRUS
networks and currently operates automatic teller machines at all 11 of its
offices, as well as one off-site location.
The following table shows the distribution of the Association's deposits
by type of deposit as of December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994
-------------------- ----------------- ------------------
% OF % OF % OF
AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS
------ -------- ------ -------- ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing $ 14,303 4.98% $ 13,107 5.27% $ 10,812 5.13%
NOW accounts 28,593 9.97 22,918 9.21 23,918 11.34
Passbook and statement
savings accounts 29,388 10.24 40,764 16.37 48,239 22.88
-------- ------ -------- ------ -------- ------
Total 72,284 25.19 76,789 30.85 82,969 39.35
-------- ------ -------- ------ -------- ------
Certificate deposits:
3-12 months 132,990 46.35 38,753 15.57 29,936 14.20
13-24 months 53,346 18.59 70,345 28.26 28,765 13.64
25-36 months 13,834 4.82 16,180 6.50 9,800 4.65
37+ months 14,473 5.05 46,869 18.82 59,362 28.16
-------- ------ -------- ------ -------- ------
Total 214,643 74.81 172,147 69.15 127,863 60.65
-------- ------ -------- ------ -------- ------
Total deposits $286,927 100.00% $248,936 100.00% $210,832 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The Association has been required by market conditions to rely increasingly
on newly-authorized types of short-term certificate accounts and other types of
deposit accounts that are more responsive to market interest
17
<PAGE> 21
rates than passbook accounts and fixed-rate, fixed-term certificates that were
historically the Association's primary sources of deposits. In recent years, the
Association 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 the
Association to attract and maintain deposits and the Association's cost of funds
have been and will continue to be significantly affected by economic and
competitive conditions.
The following table sets forth the net deposit flows of the Association
during each of the years in the three year period ended December 31, 1996. The
decrease during 1994 was primarily attributable to management's efforts to
improve the Association's capital ratios by reducing its assets, restrictions
imposed on the Association's business by Federal regulatory authorities, the
effects of conducting business under growth restrictions in a competitive
industry and the Association's financial condition during these periods, as well
as investors seeking enhanced returns on investments available through mutual
funds and other market alternatives.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995 1994
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Increase (decrease) before interest credited $ 28,992 30,172 (5,950)
Interest credited 8,999 7,932 5,664
--------- ------- -------
Net deposit increase (decrease) $ 37,991 38,104 (286)
========= ======= =======
</TABLE>
The following table presents by various interest rate categories the
amounts of certificates of deposit as of December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(dollars in thousands)
INTEREST RATE:
<S> <C> <C> <C>
1.00% - 3.00% $ 542 $ 829 $ 210
3.01% - 4.00% 251 2,483 32,765
4.01% - 5.00% 33,459 12,962 43,789
5.01% - 6.00% 146,338 87,815 29,395
6.01% - 7.00% 23,992 59,043 17,381
7.01% - 8.00% 9,128 6,796 1,680
8.01% - 9.00% 933 1,824 1,982
9.01% - 10.00% -- 317 342
10.01% - 11.00% -- 78 319
-------- -------- --------
Total $214,643 $172,147 $127,863
======== ======== ========
</TABLE>
18
<PAGE> 22
The following table presents by various interest rate categories the amount
of certificate accounts maturing during the periods reflected below (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-----------------------------------------------------
2001 AND
AT DECEMBER 31, 1996: 1997 1998 1999 2000 THEREAFTER TOTAL
---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
1.00% - 3.00% $ 105 331 106 -- -- 542
3.01% - 5.00% 22,175 10,555 975 5 -- 33,710
5.01% - 7.00% 103,858 41,278 12,040 11,401 1,753 170,330
7.01% - 9.00% 6,852 1,182 713 556 758 10,061
-------- ------ ------ ------ ----- -------
$132,990 53,346 13,834 11,962 2,511 214,643
======== ====== ====== ====== ===== =======
</TABLE>
At December 31, 1996, the Association had $24.0 million of certificate
deposits in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
MATURITY AMOUNT
-------- ------
(dollars in thousands)
<S> <C>
Three months or less $ 2,162
Over three through six months 5,416
Over six through 12 months 5,601
Over 12 months 10,791
--------
Total $ 23,970
========
</TABLE>
As of December 31, 1996, the Association had no deposits of public funds.
Borrowings. The Association may obtain advances from the FHLB of Atlanta
upon the security of the common stock it owns in the Bank, certain of its
residential mortgage loans and certain U.S. Government securities provided
certain standards related to creditworthiness have been met. See "Regulation --
Savings Institution Regulations -- Federal Home Loan Bank System." 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 December 31, 1996 and 1995, the Association had outstanding FHLB advances
totaling $7.0 million and $30.0 million, with a weighted average interest rate
of 6.95% and 5.85%, respectively.
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<PAGE> 23
The following table sets forth certain information with respect to
short-term borrowings at December 31, 1996, 1995 and 1994, and for each of the
years in the three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDING
DECEMBER 31,
----------------------------------
1996 1995 1994
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
FHLB ADVANCES:
Average balance outstanding $ 5,604 2,705 8,672
Maximum amount outstanding at
any month-end during the year $28,000 30,000 25,000
Weighted average interest rate
during the year 5.59% 6.03% 4.74%
Weighted average interest rate
at end of year 6.95% 5.85% 6.81%
Total borrowings at end of year $ 7,000 30,000 21,400
</TABLE>
SUBSIDIARIES
Under Federal regulations, investments in and extensions of credit to
subsidiaries engaged in activities which are not permissible for national banks
must generally be deducted from the Association's regulatory capital. However,
certain exemptions generally apply where (i) a subsidiary is engaged in
activities permissible for national banks solely as an agent for its customers,
(ii) the subsidiary is engaged solely in mortgage-banking activities, (iii) the
subsidiary is itself an insured depository institution or a company the sole
investment of which is an insured depository institution acquired by the parent
insured depository institution prior to May 1989, and (iv) the institution is a
federal savings bank, was chartered prior to October 1982 as a federal savings
bank, or acquired its principal assets for a federal savings bank chartered
prior to October 1982.
The Association has one wholly owned subsidiary: Gulf American Financial
Corporation ("GAFC"). GAFC owns Gulf American SBL, Inc. ("Gulf American"), which
was an approved U.S. Small Business Administration ("SBA") lender. Gulf American
ceased operations in December 1992, when the Company sold Gulf American's SBA
license. The remaining net assets of Gulf American were transferred to the
Association in 1994. GAFC, which previously made conventional commercial loans
and commercial construction loans, is no longer originating new loans and has
ceased its operations. During 1994, GAFC transferred its remaining assets and
liabilities to the Association. GAFC owns Gulf American, which was an approved
SBA lender prior to the Company's sale of Gulf American's SBA license, which
sale occurred in December 1992. Generally, Gulf American sold the guaranteed
portion of the SBA loans, retained the non-guaranteed portion, and also retained
the servicing rights to the loans. During 1992, Gulf American sold approximately
$27.0 million of SBA loans and servicing rights related to $117.0 million of SBA
loans. These transactions were based on a decision to cease such lending in
areas not directly served by the Company's thrift branches. The remaining net
assets of Gulf American were transferred to the Association in 1994.
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<PAGE> 24
COMPETITION
The Association 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 the Association.
Particularly intense competition exists for attracting and retaining deposits
and lending funds. The Association competes for deposits principally by offering
depositors a variety of deposit programs, convenient branch locations and hours,
and other services. The Association does not rely upon any individual group or
entity for a material portion of its deposits. For additional information
regarding pending and recent legislation which is expected to increase
competition further by allowing additional out-of-state bank holding companies
to conduct business in Florida, see "Regulation -- Recent Legislative
Developments -- Interstate Banking."
The Association'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 the Association. The
Association 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.
EMPLOYEES
The Association had 146 full-time employees and 24 part-time employees as
of December 31, 1996. None of these employees is represented by a collective
bargaining agent, and the Company believes that it enjoys good relations with
its personnel.
REGULATION
In recent years, measures have been taken to reform the thrift and banking
industries and to strengthen the insurance funds for depository institutions.
The most significant of these measures was FIRREA, which has had a major impact
on the operation and regulation of savings associations generally. In 1991, a
comprehensive deposit insurance and banking reform plan, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), became law. Although
FDICIA's primary purpose is to recapitalize the Bank Insurance Fund ("BIF") of
the FDIC, which insures the deposits of banks, FDICIA also affects the
supervision and regulation of all federally insured depository institutions,
including federal savings institutions such as the Association.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
FIRREA, which was enacted in response to concerns regarding the soundness of the
thrift industry, brought about a significant regulatory restructuring, limited
savings institutions' business activities, and increased savings institutions'
regulatory capital requirements. FIRREA abolished the Federal Home Loan Bank
Board and the Federal Savings and Loan Insurance Corporation (the "FSLIC"), and
established the Office of Thrift Supervision ("OTS") as the primary federal
regulator for savings institutions. Deposits at the Association are insured
through the Savings Association Insurance Fund (the "SAIF"), a separate fund
managed by the FDIC for institutions whose deposits were formerly insured by the
FSLIC. Regulatory functions relating to deposit insurance are generally
exercised by the FDIC.
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<PAGE> 25
The Federal Deposit Insurance Corporation Improvement Act of 1991. FDICIA,
which was enacted to recapitalize the BIF, effects a number of regulatory
reforms that impact both savings institutions and banks. FDICIA authorizes the
regulators to take prompt corrective action to solve the problems of critically
undercapitalized institutions. As a result, the banking regulators are required
to take certain supervisory actions against undercapitalized institutions, the
severity of which increases as an institution's level of capitalization
decreases. Pursuant to FDICIA, the federal banking agencies have established the
levels at which an insured institution is considered to be "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." See "Savings Institution Regulations--Prompt
Corrective Action" below for a discussion of the applicable levels.
In addition, FDICIA requires each federal banking agency to establish
standards relating to internal controls, information systems, and internal audit
systems that are designed to assess the financial condition and management of
the institution; loan documentation; credit underwriting; interest rate
exposure; asset growth; and compensation, fees and benefits. FDICIA lowered the
qualified thrift lender ("QTL") investment percentage applicable to SAIF-insured
institutions. FDICIA further requires annual on-site full examinations of
depository institutions, with certain exceptions, and annual reports on
institutions' financial and management controls. See "Savings Institution
Regulations--Qualified Thrift Lender Test" and "--Insurance of Accounts" below.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching and
Efficiency Act of 1994 provides for nationwide interstate banking and branching.
Interstate banking and consolidation of existing bank subsidiaries in different
states will be permissible beginning June 1, 1997. The Florida legislature also
has enacted a law that allows out-of-state bank holding companies (located in
states that allow Florida bank holding companies to acquire banks and bank
holding companies in that state) to acquire Florida banks and Florida bank
holding companies. The law essentially provides for out-of-state entry by
acquisition only (and not by interstate branching) and requires the acquired
Florida bank to have been in existence for at least two years.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
Transactions with Affiliates. The Company is a unitary savings and loan
holding company and is subject to the OTS regulations and to examination,
supervision and reporting requirements pursuant to certain provisions of the
Home Owners' Loan Act (the "HOLA") and the Federal Deposit Insurance Act. As an
insured institution and a subsidiary of a savings and loan holding company, the
Association is subject to restrictions in its dealings with companies that are
"affiliates" of the Company under the HOLA and the OTS regulations.
As a result of FIRREA, savings institutions' transactions with its
affiliates are subject to the limitations set forth in the HOLA and the OTS
regulations, which incorporate Sections 23A, 23B, 22(g) and 22(h) of the Federal
Reserve Act and Regulation O adopted by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). Under Section 23A, an "affiliate"
of an institution is defined generally as (i) any company that controls the
institution and any other company that is controlled by the company that
controls the institution, (ii) any company that is controlled by the
shareholders who control the institution or any company that controls the
institution, or (iii) any company that is determined by regulation or order to
have a relationship with the institution (or any subsidiary or affiliate of the
institution) such that "covered transactions" with the company may be affected
by the relationship to the detriment of the institution. "Control" is determined
to exist if a percentage stock ownership test is met or if there is control over
the election of directors or the management or policies of the company or
institution. "Covered transactions" generally include loans or extensions of
credit to an affiliate, purchases of securities issued by an affiliate,
purchases of assets from an affiliate (except as may be exempted by order or
regulation), and certain other transactions. The OTS regulations and Sections
23A and 23B require that covered transactions and certain other transactions
with affiliates be on terms and conditions consistent with safe and sound
banking practices or on terms comparable to similar transactions with
non-affiliated parties, and imposes quantitative restrictions on the amount of
and collateralization requirements on covered transactions. In addition, a
savings institution is prohibited from extending credit to an affiliate (other
than a subsidiary of the
22
<PAGE> 26
institution), unless the affiliate is engaged only in activities that the
Federal Reserve Board has determined, by regulation, to be permissible for bank
holding companies. Sections 22(g) and 22(h) of the Federal Reserve Act impose
limitations on loans and extensions of credit from an institution to its
executive officers, directors and principal stockholders and each of their
related interests. See "Business - Securities."
Activities Limitations. The Company is a unitary savings and loan holding
company under applicable law and the OTS regulations and will remain so until it
acquires as a separate subsidiary another savings institution. A savings and
loan holding company whose sole subsidiary qualifies as a QTL, described below,
generally has the broadest authority to engage in various types of business
activities. A holding company that acquires another institution and maintains it
as a separate subsidiary or whose sole subsidiary fails to meet the QTL test
will become subject to the activities limitations applicable to multiple savings
and loan holding companies.
In general, a multiple savings and loan holding company (or subsidiary
thereof that is not an insured institution) may not commence, or continue for
more than a limited period of time after becoming a multiple savings and loan
holding company (or a subsidiary thereof), any business activity other than (i)
furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or an escrow business, (iii)
holding, managing or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the OTS by regulation as of
March 5, 1987 to be engaged in by multiple savings and loan holding companies,
or (vii) subject to prior approval of the OTS, those activities authorized by
the Federal Reserve Board as permissible for bank holding companies. These
restrictions do not apply to a multiple savings and loan holding company if (a)
all, or all but one, of its insured institution subsidiaries were acquired in
emergency thrift acquisitions or assisted acquisitions or (b) all of its insured
institution subsidiaries are QTLs.
Restrictions on Acquisitions. The Company must obtain approval from the OTS
before acquiring control of any other savings association. Such acquisitions are
generally prohibited if they result in a savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association. The Company may
acquire up to 5%, in the aggregate, of the voting stock of any non-subsidiary
savings association or savings and loan holding company without being deemed to
acquire "control" of the association or holding company. In addition, a savings
and loan holding company may hold shares of a savings association or a savings
and loan holding company for certain purposes, including a bona fide fiduciary,
as an underwriter or in an account solely for trading purposes. Under certain
conditions, a savings and loan holding company may acquire up to 15% of the
shares of a savings association or savings and loan holding company in a
qualified stock issuance; such acquisition is not deemed a controlling interest.
The Change in Bank Control Act and the savings and loan holding company
provisions of HOLA, together with the regulations of the OTS under those Acts,
require that the consent of the OTS be obtained prior to any person or company
acquiring "control" of a savings association or a savings and loan holding
company. Under all OTS regulations, control is conclusively presumed to exist if
an individual or company acquires more than 25% of any class of voting stock of
an association or holding company. Control is rebuttably presumed to exist if a
person acquires more than 10% of any class of voting stock (or more than 25% of
any class of non-voting stock) and is subject to any of several "control
factors." The control factors relate, among other matters, to the relative
ownership position of a person, the percentage of debt and/or equity of the
association or holding company controlled by the person, agreements giving the
person influence over a material aspect of the operations of the association or
holding company and the number of seats on the board of directors thereof held
by the person or his designees. The regulations provide a procedure for
challenging the rebuttable control presumption. Restrictions applicable to the
operations of savings and loan holding companies and conditions imposed by the
OTS in connection with its approval of companies to become savings and loan
holding companies may deter companies from seeking to obtain control of the
Company.
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<PAGE> 27
SAVINGS INSTITUTION REGULATIONS
Federal savings institutions such as the Association are chartered by the
OTS, are members of the FHLB system, and have their deposits insured by the
SAIF. They are subject to comprehensive OTS and FDIC regulations that are
intended primarily to protect depositors. SAIF-insured, federal chartered
institutions may not enter into certain transactions unless applicable
regulatory tests are met or they obtain necessary approvals. They are also
required to file reports with the OTS describing their activities and financial
condition, and periodic examinations by the OTS test compliance by institutions
with various regulatory requirements, some of which are described below.
Insurance of Accounts. The Association's deposits are insured by the SAIF
up to $100,000 for each insured account holder, the maximum amount currently
permitted by law.
With respect to assessments paid by associations, the FDIC historically
imposed assessments on each association based on the institution's assessment
risk classification. The rates ranged from $.23 to $.31 per each $100 of
domestic deposits. The rate at which a SAIF member institution paid assessments
was determined on the basis of capital and supervisory measures. On September
30, 1996, legislation was enacted which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Association, in
order to recapitalize the SAIF and allocate to SAIF and BIF-insured institutions
an annual assessment to cover interest payments on Financing Corp. (FICO) bonds
issued in the 1980's to assist the thrift industry. The special one-time
assessment levied by the FDIC amounted to 65.47 basis points on SAIF assessable
deposits held by an institution as of March 31, 1995. SAIF-insured institutions
were required to recognize the special assessment, which is tax deductible, as
of September 30, 1996. Accordingly, in 1996 the Association took a charge of
$1.5 million before taxes as a result of the FDIC special assessment. Beginning
on January 1, 1997, SAIF members began paying an annual assessment of 6.4 basis
points on SAIF-insured deposits to cover interest payments on the FICO bonds.
The FDIC also has issued a base assessment schedule for SAIF institutions which
ranges from 4 to 31 basis points, with an adjusted assessment schedule that
reduces those rates by 4 basis points. Accordingly, well-capitalized thrifts
effectively have an assessment rate of zero for deposit insurance, except for
FICO assessment of 6.4 basis points discussed above. The new rate applied to all
SAIF-insured institutions effective January 1, 1997.
As an insurer, the FDIC issues regulations and conducts examinations of its
insured members. SAIF insurance of deposits may be terminated by the FDIC, after
notice and hearing, upon a finding that an institution has engaged in unsafe and
unsound practices, is in an unsafe and unsound condition to continue operations,
or has violated any applicable law, regulation, rule, order or condition imposed
by the OTS or FDIC. When conditions warrant, the FDIC may impose less severe
sanctions as an alternative to termination of insurance. The Association's
management does not know of any present condition pursuant to which the FDIC
would seek to impose sanctions on the Association or terminate insurance of its
deposits.
Regulatory Capital Requirements. As mandated by FIRREA, the OTS adopted
capital standards under which savings institutions must currently maintain (i) a
tangible capital requirement of 1.5% of tangible assets, (ii) a leverage (or
core capital) ratio of 3.0% of adjusted total assets, and (iii) a risk-based
capital requirement of 8.0% of risk-weighted assets. These requirements apply to
the Association and its capital levels; under current law and regulations, there
are no capital requirements directly applicable to the Company. See also
"Proposed Changes to Capital Requirements" below.
Under the current OTS regulations, "tangible capital" includes common
stockholders' equity, noncumulative perpetual preferred stock and related
surplus, certain qualifying non-withdrawable accounts and pledged deposits, and
minority interests in fully consolidated subsidiaries, less intangible assets
(except 90% of purchased mortgage servicing rights) and specified percentages of
debt and equity investments in certain subsidiaries. "Core capital" is tangible
capital and other intangible assets meeting marketability criteria. The
"risk-based capital" requirement provides that an institution's total capital
must equal 8.0% of risk-weighted assets. "Total capital" equals core
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<PAGE> 28
capital plus "supplementary capital" (which includes specified amounts of
cumulative preferred stock, certain limited-life preferred stock, subordinated
debt and other capital instruments) in an amount equal to not more than 100% of
core capital. "Risk-weighted assets" are determined by assigning designated risk
weights based on the credit risk associated with the particular asset. As
provided by the OTS regulations, representative risk weights include: 0% for
cash and assets that are backed by the full faith and credit of the United
States; 20% for FHLB stock, agency securities not backed by the full faith and
credit of the United States and certain high-quality mortgage-related
securities; 50% for qualifying mortgage loans and certain non-high-quality
mortgage-related securities; and 100% for consumer, commercial and other loans,
repossessed assets and assets that are 90 or more days past due.
At December 31, 1996, the Association's tangible, core and risk-based
capital ratios were 5.9%, 5.9% and 12.3%, respectively.
The OTS risk-based capital guidelines also cite concentrations of credit
risk and an institution's ability to monitor and control them as important
factors in assessing an institution's overall capital adequacy. In addition to
reviewing concentrations of credit risk, the OTS also may review an
institution's management of concentrations of credit risk for adequacy and
consistency with safety and soundness standards regarding internal controls,
credit underwriting and other relevant operational and managerial areas.
If an institution becomes categorized as "undercapitalized" under the
definitions established by the "prompt corrective action" provisions of FDICIA,
it will become subject to certain restrictions imposed by the FDICIA.
See "Prompt Corrective Action" below.
Prompt Corrective Action. The OTS and other federal banking regulators have
established capital levels for institutions to implement the "prompt corrective
action" provisions of FDICIA. Capital levels have been established for which an
insured institution will be categorized as well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized or critically
undercapitalized. FDICIA requires federal banking regulators, including the OTS,
to take prompt corrective action to solve the problems of those institutions
that fail to satisfy their applicable minimum capital requirements. The level of
regulatory scrutiny and restrictions imposed become increasingly severe as an
institution's capital level falls.
A "well capitalized" institution must have risk-based capital of 10% or
more, core capital ratio of 5% or more and Tier 1 risk-based capital (based on
the ratio of core capital to risk-weighted assets) of 6% or more and may not be
subject to any written agreement, order, capital directive, or prompt corrective
action directive issued by the OTS. The Association is a well capitalized
institution under the definitions as adopted. An institution will be categorized
as "adequately capitalized" if it has total risk-based capital of 8% or more,
Tier 1 risk-based capital of 4% or more, and core capital of 4% or more;
"undercapitalized" if it has total risk-based capital of less than 8%, Tier 1
risk-based capital of less than 6%, or core capital of less than 3%;
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6% and a Tier 1 risk-based capital ratio of less than 3%; and
"critically undercapitalized" if it has tangible capital of less than 2%. A well
capitalized, adequately capitalized or undercapitalized insured institution may
be treated as if it had a lower capital-based classification if it is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice.
Thus, an adequately capitalized institution can be subjected to the restrictions
on undercapitalized institutions and an undercapitalized institution can be
subjected to the restrictions applicable to a significantly undercapitalized
institution.
In the case of an institution that is categorized as "undercapitalized,"
such an institution must submit a capital restoration plan to the appropriate
agency. An undercapitalized institution generally cannot make capital
distributions or pay management fees to any person, and also is generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches or engaging in any new line of business except in
accordance with an accepted capital restoration plan or with the approval of the
OTS. In addition, the OTS is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution if it determines that those actions are
25
<PAGE> 29
necessary to carry out the purposes of FDICIA. A "significantly
undercapitalized" institution will be subject to additional restrictions on its
affiliate transactions, the interest rates paid by the institution on its
deposits, asset growth, senior executive officers' compensation, and activities
deemed to pose excessive risk to the institution. Regulators may also order a
significantly undercapitalized institution to hold a new election of directors,
terminate any director or senior executive officer employed for more than 180
days prior to the time the institution became significantly undercapitalized, or
hire qualified senior executive officers approved by the regulators.
FDICIA provides that an institution that is "critically undercapitalized"
must be placed in conservatorship or receivership within 90 days of becoming
categorized as such unless the institution's regulator and the FDIC jointly
determine that some other course of action would result in a lower resolution
cost to the institution's insurance fund. Thereafter, the institution's
regulator must periodically reassess its determination to permit a particular
critically undercapitalized institution to continue to operate and must appoint
a conservator or receiver for the institution at the end of an approximately
one-year period following the institution's initial classification as critically
undercapitalized unless a number of stringent conditions are met, including a
determination by the regulator and the FDIC that the institution has positive
net worth and a certification by such agencies that the institution is viable
and is not expected to fail.
The OTS has adopted changes to its risk-based and leverage ratio
requirements that require all intangible assets, with certain exceptions, be
deducted from Tier 1 capital.
In addition to the foregoing prompt corrective action provisions, FDICIA
also sets forth requirements that the federal banking agencies, including the
OTS, review their capital standards every two years to ensure that their
standards require sufficient capital to facilitate prompt corrective action and
to minimize loss to the SAIF and the BIF.
Restrictions on Dividends and Other Capital Distributions. The current OTS
regulation applicable to the payment of cash dividends by savings institutions
imposes limits on capital distributions based on an institution's regulatory
capital levels and net income. An institution that meets or exceeds all of its
fully phased-in capital requirements (both before and after giving effect to the
distribution) and is not in need of more than normal supervision would be a
"Tier 1 association." A Tier 1 association may make capital distributions during
a calendar year of up to the greater of (i) 100% of net income for the current
calendar year plus 50% of its capital surplus or (ii) 75% of its net income over
the most recent four quarters. Any additional capital distributions would
require prior regulatory approval.
An institution that meets the minimum regulatory capital requirements but
does not meet the fully phased-in capital requirements would be a "Tier 2
association," which may make capital distributions of between 25% and 75% of its
net income over the most recent four-quarter period, depending on the
institution's risk-based capital level. A "Tier 3 association" is defined as an
institution that does not meet all of the minimum regulatory capital
requirements and therefore may not make any capital distributions without the
prior approval of the OTS. As of December 31, 1996, the Association was a Tier 2
institution for purposes of the regulation relating to capital distributions.
Savings institutions must provide the OTS with at least 30 days' written
notice before making any capital distributions. All such capital distributions
are also subject to the OTS' right to object to a distribution on safety and
soundness grounds.
Qualified Thrift Lender Test. Pursuant to amendments effected by FDICIA, a
savings institution will be a QTL if its qualified thrift investments equal or
exceed 65% of the savings institution's portfolio assets on a monthly average
basis in nine of every 12 months. Qualified thrift investments, under the
revised QTL test, include (i) certain housing-related loans and investments,
(ii) certain obligations of the FSLIC, the FDIC, the FSLIC Resolution Fund and
the RTC, (iii) loans to purchase or construct churches, schools, nursing homes
and hospitals (subject to certain limitations), (iv) consumer loans (subject to
certain limitations), (v) shares of stock issued by any FHLB,
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<PAGE> 30
and (vi) shares of stock issued by the FHLMC or the FNMA (subject to certain
limitations). Portfolio assets under the revised test consist of total assets
minus (a) goodwill and other intangible assets, (b) the value of properties used
by the savings institution to conduct its business, and (c) certain liquid
assets in an amount not exceeding 20% of total assets.
Any savings institution that fails to become or remain a QTL must either
convert to a commercial bank charter or be subject to restrictions specified in
the OTS regulations. A savings institution that converts to a bank must pay SAIF
insurance assessments until the date of its conversion to BIF membership. Any
such institution that does not become a bank will be: (i) prohibited from making
any new investment or engaging in activities that would not be permissible for
national banks; (ii) prohibited from establishing any new branch office in a
location that would not be permissible for a national bank in the institution's
home state; (iii) ineligible to obtain new advances from any FHLB; and (iv)
subject to limitations on the payment of dividends comparable to the statutory
and regulatory dividend restrictions applicable to national banks. Also,
beginning three years after the date on which the savings association ceases to
be a QTL, the savings association would be prohibited from retaining any
investment or engaging in any activity not permissible for a national bank and
would be required to repay any outstanding advances to any FHLB. A savings
institution may requalify as a QTL if it thereafter complies with the QTL Test.
At December 31, 1996, the Association exceeded the QTL requirements.
Federal Home Loan Bank System. The Association is a member of the FHLB
system, which consists of 12 regional Federal Home Loan Banks governed and
regulated by the Federal Housing Finance Board. The Federal Home Loan Banks
provide a central credit facility for member institutions. The Association, as a
member of the FHLB of Atlanta, is required to acquire and hold shares of capital
stock in the FHLB of Atlanta in an amount at least equal to the greater of 1% of
the aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations as of the close of each calendar
year, 0.3% of its assets, or 5% of its borrowings from the FHLB of Atlanta
(including advances and letters of credit issued by the FHLB on the
Association's behalf). As of December 31, 1996, the Association was in
compliance with this requirement with a $2.4 million investment in stock of the
FHLB of Atlanta.
The FHLB of Atlanta makes advances to members in accordance with policies
and procedures periodically established by the Federal Housing Finance Board and
the Board of Directors of the FHLB of Atlanta. Currently outstanding advances
from the FHLB of Atlanta are required to be secured by a member's shares of
stock in the FHLB of Atlanta and by certain types of mortgages and other assets.
FIRREA further limited the eligible collateral in certain respects. Interest
rates charged for advances vary depending on maturity, the cost of funds to the
FHLB of Atlanta and the purpose of the borrowing. At December 31, 1996, advances
from the FHLB of Atlanta totaled $7.0 million. See Note 9 to the Company's
Consolidated Financial Statements. FIRREA restricts the amount of FHLB advances
that a member institution may obtain, and in some circumstances requires
repayment of outstanding advances, if the institution does not meet the QTL
test. See "Qualified Thrift Lender Test" above.
Liquidity. OTS regulations currently require member savings institutions to
maintain for each calendar month an average daily balance of liquid assets (cash
and certain time deposits, securities of certain mutual funds, bankers'
acceptances, corporate debt securities and commercial paper, and specified U.S.
government, state government and federal agency obligations) equal to at least
5% of its average daily balance during the preceding calendar month of net
withdrawable deposits and short-term borrowings (generally borrowings having
maturities of one year or less). The Director of the OTS may vary this liquidity
requirement from time to time within a range of 4% to 10%. An institution must
also maintain for each calendar month an average daily balance of short-term
liquid assets (generally those having maturities of one year or less) equal to
at least 1% of its average daily balance during the preceding calendar month of
net withdrawable accounts and short-term borrowings. Monetary penalties may be
imposed for failure to meet liquidity requirements. At December 31, 1996, the
Association's liquidity ratio (which must be at least 5%) was 7.6%, and its
short-term liquidity ratio (which must be at least 1%) was 6.2%.
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<PAGE> 31
Enforcement Authority. Pursuant to FIRREA, the OTS was granted enhanced,
extensive enforcement authority over all savings associations. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Since the
enactment of FIRREA, the OTS has significantly increased the use of written
agreements to correct compliance deficiencies with respect to applicable laws
and regulations and to ensure safe and sound practices; violations of such
written agreements are grounds for initiation of cease-and-desist proceedings.
FIRREA significantly increased the amount of and grounds for civil money
penalties assessable against savings associations and "institution-affiliated
parties." FDICIA granted the FDIC back-up enforcement authority to recommend
enforcement action to an appropriate federal banking agency (i.e., the OTS) and
to bring such enforcement action against a savings association or an
institution-affiliated party if such federal banking agency fails to follow the
FDIC's recommendation. In addition, FIRREA requires, except under certain
circumstances, public disclosure of final enforcement actions by the OTS.
FIRREA also expanded the grounds for appointment of a conservator or
receiver for a savings association. Grounds for such appointment include:
insolvency; substantial dissipation of assets or earnings; existence of an
unsafe or unsound condition to transact business; likelihood that the
association will be unable to pay its obligations in the normal course of
business; and insufficient capital or the incurring or likely incurring of
losses that will deplete substantially all capital with no reasonable prospect
for replenishment.
FDICIA added additional grounds for the appointment of a conservator or
receiver of a savings association, which include: undercapitalization where the
association (i) has no reasonable prospect of becoming adequately capitalized,
(ii) fails to become adequately capitalized when required to do so, (iii) fails
to timely submit an acceptable capital restoration plan, or (iv) materially
fails to implement a capital restoration plan; or the association is "critically
undercapitalized" or "otherwise has substantially insufficient capital."
OTS Assessments. FIRREA empowers the OTS to issue regulations for the
collection of fees in order to recover the expenses of the agency, the cost of
the supervision of savings associations, the examination of affiliates of
savings associations, and the processing of applications, filings, notices and
other requests of associations filed with the OTS. The OTS adopted a two-pronged
sliding scale approach in 1991 by which all institutions pay a general
assessment and troubled institutions pay an additional premium assessment.
Loans-to-One Borrower Limitations. FIRREA provides that loans-to-one
borrower limits applicable to national banks will apply to savings institutions.
Generally, under current limits, loans and extensions of credit outstanding at
one time to a single borrower may not exceed 15% of the savings institution's
unimpaired capital and unimpaired surplus. Loans and extensions of credit fully
secured by certain readily marketable collateral may represent an additional 10%
of unimpaired capital and unimpaired surplus. Notwithstanding general
limitations, FIRREA additionally provides that a savings institution may make
loans to one borrower, for any purpose, in an amount not to exceed $500,000 or,
by order of the Director of the OTS, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and unimpaired surplus to develop
residential housing if: (i) the purchase price of each single-family dwelling in
the development does not exceed $500,000; (ii) the savings institution is and
continues to be in compliance with the fully phased-in capital standards of
FIRREA; (iii) loans made under this exception to all borrowers do not, in the
aggregate, exceed 150% of the institution's unimpaired capital and unimpaired
surplus; and (iv) such loans comply with applicable loan-to-value requirements.
While the Association had loans outstanding to three borrowers at December 31,
1996 in excess of the loan limits described above, it is not required to reduce
or divest the loans because they existed prior to the enactment of FIRREA.
Federal Reserve System. The Association is subject to certain regulations
promulgated by the Federal Reserve Board. Pursuant to such regulations, savings
institutions are required to maintain reserves against their transaction
accounts (primarily interest-bearing checking accounts) and non-personal time
deposits. The balances maintained to meet the reserve requirements imposed by
the Federal Reserve Board may be used to satisfy liquidity
28
<PAGE> 32
requirements imposed by the OTS. In addition, Federal Reserve Board regulations
limit the periods within which depository institutions must provide availability
for and pay interest on deposits to transaction accounts. Depository
institutions are required to disclose their check-hold policies and any changes
to those policies in writing to customers.
Thrift Rechartering Legislation. Bills have been introduced in Congress
which would eliminate the federal thrift charter. These bills would require that
all federal savings associations convert to national banks or state banks by no
later than January 1, 1998 and would treat all state savings associations as
state banks as of that date. All savings and loan holding companies would
become bank holding companies under the legislative proposals and would be
subject to the activities restrictions (with some activities grandfathered)
applicable to bank holding companies. The legislative proposals would also
abolish the OTS; savings associations would be regulated by the bank regulators
depending upon the type of bank charter selected. The Board of Governors of the
Federal Reserve System would be responsible for the regulation of savings and
loan holding companies. Management cannot predict whether or when this
legislation will be enacted. However, any such future legislation could
eliminate the institution's ability to engage in certain activities, have
significantly adverse tax effects and otherwise disrupt operations. See
"Taxation."
TAXATION
FEDERAL TAXATION
General. The Company and the Association are subject to the generally
applicable corporate tax provisions of the Internal Revenue Code of 1986, as
amended ("Code"), as well as certain additional provisions of the Code which
apply to thrift and other types of financial institutions. The following
discussion of Federal taxation is intended only to summarize certain pertinent
Federal income tax matters and is not a comprehensive description of the tax
rules applicable to the Company and the Association.
Method of Accounting. For Federal income tax purposes, the Company and the
Association report their income and expenses on the accrual basis method of
accounting and use a tax year ending December 31 for filing Federal income tax
returns. The Company and the Association have filed consolidated returns since
the calendar year 1989.
Bad Debt Reserves. For fiscal years beginning prior to January 1, 1996,
thrift institutions which qualified under certain definitional tests and other
conditions of the Code were permitted to use certain favorable provisions to
calculate their deductions from taxable income for annual additions to their bad
debt reserve. A reserve could be established for bad debts on qualifying real
property loans (generally secured by interests in real property improved or to
be improved) under (i) the Percentage of Taxable Income Method (the "PTI
Method") or (ii) the Experience Method. The reserve for nonqualifying loans was
computed using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 2, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. For
fiscal years beginning after December 31, 1995, thrift institutions that would
be treated as small banks are allowed to utilize the Experience Method
applicable to such institutions, while thrift institutions that are treated as
large banks (those generally exceeding $500 million in assets) are required to
use only the specific charge-off method. Thus, the PTI Method of accounting for
bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such changes as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
adjustment required to be taken into income ratably over a six-taxable year
period, beginning with the
29
<PAGE> 33
first taxable year beginning after December 31, 1995, subject to the residential
loan requirement. At December 31, 1996, the Association had no excess bad debt
reserves over the 1987 base year reserves and accordingly management does not
expect the change in method to affect the financial condition of the Company.
Distributions. Distributions by the Company to its stockholders would not
cause the Association to recapture any amount of its bad debt reserves into
taxable income. However, if the Association distributes cash or property to the
Company, and the distribution is treated as being from its accumulated bad debt
reserves, the distribution will cause the Association to have additional taxable
income. A distribution to the Company would be deemed to have been made from
accumulated bad debt reserves to the extent that (a) the reserves exceed the
amount that would have been accumulated on the basis of actual loss experience,
and (b) the distribution is a "non-dividend distribution." A distribution in
respect of stock is a non-dividend distribution to the extent that, for Federal
income tax purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, exceeds the
Association's current and post-1951 accumulated earnings and profits. The amount
of additional taxable income created by a non-dividend distribution is an amount
that when reduced by the tax attributable to it is equal to the amount of the
distribution.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7 cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment of $1.5 million before taxes was recorded by the
Association as an expense for the quarter ended September 30, 1996. The Funds
Act includes a provision which states that the amount of any special assessment
paid to capitalize SAIF under this legislation is deductible under Section 162
of the Code in the year of payment.
Minimum Tax. For taxable years beginning after December 31, 1986, the Code
imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally will apply to a base of regular taxable income with certain
adjustments plus certain tax preferences ("alternative minimum taxable income"
or "AMTI"), less an exemption amount (which will be phased out to the extent
that the AMTI exceeds $150,000). The Code provides that an item of tax
preference is the excess of the bad debt deduction allowable for a taxable year
pursuant to the percentage of taxable income method over the amount allowable
under the experience method. The other items of tax preference that constitute
AMTI include (a) tax exempt interest on newly-issued (generally, issued on or
after August 8, 1986) private activity bonds other than certain qualified bonds
and (b) for taxable years beginning after 1989, 75% of the excess (if any) of
(i) adjusted current earnings (as defined) over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses). Net
operating losses can offset no more than 90% of AMTI. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. In addition, corporations, including thrift institutions, are
also subject to an environmental tax equal to 0.12% of the excess of AMTI for
the taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2.0 million.
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. Losses incurred by savings institutions in
years beginning after 1981 and before 1986 may be carried back 10 years and
forward eight years. Losses attributable to years before 1982 may be carried
back 10 years and forward five years. At December 31, 1996, the Association has
operating loss carryforwards for Federal income tax purposes of approximately
$4.1 million, which are available to offset future Federal taxable income and
which expire in 2007, 2008 and 2010. The total net operating loss carryforwards
are subject to an annual limitation of $268,000 as a result of the capital
infusion attributable to shares sold by the Company in September 1993. In
addition, the Company has alternative minimum tax credit carryforwards of
approximately $121,000 which are available to reduce future Federal income taxes
over an indefinite period.
Capital Gains and Corporate Dividends-Received Deduction. Corporate net
capital gains are taxed at a maximum rate of 34%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations
30
<PAGE> 34
which own less than 20% of the stock of a corporation distributing a dividend
may deduct only 70% of dividends received or accrued on their behalf. However, a
corporation may deduct 100% of dividends from a member of the same affiliated
group of corporations. In addition to the foregoing general rules, certain
additional exceptions to the dividends-received deduction allowed to the
Association may be applicable under the Code in certain circumstances.
FLORIDA TAXATION
The State of Florida has a corporate franchise tax which subjects the
Company's Florida taxable income to a 5.5% tax. This tax is deductible in
determining Federal taxable income.
IMPACT OF NEW ACCOUNTING ISSUES
The FASB has issued Statement of Financial Accounting Standards No. 125
("SFAS 125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets as well as extinguishments of
liabilities. The statement also provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 is effective for transfers and servicing of financial
assets as well as extinguishments of liabilities occurring in 1997. Management
does not anticipate SFAS 125 will have a material impact on the Company.
STATISTICAL PROFILE AND OTHER DATA
Reference is hereby made to the statistical and financial data contained in
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations," which is included in the Company's 1996
Annual Report to Stockholders and incorporated in this Report under Item 7 of
Part II, for statistical and financial data providing a review of the Company's
business activities.
ITEM 2. PROPERTIES
At December 31, 1996, the Company and the Association conducted business
from an administrative facility located at 2013 Live Oak Boulevard, St. Cloud,
Florida. In addition, the Association maintained a main office at 200 East
Broadway, Kissimmee, Florida and ten full service branch offices in Osceola and
Brevard Counties, Florida. As of December 31, 1996, the Association owned seven
of its offices and leased four other offices. The office and properties which
are leased by the Association have lease terms, including renewal options, of
one to 10 years.
The following table sets forth certain information regarding the Company's
administrative office and the Association's office properties.
<TABLE>
<CAPTION>
NET BOOK VALUE AT DECEMBER 31, 1996
-----------------------------------
LAND, BUILDING AND FURNITURE, FIXTURES
LOCATION DATE ACQUIRED LEASEHOLD IMPROVEMENTS AND EQUIPMENT
-------- ------------- ---------------------- -------------
<C> <C> <C> <C>
ADMINISTRATIVE OFFICE
2013 Live Oak Boulevard 1986 $659,432 $204,019
St. Cloud, FL 34771-8462
</TABLE>
31
<PAGE> 35
<TABLE>
<C> <C> <C> <C>
ASSOCIATION MAIN OFFICE
200 East Broadway 1965 311,337 181,226
P.O. Box 421708
Kissimmee, FL 34742-1708
ASSOCIATION BRANCH OFFICES:
1115 North Bermuda Avenue 1973 446,285 33,715
Kissimmee, FL 34741-4209
1300 East Vine Street 1981 387,548 68,742
Kissimmee, FL 34744-3620
1220 Ninth Street (1) 1959 - 79,498
St. Cloud, FL 34769-3376
4291 13th Street 1989 763,559 130,963
St. Cloud, FL 34769-6730
1300 Babcock Street 1973 534,976 40,667
Melbourne, FL 32901-3097
450 East Eau Gallie Blvd. 1995 275,694 64,912
Indian Harbour Beach, FL 32937-4207
Building B, Suite 100 (1) 1989 229,973 163,209
6769 N. Wickham Road, Suite 100
Melbourne, FL 32940-2019
401 Ocean Avenue (1) 1979 24,946 28,146
Melbourne Beach, FL 32951-2567
6000 Babcock Street, SE (1) 1984 71,271 46,966
Palm Bay, FL 32909-3921
232 South Dillard Street 1982 389,012 85,169
Winter Garden, FL 34787
</TABLE>
- ----------------------
(1) Presently leased by the Association.
ITEM 3. LEGAL PROCEEDINGS
The Company and the Association are periodically parties 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 the Association's business.
Management does not believe that there is any pending proceeding against the
Company or the Association which, if determined adversely, would have a material
adverse effect on the business, results of operations, or financial position of
the Company or the Association.
32
<PAGE> 36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Company security holders during the
fourth quarter of the year ended December 31, 1996.
33
<PAGE> 37
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information contained under the section captioned "Common Stock Data"
in the Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and the supplementary financial
information included in the 1996 Annual Report to Stockholders are incorporated
herein by reference:
1. The consolidated financial statements, together with the report
thereon of Hacker, Johnson, Cohen & Grieb dated February 11, 1997, except for
Note 21, as to which the date is March 11, 1997.
2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and related statistical information.
With the exception of the aforementioned information and the information
incorporated in Items 5, 6, 7 and 8, the 1996 Annual Report to Stockholders is
not to be deemed filed as part of this Form 10-K Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
34
<PAGE> 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the sections captioned "Directors" and
"Executive Officers" under "Election of Directors" in the registrant's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
April 23, 1997, to be filed with the SEC pursuant to Regulation 14A within 120
days of the registrant's fiscal year end (the "Proxy Statement"), is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the sections captioned "Information About the
Board of Directors and Its Committees", "Executive Compensation and Benefits"
and "Information on Benefit Plans and Policies" under "Election of Directors" in
the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the sections captioned "Directors" and
"Management Stock Ownership" under "Election of Directors", and "Ownership of
Equity Securities" in the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section captioned "Certain Transactions"
under "Election of Directors" in the Proxy Statement is incorporated herein by
reference.
35
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. The following financial statements are incorporated by reference
from Item 8 hereof (see Exhibit 13):
Independent Auditors' Report (page 43 of the Annual Report)
Consolidated Balance Sheets at December 31, 1996 and 1995 (page
16 of the Annual Report)
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1996 (page 17 of the Annual
Report)
Consolidated Statements of Stockholders' Equity for each of the
years in the three-year period ended December 31, 1996 (page 18
of the Annual Report)
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 1996 (pages 19 and 20
of the Annual Report)
Notes to Consolidated Financial Statements (pages 21 through 42
of the Annual Report)
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because the
required information is either not applicable or not required,
or the required information is shown in the Consolidated
Financial Statements or in the notes thereto.
3. EXHIBITS
The following exhibits are filed as part of this Form 10-K and
this list includes the Exhibit index.
3.1 Amended Articles of Incorporation *
3.2 Articles of Amendment to Articles of Incorporation**
3.3 Bylaws *
3.4 Amendment to Bylaws dated September 21, 1994***
4 Specimen form of stock certificate *
10.1 Key Employee Stock Compensation Program */****
13 1996 Annual Report to Stockholders
36
<PAGE> 40
22 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business - The Association" for the required information
27 Financial Data Schedule (for SEC use only)
(*) Incorporated herein by reference from the Company's
registration statement on Form S-1 (File No. 33-23161).
(**) Incorporated herein by reference from the Company's
Registration Statement on Form S-1 (File No. 33-79472).
(***) Incorporated herein by reference from the Company's Form
10-K for the year ending December 31, 1994.
(****) Represents a management contract or compensatory plan or
arrangement required to be filed as an exhibit.
37
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of St.
Cloud, State of Florida, on the 31st day of March, 1997.
F.F.O. FINANCIAL GROUP, INC.
By: /s/ James B. Davis
-------------------------
James B. Davis, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Alfred T. May March 31, 1997
- -------------------------------------------------
Alfred T. May
Chairman
/s/ James B. Davis March 31, 1997
- --------------------------------------------------
James B. Davis
President/Chief Executive Officer
/s/ Phyllis A. Elam March 31, 1997
- -------------------------------------------------
Phyllis A. Elam
Chief Financial Officer
/s/ Donald S. Brown, D.V.M. March 31, 1997
- -------------------------------------------
Donald S. Brown, D.V.M.
Director
/s/ William R. Hough March 31, 1997
- -----------------------------------------------
William R. Hough
Director
/s/ Edward A. Moore March 31, 1997
- ----------------------------------------------
Edward A. Moore
Director
/s/ Mildred W. Pierson March 31, 1997
- ----------------------------------------------
Mildred W. Pierson
Director
</TABLE>
38
<PAGE> 42
F.F.O. Financial Group, Inc.
Form 10-K
For Fiscal Year Ending December 31, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
No. Exhibit No.
- ------- ------------------------------------------ ----
<S> <C> <C>
13 1996 Annual Report to Stockholders
27 Financial Data Schedule (for SEC use only)
</TABLE>
39
<PAGE> 1
F.F.O. FINANCIAL GROUP, INC.
Financial Highlights
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
For the Year
Interest Income $ 21,997 $ 19,730 $ 16,882
Interest Expense 12,023 10,111 7,553
Provision (Credit) for Loan Losses 782 477 (1,403)
Noninterest Income 2,387 2,602 2,487
Noninterest Expenses 9,176 9,457 12,545
Net Income 1,600 1,646 440
Net Income per Share of Common Stock $ 0.19 $ 0.20 $ 0.06
At Year End
Total Assets $ 316,949 $ 301,485 $ 253,428
Securities 66,368 90,544 60,757
Loans Receivable (1) 219,467 183,955 163,992
Deposits 286,927 248,936 210,832
Borrowed Funds 7,000 30,000 21,400
Stockholders' Equity 20,280 18,780 16,545
Book Value per Share $ 2.41 $ 2.23 $ 1.96
Shares Outstanding 8,430,000 8,430,000 8,430,000
Certain Ratios
Return on Average Assets 0.54% 0.64% 0.18%
Return on Average Equity 8.18% 9.17% 3.08%
Equity to Assets at Year End 6.40% 6.23% 6.53%
Interest Rate Spread During the Year 3.20% 3.86% 4.24%
Net Interest Margin During the Year 3.44% 3.99% 4.25%
Ratio of Allowance for Loan Losses to Gross Loans (1) 2.38% 2.62% 4.61%
Nonperforming Assets to Total Assets 3.12% 4.00% 8.96%
(1) Includes loans held for sale.
- ------------------------------------------------------------------------------------------------------
</TABLE>
TABLE OF CONTENTS
President's Message 1
Marketing Profile 2
Selected Consolidated Financial and Other Data 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations 4
Consolidated Financial Statements 16
Independent Auditors' Report 43
Office Locations 44
<PAGE> 2
F.F.O. FINANCIAL GROUP, INC.
Selected Consolidated Financial and Other Data
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
At Year End
Total assets $ 316,949 $ 301,485 $ 253,428 $ 249,399 $ 308,930
Securities 66,368 90,544 60,757 36,660 22,073
Loans receivable (1) 219,467 183,955 163,992 165,130 231,300
Deposits 286,927 248,936 210,832 211,118 278,463
Borrowed funds 7,000 30,000 21,400 20,000 15,000
Stockholders' equity 20,280 18,780 16,545 14,527 8,718
For the Year
Interest income $ 21,997 $ 19,730 $ 16,882 $ 18,888 $ 25,395
Interest expense 12,023 10,111 7,553 9,033 14,197
--------- --------- --------- --------- ---------
Net interest income 9,974 9,619 9,329 9,855 11,198
Provision (credit) for loan losses 782 477 (1,403) 4,807 7,591
--------- --------- --------- --------- ---------
Net interest income after
provision (credit) for loan losses 9,192 9,142 10,732 5,048 3,607
Noninterest income 2,387 2,602 2,487 3,004 4,166
Noninterest expenses 9,176 9,457 12,545 10,614 13,386
--------- --------- --------- --------- ---------
Income (loss) before
income tax expense (benefit) 2,403 2,287 674 (2,562) (5,613)
Income tax expense (benefit) 803 641 234 (2,844) (1,012)
--------- --------- --------- --------- ---------
Net income (loss) $ 1,600 $ 1,646 $ 440 $ 282 ($ 4,601)
========= ========= ========= ========= =========
Net income (loss) per
share of common stock $ 0.19 $ 0.20 $ 0.06 $ 0.08 ($ 2.11)
========= ========= ========= ========= =========
Other Data
Return on average assets 0.54% 0.64% 0.18% 0.11% (1.36)%
Return on average equity 8.18% 9.17% 3.08% 2.60% (41.00)%
Equity to assets at year end 6.40% 6.23% 6.53% 5.82% 2.82 %
Interest rate spread during the year 3.20% 3.86% 4.24% 4.17% 3.97 %
Net interest margin during the year 3.44% 3.99% 4.25% 4.08% 3.73 %
Ratio of allowance for loan losses
to gross loans (1) 2.38% 2.62% 4.61% 5.31% 2.66 %
Nonperforming assets to total assets 3.12% 4.00% 8.96% 11.51% 17.36 %
Number of full-service offices 11 11 10 10 12
</TABLE>
(1) Includes $10.5 million, $22.8 million, $7.9 million, $11.3 million and
$62.7 million in loans held for sale as of December 31, 1996, 1995, 1994,
1993 and 1992, respectively.
3
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
INTRODUCTION
F.F.O. FINANCIAL GROUP, INC. F.F.O. Financial Group, Inc. (the "Holding
Company") was incorporated in the State of Florida on June 6, 1988. On October
20, 1988 the Holding Company became the unitary savings and loan holding
company for First Federal Savings and Loan Association of Osceola County (the
"Association") (together, the "Company"). The Holding Company's operations are
limited to ownership of the Association. As of December 31, 1996, the Company
had consolidated assets of $316.9 million, consolidated deposits of $286.9
million, and consolidated stockholders' equity of $20.3 million. The Company's
executive office is located at 2013 Live Oak Boulevard, St. Cloud, Florida
34771, and its telephone number is (407) 892-1200.
THE ASSOCIATION. The Association is a federally chartered savings and
loan association which conducts business from its headquarters and main office
in Kissimmee, Florida and ten branch offices located in Central Florida. The
Association was founded in 1934 as a mutual savings and loan association. On
October 20, 1988, the Association converted to a federally chartered stock
association. The Association's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to applicable limits through the Savings
Association Insurance Fund ("SAIF"). The Association has one wholly-owned
subsidiary, Gulf American Financial Corporation, which is currently inactive.
The principal business of the Association 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 the Association through proceeds from the sale of loans,
repayment of outstanding loans, proceeds from the sale and maturity of
securities, and borrowings from the Federal Home Loan Bank ("FHLB") of Atlanta.
The Association's operating results depend substantially on (i) net interest
income (the difference between its interest income and interest expense), (ii)
provisions for losses on loans and foreclosed real estate, (iii) noninterest
income, (iv) noninterest expenses and (v) 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).
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are from time deposit inflows, loan
principal repayments, principal repayments and proceeds from sales and
maturities of securities available for sale, proceeds from sales of loans held
for sale, and a net decrease in trading account securities. During 1996, net
time deposit inflows were $42.5 million, loan principal repayments were $42.0
million, principal repayments on securities available for sale were $18.8
million, proceeds from maturities and sales of securities available for sale
were $10.0 million and $26.7 million, respectively, proceeds from sales of
loans held for sale were
4
<PAGE> 4
$25.7 million and the net decrease in trading securities was $13.5 million.
Cash was used primarily to fund loan disbursements of $80.3 million, and to
purchase securities available for sale of $47.4 million. At December 31, 1996,
the Company had approved commitments to originate real estate loans of $5.1
million and to fund the undisbursed portions of loans in process of $10.8
million. It is expected that these requirements will be funded from the sources
described above.
The Association is required under federal regulations to maintain
specified levels of liquid assets, which include qualifying types of U.S.
government and federal agency securities, cash and other investments. Current
regulations require the Association to maintain liquid assets of not less than
5% of its average daily balance of net withdrawable deposit accounts plus short
term borrowings during the preceding calendar month; short term liquid assets
must consist of not less than 1% of that amount. These levels are established
by the Office of Thrift Supervision ("OTS") and are adjustable periodically to
reflect current conditions. The Association has generally maintained liquidity
in excess of required levels. The Association's average daily liquidity ratio
was 7.64% and the short-term liquidity ratio was 6.22% at December 31, 1996.
In accordance with applicable law, the Association is required to meet
certain minimum regulatory capital requirements. The following table is a
summary of the capital requirements, the Association's regulatory capital and
the amounts in excess at December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
------------------- --------------------- ------------------
% OF
% OF % OF RISK
ADJUSTED ADJUSTED WEIGHTED
AMOUNT ASSETS AMOUNT ASSETS AMOUNT ASSETS
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital $18,772 5.9% $ 18,772 5.9% $ 20,926 12.3%
Requirement 4,734 1.5 9,469 3.0 13,572 8.0
------- --- -------- --- ------ -----
Excess $14,038 4.4% $ 9,303 2.9% $ 7,354 4.3%
======= === ======== === ======== =====
</TABLE>
If an association is unable to comply with all of its regulatory capital
requirements, the OTS may take such action as it deems appropriate to protect
the deposit insurance funds, the association and its depositors. Such action
may include various operating restrictions, limitations on liability growth,
limitations on deposit account interest rates and investment restrictions. As a
means of limiting regulatory discretion to allow undercapitalized depository
institutions to remain in operation, and thereby minimizing insurance fund
losses, the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required the OTS and the other federal banking agencies to establish
a prompt regulatory action system pursuant to which banks and thrifts will be
classified, according to their capital levels, into five categories: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
Under regulations adopted by the federal banking agencies to implement
these requirements, the Association met the capital requirements of a "well
capitalized" institution as of December 31, 1996.
5
<PAGE> 5
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF member institutions, including
the Association, to recapitalize the SAIF and spread the obligation for
repayment of Financing Corporation ("FICO") bonds across all SAIF and Bank
Insurance Fund ("BIF") members. The FDIC special assessment amounted to 65.7
basis points on SAIF-assessable deposits held as of March 31, 1995. The special
assessment of $1.5 million was recognized in the third quarter of 1996 and is
tax deductible.
Beginning on January 1, 1997, BIF members will pay a portion of the FICO
payment equal to 1.3 basis points on BIF-insured deposits, compared to 6.5
basis points payable by SAIF members on SAIF-insured deposits, and will pay a
pro rata share of the FICO payment on the earlier of January 1, 2000 or the
date upon which the last savings association ceases to exist. The legislation
also requires BIF and SAIF to be merged by January 1, 1999, provided that
subsequent legislation is adopted to eliminate the savings association charter
and no savings associations remain as of that time.
The FDIC recently lowered SAIF assessments to a range comparable to those
of BIF members, although SAIF members will continue to pay the higher FICO
payments described above. Management cannot predict the level of FDIC insurance
assessments on an ongoing basis or whether the BIF and SAIF will eventually be
merged.
ASSET QUALITY
The Company is required by the OTS to classify its own assets and to
establish valuation allowances based in part on such classifications. These
classifications are subject to review by OTS examiners. Management of the
Company reviews its loan, foreclosed real estate and securities portfolios on a
monthly basis, classifying those assets deemed appropriate and establishing
valuation allowances as appropriate. In addition, the Company continues to
establish general loss allowances for unclassified loans based on its
historical loss experience. An asset is classified substandard if it is
determined to involve a distinct possibility that the Company could sustain
some loss if deficiencies associated with the asset are not corrected. An asset
is classified doubtful if full collection is highly questionable or improbable.
An asset is classified loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. If an asset is classified
substandard or doubtful pursuant to the Company's policies or by regulatory
examiners, general allowances for losses may be established. If an asset is
classified loss, the Company is required to establish a specific allowance in
an amount equal to 100% of the portion of the asset classified loss or it must
charge off that amount.
Pursuant to applicable regulations, the OTS and the FDIC have the
authority to require the Association to increase its valuation allowances if
either 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 allowance levels. The OTS last performed an
examination of the Association as of December 31, 1996. The examination was
part of the OTS' routine supervision of the Association and included
evaluations of the Association's loan and foreclosed real estate loss
allowances. Based upon the results of the OTS examination, management believes
the Association's policies and procedures for determination of loan and
foreclosed real estate allowances are generally consistent with those used by
the OTS in determining the adequacy of the loss allowances maintained by thrift
institutions. However, there is no assurance that the OTS will concur with this
assessment in future examinations.
6
<PAGE> 6
The following table illustrates the Company's classified assets as of
December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Substandard $ 6,747
Doubtful 145
Loss 800
-------
Total classified assets $ 7,692
-------
</TABLE>
The Company had nonperforming assets as follows (dollars in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Nonperforming Loans:
Nonaccrual Loans:
Single family residential $ 2,080 887 371
Improved and unimproved land 544 414 214
Commercial real estate 1,434 623 2,178
SBA loans -- 751 588
Consumer loans -- -- 12
------- ------- -------
Total 4,058 2,675 3,363
------- ------- -------
Troubled Debt Restructured:
Multifamily residential 4,862 4,890 10,424
------- ------- -------
Total Nonperforming Loans 8,920 7,565 13,787
------- ------- -------
Foreclosed Real Estate:
Single family residential 57 38 86
Multifamily residential -- 2,651 --
Improved and unimproved land 900 1,278 6,171
Commercial real estate -- 515 2,255
SBA loans -- -- 415
------- ------- -------
Total Foreclosed Real Estate 957 4,482 8,927
------- ------- -------
Total Nonperforming Assets $ 9,877 12,047 22,714
------- ------- -------
Nonperforming Assets to Total Assets 3.12% 4.00% 8.96%
------- ------- -------
Allowance for Loan Losses $ 5,613 5,138 8,207
Allowance for Foreclosed Real Estate Losses 158 1,124 2,873
------- ------- -------
Total Allowance for Losses $ 5,771 6,262 11,080
======= ======= =======
</TABLE>
7
<PAGE> 7
NONACCRUAL LOANS. At December 31, 1996, loans on nonaccrual status
totaled $4.1 million. During 1996 and 1995, approximately $523,000 and
$400,000, 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
Company's interest income in the respective periods.
TROUBLED DEBT RESTRUCTURED. At December 31, 1996, the Company's troubled
debt restructurings totaled $4.9 million and consisted of one multifamily real
estate loan. The loan is collateralized by a 172-unit apartment complex located
in Seminole County, Florida. The apartment complex was appraised for $6.4
million as of the most recent appraisal in 1988. During December 1992, while
the loan was delinquent, the Association allowed it to be assumed by a
nonprofit organization, and reduced the interest rate from 10.75% to 7.0%.
Under the restructured terms, the loan requires monthly principal and interest
payments of approximately $31,000 plus a balloon payment of $4,361,000 in
December 2007. The Association retained the personal guarantees of two
individuals who executed the note at the time of origination. Subsequent to the
date of modification, the loan has performed in accordance with the
restructured terms of the contract. In conjunction with the quarterly
evaluation of the reasonableness of the carrying value of this property,
management has considered, among other factors, the 1988 appraisal of the
property, the indicated valuation of the property by the nonprofit organization
which assumed the loan in 1992, the location of the property and management's
assessment of the current real estate valuation of similar properties in the
local real estate market, management's assessment of the cash flows generated
by the collateral property based on current operating information provided by
the borrower, and management's assessment of the financial capacity of the two
individuals whose personal guarantees also secure the loan.
FORECLOSED REAL ESTATE. Foreclosed real estate includes property acquired
by foreclosure or deed in lieu of foreclosure. Total foreclosed real estate
decreased from $4.5 million at December 31, 1995 to $957,000 at December 31,
1996. The decrease was due to sales of foreclosed real estate properties,
partially offset by foreclosures during the year ended December 31, 1996.
ASSET/LIABILITY MANAGEMENT
The Association, 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. The Company 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.
8
<PAGE> 8
In order to increase the interest-rate sensitivity of its interest-earning
assets, the Company has emphasized the origination of residential mortgage
loans with adjustable interest rates and loans with short-term maturities. The
Company 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 the Company 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.
The following table summarizes the anticipated maturities or repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1996, based upon certain estimates and assumptions as to loan
prepayment rates and certain deposit erosion rates which management believes
are reasonable based on the Company's experience (dollars in thousands).
<TABLE>
<CAPTION>
One Year Over
One Year to Three Three
or Less Years Years Total
------- ----- ----- -----
<S> <C> <C> <C> <C>
Rate-Sensitive Assets:
Loans (1) $110,600 56,902 53,689 221,191
Securities 47,780 10,893 7,679 66,352
Other interest-earning assets (2) 11,665 -- 2,378 14,043
-------- -------- ------ -------
Total Rate-Sensitive Assets $170,045 67,795 63,746 301,586
======== ======== ====== =======
Rate-Sensitive Liabilities:
Deposits (3) 153,428 104,626 28,873 286,927
Borrowed funds 7,000 -- -- 7,000
-------- -------- ------ -------
Total Rate-Sensitive Liabilities $160,428 104,626 28,873 293,927
======== ======== ====== =======
GAP (Repricing differences) $ 9,617 (36,831) 34,873 7,659
======== ======== ====== =======
Cumulative GAP $ 9,617 (27,214) 7,659 --
======== ======== ====== =======
Cumulative GAP as a
Percent of Total Assets 3.03% 8.59% 2.42% --
======== ======== ====== =======
</TABLE>
- ------------------------------
(1) Loans are net of the undisbursed portion of loans in process and
nonaccrual loans.
(2) Consists of interest-earning deposits and FHLB stock.
(3) In preparing the table above, the following assumptions were made
regarding the withdrawal of deposits: (i) passbook withdrawals of 17% for
the first three years and (ii) NOW account withdrawals of 36% for the
first year and 32% for years two and three.
The above assumptions are annual percentages based on remaining balances
and should not be regarded as indicative of the actual withdrawals that may be
experienced by the Company. Moreover, certain shortcomings are inherent in the
analysis presented in the foregoing table. For example, although certain assets
and liabilities may have similar maturities or periods to repricing, they may
react differently to changes in market interest rates. Also, interest rates on
certain types of assets and liabilities may fluctuate in advance of or lag
behind changes in market interest rates. Additionally, certain assets, such as
adjustable rate mortgage loans, have features that restrict changes in interest
rates on a short-term basis and over the life of the assets. Moreover, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the above
table.
9
<PAGE> 9
RESULTS OF OPERATIONS
The Company's operating results depend substantially on (i) net interest
income (the difference between its interest income and interest expense), (ii)
provisions for losses on loans and foreclosed real estate, (iii) noninterest
income (including gains and losses on the sale of securities and loans, and
fees from lending and deposit operations), (iv) noninterest expenses (including
salaries and employee benefits, and occupancy expense) and (v) income taxes.
Net interest income is determined primarily by interest rate spread and the
relative amounts of interest-earning assets and interest-bearing liabilities.
The following table shows selected ratios for the periods ended or at the dates
indicated:
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average equity as a percentage of
average assets 6.57% 6.96% 5.98%
Equity to assets at end of year 6.40% 6.23% 6.53%
Return on average assets .54% .64% .18%
Return on average equity 8.18% 9.17% 3.08%
Noninterest expenses to average assets 3.08% 3.67% 5.25%
Nonperforming assets to total assets
at end of year 3.12% 4.00% 8.96%
Interest rate spread during the year 3.20% 3.86% 4.24%
</TABLE>
The following table shows weighted average interest rates as of the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest-earning assets:
Loans 8.15% 8.44% 8.05%
Mortgage-backed securities 6.23% 6.59% 6.00%
Investment securities 7.57% 6.58% 6.28%
Other interest-earning assets 6.70% 5.56% 5.65%
Total interest-earning assets 7.72% 7.80% 7.49%
Interest-bearing liabilities:
Deposits 4.57% 4.50% 3.79%
Borrowed funds 6.95% 5.85% 6.81%
Total interest-bearing liabilities 4.63% 4.65% 4.07%
Interest rate spread 3.09% 3.15% 3.42%
</TABLE>
10
<PAGE> 10
The following table sets forth information regarding (i) the average
balance of the Company's interest-earning assets and interest-bearing
liabilities, (ii) the total dollar amount of interest and dividend income from
interest-earning assets and the resultant average yields, (iii) the total
dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost, (iv) net interest/dividend income, (v) interest rate
spread and (vi) net interest margin.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 1995 1994
------------------------- ---------------------------- ------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE INTEREST/ YIELD/ AVERAGE INTEREST/ YIELD/ AVERAGE INTEREST/ YIELD/
BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest - earning assets:
Loans (1) $206,755 16,712 8.08% 174,203 15,357 8.82% 167,192 13,752 8.23%
Securities 77,524 4,917 6.34% 58,024 3,782 6.52% 41,155 2,647 6.43%
Other interest - earning assets 5,330 368 6.92% 8,585 591 6.88% 11,168 483 4.32%
-------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest - earning assets 289,609 21,997 7.60% 240,812 19,730 8.19% 219,515 16,882 7.69%
Noninterest - earning assets 8,010 17,028 19,589
-------- ------- -------
Total assets $297,619 257,840 239,104
-------- ------- -------
Interest - bearing liabilities:
Deposits:
Noninterest - bearing accounts 14,054 -- -- 12,.415 -- -- 10,243 -- --
NOW accounts 24,386 339 1.39% 29,708 440 1.48% 25,331 423 1.67%
Passbook and statement accounts 37,935 597 1.57% 35,920 914 2.55% 52,672 1,034 1.96%
Certificate accounts 190,927 10,774 5.64% 152,716 8,594 5.63% 121,704 5,685 4.67%
-------- ------ ---- ------- ------ ---- ------- ------ ----
Total deposits 267,302 11,710 4.38% 230,759 9,948 4.31% 209,950 7,142 3.40%
Borrowed funds 5,627 313 5.56% 2,705 163 6.03% 8,672 411 4.74%
-------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest - bearing liabilities 272,929 12,023 4.40% 233,464 10,111 4.33% 218,622 7,553 3.45%
------ ------ ------
Noninterest - bearing liabilities 5,134 6,420 6,181
Stockholders' equity 19,556 17,956 14,301
-------- ------ ------
Total liabilities & stockholders' equity $297,619 257,840 239,104
======== ====== =========
Net interest/dividend income 9,974 9,619 9,329
===== ===== =====
Interest rate spread (2) 3.20% 3.86% 4.24%
===== =====
Net average interest - earning assets,
net interest margin (3) $ 16,680 3.44% 7,348 3.99% 893 4.25%
======== ==== ======= ===== ======== ====
Ratio of average interest - earning
assets to average interest - bearing
liabilies 1.06 1.03 1.00
======== ======= ========
</TABLE>
- ----------------------------------
(1) Includes nonaccrual loans.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
11
<PAGE> 11
The following table presents certain information regarding changes in
interest and dividend income and interest expense of the Company for the years
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided with respect to changes attributable to
(i) changes in rate (change in rate multiplied by prior volume), (ii) changes
in volume (change in volume multiplied by prior rate) and (iii) changes in
rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1996 VS. 1995 1995 VS. 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------------------- -------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME TOTAL RATE VOLUME VOLUME TOTAL
----- ------ ------ ----- ---- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $(1,276) 2,870 (239) 1,355 $ 987 577 41 1,605
Securities -- 1,237 (103) 1,134 25 1,010 100 1,135
Other interest-earning assets 3 (224) (1) (222) 286 (112) (66) 108
------- ------ ---- ------ ------- ------ ---- ------
Total (1,273) 3,883 (343) 2,267 1,298 1,475 75 2,848
------- ------ ---- ------ ------- ------ ---- ------
Interest-bearing liabilities:
Deposits 161 1,575 26 1,762 1,909 708 189 2,806
Borrowings (13) 176 (14) 149 112 (283) (77) (248)
------- ------ ---- ------ ------- ------ ---- ------
Total 148 1,751 12 1,911 2,021 425 112 2,558
------- ------ ---- ------ ------- ------ ---- ------
Net change in interest income $(1,421) 2,132 (355) 356 (723) 1,050 (37) 290
------- ------ ---- ------ ------- ------ ---- ------
</TABLE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO DECEMBER 31, 1995
GENERAL. The Company reported net earnings of $1.6 million or $0.19 per
share for the year ended December 31, 1996 compared to net earnings of $1.6
million or $0.20 per share for 1995.
INTEREST INCOME. Total interest income for 1996 was $22.0 million, an
increase of $2.3 million from 1995. Interest income on loans increased $1.4
million or 8.8% in 1996 compared to 1995. The increase in interest income on
loans was the result of an increase in the average balance of loans outstanding
from $174.2 million in 1995 to $206.8 million in 1996, partially offset by a
decrease in the average yield earned on such loans from 8.82% in 1995 to 8.08%
in 1996. Interest income on securities increased $1.1 million or 30.0%, due to
an increase in the average balance from $58.0 million in 1995 to $77.5 million
in 1996, partially offset by a decrease in the average yield earned from 6.52%
in 1995 to 6.34% in 1996. Interest income on other interest-earning assets
decreased $223,000 from $591,000 in 1995 to $368,000 in 1996. The decrease was
the result of a decrease in the average balance outstanding during 1996
compared to 1995, partially offset by a slight increase in average yield earned
in 1996 compared to 1995.
INTEREST EXPENSE. Total interest expense for 1996 increased from $10.1
million in 1995 to $12.0 million in 1996. Interest paid on deposit accounts
increased by $1.8 million. The increase in interest expense on deposits was due
to an increase in the average balances outstanding and an increase in the rates
paid thereon. During 1996,
12
<PAGE> 12
deposits averaged $267.3 million at an average rate of 4.38% compared to $230.8
million at an average rate of 4.31% during 1995.
PROVISION FOR LOAN LOSSES. The Company recorded a provision for loan
losses of $782,000 for 1996, compared to a $477,000 provision for 1995. The
ratio of nonperforming loans and foreclosed real estate to total assets was
3.12% at December 31, 1996, compared to 4.00% at December 31, 1995. The
Company's total allowance for losses on loans and foreclosed real estate
equaled 58.4% of nonperforming assets at December 31, 1996 compared to 52.0% of
nonperforming assets at December 31, 1995.
NONINTEREST INCOME. For the year ended December 31, 1996, noninterest
income was $2.4 million, a decrease of $215,000 from 1995. The decrease was
primarily due to a net loss on trading securities during 1996 of $196,000
compared to a net profit on trading securities of $229,000 during 1995 and an
unrealized loss on loans held for sale of $150,000 at December 31, 1996
compared to no such loss at December 31, 1995. Partially offsetting these
decreases was a $264,000 increase in other income.
NONINTEREST EXPENSES. During 1996 noninterest expenses decreased by
$281,000 from $9.5 million during 1995 to $9.2 million in 1996. The decrease
resulted from a $2.4 million decrease in loss on foreclosed real estate during
1996, partially offset by the one-time SAIF assessment of $1.5 million and an
increase of $247,000 in other expenses. The decrease in loss on foreclosed real
estate was due to a credit provision for losses on foreclosed real estate of
$1.5 million in 1996 compared to $240,000 provision for losses on foreclosed
real estate in 1995.
INCOME TAXES. The income tax provision increased from $641,000 for 1995
(an effective rate of 28.0%) to $803,000 for 1996 (an effective rate of 33.4%).
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO DECEMBER 31, 1994
GENERAL. The Company reported net earnings of $1.6 million or $0.20 per
share for the year ended December 31, 1995 compared to net earnings of $440,000
or $0.06 per share for 1994. The improvement in operating results for 1995 was
primarily due to a $3.1 million decrease in noninterest expenses partially
offset by a $1.9 million increase in provision for loan losses.
INTEREST INCOME. Total interest income for 1995 was $19.7 million, an
increase of $2.8 million from 1994. Interest income on loans increased $1.6
million or 11.7% in 1995 compared to 1994. The increase in interest income on
loans was the result of an increase in the average balance of loans outstanding
from $167.2 million in 1994 to $174.2 million in 1995 and an increase in the
average yield earned on such loans from 8.23% in 1994 to 8.82% in 1995.
Interest income on securities increased $1.1 million or 42.9%, due to an
increase in the average balance from $41.2 million during 1994 to $58.0 million
during 1995, and an increase in the average yield earned from 6.43% during 1994
to 6.52% during 1995. Interest income on other interest-earning assets
increased in $108,000 from $483,000 in 1994 to $591,000 in 1995. The increase
was the result of an increase in the average yield earned in 1995 compared to
1994, partially offset by a decrease in the average balance outstanding during
1995 compared to 1994.
13
<PAGE> 13
INTEREST EXPENSE. Total interest expense for 1995 increased from $7.6
million in 1994 to $10.1 million in 1995. Interest paid on deposits increased
by $2.8 million. The increase in interest expense on deposits was due to an
increase in the average balances outstanding and an increase in the rates paid
thereon. During 1995, deposits averaged $230.8 million at an average rate of
4.31% compared to $210.0 million at an average rate of 3.40% during 1994.
PROVISION FOR LOAN LOSSES. The Company recorded a credit for loan losses
for 1994 of $1.4 million, compared to a $477,000 provision for 1995. The credit
in 1994 was partially offset by a $3.4 million provision for losses on
foreclosed real estate. See "Noninterest Expenses" below. The ratio of
nonperforming loans and foreclosed real estate to total assets was 4.00% at
December 31, 1995, compared to 8.96% at December 31, 1994. The Company's total
allowance for losses on loans and foreclosed real estate equaled 52.0% of
nonperforming assets at December 31, 1995 compared to 48.8% of nonperforming
assets at December 31, 1994.
NONINTEREST INCOME. For the year ended December 31, 1995, noninterest
income was $2.6 million, an increase of $115,000 from 1994. The increase was
primarily due to a net profit on trading securities during 1995 of $229,000
compared to a net loss on trading securities of $76,000 during 1994, and an
increase of $129,000 on loan related fees and service charges. Partially
offsetting these increases was a $277,000 gain on sale of premises and
equipment during 1994 compared to no such gain in 1995.
NONINTEREST EXPENSES. During 1995, noninterest expenses decreased by $3.0
million from $12.5 million during 1994 to $9.5 million in 1995. The decrease
resulted primarily from a $3.2 million decrease in loss on foreclosed real
estate during 1995, from $3.8 million in 1994 to $613,000 during 1995. Such
decreased in noninterest expenses were partially offset by a $241,000 increase
in employee compensation and benefits. The decrease in loss on foreclosed real
estate was due to a decrease in provision for losses from $3.4 million in 1994
to $240,000 in 1995. The large provision in the allowance for losses on
foreclosed real estate during 1994 was the result of the Company's decision to
accelerate the disposition of such properties. During 1994 and 1995, foreclosed
real estate totaling $14.2 million was sold.
INCOME TAXES. The income tax provision increased from $234,000 in 1994
(an effective rate of 34.7%) to $641,000 in 1995 (an effective rate of 28.0%).
14
<PAGE> 14
FUTURE ACCOUNTING REQUIREMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 125 ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets as well as
extinguishments of liabilities. SFAS 125 also provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS 125 is effective for transfers and servicing of
financial assets as well as extinguishments of liabilities occurring after
December 31, 1996. Management does not anticipate SFAS 125 will have a material
impact on the Company.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented herein
have been prepared in accordance with Generally Accepted Accounting Principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
liabilities of the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company's performance than the effects of
general levels of inflation. Interest rates may not necessarily move in the
same direction or in the same magnitude as the prices of goods and services,
since such prices are affected by inflation to a larger extent than interest
rates. See "Asset/Liability Management" and "Results of Operations" above.
15
<PAGE> 15
F.F.O. FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,300 6,989
Interest-bearing deposits with banks 11,665 2,768
Federal funds sold -- 669
--------- -------
Cash and cash equivalents 17,965 10,426
Trading securities 9,580 23,076
Securities available for sale 41,445 49,832
Securities held to maturity, at cost 15,343 17,636
Loans held for sale, net of unrealized losses of $150 in 1996 10,462 22,765
Loans receivable, net of allowances for loan losses of
$5,613 in 1996 and $5,138 in 1995 209,005 161,190
Accrued interest receivable 1,710 1,821
Premises and equipment 5,324 5,700
5,700 Restricted securities - Federal Home Loan Bank stock, at cost 2,378 2,514
Foreclosed real estate, net of allowances of $158 in 1996 and
$1,124 in 1995 799 3,358
Deferred tax asset 1,490 2,249
Other assets 1,448 918
--------- -------
Total assets $ 316,949 301,485
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits 14,303 13,107
Savings and NOW deposits 57,981 63,682
Time deposits 214,643 172,147
--------- -------
Total deposits 286,927 248,936
Accrued interest on deposits 256 282
Due to bank 424 1,120
Advances from Federal Home Loan Bank 7,000 30,000
Advance payments by borrowers for taxes and insurance 608 819
Other liabilities 1,454 1,548
--------- -------
Total liabilities 296,669 282,705
--------- -------
Commitments and Contingencies (Notes 6, 12, 13, 15 and 21)
Stockholders' Equity:
Preferred stock, $.10 par value, 2,500,000 shares
authorized, none outstanding -- --
Common stock, $.10 par value, 20,000,000 shares authorized,
8,430,000 shares issued and outstanding 843 843
Additional paid-in capital 17,599 17,599
Retained earnings 1,844 244
Net unrealized (depreciation) appreciation on securities
available for sale, net of tax of $4 in 1996
and $(56) in 1995 (6) 94
--------- -------
Total stockholders' equity 20,280 18,780
--------- -------
Total liabilities and stockholders' equity $ 316,949 301,485
========= =======
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE> 16
F.F.O. FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable $ 16,712 15,357 13,752
Securities available for sale 2,524 1,218 1,963
Securities held to maturity 1,179 1,297 684
Trading securities 1,214 1,267 --
Federal funds sold 80 150 125
Deposits with banks 288 441 358
----------- --------- ---------
Total interest income 21,997 19,730 16,882
----------- --------- ---------
Interest expense:
Deposits 11,710 9,948 7,142
Other borrowed funds 313 163 411
----------- --------- ---------
Total interest expense 12,023 10,111 7,553
----------- --------- ---------
Net interest income 9,974 9,619 9,329
Provision (credit) for loan losses 782 477 (1,403)
----------- --------- ---------
Net interest income after provision (credit)
for loan losses 9,192 9,142 10,732
----------- --------- ---------
Noninterest income:
Service charges on deposits 1,306 1,269 1,297
Loan related fees and service charges 443 375 246
Loan servicing fees 279 367 409
Net trading account (losses) profit (196) 229 (76)
Net realized gain on sales of available-for-sale securities 87 66 --
Net gain on sale of loans 144 86
131
Unrealized loss on loans held for sale (150) -- --
Net gain on sale of premises and equipment -- -- 277
Other income 474 210 203
----------- --------- ---------
Total noninterest income 2,387 2,602 2,487
----------- --------- ---------
Noninterest expenses:
Salaries and employee benefits 4,192 4,043 3,802
Occupancy expense 1,925 1,814 1,755
(Gain) loss on foreclosed real estate (1,818) 613 3,784
Deposit insurance premium 657 646 645
SAIF recapitalization assessment 1,466 -- --
Marketing and advertising 381 299 298
Data processing 668 564 563
Printing and office supplies 280 284 279
Telephone expense 255 271 272
Other expense 1,170 923 1,147
----------- --------- ---------
Total noninterest expenses 9,176 9,457 12,545
----------- --------- ---------
Income before income taxes 2,403 2,287 674
Income tax expense 803 641 234
----------- --------- ---------
Net income $ 1,600 1,646 440
=========== ========= =========
Net income per share of common stock $ .19 .20 .06
=========== ========= =========
Weighted average number of shares outstanding 8,430,000 8,430,000 7,354,658
=========== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE> 17
F.F.O. FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET
UNREALIZED
(DEPRECIATION)
APPRECIATION
RETAINED ON
ADDITIONAL EARNINGS SECURITIES TOTAL
COMMON PAID-IN (ACCUMULATED AVAILABLE STOCKHOLDERS'
STOCK CAPITAL DEFICIT) FOR SALE EQUITY
----- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $718 15,324 (1,842) 327 14,527
Proceeds from issuance of 1,250,000
shares of common stock 125 2,275 -- -- 2,400
Net income for 1994 -- -- 440 -- 440
Net change in unrealized (depreciation)
appreciation on securities available
for sale -- -- -- (822) (822)
---- ------ ------ ----- ------
Balance at December 31, 1994 843 17,599 (1,402) (495) 16,545
Net income for 1995 -- -- 1,646 -- 1,646
Net change in unrealized (depreciation)
appreciation on securities available
for sale -- -- -- 589 589
---- ------ ------ ----- ------
Balance at December 31, 1995 843 17,599 244 94 18,780
Net income for 1996 -- -- 1,600 -- 1,600
Net change in unrealized (depreciation)
appreciation on securities available
for sale -- -- -- (100) (100)
---- ------ ------ ----- ------
Balance at December 31, 1996 $843 17,599 1,844 (6) 20,280
==== ====== ===== ===== ======
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE> 18
F.F.O. FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
------- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,600 1,646 440
Adjustments to reconcile net income to
net cash provided by (used in) operations:
Provision (credit) for loan losses 782 477 (1,403)
(Credit) provision for losses on foreclosed real estate (1,500) 240 3,410
Net amortization of premiums and discounts 159 (210) (115)
Net gain on sale of premises and equipment -- -- (277)
Net amortization of deferred loan fees (180) 52 (168)
Depreciation of premises and equipment 554 566 597
Net gain on sale of foreclosed real estate (368) (35) (175)
Net realized gain on sales of available-for-sale securities (87) (66) --
Net decrease (increase) in trading account securities 13,496 (16,106) (6,970)
Provision (benefit) for deferred income taxes 819 1,012 (276)
Proceeds from sales of loans held for sale 25,745 8,924 9,858
Originations of loans held for sale (13,448) (23,673) (6,311)
Decrease (increase) in accrued interest receivable 111 (356) (143)
Increase in other assets (530) (216) (157)
Gain on sale of loans (144) (86) (131)
Unrealized loss on loans held for sale 150 -- --
(Decrease) increase in accrued interest payable (26) 123 9
(Decrease) increase in other liabilities and due to bank (790) (1,131) 997
-------- ------- ------
Net cash provided by (used in) operating activities 26,343 (28,839) (815)
-------- ------- ------
Cash flows from investing activities:
Purchase of available-for-sale securities (47,400) (35,104) (19,868)
Purchase of held-to-maturity securities -- -- (47,504)
Proceeds from maturities of held-to-maturity securities -- 12,526 47,129
Proceeds from sale of available-for-sale securities 26,673 7,755 --
Proceeds from maturities of available-for-sale securities 10,000 -- --
Principal repayments on available-for-sale securities 18,832 746 1,916
Principal repayments on held-to-maturity securities 2,343 1,613 --
Net (increase) decrease in loans receivable (45,860) (10,512) 1,110
Proceeds from sale of premises and equipment -- -- 524
Net purchases of premises and equipment (178) (501) (365)
Proceeds from sale of foreclosed real estate 2,001 7,389 4,123
Payments capitalized to foreclosed real estate (131) (43) (7)
Redemption (purchase) of Federal Home Loan Bank stock 136 -- (31)
-------- ------- ------
Net cash used in investing activities (33,584) (16,131) (12,973)
-------- ------- ------
</TABLE>
19
(continued)
<PAGE> 19
F.F.O. FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities:
Net decrease in demand, savings and NOW deposits (4,505) (6,180) (5,979)
Net increase in time deposits 42,496 44,284 5,693
(Repayments of) proceeds from Federal Home Loan Bank advances (23,000) 8,600 1,400
Net proceeds from issuance of common stock -- -- 2,400
Net (decrease) increase in advances by borrowers for taxes
and insurance (211) 126 (109)
-------- ------ -----
Net cash provided by financing activities 14,780 46,830 3,405
-------- ------ -----
Net increase (decrease) in cash and cash equivalents 7,539 1,860 (10,383)
Cash and cash equivalents at beginning of year 10,426 8,566 18,949
-------- ------ -----
Cash and cash equivalents at end of year $ 17,965 10,426 8,566
======== ====== =====
Supplemental disclosures of cash flow information:
Cash paid during the year for:
(Refunds received) income tax paid $ (134) 550 311
======== ====== =====
Interest $ 12,049 9,957 7,544
======== ====== =====
Noncash investing and financing activities:
Transfers of loans to foreclosed real estate $ 339 6,382 1,447
======== ====== =====
Loans originated for the sale of foreclosed real estate $ 2,896 1,527 1,346
======== ====== =====
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE> 20
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
F.F.O. Financial Group, Inc. (the "Holding Company" or "F.F.O.") is the
holding company for First Federal Savings and Loan Association of
Osceola County (the "Association"). The Holding Company's operations
are limited to ownership of the Association. The Association is a
federally chartered savings and loan association which conducts
business from its headquarters and main office in Kissimmee, Florida
and ten branch offices located in Central Florida. The Association's
deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") up to applicable limits through the Savings Association
Insurance Fund ("SAIF").
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Holding Company and its wholly-owned subsidiary,
First Federal Savings and Loan Association of Osceola County, and
the Association's wholly-owned subsidiary, Gulf American Financial
Corporation. Gulf American Financial Corporation is currently
inactive. All significant intercompany transactions and balances
have been eliminated in consolidation.
GENERAL. The accounting and reporting policies of F.F.O. Financial Group,
Inc. and Subsidiaries (together, the "Company") conform to generally
accepted accounting principles and to general practices within the
thrift industry. The following summarizes the significant accounting
policies of the Company:
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.
TRADING SECURITIES. Securities held principally for resale in the near
term are classified as trading account securities and recorded at
their fair values. Unrealized gains and losses on trading account
securities are included immediately in noninterest income.
SECURITIES HELD TO MATURITY. Securities for which the Company has the
positive intent and ability to hold to maturity are reported at cost,
adjusted for premiums and discounts that are recognized in interest
income using the interest method over the period to maturity.
SECURITIES AVAILABLE FOR SALE. Available-for-sale securities consist of
securities not classified as trading securitie s nor as held-to-
maturity securities.
(continued)
21
<PAGE> 21
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED SECURITIES AVAILABLE
FOR SALE, CONTINUED. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a separate component of
stockholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are
determined using the specific identification method.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
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 balance adjusted
for any charge-offs, the allowance for loan losses, and any deferred
fees or costs on originated loans and unamortized premiums or
discounts on purchased loans.
Discounts and premiums on purchased real estate loans are amortized
to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
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 the Company'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)
22
<PAGE> 22
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 costs to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in
the consolidated statements of income.
INCOME TAXES. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicabl e to the period in which
the deferred tax assets or liabiliti es are expected to be realized
or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabiliti es are adjusted through the provision for income
taxes.
PREMISES AND EQUIPMENT. Land is carried at cost. The Company's premises,
furniture and equipment and leasehold improvements are carried at
cost, less accumulated depreciation and amortization computed
principally by the straight-line method.
OFF-BALANCE SHEET INSTRUMENTS. In the ordinary course of business the
Company has entered into off-balance-sheet financial instruments
consisting of commitments to extend credit. Such financial
instruments are recorded in the financial statements when they are
funded or related fees are incurred or received.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The following methods and
assumptions were used by the Company in estimating fair values of
financial instruments:
CASH AND CASH EQUIVALENTS. The carrying amounts of cash and
short-term instruments approximate their fair value.
TRADING SECURITIES. Fair values for trading account securities, which
also are the amounts recognized in the consolidated balance sheets,
are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market
prices of comparable instruments.
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES. Fair values for
available-for-sale and held-to-maturity securities, excluding
restricted equity securities, are based on quoted market prices.
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.
FEDERAL HOME LOAN BANK STOCK. Fair value of the Company's investment
in FHLB stock is based on its redemption value, which is its cost of
$100 per share.
(continued)
23
<PAGE> 23
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED. DEPOSITS. The fair values
disclosed for demand, NOW, money market and savings deposits 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.
SHORT-TERM BORROWINGS. The carrying amounts of borrowings maturing
within 90 days approximate their fair values. Fair values of other
borrowings are estimated using discounted cash flow analysis based on
the Company's current incremental borrowing rates for similar types
of borrowing arrangements.
ACCRUED INTEREST RECEIVABLE. The carrying amounts of accrued interest
receivable approximate their fair values.
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.
NET INCOME PER SHARE. Net income per share of common stock has been
computed on the basis of the weighted average number of shares of
common stock outstanding.
RECLASSIFICATIONS. Certain reclassifications have been made to the
financial statements for 1994 and 1995 to conform to the presentat
ions used in the financial statement s for 1996.
FUTURE ACCOUNTING REQUIREMENTS. The Financial Accounting Standards Board
(the "FASB") has issued Statement of Financial Accounting Standards
No. 125 ("SFAS 125"). This Statement provides accounting and
reporting standards for transfers and servicing of financial assets
as well as extinguishments of liabilities. This Statement also
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. SFAS 125 is effective for transfers and servicing of
financial assets as well as extinguishments of liabilities occurring
after December 31, 1996. Management does not anticipate SFAS 125 will
have a material impact on the Company.
(continued)
24
<PAGE> 24
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) SECURITIES
Securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amounts of securitie s
and their approximate fair values at December 31, were as follows
(in thousands ):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C>
TRADING SECURITIES:
DECEMBER 31, 1996:
Agency notes and debentures $ 4,000 32 -- 4,032
Collateralized mortgage-backed obligations 5,554 -- (6) 5,548
------- --- --- ------
$ 9,554 32 (6) 9,580
======= === --- ======
DECEMBER 31, 1995:
Agency notes and debentures 9,359 42 -- 9,401
Collateralized mortgage-backed obligations 13,616 59 -- 13,675
------- --- --- ------
$22,975 101 -- 23,076
======= === ==== ======
SECURITIES AVAILABLE FOR SALE:
DECEMBER 31, 1996-
Mortgage-backed securities $41,455 108 (118) 41,445
======= === ==== ======
DECEMBER 31, 1995:
U.S. Treasury notes 9,996 23 -- 10,019
Mortgage-backed securities 39,686 127 -- 39,813
------- --- ---- ------
$49,682 150 -- 49,832
======= === ===== ======
SECURITIES HELD TO MATURITY:
DECEMBER 31, 1996-
Mortgage-backed securities $15,343 218 (47) 15,514
======= === ===== ======
DECEMBER 31, 1995-
Mortgage-backed securities $17,636 204 -- 17,840
======= === ===== ======
</TABLE>
Gross realized gains and gross realized losses on sales of
available-for-sale securities were $141,000 and $54,000, respectively
in 1996 and $75,000 and $9,000, respectively in 1995. There
were no sales of available-for-sale securities during the year
ended December 31, 1994.
Net unrealized holding gains on trading securities of $26,000, $101,000
and $76,000 were included in income during 1996, 1995 and 1994,
respectively.
The Board of Directors has authorized the Company to purchase and sell,
from time to time, securities through third parties including through
William R. Hough & Co. ("WRHC"), an investment banking firm
headquartered in St. Petersburg, Florida. Mr. Hough (a director and
principal shareholder of the Company) is Chairman and principal
shareholder of WRHC. During the years ended December 31, 1996, 1995
and 1994, the Company purchased approximately $53.3 million, $69.5
million and $30.5 million of securities through WRHC, respectively.
During the years ended December 31, 1996 and 1995, the Company sold
approximately $46.0 million and $19.7 million of securities through
WRHC, respectively. No securities were sold through WRHC in 1994. In
connection with such transactions, the Company paid WRHC an aggregate
of $118,000, $92,000 and $20,000 in commissions during the years
ended December 31, 1996, 1995 and 1994, respectively.
(continued)
25
<PAGE> 25
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LOANS RECEIVABLE
The components of loans in the consolidated balance sheets were as follows
(in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Mortgage Loans:
Conventional 1-4 family residential $ 112,827 78,680
FHA and VA single family residential 10,131 11,529
Multifamily residential 19,778 18,576
Land 8,279 6,476
Other nonresidential real estate 34,138 26,927
Construction residential 14,166 10,288
Construction nonresidential 990 --
--------- -------
Total mortgage loans 200,309 152,476
--------- -------
Other Loans:
Deposit account loans 957 868
Credit card loans 594 2,637
Consumer loans 20,537 13,717
SBA loans 3,009 3,633
Home improvement loans 55 76
--------- -------
Total other loans 25,152 20,931
--------- -------
Total loans 225,461 173,407
--------- -------
Deduct:
Undisbursed portion of loans in process (10,824) (6,880)
Deferred net loan origination fees and discounts (19) (199)
Allowance for loan losses (5,613) (5,138)
--------- -------
Total deductions (16,456) (12,217)
--------- -------
Loans receivable, net $ 209,005 161,190
========= =======
</TABLE>
(continued)
26
<PAGE> 26
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LOANS RECEIVABLE, CONTINUED
An analysis of the change in the allowance for loan losses was as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 5,138 8,207 9,333
Loans charged-off, net of recoveries (307) (3,546) (260)
Provision (credit) for loan losses 782 477 (1,403)
Reclassification due to adoption of SFAS 114 and 118 -- -- 537
----------- ----- -----
Balance at December 31 $ 5,613 5,138 8,207
=========== ===== =====
</TABLE>
The amounts of impaired loans, all of which were collateral-dependent,
were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- ------
<S> <C> <C>
Loans identified as impaired:
Gross loans with related allowances for losses recorded $ 8,256 6,380
Less: Allowances on these loans (1,766) (1,537)
--------- -----
Net investment in impaired loans $ 6,490 4,843
========= =====
</TABLE>
The average net investment in impaired loans and interest income recognized
and received on impaired loans were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average investment in impaired loans $ 6,175 5,037 7,259
======== ===== =====
Interest income recognized on impaired loans $ 521 337 307
======== ===== =====
Interest income received on impaired loans $ 521 337 307
======== ===== =====
</TABLE>
(continued)
27
<PAGE> 27
F.F.O. FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements, Continued
(3) Loans Receivable, Continued
Nonaccrual and renegotiated loans for which interest has been reduced
totalled approximately $8.9 million, $7.6 million and $13.8 million
at December 31, 1996, 1995 and 1994, respectively. Interest income
that would have been recorded under the original terms of such loans
and the interest income actually recognized are summarized below (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income that would have been recorded $ 863 742 971
Interest income recognized (340) (342) (383)
----- --- ---
Interest income foregone $ 523 400 588
===== === ===
</TABLE>
The Company is not committed to lend additional funds to debtors whose
loans have been modified.
(4) LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of
mortgage loans serviced for others was $103.6 million, $89.6 million
and $101.2 million at December 31, 1996, 1995 and 1994, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing are included in advance payments by borrowers for taxes and
insurance, and were approximately $494,000 and $498,000 at December
31, 1996 and 1995, respectively.
(5) FORECLOSED REAL ESTATE
Activity in the allowance for losses on foreclosed real estate was as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 1,124 2,873 62
(Credit) provision charged to operations (1,500) 240 3,410
Recoveries (charge-offs), net 534 (1,989) (62)
158 1,124 3,410
Reclassification due to adoption of SFAS 114 and 118 -- -- (537)
------- ----- -----
Balance at December 31 $ 158 1,124 2,873
======= ===== =====
</TABLE>
Gain or loss on foreclosed real estate for the years ended December 31,
1996, 1995 and 1994 includes net expense of $50,000, $408,000 and
$549,000, respectively, from operation of foreclosed real estate.
(continued)
28
<PAGE> 28
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) PREMISES AND EQUIPMENT
Components of premises and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Cost:
Land $ 1,298 1,298
Premises and leasehold improvements 5,154 5,207
Furniture and equipment 5,263 5,772
-------- ------
Total cost 11,715 12,277
Less accumulated depreciation (6,391) (6,577)
-------- ------
Total $ 5,324 5,700
======== ======
</TABLE>
At December 31, 1996, the Company was obligated under noncancelable
operating leases for office space. Certain leases contain escalation
clauses providing for increased rentals based primarily on increases
in real estate taxes or in the average consumer price index. Net rent
expense under operating leases, included in occupancy expense, was
approximately $378,000, $363,000 and $341,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, future minimum rental commitments under
noncancellable leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
1997 $ 364
1998 309
1999 229
2000 54
2001 54
Thereafter 126
-------
Total $ 1,136
=======
</TABLE>
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in thousands):
<TABLE>
<CAPTION>
At December 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Loans $1,279 1,164
Securities 431 657
Total $1,710 1,821
</TABLE>
(continued)
29
<PAGE> 29
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each
with a minimum denomination of $100,000, was approximately $13.2
million and $14.2 million at December 31, 1996 and 1995,
respectively.
At December 31, 1996, the scheduled maturities of certificates of
deposit were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
1997 $ 132,990
1998 53,346
1999 13,834
2000 11,962
2001 and thereafter 2,511
---------
Total $ 214,643
=========
</TABLE>
(9) ADVANCES FROM FEDERAL HOME LOAN BANK
Maturities and interest rates of advances from the Federal Home Loan Bank
of Atlanta ("FHLB") were as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDING INTEREST AT DECEMBER 31,
DECEMBER 31, RATE 1996 1995
------------ ---- ---- ----
<S> <C> <C> <C>
1996 5.85% $ - 30,000
1997 6.95% 7,000 -
------- ------
Total $ 7,000 30,000
======= ======
</TABLE>
At December 31, 1996, the Association was required by its collateral
agreement with the FHLB to maintain qualifying first mortgage loans
in an amount equal to at least 150% of the FHLB advances outstanding
at December 31, 1996 as collateral. The Association's FHLB stock is
also pledged as collateral for such advances. The FHLB advances
outstanding at December 31, 1995 were collateralized by certain
securities with a book value of $32.2 million and a market value of
$32.6 million as allowed by the Association's collateral agreement
with the FHLB. The Association's FHLB stock was also pledged as
collateral for those advances while outstanding.
(continued)
30
<PAGE> 30
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) INCOME TAXES
The provision (credit) for income taxes is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Federal $ (16) 695 679
State -- 124 124
----- ----- ---
Total $ (16) 819 803
===== ===== ===
YEAR ENDED DECEMBER 31, 1995:
Federal (371) 864 493
State -- 148 148
----- ----- ---
Total $(371) 1,012 641
===== ===== ===
YEAR ENDED DECEMBER 31, 1994:
Federal 435 (236) 199
State 75 (40) 35
----- ----- ---
Total $ 510 (276) 234
===== ===== ===
</TABLE>
The effective tax rate on income before income taxes differs from the
U.S. statutory rate of 34%. The following summary reconciles taxes at
the U.S. statutory rate with the effective rates (dollars in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
-------------- ---------------- -------------------
Amount % Amount % Amount %
------ - ------ - ------ ---
<S> <C> <C> <C> <C> <C> <C>
Taxes on income at U.S.
statutory rate $ 817 34.0% $ 777 34.0% $ 229 34.0%
State income taxes, net of
federal tax benefit 87 3.6 82 3.6 24 3.6
Recomputed bad-debt reserve -- -- (178) (7.8) -- --
Other - net (101) (4.2) (40) (1.8) (19) (2.8)
----- ----- ------ ----- ----- -----
Taxes on income at
effective rates $ 803 33.4% $ 641 28.0% $ 234 34.7%
===== ===== ====== ===== ===== =====
</TABLE>
(continued)
31
<PAGE> 31
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) INCOME TAXES, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities related to the
following (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $1,454 1,516
Allowance for losses on foreclosed real estate 59 423
Accrued pension expense -- 141
Charitable contributions 4 --
Net operating loss carryforwards 1,601 2,149
Alternative minimum tax credit carryforwards 121 122
Unrealized depreciation on securities available for sale 4 --
------ -----
Total gross deferred tax assets 3,243 4,351
------ -----
Deferred tax liabilities:
Deferred loan fees 1,504 1,711
Federal Home Loan Bank stock 226 239
Accumulated depreciation on premises
and equipment 23 66
Unrealized appreciation on securities available for sale -- 56
Other -- 30
------ -----
Total gross deferred tax liabilities 1,753 2,102
------ -----
Deferred tax asset $1,490 2,249
====== =====
</TABLE>
With respect to the net deferred tax asset of $1.5 million at December 31,
1996, management believes that it is more likely than not that the
Company 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
Association expects to realize within the subsequent twelve-month
period. OTS guidelines require the Association to recalculate this
capital component on a quarterly basis.
(continued)
32
<PAGE> 32
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) INCOME TAXES, CONTINUED
At December 31, 1996, the Company's net operating loss carryforwards for
federal income tax purposes which are available to offset future
federal taxable income were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION AMOUNT
---------- ------
<S> <C>
2007 $ 1,324
2008 1,826
2010 980
-------
Total $ 4,130
=======
</TABLE>
Net operating loss carryforwards of $3,150,000 included above are subject
to an annual limitation of $268,000 due to section 382 of the
Internal Revenue Code. In addition, the Company has alternative
minimum tax credit carryforwards of approximately $121,000 which are
available to reduce future federal regular income taxes over an
indefinite period.
(11) PENSION AND PROFIT SHARING PLANS
Prior to 1996, the Company had a noncontributory defined benefit pension
plan ("Plan") covering all employees who meet certain eligibility
requirements. It was the Company's policy to fund the maximum amount
that could be deducted for federal income tax purposes. Prior to
1992, the Company periodically made contributions to a profit sharing
plan covering all full-time employees in amounts determined by the
Board of Directors. No contributions were made to the Plan during any
of the years in the three-year period ended December 31, 1995. During
1994, the Company decided to terminate the pension and profit sharing
plans effective December 31, 1994 and ceased accrual of benefits as
of that date. The Company submitted plan termination documents, which
were subsequently approved, to the Internal Revenue Service ("IRS")
and the Pension Benefit Guarantee Corporation for the Plan, and to
the IRS for the profit sharing plan. Distributions from the plans
were made during January and February of 1996.
The following table sets forth the Plan's status as of December 31, 1995
(in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995
----
<S> <C>
Actuarial present value of accumulated benefit obligation, including
vested benefits of $1,626 $ 1,626
=======
Accrued pension liability:
Projected benefit obligation for service rendered to date (1,626)
Plan assets at fair value 1,264
=======
Plan assets less than projected benefit obligation (362)
Unrecognized net loss 450
Unrecognized net asset being amortized over 15 years (388)
-------
Accrued pension liability included in other liabilities $ (300)
=======
</TABLE>
(continued)
33
<PAGE> 33
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) Pension and Profit Sharing Plans, Continued
Net periodic pension costs under the Plan prior to 1996 were as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1994
---- ----
<S> <C> <C>
Service cost-benefits earned during the year $ - 150
Interest cost of projected benefit obligation 75 79
Actual return on plan assets 173 (82)
Net amortization and deferral adjustments (324) (96)
------ --
Net periodic pension costs $ (76) 51
====== ==
</TABLE>
Disclosure assumptions used in accounting for the Plan as of December 31,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Weighted average discount rate 4.5% 5.0%
Rate of increase in compensation levels N/A 6.0%
Expected long-term rate of return on assets 6.0% 6.0%
</TABLE>
In connection with the plan terminations, the Company adopted a new defined
contribution profit sharing 401(k) plan (the "401(k) Plan") effective
January 1, 1995. All employees who meet certain eligibility requirements
are covered under the 401(k) Plan. Under the 401(k) Plan, an employee may
elect to contribute up to 15% of their annual compensation. Employer
contributions to the 401(k) Plan are made at the discretion of the Board of
Directors. Contributions to the 401(k) Plan for the years ended December
31, 1996 and 1995 were $78,000 and $49,000, respectively.
(12) FINANCIAL INSTRUMENTS
The Company 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 are commitments to extend
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 the Company has in
these financial instruments.
The Company'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.
The Company uses the same credit policies in making commitments as it
does for on-balance-sheet instruments.
(continued)
34
<PAGE> 34
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) FINANCIAL INSTRUMENTS, CONTINUED
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. The Company evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained by the
Company upon extension of credit is based on management's credit
evaluation of the counterparty.
The estimated fair values of the Company's financial instruments were as
follows (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 17,965 17,965 10,426 10,426
Trading securities 9,580 9,580 23,076 23,076
Securities available for sale 41,445 41,445 49,832 49,832
Securities held to maturity 15,343 15,514 17,636 17,840
Loans receivable 209,005 209,354 161,190 163,660
Loans held for sale 10,462 10,462 22,765 22,765
Accrued interest receivable 1,710 1,710 1,821 1,821
Federal Home Loan Bank stock 2,378 2,378 2,514 2,514
Financial Liabilities:
Deposits 286,927 289,326 248,936 251,116
Advances from Federal Home Loan Bank 7,000 7,000 30,000 30,000
</TABLE>
The notional amount, which approximates fair value, of the Company's
financial instruments with off-balance-sheet risk at December 31,
1996, was as follows (in thousands):
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
<S> <C>
Commitments to extend credit $ 5,062
</TABLE>
(13) SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
The Company grants real estate, commercial and consumer loans to
customers primarily in the State of Florida with the majority of such
loans in the Central Florida area. Therefore, the Company's exposure
to credit risk is significantly affected by changes in the economy of
the Central Florida 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.
(continued)
35
<PAGE> 35
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) RELATED PARTIES
Loans to directors and officers of the Company, 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 officers
were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
Beginning balance $ 793 867
Amounts related to new officers and directors 15 7
Loans originated - 7
Principal repayments (35) (88)
Ending balance $ 773 793
===== ===
</TABLE>
(15) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the
Company 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 balance sheets of the Company.
(16) RESTRICTIONS ON RETAINED EARNINGS
The Association is subject to certain restrictions on the amount of
dividends that it may declare without prior regulatory approval. At
December 31, 1996, the Association was a Tier 2 institution for
purposes of the regulations relating to capital distributions; as
such, the Association may make capital distributions of up to 75% of
its net income over the most recent four-quarter period (depending on
its risk-based capital level) without prior regulatory approval.
(17) REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet
specific capital guidelines that involve quantitative measures of the
Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Association'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 Association to maintain minimum amounts (set forth in the
following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined). Management
believes, as of December 31, 1996, that the Association meets all
capital adequacy requirements to which it is subject.
(continued)
36
<PAGE> 36
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) REGULATORY MATTERS, CONTINUED
As of December 31, 1996, the most recent notification from the OTS
categorized the Association as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Association must maintain minimum Tier I (core), Tier
I (risk-based) and total risk-based capital ratios as set forth
below. There are no conditions or events since that notification that
management believes have changed the Association's category.
The Association's actual capital amounts and ratios at December 31, 1996
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM CAPITALIZED
FOR CAPITAL FOR PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
----------------- ----------------- ---------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
----- ------ ----- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, and
ratio to total assets 6.4% $ 20,167
Less - nonincludable portion
of deferred tax asset
and mortgage
servicing rights (1,401)
Add back - unrealized
depreciation on
available-for-sale
securities 6
---------
Tangible capital, and ratio
to adjusted total assets 5.9% $ 18,772 1.5% $ 4,734
========= ========
Tier 1 (core) capital, and
ratio to adjusted total
assets 5.9% $ 18,772 3.0% $ 9,469 5.0% $ 15,782
========= ======== ========
Tier 1 capital, and ratio
to risk-weighted assets 11.1% 18,772 4.0% $ 6,786 6.0% $ 10,179
========= ======== ========
Tier 2 capital (excess allowance
for loan losses) 2,154
---------
Total risk-based capital,
and ratio to risk-
weighted assets 12.3% $ 20,926 8.0% $ 13,572 10.0% $ 16,965
========= ======== ========
Total assets $ 317,024
=========
Adjusted total assets $ 315,630
=========
Risk-weighted assets $ 169,647
=========
</TABLE>
(continued)
37
<PAGE> 37
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) 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 Association, 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
special assessment was recognized in the third quarter and is tax
deductible. The Association recorded a charge of $1.5 million before
taxes as a result of the FDIC special assessment.
Beginning on January 1, 1997, BIF members will pay a portion of the FICO
payment equal to 1.3 basis points on BIF-insured deposits, compared
to 6.48 basis points payable by SAIF members on SAIF-insured
deposits, and will pay a pro rata share of the FICO payment on the
earlier of January 1, 2000 or the date upon which the last savings
association, such as the Association, ceases to exist. The
legislation also requires BIF and SAIF to be merged by January 1,
1999 provided that subsequent legislation is adopted to eliminate the
savings association charter and no savings associations remain as of
that time.
The FDIC recently lowered SAIF assessments to a range comparable to those
of BIF members, however, SAIF members will continue to pay the higher
FICO payments described above. Management cannot predict the level of
FDIC insurance assessments on an ongoing basis or whether the BIF and
SAIF will eventually be merged.
(18) STOCK OPTION PLAN
In 1988, the Company adopted a stock option program (the "Program") for
the benefit of its directors, officers and other selected key
employees of the Company. Four kinds of rights are contained in the
program and are available for grant: incentive stock options (options
to purchase common stock, granted to officers and key employees),
compensatory stock options (options to purchase common stock, granted
to directors), stock appreciation rights and performance share
awards. A total of 241,500 shares of common stock were reserved for
issuance pursuant to the exercise of stock options under the Program.
As of December 31, 1996, the Company had granted incentive stock
options and compensatory stock options as discussed in more detail
below. No stock appreciation rights or performance share awards have
been issued to date. The Program provides that incentive stock
options and compensatory stock options are granted to purchase stock
at the market value of the stock at the date of the grant; such
grants are exercisable immediately for compensatory stock options,
and ratably over a three-year period for incentive stock options. All
stock options expire at the earlier of ten years from the date of the
grant, or three months after the director, officer or employee ceases
employment with the Company.
(continued)
38
<PAGE> 38
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(18) STOCK OPTION PLAN, CONTINUED
During 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 applies to stock-based
compensation under the Company's Program. As allowed by SFAS 123, the
Company elected to continue to measure compensation cost for the
options or shares granted under the Program using the intrinsic value
method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Under that accounting method, the
Company recorded no compensation expense related to the Program
during the years ended December 31, 1996, 1995 and 1994.
During the years ended December 31, 1996 and 1995, 47,000 and 52,100
options were granted under the Program. If compensation cost for the
Program had been determined based on the fair value of the awards at
the grant date, using the fair value method defined in SFAS 123, the
Company's net income and net income per share for 1996 and 1995 would
not have been materially reduced.
The stock option transactions were as follows:
<TABLE>
<CAPTION>
INCENTIVE COMPENSATORY
STOCK OPTIONS STOCK OPTIONS
--------------------------- --------------------------
OPTION PRICE OPTION PRICE
SHARES PER SHARE SHARES PER SHARE
------ --------- ------ ---------
<S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1993 133,125 $ 2.13 15,813 $ 2.13
Granted 10,000 $ 2.13 - -
------- ------
Outstanding, December 31, 1994 143,125 $ 2.13 15,813 $ 2.13
Granted 52,100 $ 2.25 - -
Cancelled or expired (10,000) $ 2.13 (2,875) $ 2.13
------- ------
Outstanding, December 31, 1995 185,225 $2.13 - $ 2.25 12,938 $ 2.13
Granted 47,000 $ 2.75 - -
Cancelled or expired (37,600) $2.13 - $ 2.25 (4,313) $ 2.13
------- ------
Outstanding, December 31, 1996 194,625 $2.13 - $ 2.75 8,625 $ 2.13
======= ======
</TABLE>
At December 31, 1996, the weighted-average option price per share for
the incentive stock options was $2.30 and for the compensatory stock
options was $2.13. The weighted- average option price per share of
all options under the Program at December 31, 1996 was $2.29. Of the
total incentive stock options outstanding at December 31, 1996, 1995
and 1994, 114,624, 82,083 and 44,375, respectively, were exercisable.
(continued)
39
<PAGE> 39
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(19) PARENT COMPANY ONLY FINANCIAL STATEMENTS
Condensed financial statements of the Holding Company are presented below.
Amounts shown as investment in wholly-owned subsidiaries and equity
in earnings of subsidiaries are eliminated in consolidation (in
thousands).
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash, deposited with subsidiary $ 113 117
Investment in wholly-owned subsidiaries 20,167 18,663
------- ------
Total $20,280 18,780
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities -- --
Stockholders' equity 20,280 18,780
Total $20,280 18,780
======= ======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income:
Equity in undistributed earnings of subsidiaries $ 1,604 1,591 379
Other income 120 120 120
Expense (124) (65) (59)
------- ----- ---
Net income $ 1,600 1,646 440
======= ===== ===
</TABLE>
(continued)
40
<PAGE> 40
F.F.O. FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(19) PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------ ---- ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 1,600 1,646 440
Adjustments to reconcile net earnings to net cash
(used in) provided by operations:
Equity in earnings of subsidiaries (1,604) (1,591) (379)
------- ----- ---
Net cash (used in) provided by operating activities (4) 55 61
------- ----- ---
Cash Flows from Financing Activities:
Proceeds from sale of common stock -- -- 2,400
Investment in subsidiary -- -- (2,400)
------- ----- ---
Net cash provided by financing activities -- -- --
------- ----- ---
Net (decrease) increase in cash (4) 55 61
Cash at beginning of year 117 62 1
------- ----- ---
Cash at end of year $ 113 117 62
======= ===== ===
</TABLE>
(20) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present summarized quarterly data (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Interest income $5,466 5,398 5,340 5,793 21,997
Interest expense 3,140 2,942 2,824 3,117 12,023
------ ----- ----- ----- ------
Net interest income 2,326 2,456 2,516 2,676 9,974
Provision for loan losses 150 -- 7 625 782
------ ----- ----- ----- ------
Net interest income
after provision for loan losses 2,176 2,456 2,509 2,051 9,192
Noninterest income 304 563 535 985 2,387
Noninterest expenses 2,391 2,187 3,771 827 9,176
------ ----- ----- ----- ------
Income (loss) before income taxes 89 832 (727) 2,209 2,403
Provision (credit) for income taxes 33 310 (270) 730 803
------ ----- ----- ----- ------
Net income (loss) $ 56 522 (457) 1,479 1,600
====== ===== ===== ===== ======
Income (loss) per share $ .01 .06 (.05) .17 .19
====== ===== ===== ===== ======
</TABLE>
(continued)
41
<PAGE> 41
F.F.O. FINANCIAL GROUP, INC.
Notes to Consolidated Financial Statements, Continued
(20) QUARTERLY FINANCIAL DATA (UNAUDITED), CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Interest income $4,978 4,780 4,897 5,075 19,730
Interest expense 2,259 2,477 2,616 2,759 10,111
------ ----- ----- ----- ------
Net interest income 2,719 2,303 2,281 2,316 9,619
Provision for loan losses 141 30 154 152 477
------ ----- ----- ----- ------
Net interest income
after provision for loan losses 2,578 2,273 2,127 2,164 9,142
Noninterest income 663 665 604 670 2,602
Noninterest expenses 2,530 2,428 2,182 2,317 9,457
------ ----- ----- ----- ------
Income before income taxes 711 510 549 517 2,287
Provision for income taxes 250 174 190 27 641
------ ----- ----- ----- ------
Net income $ 461 336 359 490 1,646
====== ===== ===== ===== ======
Income per share $ .05 .04 .05 .06 .20
====== ===== ===== ===== ======
</TABLE>
(21) SUBSEQUENT EVENT - PENDING MERGER
On March 10, 1997, the Holding Company executed a Letter of Intent to
merge with 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 F.F.O.'s common stock at
an exchange ratio of .29 share of Republic common stock for each
share of F.F.O. common stock. The exchange ratio may be adjusted for
decreases in Republic's stock price, but in no event will the
exchange ratio exceed .30 share of Republic common stock for each
share of F.F.O. common stock. F.F.O. has the right to terminate the
transaction if Republic's stock price is less than $13.50 shortly
before closing. Outstanding options for F.F.O.'s common stock will be
converted into options for Republic common stock on the same terms.
The transaction is expected to be completed in 1997, and is to be
accounted for as a corporate reorganization under which the
controlling shareholder's interest in F.F.O. will be carried forward
at its historical cost while the minority interest in F.F.O. will be
recorded at fair value. The proposed merger is subject to completion
of a definitive agreement, approval by the respective shareholders of
F.F.O. and Republic, and approval by applicable regulatory
authorities. Upon completion of the proposed merger, the
then-outstanding options under the Company's stock option program
(see Note 18) will become immediately exercisable.
42
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
The Board of Directors
F.F.O. Financial Group, Inc.
St. Cloud, Florida:
We have audited the accompanying consolidated balance sheets of F.F.O.
Financial Group, Inc. and Subsidiaries (the "Company") as of December 31, 1996
and 1995 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the
Company as of December 31, 1996 and 1995 and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.
HACKER, JOHNSON, COHEN & GRIEB
Orlando, Florida
February 11, 1997, except for Note 21,
as to which the date is March 11, 1997
43
<PAGE> 43
F.F.O. FINANCIAL GROUP, INC. CORPORATE OFFICE
2013 LIVE OAK BOULEVARD
ST. CLOUD, FL 34771-8462
FIRST FEDERAL/OSCEOLA BRANCH OFFICE LOCATIONS
<TABLE>
<CAPTION>
OSCEOLA COUNTY BREVARD COUNTY
<S> <C>
BROADWAY (Main Office) MELBOURNE
200 East Broadway (34741-5791) 1300 Babcock Street
P. O. Box 421708 Melbourne, FL 32901-3097
Kissimmee, FL 34742-1708 (407) 984-3100
(407) 846-3000
IMPERIAL PLAZA
BERMUDA Building B, Suite 100
1115 North Bermuda Avenue 6769 North Wickham Road
Kissimmee, FL 34741-4209 Melbourne, FL 32940-2019
(407) 846-2171 (407) 255-3300
MILL CREEK CAUSEWAY
1300 East Vine Street 450 East Eau Gallie Boulevard
Kissimmee, FL 34744-3620 Indian Harbour Beach, FL 32937-4207
(407) 847-5566 (407) 773-5000
NINTH STREET MELBOURNE BEACH
1220 Ninth Street 401 Ocean Avenue
St. Cloud, FL 34769-3376 Melbourne Beach, FL 32951-2567
(407) 892-2181 (407) 725-7420
OAK PARK PALM BAY
4291 13th Street 6000 Babcock Street, SE
St. Cloud, FL 34769-6730 Palm Bay, FL 32909-3921
(407) 892-2191 (407) 768-2811
ORANGE COUNTY
WINTER GARDEN
232 South Dillard Street
Winter Garden, FL 32787-3510
(407) 656-5100
</TABLE>
44
<PAGE> 44
CORPORATE INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
DONALD S. BROWN, D.V.M.
Director, D. Brown Enterprises
JAMES B. DAVIS
Director, President and Chief Executive Officer
WILLIAM R. HOUGH
Director, President of William R. Hough & Co.
ALFRED T. MAY
Chairman of the Board
EDWARD A. MOORE
Director, Vice President of Poe & Brown Insurance
MILDRED W. PIERSON
Director, Retired Savings and Loan Executive
PHYLLIS A. ELAM
Senior Vice President, Chief Financial Officer and Corporate Secretary
- -----------------------------------------
Common Stock Data
F.F.O. Financial Group, Inc.'s Common Stock is traded on the NASDAQ Small
Cap Market System under the symbol "FFFG."
The following table sets forth, for the periods indicated, the range of
high and low bid prices for the Common Stock quoted on the NASDAQ Small Cap
Market System. Stock price data reflects inter-dealer prices, without retail
markup, markdown or commission, and may not necessarily represent actual
transactions. Because the Common Stock is not actively traded, the prices
indicated below may not be an accurate indication of the Common Stock's actual
value.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
December 31, 1996 4 2 3/4
September 30, 1996 3 1/8 2 1/2
June 30, 1996 3 1/2 2 5/8
March 31, 1996 2 7/8 2 3/8
December 31, 1995 2 5/8 2 1/4
September 30, 1995 2 1/2 2 3/8
June 30, 1995 2 3/8 2 1/4
March 31, 1995 2 1/4 2 1/8
</TABLE>
The prices shown in the table above are not necessarily reflective of
current or future prices. As of December 31, 1996, no dividends had been
declared or paid on the Company's Common Stock. The Board of Directors of the
Company anticipates that for the foreseeable future any earnings of the
Association and the Company will be retained for purposes of enhancing the
Company's or the Association's capital position and for other purposes.
As of December 31, 1996, the Company's 8,430,000 outstanding shares of
Common Stock were held by 684 stockholders of record.
TRANSFER AGENT
ChaseMellon Shareholder Services
3rd Floor
4 Station Square
Pittsburgh, Pennsylvania 15219
INDEPENDENT AUDITORS
Hacker, Johnson, Cohen & Grieb
930 Woodcock Road, Suite 211
Orlando, Florida 32803
SPECIAL COUNSEL
Smith, Mackinnon, Harris, Greeley,
Bowdoin & Edwards, P.A.
Citrus Tower
255 South Orange Avenue, Suite 800
Orlando, Florida 32801
ANNUAL MEETING
The annual meeting of stockholders is scheduled for April,23, 1997, 10:00 a.m.,
at the Osceola County Stadium Clubhouse, 1000 Bill Beck Boulevard, Kissimmee,
Florida. Holders of record of the Company's Common Stock as of February 28,
1997 will be eligible to vote.
FORM 10-K
A copy of the Company's 1996 Annual Report on Form 10-K as filed with the U.S.
Securities and Exchange Commission will be furnished without charge (excluding
exhibits) to shareholders upon written request to:
Shareholder Relations
F.F.O. Financial Group, Inc.
2013 Live Oak Boulevard
St. Cloud, Florida 34771-8462
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000836819
<NAME> F.F.O. FINANCIAL GROUP, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,300
<INT-BEARING-DEPOSITS> 11,665
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 9,580
<INVESTMENTS-HELD-FOR-SALE> 41,445
<INVESTMENTS-CARRYING> 15,343
<INVESTMENTS-MARKET> 15,514
<LOANS> 219,467
<ALLOWANCE> 5,613
<TOTAL-ASSETS> 316,949
<DEPOSITS> 286,927
<SHORT-TERM> 7,000
<LIABILITIES-OTHER> 2,742
<LONG-TERM> 0
0
0
<COMMON> 843
<OTHER-SE> 19,437
<TOTAL-LIABILITIES-AND-EQUITY> 316,949
<INTEREST-LOAN> 16,712
<INTEREST-INVEST> 4,917
<INTEREST-OTHER> 368
<INTEREST-TOTAL> 21,997
<INTEREST-DEPOSIT> 11,710
<INTEREST-EXPENSE> 12,023
<INTEREST-INCOME-NET> 9,192
<LOAN-LOSSES> 782
<SECURITIES-GAINS> (109)
<EXPENSE-OTHER> 9,176
<INCOME-PRETAX> 2,403
<INCOME-PRE-EXTRAORDINARY> 1,600
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,600
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
<YIELD-ACTUAL> 7.60
<LOANS-NON> 4,058
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,862
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,138
<CHARGE-OFFS> (337)
<RECOVERIES> 30
<ALLOWANCE-CLOSE> 5,613
<ALLOWANCE-DOMESTIC> 5,613
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
