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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B)
OR 12(G) OF THE SECURITIES ACT OF 1934
KEY FLORIDA BANCORP, INC.
(Name of Small Business Issuer in Its Charter)
Florida 65-0105205
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6016 26th Street West, Suite 1, Bradenton, Florida 34207
(Address of Principal Executive Offices) (Zip Code)
(941) 751-4460
(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Key Florida Bancorp, Inc. ("Bancorp") was incorporated under the laws
of the State of Florida on July 26, 1988. Bancorp is a registered bank company
and owns all of the voting shares of Liberty National Bank ("LNB"). Bancorp has
no significant operations other than owning the stock of LNB. LNB, which is a
national banking association, is the only source of revenue for Bancorp.
On July 30, 1996, Bancorp closed the merger of Key Florida Bank, F.S.B.
("KFB"), which was a wholly-owned subsidiary of Bancorp at the time of the
merger, with and into LNB. In the merger, the outstanding shares of LNB common
stock were converted into an aggregate of 2,739,847 shares of Bancorp common
stock, par value $.01 per share ("Bancorp Common Stock").
LNB provides a range of consumer and commercial banking services to
individuals, businesses and industries. The basic services offered by LNB
include: demand interest bearing and noninterest bearing accounts, money market
deposit accounts, NOW accounts, time deposits, safe deposit services, credit
cards, cash management, direct deposits, notary services, money orders, night
depository, travelers' checks, cashier's checks, domestic collections, savings
bonds, bank drafts, automated teller services, drive-in tellers, and banking by
mail. In addition, LNB makes secured and unsecured commercial and real estate
loans and issues stand-by letters of credit. LNB provides automated teller
machine (ATM) cards, as a part of the HONOR ATM network, thereby permitting
customers to utilize the convenience of larger ATM networks. In addition to the
foregoing services, the offices of LNB provide customers with extended banking
hours. LNB does not have trust powers and, accordingly, no trust services are
provided.
The revenues of LNB are primarily derived from interest on, and fees
received in connection with, real estate and other loans, and from interest and
dividends from investment and mortgage-backed securities, and short-term
investments. The principal sources of funds for LNB's lending activities are its
deposits, repayment of loans, the sale and maturity of investment securities,
and borrowings from the Federal Home Loan Bank of Atlanta. The principal
expenses of LNB are the interest paid on deposits, and operating and general
administrative expenses.
As is the case with banking institutions generally, LNB's operations
are materially and significantly influenced by general economic conditions and
by related monetary and fiscal policies of financial institution regulatory
agencies, including the Board of Governors of the Federal Reserve System
("Federal Reserve") and the Office of the Comptroller of the Currency ("OCC").
Deposit flows and costs of funds are influenced by interest rates on competing
investments and general market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing may be
offered and other factors affecting local demand and availability of funds. LNB
faces strong competition in the attraction of deposits (its primary source of
lendable funds) and in the origination of loans. See "Competition."
As of September 30, 1996, Bancorp had total consolidated assets of $198
million, total consolidated deposits of $183.9 million, and total consolidated
shareholders' equity of $12.9 million. The principal executive offices of
Bancorp are located at 6016 26th Street West, Suite 1, Bradenton, Florida 34207.
The telephone number at such office is (941) 751-4460.
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LENDING ACTIVITIES
LNB offers a range of lending services, including real estate, consumer
and commercial loans, to individuals and small businesses and other
organizations that are located in or conduct a substantial portion of their
business in LNB's market area. LNB's total loans at September 30, 1996 were $147
million, or 74% of total assets. The interest rates charged on loans vary with
the degree of risk, maturity, and amount of the loan, and are further subject to
competitive pressures, money market rates, availability of funds, and government
regulations. LNB has no foreign loans or loans for highly leveraged
transactions.
LNB's primary market area consists of Manatee County, and portions of
Sarasota County, Florida. This area is located approximately 40 miles south of
Tampa. The principal economic activities of the area include tourism, retail
trade, manufacturing, and services. There is no assurance that this area will
experience economic growth. Adverse conditions in any one or more of the
industries operating in Manatee or Sarasota County or a slow-down in general
economic conditions could have an adverse effect on Bancorp (and LNB).
LNB's loans are concentrated in three major areas: commercial loans,
real estate loans, and consumer loans. Approximately 13% of LNB's loan portfolio
at September 30, 1996 consisted of commercial loans. A majority of LNB's loans
are made on a secured basis. As of September 30, 1996, approximately 83% of the
loan portfolio consisted of loans secured by mortgages on real estate.
LNB's commercial loans include loans to individuals and small-to-medium
sized businesses located primarily in Manatee and Sarasota Counties for working
capital, equipment purchases, and various other business purposes. A majority of
LNB's commercial loans are secured by equipment or similar assets, but these
loans may also be made on an unsecured basis. Commercial loans may be made at
variable or fixed rates of interest. Commercial lines of credit are typically
granted on a one-year basis, with loan covenants and monetary thresholds. Other
commercial loans with terms or amortization schedules of longer than one year
will normally carry interest rates which vary with the prime lending rate and
will become payable in full and are generally refinanced in three to five years.
LNB's real estate loans are secured by mortgages and consist primarily
of loans to individuals and businesses for the purchase, improvement of or
investment in real estate and for the construction of single-family residential
units or the development of single-family residential building lots. These real
estate loans may be made at fixed or variable interest rates. LNB generally does
not make fixed-rate commercial real estate loans for terms exceeding five years.
Loans in excess of three years are generally adjustable. LNB's residential real
estate loans generally are repayable in monthly installments based on up to a
30-year amortization schedule with variable and fixed interest rates.
LNB's consumer loan portfolio consists primarily of loans to
individuals for various consumer purposes, but includes some business purpose
loans which are payable on an installment basis. The majority of these loans are
for terms of less than five years and are secured by liens on various personal
assets of the borrowers, but consumer loans may also be made on an unsecured
basis. Consumer loans are made at fixed and variable interest rates, and are
often based on up to a five-year amortization schedule.
For additional information regarding LNB's loan portfolio, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition."
Loan originations are derived from a number of sources. Loan
originations are derived from a number of sources, including direct solicitation
by LNB's loan officers, existing customers and borrowers, advertising, walk-in
customers and, in some instances, referrals from brokers.
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Certain credit risks are inherent in making loans. These include
prepayment risks, risks resulting from uncertainties in the future value of
collateral, risks resulting from changes in economic and industry conditions,
and risks inherent in dealing with individual borrowers. In particular, longer
maturities increase the risk that economic conditions will change and adversely
affect collectibility. LNB attempts to minimize loan losses through various
means. In particular, on larger credits, LNB generally relies on the cash flow
of a debtor as the source of repayment and secondarily on the value of the
underlying collateral. In addition, LNB attempts to utilize shorter loan terms
in order to reduce the risk of a decline in the value of such collateral.
DEPOSIT ACTIVITIES
Deposits are the major source of LNB's funds for lending and other
investment activities. LNB considers the majority of its regular savings,
demand, NOW and money market deposit accounts to be core deposits. These
accounts comprised approximately 33% of LNB's total deposits at September 30,
1996. Approximately 67% of LNB's deposits at September 30, 1996 were
certificates of deposit. Generally, LNB attempts to maintain the rates paid on
its deposits at a competitive level. Time deposits of $100,000 and over made up
approximately 10% of LNB's total deposits at September 30, 1996. The majority of
the deposits of LNB are generated from Manatee County. LNB does not accept
brokered deposits. For additional information regarding LNB's deposit accounts,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition."
INVESTMENTS
LNB invests a portion of its assets in U.S. Treasury and U.S.
Government agency obligations, FHLMC and FNMA mortgage-backed securities, state,
county and municipal obligations, certificates of deposit, collateralized
mortgage obligations ("CMO's"), and federal funds sold. LNB's investments are
managed in relation to loan demand and deposit growth, and are generally used to
provide for the investment of excess funds at reduced yields and risks relative
to yields and risks of the loan portfolio, while providing liquidity to fund
increases in loan demand or to offset fluctuations in deposits. For additional
information relating to Bancorp's investments, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial Condition
- -- Investment Securities" and Note 5 to the Notes to Bancorp's Consolidated
Financial Statements.
SUPERVISION AND REGULATION
Bank Holding Company Regulation. Bancorp is a one-bank holding company,
registered with the Federal Reserve under the Bank Holding Company Act of 1956
("BHC Act"). As such, Bancorp is subject to the supervision, examination, and
reporting requirements of the BHC Act and the regulations of the Federal
Reserve. Bancorp is required to furnish to the Federal Reserve an annual report
of its operations at the end of each fiscal year, and such additional
information as the Federal Reserve may require pursuant to the BHC Act.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before (i) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or control
more than 5% of the total voting shares of the bank, (ii) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of the bank, or (iii) it may merge or consolidate with any other bank
holding company.
The BHC Act further provides that the Federal Reserve may not approve
any transaction that would result in a monopoly or would be in furtherance of
any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any section of the United States, or the effect of which
may be substantially to lessen
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competition or to tend to create a monopoly in any section of the country, or
that in any other manner would be in restraint of trade, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by
the public interest in meeting the convenience and needs of the community to be
served. The Federal Reserve is also required to consider the financial and
managerial resources and future prospects of the bank holding companies and
banks concerned and the convenience and needs of the community to be served.
Consideration of financial resources generally focuses on capital adequacy and
consideration of convenience and needs issues includes the parties' performance
under the Community Reinvestment Act of 1977 (the "CRA"), both of which are
discussed below.
The BHC Act generally prohibits Bancorp from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by the
Federal Reserve to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In determining whether a particular
activity is permissible, the Federal Reserve must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interests, or
unsound banking practices. For example, factoring accounts receivable, acquiring
or servicing loans, leasing personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and performing certain
insurance underwriting activities all have been determined by the Federal
Reserve to be permissible activities of bank holding companies. Despite prior
approval, the Federal Reserve has the power to order a bank holding company or
its subsidiaries to terminate any activity or to terminate its ownership or
control of any subsidiary when it has reasonable cause to believe that
continuation of such activity or such ownership or control constitutes a serious
risk to the financial safety, soundness, or stability of any bank subsidiary of
that bank holding company.
Banks are subject to the provisions of the CRA. Under the terms of the
CRA, the appropriate federal bank regulatory agency is required, in connection
with its examination of a bank, to assess such bank's record in meeting the
credit needs of the community served by that bank, including low- and
moderate-income neighborhoods. The regulatory agency's assessment of the bank's
record is made available to the public. Further, such assessment is required of
any bank which has applied to (i) charter a national bank, (ii) obtain deposit
insurance coverage for a newly chartered institution, (iii) establish a new
branch office that will accept deposits, (iv) relocate an office, or (v) merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution. In the case of a bank holding company
applying for approval to acquire a bank or other bank holding company, the
Federal Reserve will assess the record of each subsidiary bank of the applicant
bank holding company, and such records may be the basis for denying the
application.
Bank Regulation. LNB is chartered under the laws of the United States
and its deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC") to the extent provided by law. LNB is subject to comprehensive
regulation, examination and supervision by the OCC and to other laws and
regulations applicable to banks. Such regulations include limitations on loans
to a single borrower and to its directors, officers and employees; restrictions
on the opening and closing of branch offices; the maintenance of required
capital and liquidity ratios; the granting of credit under equal and fair
conditions; and the disclosure of the costs and terms of such credit. LNB is
examined periodically by the OCC to whom it submits periodic reports regarding
its financial condition and other matters. The OCC has a broad range of powers
to enforce regulations under its jurisdiction, and to take discretionary actions
determined to be for the protection of the safety and soundness of national
banks, including the institution of cease and desist orders and the removal of
directors and officers. The OCC also has the authority to approve or disapprove
mergers, consolidations, and similar corporate actions.
Under federal law, federally insured banks are subject, with certain
exceptions, to certain restrictions on any extension of credit to their parent
holding companies or other affiliates, on investment in the stock or other
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securities of affiliates, and on the taking of such stock or securities as
collateral from any borrower. In addition, such banks are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or the providing of any property or service.
In 1989, the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") was enacted. FIRREA contains major regulatory reforms,
stronger capital standards for savings and loan associations and stronger civil
and criminal enforcement provisions. FIRREA also provides that a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC insured depository
institution, or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC insured institution in danger of default.
In 1991, the FDIC Improvement Act of 1991 ("FDICIA") was enacted.
FDICIA made a number of reforms addressing the safety and soundness of deposit
insurance funds, supervision, accounting, and prompt regulatory action, and also
implements other regulatory improvements. Annual full-scope, on-site
examinations are required of all insured depository institutions. The cost for
conducting an examination of an institution may be assessed to that institution,
with special consideration given to affiliates and any penalties imposed for
failure to provide information requested. Insured state banks also are precluded
from engaging as principal in any type of activity that is impermissible for a
national bank, including activities relating to insurance and equity
investments. FDICIA also recodified current law restricting extensions of credit
to insiders under the Federal Reserve Act.
Dividends. Dividends from LNB constitute the primary source of funds
for dividends to be paid by Bancorp. There are various statutory and contractual
limitations on the ability of LNB to pay dividends, extend credit, or otherwise
supply funds to Bancorp. The Federal Reserve and the OCC also have the general
authority to limit the dividends paid by bank holding companies and national
banks, respectively, if such payment may be deemed to constitute an unsafe and
unsound practice. The declaration and payment of dividends by a national bank
are subject to the national banking laws and the rules and regulations of the
OCC governing the manner and amount of dividends which may be paid to
shareholders and the methods, if any, by which permanent capital reserves may be
retired or reduced. Under the national banking laws, a national bank may not pay
dividends from its capital; all dividends must be paid out of net profits, after
deducting for expenses. A national bank also is precluded from declaring a
dividend until its surplus equals its stated capital, unless there has been
transferred to surplus no less than 1/10th of the bank's net profits for the
preceding two consecutive half-year periods (in the case of an annual dividend).
The approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years, plus
any required transfers to surplus. Florida law applicable to companies
(including Bancorp) provides that dividends may be declared and paid only if,
after giving it effect, (i) the company is able to pay its debts as they become
due in the usual course of business, and (ii) the company's total assets would
be greater than the sum of its total liabilities plus the amount that would be
needed if the company were to be dissolved at the time of the dividend to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the dividend.
Effect of Governmental Policies. The earnings and business of Bancorp
and LNB are effected by the policies of various regulatory authorities of the
United States, especially the Federal Reserve. The Federal Reserve, among other
things, regulates the supply of credit and deals with general economic
conditions within the United States. The instruments of monetary policy employed
by the Federal Reserve for those purposes influence in various ways the overall
level of investments, loans, other extensions of credits, and deposits, and the
interest rates paid on liabilities and received on assets.
Enforcement Powers. Congress has provided the federal bank regulatory
agencies with an array of powers to enforce laws, rules, regulations and orders.
Among other things, the agencies may require that institutions cease and desist
from certain activities, may preclude persons from participating in the affairs
of insured depository
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institutions, may suspend or remove deposit insurance, and may impose civil
money penalties against institution-affiliated parties for certain violations.
Maximum Legal Interest Rates. Like the laws of many states, Florida law
contains provisions on interest rates that may be charged by banks and other
lenders on certain types of loans. Numerous exceptions exist to the general
interest limitations imposed by Florida law. The relative importance of these
interest limitation laws to the financial operations of LNB will vary from time
to time, depending on a number of factors, including conditions in the money
markets, the costs and availability of funds, and prevailing interest rates.
Bank Branching. Banks in Florida are permitted to branch state wide.
Such branch banking by national banks, however, is subject to prior approval by
the OCC. Any such approval would take into consideration several factors,
including the bank's level of capital, the prospects and economics of the
proposed branch office, and other conditions deemed relevant by the OCC for
purposes of determining whether approval should be granted to open a branch
office.
Change of Control. Federal law restricts the amount of voting stock of
a bank holding company and a bank that a person may acquire without the prior
approval of banking regulators. The overall effect of such laws is to make it
more difficult to acquire a bank holding company and a bank by tender offer or
similar means than it might be to acquire control of another type of
corporation. Consequently, shareholders of Bancorp may be less likely to benefit
from the rapid increases in stock prices that may result from tender offers or
similar efforts to acquire control of other companies. Federal law also imposes
restrictions on acquisitions of stock in a bank holding company and a state
bank. Under the federal Change in Bank Control Act and the regulations
thereunder, a person or group must give advance notice to the Federal Reserve
before acquiring control of any bank holding company and the OCC before
acquiring control of any national bank (such as LNB). Upon receipt of such
notice, the Federal Reserve and the OCC, as the case may be, may approve or
disapprove the acquisition. The Change in Bank Control Act creates a rebuttable
presumption of control if a member or group acquires a certain percentage or
more of a bank holding company's or bank's voting stock, or if one or more other
control factors set forth in the Act are present.
Insurance of Deposits. LNB's deposit accounts are insured by the FDIC
up to a maximum of $100,000 per insured depositor. The FDIC issues regulations,
conducts periodic examinations, requires the filing of reports and generally
supervises the operations of its insured banks. Any insured bank which is not
operated in accordance with or does not conform to FDIC regulations, policies
and directives may be sanctioned for non-compliance. Proceedings may be
instituted against any insured bank or any director, officer, or employee of
such bank engaging in unsafe and unsound practices, including the violation of
applicable laws and regulations. The FDIC has the authority to terminate
insurance of accounts pursuant to procedures established for that purpose.
Capital Requirements. The federal bank regulatory authorities have
adopted risk-based capital guidelines for banks and bank holding companies that
are designed to make regulatory capital requirements more sensitive to
differences in risk profile among banks and bank holding companies. The
resulting capital ratios represent qualifying capital as a percentage of total
risk-weighted assets and off-balance sheet items. The guidelines are minimums,
and the federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain all ratios well in excess of
the minimums. The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital
includes common stockholders' equity, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but excludes
goodwill and most other intangibles and excludes the allowance for loan and
lease losses. Tier 2 capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred stock, and
general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
At September 30, 1996,
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(i) Bancorp's Tier 1 and total risk-based capital ratios were 8.86% and 10.2%,
respectively, and (ii) LNB's Tier 1 and total risk-based capital ratios were
9.21% and 10.23%, respectively.
FDICIA contains "prompt corrective action" provisions pursuant to which
banks are to be classified into one of five categories based upon capital
adequacy, ranging from "well capitalized" to "critically undercapitalized" and
which require (subject to certain exceptions) the appropriate federal banking
agency to take prompt corrective action with respect to an institution which
becomes "significantly undercapitalized" or "critically undercapitalized".
The FDIC has issued regulations to implement the "prompt corrective
action" provisions of FDICIA. In general, the regulations define the five
capital categories as follows: (i) an institution is "well capitalized" if it
has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based
capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not
subject to any written capital order or directive to meet and maintain a
specific capital level for any capital measures; (ii) an institution is
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a
leverage ratio of 4% or greater; (iii) an institution is "undercapitalized" if
it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based
capital ratio that is less than 4% or has a leverage ratio that is less than 4%;
(iv) an institution is "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio
that is less than 3% or a leverage ratio that is less than 3%; and (v) an
institution is "critically undercapitalized" if its "tangible equity" is equal
to or less than 2% of its total assets. The FDIC also, after an opportunity for
a hearing, has authority to downgrade an institution from "well capitalized" to
"adequately capitalized" or to subject an "adequately capitalized" or
"under-capitalized" institution to the supervisory actions applicable to the
next lower category, for supervisory concerns. As of September 30, 1996, LNB had
a total risk-based capital ratio of 10.23%, a Tier 1 risk-based capital ratio of
9.21%, and a leverage ratio of 6.69%.
Additionally, FDICIA requires, among other things, that (i) only a
"well capitalized" depository institution may accept brokered deposits without
prior regulatory approval and (ii) the appropriate federal banking agency
annually examine all insured depository institutions, with some exceptions for
small, "well capitalized" institutions and state-chartered institutions examined
by state regulators. FDICIA also contains a number of consumer banking
provisions, including disclosure requirements and substantive contractual
limitations with respect to deposit accounts.
Interstate Banking. The Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 provides for nationwide interstate banking and branching.
Under the law, interstate acquisitions of banks or bank holding companies in any
state by bank holding companies in any other state is permissible subject to
certain limitations. Florida also has 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 three
years. Interstate branching and consolidation of existing bank subsidiaries in
different states will be permissible beginning June 1, 1997. Out-of-state banks
that do not operate a branch in Florida are prohibited from establishing a de
novo branch in Florida. Beginning June 1, 1997, a Florida bank may establish,
maintain, and operate one or more branches in a state other than Florida
pursuant to an interstate merger transaction in which the Florida bank is the
resulting bank. An interstate merger transaction resulting in the acquisition by
an out-of-state bank of a Florida bank is not permitted unless the Florida bank
has been in existence and continuously operating, on the day of the acquisition,
for more than three years.
INDUSTRY RESTRUCTURING
For well over a decade, the banking industry has been undergoing a
restructuring process which is anticipated to continue. The restructuring has
been caused by product and technological innovations in the financial services
industry, deregulation of interest rates, and increased competition from foreign
and nontraditional banking
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competitors, and has been characterized principally by the gradual erosion of
geographic barriers to intrastate and interstate banking and the gradual
expansion of investment and lending authorities for bank institutions.
Members of Congress and the administration have indicated their
intention to consider additional legislation designed to institute reforms to
promote the viability of the industry. Certain of the proposals would revise the
federal regulatory structure for insured depository institutions; others would
affect the nature of products, services, and activities that bank holding
companies and their subsidiaries may offer or engage in, and the types of
entities that may control depository institutions. There can be no assurance as
to whether or in what form any such proposed legislation might be enacted, or
what impact such legislation might have upon Bancorp.
COMPETITION
Bancorp encounters strong competition both in making loans and in
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws which permit multi-bank holding companies as well as an
increasing level of interstate banking have created a highly competitive
environment for commercial banking. In one or more aspects of its business, LNB
competes with other commercial banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking companies, and other financial intermediaries. Most of these
competitors, some of which are affiliated with bank holding companies, have
substantially greater resources and lending limits, and may offer certain
services that LNB does not currently provide. In addition, many of LNB's
non-bank competitors are not subject to the same extensive federal regulations
that govern bank holding companies and federally insured banks. Recent federal
and state legislation has heightened the competitive environment in which
financial institutions must conduct their business, and the potential for
competition among financial institutions of all types has increased
significantly.
To compete, LNB relies upon specialized services, responsive handling
of customer needs, and personal contacts by its officers, directors, and staff.
Large multi-branch banking competitors tend to compete primarily by rate and the
number and location of branches while smaller, independent financial
institutions tend to compete primarily by rate and personal service.
EMPLOYEES
As of September 30, 1996, Bancorp and LNB employed 81 full-time
employees and six part-time employees. The employees are not represented by a
collective bargaining unit. Bancorp and LNB consider relations with employees to
be good.
STATISTICAL PROFILE AND OTHER FINANCIAL DATA
For additional statistical, financial and other information regarding
Bancorp and LNB, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
INTRODUCTION
The following section sets forth the Management's Discussion and
Analysis of Bancorp for the fiscal years ended September 30, 1995 and 1994. Such
financial information includes the accounts of KFB. Also set forth in
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this Section is the Management's Discussion and Analysis of LNB for the years
ended December 31, 1995 and 1994. Finally, this Section includes the
Management's Discussion and Analysis of Bancorp for the nine months ended
September 30, 1996. As a result of the merger of KFB with and into LNB on July
30, 1996, the operating results of LNB have been included in Bancorp's results
of operations for the nine months ended September 30, 1996. Because the merger
resulted in a change of control of Bancorp to the LNB shareholders, the
comparative financial statements presented for the preceding fiscal period ended
September 30, 1995 are those of LNB.
BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1994
GENERAL
Bancorp's principal asset is its ownership of all of the outstanding
shares of LNB. Accordingly, Bancorp's results of operations are primarily
dependent upon the results of operations of LNB. LNB conducts commercial
business consisting of attracting deposits from the general public and applying
those funds to the origination of commercial, consumer and real estate loans
(including commercial loans collateralized by real estate). LNB's profitability
depends primarily on net interest income, which is the difference between
interest income generated from interest-earning assets (i.e., loans and
investments) less the interest expense incurred on interest-bearing liabilities
(i.e., customer deposits and borrowed funds). Net interest income is affected by
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the interest rate earned and paid on these balances. Net
interest income is dependent upon LNB's interest-rate spread which is the
difference between the average yield earned on its interest-earning assets and
the average rate paid on its interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. The interest rate spread is
impacted by interest rates, deposit flows, and loan demand. Additionally, and to
a lesser extent, LNB's profitability is affected by such factors as the level of
noninterest income and expenses, the provision for credit losses, and the
effective tax rate. Noninterest income consists primarily of service fees on
deposit accounts and income from the sale of loans and investment securities.
Noninterest expense consists of compensation and employee benefits, occupancy
and equipment expenses, deposit insurance premiums paid to the FDIC, and other
operating expenses.
All loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention have been disclosed in the section
"Classification of Assets." Bancorp management is not aware of any trends or
uncertainties which will materially impact future operating results, liquidity,
or capital resources. Bancorp management also is not aware of any material
credits for which there is serious doubt as to the ability of borrowers to
comply with the loan repayment terms. Further, Bancorp management is not aware
of any current recommendations by regulatory authorities which would have any
effect on liquidity, capital resources or results of operation.
Management's discussion and analysis of earnings and related financial
data are presented herein to assist in an understanding of the financial
condition of Bancorp at, and results of operations of Bancorp for, the nine
months ended September 30, 1996 and 1995 and for the years ended, September 30,
1995 and 1994. This discussion should be read in conjunction with the
consolidated financial statements and related footnotes of Bancorp presented
elsewhere herein.
9
<PAGE> 11
LIQUIDITY
Bancorp. Bancorp is a legal business entity separate and distinct from
LNB. Bancorp's principal source of cash flow includes dividends or management
fees from LNB. However, there are various statutory limitations on the ability
of LNB to pay dividends, extend credit, or otherwise supply funds to Bancorp.
The OCC also has the general authority to limit the dividends paid by national
banks. Bancorp has not paid any cash dividends to its shareholders since
February 1991.
LNB. Liquidity management involves the ability to meet the cash flow
requirements of customers who may be either depositors wanting to withdraw their
funds or borrowers needing assurance that sufficient funds will be available to
meet their credit needs. In the ordinary course of business, LNB's cash flows
are generated from interest and fee income, as well as from loan repayments and
the maturity of investment securities held-to-maturity. In addition to cash and
due from banks, LNB considers all securities available-for-sale and federal
funds sold as primary sources of asset liquidity. Many factors affect the
ability to accomplish these liquidity objectives successfully, including the
economic environment, and the asset/liability mix within the balance sheet, as
well as LNB's reputation in the community. At September 30, 1996, LNB had
commitments to originate loans totaling $17.7 million. In addition, scheduled
maturities of certificates of deposit during 1996 totaled $88.3 million.
Management believes that LNB has adequate resources to fund all its commitments,
that substantially all of its existing commitments will be funded within 12
months and, if so desired, that LNB can adjust the rates and terms on
certificates of deposit and other deposit accounts to retain deposits in a
changing interest rate environment. As of December 31, 1995 and September 30,
1995, LNB had liquidity ratios of 17% and 18%, respectively.
CAPITAL RESOURCES
The federal banking regulatory authorities have adopted certain "prompt
corrective action" rules with respect to depository institutions. The rules
establish five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." The various federal banking regulatory agencies have adopted
regulations to implement the capital rules by, among other things, defining the
relevant capital measures for the five capital categories. An institution is
deemed to be "well capitalized" if it has a total risk-based capital ratio of
10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1
leverage ratio of 5% or greater and is not subject to a regulatory order,
agreement, or directive to meet and maintain a specific capital level. At
September 30, 1996, LNB met the capital ratios of a "well capitalized" financial
institution with a total risk-based capital ratio of 10.23%, a Tier 1 risk-based
capital ratio of 9.21%, and a Tier 1 leverage ratio of 6.69%. Depository
institutions which fall below the "adequately capitalized" category generally
are prohibited from making any capital distribution, are subject to growth
limitations, and are required to submit a capital restoration plan. There are a
number of requirements and restrictions that may be imposed on institutions
treated as "significantly undercapitalized" and, if the institution is
"critically undercapitalized," the banking regulatory agencies have the right to
appoint a receiver or conservator.
10
<PAGE> 12
In accordance with risk capital guidelines issued by the OCC, LNB is
required to maintain a minimum standard of total capital to risk-weighted assets
of 8%. Additionally, the FDIC requires banks to maintain a minimum
leverage-capital ratio of Tier 1 capital (as defined) to total assets. The
leverage-capital ratio ranges from 3% to 5% based on the bank's rating under the
regulatory rating system. The required leverage-capital ratio for LNB at
September 30, 1996 was 4%. The following table summarizes the regulatory capital
levels and ratios for LNB:
<TABLE>
<CAPTION>
ACTUAL REGULATORY
RATIOS REQUIREMENT
------ -----------
<S> <C> <C>
At September 30, 1996:
Total capital to risk-weighted assets 10.23% 8.00%
Tier I capital to risk-weighted assets 9.21% 4.00%
Tier I capital to total assets - leverage ratio 6.69% 4.00%
At December 31, 1995:
Total capital to risk-weighted assets 12.03% 8.00%
Tier I capital to risk-weighted assets 10.98% 4.00%
Tier I capital to total assets - leverage ratio 7.98% 4.00%
</TABLE>
RESULTS OF OPERATIONS
Net interest income, which constitutes the principal source of income for
Bancorp, represents the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The principal
interest-earning assets are investment and mortgage-backed securities and loans
made to businesses and individuals. Interest-bearing liabilities primarily
consist of time deposits, interest-bearing checking accounts ("NOW accounts"),
retail savings deposits and money market accounts. Accordingly, net interest
income depends upon the volume of average interest-earning assets and average
interest-bearing liabilities and the interest rates earned or paid on them.
Net interest income was $2 million for Bancorp for the year ended
September 30, 1995 compared with $2.3 million for the year ended September 30,
1994.
11
<PAGE> 13
The following table shows selected ratios for the periods ended or at the
dates indicated:
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
SEPTEMBER 30,
-------------------
1995 1994
---- ----
<S> <C> <C>
Average equity as a percentage 4.58% 4.62%
of average assets
Equity to total assets at end 5.10% 4.51%
of period
Return on average assets(1) 0.03% 0.14%
Return on average equity(1) 0.73% 2.94%
Noninterest expense to 2.49% 3.01%
average assets
Interest-rate spread 2.24% 2.75%
</TABLE>
(1) Annualized
The rates and yields at the dates indicated were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE YIELD OR RATE AT
------------------------------------
SEPTEMBER 30,
------------------------------------
1995 1994
---- ----
<S> <C> <C>
Loans 7.87% 7.83%
Investment securities 6.38% 5.58%
Other interest-earning assets 0.00% 4.29%
All interest-earning assets 7.67% 7.46%
Savings deposits 3.57% 3.08%
Demand money market and
and NOW deposits 2.78% 2.07%
Certificates of deposit 5.83% 5.16%
Other interest-bearing liabilities 6.63% 5.00%
All interest-bearing liabilities 5.43% 4.71%
Interest-rate spread 2.24% 2.75%
</TABLE>
12
<PAGE> 14
The following table sets forth for the periods indicated, information
regarding (i) the total dollar amount of interest and dividend income of Bancorp
from interest-earning assets and the resultant average yield; (ii) the total
dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest/dividend income; (iv) interest-rate
spread; and (v) net interest margin. Average balances were based on average
daily balances.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1995 1994
---------------------------------- ---------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE AND YIELD/ AVERAGE AND YIELD/
(Dollars in thousands) BALANCE DIVIDENDS RATE BALANCE DIVIDENDS RATE
------- --------- ------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1) $ 73,187 $ 5,763 7.87% $ 67,233 $ 5,265 7.83%
Investment and mortgage
backed securities 11,614 741 6.38% 13,111 731 5.58%
Other interest-earning assets(2) -0- -0- 70 3 4.29%
-------- ------ ---- ------- ------ ----
Total interest-earning assets $ 84,801 $ 6,504 7.67% $ 80,414 $ 5,999 7.46%
Noninterest-earning assets 5,154 4,062
------ ------
Total assets $ 89,955 $ 84,476
====== ======
Interest-bearing liabilities:
Demand, money market and
NOW deposits $ 11,379 $ 316 2.78% $ 9,339 $ 193 2.07%
Savings 2,408 86 3.57% 1,886 58 3.08%
Certificates of deposit 60,349 3,516 5.83% 54,155 2,795 5.16%
Other Borrowings 8,700 576 6.63% 12,991 649 5.00%
------ ----- ----- ------ ----- ----
Total interest-bearing
liabilities $ 82,836 $ 4,494 5.43% 78,371 $ 3,695 4.71%
----- ---- ----- ----
Noninterest-bearing liabilities 2,999 2,198
Stockholders' equity 4,120 3,907
----- -----
Total Liabilities and
Stockholders' equity $ 89,955 $ 84,476
====== ======
Net interest/dividend income $ 2,010 $ 2,304
===== =======
Interest-rate spread(3) 2.24% 2.75%
==== ====
Net interest margin(4) 2.37% 2.87%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.02% 1.03%
===== =====
</TABLE>
- ------------------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits due from other banks and federal funds
sold.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
13
<PAGE> 15
The following table sets forth certain information regarding changes in
interest income and interest expense of Bancorp for the periods indicated. The
rate/volume variance for each category has been allocated on a consistent basis
between rate and volume variances based on the percentage of the rate or volume
variance to the sum of the two absolute variances.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED,
SEPTEMBER 30,
1995 VS 1994
INCREASE (DECREASE) DUE TO
------------------------------------
RATE VOLUME TOTAL
---- ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 30.5 $467.5 $ 498.0
Investment and mortgage-backed securities 99.5 (89.5) 10.0
Other interest-earning assets (1.5) (1.5) (3.0)
------- ------ -------
Total 128.5 376.5 505.0
Interest-bearing liabilities:
Demand, money market and NOW deposits 72.6 49.4 122.0
Savings 10.7 17.3 28.0
Certificate of deposit 380.7 340.3 721.0
Other borrowings 177.5 (249.5) (72.0)
------- ------ -------
Total 641.5 157.5 799.0
------- ------ -------
Net change in net interest income $(513.0) $219.0 $(294.0)
======= ====== =======
</TABLE>
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1995 AND 1994.
General
Bancorp net earnings for the year ended September 30, 1995 were
$30,000, or $.03 per share, compared to net earnings of $115,000 or $.16 per
share, for the year ended September 30, 1994. The decrease in net earnings was
primarily due to a decrease in net interest income, which was caused by a
decrease in the interest rate spread. The increase in interest income and
interest expense was largely caused by an increase in interest rates.
Interest Income and Expense
Interest income increased by $505,000 from $6 million for the year
ended September 30, 1994 to $6.5 million for the year ended September 30, 1995.
Interest income on loans increased $498,000 due to an increase in the average
loan portfolio balance from $67.2 million for the year ended September 30, 1994
to $73.2 million for the comparable 1995 period, and an increase in the weighted
average yield of 4 basis points. The increase in weighted average yield was the
result of increases in market interest rates, rather than a material change in
the loan composition. Interest on investment and mortgage-backed securities
increased $10,000 due to an increase in the average yield earned to 6.38% in
1995 from 5.58% in 1994 partially offset by a decrease in the average investment
and mortgage-backed securities portfolio from $13 million in 1994 to $11.6
million in 1995.
Interest expense increased to $4.5 million for the year ended September
30, 1995 from $3.7 million for the year ended September 30, 1994. Interest
expense on deposit accounts increased because of an increase in the average rate
paid on deposits from 4.71% for the year ended September 30, 1994 to 5.43% for
the year ended September 30, 1995, and a $4.5 million increase in the average
balance during the 1995 period. The increase in rates paid on deposits was
caused by rising interest rates since there was no material change in the
deposit mix.
14
<PAGE> 16
Provision for Credit Losses
The provision for credit losses is charged to earnings to bring the
total allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by Bancorp, the
amounts of nonperforming loans, general economic conditions, particularly as
they relate to Bancorp's market area, and other factors related to the
collectibility of Bancorp's loan portfolio. The increase in the provision from
$45,000 for the year ended September 30, 1994 to $102,000 for the year ended
September 30, 1995 was primarily due to the increase in average loans
outstanding for the same periods, from approximately $67.2 million in 1994 to
$73.2 million in 1995, and taking into account Bancorp's level of nonperforming
loans and total loans.
Other Income
Total other income decreased $217,000 for the year ended September 30,
1995 compared to 1994, principally due to a decrease in mortgage originations
and a decrease in gains on sale of loan servicing rights.
Other Expense
Total other expense decreased $303,000 to $2.2 million for the year
ended September 30, 1995 from $2.5 million for the year ended September 30,
1994, primarily due to a decrease in employee compensation and benefits of
$129,000, professional fees of $111,000 and other operating expenses of $63,000.
ASSET/LIABILITY MANAGEMENT
A principal objective of Bancorp's asset/liability management strategy
is to minimize its exposure to changes in interest rates by matching the
maturity and repricing horizons of interest-earning assets and interest-bearing
liabilities. This strategy is overseen in part through the direction of an Asset
and Liability Committee (the "ALCO Committee") which establishes policies and
monitors results to control interest rate sensitivity.
Management evaluates interest rate risk and then formulates guidelines
regarding asset generation and repricing, funding sources and pricing, and
off-balance sheet commitments in order to maintain interest rate risk within
target levels for the appropriate level of risk which are determined by the ALCO
Committee. The ALCO Committee uses computer models prepared by a third party to
measure the Bank's interest rate sensitivity. From these reports, the ALCO
Committee can estimate the net income effect of various interest rate scenarios.
As a part of Bancorp's interest rate risk management policy, the ALCO
Committee examines the extent to which its assets and liabilities are "interest
rate sensitive" and monitors the bank's interest rate sensitivity "gap." An
asset or liability is considered to be interest rate sensitive if it will
reprice or mature within the time period analyzed, usually one year or less. The
interest rate sensitivity gap is the difference between interest earning assets
and interest bearing liabilities scheduled to mature or reprice within such time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income, while
a positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to
adversely affect net interest income. If the repricing of each bank's assets and
liabilities were equally flexible and moved concurrently, the impact of any
increase or decrease in interest rates on net interest income would be minimal.
The ALCO Committee's policy is to maintain a cumulative one-year gap
which falls in the range of (5%) to 10% of total assets. Management attempts to
conform to this policy by managing the maturity distribution of its investment
portfolio and emphasizing originations and purchases of adjustable rate loans,
and by managing the product mix and maturity of its deposit accounts.
15
<PAGE> 17
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the ALCO Committee also evaluates how the repayment of
particular assets and liabilities is impacted by changes in interest rates.
Income associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities fluctuate in
advance of changes in general market interest rates, while interest rates on
other types may lag behind changes in general market rates. In addition, certain
assets, such as adjustable rate mortgage loans, have features (generally
referred to as "interest rate caps") which limit changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment (on loans) and early withdrawal (of deposit accounts)
levels also could deviate significantly from those assumed in calculating the
interest rate gap. The ability of many borrowers to service their debts also may
decrease in the event of an interest rate increase.
Management's strategy is to maintain a balanced interest rate risk
position to protect its net interest margin from market fluctuations. To this
end, the ALCO Committee reviews, on a quarterly basis, the maturity and
repricing of assets and liabilities.
FINANCIAL CONDITION
Lending Activities
A significant source of income for Bancorp is the interest earned on
loans. At September 30, 1995, Bancorp's total assets were $89 million and its
net loans were $72 million or 81% of total assets. At September 30, 1994,
Bancorp's total assets were $87.7 million and its net loans were $71 million or
81% of total assets.
The following table sets forth information concerning Bancorp's loan
portfolio by type of loan at the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------
1995 1994
----------------------- ---------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial Loans $ 2,769 4% $ 2,148 3%
Commercial Real Estate Loans 11,419 16% 12,329 17%
Residential Mortgage Loans 56,456 78% 55,308 78%
Consumer Loans 1,698 2% 1,560 2%
-------- --- ------- ---
Total Loans 72,342 100% 71,345 100%
=== ===
Less:
Deferred Loan Fees (Costs) 371 225
Allowance for Credit Losses (607) (612)
Loans, net $ 72,106 $70,958
======== =======
</TABLE>
16
<PAGE> 18
The following table sets forth total loans originated and repaid during
the periods indicated.
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
(Dollars in thousands) SEPTEMBER 30,
-------------------------
1995 1994
--------- ---------
<S> <C> <C>
Originations:
Residential real estate $ 15,839 $ 53,314
Commercial 1,270 311
Commercial real estate loans 1,186 1,672
Consumer loans 811 1,193
--------- ---------
19,106 56,490
Principal reductions (18,109) (42,288)
--------- ---------
Increase (decrease) in total loans $ 997 $ 14,202
========= =========
</TABLE>
Asset Quality
Management seeks to maintain a high quality of assets through
conservative underwriting and sound lending practices. The majority of the loans
in Bancorp's loan portfolio are collateralized by residential real estate
mortgages. As of September 30, 1995 and 1994, approximately 79%, and 78%,
respectively, of the total loan portfolio was collateralized by this type of
property. The level of delinquent loans and real estate owned also is relevant
to the credit quality of a loan portfolio. As of September 30, 1995, total
nonperforming assets were $1.4 million or 1.59% of total assets, compared to
$1.6 million or 1.86% of total assets at September 30, 1994.
In an effort to maintain the quality of the loan portfolio, management
seeks to minimize higher risk types of lending. In view of the relative
significance of real estate related loans, a downturn in the value of the real
estate could have an adverse impact on Bancorp's profitability. However, as part
of its loan portfolio management strategy, Bancorp generally limits its loans to
a maximum of 80% of the value of the underlying real estate as determined by
appraisal. In addition, knowledgeable members of management make physical
inspections of properties being considered for mortgage loans. Management
believes that such precautions reduce Bancorp's exposure to the risk associated
with a downturn in real estate values.
Commercial loans also entail risks since repayment is usually dependent
upon the successful operation of the commercial enterprise. They also are
subject to adverse conditions in the economy. Commercial loans are generally
riskier than mortgage loans because they are typically underwritten on the basis
of the ability to repay from the cash flow of a business rather than on the
ability of the borrower or guarantor to repay. Further, the collateral
underlying a commercial loan may depreciate over time, cannot be appraised with
as much precision as real estate, and may fluctuate in value based on the
success of the business.
Classification of Assets
Generally, interest on loans accrues and is credited to income based
upon the principal balance outstanding. It is management's policy to discontinue
the accrual of interest income and classify a loan as nonaccrual when principal
or interest is past due 90 days or more and the loan is not adequately
collateralized, or when in the opinion of management, principal or interest is
not likely to be paid in accordance with the terms of the obligation. Consumer
installment loans are generally charged-off after 90 days of delinquency unless
adequately collateralized and in the process of collection. Loans are not
returned to accrual status until principal and interest payments are brought
current and future payments appear reasonably certain. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent payments received are applied to the outstanding
principal balance.
17
<PAGE> 19
Real estate acquired by Bancorp as a result of foreclosure or by deed
in lieu of foreclosure is classified as other real estate owned ("OREO").
Bancorp considers the collateral for a loan in-substance foreclosure when the
debtor has little or no equity in the collateral, expects repayment for the loan
to come only from the operation and sale of the collateral, and the borrower has
either effectively abandoned control of the collateral or has retained control
of the collateral but will be unable to rebuild equity in the collateral or
repay the loan. At September 30, 1995 and 1994, no loans were considered to be
in-substance foreclosed.
OREO properties are recorded at the lower of cost or fair value less
estimated selling costs, and the estimated loss, if any, is charged to the
allowance for credit losses at the time it is transferred to OREO. Further
allowances for losses in OREO are recorded at the time management believes
additional deterioration in value has occurred.
The following tables sets forth certain information on nonaccrual loans
and real estate owned, the ratio of such loans and real estate owned to total
assets as of the dates indicated, and certain other related information.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------
1995 1994
---- ----
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans:
Commercial real estate $ 0 $ 299
Residential mortgage loans 574 817
Commercial loans 68 136
Consumer and other loans 0 94
--------- ---------
Total nonaccrual loans 642 1,346
Accruing loans over 90 days delinquent 0 0
Troubled debt restructurings 0 0
--------- ---------
Total nonperforming loans 642 1,346
Other real estate owned:
Real estate acquired by foreclosure
or deed in lieu of foreclosure 777 286
--------- ---------
Total nonperforming loans and
other real estate owned $ 1,419 $ 1,632
========= =========
Total nonperforming loans as a per-
centage of total loans 0.89% 1.89%
Total nonperforming loans as a per-
centage of total assets 0.72% 1.54%
Total nonperforming loans and real
estate owned as a percentage
of total assets 1.59% 1.86%
</TABLE>
Allowance for Credit Losses
In originating loans, Bancorp recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a collateralized loan, the quality of the
collateral for the loan as well as general
18
<PAGE> 20
economic conditions. It is management's policy to attempt to maintain an
adequate allowance for credit losses based on, among other things, Bancorp's
historical loan loss experience, evaluation of economic conditions and regular
reviews of any delinquencies and loan portfolio quality. Specific allowances are
provided for individual loans when ultimate collection is considered
questionable by management after reviewing the current status of loans which are
contractually past due and considering the net realizable value of the
collateral for the loan. Management recognizes the greater inherent risks in
connection with commercial and consumer lending.
Management continues to actively monitor Bancorp's asset quality and to
charge-off loans against the allowance for credit losses when appropriate or to
provide specific loss allowances when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for credit losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in making
the initial determinations. Bancorp's allowance for credit losses at September
30, 1994 was $612,000 and Bancorp decreased the allowance to $607,000 at
September 30, 1995.
The following table sets forth information with respect to activity in
Bancorp's allowance for credit losses during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------------
1995 1994
---- ----
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of period $ 612 $ 566
Charge-offs:
Commercial real estate 69 -
Commercial loans 16 2
Consumer loans - 1
Residential real estate 47 3
--------- ----------
Total loans charged-off 132 6
Recoveries 25 7
--------- ----------
Net charge-offs 107 (1)
Provision for credit losses charged to
operating expenses 102 45
--------- ----------
Allowance at end of period $ 607 $ 612
========= ==========
Net charge-offs as a percentage
of average loans outstanding 0.15% 0.00%
Allowance for credit losses as a
percentage of period-end total loans 0.84% 0.86%
Allowance for credit losses as a
percentage of nonperforming loans 94.55% 45.47%
Average loans outstanding, net $ 73,187 $ 67,233
Period-end total loans $ 72,342 $ 71,345
</TABLE>
19
<PAGE> 21
The following table presents information regarding Bancorp's total
allowance for losses as well as the allocation of such amounts to the various
categories of loans:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------
1995 1994
---- ----
% OF % OF
LOANS TO LOANS TO
TOTAL TOTAL
(Dollars in thousands) AMOUNT LOANS AMOUNT LOANS
------ ----- ------ -----
<S> <C> <C> <C> <C>
Commercial loans $ 98 4% $ 84 3%
Commercial real estate loans 195 16% 201 17%
Residential real estate loans 295 78% 310 78%
Consumer loans and other 19 2% 17 2%
------ --- ------- ---
Total allowance for credit
losses $ 607 100% $ 612 100%
</TABLE>
The allowance for credit losses represented 0.84% and 0.86% of the total
loans outstanding at September 30, 1995 and 1994, respectively.
Investment Securities
Bancorp's investment securities portfolio at September 30, 1995
primarily consisted of United States Treasury and federal agency securities.
Although investment securities generally have a lower yield than loans,
investment securities increase the quality of Bancorp's assets by virtue of the
guarantees that back them, are more liquid than loans, and may be used to
collateralize borrowings or other obligations of Bancorp. Due to repayment and
prepayments of the underlying loans, mortgage-backed securities are
substantially less than the scheduled maturities. Changes in interest rates may
also affect the average life, yield to maturity, and related market value of
Bancorp's securities portfolio.
20
<PAGE> 22
The following table sets forth the carrying value of investment
securities held by Bancorp at the dates indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------
1995 1994
---- ----
(Dollars in thousands)
<S> <C> <C>
Available for Sale (1):
U.S. Treasury Securities $ 970 $ -0-
Held-to-maturity (2):
U.S. Treasury Securities - 998
GNMA certificates 3,170 3,540
FNMA certificates - -
Collateralized mortgage
obligations 6,388 6,441
Obligations of states and
municipalities 52 53
-------- ---------
Total held-to-maturity $ 9,610 $ 11,032
-------- ---------
Total Investment Securities $ 10,580 $ 11,032
======== =========
</TABLE>
- ----------------------------
(1) Carried at estimated market value.
(2) Carried at amortized cost.
Bancorp's mortgage backed securities consist of three Federal Home
Loan Mortgage Corporation ("FHLMC) and two Federal National Mortgage Association
(FNMA) obligations. The tranches for the five instruments have a current average
life of 2.7 years with the longest being 3.51 years and the shortest being 1.49
years. Most have little or no extension risk should rates rise 300 basis points
with the average life increasing to only 2.87 years. A fall in interest rates of
300 basis points would shorten the average life to 1.32 years.
FHLMC is a corporate instrumentality of the United States, created by
an act of Congress on July 24, 1970 in order to increase the availability of
mortgage credit for the financing of housing. FNMA is a government sponsored
corporation subject to regulation by the Secretary of HUD and purchases and
resells residential mortgages insured by FHA or guaranteed by the VA, as well as
conventional home mortgages. Credit risk is the risk of loss due to a counter
party's unwillingness or inability to pay its obligations. Given the issuers of
these obligations, Bancorp sees little or no credit risk.
Interest rate risk arises when a change in interest rates results in a
change in the value of a financial instrument. The magnitude of this change
depends on the sensitivity of the instrument to changes in interest rates as
well as the absolute change in interest rates.
21
<PAGE> 23
The following table sets forth, by maturity distribution, certain
information pertaining to the investment securities portfolio as follows:
<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS AFTER TEN YEARS TOTAL
------------------ ------------------- ------------------- ----------------- ------------------
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
---------- ------ ---------- ------ --------- ----- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
September 30, 1995:
U.S. Treasury securities -- -- $ 998 4.82% -- -- -- -- $ 998 4.82%
GNMA certificates -- -- -- -- -- -- $ 3,170 7.38% 3,170 7.38%
FNMA certificates -- -- -- -- -- -- -- -- -- --
Collateralized mortgage
obligations -- -- 2,012 5.21% -- -- 4,376 5.96% 6,388 5.59%
Obligations of state and
municipals 52 5.75% -- -- -- -- -- -- 52 5.75%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 52 5.75% $ 3,010 5.08% $ -- -- $ 7,546 -- $10,608 5.88%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
September 30, 1994:
U.S. Treasury securities -- -- $ 998 4.82% -- -- -- -- $ 998 4.82%
GNMA certificates -- -- -- -- -- -- $ 3,540 5.26% 3,540 5.26%
FNMA certificates -- -- -- -- -- -- -- -- -- --
Collateralized mortgage
obligations -- -- -- -- 2,013 5.21% 4,428 5.55% 6,441 5.38%
Obligations of state and
municipals 53 5.75% -- -- -- -- -- -- 53 5.75%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 53 5.75% $ 998 4.82% $ 2,013 5.21% $ 7,968 5.40% $11,032 5.30%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Deposit Activities
Deposits are the major source of Bancorp's funds for lending and other
investment purposes. Deposits are attracted principally from within Bancorp's
primary market area through the offering of a broad variety of deposit
instruments including checking accounts, money market accounts, regular savings
accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more) and retirement savings plans.
Maturity terms, service fees and withdrawal penalties are established by
Bancorp on a periodic basis. The determination of rates and terms is predicated
on funds acquisition and liquidity requirements, rates paid by competitors,
growth goals and federal regulations.
FDIC regulations limit the ability of certain insured depository
institutions to accept, renew, or rollover deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions having the same type
of charter in such depository institutions' normal market area. Under these
regulations, "well capitalized" depository institutions may accept, renew, or
roll over deposits at such rates without restriction, "adequately capitalized"
depository institutions may accept, renew or roll over deposits at such rates
with a waiver from the FDIC (subject to certain restrictions on payments of
rates), and "undercapitalized" depository institutions may not accept, renew or
roll over deposits at such rates. The regulations contemplate that the
definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" will be the
22
<PAGE> 24
same as the definitions adopted by the agencies to implement the prompt
corrective action provisions of applicable law. See "Supervision, Regulation and
Governmental Policy -- Capital Requirements." As of September 30, 1996, LNB met
the definition of a "well capitalized" depository institution.
The following table shows the distribution of, and certain other
information relating to, Bancorp's deposit accounts by type:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------
1995 1994
-------------------- -------------------
% OF % OF
AMOUNT DEPOSITS AMOUNT DEPOSITS
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits $ 2,394 3% $ 3,174 4%
NOW deposits 5,147 6% 5,143 7%
Money market deposits 4,128 5% 4,294 6%
Savings deposits 6,817 8% 1,640 2%
------- --- ------- ---
Subtotal 18,486 22% 14,251 19%
Certificates of deposit(1) 64,730 78% 59,432 81%
------- --- ------- ---
Total deposits $83,216 100% $73,683 100%
</TABLE>
- -----------------------------------
(1) Includes individual retirement accounts ("IRAs") totalling $3.2 million and
$3.4 million at September 30, 1995 and 1994, respectively, all of which are
in the form of certificates of deposit.
The following table shows the average amount outstanding and the
average rate paid on each of the following deposit account categories during the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
-----------------------------------------------
1995 1994
----------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand, money market
and NOW $11,379 2.78% $ 9,339 2.07%
Savings deposits 2,408 3.57% 1,886 3.08%
Certificates of deposit 60,349 5.83% 54,155 5.16%
------- -------
Total interest-bearing
deposits $74,136 4.06% $65,380 3.44%
======= =======
</TABLE>
Bancorp does not have a concentration of deposits from any one source,
the loss of which would have a material adverse effect on Bancorp. Management
believes that substantially all of Bancorp's depositors are residents in its
primary market areas. Bancorp currently does not accept brokered deposits. As
shown in the tables below, a significant amount of Bancorp's certificates of
deposit will mature during the year ending December 31, 1996. The high volume of
maturities during this period is primarily due to customer demand for
certificates of deposit having original maturities of 12 months or less. Based
upon current and anticipated levels of interest rates and past
23
<PAGE> 25
practice, Bancorp management anticipates that substantially all of Bancorp's
certificates of deposit maturing during this time period will be renewed or
replaced by certificates of deposit issued to other customers at competitive
market rates, which may be higher or lower than the rates currently being paid.
Consequently, Bancorp management does not believe that the maturity of Bancorp's
certificates of deposit during the year ended December 31, 1996, will have a
material adverse effect on Bancorp's liquidity. However, if Bancorp is required
to pay substantially higher rates to obtain the renewal of these or other
certificates of deposit or alternative sources of funds, the higher net interest
expense could have a material adverse effect on Bancorp's net income.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data concerning Bancorp
presented in this Proxy Statement 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. The primary impact of inflation on the operations of Bancorp is
reflected in increased operating costs. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, changes in interest rates have a more
significant impact on the performance of a financial institution than do the
effects of changes in the general rate of inflation and changes in prices.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services.
LNB
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
GENERAL
LNB conducts a commercial banking business which consists of attracting
deposits from the general public and applying those funds to the origination of
commercial, consumer and real estate loans (including commercial loans
collateralized by real estate). LNB's profitability depends primarily on net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) less the interest expense
incurred on interest-bearing liabilities (i.e., customer deposits and borrowed
funds). Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities, and the interest-rate
earned and paid on these balances. Net interest income is dependent upon LNB's
interest-rate spread, which is the difference between the average yield earned
on its interest-earning assets and the average rate paid on its interest-bearing
liabilities. When interest-earning assets approximate or exceed interest-bearing
liabilities, any positive interest rate spread will generate net interest
income. The interest rate spread is impacted by interest rates, deposit flows,
and loan demand. Additionally, and to a lesser extent, LNB's profitability is
affected by such factors as the level of noninterest income and expenses, the
provision for credit losses, and the effective tax rate. Noninterest income
consists primarily of service fees on deposit accounts. Noninterest expense
consists of compensation and employee benefits, occupancy related expenses,
deposit insurance premiums paid to the FDIC, and other operating expenses.
All loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention have been disclosed in the section
"Classification of Assets." LNB management is not aware of any trends or
uncertainties which will materially impact future operating results, liquidity,
or capital resources. LNB management also is not aware of any material credits
for which there is serious doubt as to the ability of the borrower to comply
with the loan repayment terms. Further, LNB's management is not aware of any
current recommendations from regulatory authorities which would have any effect
on liquidity, capital resources or results of operations.
24
<PAGE> 26
Management's discussion and analysis of earnings and related financial
data are presented herein to assist investors in an understanding of the
financial condition of LNB at, and results of operations of LNB for the years
ended, December 31, 1995 and 1994. The following discussion should be read in
conjunction with the financial statements and related footnotes presented
elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
A bank, in its normal course of business, will closely monitor its
liquidity reserve on a monthly basis. The liquidity reserve typically consists
of cash on hand, cash on demand deposits with other correspondent banks, and
other investments in short-term marketable securities that may be liquidated on
short notice. Accordingly, LNB, as of December 31, 1995 and 1994 had liquidity
ratios of 17.0% and 21.7%, respectively.
LNB's principal sources of funds are those generated by LNB. LNB's
principal sources of funds are net increases in deposits, principal and interest
payments on loans and proceeds from sales and maturities of investment and
mortgage-backed securities. LNB uses its capital resources primarily to fund
existing and continuing loan commitments and to purchase investment and
mortgage-backed securities. At December 31, 1995 and 1994, LNB had commitments
to originate loans totaling $9 million and $7 million, respectively, and had
issued but unused standby letters of credit of $137,000 and $150,000,
respectively. Scheduled maturities of certificates of deposit during the twelve
months following December 31, 1995 and 1994 totaled $34 million and $22 million,
respectively.
The following table summarizes the regulatory capital levels and ratios
of LNB:
<TABLE>
<CAPTION>
ACTUAL REGULATORY
RATIOS REQUIREMENT
------ -----------
<S> <C> <C>
At December 31, 1995:
Total capital to risk-weighted assets 12.03% 8%
Tier 1 capital to risk-weighted assets 10.98% 4%
Tier 1 capital to total average assets-
leverage ratio 7.98% 3%
At December 31, 1994:
Total capital to risk-weighted assets 13.93% 8%
Tier I capital to risk-weighted assets 13.09% 4%
Tier 1 capital to total average assets -
leverage ratio 8.84% 3%
</TABLE>
RESULTS OF OPERATIONS
Net interest income, which constitutes the principal source of income
for LNB, represents the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The principal
interest-earning assets are investment and mortgage-backed securities and loans
made to businesses and individuals. Interest-bearing liabilities primarily
consist of time deposits, interest-bearing checking accounts ("NOW accounts"),
retail savings deposits and money market accounts. Funds attracted by these
interest-bearing liabilities are invested in interest-earning assets.
Accordingly, net interest income depends upon the volume of average
interest-earning assets and average interest-bearing liabilities and the
interest rates earned or paid on them.
25
<PAGE> 27
Net interest income was $3.2 million for LNB for the year ended
December 31, 1995 compared with $2.5 million for the year ended December 31,
1994. This improvement in net interest income was a result of a higher volume of
net interest-earning assets.
The following table shows selected ratios for the periods ended or at
the dates indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1995 1994
---- ----
<S> <C> <C>
Average equity as a percentage
of average assets 7.90% 9.23%
Equity to total assets at end
of period 7.65% 7.91%
Return on average assets .63% .15%
Return on average equity 8.02% 1.63%
Noninterest expense to
average assets 2.80% 3.82%
Interest-rate spread 3.09% 3.31%
</TABLE>
The rates and yields at the dates indicated were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE YIELD OR RATE AT
DECEMBER 31
---------------------------------
1995 1994
---- ----
<S> <C> <C>
Loans 9.24% 8.53%
Investment and mortgage-backed securities 5.88% 5.07%
Other interest-earning assets 6.05% 4.10%
All interest-earning assets 8.17% 7.35%
Savings deposits 2.78% 2.26%
NOW and Money Market deposits 3.04% 2.23%
Certificates of deposits 5.72% 4.63%
Other interest-bearing liabilities 6.41% 4.04%
All interest-bearing liabilities 5.08% 4.04%
Interest-rate spread 3.09% 3.31%
</TABLE>
26
<PAGE> 28
The following tables set forth for the periods indicated, information
regarding (i) the total dollar amount of interest and dividend income of LNB
from interest-earning assets and the resultant average yield; (ii) the total
dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest/dividend income; (iv) interest-rate
spread; and (v) net interest margin. Average balances were based on average
daily balances.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
---------------------------------------------
INTEREST AVERAGE
AVERAGE AND YIELD/
BALANCE DIVIDENDS RATE
------- --------- ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans(1) $ 57,186 $ 5,282 9.24%
Investment and mortgage-
backed securities 24,481 1,440 5.88%
Other interest-earning assets(2) 2,233 135 6.05%
--------- -------- ----
Total interest-earning
assets 83,900 6,857 8.17%
Noninterest-earning assets 4,850
---------
Total assets $ 88,750
=========
Interest-bearing liabilities:
Demand, money market and
NOW deposit 12,843 391 3.04%
Savings 4,033 112 2.78%
Certificates of deposit 55,493 3,174 5.72%
Other Borrowings 78 5 6.41%
--------- -------- ----
Total interest-bearing
liabilities 72,447 $ 3,682 5.08%
-------- ----
Noninterest-bearing liabilities 9,296
Stockholders' equity 7,007
---------
Total liabilities and
stockholders' equity $ 88,750
=========
Net interest/dividend income $ 3,175
========
Interest-rate spread(3) 3.09%
====
Net interest margin(4) 3.78%
====
Ratio of average interest-earning assets
to average interest-bearing
liabilities 1.16
=========
</TABLE>
- -------------------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits in other banks and federal funds sold.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
27
<PAGE> 29
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994
-----------------------------------
INTEREST AVERAGE
AVERAGE AND YIELD/
BALANCE DIVIDENDS RATE
------- --------- ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans(1) $42,859 $ 3,655 8.53%
Investment and mortgage-backed
securities 20,891 1,060 5.07%
Other interest-earning assets(2) 952 39 4.10%
------- ------- -------
Total interest-earning assets 64,702 4,754 7.35%
Noninterest-earning assets 4,993
-------
Total assets $69,695
=======
Interest-bearing liabilities:
Demand, money market and
NOW deposits 9,577 214 2.23%
Savings 3,892 88 2.26%
Certificates of deposit 41,169 1,908 4.63%
Other 50 2 4.00%
------- ------- -------
Total interest-bearing
liabilities 54,688 2,212 4.04%
------- ------- -------
Noninterest-bearing liabilities 8,573
Stockholders' equity 6,434
-------
Total liabilities and
stockholders' equity $69,695
=======
Net interest/dividend income $ 2,542
=======
Interest-rate spread(3) 3.31%
=======
Net interest margin(4) 3.93%
=======
Ratio of average interest-earning assets
to average interest-bearing
liabilities 1.18
=======
</TABLE>
- ---------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits in other banks and federal funds sold.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
28
<PAGE> 30
The following table sets forth certain information regarding changes in
interest income and interest expense of LNB for the periods indicated. The
rate/volume variance for each category has been allocated on a consistent basis
between rate and volume variances based on the percentage of the rate or volume
variance to the sum of the two absolute variances.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 COMPARED TO 1994
-----------------------------
RATE VOLUME TOTAL
---- ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 396 $1,231 $1,627
Investment and
mortgage-backed
securities 165 216 381
Other interest-earning
assets 31 65 96
----- ------ ------
Total 592 1,512 2,104
----- ------ ------
Interest-bearing liabilities:
Demand, money market
and NOW deposits 92 86 178
Savings 20 3 23
Certificates of deposit 520 746 1,266
Other borrowings 1 2 3
----- ------ ------
Total 633 837 1,470
----- ------ ------
Net change in net interest
income $(41) $ 675 $ 634
==== ====== ======
</TABLE>
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
General
Net earnings for the year ended December 31, 1995 were $562,000 or $.51 per
share, compared to net earnings of $105,000 or $.10 per share for 1994. This
increase in LNB's net earnings was primarily due to an increase in net interest
income and a reduction in other expense. During 1995, LNB used up all net
operating loss carryforwards from prior years and recorded a tax provision of
$357,000.
Interest Income and Expense
Interest income increased by $2.1 million from $4.8 million for the year
ended December 31, 1994 to $6.9 million for the year ended December 31, 1995.
Interest income on loans increased $1.6 million due to an increase in the
average loan portfolio balance outstanding from $42.8 million for the year 1994
to $57.1 million for 1995, and an increase in the weighted average yield of 71
basis points. The increase in loans outstanding was due to an increase in
personnel in the loan department, overall growth in LNB and strong loan demand
in Manatee and
29
<PAGE> 31
Sarasota Counties. The increase in average yield is reflective of general market
conditions in the area. Interest on investment and mortgage-backed securities
increased $380,000 due to an increase in the average investment and securities
portfolio outstanding from $20.9 million in 1994 to $24.5 million in 1995, and
an increase in the average yield earned from 5.07% during 1994 to 5.88% during
1995. Interest on other interest-earning assets increased by $96,000 in 1995 to
$135,000 due to an increase in average balances outstanding of $1.3 million and
an increase in weighted average yield of 195 basis points.
Interest expense increased to $3.7 million for the year ended December 31,
1995, from $2.2 million for the year 1994. Interest on deposit accounts
increased because of an increase in the average balance of deposit accounts
outstanding from $54.7 million in 1994 to $72.4 million in 1995 and an increase
in the weighted average rate paid on deposit accounts from 4.04% during 1994 to
5.08% during 1995. There was a change in the overall deposit mix during 1995
with certificates of deposit increasing to 67% of total deposits from 63% in
1994. This increase was a result of market demands caused by increased marketing
activities for deposits by several large banks in the area.
Provision for Credit Losses
The provision for credit losses is charged to earnings to bring the total
allowance for credit losses to a level deemed appropriate by management, which
is based upon historical experience, the volume and type of lending conducted by
LNB, the amounts of nonperforming loans, general economic conditions,
particularly as they relate to LNB's market areas, and other factors related to
the collectibility of LNB's loan portfolio. The provision increased from
$276,000 for the year ended December 31, 1994, to $362,000 for the year ended
December 31, 1995. The increase resulted from the additional loan volume
outstanding at December 31, 1995. Nonperforming loans and other real estate
owned compared to total assets was .88% at December 31, 1995 compared to 1.11%
at December 31, 1994. LNB's allowance for loan losses increased to 1.06% of
loans outstanding at December 31, 1995 as compared to .86% at December 31, 1994.
Net charge-offs as a percentage of average loans outstanding decreased from .50%
for the year ended December 31, 1994 to .15% for the year ended December 31,
1995. Based upon the decreases in nonperforming assets and net charge-offs,
management believes that the current provision will maintain the allowance for
loan losses at an appropriate level.
Noninterest Income
Total other income increased $132,000 for the year ended December 31, 1995,
compared to 1994, principally due to an increase in recoveries on sales of other
real estate owned.
Noninterest Expenses
Total other expenses decreased $180,000 to $2.5 million for the year ended
December 31, 1995, from $2.7 million for 1994, primarily due to a loss on an
insurance settlement of $600,000 in 1994. In January 1992, the Bank uncovered a
check kiting scheme by one of the Bank's customers. This scheme, which involved
several financial institutions in the Sarasota, Florida area, resulted in LNB
making a claim against its bonding company for reimbursement due to employee
participation in the fraud. After two years of litigating this claim against the
bond insurance company, LNB determined to settle out of court with the insurance
bond company and expensed the insurance claim receivable on its balance sheet in
the amount of $600,000. This charge, which was recorded in 1994, settled all
outstanding suits and countersuits among different banks, insurance companies
and law firms. LNB also experienced a reduction in federal insurance premiums in
1995 of $60,000. These decreases were offset by increases in compensation and
employee benefits of $236,000, data processing of $51,000, professional fees of
$59,000 (substantially all of which were related to the Merger) and occupancy
expense of $45,000. The increase in compensation and employee benefits during
1995 was the result of LNB increasing its staffing levels in order to provide
for increased customer service, as well as to prepare for the opening of a new
branch office in 1996. The data processing increase was the result of the normal
growth of LNB in its loan and deposit areas and the accompanying cost of
servicing a larger asset base. The increase in occupancy expense during 1995 was
also the
30
<PAGE> 32
result of additional equipment and materials being needed to support the
increase in staff within LNB, as well as for the opening of LNB's new branch
office.
ASSET/LIABILITY MANAGEMENT
A principal objective of LNB's asset/liability management strategy is to
minimize LNB's exposure to changes in interest rates by matching the maturity
and repricing horizons of interest-earning assets and interest-bearing
liabilities. This strategy is monitored by the ALCO Committee which
establishes policies and monitors results to control interest rate sensitivity.
Management evaluates interest rate risk and then formulates guidelines
regarding asset generation and repricing, funding sources and pricing, and
off-balance sheet commitments in order to maintain interest rate risk within
target levels for the appropriate level of risk which are determined by the ALCO
Committee. The ALCO Committee uses computer models prepared by a third party to
measure the Bank's interest rate sensitivity. From these reports, the ALCO
Committee can estimate the net income effect of various interest rate scenarios.
As a part of LNB's interest rate risk management policy, the ALCO Committee
examines the extent to which its assets and liabilities are "interest rate
sensitive" and monitors LNB's interest rate sensitivity "gap." An asset or
liability is considered to be interest rate sensitive if it will reprice or
mature within the time period analyzed, usually one year or less. The interest
rate sensitivity gap is the difference between interest-earning assets and
interest-bearing liabilities scheduled to mature or reprice within such time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income, while
a positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income, while a positive gap would tend to
adversely affect net interest income. If the repricing of LNB's assets and
liabilities were equally flexible and moved concurrently, the impact of any
increase or decrease in interest rates on net interest income would be minimal.
The ALCO Committee's policy is to maintain a cumulative one-year gap which
falls in the range of (5%) to 10% of total assets. Management attempts to
conform to this policy by managing the maturity distribution of its investment
portfolio and emphasizing originations and purchases of adjustable rate loans,
and by managing the product mix and maturity of its deposit accounts.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the ALCO Committee also evaluates how the repayment of
particular assets and liabilities is impacted by changes in interest rates.
Income associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities fluctuate in
advance of changes in general market interest rates, while interest rates on
other types may lag behind changes in general market rates. In addition, certain
assets, such as adjustable rate mortgage loans, have features (generally
referred to as "interest rate caps") which limit changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment (on loans) and early withdrawal (of deposit accounts)
levels also could deviate significantly from those assumed in calculating the
interest rate gap. The ability of many borrowers to service their debts also may
decrease in the event of an interest rate increase.
31
<PAGE> 33
Management's strategy is to maintain a balanced interest rate risk position
to protect its net interest margin from market fluctuations. To this end, the
ALCO Committee reviews, on a quarterly basis, the maturity and repricing of
assets and liabilities.
LNB's cumulative one-year gap at December 31, 1994 was 5.73% of assets. At
December 31, 1995, the cumulative one-year gap was a positive 11.84% which was
slightly higher than the target range established by the ALCO Committee.
Management believes that the foregoing interest rate sensitivity analysis does
not take into account the potential impact of prepayments on fixed rate loans
(which would tend to mitigate the effect of a negative gap) and that the
analysis assumes all NOW and statement savings accounts will reprice
immediately, although management considers at least a portion of such accounts
to be "core deposits" which management believes would not reprice in direct
response to changes in market interest rates, and therefore would tend to
mitigate the effect of a negative gap.
Principal among LNB's asset/liability management strategies has been the
emphasis on managing its interest rate sensitive liabilities in a manner
designed to attempt to reduce LNB's exposure during periods of fluctuating
interest rates. Management believes that the type and amount of LNB's interest
rate sensitive liabilities may reduce the potential impact that a rise in
interest rates might have on LNB's net interest income. LNB seeks to maintain a
core deposit base by providing quality services to its customers without
significantly increasing its cost of funds or operating expenses. LNB's demand,
money market, and NOW deposit accounts, approximated 28% and 32% of total
deposits at December 31, 1995 and 1994, respectively. These accounts bore a
weighted average rate of 3.04% and 2.23% during the years ended December 31,
1995 and 1994, respectively. Management anticipates that these accounts will
continue to comprise a significant portion of LNB's total deposit base. At
December 31, 1995 and 1994, 6.5% and 7.9%, respectively, of LNB's total assets
consisted of cash and cash equivalents and short-term investment securities. In
addition, at December 31, 1995 and 1994, LNB's liquidity ratio was 17% and
21.7%, respectively. LNB also maintains a "floor," or minimum rate, on certain
of its floating or prime based loans. These floors allow LNB to continue to earn
a higher rate when the floating rate falls below the established floor rate.
32
<PAGE> 34
The following table sets forth certain information relating to LNB's
interest-earning assets and interest-bearing liabilities at December 31, 1995
that were estimated to mature or were scheduled to reprice within the period
shown.
<TABLE>
<CAPTION>
0-3 4-12 MORE THAN
MONTHS MONTHS ONE YEAR TOTAL
------ ------ --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans receivable: (1)
Adjustable-rate $ 22,467 $ 17,342 $ 4,816 $ 44,625
Fixed-rate 1,146 2,053 17,926 21,125
-------- -------- -------- --------
Total loans 23,613 19,395 22,742 65,750
Federal funds sold 1,102 0 0 1,102
Investment and mortgage-backed
securities (2) 4,125 4,377 12,579 21,081
-------- -------- -------- --------
Total rate-sensitive assets $ 28,840 $ 23,772 $ 35,321 $ 87,933
======== ======== ======== ========
Deposit accounts(2):
Money market deposits $ 6,405 - - $ 6,405
NOW and savings deposits 11,406 - - 11,406
Certificates of deposit 15,103 $ 18,877 $ 24,776 58,756
-------- -------- -------- --------
Total rate-sensitive
liabilities $ 32,914 $ 18,877 $ 24,776 $ 76,567
======== ======== ======== ========
GAP (repricing differences) $(4,074) $ 4,895 $ 10,545 $ 11,366
======== ======== ======== ========
Cumulative GAP $(4,074) $ 821 $ 11,366
======== ======== ========
Cumulative GAP/total assets (4.24%) 0.86% 11.84%
======== ======== ========
</TABLE>
- ------------------------------
(1) In preparing the table above, adjustable-rate loans were included in the
period in which the interest rates are next scheduled to adjust rather
than in the period in which the loans mature. Fixed-rate loans were
scheduled according to their contractual maturities.
(2) Excludes noninterest bearing deposit accounts. Money market, NOW, and
savings deposits were regarded as maturing immediately. All other time
deposits were scheduled through the maturity dates. Investment and
mortgage-backed securities were scheduled through their contractual
maturity dates.
33
<PAGE> 35
FINANCIAL CONDITION
Lending Activities
A significant source of income for LNB is the interest earned on loans.
At December 31, 1995, LNB's total assets were $96 million of which net loans
were $66 million or 69% of total assets. At December 31, 1994, LNB's total
assets were $80 million, of which net loans were $49 million or 62% of total
assets.
Lending activities are conducted pursuant to a written policy which has
been adopted by LNB. Each loan officer has defined lending authority beyond
which loans, depending upon their type and size, must be reviewed and approved
by a loan committee comprised of certain directors of LNB.
The following table sets forth information concerning LNB's loan
portfolio by type of loan at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1995 1994
------------------- ---------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial loans $13,050 19.61% $10,784 21.63%
Commercial real estate loans 22,000 33.07% 11,511 23.09%
Residential mortgage loans 26,358 39.62% 24,175 48.49%
Consumer loans 5,127 7.70% 3,382 6.79%
------- ------ ------- ------
Total loans 66,535 100.00% 49,852 100.00%
====== ======
Less:
Loan suspense and unposted
Deferred loan fees (84) (82)
Allowance for credit losses (707) (431)
------- -------
Loans, net $65,744 $49,339
======= =======
</TABLE>
34
<PAGE> 36
The following table sets forth total loans originated and principal
reductions during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1994
---- ----
(Dollars in thousands)
<S> <C> <C>
Originations:
Commercial loans $ 22,574 $ 18,152
Commercial real estate loans 7,923 7,551
Residential mortgage loans 5,732 5,506
Consumer loans 1,647 1,344
------ ------
Total loans originated 37,876 32,553
Principal reductions 21,193 19,661
------ ------
Increase in total loans $ 16,683 $ 12,892
====== ======
</TABLE>
Asset Quality
Management seeks to maintain a high quality of assets through
conservative underwriting and sound lending practices. As of December 31, 1995
and 1994, approximately 73% and 72%, respectively, of the total loan portfolio
was collateralized by commercial and residential real estate mortgages. The
level of delinquent loans and real estate owned also is relevant to the credit
quality of a loan portfolio. As of December 31, 1995, total nonperforming assets
were $841,000 or .88% of total assets, while as of December 31, 1994, total
non-performing assets were $879,000 or 1.11% of total assets.
In an effort to maintain the quality of the loan portfolio management
seeks to minimize higher risk types of lending. In view of the relative
significance of real estate related loans, a downturn in the value of the real
estate could have an adverse impact on LNB's profitability. However, as part of
its loan portfolio management strategy, LNB generally limits its loans to a
maximum of 80% of the value of the underlying real estate as determined by
appraisal. In addition, knowledgeable members of management generally make
physical inspections of properties being considered for mortgage loans.
Commercial loans also entail risks since repayment is usually dependent
upon the successful operation of the commercial enterprise. They also are
subject to adverse conditions in the economy. Commercial loans are generally
riskier than mortgage loans because they are typically underwritten on the basis
of the ability to repay from the cash flow of a business rather than on the
ability of the borrower or guarantor to repay. Further, the collateral
underlying a commercial loan may depreciate over time, cannot be appraised with
as much precision as real estate, and may fluctuate in value based on the
success of the business.
Loan concentrations are defined as amounts loaned to a number of
borrowers engaged in similar activities which would cause them to be similarly
impacted by economic or other conditions. LNB, on a routine basis, monitors
these concentrations in order to consider adjustments in its lending practices
to reflect economic conditions, loan to deposit ratios, and industry trends.
The Loan Committee of the Board of Directors of LNB concentrates its
efforts and resources, and that of its senior management and lending officers,
on loan review and underwriting procedures. Internal controls include ongoing
reviews of loans made to monitor documentation and the existence and valuations
of collateral. In addition, management of LNB has established a review process
with the objective of identifying, evaluating, and initiating necessary
corrective action for marginal loans. The goal of the loan review process is to
address classified and non-performing loans as early as possible.
35
<PAGE> 37
Classification of Assets
Generally, interest on loans accrues and is credited to income based
upon the principal balance outstanding. It is management's policy to discontinue
the accrual of interest income and classify a loan as non-accrual when principal
or interest is past due 90 days or more and the loan is not adequately
collateralized, or when in the opinion of management, principal or interest is
not likely to be paid in accordance with the terms of the obligation. Consumer
installment loans are generally charged-off after 90 days of delinquency unless
adequately collateralized and in the process of collection. Loans are not
returned to accrual status until principal and interest payments are brought
current and future payments appear reasonably certain. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent payments received are applied to the outstanding
principal balance.
Real estate acquired by LNB as a result of foreclosure or by deed in
lieu of foreclosure is classified as OREO. LNB considers the collateral for a
loan in-substance foreclosed when the debtor has little or no equity in the
collateral, expects repayment for the loan to come only from the operation and
sale of the collateral, and the borrower has either effectively abandoned
control of the collateral or has retained control of the collateral but will be
unable to rebuild equity in the collateral or repay the loan. At December 31,
1995 and 1994, no loans were considered in-substance foreclosed.
OREO properties are recorded at the lower of cost or fair value less
estimated selling costs, and the estimated loss, if any, is charged to the
allowance for credit losses at the time it is transferred to OREO. Further
allowances for losses in OREO, including in-substance foreclosed loans, are
recorded by a charge to operations at the time management believes additional
deterioration in value has occurred.
The following table sets forth certain information on nonaccrual loans
and other real estate owned, the ratio of such loans and other real estate owned
to total loans and total assets as of the dates indicated, and certain other
related information.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1995 1994
---- ----
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans:
Commercial real estate $ 0 $ 0
Residential mortgage loans 215 -
Commercial loans 409 269
Consumer and other loans 72 4
----- -----
Total nonaccrual loans 696 273
Accruing loans 90 days or more past due - 513
Troubled debt restructurings - -
----- -----
Total nonperforming loans 696 786
----- -----
Other real estate:
Real estate acquired by foreclosure or deed
in lieu of foreclosure 145 93
----- -----
Total nonperforming loans and other
real estate owned $ 841 $ 879
===== =====
Total nonperforming loans and real estate
owned to total assets 1.05% 1.58%
===== =====
Total nonperforming loans as a percentage
of total loans .72% .99%
===== =====
Total nonperforming loans as a percentage
of total assets 0.88% 1.11%
===== =====
</TABLE>
36
<PAGE> 38
Allowance for Credit Losses
In originating loans, LNB recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a collateralized loan, the quality of the
collateral for the loan as well as general economic conditions. It is
management's policy to attempt to maintain an adequate allowance for credit
losses based on, among other things, LNB's historical loan loss experience,
evaluation of economic conditions and regular reviews of any delinquencies and
loan portfolio quality. Specific allowances are provided for individual loans
when ultimate collection is considered questionable by management after
reviewing the current status of loans which are contractually past due and
considering the fair value of the collateral for the loan. Management recognizes
the greater inherent risks in connection with commercial and consumer lending.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition."
Management continues to actively monitor LNB's asset quality and to
charge-off loans against the allowance for credit losses when appropriate or to
provide specific loss allowances when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for credit losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in making
the initial determinations. LNB's allowance $706,000 or 1.06% of total loans at
December 31, 1995, compared to $431,000 or .86% of total loans at December 31,
1994.
The following table sets forth information with respect to activity in
LNB's allowance for credit losses during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1995 1994
---- ----
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of period $ 431 $ 370
Charge-offs:
Commercial loans 6 -
Commercial real estate - 172
Residential - -
Consumer loans 87 52
------- -------
Total loans charged-off 93 224
------- -------
Recoveries 6 9
------- -------
Net charge-offs 87 215
Provision for credit losses charged to
operating expenses 362 276
------- -------
Allowance at end of period $ 706 $ 431
======= =======
Net charge-offs as a percentage of average
loans outstanding .15% .50%
======= =======
Allowance for credit losses as a percentage of
period-end total loans 1.06% .86%
======= =======
Allowance for credit losses as a percentage of
nonperforming loans 101.44% 54.83%
======= =======
Period-end total loans $66,535 $49,852
======= =======
Average loans outstanding, net $56,647 $42,859
======= =======
</TABLE>
37
<PAGE> 39
The following table presents information regarding LNB's total
allowance for credit losses as well as the allocation of such amounts to the
various categories of loans:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994
------------------ -------------------
% OF % OF
LOANS TO LOANS TO
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial loans $ 327 19.61% $ 143 21.63%
Commercial real estate loans 226 33.07% 155 23.09%
Residential real estate loans 109 39.62% 108 48.49%
Consumer loans and other 44 7.70% 25 6.79%
------- ----- ------ -----
Total allowance for
credit losses $ 760 100.0% $ 431 100.0%
======= ===== ====== =====
</TABLE>
The allowance for credit losses represented 1.06% of the total loans
outstanding as of December 31, 1995, compared with .86% of the total loans
outstanding as of December 31, 1994. The amount of the provision for credit
losses charged to expense in each of the periods presented above represents
management's best estimate during those periods of the additions necessary to
establish appropriate allowances for estimated credit losses. Such estimates
were based on management's assessment of the current and future general economic
conditions in LNB's market area, the risk levels associated with the particular
composition of the loan portfolio during such periods, and LNB's past collection
experience.
The provision for credit losses increased from $276,000 during the year
ending December 31, 1994 to $362,000 during 1995. The increase resulted from LNB
management's assessment of the economic environment and the commercial real
estate market and the increase in total volume of loans outstanding. Total
nonperforming loans and other real estate owned as a percentage of total assets
decreased from 1.11% at December 31, 1994 to .88% at December 31, 1995. During
1994, management determined that certain commercial loans were not fully
collectible and recorded a charge-off against those loans. Charge-offs decreased
during the year ended December 31, 1995 compared to 1994.
Investment Securities
LNB's investment securities at December 31, 1995 primarily consisted of
United States Treasury and Government Agency securities. Although investment
securities generally have a lower yield than loans, investment securities
increase the quality of LNB's assets by virtue of the guarantees that back them,
are more liquid than loans, and may be used to collateralize borrowings or other
obligations of LNB. Due to repayment and prepayments of the underlying loans,
mortgage-backed securities are substantially less than the scheduled maturities.
Changes in interest rates may also affect the average life, yield to maturity,
and related market value of LNB's securities portfolio.
38
<PAGE> 40
The following table sets forth the carrying value of investment
securities held by LNB at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1995 1994
-------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ------ --------- -------
(Dollars in thousands)
Investment securities:
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,850 $ 2,856 $ 5,646 $ 5,523
U.S. Government Agency
securities 15,972 15,879 13,846 13,392
Mortgage-backed securities
Guaranteed by GNMA 475 473 497 431
Issued by FNMA 487 476 499 456
Issued by FHLMC 983 982 1,105 1,056
State revenue obligations 413 416 419 419
Other equity securities 212 212 194 194
------- ------- ------- -------
Total investment securities $21,392 $21,294 $22,206 $21,471
======= ======= ======= =======
</TABLE>
The following table sets forth, by maturity distribution, certain
information pertaining to the investment securities portfolio as follows:
<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS AFTER TEN YEARS TOTAL
---------------- ------------- ------------- ------------------- ------------------
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
----- ----- ---- ---- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury securities $ 1,339 5.72% $ 1,511 5.60% $ 0 0.00% $ 0 0.00% $ 2.850 45.37%
Government agencies 4,248 4.65 11,724 5.70 0 0 15,972 5.42
Mortgage-backed securities 0 1,282 5.85 0 663 5.65 1,945 5.78
State revenue obligations 0 413 5.75 0 0 413 5.75
Other equity securities 0 0.00 212 6.00 0 0.00 212 6.00
----- ---- ------ ---- --- ---- --- ---- ------ ----
Total $ 5,587 4.91% $ 14,930 5.70% $ 212 6.00% $ 663 5.65% $ 21,392 5.46%
===== ==== ====== ==== === ==== === ==== ====== ====
December 31, 1994:
U.S. Treasury securities $ 3,840 4.38% $ 1,806 5.24% $ 0 0.00% $ 0 0.00% $ 5,646 4.64%
Government agencies 1,000 6.28 12,596 5.36 250 7.99 0 0.00 13,846 5.42
Mortgage-backed securities 0 0.00 412 5.47 499 5.49 1,190 4.46 2,101 5.25
State revenue obligations 0 0.00 419 5.75 0 0.00 0 0.00 419 5.75
Other equity securities 0 0.00 0 0.00 0 0.00 194 5.00 194 5.00
----- ---- ----- ---- --- ---- ----- ---- ------ ----
Total $ 4,840 4.75% $ 15,233 5.36% $ 749 6.33% $ 1,384 4.59% $ 22,206 5.21%
===== ==== ====== ==== === ==== ===== ==== ====== ====
</TABLE>
39
<PAGE> 41
Deposit Activities
Deposits are the major source of LNB's funds for lending and other
investment purposes. Deposits are attracted principally from within LNB's
primary market area through the offering of a broad variety of deposit
instruments including checking accounts, money market accounts, regular savings
accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more) and retirement savings plans.
Maturity terms, service fees and withdrawal penalties are established by
LNB on a periodic basis. The determination of rates and terms is predicated on
funds acquisition and liquidity requirements, rates paid by competitors, growth
goals and federal regulations.
FDIC regulations limit the ability of certain insured depository
institutions to accept, renew, or rollover deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions having the same type
of charter in such depository institutions's normal market area. Under these
regulations, "well capitalized" depository institutions may accept, renew, or
roll over deposits at such rates without restriction, "adequately capitalized"
depository institutions may accept, renew or roll over deposits at such rates
with a waiver from the FDIC (subject to certain restrictions on payments of
rates), and "undercapitalized" depository institutions may not accept, renew or
roll over deposits at such rates. The regulations contemplate that the
definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" will be the same as the definitions adopted by the agencies
to implement the prompt corrective action provisions of applicable law. See
"Supervision, Regulation and Governmental Policy -- Capital Requirements." As of
December 31, 1996, LNB met the definition of a "well capitalized" depository
institution.
The following table shows the distribution of, and certain other
information relating to, LNB's deposit accounts by type:
<TABLE>
<CAPTION>
AT DECEMBER 30,
--------------------------------------------
1995 1994
--------------------- -------------------
% OF % OF
AMOUNT DEPOSITS AMOUNT DEPOSITS
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposits $11,388 12.95% $11,154 15.36%
NOW deposits 7,249 8.24% 5,955 8.20%
Money market deposits 6,405 7.29% 5.843 8.05%
Savings deposits 4,157 4.72% 4,203 5.78%
------- ------ ------- ------
Total 29,199 33.20% 27,155 37.39%
Certificates of deposits (1)
2.00% - 2.99% 0 0.00% 662 0.91%
3.00% - 3.99% 812 0.92% 3,810 5.25%
4.00% - 4.99% 3,214 3.65% 11,950 16.46%
5.00% - 5.99% 27,837 31.65% 22,484 30.96%
6.00% - 6.99% 19,127 21.75% 5,884 8.10%
7.00% - 7.99% 7,411 8.43% 660 0.91%
8.00% - 8.99% 355 0.40% 12 0.02%
------- ------ ------- ------
58,756 66.80% 45,462 62.61%
------- ------ ------- ------
Total deposits $87,955 100.00% $72,617 100.00%
======= ====== ======= ======
</TABLE>
- -----------------------------------
(1) Includes individual retirement accounts ("IRAs") totalling $6.5 million
and $3.9 million at December 31, 1995 and 1994, respectively, all of
which are in the form of certificates of deposit.
40
<PAGE> 42
The following table shows the average amount of and the average rate
paid on each of the following deposit account categories during the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994
------------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD
------- ----- ------- -----
<S> <C> <C> <C> <C>
Demand, money market and NOW $ 12,843 3.04% $ 9,577 2.23%
Savings deposits 4,033 2.78% 3,892 2.26%
Certificates of deposit 55,493 5.72% 41,169 4.63%
------ ---- ------ ----
Total interest-bearing
deposits $ 72,369 5.08% $ 54,638 4.04%
====== ==== ====== ====
</TABLE>
LNB does not have a concentration of deposits from any one source, the
loss of which would have a material adverse effect on the business of LNB.
Management believes that substantially all of LNB's depositors are residents in
its primary market area. LNB currently does not accept brokered deposits. As
shown in the tables below, a significant amount of LNB's certificates of deposit
will mature during the year ending December 31, 1996. The high volume of
maturities during this period is primarily due to customer demand for
certificates of deposit having original maturities of 12 months or less. Based
upon current and anticipated levels of interest rates and past practice, LNB
management anticipates that substantially all of LNB's certificates of deposit
maturing during this time period will be renewed or replaced by certificates of
deposit issued to other customers at competitive market rates, which may be
higher or lower than the rates currently being paid. Consequently, LNB
management does not believe that the maturity of LNB's certificates of deposit
during the year ended December 31, 1996, will have a material adverse effect on
LNB's liquidity. However, if LNB is required to pay substantially higher rates
to obtain the renewal of these or other certificates of deposit or alternative
sources of funds, the higher net interest expense could have a material adverse
effect on LNB's net income.
BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Bancorp hereby incorporates by reference from the Form-QSB filed by
Bancorp with the Securities and Exchange Commission for the quarter ended
September 30, 1996 the disclosure contained under the heading "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," commencing on pages 22 through 49 of the Form 10-QSB.
41
<PAGE> 43
ITEM 3. DESCRIPTION OF PROPERTY.
The main office of Bancorp is located at 6016 26th Street West, Suite
1, Bradenton, Florida in a one-story building, in which approximately 1,000
square feet is leased by Bancorp (under a lease which, with renewal options,
expires in June, 1999). The main office of LNB is located at 6001 26th Street
West, Bradenton, Florida in a two-story building of approximately 9,000 square
feet, which is owned by LNB. LNB also has banking offices located at 3901 Cortez
Road West, Bradenton, Florida in a one-story building of approximately 4,500
square feet, which is leased by LNB (under a lease which, with renewal options,
expires in December, 1997); 5390 Gulf of Mexico Drive Longboat Key, Florida in a
one-story building of approximately 2,310 square feet, which is leased by LNB
(under a lease which, with renewal options, expires in August 2001);
4423 Manatee Avenue West, Bradenton, Florida in a one-story building of
approximately 2,400 square feet, which is owned by LNB; 6304 N. Lockwood Ridge
Road, Sarasota, Florida in a one-story building of approximately 4,000 square
feet, which is owned by LNB; 6704 Bee Ridge Road, Sarasota, Florida in a
two-story building of approximately 4,000 square feet, which is leased by LNB
(under a lease which, with renewal options, expires in 2011); 3815 U.S. Highway
301 N., Ellenton, Florida 34222 in a one-story building of approximately 4,000
square feet, which is owned by LNB; and a lending division at 4900 Manatee West,
Suit 103, Bradenton, Florida in a two-story building of approximately 2,400
square feet, which is owned by LNB.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Directors and Executive Officers
The following table sets forth the beneficial ownership of outstanding
shares of Bancorp Common Stock as of September 30, 1996 by Bancorp's current
directors, and by current directors and executive officers as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT/NATURE OF PERCENT
OF INDIVIDUAL BENEFICIAL OWNERSHIP (1) OF CLASS
------------- ------------------------ --------
<S> <C> <C>
Harvey E. Anderson 286,449 (2) 10.0%
3807 Bayside Drive
Bradenton, FL 34210
Roger P. Conley 101,219 (3) 3.0%
1024 85th Street Court Northwest
Bradenton, FL 34209
Daniel S. Hager 2,030 *%
4323 15th Way
Palmetto, FL 34221
Dale R. Hoffner 2,729 (4) *%
2314 17th Street West
Palmetto, FL 34221
Stephen R. Jonsson 80,380 (5) 2.8%
6212 45th Street West
Bradenton, FL 34210
Bryant A. Meeks 13,354 (6) *%
911 Pomelo Avenue
Sarasota, FL 34236
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT/NATURE OF PERCENT
OF INDIVIDUAL BENEFICIAL OWNERSHIP (1) OF CLASS
------------- ------------------------ --------
<S> <C> <C>
Leonard J. Najjar 72,658 (7) 2.6%
4710 Oakrun Drive
Sarasota, FL 34243
James T. Rogers, M.D. 64,030 (8) 2.3%
6500 Riverview Blvd. West
Bradenton, FL 34209
H. R. Williams 51,395 (9) 1.9%
7813 Broadmoor Pines Blvd.
Sarasota, FL 34243
All directors and executive
officers as a group (9 persons) 656,877 23.5%
</TABLE>
- -----------------------
* Less than one percent of the Common Stock.
(1) Information relating to beneficial ownership is based upon information
available to Bancorp and uses "beneficial ownership" concepts set forth
in the rules of the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended. Under such rules, more than
one person may be deemed to be the beneficial owner of the same
securities, and a person may be deemed to be the beneficial owner of
securities as to which he or she may disclaim any beneficial interest.
Accordingly, directors may be named as beneficial owners of shares as to
which they may disclaim any beneficial interest. Except as otherwise
indicated in the notes to this table, the individual possessed sole
voting and investment power as to all shares of Bancorp Common Stock set
forth opposite his name.
(2) Consists of shares held as trustee (as to which shares he has sole
voting and sole investment power).
(3) Includes 32,498 shares held jointly with his spouse, 5,552 shares held
by his IRA, 4,780 shares held as trustee (as to which shares he has sole
voting and sole investment power), 218 shares held by his spouse, and
159 shares held by his spouse's IRA.
(4) Consists of shares held jointly with his spouse.
(5) Includes 11,250 shares held jointly with his spouse and 1,500 shares
held as custodian. Also includes as to Mr. Jonsson 60,937 shares,
which represent shares the individual has the right to acquire
pursuant to presently exercisable options.
(6) Consists of shares held jointly as co-trustee (as to which he shares
sole voting and sole investment power).
(7) Includes 39,375 shares held jointly with his spouse.
(8) Includes 34,780 shares held jointly with his spouse.
(9) Includes 41,047 shares held by his spouse as trustee (as to which shares
he has sole voting and sole investment power), 8,244 shares held in his
IRA, 1,104 shares held as trustee (as to which shares he has sole voting
and sole investment power), and 1,000 shares held in his spouse's IRA.
43
<PAGE> 45
Other Principal Shareholders
In addition to Mr. Anderson, the following is the only individual
beneficially owning more than 5% of Bancorp Common Stock on September 30, 1996.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
---------------- -------------------- ----------------
<S> <C> <C>
Charles J. Hire 166,399 (1) 6.1%
c/o Hi-Stat Manufacturing
7292 26th Court East
Sarasota, FL 34243
</TABLE>
- ----------------------
(1) Consists of shares held as trustee.
44
<PAGE> 46
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Board of Directors. The Board of Directors of Bancorp currently
consists of nine directors. The Board of Directors is divided into three classes
with each class serving a three-year term. Classes are staggered so that only
one class is elected each year to serve its three-year term. The following table
sets forth certain information with respect to the directors of Bancorp.
<TABLE>
<CAPTION>
DIRECTOR OR OFFICER
OF BANCORP OR DIRECTOR
LNB TERM PRINCIPAL OCCUPATION AND BUSINESS
NAME AND AGE SINCE EXPIRES EXPERIENCE DURING PAST FIVE YEARS
- ------------ ------------------- -------- ---------------------------------
<S> <C> <C> <C>
Harvey E. Anderson, 68 1989 1997 Chairman of the Board of Bancorp and Vice
Chairman of the Board of LNB; former owner
and operator of the Coca-Cola Bottling Corp.,
Rochester, NY.
Roger P. Conley, 49 1988 1997 Vice Chairman of the Board of Bancorp and
Chairman of the Board of LNB; Attorney with
Conley, Cleary and Ozark, Bradenton,
Florida.
Daniel S. Hager, 39 1992 1997 President and Chief Executive Officer of LNB
(August 1996 to present) and of KFB (1992 to
August 1996). Prior to 1992, served as Vice
President and District Manager for
NationsBank of Florida in Manatee County.
Dale R. Hoffner, 1988 1998 Certified Public Accountant with the firm of
C.P.A., 52 Kerkering, Barberio & Co. in Bradenton,
Florida.
Stephen R. Jonsson, 45 1989 1997 President and Chief Executive Officer of
Bancorp (August 1996 to present) and of LNB
(1989 to August 1996).
Bryant A. Meeks, 71 1988 1997 Owner and President of Bryant Meeks, Inc.,
Realtor, Consultant in Sarasota, Florida.
Leonard J. Najjar, 49 1989 1997 Partner and Executive Vice President of
Zoller, Najjar & Schroyer, Bradenton,
Florida.
Dr. James T. Rogers, 55 1989 1997 Senior Partner Bradenton Orthopaedics
Associates, Bradenton, Florida.
H. R. Williams, 61 1991 1997 President, Chief Executive Officer and
Chairman of the Board of BesTechnologies,
Inc.; Executive Vice President of Hi-Stat
Manufacturing, Sarasota, Florida.
</TABLE>
45
<PAGE> 47
Executive Officers. The following sets forth information regarding the
executive officers of Bancorp and LNB. The officers of Bancorp serve at the
pleasure of the Board of Directors.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND BUSINESS
NAME AND AGE EXPERIENCE DURING PAST FIVE YEARS
- ------------ ---------------------------------
<S> <C>
Stephen R. Jonsson, 45 President and Chief Executive Officer of Bancorp (August 1996 to
present); President and Chief Executive Officer of LNB (1989 to
August 1996).
Daniel S. Hager, 39 President and Chief Executive Officer of LNB (August 1996 to
present), Bancorp (1992 to August 1996) and KFB (1992 to August
1996). Prior to joining Bancorp, Mr. Hager served as Vice President
and District Manager for NationsBank of Florida in Manatee County.
Michael L. Hogan, CPA, 44 Senior Vice President (July 1996 to present); prior thereto, he was an
audit manager with Purvis Gray & Company, certified public
accountants.
Ronald A. Monteau, 53 Senior Vice President of LNB and Senior Vice President of Operations
for KFB (1992 to August 1996) and LNB (August 1996 to present).
Prior to joining Bancorp, Mr. Monteau was Vice President/Branch
Manager with NationsBank/NCNB, Bradenton, Florida.
Loretta Waugh, 50 Vice President of LNB (August 1996 to present) and Vice President
and Assistant to the President of KFB (1987 to August 1996). Prior to
1987, Ms. Waugh was in the Commercial Loan Department and Branch
Operations of Goldome for six years. Previously, Ms. Waugh held the
positions of Savings Operations Supervisor and Assistant Branch
Manager with First Federal of Largo.
Ross Hodges, 38 Senior Vice President and Chief Lending Officer of KFB (1994 to
August 1996) and of LNB (August 1996 to present). Prior to 1994,
Mr. Hodges was an Account Officer in the Division of Depositor and
Asset Services with the Federal Deposit Insurance Corporation for three
years. Previously, he was Vice President/Income Property Loan
Servicing Manager for Pioneer Savings Bank.
H. Eugene Bay, Jr., 42 Senior Vice President/Chief Lending Officer since 1990.
Larry R. Chulock, 41 Senior Vice President/Chief Operating Officer since 1995; prior thereto
he was an attorney with Schwartz & Freeman, Chicago, Illinois.
Henry A. Goldsby, 52 Senior Vice President/Bee Ridge Road Manager since August
1993; prior thereto, he was Senior Lender First State Bank, Sarasota, Florida.
</TABLE>
46
<PAGE> 48
ITEM 6. EXECUTIVE COMPENSATION.
The table below sets forth certain information with respect to
compensation paid to Mr. Jonsson (President and Chief Executive Officer of
Bancorp) and Mr. Hager (President and Chief Executive Officer of LNB) during the
years presented. No executive officers of Bancorp and LNB received a total
salary and bonus in excess of $100,000 in 1995.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS COMPENSATION COMPENSATION
- ------------------ ---- --------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Stephen R. Jonsson 1995 $ 115,000 $ 11,700 $ --- $ 4,200
President and Chief 1994 $ 112,930 $ --- $ --- $ 600
Executive Officer of 1993 $ 100,049 $ --- $ --- $ 600
Bancorp
Daniel S. Hager 1995 $ 92,000 $ --- $ --- $ 1,791
President and Chief 1994 $ 81,000 $ --- $ --- $ 1,244
Executive Officer of 1993 $ 81,000 $ --- $ --- $ 3,344
LNB
</TABLE>
- ------------------
Directors of Bancorp are paid fees of $300 for each Board meeting
(except for the Chairman, who receives $400 for each meeting); $100 for the
first committee meeting; and $50 for each additional committee meeting attended
during the month.
Executive Agreement. Bancorp and LNB have entered into separate
employment agreements with Stephen R. Jonsson (President and Chief Executive
Officer of Bancorp) and Daniel S. Hager (President and Chief Executive Officer).
The Employment Agreements provide that they can be terminated by Messrs. Hager
and Jonsson upon 30 days prior notice or by Bancorp and LNB for "cause" as
defined in the Agreement, and continue for a term of three years following a
merger, sale or other change of control. Messrs. Jonsson and Hager currently
receive annual salaries of $120,000 and $92,000, respectively, and each is
eligible for annual bonuses as determined by the Board of Directors. The
Employment Agreements provide for Messrs. Hager and Jonsson to receive an
automobile or an allowance in lieu thereof, an insurance policy providing for
death benefits of two times his annual salary in the case of Mr. Jonsson and
$500,000 in the case of Mr. Hager, disability and insurance benefits maintained
by Bancorp or LNB and monthly dues for a club membership. The employment
agreement also provides for reimbursement of certain business related expenses.
Messrs. Jonsson and Hager have each agreed that for a period of 12 months
following the date of termination of his employment he will not, directly or
indirectly, enter into, engage in, be employed by, or consult with any
individual or entity in the banking business or any related field in Sarasota
and Manatee Counties, Florida. During such period, Messrs. Jonsson and Hager
each also has agreed that he will not, directly or indirectly, solicit any
employees of Bancorp or LNB or any subsidiary or affiliated organization to
terminate their employment and/or accept employment with or seek remuneration by
any of the clients or customers of Bancorp or LNB or any subsidiary or
affiliated organization with whom Bancorp or LNB or any subsidiary or affiliated
organization did business during the term of the employment agreement.
ESOP. Bancorp established an Employee Stock Ownership Plan on January
1, 1989 (the "ESOP"). The ESOP owns 10,817 shares of Bancorp Preferred Stock and
1,688 shares of Bancorp Common Stock. No contributions were made during the nine
months ended September 30, 1996 and the years ended December 31, 1995 and 1994
to the ESOP.
47
<PAGE> 49
Stock Option Plan. Bancorp maintains two stock option plans. The first
plan is an incentive stock option plan for its officers and employees. The plan,
which expires in 1998, provides that no options granted thereunder are
exercisable more than five years after the date of grant. At December 31, 1995,
options for an aggregate of 38,999 shares were available for grant under the
stock option plan. As of September 30, 1996, there were no outstanding options
under the stock option plan. The second plan consists of options that were
outstanding and exercisable for LNB common stock at the time of the merger of
KFB with and into LNB. In the merger, the LNB options became exercisable for an
aggregate of 92,111 shares of Bancorp Common Stock at an exercise price of $4.27
per share. Included in these options is an option exercisable for 60,937 shares
owned by Stephen R. Jonsson (President and Chief Executive Officer of Bancorp).
Unexercised options expire on March 14, 2000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Bancorp has had, and expects to have in the future, banking
transactions in the ordinary course of business with certain of its directors
and executive officers and their associates. As of September 30, 1996, the
directors and executive officers of Bancorp and their associates, as a group,
were indebted to Bancorp in the aggregate amount of approximately $1,659,503.
All loans included in such transactions were made in the ordinary course of
business, on substantially the same terms (including interest rate and
collateral) as those prevailing at the time for comparable transactions with
other persons, and in the opinion of management of Bancorp did not involve more
than the normal risk of collectibility or present other unfavorable features.
ITEM 8. DESCRIPTION OF SECURITIES.
GENERAL
The authorized capital stock of Bancorp consists of (i) 4,000,000
shares of Bancorp Common Stock, of which 2,739,847 shares were outstanding as of
September 30, 1996 and held by approximately 550 shareholders of record, and
(ii) 1,000,000 shares of Bancorp Preferred Stock, none of which are
outstanding.
The following discussion is a brief summary of certain rights relating
to Bancorp Common Stock, as determined by the Bancorp Articles of Incorporation
("Bancorp Articles") and Bylaws. The following discussion is not intended to be
a complete description of such capital stock and is qualified in its entirety by
reference to governing laws and the Bancorp Articles and Bylaws of Bancorp.
COMMON STOCK
Holders of shares of Bancorp Common Stock are entitled to receive such
dividends as may from time to time be declared by the Board of Directors of
Bancorp out of funds legally available therefor. In the event that dividends are
in arrears on the shares of Bancorp preferred stock, Bancorp may not pay any
dividends on the shares of Bancorp Common Stock. Holders of Bancorp Common Stock
are entitled to one vote per share on all matters on which the holders are
entitled to vote and do not have any cumulative rights. Holders of Bancorp
Common Stock have no preemptive, conversion, redemption or sinking fund rights.
In the event of a liquidation, dissolution or winding-up of Bancorp, holders of
Bancorp Common Stock are entitled to share equally and ratably in the assets of
Bancorp, if any, remaining after the payment of all debts and liabilities of
Bancorp and the liquidation preferences of any outstanding shares of Bancorp
preferred stock. The rights, preferences and privileges of holders of Bancorp
Common Stock are subject to any classes or series of Bancorp preferred stock
that Bancorp may issue in the future.
48
<PAGE> 50
PREFERRED STOCK
49
<PAGE> 51
The Board of Directors of Bancorp is authorized, without further action
by the holders of Bancorp Common Stock, to provide for the issuance of shares of
preferred stock in one or more classes or series and to fix the designations,
powers, preferences and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference, and to fix the number of shares to be included in any such classes
or series. Any preferred stock so issued may rank senior to Bancorp Common Stock
with respect to the payment of dividends or amounts upon liquidation,
dissolution or winding-up, or both. In addition, any such shares of preferred
stock may have class or series voting rights. Issuance of preferred stock, while
providing Bancorp with flexibility in connection with general corporate
purposes, may, among other things, have an adverse effect on the rights of
holders of Bancorp Common Stock.
CERTAIN ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF BANCORP ARTICLES
Authorized Capital Stock.
The Bancorp Board of Directors may authorize the issuance of additional
shares of Bancorp Common Stock or preferred stock without further action by the
Bancorp shareholders, unless such action is required in a particular case by
applicable laws or regulations. The authority to issue additional shares of
Bancorp Common Stock or preferred stock provides Bancorp with the flexibility
necessary to meet its future needs without the delay resulting from seeking
shareholder approval. The unissued shares of Bancorp Common Stock and preferred
stock may be issued from time to time for any corporate purposes, including,
without limitation, stock splits, stock dividends, employee benefit and
compensation plans, acquisitions, and public or private sales for cash as a
means of raising capital. Such shares could be used to dilute the stock
ownership of persons seeking to obtain control of Bancorp. In addition, the sale
of a substantial number of shares of Bancorp Common Stock or the sale of
preferred stock to persons who have an understanding with Bancorp concerning the
voting of such shares, or the distribution or dividend of shares of Bancorp
Common Stock or preferred stock (or the right to receive such shares) to Bancorp
shareholders, may have the effect of discouraging or increasing the cost of
unsolicited attempts to acquire control of Bancorp. Further, because the Bancorp
Board has the power to determine the voting, conversion or other rights of
Bancorp preferred stock, the issuance of a series of preferred stock to persons
friendly to management could effectively discourage or preclude consummation of
a change in control transaction or have the effect of maintaining the position
of Bancorp incumbent management. Bancorp does not currently have any plans or
commitments for Bancorp to use its authority to effect any such issuance, but
reserves the right to take any action that the Board of Directors deems to be in
the best interests of Bancorp and its shareholders.
50
<PAGE> 52
Directors; Voting
The Bancorp Articles divide the number of directors into three classes,
as nearly equal in number as reasonably possible, with the term of office of
each class expiring at each succeeding annual meeting of the Bancorp
shareholders. The classification of directors has the effect of making it more
difficult to change the composition of the Board. At least
two shareholder meetings, instead of one, is required to effect a change in a
majority of the Board. The Board believes that the longer term required to elect
a majority of a class of the Board will help to assure the continuity and
stability of Bancorp's directors and policies in the future, since a majority of
the directors at any given time will have prior experience as directors of
Bancorp. The classification provision will apply to every election of directors,
regardless of whether a change in the Board might arguably be beneficial to
Bancorp and its shareholders and whether or not a majority of Bancorp's
shareholders believe that such a change would be desirable.
The Bancorp Articles provide that Bancorp directors may be removed only
for cause and only by the affirmative vote of the holders of in excess of 60% of
the outstanding shares of Bancorp Common Stock. The provision relating to the
removal of directors only for cause precludes a third party from removing
incumbent directors without cause and simultaneously gaining control of the
Board by filling the vacancies with its own nominees. Further, the Bancorp
Articles provide that any action required or permitted to be taken by the
shareholders of Bancorp must be effected at a duly called annual or special
meeting of shareholders and may not be effected by any consent in writing by
such shareholders. The provision prohibiting shareholder action by written
consent gives all shareholders of Bancorp the opportunity to participate in
determining any proposed action and prevents the holders of a simple majority of
the voting power of Bancorp from using the written consent procedure to take
shareholder action without a meeting. Otherwise, holders of a simple majority of
the voting stock of Bancorp could take action without the opportunity for
discussion at a meeting, thereby decreasing the ability of minority shareholders
to have their views considered. The provision tends to support incumbent
directors and management and makes it more difficult for shareholders to effect
certain actions even if such actions are desired by the holders of a majority of
the outstanding shares.
Shareholders' Meetings
Bancorp's Bylaws provide that special meetings of Bancorp shareholders
may be called only by the Bancorp Board of Directors. The Board believes that
the right of directors to call special meetings provides for the orderly conduct
of all Bancorp affairs at the annual meeting of shareholders or a special
meeting called by the Board. Accordingly, shareholders cannot force shareholder
consideration of a proposal over the opposition of the Board by calling a
special meeting of shareholders prior to such time that the Board believed such
consideration to be appropriate. The provision could have the effect of delaying
consideration of a shareholder proposal until the next annual meeting unless a
special meeting is called by Bancorp directors.
Control Share and Affiliated Transactions
Florida has a "Control-Shares Acquisitions" act which places certain
limits on the ability of a person or group of persons to vote stock of
corporations, including Bancorp. In general, shares of Bancorp's Common Stock
acquired in a "Control-Share Acquisition" ("Control-Shares") have no voting
rights unless such rights are granted by resolution adopted by the holders of at
least a majority of the outstanding shares of Bancorp entitled to vote in the
election of directors, excluding shares held by any person who has acquired or
proposes to acquire Control Shares and excluding shares held by any officer or
director of Bancorp who is also an employee of Bancorp. "Control Shares" are
defined as shares owned by a person which, when added to the shares already
owned by such person, would entitled that person (except for the application of
the statute) to voting power in the election of directors that is equal to or
greater than (i) one-fifth of all voting power, (ii) one-third of all voting
power, or (iii)
51
<PAGE> 53
a majority of all voting power. "Control-Share Acquisition" means the
acquisition by any person of beneficial ownership of controlled shares with
certain exceptions, including an acquisition pursuant to certain agreements of
merger or consolidation. Florida also has an affiliated transaction statute
which imposes a two-thirds shareholder vote requirement (excluding shares owned
by the interested shareholder) for certain business combinations between a
Florida corporation (such as Bancorp) and an entity which owns more than 10% of
the voting shares of such corporation.
Although the Control-Shares Acquisitions Act and the affiliated
transaction statute may be beneficial to shareholders because such laws have a
tendency to encourage arms--length negotiation with potential bidders, the laws
also may tend to discourage some takeover bids and as a result deprive
shareholders of an opportunity to sell some or all of their shares in a tender
offer. Tender offers for control usually involve a purchase price higher than
the current price of a company's stock.
Certain Anti-Takeover Provisions
The Bancorp Articles include a provision that shares beneficially owned
by any person in excess of 10% of the issued and outstanding Bancorp Common
Stock (except for those shareholders owning 10% or more of Bancorp Common Stock
as of December 15, 1988) may not be voted unless approved by the majority of
directors. The Bancorp Articles also require an affirmative vote of 60% of the
Bancorp Common Stock to approve certain "Business Combinations" as defined
therein, if such Business Combinations are not approved by a majority of
disinterested directors of Bancorp or if the stockholders are not given a fair
price (as determined pursuant to applicable provisions of the Bancorp Articles)
in consideration for any proposed Business Combination. The Bancorp Bylaws
require a shareholder who intends to nominate a candidate for election to the
Board of Directors or to raise new business at a shareholders meeting to give at
least 30 days' advance notice to the Secretary of Bancorp.
Removal of Directors.
The Bancorp Articles provide that Bancorp directors may be removed by
shareholders only for cause and only by the affirmative vote of the holders of
at least 60% of the voting power of the then outstanding shares of Bancorp
Common Stock. Under the Florida Business Corporation Act (the "Florida Act"),
shareholders of a Florida corporation may remove directors with or without
cause, unless the Articles of Incorporation provide that directors may be
removed only for cause. Bancorp believes that such a provision facilities
continuity and stability of leadership and policy, and at the same time assures
that directors remain accountable to shareholders who retain the right to remove
such individuals for cause. Such a provision could moderate the pace of any
change in control of Bancorp.
No Shareholder Action By Consent.
The Bancorp Articles provide that action taken by shareholders may be
taken only at an annual or special meeting of shareholders and may not be taken
by written consent or any other action. Bancorp believes that this provision
provides a more deliberative process for decisions to be made by Bancorp
shareholders since it will assure that shareholder action is taken at a meeting
at which all shareholders receive notice as provided by, and information in
accordance with, applicable law, and also have the opportunity to both attend
and participate in discussion regarding action for consideration by
shareholders. In the absence of this provision, holders owning more than 50% of
the outstanding shares of Bancorp Common Stock could unilaterally take action on
behalf of the shareholders by signing a written consent (without shareholders
having the opportunity to participate in a meeting at which the resolution is
presented and discussed) and sending other Bancorp shareholders a notice that
the action was taken
52
<PAGE> 54
within 10 days thereafter. The provisions of the Bancorp Articles prohibiting
shareholder action by written consent may have the effect of delaying
consideration of a shareholder proposal until the next annual meeting unless a
special meeting is called by the Board of Directors.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
As of the date of this Form 10-SB, there were 2,739,847 shares of
Bancorp Common Stock outstanding. The outstanding shares of Bancorp Common Stock
are immediately eligible for sale in the public market, except for approximately
949,428 shares of Bancorp Common Stock which are subject to the volume
limitations and the manner of sale restrictions of Rule 144 of the Securities
Act of 1933 ("Securities Act"), and consist of (i) shares of Bancorp Common
Stock issued by Bancorp from September 23, 1994 to August 31, 1995 in a
transaction exempt from registration under Section 4(2) of the Securities Act,
(ii) shares of Bancorp Common Stock issued by Bancorp on November 22, 1996
pursuant to the exercise of stock options and in a transaction exempt from
registration under Section 4(2) of the Securities Act, (iii) shares of Bancorp
Common Stock owned by directors and executive officers of Bancorp, and (iv)
shares of Bancorp Common Stock issued on July 30, 1996 to affiliates of LNB
pursuant to Rule 145 of the Securities Act in connection with the merger of KFB
with LNB. The Registrant has not entered into any agreement to register any
shares of Bancorp Common Stock under the Securities Act for sale by security
holders.
STOCK TRADING INFORMATION
The shares of Bancorp Common Stock are not actively traded, and such
trading activity, as it occurs, takes place in privately negotiated
transactions. There is no established public trading market for the shares of
Bancorp Common Stock. The following sets forth the high and low trading prices
for certain trades for Bancorp Common Stock that occurred in transactions known
to Bancorp management from January 1, 1994 and during the respective periods
indicated:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------ --------------------------
HIGH LOW SHARES HIGH LOW SHARES HIGH LOW SHARES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $ --- $ --- 0 $4.50 $4.50 3,000 $5.00 $5.00 117
2nd Quarter --- --- 0 --- --- 0 --- --- 0
3rd Quarter 8.00 7.50 9,594 --- --- 0 --- --- 0
4th Quarter 8.00 8.00 7,335 --- --- 0 --- --- 0
</TABLE>
From September 23, 1994 to August 31, 1995, Bancorp sold 251,175 shares of
Bancorp Common Stock in a private placement offering at $4.50 per share.
DIVIDENDS
Bancorp has not paid any cash dividends since February, 1991. Bancorp
intends that, for the foreseeable future, Bancorp will retain earnings to
finance continued growth rather than pay cash dividends on Bancorp Common Stock.
In the event that dividends are in arrears on the shares of Bancorp Preferred
Stock, Bancorp may not pay any dividends on the shares of Bancorp Common Stock.
If at any time the Bancorp Board determines to pay dividends on Bancorp Common
Stock, the timing and the extent to which dividends are paid by Bancorp will
53
<PAGE> 55
be determined by such Board in light of then-existing circumstances, including
Bancorp's rate of growth, profitability, financial condition, existing and
anticipated capital requirements, the amount of funds legally available for the
payment of cash dividends, regulatory constraints and such other factors as the
Board determines relevant. The primary source of funds for payment of dividends
by Bancorp is dividends paid to Bancorp by LNB. Payments made by LNB to Bancorp
are limited by law and regulations of the bank regulatory authorities. Under the
National Bank Act, a national bank may not pay dividends from its capital. All
dividends must be paid out of net profits then on hand, after deducting losses
and bad debts. Payments of dividends out of net profits is further limited by 12
U.S.C. Section 60(a), which prohibits a bank from declaring a dividend on its
shares of common stock until its surplus equals its stated capital, unless there
has been transferred to surplus not less than 10% of the bank's net profits of
the preceding two consecutive half-year periods (in the case of an annual
dividend). Pursuant to 12 U.S.C. Section 60(b), the approval of the OCC is
required if the total of all dividends declared by a bank in any calendar year
exceeds the total of its net profits for that year combined with its retained
net profits for the preceding two years, less any required transfer to surplus.
As of September 30, 1996, Bancorp had approximately 550 shareholders of
record of Bancorp Common Stock, and 15 shareholders of record of Bancorp
Preferred Stock.
ITEM 2. LEGAL PROCEEDINGS.
Bancorp and LNB 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 its business. Management does not believe that
there is any pending or threatened proceeding against Bancorp or LNB which, if
determined adversely, would have a material adverse effect on the business,
results of operations, or financial position of Bancorp.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The consolidated financial statements of Bancorp at September 30, 1995
and 1994 and for the years then ended appearing in this Proxy Statement were
audited by Varnadore, Tyler & Hawthorne, P.A., independent auditors, as stated
in their report herein. On January 26, 1995, Bancorp dismissed Coopers &
Lybrand, L.L.P. as its accountants and retained the accounting firm of
Varnadore, Tyler & Hawthorne, P.A. The report of Coopers & Lybrand, L.L.P. on
the financial statements for 1994 and 1993 did not contain an adverse opinion or
a disclaimer of opinion nor was such report qualified or modified as to audit
scope or accounting principle, except that the report on the financial statement
for the year ending September 30, 1993 included an explanatory paragraph that,
at September 30, 1993, KFB "did not have the required minimum regulatory capital
which could result in regulatory authorities limiting an institution's asset
growth and imposing other sanctions and enforcement actions, including
regulatory take-over, that raise substantial doubt about its ability to continue
as a going concern." During Bancorp's two most recent fiscal years and the
subsequent interim period preceding the change in Coopers & Lybrand, L.L.P. as
Bancorp's accountants, there were no disagreements with the former accountant on
any matter of accounting principle or practices, financial statement disclosure,
or auditing scope or procedure, which disagreement or disagreements, if not
resolved to the satisfaction of the former accountant, would have caused it to
make a reference to the subject matter of the disagreement in connection with
its report. The decision to dismiss Coopers & Lybrand, L.L.P. was recommended
and approved by the Board of Directors of Bancorp.
On November 26, 1996, Varnadore, Tyler & Hawthorne, P.A. resigned as
independent auditors of Bancorp. On December 19, 1996, Bancorp engaged Purvis,
Gray and Company, certified public accountants, to act as independent auditors
for Bancorp. The report of Varnadore, Tyler & Hawthorne, P.A. on the financial
statements of Bancorp at December 31, 1995 and 1994 and for the years then ended
did not contain an adverse opinion or disclaimer of opinion nor was such report
qualified as to auditing scope or accounting principle. During
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<PAGE> 56
Bancorp's two most recent fiscal years and the subsequent interim period
preceding the change in Varnadore, Tyler & Hawthorne, P.A. as Bancorp's
accountants, there were no disagreements with the former accountant on any
matter of accounting principle or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement or disagreements, if not
resolved in the satisfaction of the former accountant, would have caused it to
make a reference to the subject matter of the disagreement in connection with
this report.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
From September 23, 1994 to August 31, 1995, Bancorp sold an aggregate
of 251,175 shares of Bancorp Common Stock to 18 individuals for $4.50 per share.
The shares were not publicly offered and no underwriter was used by Bancorp.
Rather, the shares were sold by directors and executive officers of Bancorp, who
did not receive any commission or other remuneration on account of such sales.
The sale of shares was exempt from registration pursuant to Section 4(2) of the
Securities Act based upon the limited number and nature of offerees, and the
access to information on Bancorp made available to the offerees upon request. On
November 22, 1996, Bancorp issued 18,282 shares of Bancorp Common Stock to an
individual upon the exercise of an outstanding stock option. No underwriter was
utilized by Bancorp in connection with the transaction. The sale of shares was
exempt from registration pursuant to Section 4(2) of the Securities Act based
upon the nature of the offeree, and the access to information on Bancorp made
available to the offeree upon request.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Bancorp Articles authorize it to indemnify any director or officer
of Bancorp against judgments, fines, penalties, amounts paid in settlement, and
expenses incurred in any pending, threatened, or completed civil, criminal,
administrative, or investigative proceeding (except an action by Bancorp)
against him in his capacity as a director, officer, employee, or agent of
Bancorp, or another company if serving in such capacity at Bancorp's request, if
he: (i) acted in good faith, (ii) acted in a manner in which he reasonably
believed to be in, and not opposed to, the best interests of Bancorp, and (iii)
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. In addition, Bancorp may indemnify any director, officer,
employee, or agent against expenses incurred in defense or settlement of any
proceeding against him in his official capacity, brought by Bancorp, if he: (i)
acted in good faith, (ii) acted in a manner in which he reasonably believed to
be in, or not opposed to, the best interests of Bancorp, and (iii) is not
adjudged to be liable (unless the Court finds that he is nevertheless reasonably
entitled to indemnity for expenses for which the Court deems proper). Bancorp
must pay the actual and reasonable expenses of any director, officer, employee,
or agent who is successful on the merits or otherwise in defense of any
proceeding against him in his capacity as such.
The Bancorp Articles also authorize it to make any other or further
indemnification or advancement of expenses of any of its directors, officers,
employees or agents, except for acts or omissions which constitute (i) a
violation of the criminal law (unless the individual had reasonable cause to
believe his conduct was lawful or no reasonable cause to believe it was
unlawful), (ii) a transaction in which the individual derived an improper
personal benefit, (iii) in the case of a director, a circumstance under which
certain liability provisions of the Florida Act are applicable (related to
payment of dividends or other distributions or repurchases of shares in
violation of such Act, or (iv) willful misconduct or a conscious disregard for
the best interests of Bancorp in a proceeding by Bancorp or by a Bancorp
shareholder. The Bancorp Articles permit Bancorp to, and it may, purchase and
maintain insurance for the purpose of indemnifying its directors, officers,
employees, and agents.
Pursuant to such authority, Bancorp has purchased director and officer
insurance for the period of August 1, 1996 to August 1, 1999 in the amount of
$5.0 million and for Loss (as defined in the policy) which excludes punitive or
exemplary damages, criminal or civil fines or penalties imposed by law, taxes,
or matters deemed uninsurable under the law pursuant to which the policy is
construed.
55
<PAGE> 57
Under the Florida Act, a director is not personally liable for monetary
damages to a corporation or any other person for any statement, vote, decision,
or failure to act, regarding corporate management or policy, unless (a) the
director breached or failed to perform his or her duties as a director, and (b)
the director's breach or failure to perform those duties constitutes (i) a
violation of the criminal law (unless the director had reasonable cause to
believe his or her conduct was lawful or had no reasonable cause to believe his
or her conduct was unlawful), (ii) a transaction from which the director derived
an improper personal benefit, either directly or indirectly, (iii) a transaction
involving the payment of dividends or other distributions or repurchases of
shares in violation of the Florida Act, (iv) in a proceeding by or in the right
of the corporation to procure judgment in its favor or by or in the right of a
shareholder, conscious disregard by the director for the best interests of the
corporation, or willful misconduct, or (v) in a proceeding by or in the right of
someone other than the corporation or a shareholder, recklessness or an act or
omission by the director which was committed in bad faith or with malicious
purpose or in a manner exhibiting wanton and willful disregard of human rights,
safety, or property.
FINANCIAL STATEMENTS
In response to this Item, Bancorp hereby incorporates by reference from
the Registration Statement on Form S-4 (File No. 333-2962) filed by Bancorp with
the Commission (i) the audited financial statements of Bancorp as of and for the
years ended September 30, 1995 and 1994 included on pages F-10 through F-29 of
the Registration Statement, (ii) the Report of Varnadore, Tyler & Hawthorne,
P.A., included on page F-9 of the Registration Statement, (iii) the audited
financial statements for Liberty National Bank as of and for the years ended
December 31, 1995 and 1994 included on pages F-36 through F-51 of the
Registration Statement, and (iv) the Report of Varnadore, Tyler & Hawthorne,
P.A., from the Form 10-QSB filed by Bancorp for the quarter ended September 30,
1996, the financial statements for September 30, 1996 and 1995 included on pages
3 through 21 of the Form 10-QSB.
56
<PAGE> 58
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------- ----------- ----------
<S> <C>
3.1 Articles of Incorporation of Key Florida Bancorp, Inc.;
Articles of Amendment for Certificate of Designation of
Variable Rate Cumulative Preferred Stock, Series A;
and Amendment to Certificate of Designation of Variable
Rate Cumulative Preferred Stock, Series A (Incorporated by
reference to Exhibit 3.1 to Bancorp's Registration Statement
No. 333-2962 (the "Registration Statement"))
3.2 Bylaws of Key Florida Bancorp, Inc. (Incorporated by
reference to Exhibit 3.2 to the Registration Statement)
4.1 Specimen Stock Certificate of Key Florida Bancorp, Inc.
(Incorporated by reference to Exhibit 4.1 to the
Registration Statement)
10.1 Key Florida Bancorp, Inc. 1987 Stock Option Plan
(Incorporated by reference to Exhibit 10.1 to the
Registration Statement)
10.2 Employment Agreement dated December 1, 1995
between Key Florida Bancorp, Inc. and Daniel S. Hager
(Incorporated by reference to Exhibit 10.2 to the
Registration Statement)
10.3 Employment Agreement dated July 30, 1996
between Liberty National Bank and Stephen R. Jonsson
10.4 Lease dated July 1, 1991 between The Centre
of LBK, Inc. and Key Florida Bank, F.S.B.
(Incorporated by reference to Exhibit 10.5 to the
Registration Statement)
10.5 Lease dated May 11, 1995 between Wildewood
Plaza and Key Florida Bank, F.S.B. and Addendum
to Lease dated May 11, 1995 (Incorporated by
reference to Exhibit 10.6 to the Registration
Statement)
10.6 Lease between Liberty National Bank and Gingerich
Properties Partnership (and Addenda thereto)
(Incorporated by reference to Exhibit 10.7 to the
Registration Statement)
</TABLE>
57
<PAGE> 59
<TABLE>
<S> <C>
21 Subsidiaries of the Registrant
99.1 Consent of Varnadore, Tyler & Hawthorne, P.A.
99.2 Key Florida Bancorp, Inc. Quarterly Report on Form 10-Q
for September 30, 1996
99.3 Key Florida Bancorp, Inc. audited financial statements as of and
for the years ended September 30, 1995 and 1994, together
with the Report of Varnadore, Tyler & Hawthorne, P.A. thereon.
99.4 Liberty National Bank audited financial statements as of and
for the years ended December 31, 1995 and 1994, together
with the Report of Varnadore, Tyler & Hawthorne, P.A. thereon.
</TABLE>
- ----------------------
* Represents a management contract or compensation plan or arrangement
required to be filed as an exhibit.
ITEM 2. DESCRIPTION OF EXHIBITS
The description of exhibits is included in Item 1 of Part III of this
registration statement and is incorporated herein by reference.
58
<PAGE> 60
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
KEY FLORIDA BANCORP, INC.
Date: January 10, 1997 By: /s/ Stephen R. Jonsson
----------------------------------
Stephen R. Jonsson
President and Chief Executive
Officer
By: /s/ Michael L. Hogan
----------------------------------
Michael L. Hogan
Senior Vice President, Chief
Financial Officer, and Treasurer
59
<PAGE> 61
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C>
10.3 Employment Agreement dated July 30, 1996
between Liberty National Bank and Stephen R. Jonsson
21 Subsidiaries of the Registrant
99.1 Consent of Varnadore, Tyler & Hawthorne, P.A.
99.2 Key Florida Bancorp, Inc. Quarterly Report on Form 10-Q
for September 30, 1996
99.3 Key Florida Bancorp, Inc. audited financial statements as of
and for the years ended September 30, 1995 and 1994, together
with the Report of Varnadore, Tyler & Hawthorne, P.A. thereon.
99.4 Liberty National Bank audited financial statements as of and
for the years ended December 31, 1995 and 1994, together
with the Report of Varnadore, Tyler & Hawthorne, P.A. thereon.
</TABLE>
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the
30th day of July, 1996, by and between KEY FLORIDA BANCORP, INC. ("Employer"),
and STEPHEN R. JONSSON ("Employee").
WITNESSETH:
WHEREAS, Employer wishes to provide for the terms and conditions of
Employee's employment;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
I. TERMS OF EMPLOYMENT
(a) Employer hereby employs Employee as Chief Executive Officer, to
hold the title of President, and to perform such services and duties as its
Board of Directors may from time to time, designate during the terms hereof.
Subject to the terms and conditions hereof, Employee will perform such duties
and exercise such authority as are customarily performed and exercised by
persons holding such office subject to the general supervision of the Board of
Directors of Employer, exercised in good faith in accordance with standards of
reasonable commercial judgment.
(b) Employee shall serve on the Board of Directors of Employer subject
to the terms hereof.
(c) Employee accepts such employment and shall devote his full time,
attention, and efforts to the diligent performance of his duties herein
specified and as an officer and director of Employer and will not accept
employment with any other individual, corporation, partnership, governmental
authority or other entity or engage in any venture for profit which Employer
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of the 1st
day of November, 1993, by and between LIBERTY NATIONAL BANK, a National Bank
("Employer"), and STEPHEN R. JONSSON ("Employee").
WITNESSETH:
WHEREAS, Employer wishes to provide for the terms and conditions of
Employee's employment;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
I. TERMS OF EMPLOYMENT
(a) Employer hereby employs Employee as Chief Executive Officer, to
hold the title of President, and to perform such services and duties as its
Board of Directors may, from time to time, designate during the terms hereof.
Subject to the terms and conditions hereof, Employee will perform such duties
and exercise such authority as are customarily performed and exercised by
persons holding such office, subject to the general supervision of the Board of
Directors of Employer, exercised in good faith in accordance with standards of
reasonable commercial judgment.
(b) Employee shall serve on the Board of Directors of Employer subject
to the terms hereof.
(c) Employee accepts such employment and shall devote his full time,
attention, and efforts to the diligent performance of his duties herein
specified and as an officer and director of Employer and will not accept
employment with any other individual, corporation, partnership, governmental
authority or other entity, or engage in any other venture for profit which
Employer
<PAGE> 3
may consider to be in conflict with his or its best interest or to be in
competition with Employer's business, or which may interfere in any way with
the Employee's performance of his duties hereunder.
II. TERM OF AGREEMENT
This Agreement shall commence effective as of the 1st day of July 1996,
and shall continue indefinitely from day-to-day until terminated as set forth
below.
A. Voluntary Termination. In the event Employee chooses to resign
from his position, this Agreement will terminate upon 30 days from the date
Employee submits a letter of termination. Upon such termination, neither party
shall have any further obligations hereunder except as specifically provided.
B. Termination by Acquisition of Employer. In the event Employer is
acquired, merged, bought or otherwise changes or terminates its corporate
existence, the following shall occur:
(1) Effective on the date Employer's stock is transferred to such
other entity, the term of this Agreement will become fixed, and will expire
three (3) years from such date.
(2) Employer, may, in its sole discretion, require that Employee
continue to perform his duties under the Agreement for the remainder of the
term, or for such portion thereof as Employer shall designate.
C. Involuntary Termination. This Agreement will terminate on the
occurrence of any of the following:
(1) death of Employee;
(2) consistent with the provisions of the Americans with
Disabilities Act(ADA),
2
<PAGE> 4
the partial disability of Employee. "Partial disability" as used herein shall
mean the inability of Employee, due to illness, accident, or any other
physical or mental incapacity (other than incapacity or illness resulting from
Employee's performance of his duties hereunder) to perform the services
provided for hereunder for an aggregate of sixty (60) days within any period of
120 consecutive days during the term hereof, or as is defined in the partial or
residual disability required in Section IV;
(3) the discharge of Employee by Employer with cause, "Cause" as
used herein shall mean (i) such negligence or misconduct as shall constitute,
as a matter of law, a breach of covenants and obligations or Employee
hereunder, (ii) failure or refusal or Employee to comply with the provisions of
this Agreement (ii) Employee's being convicted of or pleading nolo contendere
to any crime involving moral turpitude; provided, however, disability because
of illness or accident or any other physical or mental disability shall not
constitute a basis for discharge for cause; (iv) Employer's being subjected to
cease and desist order or other regulatory supervision caused by Employee's
fault; or, (v) any breach of fiduciary duty to Shareholders of Employer.
D. Effect of Termination.
(1) Termination of this Agreement for any reason shall constitute a
tender by Employee of his resignation as an officer and director of Employer.
(2) In the event of termination of this Agreement, except as
provided elsewhere, Employer shall pay to Employee the compensation provided in
Section III, below, to the effective date of termination and neither of the
parties shall have any further obligations hereunder except as otherwise
specifically provided. Except as provided in Section II.A.(3), the
3
<PAGE> 5
timing and manner of payment of such compensation shall not be accelerated by
termination of this Agreement.
(3) In the event Employee's employment is terminated under any of the
events described in paragraph A through C above, then upon receipt of
Employee's letter of termination or the occurrence of such other event giving
rise to a termination under this Agreement, Employer may, in its sole
discretion, immediately relieve Employee of his responsibilities for performing
any further duties hereunder, may after giving Employee a reasonable opportunity
to remove his personal possessions require Employee to immediately vacate the
premises of the Employer any may continue Employee's compensation as set forth
herein or may pay to Employee all remaining compensation due to the end of the
term in one lump sum.
III. COMPENSATION
For all services which Employee may render to Employer while this
Agreement is in effect, including service on the Board of Directors and other
assigned committees of Employer, Employer shall pay to Employee, subject to
such deductions as may be required by law;
A. Base Salary. An annual salary payable in twenty-four (24)
equal installments and subject to such deductions as may be required by law of:
$120,000 each year.
B. Performance Bonus. Employee will be paid a performance bonus
in accordance with Employer's Incentive Plan, as it may be changed from
time-to-time.
4
<PAGE> 6
C. Stock Options. Employee will receive such stock options as are
approved by the Board of Directors from time-to-time in accordance with
Employer's Stock Option Plan.
IV. OTHER BENEFITS
During the term of this Agreement, Employer shall furnish to Employee
(i) an automobile allowance of $425.00 per month; (ii) a life insurance policy
providing for death benefits equal to two times Employee's base salary at the
time of death, to such beneficiary(ies) designated by Employee; (iii) group
health and hospital insurance covering Employee and his family; (iv) long term
disability insurance with benefits of at least $25,000.00 per year, with a
partial or residual disability rider; and (v) monthly dues for membership in a
club suitable for business entertainment. In addition, the Employee shall be
entitled to such other benefits, including vacation, as are set forth in
Employer's Personnel Policy, as it may change from time-to-time.
V. EXPENSES
Upon presentment to Employer of expense reports in sufficiently
detailed form to comply with standards for deductibility of business expenses
established from time-to-time by the Internal Revenue Service, Employer will
reimburse Employee for such reasonable business expenses incurred by Employee
in connection with performance of his duties hereunder.
VI. POST TERMINATION COVENANTS
A. Confidentiality. Employee recognizes that in performing the
services contemplated hereunder, Employee will be exposed to and in possession
of certain proprietary and other information of a confidential nature
(collectively, the "Confidential Information"), the dissemination of which
could cause irreparable harm to Employer. For purposes of this Agreement,
Confidential Information shall include, but not be limited to, all documentation
and
5
<PAGE> 7
information (whether written, oral or otherwise) relating to the past, present
or future business plans of Employer, customer information, pricing
information, intellectual property, and information regarding the operation
and management of Employer. During the term of this Agreement and following
the termination of this Agreement, Employee agrees to treat any and all such
Confidential Information in confidence and undertake the following security
measures and obligations:
(1) Employee agree to limit dissemination and distribution
of Confidential Information only to those employees, agents,
successors or assigns of Employer who have a need to know such
information in connection with Employee performing the services
contemplated hereunder;
(2) to utilize Confidential Information for the sole and
exclusive purposes contemplated hereunder;
(3) not to copy, by photostatic, electronic or other means,
including magnetic media, all or any portion of information given to
Employee that relates to Confidential Information; and
(4) at the conclusion of this Agreement, to return any and
all documents, notes or physical evidence, including diskettes
or media for electronic storage of information, without making copies
or a summary thereof.
B. Non-Competition. During the term of this Agreement and for a period
of one (1) year thereafter, Employee shall not, directly or indirectly, enter
into, engage in, be employed by, or consult with any individual or entity in
the banking business or any related field in Sarasota and Manatee Counties,
Florida.
6
<PAGE> 8
C. Non-Solicitation. During the term of this Agreement and for a
period of one (1) year thereafter, Employee shall not, directly or indirectly,
solicit any employee of Employer or any subsidiary or affiliated organization
of the Employer to terminate their employment and/or accept employment with or
seek remuneration by any of the clients or customers of Employer or any
subsidiary or affiliated organization with whom Employer or any subsidiary or
affiliated organization of Employer did business during the term of this
Agreement.
D. Scope. Except as otherwise provided below, the restrictions
provided in paragraphs A through C above shall extend to any and all activities
of Employee, whether as an independent contractor, partner, joint venturer,
officer, director, stockholder, agent, employee, salesman or otherwise, for any
person, firm, partnership, corporation or other entity or otherwise.
E. Time Period. The period of time during which Employee is
prohibited from engaging in certain business practices pursuant to paragraphs A
through C above, shall be extended by any length of time during which Employee
is in breach of such covenants.
F. Essential Elements. It is understood and agreed by and between the
parties hereto that the restrictive covenants set forth in paragraphs A through
C above are essential elements of this Agreement and that, but for the
agreement of Employee to comply with such covenants, Employer would not have
agreed to enter into this Agreement. Such covenants by Employee shall be
construed as agreements independent of any other provisions of this Agreement
and the existence of any claim or cause of action of Employee against Employer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement of such covenants by Employer.
7
<PAGE> 9
G. Severability. It is agreed by and between the parties hereto that
if any portion of the covenants set forth above are held to be invalid,
unreasonable, arbitrary or against public policy, then such portion of such
covenant shall be considered divisible both as to time and geographical area.
The parties agree that if any court of competent jurisdiction determines the
specified time period or specified geographical area to be invalid,
unreasonable, arbitrary or against public policy, a lesser time period and
geographical area that is determined to be reasonable, non-arbitrary and not
against public policy may be enforced against Employee. The parties further
agree that the foregoing covenants are appropriate and reasonable when
considered in light of the nature of the business conducted by Employer.
H. Injunctive Relief. The parties agree that damages at law will be an
insufficient remedy if Employee violates a material term or condition of this
Agreement. Accordingly, it is agreed that Employer shall be entitled, upon
application to a court of competent jurisdiction, to obtain injunctive relief
to enforce the provisions of this Agreement and that such injunctive relief
shall be in addition to any other rights or remedies available to Employer.
I. Survival of Obligations. The restrictions and obligations imposed
by paragraphs A through C above shall survive any expiration, termination or
cancellation of this Agreement and shall continue to bind Employer, his
employees, agents, successors or assigns as set forth herein.
J. Notice. Employer shall immediately put Employee on notice in
accordance with Article IX below if it knows or has reason to believe that
Employee has violated any of the restrictive covenants imposed by paragraphs A
through C above.
8
<PAGE> 10
VII. WAIVER OF PROVISIONS
Failure of any of the parties to insist, in one or more instances, on
performance by the others in strict accordance with the terms and conditions of
this Agreement shall not be deemed a waiver or relinquishment of any right
granted hereunder or of any other term or condition of this Agreement, unless
such waiver is contained in a writing signed by or on behalf of both parties.
VIII. ATTORNEY FEES
In the event of litigation arising out of the enforcement of this
Agreement, the prevailing party shall be entitled to recover a reasonable
attorneys fee, together with all court costs expended from the non-prevailing
party in action at trial or upon appeal.
IX. NOTICE
Any notice required to be given hereunder shall be sufficient if in
writing and delivered in person or by certified mail, return receipt requested,
to the parties at the addresses listed below or at such other location as a
party may designate form time to time:
IF TO BANCORP:
6001 26th Street West
Bradenton, Florida 34207
Attention: Harvey Anderson
IF TO JONSSON:
6001 26th Street West
Bradenton, Florida 34207
X. GOVERNING LAW
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Florida. If for any reason any
provision of this Agreement shall be held by
9
<PAGE> 11
a court of competent jurisdiction to be void or unenforceable, the same shall
not affect the remaining provisions thereof. Venue for enforcement of this
Agreement shall be in Manatee County, Florida.
XI. MODIFICATION AND AMENDMENT
This Agreement shall not be modified or amended except by an instrument
in writing signed by or on behalf of the parties.
XII. COUNTERPARTS AND HEADINGS
This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument. The headings set out herein are for
convenience of reference and shall not be deemed a part of this Agreement.
XIII. CONTRACT NON-ASSIGNABLE
This Agreement may not be assigned or transferred by any party hereto,
in whole or in part, without prior written consent of the other.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the date first above written.
WITNESSES:
/s/ Denise Lee-Hagmann /s/ Stephen R. Jonsson
- ------------------------------------------ ---------------------------------
/s/ Lynne M. Schooley STEPHEN R. JONSSON
- ------------------------------------------ "Employee"
10
<PAGE> 12
Denise Lee-Hagmann LIBERTY NATIONAL BANK
- -------------------------
Lynne M. Schooley By: /s/ Harvey Anderson
- ------------------------- ----------------------------------
Harvey Anderson, Chairman of the
Board
"Employer"
11
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
LIBERTY NATIONAL BANK
<PAGE> 1
EXHIBIT 99.1
CONSENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Key Florida Bancorp, Inc.
6016 26th Street West
Suite 1
Bradenton, FL 34207
Liberty National Bank
6001 26th Street West
Bradenton, FL 34207
Gentlemen:
We consent to the incorporation by reference into the Registration
Statement on Form 10-SB filed by Key Florida Bancorp, Inc., of our report dated
March 6, 1996 (except for Note 10, which is dated May 10, 1996) with respect to
the consolidated financial statements of Key Florida Bancorp, Inc. for the years
ended September 30, 1995 and 1994, and to the incorporation by reference therein
of our report dated February 9, 1996 (except for Notes 1, 3, and 8, which are
dated May 9, 1996) with respect to the financial statements of Liberty National
Bank for the years ended December 31, 1995 and 1994.
VARNADORE, TYLER & HAWTHORNE, P.A.
By: /s/ William H Hawthorne CPA
-------------------------------------
Bradenton, Florida
January 6, 1997
<PAGE> 1
EXHIBIT 99.2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-2962
KEY FLORIDA BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0105205
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER)
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6016 26th STREET WEST, BRADENTON FLORIDA 34207
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (941) 751-0611
Former Fiscal Year was September 30, has been changed to December 31 since the
Form 10-QSB was filed for the quarter ended June 30, 1996.
(Former name, former address and former fiscal year, if changed since last
report.)
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 .
--- ---
As of November 12, 1996, there were outstanding 2,739,847 shares of the
Registrant's Common Stock.
<PAGE> 2
FINANCIAL STATEMENTS (UNAUDITED)
KEY FLORIDA BANCORP, INC.
FORM 10-QSB - For the Quarter Ended September 30, 1996
TABLE of CONTENTS
<TABLE>
<S> <C>
Part I. Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page
Item 1. Financial Statements
Consolidated Statement of Income and Statement of Income
Three Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Income and Statement of Income
Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Balance Sheet
At September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Changes in Stockholders' Equity
Nine Months Ended September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statement of Cash Flows and Statement of Cash Flows
Nine Months Ended September, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Unaudited Financial Statements . . . . . . . . . . . . . . . . . . . . . . 8-21
Item 2.
Management's Discussion and Analysis of Financial
Conditions and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-50
Part II. Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults upon Senior Securities - Not Applicable
Item 4. Submissions of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE> 3
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
AND
LIBERTY NATIONAL BANK
STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
(Unaudited)
------------------------
Increase
1996 1995 (Decrease)
---- ---- -----------
<S> <C> <C> <C>
Interest Income
Interest and Fees on Loans $ 2,774,438 $ 1,386,679 $ 1,387,759
U.S. Treasury and Government Agencies 380,051 408,557 (28,506)
Other 54,498 30,758 (23,740)
----------- ----------- ------------
Total Interest Income 3,208,987 1,825,994 1,382,993
----------- ----------- ------------
Interest Expense
Interest on Deposits 1,669,156 999,113 670,043
Interest on other borrowings 16,175 0 16,175
----------- ----------- ------------
Total Interest Expense 1,685,331 999,113 686,218
----------- ----------- ------------
Net Interest Income 1,523,656 826,881 696,775
Provision for Loan Losses 61,859 167,263 (105,404)
----------- ----------- ------------
Net Interest Income After Provision
for Loan Losses 1,461,797 659,618 802,179
----------- ----------- ------------
Noninterest Income
Service Charges on Deposit Accounts 104,899 87,166 17,733
Other Income 13,069 83,166 (70,097)
----------- ----------- ------------
Total Noninterest Income 117,968 170,332 (52,364)
----------- ----------- ------------
Noninterest Expense
Salaries and Employee Benefits 607,468 370,471 236,997
Occupancy Expense 211,908 115,459 96,449
Data Processing Expense 65,855 39,247 26,608
FDIC Insurance Premiums and Assessments 450,641 6,030 444,611
Other Expenses 268,513 183,564 84,949
----------- ----------- ------------
Total Noninterest Expense 1,604,385 714,771 889,614
----------- ----------- ------------
Income (Loss) Before Income Taxes (24,620) 115,179 (139,799)
Income Tax (Expense) Benefit 10,702 (114,313) 125,015
----------- ----------- ------------
Net Income (Loss) $ (13,918) $ 866 $ (14,784)
=========== =========== ============
Net income(loss) per common share $ (0.01) $ *
=========== ===========
Weighted average number of
common shares outstanding 1,366,366 1,091,803
=========== ===========
*Amount less than $0.01 per common share
</TABLE>
(3)
<PAGE> 4
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND
LIBERTY NATIONAL BANK
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
(Unaudited)
---------------------------- Increase
1996 1995 (Decrease)
---- ---- ----------
<S> <C> <C> <C>
Interest Income
Interest and Fees on Loans $ 6,196,222 $ 3,994,869 $ 2,201,353
Interest on Investment Securities
U.S. Treasury and Government Agencies 941,344 1,086,377 (145,033)
Other 136,351 124,987 11,364
------------ ------------ ------------
Total Interest Income 7,273,917 5,206,233 2,067,684
------------ ------------ ------------
Interest Expense
Interest on Deposits 3,626,569 2,689,656 936,913
Interest on Notes Payable 9,191 0 9,191
Interest on Federal Home Loan Bank Advances 42,551 0 42,551
------------ ------------ ------------
Total Interest Expense 3,678,311 2,689,656 988,655
------------ ------------ ------------
Net Interest Income 3,595,606 2,516,577 1,079,029
Provision for Loan Losses 256,859 277,263 (20,404)
------------ ------------ ------------
Net Interest Income After Provision
for Loan Losses 3,338,747 2,239,314 1,099,433
------------ ------------ ------------
Noninterest Income
Gain (Loss) on Sale of Investment Securities 1,237 (5,572) 6,809
Service Charges on Deposit Accounts 256,394 246,191 10,203
Other Income 30,836 236,077 (205,241)
------------ ------------ ------------
Total Noninterest Income 288,467 476,696 (188,229)
------------ ------------ ------------
Noninterest Expense
Salaries and Employee Benefits 1,368,079 991,921 376,158
Occupancy Expense 450,116 340,903 109,213
Data Processing Expense 160,003 110,413 49,590
FDIC Insurance Assessments 479,605 89,916 389,689
Other Expenses 682,505 564,150 118,355
------------ ------------ ------------
Total Noninterest Expense 3,140,308 2,097,303 1,043,005
------------ ------------ ------------
Income Before Income Taxes 486,906 618,707 (131,801)
Income Tax (Expense) Benefit (178,321) (249,532) 71,211
------------ ------------ ------------
Net Income $ 308,585 $ 369,175 $ (60,590)
============ ============ ============
Net income per common share $ 0.23 $ 0.34
============ ============
Weighted average number of
common shares outstanding 1,366,366 1,091,803
============ ============
</TABLE>
(4)
<PAGE> 5
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
September 30,
1996
-------------
<S> <C>
ASSETS
Cash and Due From Banks 6,719,111
Federal Funds Sold 7,256,117
Securities Available for Sale 29,523,986
Loans Receivable, Net 146,963,270
Bank Premises and Equipment, Net 4,338,778
Accrued Interest Receivable 1,232,166
Other Real Estate Owned and Other Repossessed Assets 497,328
Federal Home Loan Bank Stock, at cost 500,000
Loan Servicing Rights Acquired and Excess
Servicing Fees Receivable 165,442
Deferred Tax Asset, Net 207,000
Prepaid Expenses and Other Assets 1,200,251
------------
TOTAL ASSETS $198,603,449
============
LIABILITIES
Deposits
Noninterest Bearing Deposits 14,162,983
Interest Bearing Demand Deposits 13,330,032
Money Market Deposits 15,244,519
Savings Deposits 17,369,453
Time Deposits 123,865,147
------------
Total Deposits 183,972,134
Notes Payable 149,294
Accrued Interest Payable 443,330
Amounts Due on Loans Serviced 104,819
Accrued Expenses and Other Liabilities 946,365
------------
TOTAL LIABILITIES $185,615,942
STOCKHOLDERS' EQUITY
Preferred Stock-Variable Rate Cumulative Convertible,
$.01 par value and $10 stated value, 1,000,000 shares
authorized, 43,025 shares issued 430,250
Common Stock, $.01 par value, 4,000,000 shares authorized,
2,739,847 shares issued 27,400
Additional Paid in Capital 11,284,742
Unrealized Gain (Loss) on Securities (155,245)
Retained Earnings 1,402,313
Less: Treasury Stock at cost (94 shares of common stock and
266 shares of preferred stock) (1,953)
-------------
TOTAL STOCKHOLDERS' EQUITY 12,987,507
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 198,603,449
=============
</TABLE>
(5)
<PAGE> 6
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock Additonal
------------------ ------------------- -------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 (Unaudited) 43,025 $430,250 940,986 $ 9,411 319 $(1,755) $5,720,080
Preferred Dividends Paid
Change in unrealized gain (loss) on
Securities Available for Sale
Common Stock Issued 1,798,861 17,989 5,564,662
Purchase of Treasury Stock:
Common Stock 24 (74)
Preferred Stock 17 (124)
Net Income
------ -------- --------- ------- --- ------- -----------
BALANCE, September 30, 1996 (Unaudited) 43,025 $430,250 2,739,847 $27,400 360 $(1,953) $11,284,742
====== ======== ========= ======= === ======= ===========
<CAPTION>
Retained
Unrealized Earnings
Gain (Loss) (Accumulated
on Securities Deficit) Total
------------- ------------- ----------
<S> <C> <C> <C>
Balance, January 1, 1996 (Unaudited) $ (14,866) $(1,497,984) $ 4,645,136
Preferred Dividends Paid (30,107) (30,107)
Change in unrealized gain (loss) on
Securities Available for Sale (140,379) (140,379)
Common Stock Issued 2,621,819 8,204,470
Purchase of Treasury Stock:
Common Stock (74)
Preferred Stock (124)
Net Income
308,585 308,585
--------- ----------- -----------
BALANCE, September 30, 1996 (Unaudited) $(155,245) $ 1,402,313 $12,987,507
========= =========== ===========
</TABLE>
(6)
<PAGE> 7
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND
LIBERTY NATIONAL BANK
STATEMENT OF CASH FLOWS
FOR THE NINE MONTH ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
(Unaudited)
--------------------------------
1996 1995
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 308,585 $ 369,175
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 143,296 67,732
Provision for possible loan losses 256,859 277,263
Net amortization/accretion of premium/discount on investment securities 5,617 (3,729)
Amortization of loan servicing rights and excess servicing fees 142,965 0
Net (gain) loss on sale of investment securities (1,237) 5,572
Net loss on sale of other real estate owned 13,143 0
Deferred income taxes (24,000) 76,532
Changes in assets and liabilities
(Increase) decrease in accrued interest receivable (722,425) (261,858)
(Increase) decrease in prepaid expenses and other assets 518,949 45,024
Increase (decrease) in accrued interest payable 431,169 133,917
Increase (decrease) in amounts due on loans serviced 79,560 0
Increase (decrease) in accrued expense and other liabilities 826,027 213,575
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,978,508 923,203
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities 501,237 494,029
Proceeds from sale of Federal Home Loan Bank stock 0
Loan originations, net (79,968,345) (11,183,202)
Proceeds from sale of loans 0
Proceeds from sale of other real estate owned 132,194 32,220
Purchase of investment securities (30,690,885) (10,746,688)
Purchase from maturities and calls of investment securities 10,942,972 5,488,167
Purchase of core deposit intangible (975,000)
Purchase of bank premises and equipment (3,446,457) (615,687)
Recoveries of loans charged-off 1,688 1,621
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (103,502,596) (16,529,540)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits 11,570,338 (2,866,163)
Net increase (decrease) in interest-bearing demand deposits 8,048,351 221,044
Net increase (decrease) in money market deposits 11,534,183 (2,430,296)
Net increase (decrease) in savings deposits 5,494,146 (116,618)
Net increase (decrease) in time deposits 60,049,028 16,822,894
Proceeds from Federal Home Loan Bank advances 3,000,000 0
Repayment of Federal Home Loan Bank advances (3,000,000) 0
Repayment of note payable (18,114) 0
Cash dividends paid on preferred stock (30,107) 0
Proceeds from issuance of common stock 8,204,470 86,965
Increase in Federal Funds Purchased 0 1,500,000
Purchase of Treasury stock (198) 0
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 104,852,097 13,217,826
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,328,009 (2,388,511)
CASH AND CASH EQUIVALENTS AT JANUARY 1 10,647,219 6,277,180
------------- -------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 13,975,228 $ 3,888,669
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for Interest $ 3,195,400 $ 2,555,739
============= =============
Cash Payments for Income Taxes $ 199,372 $ 0
============= =============
</TABLE>
(7)
<PAGE> 8
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
BUSINESS ACTIVITY
Key Florida Bancorp, Inc. (the "Company") is a commercial bank holding company,
incorporated under the laws of Florida. It is the parent company of its
wholly-owned subsidiary, Liberty National Bank (the "Bank"), a national bank.
The Bank is engaged in bank and bank-related activities. Liberty National Bank
conducts a commercial banking business which consists of attracting deposits
from the general public and applying those funds to the origination of
commercial, consumer and real estate loans (including commercial loans
collateralized by real estate). The Bank's profitability depends primarily on
net interest income, which is the difference between interest income generated
from interest-earning assets (i.e. loans and investments) less the interest
expense incurred on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities, and the interest-rate
earned and paid on these balances. Net interest income is dependent upon the
Bank's interest-rate spread, which is the difference between the average yield
earned on its interest earning assets and the average rate paid on its
interest-bearing liabilities. When interest-earning assets approximate or
exceed interest - bearing liabilities, any positive interest rate spread will
generate net interest income. The interest rate spread is impacted by interest
rates, deposit flows, and loan demand.
Additionally, and to a lesser extent, the Bank's profitability is affected by
such factors as the level of noninterest income and expenses, the provision for
credit losses, and the effective tax rate.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and do not include all of
the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
the Company, the unaudited consolidated financial statements reflect all
adjustments which are of a normal recurring nature and which are necessary to
present fairly the consolidated financial position of the Company as of
September 30, 1996, the results of its operations for the nine months and the
three months ended September 30, 1996 and 1995, and its cash flows for the nine
months ended September 30, 1996 and 1995. The results of operations for the
nine months and the three months ended September 30, 1996 are not necessarily
indicative of the results which may be expected for the entire fiscal year.
(8)
<PAGE> 9
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - CONTINUED
WEIGHTED AVERAGE SHARES OUTSTANDING
Net income per share of the Company's common stock was computed by dividing net
income for the respective period by the weighted average number of shares of
common stock outstanding, including common stock equivalents using the treasury
stock method. Stock options issued to officers are considered common stock
equivalents. Because there is no established public trading of the Company's
common stock, the treasury stock method assumes that the Company purchased
common stock at the Company's average book value during the respective periods.
Because the preferred stock does not pass the yield test nor does the assumed
exercise of stock options pass the 3% dilution test in accordance with
Accounting Principles Board Opinion No. 15 the Company is deemed to have a
simple capital structure and need only report primary earnings per share. For
the nine months ended September 30, 1996 and 1995, weighted average number of
shares of common stock and common stock equivalents outstanding was computed as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
(Unaudited)
<S> <C> <C>
Weighted average shares of common stock outstanding . . . . . . . . . . . . . 1,348,028 1,077,350
Common shares assumed outstanding to reflect the dilutive
effect of Treasury common stock . . . . . . . . . . . . . . . . . . . . . (84) 0
Common shares assumed outstanding to reflect the dilutive
effect of stock options to purchase common stock . . . . . . . . . . . . . 18,422 14,453
--------- ---------
Weighted average number of shares of common stock
and common stock equivalents outstanding . . . . . . . . . . . . . . . . . 1,366,366 1,091,803
========= =========
</TABLE>
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principals 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.
CASH EQUIVALENTS
Cash equivalents include cash, demand deposits due from banks and federal funds
sold. Generally, federal funds sold mature within ninety days.
(9)
<PAGE> 10
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BUSINESS COMBINATION AND COMPARABILITY OF FINANCIAL STATEMENTS
Merger with Key Florida Bank, F.S.B.
On July 30, 1996, effective the close of business, the Company and the Bank
closed the merger of Key Florida Bank, F.S.B. with and into the Bank. The Key
Florida Bank, F.S.B./Liberty National Bank merger transaction has been
accounted for under the purchase method of accounting. As a result of the
merger the outstanding shares of the Bank were converted into an aggregate of
2,739,847 shares of Key Florida Bancorp, Inc. common stock. In connection with
the merger, the bank recorded intangible assets, including a core deposit
intangible in the amount of $975,000 which is being amortized over ten years in
accordance with guidelines promulgated by the Office of the Comptroller of the
Currency ("OCC").
Comparability of Financial Statements
Due to the aforementioned merger transaction the resultant change in control to
Liberty National Bank shareholders, the operating results of Liberty
National Bank have been included in the Company's consolidated results of
operations for the period (also the nine months and three months) ended
September 30, 1996. At the time of the merger each share of Liberty National
Bank common stock was converted into 1.5 shares of the Company's common stock
or a total of 1,798,861 shares (cash was paid in lieu of fractional shares).
The shares of the Company's common stock issued and outstanding at the time of
the merger remained unchanged as shares of Key Florida Bancorp, Inc. common
stock, 940,986 shares. As previously mentioned, the conversion of Liberty
National Bank's common shares plus the original issued and outstanding shares
of the Company yielded an aggregate number of the Company's common shares
issued of 2,739,847. Due to the number of shares of the Company's stock issued
to Liberty National Bank shareholders in the merger, a change of control of the
Company was deemed to have occurred. Because control changed to Liberty
National Bank shareholders at merger the comparative financial statements
presented for the preceding fiscal periods ended September 30, 1995 are those
of Liberty National Bank.
(10)
<PAGE> 11
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BUSINESS COMBINATION AND COMPARABILITY OF FINANCIAL STATEMENTS -
CONCLUDED
Pro Forma Income Statements
Had the aforementioned business combination occurred at the beginning of each
of the periods presented, the Company's pro forma unaudited results of
operations would have been:
<TABLE>
<CAPTION>
(Unaudited)
For the Nine Months Ended
-------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Interest Income $11,075,721 $10,176,315
Interest Expense 6,266,796 6,152,073
----------- -----------
Net Interest Income 4,808,925 4,024,242
Provision for Loan Losses 253,141 378,263
----------- -----------
Net Interest Income After
Provision for Loan Losses 4,555,784 3,645,979
Noninterest Income 695,391 810,457
Noninterest Expense (4,502,786) (3,915,602)
----------- -----------
Net Income Before Income Taxes 748,389 540,834
Income Taxes (246,333) (69,532)
----------- -----------
Net Income $ 502,056 $ 471,302
=========== ===========
</TABLE>
The unaudited pro forma results are not necessarily indicative of the results
that would have been attained had the merger occurred at the beginning of 1996
or 1995 or of the results which may occur in the future.
(11)
<PAGE> 12
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SAIF SPECIAL ASSESSMENT
On September 30, 1996 the President of the United States signed the omnibus
appropriations bill into law. This legislation is aimed at recapitalizing
the Savings Association Insurance Fund (SAIF) through a one time special
assessment on the insured deposits of SAIF member institutions. Though Liberty
National Bank is a member of the Federal Deposit Insurance Corporation (FDIC)
Bank Insurance Fund (BIF) it holds assessable deposits acquired in the merger
with Key Florida Bank, F.S.B. and due to its participation in a Section 5
(d)(3) "Oakar" transaction is subject to the SAIF special assessment. Based
upon the amount of assessable deposits held by the Bank at September 30, 1996
the calculated special assessment payable by the Bank to the FDIC is
$400,150. Though the SAIF special assessment is not payable until November 27,
1996 the amount was determinable as of September 30, 1996 and is therefore
recorded as a liability in the accompanying balance sheet at that date. In
accordance with the Financial Accounting Standards Board (FASB) Emerging Issues
Task Force (EITF) Topic No. D-47 the aforementioned liability was accrued when
the legislation was enacted and a corresponding charge was reported as a
component of operating income in the period that includes the enactment date.
Per EITF Topic No. D-47 the charge to income was not reported as an
extraordinary item.
NOTE 4 - CHANGE IN REPORTING YEAR
Though the Company's legal fiscal year for tax reporting purposes is a December
31 calendar year-end it has previously used September 30 as its financial
statement reporting year-end. With the merger of Liberty National Bank with
Key Florida Bank, F.S.B. the Company and the Bank will use a December 31 fiscal
year-end for income tax reporting purposes and for preparation of its annual
financial statements. Under rules of OCC, National Bank's (including the
Bank) must use a calendar year fiscal year.
NOTE 5 - INCOME TAXES
Federal and state income taxes are provided on income reported for financial
statement purposes and include both current and deferred income tax expense.
Current income tax expense is recorded to reflect income taxes based upon the
tax returns filed with the appropriate taxing agencies. Deferred income taxes
are recorded to reflect the tax consequences on future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at year-end. The change in deferred taxes attributable to the carrying
value of investments categorized as "Available-for-Sale" is recognized as a
change in stockholders' equity. The change in deferred income taxes
attributable to all other timing differences is recognized as deferred income
tax expense or benefit. The tax benefit related to operating loss and tax
credit carryforwards, if any, are recognized if management believes, based on
available evidence, that it is more likely than not that they will be realized.
Investment tax credits, if any, are accounted for using the flow-through
method.
(12)
<PAGE> 13
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES (CONCLUDED)
The Company files consolidated federal and state income tax returns with its
subsidiary, Liberty National Bank. Federal and state income taxes are
allocated between the Company and its subsidiary in proportion to the
respective contributions in consolidated taxable income.
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The major categories of loans included in the loan portfolio are:
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1996
------------------
<S> <C>
Commercial $ 20,140,727
Real Estate 122,095,347
Installment loans 6,051,234
-----------------
Loans Receivable (Gross) $ 148,287,308
=================
Changes in the allowance for loan losses are summarized as follows:
(Unaudited)
Balance, January 1, 1996 $ 1,320,124
Provision charged to expense 256,859
Recoveries of loans previously charged off 1,688
-----------------
Total Additions 1,578,671
(Loans charged off) (254,633)
-----------------
Balance, September 30, 1996 $ 1,324,038
=================
</TABLE>
(13)
<PAGE> 14
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INVESTMENTS
The carrying amounts of investment securities as shown on the 1996 balance
sheet of the Bank and their approximate market value at September 30, 1996
were as follows;
<TABLE>
<CAPTION>
September 30, 1996 Available-for-Sale
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- -------------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 7,484,381 $ 8,114 $ 17,966 $ 7,474,529
U.S. Government Agencies 17,380,575 505 195,925 17,185,155
Mortgage-Backed Securities 4,207,120 9,919 33,309 4,183,730
Obligations of State and
Political Subdivisions 461,526 7,146 --- 468,672
------------ -------- --------- -----------
Total Debt Securities 29,533,602 25,684 247, 200 29,312,086
Equity Securities 711,900 --- --- 711,900
------------ -------- --------- -----------
Total Securities $ 30,245,502 $ 25,684 $ 247,200 $30,023,986
============ ======== ========= ===========
</TABLE>
The book value and approximate market value of investments at September 30,
1996, by contractual maturity are shown below. Expected maturities may differ
from contractual maturities due to borrowers having the right to call or repay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Securities Available for Sale
-----------------------------
Amortized Cost Carrying (Market) Value
-------------- -----------------------
<S> <C> <C>
Due in one year or less $ 4,689,731 $ 5,127,889
Due from one year to five years 23,862,000 23,683,310
Due from five to ten years 981,871 500,887
Other 711,900 711,900
------------- -------------
$ 30,245,502 $ 30,023,986
============= =============
</TABLE>
Effective December 31, 1993, the Company adopted the investment categorizations
and carrying value rules as required by Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 115 (FASB No. 115), Accounting
for Certain Investments in Debt and Equity Securities. Under this statement,
the unrealized gain or loss on investment securities available-for-sale, net of
the applicable deferred income taxes, is shown as a separate component of
stockholders' equity in the balance sheet. The following is a summary of the
effects on the statement of stockholders' equity as of September 30, 1996:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
Gross Unrealized Loss on Securities Available-for-Sale $ (221,516)
Deferred Income Tax Benefit on Unrealized Loss 66,271
------------
Net Decrease in Stockholders' Equity $ (155,245)
============
</TABLE>
(14)
<PAGE> 15
KEY FLORIDA BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATE FINANCIAL STATEMENTS
NOTE 8 - PREMISES AND EQUIPMENT
A summary of premises and equipment at September 30, 1996 is as follows;
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
Land $ 1,010,900
Buildings 2,652,000
Furniture, Fixtures and Equipment 2,051,085
--------------
5,713,985
(Accumulated Depreciation) (1,375,207)
--------------
Total Premises and Equipment $ 4,338,778
==============
</TABLE>
NOTE 9 - DEPOSITS
A summary of interest-bearing deposits at September 30, 1996 is as follows:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
Demand $ 28,574,551
Savings 17,369,453
Time 123,865,147
---------------
Total Interest-Bearing Accounts $ 169,809,151
===============
</TABLE>
NOTE 10 - STOCK OPTION PLAN
During 1991, the Bank adopted a Nonqualified Employee Stock Option Plan. Under
the Plan, a committee designated by the Board of Directors is authorized to
grant options to purchase up to 117,188 shares of common stock to officers and
employees of the Bank. The committee administers the Plan and designates the
optionee and all terms.
The option price per share with respect to each option shall be determined by
the committee but will, in no instance, be less than $4.27 per share. As of
September 30, 1996, the number of options outstanding totals 92,111. The
options granted must be exercised by March 14, 2000.
(15)
<PAGE> 16
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) 107,
Disclosures About Fair Value of Financial Instruments, on October 1, 1995.
SFAS 107 requires disclosures about the fair value of financial instruments and
the methods and assumptions used to estimate fair value. Included in the
definition of financial instruments are investment and mortgage-backed
securities, loans, deposit liabilities, and unfunded loan commitments. SFAS
107 relates only to disclosure issues and has no impact on the financial
position of the Company.
The Company adopted Financial Accounting Standards Board (SFAS) 114, Accounting
by Creditors for Impairment of a Loan, and SFAS 118, Accounting by Creditor for
Impairment of a Loan-income Recognition and Disclosures, on October 1, 1995.
Under the new standards, a loan is considered impaired, based on current
information and events, when it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual value of expected future cash flows discounted at the
historical effective interest rate, except that all collateral-dependent loans
are measured for impairment based on the fair value of the collateral. Prior
to October 1, 1995, the allowance for credit losses related to these loans was
based on undiscounted cash flows or the fair value of the collateral for
collateral dependent loans. The effect of the adoption of SFAS 114 was
immaterial to the Company and, accordingly, no additional provision for credit
losses was necessary for the nine-month period ended September 30, 1996.
NONACCRUAL LOANS - Generally, a loan (including a loan impaired under SFAS 114)
is classified as Nonaccrual and the accrual of interest on such loan is
discounted when the contractual payment of principal or interest has become 90
days past due or management has serious doubts about further collectibility of
principal or interest, even though the loan currently is performing. A loan
may remain on accrual status if it is in the process of collection and is either
guaranteed or well collateralized. When a loan is placed on nonaccrual status,
unpaid interest, credited to income in the current year is reversed and unpaid
interest accrued in prior years is charged against the allowance for credit
losses. Generally, loans are restored to accrual status when the obligation is
brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
(16)
<PAGE> 17
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
The Company's loan portfolio by type of loan consisted of the following:
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1996
------------------
<S> <C>
Commercial $ 20,140,727
Commercial real estate 35,494,227
Residential real estate 86,601,120
Consumer loans 6,051,234
-------------
$ 148,287,308
Allowance for loan losses 1,324,038
-------------
Loans, net $ 146,963,270
=============
</TABLE>
The adequacy of the allowance for loan losses is periodically evaluated by the
Company in order to maintain the allowance at a level that is sufficient to
absorb probable credit losses. Management's evaluation of the adequacy of the
allowance is based on a review of the Company's historical loss experience,
known and inherent risks in the loan portfolio, including adverse circumstances
that may affect the borrower's ability to repay interest and/or principal, the
delinquencies, charge-offs, and the risk ratings of the various loan
categories. Such factors as the level and trend of interest rates and the
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
Management does not consider an insignificant delay or shortfall in the amount
of payments an event that, when considered in isolation, would automatically
cause a loan to be considered impaired for purposes of SFAS 114. Examples of
insignificant delays or shortfalls include, depending on the specific facts
and circumstances, those that are associated with a temporary stoppage in
operations due to equipment failure or a natural disaster, or due to tight
cash flows during the off-peak season of a business. Recurring shortfalls or
delays in payments and/or extended delinquency periods may provide evidence that
a delay or shortfall is significant and are considered by management in
reviewing loans for impairment.
Management divides the Company's loan portfolio into the following categories
when estimating the allowance: (1) individually identified impaired loans; (2)
individually classified loans, other than those considered impaired; (3) groups
of homogeneous performing loans, i.e., residential mortgages, consumer, etc.;
and (4) groups of homogeneous loan commitments and other off-balance sheet
exposures.
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are included in the
provision for loan losses. Loans continue to be classified as impaired unless
they are brought fully current and the collection of principal and interest is
considered probable.
When a loan or portion of a loan is determined to be uncollectible, the portion
deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.
(17)
<PAGE> 18
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
An analysis of the allowance for loan losses for the nine months ended
September 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
Allowance at January 1 $ 1,320,124 $ 431,416
Provision charged to operating expense 256,859 277,263
Recovered on loans 1,688 1,876
Loans charged-off (254,633) (85,555)
------------- -----------
Balance at September 30 $ 1,324,038 $ 625,000
============= ===========
</TABLE>
At September 30, 1996, the Bank had no loans which were considered impaired and
had nonaccrual loans totaling approximately $1,413,219. Interest income which
would have been recorded on these loans was insignificant.
The Company adopted SFAS 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments" on October 1, 1995. SFAS
119 requires disclosures about derivative financial instruments--futures,
forward, swap, and option contracts, and other financial instruments with
similar characteristics. SFAS 119 also amends existing requirements of SFAS
105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, and SFAS 107. SFAS 119 requires disclosures about amounts, nature, and
terms of derivative financial instruments that are not subject to SFAS 105
because they do not result in off-balance-sheet risk of accounting loss. It
requires that a distinction be made between financial instruments held or
issued for trading activities measured at fair value with gains and losses
recognized in earnings and financial instruments held or issued for purposes
other than trading. SFAS 119 relates only to disclosure issues and does not
have a financial impact on the Company.
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of", issued by the FASB in March 1995, is
effective for the Company for fiscal years beginning on or after December 15,
1995. SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review for
recoverability, the entity should estimate the future cash flows expected to
result from the use of that asset and its eventual disposition. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that an entity expects to hold and use should be based on the fair
value of the asset. Management has determined that the impact, of SFAS
121 on the Company's financial statements as of September 30, 1996, is not
material.
(18)
<PAGE> 19
KEY FLORIDA BANCORP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONCLUDED)
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
"Accounting for Mortgage Servicing Rights," SFAS 122 requires companies that
engage in mortgage banking activities to allocate the total cost of the
mortgage loans it acquires or originates and then sells with servicing rights
retained between the estimated fair value of the loans and the capitalized
mortgage servicing rights, if practical. SFAS 122 also requires that
capitalized mortgage servicing rights be assessed for impairment based on the
fair value of those rights. SFAS applies prospectively to fiscal years
beginning after December 15, 1995. The adoption of the provision of SFAS 122
is not expected to have a material impact on the financial position of the
Company.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock Based
Compensation," effective for fiscal years beginning after December 15, 1995.
SFAS 123 requires a fair value-based method of accounting for stock-based
compensation. SFAS 123 is not expected to have a material impact on the
financial position or results of operations of the Company.
The FASB recently issued SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This Statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. The Statement
breaks new ground in resolving long-standing questions about whether
transactions should be accounted for as secured borrowings or as sales. The
approach that is used focuses on control. A company is required to recognize
the financial and servicing assets that it controls and the liabilities that
has incurred. The opposite result would occur when control of financial assets
has been surrendered and liabilities extinguished. SFAS 125 applies
prospectively to fiscal years beginning after December 15, 1996. No earlier or
retroactive application is allowed. The adoption of the provisions of SFAS 125
is not expected to have material impact on the financial position of the
Company.
(19)
<PAGE> 20
KEY FLORIDA BANCORP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - PARENT COMPANY ONLY FINANCIAL STATEMENTS.
Condensed financial statements of Key Florida Bancorp, Inc. (Parent Company
only) for the nine months ended September 30, 1996 are presented as follows;
<TABLE>
<CAPTION>
Condensed Balance Sheet
September 30, 1996
-------------------------
<S> <C>
ASSETS
Cash $ 281,425
Investment in wholly-owned subsidiary, at
Equity in underlying assets 12,936,253
Other assets 1,608
------------
Total assets $ 13,219,286
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable 149,294
Other liabilities 82,485
------------
Total liabilities 231,779
------------
Stockholders' Equity
Preferred stock 430,250
Common stock 27,400
Additional paid-in capital 11,284,742
Retained earnings 1,402,313
(Treasury stock) (1,953)
(Unrealized losses on certain securities) (155,245)
------------
Total stockholder's equity 12,987,507
------------
Total liabilities and stockholders' equity $ 13,219,286
============
</TABLE>
(20)
<PAGE> 21
KEY FLORIDA BANCORP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - PARENT COMPANY ONLY FINANCIAL STATMENTS (CONCLUDED)
<TABLE>
<CAPTION>
Condensed Statement of Income
For the Nine Months Ended September 30, 1996
--------------------------------------------
<S> <C>
INCOME
Interest income $ 2,476
---------
Total income 2,476
---------
EXPENSES
Interest 2,622
Other expense 28,050
---------
Total expense 30,672
---------
Loss before equity in undistributed earnings
of subsidiary (28,196)
Equity in undistributed income of subsidiary 336,781
---------
Net income $ 308,585
=========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
For the Nine Months Ended September 30, 1996
--------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 308,585
Adjustments to reconcile net income to net cash
used in operating activities:
Income from subsidiary (336,781)
Other 901
-----------
Net cash used in operating activities (27,295)
-----------
Cash Flows from Investing Activities
Additonal Investment in Subsidiary (8,544,901)
-----------
Net cash used in investing activities (8,544,901)
-----------
Cash flows from financing activities
Repayments on notes payable (18,114)
Cash dividends paid on preferred stock (30,107)
Purchase of treasury stock (198)
Proceeds from issuance of common stock 8,541,252
-----------
Net cash provided by financing activities 8,492,833
-----------
Decrease in cash (79,363)
Cash, January 1 360,788
-----------
Cash, September 30 $ 281,425
===========
</TABLE>
(21)
<PAGE> 22
KEY FLORIDA BANCORP, INC.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the third quarter of fiscal 1996
ending September 30, 1996 subsequent to the merger of the Company's former
subsidiary Key Florida Bank, F.S.B. with and into Liberty National Bank.
Management's discussion and analysis of earnings and related financial data are
presented herein to assist investors in understanding the financial condition
of the Company at September 30, 1996, and the results of operations of the
Company and for Liberty National Bank for the nine months and for the three
months ended September 30, 1996 and 1995, respectively. This discussion should
be read in conjunction with the unaudited consolidated financial statements and
related unaudited footnotes of the Company presented elsewhere within.
General
The Company's principal asset is its ownership of a controlling interest in
Liberty National Bank ("the Bank"). Accordingly, the Company's results of
operations are primarily dependent upon the results of operations of the Bank.
The Bank conducts commercial business consisting of attracting deposits from
the general public and applying those funds to the origination of commercial,
consumer and real estate loans (including commercial loans collateralized by
real estate). The Bank's profitability depends primarily on net interest
income, which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) less the interest expense
incurred on interest-bearing liabilities (i.e., customer deposits and borrowed
funds). Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities, and the interest rate
earned and paid on these balances. Net interest income is dependent upon the
Bank's interest-rate spread which is the difference between the average yield
earned on its interest-earning assets and the average rate paid on its
interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income. The interest rate spread is impacted by interest
rates, deposit flows, and loan demand. Additionally, and to a less extent, the
Bank's profitability is affected by such factors as the level of noninterest
income and expenses, the provision for loan losses, and the effective tax rate.
Noninterest income consists primarily of service fees on deposit accounts and
income from the sale of loans and investment securities. Noninterest expense
consists of compensation and employee benefits, occupancy and equipment
expenses, deposit insurance premiums paid to the FDIC, and other operating
expenses.
Management's discussion and analysis of earnings and related financial data are
presented herein to assist in an understanding of the financial condition of
the Company at, and results of operations of the Company for, the nine months
ended September 30, 1996.
Recent Developments
Effective the close of business on July 30, 1996, the Company and the
Bank closed the Merger of Key Florida Bank, F.S.B. ("KFB") with and into the
Bank. In the KFB/Bank merger, the outstanding shares of Bank common stock were
converted into an aggregate of 2,739,847 shares of the Company's common stock.
At October 31, 1996, the Company elected to change its fiscal reporting year to
December 31, to correspond to the requirements for financial reporting for
national banks issued by the Office of the Comptroller of the Currency, see
Note 4 to the unaudited consolidated financial statments.
(22)
<PAGE> 23
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
Liquidity Management
The objective of liquidity management is to ensure the availability of
sufficient resources to meet all financial commitments and to capitalize on
opportunities for business expansion. Liquidity Management addresses the
ability to meet deposit withdrawals either on demand or by contractual
maturity, to repay other borrowings as they mature and to make new loans and
investments as opportunities arise.
The Company's principal source of funds are those generated by the Bank,
including net increases in deposits, principal and interest payments on loans
and proceeds from sales and maturities of investment and mortgage-backed
securities.
The Bank has numerous sources of liquidity including loan and security
principal repayments and maturities, lines of credit at other financial
institutions, a line of credit with the Federal Home Loan Bank, the sale of
securities from its available-for-sale portfolio, whole loan sales and growth
in its core deposit base. As a member of the Federal Home Loan Bank system, the
Bank has the ability to borrow on a secured basis utilizing mortgage related
loans and securities as collateral. At September 30, 1996 the Bank had no
advances with the Federal Home Loan Bank. The Bank also had an available line
of credit of $10 million.
The liquidity reserve may consist of cash on hand, cash on demand deposit with
other correspondent banks, and other investments and short-term marketable
securities as determined by the rules of the Office of the Comptroller of the
Currency, such as federal funds sold and United States securities and
securities guaranteed by the United States. At September 30, 1996, the
Company had a liquidity ratio of 9.3%.
Liquidity, as measured in the form of cash and cash equivalents, totaled
$13,975,228 at September 30, 1996. At September 30, 1995, cash and cash
equivalents totaled $3,888,669, an increase of 259% from September 30, 1995 to
September 30, 1996. Cash and cash equivalents vary with seasonal deposit
movements and are generally higher in the winter than in the summer, and vary
with the level of principal repayments occurring in the Bank's investment
securities portfolio and loan portfolio.
As is typical of financial institutions, cash flows from investing (primarily
in loans and securities) and from financing (primarily through deposit
generation and short-term borrowings) are in excess of cash flows from
operations. For the nine months ended September 30, 1996, the cash flow from
operations of $1,978,508 was higher than the same period 1995. Cash flows from
investing activities primarily reflect the net increase in loans and
investments due to the merger with Key Florida Bank, F.S.B. The cash flows from
financing activities at September 30, 1996 reflect the increase in deposits
acquired in the merger with Key Florida Bank, F.S.B.
(23)
<PAGE> 24
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
Liquidity Management - Continued
The future cash requirements of the Bank are affected by the purchase of a
seventh branch location, the payment of the one time SAIF Special assessment
and the purchase of additional property in Bradenton contiguous to the Bank's
Manatee Avenue branch. The cash requirements will be approximately $1,070,000
which will be met through the maturity of investments of $1,050,000 in November
1996, the seasonal influx of deposits, the new deposits anticipated with the
opening of the seventh branch location (subject to regulatory approval) and the
proceeds from the sale of the Bank's lending office also located on Manatee
Aveunue.
Capital Resources
As mentioned previously, the Bank's principal sources of funds are net
increases in deposits, principal and interest payments on loans and proceeds
from sales and maturities of investment and mortgage-backed securities. The
Bank uses its capital resources primarily to fund existing and continuing loan
commitments and to purchase investment and mortgage-backed securities. At
September 30, 1996 and 1995, the Bank had commitments to originate loans
totaling $17,685,000 and $9,233,000, respectively, and had issued but unused
standby letters of credit of $519,000 and $160,300, respectively. Scheduled
maturities of certificates of deposit during the twelve months following
September 30, 1996 and 1995, totaled $88 million and $33 million, respectively.
In addition to the Bank's aforementioned commitment for the purchase of a
seventh branch location (subject to regulatory approval), the payment of the
one-time SAIF special assessment and the purchase of the Manatee Avenue
property it has also committed to the capital expenditures necessary to upgrade
its computer and data processing systems. Though slightly more than half of
the projected $400,000 cost has been expended, these expenditures will enable
the bank to upgrade and convert its existing data processing system to a new
more innovative technology in order to stay competitive. The data processing
capital expenditure will be amortized over the normal useful lives of the
different components based on generally accepted accounting principles.
Management believes that the Bank has adequate resources to fund all of its
commitments, that substantially all of its existing commitments will be funded
in the subsequent twelve months and, if so desired it, can adjust the rates on
certificates of deposit and other deposit accounts to retain deposits in a
changing interest rate environment.
The Federal Reserve Board's (FRB) capital adequacy guidelines mandate that
minimum ratios be maintained by bank holding companies and banks.
Based upon their respective regulatory capital ratios at September 30, 1996
both the Company and the Bank are well capitalized, based on the
definitions in the regulations issued by the Federal Reserve Board and the
other federal bank regulatory agencies setting forth the general capital
requirements mandated by the Federal Deposit Insurance Corporation Improvement
Act of 1991.
The table below indicates the regulatory capital ratios of the Bank and the
minimum regulatory guidelines (all three regulatory capital ratios) at both
September 30, 1996 and 1995.
(24)
<PAGE> 25
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
Capital Resources - Continued
<TABLE>
<CAPTION>
Actual Ratios
---------------------------------------- FRB Minimum
September 30, September 30, Regulatory
1996 1995 Guidelines
---------- ------- --------
<S> <C> <C> <C>
Risk Based Ratios
Tier 1 Capital to risk-weighted assets 9.21% 11.15% 4.0%
Total Equity Capital to risk-weighted
assets 10.23% 11.01% 8.0%
Tier 1 Capital to total average assets-
leverage ratio 6.69% 7.92% 3.0%
</TABLE>
The following were the essential components of the Bank's risk-based capital
ratios (in thousands):
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Tier 1 Capital
Common Stock $ 4,797 $ 4,797
Additional Paid-in Capital 7,014 1,751
Retained Earnings 1,201 672
Intangible assets (1,123) 0
--------- -------
Total Tier 1 Capital 11,889 7,220
--------- -------
Tier 2 Capital
Allowance for loan losses, as limited 1,324 625
--------- -------
Total Tier 2 Capital 1,324 625
--------- -------
Total risk-based Capital 13,213 7,845
========= =======
Risk-weighted Assets $ 130,962 $64,729
========= =======
</TABLE>
During the nine months ended September 30,1996 and 1995, the Bank's Tier 1
Capital ratio declined by 194 points and the Total Capital ratio declined by
78 basis points. Though additional paid-in capital and retained earnings
increased as a result of the merger, the riskweighted assets doubled
which resulted in the decrease of the Tier 1 and Total Capital ratios. The
increase in intangible assets (primarily the core deposit intangible and the
mortgage servicing rights) caused a decrease in the Tier 1 Capital. The Bank's
total risk-weighted assets at September 30, 1996 were approximately $66,0000
higher than at year-end 1995.
(25)
<PAGE> 26
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATIONS
Nine months ended September 30, 1996, compared to nine months ended September
30, 1995
General
The Company's net income was $308,585 or $.23 per share for the nine months
ended September 30, 1996 as compared to the Bank's net income of $369,175, or
$.34 per share for the nine months ended September 30, 1995, or a decrease of
$60,590 or 16.4%. Refer to Note 2, "ProForma Income Statement" for view of
results of operations if the merger had occurred at the beginning of each of
the periods presented. The Company's income before taxes on income was $486,906
for the nine months ended September 30, 1996, as compared to $618,707 for the
Bank for the nine months ended September 30, 1995, or a decrease of $131,801,
or 27.1%. The primary reason for the decrease in income before income taxes and
net income for the nine months ended September 30, 1996 and 1995 is the accrual
for the $400,150 SAIF Special Assessment at September 30, 1996 which is
discussed in Note 3 of the accompanying notes to unaudited consolidated
financial statements. The effect of the SAIF Special Assessment was a charge to
operating income of $400,150. Had the SAIF Special Assessment not been incurred
at September 30, 1996 the income before income taxes would have been $887,056,
a $268,349 increase, or 43.4%, over the nine months ended September 30, 1995.
The effect on net income had the SAIF Special Assessment not occurred, would
have been an increase of $260,100 over the net income reported at September 30,
1995, or an increase of $199,510 over the nine months ended September 30, 1995.
Net of the effect of the SAIF Special Assessment, the improvement in income
before income taxes was the result of a higher volume of net interest-earning
assets acquired in the merger with Key Florida Bank, F.S.B. Although the Bank
experienced an interest rate spread decline during 1995, the Bank has been
successful in reversing this trend through the first nine months of 1996 as the
interest rate spread has increased from 3.44% through September 30, 1995 to
3.91% at September 30, 1996. The primary reason for this improvement is related
to an improvement in the cost of funds the Bank is incurring. Management
anticipates this trend to continue for the next twelve months as deposits
acquired from Key Florida Bank, F.S.B. of approximately $11 million at a
weighted average rate exceeding 6.6% will mature and be replaced by lower rate
time deposits. The average yield on loans decreased 103 basis points from
September 30, 1995 to September 30, 1996. This is due to the acquisition of the
loan portfolio of Key Florida Bank, F.S.B. which was composed primarily of
residential real estate loans that typically have a lower yield than commercial
loans. However, the addition of this large residential real estate portfolio to
the overall Bank loan portfolio brings a measure of increased asset quality.
Another reason management anticipates the interest rate spread may continue its
improvement is that the Bank has increased its loans to deposits ratio from
74.7% at December 31, 1995 to 79.7% at September 30, 1996.
The Bank plans on continuing to lower its cost on interest-bearing liabilities
during 1996 by repricing its deposit mix.
(26)
<PAGE> 27
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
General (Continued)
The following table shows selected ratios for the periods ended:
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1996 1995
---- ----
<S> <C> <C>
Average equity as a percentage of average assets 7.18% 8.06%
Equity to total assets at end of period 6.47% 7.60%
Return on average assets .26% .42%
Return on average equity 3.60% 5.16%
Noninterest expense to average assets 3.19% 3.15%
Interest income to average earnings assets 6.02% 8.44%
Interest expense to average interest-bearing liabilities 3.09% 3.78%
Net interest margin 3.97% 2.56%
</TABLE>
As previously discussed, the income of Key Florida Bank, F.S.B. for the period
January 1, 1996 through July 30, 1996, which was approximately $185,000, was
closed to retained earnings and acquired by the Bank on July 30, 1996.
Therefore, the net income amount used to calculate return on average assets and
return on average equity does not include the aforementioned Key Florida Bank,
F.S.B. net income through July 30, 1996.
(27)
<PAGE> 28
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
General (Continued)
The following tables set forth for the periods indicated, information regarding
(I) the total dollar amount of interest and dividend income of the Bank from
interest-earning assets and the resultant average yield; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest/dividend income; (iv) interest rate spread;
and (v) net interest margin.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------
1996 1995
----------------------------------------------------------------
(Dollars in thousands)
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
------- --------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1) $ 95,023 $6,196 8.69% $94,790 $3,995 9.72%
Investment and mortgage
backed securities 22,764 941 5.51% 24,706 1,086 5.86%
Other interest-earning assets(2) 2,999 137 6.09% 2,687 125 6.20%
-------- ------ ---- ------- ------ ----
Total interest-earning assets $120,786 $7,274 8.03% $82,183 $5,206 8.44%
Noninterest-earning assets 9,410 6,482
-------- -------
Total assets $130,196 $88,665
======== =======
Interest-bearing liabilities:
Demand, money market and
NOW deposits $ 18,124 $ 358 2.63% $12,338 $ 293 3.16%
Savings 8,615 240 3.71% 4,000 84 2.80%
Certificates of deposit 81,091 3,061 5.03% 55,327 2,313 5.57%
Other borrowings $ 1,123 $ 19 2.25% $ 0 0 0%
-------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities $108,953 $3,678 4.12% $71,665 $2,690 5.00%
-------- ------ ---- ------- ------ ----
Noninterest-bearing liabilities 11,892 9,852
Stockholders' equity 9,351 7,148
-------- -------
Total Liabilities and
Stockholders' equity $130,196 $88,665
======== =======
Net interest/dividend income $3,596 $2,516
====== ======
Interest-rate spread(3) 3.91% 3.44%
==== ====
Net interest margin(4) 3.97% 4.08%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.02% 1.15%
======== =======
</TABLE>
- -------------------------------------
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits on other banks and federal funds sold
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
(28)
<PAGE> 29
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
Net interest income
Net interest income, which constitutes the principal source of income for the
Bank, represents the excess of interest income on interest-earning assets over
interest expense on interest-bearing liabilities. The principal
interest-earning assets are federal funds sold, investment securities and loans
receivable. Interest-bearing liabilities primarily consist of time deposits,
interest-bearing checking accounts ("NOW accounts"), savings, deposits and
money market accounts. Funds attracted by these interest-bearing liabilities
are invested in interest-earning assets. Accordingly, net interest income
depends upon the volume of average interest-earning assets and average
interest-bearing liabilities and the interest rates earned or paid on them.
The following table sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. The
rate/volume variance for each category has been allocated on a consistent basis
between rate and volume variances based on the percentage of the rate or volume
variance to the sum of the two absolute variances.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 Compared to 1995
(Dollars in thousands)
---------------------------------------------------
Rate Volume Total
---- ------ -----
<S> <C> <C> <C>
Interest-earning assets:
Loans $(278) $2,479 $2,201
Investment and mortgage-backed
securities (63) (82) (145)
Other interest-earning assets (2) 14 12
----- ------ ------
Total (343) 2,411 2,068
----- ------ ------
Interest-bearing liabilities:
Demand money market and
NOW deposits (17) 82 65
Savings 34 122 156
Certificates of Deposit (129) 877 748
Other borrowings 0 19 19
----- ------ ------
Total (112) 1,110 988
----- ------ ------
Net change in net interest income $(231) $1,311 $1,080
===== ====== ======
</TABLE>
(29)
<PAGE> 30
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
Net interest income (Continued)
The Company's net interest was $3,595,606 for the nine months ended September
30, 1996 compared with $2,516,577 for the Bank for the nine months ended
September 30, 1995, or an increase of $1,079,029 or 43%. The Company's net
interest income was $2,480,186 for the quarter ended September 30, 1996
compared with $826,881 for the Bank for the quarter ended September 30, 1995,
or an increase of $1,653,305, or 200%. These increases in net interest income
resulted primarily from the increase in the loan portfolio due to the merger
with Key Florida Bank, F.S.B. The 73% volume increase in the average balance of
the loan portfolio for the first nine months of 1996 as compared to the first
nine months of 1995 resulted in a 55% increase in loan interest income. Though
there was a 10.5% decrease in the average yield on loans for the nine months
ended September 30, 1996 versus the nine months ended September 30, 1995 due to
the aforementioned addition of Key Florida Bank, F.S.B.'s residential real
estate loan portfolio, the increase in the loan portfolio volume drove the 55%
increase in loan interest income. There was also a decrease in the loan rate
environment during this time period which also caused the decrease in the
average yield on loans. As the above rate/volume variance table indicates, to a
lesser extent, other interest-earning assets, which includes interest-bearing
deposits on other banks and federal funds sold, accounted for a small portion
of the increase in interest income. Though there was a 2% decline in the
average yield on other interest-earning assets for the nine months ended
September 30, 1996 compared with the same period of 1995, there was a 12%
increase in the average balance during the same time period resulting in a 9.6%
increase in interest income from other interest-earning assets. The 36.7%
volume increase in interest expense for the first nine months of 1996 compared
with 1995 was primarily a result of a 66% increase in average balances of
interest-bearing liabilities for the same periods coupled with a 17.6% decrease
in the average rate paid on the interest-bearing liabilities. Again, the large
increase in average balances of the interest-bearing liabilities during the
first nine months of 1996 can be attributed to the merger with Key Florida
Bank, F.S.B. on July 30, 1996 and the subsequent increase in deposits of $13
million created the ability to enjoy certain economies of scale subsequent to
the merger. The merger transaction created the ability for the Bank to be more
competitive in attracting deposit relationships within its market area. The
interest rates paid on interest-bearing liabilities decreased 88 basis points
from September 30, 1995 to September 30, 1996 as the Bank paid lower rates
primarily on time deposits and demand, money market and NOW deposits. As
previously discussed, management expects the average interest rates paid to
decrease further over the next twelve months as approximately $11 million in
time deposits with an average rate exceeding 6.6% mature and are replaced by
lower rate time deposits.
Provision for Loan Losses
The provision for loan losses is charged to earnings to bring the allowance for
loan losses to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by the Company,
the amounts of non-performing loans, general economic conditions, particularly
as they relate to the Company's market area, and other factors related to the
collectibility of the Company's loan portfolio. During the nine months ended
September 30, 1996, the provision for loan losses was $256,859, as compared to
$277,263 during the nine months ended September 30, 1995, or a decrease of
$20,404, or 8%. This decreased provision for loan losses was primarily in
recognition of
(30)
<PAGE> 31
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATION (CONTINUED)
Provision for Loan Losses (Concluded)
the merger of the Liberty National Bank loan loss reserve with the loan loss
reserve of Key Florida Bank, F.S.B. and management's recognition of the
increased asset quality in the former Key Florida Bank, F.S.B. loan portfolio.
See "---Financial Condition---Allowance for Loan Losses". As of September 30,
1996, the allowance for loan losses was 0.89% of total loans outstanding.
Noninterest Income
Noninterest income is composed primarily of service charges and fees but also
includes gains or losses on the sale of loans, gains or losses on the
disposition of bank premises and equipment, gain or losses on the sale of other
real estate owned and the gain or loss on the sale of investment securities.
During the nine months ended September 30, 1996, noninterest income was
$288,467 as compared to $476,696 during the nine months ended September 30,
1995 or a decrease of $188,229, or 39.5%. This decrease was primarily
attributable to a legal settlement of $130,581 being received during the nine
months ended September 30, 1995.
Noninterest Expenses
During the nine months ended September 30, 1996, noninterest expenses were
$3,140,308 as compared to $2,097,303 during the nine months ended September 30,
1996, or an increase of $1,043,005 or 50%. The following sets forth additional
information on certain other expenses categories which had significant changes.
Compensation and benefits increased $376,158 or 38% to $1,368,079 during the
nine months ended September 30, 1996 from $991,921 during the nine months ended
September 30, 1995. This increase is primarily due to the merger of the Bank
with Key Florida Bank, F.S.B. on July 30, 1996. Prior to the merger of the two
financial institutions, the number of full time equivalent employees at the Bank
had averaged 44. Since the merger transaction occurred, the average number of
full time equivalent employees is approximately 82. Prior to the merger with
Key Florida Bank, F.S.B., the compensation and benefits expense averaged
$126,800 monthly. Subsequent to the merger, the compensation and benefits
expense average $194,000 monthly. Also, thirty days prior to the merger of the
two institutions, the Bank hired a Chief Financial Officer to oversee the
financial and regulatory reporting for the Company.
Occupancy expenses increased $109,213 or 32% to $450,116 during the nine months
ended September 30, 1996 from $340,903 during the nine months ended September
30, 1995. This increase is also attributable to the merger with Key Florida,
F.S.B. The Bank had three branch
(31)
<PAGE> 32
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
Noninterest Expenses (Concluded)
offices prior to the merger transaction and acquired the three branch offices
of Key Florida Bank, F.S.B. Prior to the merger of the two institutions, the
utilities expense had been averaging $5,100 monthly whereas subsequent to the
merger utilities expenses are averaging $9,850 per month. For the nine months
ended September 30, 1996 utilities expense was $55,593 as compared with $36,192
for the nine months ended September 30, 1995. Building maintenance costs for
the nine months ended September 30, 1996 were $126,644 an increase of $39,517
over the $87,127 for the same period of 1995. The depreciation on buildings
expense for the nine months ended September 30, 1996 was $127,046 compared to
$62,032 for the comparable period of 1995. The depreciation on buildings
increase of $65,014 is not only attributable to the addition of three branches
in the merger with Key Florida Bank, F.S.B. but also due to the April 1996
opening of the Bank's University Parkway branch.
Data processing expenses increased $49,590 or 45% to $160,003 during the nine
months ended September 30, 1996 from $110,413 during the nine months ended
September 30, 1995. This increase was the result of the merger transaction with
Key Florida Bank, F.S.B. and the payments to two service providers subsequent
to the merger as each bank was using a different data processing service
bureau. The Bank is scheduled to convert its data processing systems to one
service bureau in October 1996 and the dual expense incurred since the July 30,
1996 merger occurred should be eliminated.
FDIC insurance assessments increased $389,689, or 433%, to $479,605 during the
nine months ended September 30, 1996 from $89,916 during the nine months ended
September 30, 1995. As explained in Note 3 -SAIF Special Assessment, the bank
incurred a one time charge to operations of $400,150 which was accrued in the
third quarter of 1996 for its share of "Oakar" deposits held due to the merger
with Key Florida Bank, F.S.B. The Bank was assessed its share of the cost
necessary to recapitalize the SAIF fund.
Other expenses were $682,505 for the nine months ended September 30, 1996, as
compared to $564,150 during the nine months ended September 30, 1995, or an
increase of $118,355, or 21%. The increase in other expenses was primarily due
to the opening of the University Parkway Office. The increases were partially
offset by a decrease of $80,244 in legal and professional fees.
(32)
<PAGE> 33
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
Taxes on Income
During the nine months ended September 30, 1996 and 1995, the Company and the
Bank recorded taxes on income of $178,321 and $249,532, repectively, reflecting
effective income tax rates of 36.62% in 1996 and 40.33% in 1995. This decrease
in the effective income tax rate was primarily due to: (i) the decrease in
merger costs which are not tax deductible; (ii) the increase in the credit
against Florida income taxes for prior year's Florida intangible taxes; and
(iii) the addition of the allowable portion of the net operating loss
carryforward acquired from Key Florida Bank, F.S.B.
Three months ended September 30, 1996, compared to three months ended September
30, 1995.
General
Net loss for the quarter ended September 30, 1996 was $13,918, or $.01 per
share, compared to net earnings of $866, or $0 per share per share, for the
quarter ended September 30, 1995. The decrease in net earnings was primarily
due to the one time SAIF special assessment of $400,150, see Note 3 to the
unaudited consolidated financial statements. Contributing to the loss for the
quarter ended September 30, 1996 was that the earnings of Key Florida Bank,
F.S.B., of approximately $30,000, for the period July 1, 1996 to July 30, 1996
were included in retained earnings and acquired by the Bank in the merger
transaction. The increase in interest income resulted from increases in
average loans outstanding, investments and mortgage-backed securities and other
interest-earning assets.
The following tables set forth for the periods indicated, information regarding
(i) the total dollar amount of interest and dividend income of the Bank from
interest-earning assets and the resultant average yield; (ii) the total dollar
amount of interest expense on interest-bearing liabilites and resultant average
cost; (iii) net interest/dividend income; (iv) interest-rate spread; and (v)
net interest margin.
(33)
<PAGE> 34
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
General (Continued)
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------------------
1996 1995
-----------------------------------------------------------------------
(Dollars in thousands)
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
------- --------- ------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1) $128,656 $ 2,774 6.47% $ 59,367 $ 1,387 7.00%
Investment and mortgage
backed securities 27,082 380 4.21% 26,441 409 4.64%
Other interest-earning assets(2) 2,866 55 5.75% 1,187 30 7.58%
-------- -------- ---- -------- -------- -----
Total interest-earning assets $158,604 $ 3,209 6.07% $ 86,995 $ 1,826 6.30%
Noninterest-earning asset 12,877 6,737
-------- --------
Total assets $170,929 $ 93,732
======== ========
Interest-bearing liabilities:
Demand, money market and
NOW deposits $ 23,753 $ 166 2.09% $ 13,855 $ 106 2.29%
Savings 13,789 175 3.81% 3,996 28 2.10%
Certificates of deposit 104,752 1,328 3.80% 58,166 865 4.46%
Other borrowings 1,677 16 2.86% 0 0 0%
-------- -------- ---- -------- -------- -----
Total interest-bearing
liabilities $143,971 $ 1,685 3.51% $ 76,017 $ 999 3.94%
-------- -------- ---- -------- -------- -----
Noninterest-bearing liabilities 15,283 10,362
Stockholders' equity 11,675 7,353
-------- --------
Total Liabilities and
Stockholders' equity $170,929 $ 93,732
======== ========
Net interest/dividend income $ 1,524 $ 827
======= ========
Interest-rate spread(3) 2.56% 2.36%
==== ====
Net interest margin(4) 2.88% 2.85%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.10% 1.14%
==== ====
</TABLE>
- ------------------
(1) Includes nonaccrual loans
(2) Includes interest-bearing deposits on other banks and federal funds sold.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
(34)
<PAGE> 35
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATIONS (CONTINUED)
Interest Income and Expense
Interest income increased by $2,240,293 from $1,825,994 for the quarter ended
September 30, 1995 to $4,006,287 for the quarter ended September 30, 1996.
Interest income on loans increased $2,003,672 due to the increase in the Bank's
loan portfolio which was directly attributed to the merger with Key Florida
Bank, F.S.B. The loan portfolio continued to grow subsequent to the merger
reflecting the continued strong demand in the local area in addition to the
Bank's merger growth. The decrease in the weighted average yield on loans was
the result of the acquisition of the Key Florida Bank, F.S.B. loan portfolio
which consists predominantly of residential real estate loans which are
typically at lower interest rates than similar sized commercial loans. Interest
on investment and mortgage-backed securities decreased $28,506 due to a
decrease in the average yield on investment and mortgage-backed securities from
4.64% at September 30, 1995 to 4.21% at September 30, 1996.
Interest expense increased to $1,685,331 for the quarter ended September 30,
1996, from $999,113 for the third quarter of 1995 an increase of $686,218, or
68.7%. Interest on deposit accounts increased because of an increase in the
average balance of deposit accounts outstanding from $76 million for the third
quarter of 1995 to $142.3 million for the third quarter of 1996. During the
third quarter of 1996 and 1995 the weighted average rate paid on deposit
accounts decreased from 3.94% to 3.51%, respectively. There was a change in the
deposit mix in the third quarter of 1996 with certificates of deposit
comprising 73.6% of the total average balance of deposits compared to 76.5% of
the total average balance of deposits for the same quarter of 1995. This
decrease was primarily due to the acquisition of the total deposit base of Key
Florida Bank, F.S.B. coupled with market demands caused by increased marketing
activities for deposits by several large banks in the banks market area.
Provision for Loan Losses
The provision for loan losses is charged to earnings to bring the total
allowance to a level deemed appropriate by management and is based upon
historical experience, the volume and type of lending conducted by the Bank,
the amounts of nonperforming loans, general economic conditions, particularly
as they relate to the Bank's market area, and other factors related to the
collectibility of the Bank's loan portfolio. There was a decrease in the
provision from $167,263 for the quarter ended September 30, 1995 to $61,859 for
the quarter ended September 30, 1996. The decrease in the provision was
primarily due to the addition of the allowance for loan losses of Key Florida
Bank, F.S.B. in the merger. Management believes that the allowance at September
30, 1996 was adequate.
(35)
<PAGE> 36
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
RESULTS OF OPERATIONS (CONCLUDED)
Noninterest Income
Total noninterest income increased by $37,982 for the quarter ended September
30, 1996 compared to 1995 principally due to an increase in FASB fees on loans,
and an increase in service charges on deposits caused by the increase in
deposit accounts from the acquisition of the deposit accounts of Key Florida
Bank, F.S.B.
Noninterest Expense
Total noninterest expense increased by $283,940 to $1,998,711 for the quarter
ended September 30, 1996 from $714,771 for the quarter ended September 30,
1995, primarily due to the increases in salaries and employee benefits of
$449,626 and, due to the Bank's acquisition of "Oakar" deposits under Section
5(d)(3), there was an increase in FDIC insurance premiums and assessments of
$347,047. The increase in salaries and employee benefits was caused by the
merger with Key Florida Bank, F.S.B. which effectively doubled the number of
full-time equivlent employees and the number of branch locations. Refer to Note
3 of the accompanying notes to unaudited financial statements for an
explanation of the SAIF Special Assessment which caused the increase in FDIC
insurance premiums.
ASSET/LIABILITY MANAGEMENT
A principal objective of the Bank's asset/liability management strategy is to
minimize it's exposure to changes in interest rates by matching the maturity
and repricing horizons of interest-earning assets and interest-bearing
liabilities. This strategy is monitored by an Asset and Liability Committee
(the "ALCO Committee") which establishes policies and monitors results to
control interest rate sensitivity.
Management evaluates interest-rate-risk and then formulates guidelines
regarding asset generation and repricing funding sources and pricing, and
off-balance sheet commitments in order to maintain interest rate risk within
target levels for the appropriate level of risk which are determined by the
ALCO Committee. The ALCO Committee uses computer models prepared by a third
party to measure the Bank's interest rate sensitivity. From these reports, the
ALCO Committee can estimate the net income effect of various interest rate
scenarios.
As a part of the Bank's interest rate risk management policy, the ALCO
Committee examines the extent to which its assets and liabilities are "interest
rate sensitive" and monitors the Bank's interest rate sensitivity "gap." An
asset or liability is considered to be interest rate sensitive if it will
reprice or mature within the time period analyzed, usually one year or less.
The interest rate sensitivity gap is the difference between interest-earning
assets and interest-bearing liabilities scheduled to mature or reprice within
such time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of rising interest
rates a negative gap would tend to adversely
(36)
<PAGE> 37
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
ASSET/LIABILITY MANAGEMENT (CONTINUED)
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while
a positive gap would tend to adversely affect net interest income. If the
repricing of the Bank's assets and liabilities were equally flexible and moved
concurrently, the impact of any increase or decrease in interest rates on net
interest income would be minimal.
The ALCO Committee's policy is to maintain a cumulative one-year gap which
falls in the range of (5%) to 10% of total assets. Management attempts to
conform to this policy by managing the maturity distribution of its investment
portfolio and emphasizing origination's and purchases of adjustable rate loans,
and by managing the product mix and maturity of its deposit accounts.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the ALCO Committee also evaluates how the repayment of
particular assets and liabilities is impacted by changes in interest rates.
Income associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities fluctuate in
advance of changes in general market interest rates, while interest rates on
other types may lag behind changes in general market rates. In addition,
certain assets, such as adjustable rate mortgage loans, have features
(generally referred to as "interest rate caps") which limit changes in interest
rates on a short-term basis and over the life of the asset. In the event of a
change in interest rates, prepayment (on loans) and early withdrawal(of deposit
accounts) levels also could deviate significantly from those assumed in
calculating the interest rate gap. The ability of many borrowers to service
their debts also may decrease in the event of an interest rate increase.
Management's strategy is to maintain a balanced interest rate risk position to
protect its net interest margin from market fluctuations. To this end, the ALCO
Committee reviews, on a quarterly basis, the maturity and repricing of assets
and liabilities.
The Bank's cumulative nine month gap at September 30, 1996 was a positive 7.08%
which was within the target range established by the ALCO Committee. Management
believes that the foregoing interest rate sensitivity analysis does not take
into account the potential impact of prepayments on fixed rate loans (which
would tend to mitigate the effect of a negative gap). Also, management believes
the analysis assumes all NOW and statement savings accounts will reprice
immediately, although management considers at least a portion of such accounts
to be "core deposits" which management believes would not reprice in direct
response to changes in market interest rates, and therefore would tend to
mitigate the effect of a negative gap.
(37)
<PAGE> 38
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
ASSETS/LIABILITY MANAGEMENT (CONCLUDED)
Principal among the Bank's asset/liability management strategies has been the
emphasis on managing its interest rate sensitive liabilities in a manner
designed to attempt to reduce the Bank's exposure during periods of fluctuating
interest rates. Management believes that the type and amount of the Bank's
interest rate sensitive liabilities may reduce the potential impact that a rise
in interest rates might have on the Bank's net interest income. The Bank seeks
to maintain a core deposit base by providing quality services to its customers
without significantly increasing its cost of funds or operating expenses. The
Bank's demand, money market, and NOW deposit accounts, approximated l5.5% total
deposits at September 30, 1996. These accounts bore a weighted average rate of
2.09% and 2.63% during the three months ended September 30, 1996, and during
the nine months ended September 30, 1996, respectively. Management anticipates
that these accounts will continue to comprise a significant portion of the
Bank's total deposit base. At September 30, 1996, 8.67% of total assets
consisted of cash and cash equivalents and short-term investment securities.
The Bank also maintains a "floor", or minimum rate, on certain of its floating
or prime based loans. These floors allow the Bank to continue to earn a higher
rate when the floating rate falls below the established floor rate.
The following tables sets forth certain information relating to Bank's
interest-earning assets and interest-bearing liabilities at September 30, 1996
that were estimated to mature or were scheduled to reprice within the period
shown.
<TABLE>
<CAPTION>
(Dollars in thousands)
0-3 4-12 More than
Months Months One Year Total
------ ------ -------- -----
<S> <C> <C> <C> <C>
Loans receivable:(1)
Adjustable-rate $ 28,763 $ 56,705 $12,639 $ 98,107
Fixed-rate 637 4,807 43,402 48,846
-------- -------- ------- --------
Total loans 29,400 61,512 56,041 146,953
Federal funds sold 7,256 0 0 7,256
Investment and mortgage-backed
securities (2) 3,256 4,070 22,629 29,955
-------- -------- ------- --------
Total rate-sensitive assets $ 39,912 $ 65,582 $78,670 $184,164
======== ======== ======= ========
Deposit accounts -
Money market deposits 15,245 0 0 15,245
NOW and savings deposits 30,980 0 0 30,980
Certificates of deposit 20,798 67,580 35,487 123,865
-------- -------- ------- --------
Total rate-sensitive
liabilities $ 67,023 $ 67,580 $35,487 $170,090
======== ======== ======= ========
GAP (repricing differences) $(27,111) $ (1,998) $43,183 $ 14,074
======== ======== ======= ========
Cumulative GAP $(27,111) $(29,109) $14,074
======== ======== =======
Cumulative GAP/total assets (13.64%) (14.64%) 7.08%
</TABLE>
- --------------------------------
(1) In preparing the table above, adjustable-rate loans were included in the
period in which the interest rates are next scheduled to adjust rather that
in the period in which the loans mature. Fixed-rate loans were scheduled
according to their contractual maturities.
(2) Excludes non-interest bearing deposit accounts. Money market, NOW, and
savings deposits were regarded as maturing immediately. All other time
deposits were scheduled through the maturity dates. Investment and
mortgage-backed securities were scheduled through their contractual
maturity dates.
(38)
<PAGE> 39
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION
Lending Activities
A significant source of income for the Company is the interest earned on loans.
At September 30, 1996, the Company's total assets were $198.8 million and its
net loans were $146.9 million or 73.9% of total assets. At September 30, 1995,
the Bank's total assets were $93.8 million and its net loans were 60.3 million
or 64.2% of total assets.
Lending activities were conducted pursuant to a written policy which has been
adopted by the Bank. Each loan officer has defined lending authority beyond
which loans, depending upon their type and size, must be reviewed and approved
by loan committee comprised of certain directors of the Bank.
The following table sets forth information concerning the Company and the
Bank's loan portfolio by type of loan at the dates indicated:
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
-------------------------------------------------
1996 1995
-------------------------------------------------
(In Thousands)
% of % of
Amount Total Amount Total
--------- ----- -------- -----
<S> <C> <C> <C> <C>
Commercial Loans $ 20,141 13 $ 13,050 19
Commercial Real Estate Loans 35,494 24 22,000 33
Residential Mortgage Loans 86,601 59 26,358 40
Consumer Loans 5,735 4 5,127 8
--------- --- -------- ---
TOTAL LOANS $ 147,971 100% 66,535 100%
=== ===
Less:
Deferred Loan Fees (Costs) 316 (84)
Allowance for Credit Losses (1,324) (707)
--------- --------
LOANS, NET $ 146,963 $ 65,744
========= ========
</TABLE>
For the nine months ended September 30, 1996 and the year ended December 31
1995, the net change in total loans receivable was approximately as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(In Thousands)
<S> <C> <C>
Balance at beginning of period $ 60,158 $ 49,339
Acquisition of loans from
Key Florida Bank, F.S.B. 69,504 0
Loan origination's, net 18,913 11,654
Loans charged-off (255) (86)
Transfers to other real estate owned (33) (124)
--------- --------
Balance at end of period $ 148,287 $ 60,783
========= ========
</TABLE>
(39)
<PAGE> 40
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION (CONTINUED)
Lending Activities (Concluded)
The net loan originations for the fiscal year ended December 31, 1995 were
$16.7 million and were at an annualized rate of $16.3 million for the nine
months ended September 30, 1996. The continued loan origination's from
December 31, 1995 to September 30, 1996 can be attributed to (i) continued
loan demand in the Bank's primary market areas of Manatee and Sarasota
Counties, Florida and (ii) the doubling of the Bank's branch network due to the
merger with Key Florida Bank, F.S.B. in July 1996. In an effort to continue
improving the Bank's loan quality management charged off $255,000 in loans
during the nine months ended September 30, 1996 compared to $86,000 for the
same months ended September 30, 1995.
Asset Quality
Management seeks to maintain a high quality of assets through conservative
underwriting and sound lending practices. As of September 30, 1996 and
December 31, 1995, approximately 82.5% and 73%, respectively, of the total loan
portfolio was collateralized by commercial and residential real estate
mortgages. The level of delinquent loans and real estate owned also is
relevant to the credit quality of a loan portfolio. As of September 30, 1996
total nonperforming assets were $1,910,000 or 0.96% of total assets. As of
December 31, 1995, total nonperforming assets were $841,000 or 1.05% of total
assets. For the nine months ended September 30, 1996, the total nonperforming
assets to total assets ratio improved 25%.
In an effort to maintain the quality of the loan portfolio management seeks to
minimize higher risk types of lending. In view of the relative significance of
real estate related loans, a downturn in the value of the real estate could
have an adverse impact on the Bank's profitability. However, as part of its
loan portfolio management strategy, the Bank generally limits its loans to a
maximum of 80% of the value of the underlying real estate as determined by
appraisal. In addition, knowledgeable members of management generally make
physical inspections of properties being considered for mortgage loans.
Commercial loans also entail risks since repayment is usually dependent upon
the successful operation of the commercial enterprise.They also are subject to
adverse conditions in the economy. Commercial loans are generally riskier than
mortgage loans because they are typically underwritten on the basis of the
ability to repay from the cash flow of a business rather than on the ability of
the borrower or guarantor to repay. Further, the collateral underlying a
commercial loan may depreciate over time, cannot be appraised with as much
precision as real estate, and may fluctuate in value based on the success of
the business.
(40)
<PAGE> 41
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION (CONTINUED)
Asset Quality (Concluded)
Loan concentrations are defined as amounts loaned to a number of borrowers
engaged in similar activities which would cause them to be similarly impacted
by economic or other conditions. The Bank on a routine basis, monitors these
concentrations in order to consider adjustments in its lending practices to
reflect economic conditions, loan to deposit ratios, and industry trends.
Concentrations of loans in the following categories constituted the total loan
portfolio as September, 1996.
Commercial loans 13%
Real estate mortgage loans 83%
Installment and other loans 4%
The Loan Committee of the Board of Directors of the Bank concentrates its
efforts and resources, and that of its senior management and lending officers,
on loan review and underwriting procedures. Internal controls include ongoing
reviews of loans made to monitor documentation and the existence and valuations
of collateral.In addition, management of the Bank has established a review
process with the objective of identifying, evaluating, and initiating necessary
corrective action for marginal loans. The goal of the loan review process is
to address classified and nonperforming loans as early as possible.
Classification of Assets
Generally, interest on loans accrues and is credited to income based upon the
principal balance outstanding. It is management's policy to discontinue the
accrual of interest income and classify a loan as non-accrual when principal or
interest is past due 90 days or more and the loan is not adequately
collateralized, or when in the opinion of management, principal or interest is
not likely to be paid in accordance with the terms of the obligation. Consumer
installment loans are generally charged-off after 90 days of delinquency unless
adequately collateralized and in the process of collection. Loans are not
returned to accrual status until principal and interest payments are brought
current and future payments appear reasonably certain. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent payments received are applied to the outstanding
principal balance.
Real estate acquired by the Bank as a result of foreclosure or by deed in lieu
of foreclosure is classified as other real estate owned ("OREO"). The Bank
considers the collateral for a loan in-substance foreclosed when the debtor has
little or no equity in the collateral, expects repayment for the loan to come
only from the operation and sale of the collateral, and the borrower has either
effectively abandoned control of the collateral or has retained control of the
collateral but will be unable to rebuild equity in collateral or repay the loan.
(41)
<PAGE> 42
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION (CONTINUED)
Classification of Assets (Continued)
OREO properties are recorded at the lower of cost or fair value estimated
selling costs, and the estimated loss, if any, is charged to the allowance for
creidt losses at the time it is transferred to OREO. Further allowances for
losses in OREO, including in-substance foreclosed loans, are recorded by a
charge to operations at the time management believes additional deterioration
in value has occurred.
The following table sets forth certain information on nonaccrual loans and
other real estate owned, the ratio of such loans and other real estate owned to
total loans and total assets as of the dates indicated, and certain other
related information.
<TABLE>
<CAPTION>
At September 30, At December 31,
----------------- ---------------
1996 1995 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans:
Commercial real estate $ 368 $ 172 $ 0
Residential mortgage loans 779 84 215
Commercial loans 259 102 409
Consumer and other loans 7 9 72
------- ----- ------
Total nonaccrual loans 1,413 367 696
Accruing loans 90 days or more past due 0 275 --
Troubled debt restructuring 0 0 --
------- ----- ------
Total nonperforming loans 1,413 $ 787 696
======= ===== ======
Repossed Assets:
Real estate acquired by foreclosure or
deed in lieu of foreclosure 151 145 145
Other repossessions 346 0 0
------- ----- ------
Total Repossessed Assets 497 145 145
======= ===== ======
Total non performing assets $ 1,910 $ 787 $ 841
======= ===== ======
Total nonperforming assets to
total assets 0.96% 0.84% 1.05%
======= ===== ======
Total nonperforming loans as a
percentage of total loans .95% 0.96% .72%
======= ===== ======
Total nonperforming loans as a
percentage of total assets 0.71% 0.68% 0.88%
======= ===== ======
</TABLE>
(42)
<PAGE> 43
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION (CONTINUED)
Classification of Assets (Continued)
As of September 30, 1996, loans on nonaccrual status totaled $1.4 million and
consisted of eighteen individual loans. Approximately 62% or $878,765 of the
total loans on nonaccrual status consisted of four customer relationships.
As of September 30, 1996, loans 30 to 89 days delinquent totaled $386,669 and
consisted primarily of three customer relationships totaling $261,757 or 67.7%
of total loans 30 to 89 days delinquent. The remaining $179,011 of loans 30 to
89 days delinquent consisted of 13 loans, none of which was over $30,000.
Though in total the total nonperforming loans have increased this was to be
expected with the merger of the two financial institutions. In reviewing the
pertinent ratios for nonaccrual and nonperforming loans at September 30, 1996,
subsequent to the merger of the two institutions, the ratios are comparable at
September 30, 1996 to those of September 30, 1995 and improved over those
ratios at December 31, 1995. However, due to the merger and the approximate
doubling of the Bank's loan portfolio, management continues its special review
of the Bank's loan portfolio and has instituted a number of procedures intended
to improve the identification, evaluation, and resolution of the Bank's problem
assets. As a result of these actions, the senior management and loan staff of
the Bank meet periodically to review all past due and nonperforming loans and
to discuss collection efforts. The Board of Directors of the Bank also reviews
problem assets on a monthly basis. Additionally, an independent firm has been
retained to oversee periodic loan reviews and make recommendations for
improvement. Management intends to continue to enhance its underwriting
practices. These actions include establishing a Bank credit policy department
separate from the loan origination function and changing loan origination
authorities.
Allowance for Loan Losses
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a collateralized loan, the quality of the loan as
well as general economic conditions. It is management's policy to attempt to
maintain an adequate allowance for loan losses based on, among other things,
the Bank's historical loan loss experience, evaluation of economic conditions
and regular reviews of any delinquencies and loan portfolio quality. Specific
allowances are provided for individual loans when ultimate collection is
considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the fair value of the
collateral for the loan. Management recognizes the greater inherent risks in
connection with commercial and consumer lending See "Managment's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition."
(43)
<PAGE> 44
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION (CONTINUED)
Allowance for Loan Losses (Continued)
Management continues to monitor the Bank's asset quality and to
charge-off loans against the allowance for credit losses when appropriate or to
provide specific loss allowances when necessary. Although management believes
it uses the best information available to make determinations with respect to
the allowance for credit losses, future adjustments may be necessary if
economic conditions differ from the economic conditions in the assumptions used
in making the initial determinations. The Bank's allowance was $1,324,038 or
0.89% of total loans at September 30, 1996. The allowance was $706,000 or
1.06% of total loans at December 31, 1995. The lower percentage of the
allowance to total loans at September 30, 1996 was due to the increase in the
residential real estate loan portfolio which are typically lower risk loans
with good collateral.
The following table sets forth information with respect to activity in the
Bank's allowance for loan losses during the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
------------------ -----------------
(Dollars in thousands)
<S> <C> <C>
Allowance at beginning of period $ 706 $ 431
Allowance brought forward from merger 614 0
Charge-offs:
Comercial loans 104 6
Commercial real estate 115 ---
Residential --- ---
Consumer loans 36 87
--------- --------
Total loans charged-off 255 93
--------- --------
Recoveries 2 6
--------- --------
Net charge-offs 253 87
Provision for credit losses charged to
operating expenses 257 362
--------- --------
Allowance at end of period $ 1,324 $ 706
========= ========
Net charge-offs as a percentage of average
loans outstanding 0.26% 0.15%
========= ========
Allowance for credit losses as a percentage of
period-end total loans 0.89% 1.06%
========= ========
Allowance for credit losses as a percentage of
nonperforming loans 93.70% 101.44%
========= ========
Period-end total loans $ 147,971 $ 66,535
========= ========
Average loans outstanding, net $ 95,972 $ 56,647
========= ========
</TABLE>
(44)
<PAGE> 45
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION (CONTINUED)
Allowance for Loan Losses (Concluded)
The following table presents information regarding the Bank's total allowance
for loan losses as well as the allocation of such amounts to the various
categories of loans:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996 Year Ended December 31, 1995
------------------------------------ ----------------------------
% of % of
Loans to Loans to
Total Total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Commercial loans $ 328 13.6% $ 327 19.6%
Commercial real estate loans 582 24.0% 226 33.1%
Residential real estate loans 274 58.5% 109 39.6%
Consumer loans and other 140 3.9% 44 7.7%
------ ----- ------ -----
Total allowance for loan losses $1,324 100.0% $ 706 100.0%
====== ===== ====== =====
</TABLE>
The allowance for loan losses represented 0.89% of the total loan outstanding as
of September 30, 1996, compared with 1.06% of the total loans outstanding as of
December 31, 1995. The amount of the provision for loan losses charged to
expense in each of the periods presented above represents management's best
estimate during those periods of the addition necessary to establish appropriate
allowances for estimated credit losses. Such estimates were based on
management's assessment of the current and future general economic conditions in
the Bank's market area, the risk levels associated with the particular
composition of the loan portfolio during such periods, and the Bank's past
collection experience.
The provision for loan losses decreased from $362,000 during the year ended
December 31, 1995 to $257,000 for the nine months ended September 30, 1996.
On a quarterly basis management performs a calculation of its required loan
loss reserve using historical loan loss rates and giving weight to risk-related
loans by loan pool groups. The Bank analyzes the reserve requirements and based
on this analysis, which again gives relative risk weight to loan pools, the Bank
has determined that its reserve balance was adequate at September 30, 1996.
(45)
<PAGE> 46
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION (CONTINUED)
Investment Securities
The Bank's investment securities at September 30, 1996 primarily consisted of
United States Treasury and Government Agency securities. Although investment
securities generally have a lower yield than loans, investment securities
increase the quality of the Bank's assets by virtue of the guarantees that back
them, are more liquid than loans, and may be used to collateralize borrowings or
other obligations of the Bank. Due to repayment and prepayments of the
underlying loans mortgage-backed securities are substantially less than the
scheduled maturities. Changes in interest rates may also affect the average
life, yield to maturity, and related market value of the Bank's securities
portfolio.
The following table sets forth the carrying value of investment securities held
by the Bank at the dates indicated:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
--------------------- ---------------------
Amortized Market Amortized Market
Cost Value Cost Value
--------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Treasury securities $ 7,484 $ 7,484 $ 2,850 $ 2,856
U.S. Government Agency securities 17,381 17,185 15,972 15,879
Mortgage-backed securities
Guaranteed by GNMA 2,931 2,938 475 473
Issued by FNMA 473 451 487 476
Issued by FHLMC 803 795 983 982
State revenue obligations 462 469 413 416
Other equity securities 712 712 212 212
------- ------- ------- -------
Total investment securities $30,246 $30,024 $21,392 $21,294
======= ======= ======= =======
</TABLE>
The following table sets forth, by maturity distribution, certain information
pertaining to the investment securities portfolio as follows:
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less to Five Years to Ten Years After Ten Years Total
------------------ ------------------ ----------------- ------------------- ------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
September 30,1996:
U.S. Treasury securities $ 1,547 5.97% $ 5,937 6.01% $ 0 --- $ 0 --- $ 7,484 5.99%
Government agencies 3,138 5.64% 14,243 6.80% 0 --- 0 --- 17,381 6.01%
Mortgage-backed securities 500 5.16% 3,271 7.02% 436 5.99% 4,207 6.55%
State revenue obligations 0 --- 462 5.75% 0 --- 0 --- 462 5.75%
Other equity securities 0 --- --- --- 712 6.00% 0 --- 712 6.00%
------- ---- -------- ---- ------- ---- ----- ---- -------- ----
Total $ 5,185 5.69% $ 23,913 6.61% $ 1,148 5.99% 0 --- $ 30,246 6.11%
======= ==== ======== ==== ======= ==== ===== ==== ======== ====
December 31, 1995
U.S.Treasury securities $ 1,339 5.72% $ 1,511 5.60% $ 0 0.00% $ 0 0 $ 2,850 5.37%
Government agnecies 4,248 4.65% 11,724 5.70% 0 0 0 15,972 5.42%
Mortgage-backed securites 0 --- 1,282 5.85% 0 663 5.65% 1,945 5.78%
State revenue obligations 0 --- 413 5.75% 0 0 0 413 5.75%
Other equity securiteis 0 0 212 6.00% 0 0.00% 212 6.00%
------- ---- -------- ---- ------- ---- ----- ---- -------- ----
Total $ 5,587 4.91% $ 14,930 5.70% $ 212 6.00% $ 663 5.65% $ 21,392 5.46%
======= ==== ======== ==== ======= ==== ===== ==== ======== ====
</TABLE>
(46)
<PAGE> 47
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION (CONTINUED)
Deposit Activities
Deposits are the major source of the Bank's funds for lending and other
investment purposes. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad variety of deposit
instruments including checking accounts, money market accounts, regular savings
accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more) and retirement savings plans.
Maturity terms, service fees and withdrawal penalties are established by the
Bank on a periodic basis. The determination of rates and terms is predicated on
funds acquisition and liquidity requirements, rates paid by competitors, growth
goals and federal regulations.
The following table shows the distribution of, and certain other information
relating to, the Bank's deposit accounts by type:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------------------- -----------------------
% of % of
Amount Deposit Amount Deposit
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand deposit ......................... $ 14,163 7.70% $ 11,388 12.95%
NOW deposits ........................... 13,330 7.25% 7,249 8.24%
Money market ........................... 15,245 8.29% 6,405 7.29%
Savings accounts ....................... 17,369 9.44% 4,157 4.72%
Time deposits under $100,000 ........... 104,804 56.97% 47,643 54.17%
Time deposits #$100,000 and over ....... 19,061 10.35% 11,113 12.63%
-------- -------- -------- --------
Total deposits ................ $183,972 100.00% $ 87,955 100.00%
======== ======== ======== ========
</TABLE>
Time deposits included individual retirement accounts ("IRAs") totaling $11.0
million and $6.5 million as of September 30, 1996 and December 31, 1995,
respectively, all of which are in the form of certificates of deposit.
The Company's deposits increased $96 million or 109% to $183.9 million as of
September 30, 1996, from $87.9 million as of December 31, 1995. This increase
was primarily attributable to the merger of the Bank with Key Florida Bank,
F.S.B. on July 30, 1996.
(47)
<PAGE> 48
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION (CONTINUED)
Deposit Activities (Continued)
As of September 30, 1996 and December 31, 1995, time deposits of $100,000 and
over mature as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Due in three months or less ................. $ 3,484 $ 3,021
Due from three months to one year ........... 10,885 3,702
Due over one year ........................... 4,692 4,390
------- -------
Total time deposit $100,000 and over... $19,061 $11,113
======= =======
</TABLE>
The following table shows the average amount of and the average rate paid on
each of the following deposit account categories during the periods indicated:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
---------------------- ----------------------
Average Average Average Average
Balance Yield Balance Yield
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Demand, Money Market, and NOW $ 18,124 2.63% $ 12,843 3.04%
Savings deposits 8,615 3.71% 4,033 2.78%
Certificate of deposit 81,091 5.03% 55,493 5.72%
-------- -------- -------- --------
Total Interest-bearing deposits $107,830 4.52% $ 72,369 5.08%
======== ======== ======== ========
</TABLE>
(48)
<PAGE> 49
KEY FLORIDA BANCORP, INC.
ITEM 2 - CONTINUED
FINANCIAL CONDITION (CONCLUDED)
Deposit Activities (Concluded)
Management believes that the Bank does not have a concentration of deposits
from any one source, the loss of which would have a material adverse effect on
the business of the Bank. Management believes that substantially all of the
Bank's depositors are residents in its primary market area. The Bank currently
does not accept brokered deposits. As shown in the table below, a significant
amount of the Bank's certificates of deposit will mature during the year ending
December 31, 1996. The high volume of maturities during this period is
primarily due to customer demand for certificates of deposit having original
maturities of 12 months or less. Based upon current and anticipated levels of
interest rates and past practice, management anticipates that substantially all
of the Bank's certificates of deposit maturing during this time period will be
renewed or replaced by certificates of deposit issued to other customers at
competitive market rates, which may be higher or lower than the rates currently
being paid. Consequently, Bank management does not believe that the maturity of
the Bank's certificates of deposit during the year ended December 31, 1996 will
have a material adverse effect on the Bank's liquidity. However, if the Bank is
required to pay substantially higher rates to obtain the renewal of these or
other certificates of deposit or alternative sources of funds, the higher net
interest expense could have a material adverse effect on the Bank's net income.
As of September 30, 1996 and December 31, 1995 all time certificates of deposit
mature as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Due in three months or less $ 20,798 $ 15,113
Due from three months to one year 67,580 18,920
Due over one year 35,487 24,723
-------- --------
$123,865 $ 58,756
======== ========
</TABLE>
(49)
<PAGE> 50
KEY FLORIDA BANCORP, INC.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27 Financial Data Schedule (for SEC use only)
Reports
No reports on Form 8-K were filed during the quarter ended June 30,
1996.
Signatures
Pursuant to the requirement 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.
KEY FLORIDA BANCORP, INC.
(REGISTRANT)
DATED: November 13, 1996 BY: /S/Steven R. Jonsson, President/CEO
------------------- ---------------------------------------------
Steven R. Jonsson, President/CEO
DATED: November 13, 1996 BY: /S/Michael L. Hogan, Vice President/Treasurer
------------------- ---------------------------------------------
Michael L. Hogan, Vice President/Treasurer
(50)
<PAGE> 1
EXHIBIT 99.3
COOPERS & LYBRAND [LOGO]
COOPERS & LYBRAND L.L.P.
a professional services firm
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1993
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGES
<S> <C>
Report of Independent Accountants 1
Financial Statements:
Consolidated Balance Sheets 2-3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-22
Supplemental Information:
Accountants' Report on Supplemental Information 24
Consolidating Balance Sheet 25
Consolidating Statement of Operations 26
</TABLE>
<PAGE> 3
[COOPERS COOPERS & LYBRAND L.L.P.
& LYBRAND LOGO]
a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Key Florida Bancorp, Inc.
Bradenton, Florida
We have audited the accompanying consolidated balance sheets of Key Florida
Bancorp, Inc. and subsidiaries (the Company) as of September 30, 1994 and 1993,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. 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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Key Florida
Bancorp, Inc. and subsidiaries as of September 30, 1994 and 1993, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statement, effective
October 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes".
/s/ Coopers & Lybrand LLP
Tampa, Florida
November 23, 1994
1
<PAGE> 4
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1994 and 1993
<TABLE>
<CAPTION>
ASSETS 1994 1993
<S> <C> <C>
Cash and due from banks $ 1,763,292 $ 1,224,307
Interest bearing deposits 107,293 1,532,112
Federal funds sold 0 140,000
----------- -----------
Cash and cash equivalents 1,870,585 2,896,419
Investment securities (market value approximates $10,348,500 and
$15,435,000, respectively) 11,031,863 15,424,660
Loans held for sale 0 1,447,800
Loans receivable, net 70,958,307 56,597,166
Bank premises and equipment, net 992,701 1,376,577
Accrued interest receivable 502,725 480,360
Other real estate owned, net 703,405 751,330
Federal Home Loan Bank stock, at cost 936,000 912,900
Loan servicing rights acquired and excess servicing fees receivable 366,436 541,610
Prepaid expenses and other assets 284,480 564,214
Deferred tax asset 34,000 0
----------- -----------
$87,680,502 $80,993,036
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
September 30, 1994 and 1993
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
<S> <C> <C>
Liabilities:
Non-interest bearing deposits $ 3,173,734 $ 2,914,139
Interest bearing demand deposits 5,143,133 4,939,748
Money market deposits 4,294,114 3,921,667
Savings deposits 1,639,540 1,850,837
Time deposits 59,432,657 50,167,367
Total deposits ----------- -----------
73,683,178 63,793,758
Federal Home Loan Bank advances 9,250,000 13,000,000
Notes payable 495,073 375,948
Accrued interest payable 71,151 75,418
Amounts due on loans serviced 17,616 18,271
Accrued expenses and other liabilities 174,581 358,572
Income taxes currently payable 34,000 0
----------- -----------
Total liabilities 83,725,599 77,621,967
----------- -----------
Commitments and contingencies (Notes 2, 3, 7, 14, 15, 16, 17)
Stockholders' equity:
Series A, variable rate cumulative convertible preferred stock, $.01 par
value and $10 state value, 1,000,000 shares authorized, 43,025
shares issued and outstanding 430,250 430,250
Commom stock, $.01 par value, 4,000,000 shares authorized, 801,093
and 689,810 shares issued and outstanding, respectively 8,011 6,898
Additional paid-in capital 5,091,962 4,592,306
Accumulated deficit (1,570,413) (1,654,420)
Less treasury stock at cost (934 and 779 shares of common stock,
respectively, and 84 shares of preferred stock at September 30,
1994) (4,907) (3,965)
----------- -----------
Total stockholders' equity 3,954,903 $ 3,371,069
----------- -----------
$87,680,502 $80,993,036
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended September 30, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Interest income:
Interest and fees on loans $5,265,491 $ 4,546,610
---------- -----------
Interest and dividends on investment securities:
U.S. Treasury securities 48,041 211,408
U.S. Government agencies and mortgage-backed securities 407,062 1,078,751
Other securities 275,653 103,701
---------- -----------
730,756 1,393,860
---------- -----------
Interest on federal funds sold 2,635 5,848
---------- -----------
Total interest income 5,998,882 5,946,318
---------- -----------
Interest expense:
Interest on deposits 3,045,860 3,304,186
Interest on notes payable 44,530 37,506
Interest on Federal Home Loan Bank advances 604,489 643,031
---------- -----------
Total interest expense 3,694,879 3,984,723
---------- -----------
Net interest income
2,304,003 1,961,595
Provision for loan losses
45,311 74,162
---------- -----------
Net interest income after provision for loan losses 2,258,692 1,887,433
Other income 402,439 778,027
Other expense 2,546,311 2,590,309
---------- -----------
Net income
$ 114,820 $ 75,151
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 7
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended September 30 1994 and 1993
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
------------------- ------------------ --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- -------- -------- ------ ------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1992 43,025 $430,250 689,810 $6,898 0 0 $4,592,306 $(1,699,458) $3,329,996
Net income 75,151 75l,151
Preferred dividends paid, $.70
per share (30,113) (30,113)
Purchase of Treasury stock 779 $(3,965) (3,965)
------ -------- ------- ------ ----- ------- ---------- ----------- ----------
Balance, September 30, 1993 43,025 430,250 689,810 6,898 779 (3,965) 4,592,306 (1,654,420) 3,371,069
Net income 114,820 114,820
Preferred dividends paid, $.70
per share (30,813) (30,813)
Common stock issued 111,283 1,113 499,656 500,769
Purchase of Treasury stock:
Common stock 155 (449) (449)
Preferred stock 84 (493) (493)
------ -------- ------- ------ ----- ------- ---------- ----------- ----------
Balance, September 30, 1994 43,025 $430,250 801,093 $8,011 1,018 $(4,907) $5,091,962 $(1,570,413) $3,954,903
====== ======== ======= ====== ===== ======= ========== =========== ==========
</TABLE>
The Accompanying notes are an integral part of these financial statements.
5
<PAGE> 8
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net income $ 114,820 $ 75,151
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of bank premises and equipment 159,815 55,432
Provision for loan losses 45,311 74,162
Amortization of fees and discount on loans 181,966 343,069
Amortization of premium on investment and mortgage-backed
securities 36,385 131,863
Amortization of loan servicing rights and excess servicing fees 175,174 520,076
Net (gain) loss on disposition of bank premises and equipment (5,398) 9,332
Net loss (gain) on sale of loans 93,910 (553,858)
Net (gain) loss on sale of other real estate owned (2,280) 15,708
Net (gain) loss on sale of investment securities (12,750) (213,972)
Deferred income taxes (34,000) 0
Change in assets and liabilities:
(Increase) decrease in accrued interest receivables (22,365) 96,197
Decrease in prepaid expenses and other assets 279,734 146,096
(Decrease) increase in accrued interest payable (4,267) 12,233
Increase (decrease) in amounts due on loans serviced (655) (917,337)
Increase (decrease) in accrued expenses and other liabilities (183,991) 69,204
Increase in income taxes currently payable 34,000 0
----------- ------------
Net cash provided by (used in) operating activities 855,409 (126,644)
----------- ------------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock (23,100) (90,700)
Loan originations, net (30,207,161) (28,253,769)
Proceeds from the sale of loans 16,965,862 23,650,225
Proceeds on other real estate sold 50,205 292,122
Purchase of investment securities (1,688,750) (14,918,533)
Proceeds from the sale of investment securities 5,133,266 21,182,201
Proceeds from maturities and repayments of investment securities 924,646 7,901,893
Purchase of bank premises and equipment (129,518) (49,170)
Proceeds from sale of bank premises and equipment 358,977 144,876
Recoveries on loans charged-off 6,771 10,323
Decrease in advances from borrowers for taxes and insurance 0 (1,902,661)
----------- ------------
Net cash (used in) provided by investing activities (8,608,802) 7,936,807
----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 9
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
for the years ended September 30, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Cash flows from financing activities:
Net increase in non-interest bearing deposits $ 259,595 $ 1,138,624
Net increase (decrease) in interest bearing deposits 203,385 (637,887)
Net increase (decrease) in money market deposits 372,447 (572,766)
Net increase (decrease) in savings deposits (211,297) (1,216,453)
Net increase (decrease) in time deposits 9,265,290 (7,429,339)
Proceeds from Federal Home Loan Bank advances 94,500,000 79,500,000
Repayment of Federal Home Loan Bank advances (98,250,000) (78,500,000)
Proceeds from issuance of notes payable 300,000 0
Repayments on notes payable (180,875) (24,594)
Cash dividends paid on preferred stock (30,813) (30,113)
Proceeds from sale of common stock 500,769 0
Purchase of Treasury stock (942) 0
------------ ------------
Net cash provided by (used in) financing activities 6,727,559 (7,772,528)
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,025,834) 37,635
Cash and cash equivalents at beginning of year 2,896,419 2,858,784
------------ ------------
Cash and cash equivalents at end of year $ 1,870,585 $ 2,896,419
============ ============
Supplemental disclosures of cash flow information:
Cash payments for interest $ 3,699,000 $ 3,972,000
============ ============
Cash payments for income taxes $ 0 $ 23,000
============ ============
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
For the year ended September 30, 1993, Key Florida Bank (the Bank) received
other real estate owned of approximately $48,000 in exchange for loans
receivable. For the year ended September 30, 1993, the Bank received 779
shares of the Company's common stock in exchange for loan receivable
approximately $3,965. These non-cash transactions were excluded from the
above consolidated statement of cash flows.
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 10
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Key Florida Bancorp, Inc. (the "Holding Company") is the sole
shareholder of Key Florida Bank, F.S.B. (the "Bank"). The Holding Company
operates as a unitary savings and loan holding company. The Holding
Company's primary business activity is the operation of the Bank. The
accounting and reporting policies of Key Florida Bancorp, Inc. and
Subsidiaries (the "Company") conform to generally accepted accounting
principles and to general practices within the thrift industry. The
following summarizes the more significant of these policies and practices:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Holding Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the
Company considers cash and cash equivalents to include cash on hand,
amounts due from banks, interest-bearing deposits with maturities of less
than ninety days and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods. The Company maintains its due from
banks and federal funds sold with correspondent banking relationships as
determined by the Company's board of directors. At September 30, 1994, the
primary correspondent banks were AmSouth Bank, N.A., NationsBank and the
Federal Home Loan Bank.
INVESTMENT SECURITIES - Investment securities are carried at cost,
increased by the accretion of discounts and decreased by the amortization
of premiums. Accreted discounts and amortized premiums are included in
interest income over the term of the investment using the interest method.
Gains and losses realized from the sale of investment securities are
determined using the specific identification method. Periodic fluctuations
in market value are not considered to impair the investment quality of
these assets. Management has the intent and believes that the Company has
the ability to hold its investment securities to maturity.
LOANS HELD FOR SALE - Mortgage loans originated or purchased and
intended for sale in the secondary market are carried at the lower of cost
or estimated market value in the aggregate. Cost was $1,447,800 and market
was approximately $1,475,000 at September 30, 1993. Net unrealized losses
are recognized in a valuation allowance by charges to earnings. At
September 30, 1994, the Bank had no mortgage loans originated or purchased
and intended for sale in the secondary market.
LOAN ORIGINATION COSTS, NET - The Company accounts for loan origination
fees in accordance with Statement of Financial Accounting Standards No. 91.
This statement requires the deferral of loan origination fees and the
capitalization of direct loan costs. The fees deferred, net of costs
capitalized, are amortized to interest income as an adjustment of yield
over the life of the loan.
8
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
LOANS AND ALLOWANCE FOR LOAN LOSSES - Loans are stated at the amount of
unpaid principal, reduced by deferred loan fees and an allowance for
loan losses. Interest income is recognized using the simple interest
method on daily balances of principal amounts outstanding.
The allowance for loan losses is established through a provision for
loan losses charged to operations. Loans are charged against
the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb possible
losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into considerations such factors as
changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current
economic conditions that may affect the borrowers' ability to pay.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection
of interest is doubtful. Classification of a loan as nonaccrual is not
necessarily indicative of a potential loss of principal.
BANK PREMISES AND EQUIPMENT, NET - Bank premises and equipment are
carried at cost, less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets, which range from
seven to ten years for office furniture and equipment and forty years
for the Company's buildings. Amortization of leasehold improvements is
computed using the straight-line method over the term the Company
expects to lease the related property. Maintenance and repairs are
charged to expense as incurred. Renewals and betterments which
materially increase the value of the property are capitalized. When
office property or equipment is sold, or otherwise disposed of, the
cost and related depreciation or amortization are removed form the
respective accounts and the respective gains and losses are included in
earnings.
OTHER REAL ESTATE OWNED, NET - Other real estate owned includes
foreclosed assets held for sale and in-substance foreclosed assets.
After foreclosure, foreclosed assets are carried at the lower of fair
value minus estimated costs to sell or cost. Cost at the time of
foreclosure is the fair value of the asset foreclosed. If the fair
value of the asset minus the estimated costs to sell the asset is less
than the cost of the asset, the deficiency is recognized as a valuation
allowance.
In-substance foreclosures result when a borrower is having financial
difficulty and there has been a diminution in the value of the
collateral of such a magnitude that the borrower has no equity, and
where prospects for building equity in such collateral are doubtful.
9
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
LOAN-SERVICING RIGHTS ACQUIRED AND EXCESS SERVICING FEES RECEIVABLE -
The cost of loan-servicing rights acquired is amortized in proportion
to, and over the period of, estimated net servicing revenues. When
loans sold have an average contractual interest rate, adjusted for
normal servicing fees, that differs from the agreed yield to the
purchaser, gains or losses are recognized equal to the present value of
such differential over the estimated remaining life of such loans. The
resulting "excess servicing fees receivable" is amortized over the
estimated life using a method approximating the level-yield method.
The cost of loan-servicing rights purchased, the excess servicing fees
receivable, and the amortization thereon are periodically evaluated in
relation to estimated future net servicing revenues. The Company
evaluates the carrying value of the servicing portfolio by estimating
the future net servicing income of the portfolio based on management's
best estimate of remaining loan lives.
INCOME TAXES - The Company adopted Statement of Financial Accounting
Standard (SFAS) No. 109 "Accounting for Income Taxes" effective October
1, 1993. The adoption of SFAS No. 109 changes the Company's method of
accounting for income taxes from the deferred method (APB 11) to an
asset and liability method. Previously, the Company deferred the past
tax effects of timing differences between financial reporting and
taxable income. The asset and liability method requires the
recognition of deferred tax liabilities and assets for expected future
tax consequences of temporary differences between tax bases and
financial reporting bases of other assets and liabilities.
FUTURE ACCOUNTING REQUIREMENTS - The Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standard
No. 107 ("SFAS 107"), which extends existing fair value disclosure
practices for some instruments by requiring all entities to disclose the
fair value of financial instruments, both assets and liabilities
recognized and not recognized in the balance sheet, for which it is
practicable to estimate fair value. SFAS 107 is effective for the
Company's year ending September 30, 1996. SFAS 107 requires only
additional disclosure and will not have a financial impact on the
Company.
The FASB issued Statement of Financial Accounting Standards No. 114
("SFAS 114"), "Accounting By Creditors for Impairment of a
Loan," in May 1993. SFAS 114 requires creditors to measure loan
impairment based on the present value of expected future cash flows,
observable market prices, or the fair value of the collateral if the
loan is collateral dependent. SFAS 114 was amended by SFAS 118 in
October 1994. SFAS 118 allows creditors to use existing methods for
recognizing interest income on impaired loans. SFAS 118 is effective
for the Company's year ending September 30, 1996. Management does not
anticipate that the adoption of SFAS 118 will have a material impact on
the Company.
10
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
The FASB issued Statement of Financial Accounting Standards No. 115
("SFAS 115") "Accounting for Certain Securities," in May 1993.
SFAS 115 requires companies to classify all investments in debt
securities and investments in equity securities that have readily
determinable fair values into three distinct categories, each having
unique accounting characteristics. The categories consist of
"Held-to-Maturity," "Available-for-Sale" and "Trading."
Held-to-maturity securities would be measured at amortized cost.
Available-for-sale securities would be measured at fair value and any
unrealized holding gains and losses would be reported as a net amount
in a separate component of shareholders' equity until realized.
Trading securities would be measured at fair value and any unrealized
holding gains and losses would be included in earnings. SFAS 115 is
effective for the Company's year ending September 30, 1995. Management
does not anticipate that the adoption of SFAS 115 will have a material
impact on the Company.
The FASB issued SFAS 119 "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" in October
1994. SFAS 119 expands current disclosure requirements by
distinguishing between derivative financial instruments held or issued
for trading purposes and those held for other than trading purposes.
Entities holding derivative financial instruments for purposes other
than trading will be required to disclose a description of the entity's
objectives for holding or issuing the derivative financial instruments.
SFAS 119 is effecive for the Company's year ending September 30, 1995.
SFAS 119 requires only additional disclosures and will not have a
financial impact on the Company.
RECLASSIFICATION - Certain amounts have been reclassified from
their previous presentation to conform with current year presentation.
2. REGULATORY MATTERS:
On May 13, 1991, the Bank entered into an Operating Agreement with the
Office of Thrift Supervision (OTS). Management agreed to
establish and maintain certain written policies and procedures in
accordance with applicable regulations and to classify certain assets
under certain prescribed conditions. On March 19, 1992, the Operating
Agreement was terminated and replaced by a Supervisory Agreement. The
Board of Directors, among other things, agreed that it will provide
independent and effective oversight over all operations and activities
of the Bank, including compliance with the Supervisory Agreement and
will review and strengthen senior management. The Bank may not declare
or pay a cash dividend on, or repurchase any of, its capital stock if
the effect thereof would cause the regulatory capital of the Bank to be
reduced below the amount required for the regulatory capital
requirement imposed by regulatory authorities.
Failure by the Bank to comply with the Supervisory Agreement could
result in more restrictive actions taken by the OTS. The
Bank's ability to comply with the Supervisory Agreement is dependent on
future events and cannot be determined at the present time.
11
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. REGULATORY MATTERS, CONTINUED:
The Board of Directors replaced the Bank's president and other senior
management in the prior year in an attempt to improve operations. In
addition, overhead costs have been reduced or eliminated where they were
deemed to be unnecessary. The Company issued $300,000 of debenture notes
on December 29, 1993 with the proceeds used to purchase additional shares
in the Bank. In management's opinion the Bank is in compliance, in all
material respects, with the Supervisory Agreement.
The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)
of 1989 requires institutions to have a minimum regulatory tangible
capital equal to 2% of adjusted total assets, a minimum 4% core capital
ratio and a 8% risk-based capital ratio.
The following is a summary of the capital requirements, the Bank's
capital and the amounts in excess as of September 30, 1994:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK BASED
------------------------- -------------------------- ----------------------------
($ IN THOUSANDS) % OF
RISKED-WEIGHTED
AMOUNT % OF ASSETS AMOUNT % OF ASSETS AMOUNT ASSETS
<S> <C> <C> <C> <C> <C> <C>
Regulatory $3,910,290 4.48% $3,946,725 4.52% $4,559,326 9.01%
Capital
Requirement 1,745,268 2.00% 3,490,537 4.00% 4,048,857 8.00%
---------- ----------- ---------- ---------- ---------- -----------
Excess $2,165,022 2.48% $ 456,188 0.52% $ 510,469 1.01%
========== =========== ========== ========== ========== ===========
</TABLE>
FIRREA stipulates that an institution that does not meet any of the capital
standards must submit a capital plan to the OTS that outlines the institution's
plans for attaining the required levels of regulatory capital. Failure to
obtain approval of its capital plan or maintain compliance with an approved
capital plan could result in OTS regulatory action. An institution not in
compliance with regulatory capital standards or its capital plan will be
precluded from asset growth unless approval is specifically granted by the OTS.
If growth is allowed, it will be restricted generally to the amount of net
interest credited on deposit accounts. The Bank was in compliance with the
minimum regulatory requirements at September 30, 1994, the date of these
financial statements.
12
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENT SECURITIES:
The book value and approximate market value of investment securities at
September 30, 1994 and 1993 are summarized as follows:
<TABLE>
<CAPTION>
1994
--------------------------------------------------------------------
GROSS GROSS APPROXIMATE
BOOK VALUE UNREALIZED GAINS UNREALIZED LOSSES MARKET VALUE
----------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 997,617 $ 0 $ (75,617) $ 922,000
GNMA certificates 3,539,749 0 (134,749) 3,405,000
Collaterialized mortgage obligations 6,441,997 0 (472,997) 5,969,000
Other 52,500 0 0 52,500
----------- ------- --------- -----------
$11,031,863 $ 0 $(683,363) $10,348,500
=========== ======= ========= ===========
<CAPTION>
1993
--------------------------------------------------------------------
GROSS GROSS APPROXIMATE
BOOK VALUE UNREALIZED GAINS UNREALIZED LOSSES MARKET VALUE
----------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 997,078 $ 1,922 $ 0 $ 999,000
GNMA certificates 6,031,923 1,504 (4,427) 6,029,000
FNMA certificates 2,140,451 2,043 (12,494) 2,130,000
Collaterialized mortgage obligations 6,255,208 33,266 (11,474) 6,277,000
----------- ------- --------- -----------
$15,424,660 $38,735 $ (28,395) $15,435,000
=========== ======= ========= ===========
</TABLE>
The book value and approximate market value of investments at September 30, 1994
and 1993, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities due to borrowers having the right to call or
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
1994 1993
---------------------------- ----------------------------
APPROXIMATE APPROXIMATE
BOOK VALUE MARKET VALUE BOOK VALUE MARKET VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Due within one year $ 52,500 $ 52,500 $ 17,000 $ 0
Due after one year through five years 997,617 922,000 997,076 999,000
Mortgage-backed securities 9,981,746 9,374,000 14,427,584 14,436,000
----------- ----------- ----------- -----------
$11,031,863 $10,348,500 $15,441,660 $15,435,000
=========== =========== =========== ===========
</TABLE>
Proceeds from sales of investments in debt securities during 1994 and 1993
approximated $2,042,000 and $21,182,000, respectively. Gross gains of
approximately $17,000 and $258,000 and gross losses of approximately $6,000 and
$44,000 were realized on those sales during 1994 and 1993, respectively.
Securities with an approximate book value of $9,982,000 and approximate market
value of $9,321,500 were pledged at September 30, 1994 for Federal Home Loan
Bank advances. There were no securities pledged at September 30, 1993.
13
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES:
A summary of the loan distribution at September 30, 1994 and 1993
follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Commercial $ 2,147,786 $ 2,905,845
Commercial real estate 12,329,204 11,908,492
Residential real estate 41,851,120 31,259,049
Real estate - construction 13,456,088 9,548,715
Installment 1,560,631 1,521,106
Loan origination costs, net 226,079 20,224
----------- -----------
71,570,908 57,163,431
Allowance for loan losses (612,601) (566,265)
----------- -----------
$70,958,307 $56,597,166
=========== ===========
</TABLE>
The Company grants purchases real estate and commercial and installment loans
throughout Florida, with a majority in the Sarasota and Manatee County area.
Although the Company has a diversified loan portfolio, a significant portion of
its debtors' ability to honor their contracts is dependent primarily upon the
economy of Sarasota and Manatee Counties, Florida and general economical
conditions.
Loans on which accrual of interest has been discontinued amounted to
approximately $529,300 and $1,737,500 at September 30, 1994 and 1993,
respectively. If interest on those loans had been accrued, such income would
have approximated $19,000 and $141,000 for 1994 and 1993, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Allowance at beginning of year $566,265 $894,601
-------- --------
Additions:
Provision 45,311 74,162
Recoveries on loans previously charged off 6,771 10,323
-------- --------
Total additions 52,082 84,485
-------- --------
Loans charged off 5,746 412,821
-------- --------
Allowance at end of year $612,601 $566,265
======== ========
</TABLE>
In management's opinion, the allowance is adequate to reflect the risk in the
loan portfolio.
LOANS WITH OFFICERS AND DIRECTORS- In the course of its business, the Bank has
granted loans to executive officers, directors and principal stockholders of the
Company and to their related interests. As of September 30, 1994 and 1993,
loans to such parties were as follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Balance at beginning of year $775,569 $935,162
New loans 137,687 90,000
Repayments on loans (39,018) (249,593)
-------- --------
Balance at end of year $874,238 $775,569
======== ========
</TABLE>
14
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES, CONTINUED:
LOAN SERVICING - Mortgage loans services for others are not included in
the accompanying balance sheet. The Company has purchased servicing
rights from other lenders and has retained servicing from loans the
Company sold to other investors. Management does not plan to purchase
servicing rights in the future but does expect to continue to originate
and sell certain loans and retain the rights to service such loans. The
unpaid principal balances of these loans as of September 30, 1994 and
1993 are summarized as follows:
<TABLE>
<CAPTION>
1994
-------------------------------------------------------------------------
NUMBER APPROXIMATE UNPAID WEIGHTED AVERAGE WEIGHTED AVERAGE
OF LOANS PRINCIPAL BALANCE SERVICE FEE REMAINING MATURITY
--------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C>
Fixed rate mortgages 498 $19,145,000 0.43% 234 months
Variable rate mortgages 266 17,680,000 0.46% 268 months
--- -----------
764 $36,825,000
=== ===========
</TABLE>
<TABLE>
<CAPTION>
1993
-------------------------------------------------------------------------
NUMBER APPROXIMATE UNPAID WEIGHTED AVERAGE WEIGHTED AVERAGE
OF LOANS PRINCIPAL BALANCE SERVICE FEE REMAINING MATURITY
--------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C>
Fixed rate mortgages 723 $30,410,000 0.42% 239 months
Variable rate mortgages 337 23,467,000 0.48% 288 months
----- -----------
1,060 $53,877,000
===== ===========
</TABLE>
The following is an analysis of the changes in loan servicing rights
purchased and excess servicing fees retained asset balances for the years
ended September 30, 1994 and 1993:
<TABLE>
<CAPTION>
PURCHASED RETAINED TOTAL
----------- ---------- ------------
<S> <C> <C> <C>
Balance October 1, 1992 $1,012,138 $ 59,548 $1,071,686
Amortization (511,211) (18,865) (530,076)
---------- -------- ----------
Balance, September 30, 1993 500,927 40,683 541,610
Amortization (152,554) (22,620) (175,174)
---------- -------- ----------
Balance, September 30, 1994 $ 348,373 $ 18,063 $ 366,436
========== ======== ==========
</TABLE>
15
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. BANK PREMISES AND EQUIPMENT:
Bank premises and equipment and their related accumulated depreciation
and amortization consisted of the following:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Land $ 189,542 $ 189,542
Building 468,876 696,079
Leasehold improvements 97,803 231,171
Office machines and equipment 377,742 408,721
Signs and displays 60,699 60,699
Furniture and fixtures 518,577 471,625
Vehicles 16,438 0
---------- ----------
Total, at cost 1,729,677 2,057,837
Less accumulated depreciation and amortization 736,976 681,260
---------- ----------
Bank premises and equipment, net $ 992,701 $1,376,577
========== ==========
</TABLE>
6. OTHER REAL ESTATE OWNED:
A summary of the Company's other real estate owned at September 30, 1994
and 1993 is as follows:
<TABLE>
<CAPTION> 1994
---------------------------------------------
BANK HOLDING COMPANY CONSOLIDATED
----------- --------------- ------------
<S> <C> <C> <C>
Acquired through foreclosure $ 303,963 $ 417,087 $ 721,050
Less valuation allowance (17,645) (17,645)
--------- --------- ---------
$ 286,318 $ 417,087 $ 703,405
========= ========= =========
1993
---------------------------------------------
BANK HOLDING COMPANY CONSOLIDATED
----------- --------------- ------------
Acquired through foreclosure $ 348,391 $ 417,087 $ 765,478
Less valuation allowance (14,148) (14,148)
--------- --------- ---------
$ 344,243 $ 417,087 $ 751,330
========= ========= =========
</TABLE>
16
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. FEDERAL HOME LOAN BANK ADVANCES:
A summary of advances from the Federal Home Loan Bank as of September 30,
1994 as follows:
<TABLE>
<CAPTION>
MATURING IN WEIGHTED AVERAGE ADVANCE OUTSTANDING
YEAR ENDED INTEREST RATE AT BALANCE AT
SEPTEMBER 30, SEPTEMBER 30, 1994 SEPTEMBER 30, 1994
---------------- --------------------- ---------------------
<S> <C> <C>
1995 5.60% $ 9,250,000
============
</TABLE>
At September 30, 1994, advances from the Federal Home Loan Bank were
collaterized by certain investment securities with an approximate book
value of $9,982,000 and approximate market value of $9,321,500, and
certain loans receivable with an aggregate unpaid principal balance of
approximately $10,268,000.
8. NOTES PAYABLE:
The notes payable at September 30, 1995 and 1993 consisted of the
following:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
9% note payable, original face amount of
$65,772 payable in equal monthly
installments of $827 with a final balloon
payment due June 1994; renegotiated in May
1994, interest of prime + 1%, payable in
equal monthly installments of $537 with a
final balloon payment due in May 1997 $ 50,862 $ 55,419
8.5% note payable, original face amount
$181,000 payable in equal monthly
installments of $1,816 with a final balloon
payment due June 1995 0 161,681
9% note payable, original face amount
$188,525 payable in equal monthly
installments of $2,370, due June 2001 144,211 158,848
Subordinated debentures, original face
amount $300,000, interest or prime + 1%
due quarterly (prime rate was 7.75% at
September 30, 1994), principal of $12,500
due quarterly starting January 1995 with
balloon payment due December 2000 300,000 0
-------- --------
$495,073 $ 375,948
======== =========
</TABLE>
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. NOTES PAYABLE, continued:
Maturities of notes payable for the five years subsequent to September
30, 1994 are as follows:
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
1995 $ 72,576
1996 74,086
1997 107,263
1998 71,265
1999 73,260
</TABLE>
9. PREFERRED STOCK:
During 1991, the Holding Company sold 44,025 shares of Series A variable
rate cumulative convertible preferred stock for $10 per share. Issuance
costs of $100,417 were deducted from additional paid-in capital. During
1992, the Holding Company repurchased 1,000 shares of preferred stock in
a recision offering. In the event that dividends payable on the share
are in arrears for three quarters or more or anytime after seven years,
each share of preferred stock is convertible, at the option of the
holder, into .67 shares of the Holding Company's common stock. Dividends
on the preferred stock will be paid at a rate equal to one percent over
the prime interest rate at the time of payment, but not less than 7% per
annum or more than 13.5% per annum.
10. INCOME TAXES:
As discussed in Note 1, the Company adopted SFAS No. 109 effective
October 1, 1993. Under the provisions of SFAS No. 109, the Company
elected not to restate prior years' consolidated financial statements.
The cumulative effect of initial adoption resulted in the recognition of
deferred tax assets approximating $546,400, deferred tax liabilities
approximating $170,000, and a valuation allowance approximating $376,400.
Significant components of the provision for income taxes for the year
ending September 30, 1994 is as follows:
<TABLE>
<S> <C>
Current:
Federal $ 34,000
State 0
--------
Total Current 34,000
Deferred:
Federal (34,000)
State 0
--------
Total Deferred (34,000)
--------
$ 0
========
</TABLE>
18
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES, CONTINUED:
The effective tax rate for the year ending September 30, 1994 differs
from the statutory tax rate as follows:
<TABLE>
<CAPTION>
% of
PRETAX
AMOUNT INCOME
-------- --------
<S> <C> <C>
Statutory federal tax rate $ 39,000 34.0%
Change in deferred tax asset valuation allowance (45,400) (39.5)
Other 6,400 5.5%
-------- ------
Net provision $ 0 $ 0.0%
======== ======
</TABLE>
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recorded for financial reporting purposes and
such amounts as measured in accordance with tax laws. In general, these
temporary differences are more inclusive than timing differences recognized
under previously applicable accounting principles. The items which comprise a
significant portion of deferred tax assets and liabilities at September 30, 1994
are as follows:
<TABLE>
<S> <C>
Gross deferred tax assets:
Allowance for doubtful accounts $ 190,000
Benefit of operating loss carryforwards 225,000
Alternative minimum tax credit 34,000
Other 4,000
---------
Total 453,000
Less valuation allowance (331,000)
---------
Net deferred tax assets 122,000
---------
Gross deferred tax liabilities:
Book basis in excess of tax basis for investments (69,000)
Cash to accrual adjustment (19,000)
---------
Gross deferred tax liabilities (88,000)
---------
Net deferred tax asset $ 34,000
=========
</TABLE>
19
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES, CONTINUED:
Deferred income taxes include the tax impact of net operating loss
carryforwards. Realization of these assets is contingent on future
taxable earnings. In accordance with the provisions of SFAS No. 109, a
valuation allowance of $308,000 at September 30, 1994 is deemed adequate
for these and other items which are not considered probable of
realization. The net change in the valuation allowance for deferred tax
assets was a decrease of $68,400 related to the benefits arising from
operating loss carryforwards.
The Company's effective tax rate on pretax income differs from the
statutory federal income tax rate for the year ended September 30, 1993
as follows:
<TABLE>
<S> <C>
Tax provision at federal statutory rate $ 16,881
Decreases in tax resulting from:
Utilization of tax loss carryforwards (16,881)
--------
$ 0
========
</TABLE>
At September 30, 1994, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $563,000, which are
available to offer future taxable income through 2008.
11. INTEREST ON DEPOSITS:
Interest on deposits is summarized as follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Interest bearing demand deposits $ 193,122 $ 207,918
Savings deposits 58,182 83,620
Time deposits 2,794,556 3,012,648
---------- ----------
$3,045,860 $3,304,186
========== ==========
</TABLE>
12. OTHER INCOME:
Other income consisted of the following:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Net gain on sale of loans $ 148,869 $ 553,858
Net gain on sale of investments 10,617 213,973
Loan servicing expenses, net (105,271) (133,568)
Mortgage loan underwriting fees 34,380 27,029
Servicing charges on deposit accounts 71,048 55,588
Service charges on loans 59,459 31,612
Other miscellaneous 183,337 29,535
---------- ----------
$ 402,439 $ 778,027
========== ==========
</TABLE>
20
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. OTHER EXPENSE:
Other expense is summarized as follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Salaries and employee benefits $1,194,223 $1,126,081
Occupancy and equipment, net 370,564 470,042
Data processing 111,948 120,656
Federal insurance premium 194,661 198,423
Legal and professional fees 211,888 229,516
Real estate owned expenses 0 17,236
Printing, supplies, and postage 96,344 92,676
Telephone 62,302 63,108
Supervisory examinations 40,731 47,346
Intangible and personal property taxes 1,871 30,412
Bank service charges 35,710 29,857
Other miscellaneous 226,069 164,956
---------- ----------
$2,546,311 $2,590,309
========== ==========
</TABLE>
14. LEASE COMMITMENTS:
The Company is obligated under noncancelable operating leases for its
administrative office and three branch offices. Approximate future
minimum lease payments on these leases at September 30, 1994 are as
follows:
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
1995 $108,500
1996 107,500
--------
$216,000
========
</TABLE>
Rent expense for the years ended September 30, 1994 and 1993 approximated
$124,000 and $186,000, respectively.
15. EMPLOYEE STOCK OWNERSHIP PLAN:
Effective January 1, 1989, the Company established an Employee Stock
Ownership Plan (ESOP). The Plan has purchased 12,000 preferred shares
and 4,130 shares of common stock of the Holding Company. These stock
purchases were partially funded by a $100,000 borrowing by the ESOP. The
Company has not guaranteed the loan and is not obligated to make annual
contributions to enable the ESOP to repay the loan principal and
interest; however it intends to make such contributions. Interest
incurred on this loan was approximately $2,800 and $7,600 for 1994 and
1993, respectively. Shares that have been allocated to employees are
1,642 common shares and 795 preferred shares. No contributions were
made during the years ended September 30, 1994 and 1993.
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. STOCK OPTION PLAN:
The Company had a stock option plan for certain outside directors that
expired in November 1992.
The Company has an incentive stock option plan for officers and key
employees. The plan which expires in 1998, provides that no options are
exercisable more than five years after the grant date. At September 30,
1994 and 1993, 38,999 shares remain available for grant under the
incentive stock option plan.
A summary of transactions for 1993 under the two plans is as follows:
<TABLE>
<CAPTION>
NUMBER OPTION
OF SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at October 1, 1992 34,140 $7.05
Canceled or expired 34,140 $7.05
------ ------
Outstanding at September 30, 1993 0
======
</TABLE>
No options were granted during 1994.
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
In the normal course of business, the Company has various outstanding
commitments to extend credit, which are not reflected in the accompanying
financial statements, including approximately $8,440,000 of unfunded
lines of credit, revolving credit and unfunded loan commitments at
September 30, 1994. The Company's exposure to credit loss in the event
of nonperformance by the other party to the financial instrument for loan
commitments and unfunded lines of credit is represented by the
contractual amount of these instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Since many of the loan commitments may expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral required, if deemed necessary, is based on
management's credit evaluation of the customer. Collateral varies, but
may include accounts receivable, inventory, fixed assets, and residential
and commercial real estate.
18. SUBSEQUENT EVENT:
Through November 23, 1994, the Company has issued an additional 23,780
shares of common stock for $107,010, for $4.50 per share.
22
<PAGE> 25
SUPPLEMENTAL INFORMATION
23
<PAGE> 26
[COOPERS & LYBRAND LETTERHEAD]
ACCOUNTANT'S REPORT ON SUPPLEMENTAL INFORMATION
Board of Directors
Key Florida Bancorp, Inc.
Our report on the audit of the basic consolidated financial statements of Key
Florida Bancorp, Inc. and subsidiaries, as of September 30, 1994 and for the
year then ended appears on page 1. This audit was conducted for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The supplementary consolidating information accompanying the
consolidated financial statements is not necessary for fair presentation of the
consolidated financial position and results of operations of Key Florida
Bancorp, Inc. and subsidiaries in conformity with generally accepted accounting
principles. The supplemental information is presented only for purposes of
additional analysis and is not a required part of the basic consolidated
financial statements. The supplemental consolidating information has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements, and, in our opinion, is fairly stated, in all
material respects, in relation to the basic consolidated financial statements
taken as a whole.
/s/ COOPERS & LYBRAND LLP
Tampa Florida
November 23, 1994
24
<PAGE> 27
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
September 30, 1994
<TABLE>
<CAPTION>
Key Florida Funding Corp. Key Florida Bank Key Florida Bancorp, Inc.
------------------------- ---------------- -------------------------
<S> <C> <C> <C>
Cash and due from banks $ $ 1,763,292 $ 89,221
Interest bearing deposits 107,293
Federal funds sold 0
Investment securities 11,031,863
Loans held for sale 0
Loans receivable 71,344,829
Loan origination costs, net 226,079
Allowance for loan losses (612,601)
Bank premises and equipment, net 992,701
Accrued interest receivable 502,725
Other real estate owned, net 286,318 417,087
Federal Home Loan Bank stock, at cost 936,000
Loan servicing rights acquired and excess servicing
fees receivable 366,436
Prepaid expenses and other assets 78,921 284,480
Deferred tax asset 34,000
Investment in subsidiary 0 4,025,574
--------------------- -------------- -------------------
$ 78,921 $ 87,263,415 $ 4,531,882
===================== ============== ===================
Non-interest bearing deposits $ $ 3,173,734 $
Interest bearing demand deposits 5,143,133
Money market deposits 4,294,114
Savings deposits 1,639,540
Time deposits 59,521,878
Federal Home Loan Bank advances 9,250,000
Notes payable 0 495,073
Accrued interest payable 71,151
Amounts due on loans serviced 17,616
Accrued expenses and other liabilities 72 171,524 81,906
Income taxes currently payable 34,000
--------------------- -------------- -------------------
72 83,316,690 576,979
--------------------- -------------- -------------------
Series A preferred stock 430,250
Common stock 367,830 8,011
Additional paid-in capital 57,860 4,906,130 5,091,962
Accumulated deficit 20,989 (1,327,235) (1,570,413)
Treasury stock, at cost 0 (4,907)
--------------------- -------------- -------------------
78,849 3,946,725 3,954,903
--------------------- -------------- -------------------
$ 78,921 $ 87,263,415 $ 4,531,882
===================== ============== ===================
</TABLE>
<TABLE>
<CAPTION>
Consolidated
Eliminations Key Florida Bancorp, Inc.
--------------------- -------------------------
<S> <C> <C>
Cash and due from banks $ 89,221 $ 1,763,292
Interest bearing deposits 107,293
Federal funds sold 0
Investment securities 11,031,863
Loans held for sale 0
Loans receivable 71,344,829
Loan origination costs, net 266,079
Allowance for loan losses (612,601)
Bank premises and equipment, net 992,701
Accrued interest receivable 502,725
Other real estate owned, net 703,405
Federal Home Loan Bank stock, at cost 936,000
Loan servicing rights acquired and excess servicing 0
fees receivable 366,436
Prepaid expenses and other assets (78,921) 284,480
Deferred tax asset 34,000
Investment in subsidiary (4,025,574) 0
--------------------- -------------------------
$ (4,193,716) $ 87,680,502
===================== =========================
Non-interest bearing deposits $ $ 3,173,734
Interest bearing demand deposits 5,143,133
Money market deposits 4,294,114
Savings deposits 1,639,540
Time deposits (89,221) 59,432,657
Federal Home Loan Bank advances 9,250,000
Notes payable 495,073
Accrued interest payable 71,151
Amounts due on loans serviced 17,616
Accrued expenses and other liabilities (78,921) 174,581
Income taxes currently payable 34,000
--------------------- -------------------------
(168,142) $ 83,725,599
--------------------- -------------------------
Series A preferred stock 430,250
Common stock (367,830) 8,011
Additional paid-in capital (4,963,990) 5,091,962
Accumulated deficit 1,306,246 (1,570,413)
Treasury stock, at cost 0 (4,907)
--------------------- -------------------------
(4,025,574) 3,954,903
--------------------- -------------------------
$ (4,193,716) $ 87,680,502
===================== =========================
</TABLE>
25
<PAGE> 28
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS
for the year ended September 30, 1994
<TABLE>
<CAPTION>
Key Florida Funding Corp. Key Florida Bank Key Florida Bancorp, Inc.
------------------------- ---------------- -------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 5,265,090 $ 401
Interest and dividends on investment securities:
U.S. Treasury securities 48,041
U.S. Government agencies and mortgage-backed
securities 407,062
Other securities 275,653
Interest on federal funds sold 2,635
------------------------- ---------------- ------------------------
0 5,998,481 401
------------------------- ---------------- ------------------------
Interest expense:
Interest on deposits 3,048,018
Interest on notes payable 0 44,530
Interest on Federal Home Loan Bank advance 604,489
------------------------- ---------------- ------------------------
0 3,652,507 44,530
------------------------- ---------------- ------------------------
Net interest income 0 2,345,974 (44,129)
Provision for loan losses 45,311
------------------------- ---------------- ------------------------
Net interest income after provision for loan losses 2,300,663 (44,129)
------------------------- ---------------- ------------------------
Net gain on sale of loans 148,869
Gain on sale of investments 10,617
Loan servicing expense, net (105,271)
Mortgage loan underwriting fees 34,380
Service charges on deposits accounts 71,048
Service charges on loans 59,459
Other miscellaneous 183,173 21,922
------------------------- ---------------- ------------------------
Total other income 0 402,275 21,922
------------------------- ---------------- ------------------------
Salaries and employee benefits 1,194,223
Occupancy and equipment, net 385,187 4,977
Data processing 111,948
Federal insurance premium 194,661
Legal and professional fees 211,888
Real estate owned expenses
Printing, supplies and postage 96,344
Telephone 62,302
Supervisory examinations 38,631 2,100
Intangible and personal property loans 1,871
Bank service charges 35,710
Other miscellaneous 218,134 7,935
------------------------- ---------------- ------------------------
Total other expenses 0 2,550,899 15,012
------------------------- ---------------- ------------------------
Net income (loss) $ 0 $ 152,039 $ (37,219)
========================= ================ ========================
</TABLE>
<TABLE>
<CAPTION>
Consolidated
Eliminations Key Florida Bancorp, Inc.
----------------------- -------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 5,265,491
Interest and dividends on investment securities:
U.S. Treasury securities 48,041
U.S. Government agencies and mortgage-backed
securities 407,062
Other securities 275,653
Interest on federal funds sold 2,635
----------------------- -------------------------
0 5,998,882
----------------------- -------------------------
Interest expense:
Interest on deposits (2,158) 3,045,860
Interest on notes payable 44,530
Interest on Federal Home Loan Bank advance 604,489
----------------------- -------------------------
(2,158) 3,694,879
----------------------- -------------------------
Net interest income 2,158 2,304,003
Provision for loan losses 45,311
----------------------- -------------------------
Net interest income after provision for loan losses 2,158 2,258,692
----------------------- -------------------------
Net gain on sale of loans 148,869
Gain on sale of investments 10,617
Loan servicing expense, net (105,271)
Mortgage loan underwriting fees 34,380
Service charges on deposits accounts 71,048
Service charges on loans 59,459
Other miscellaneous (21,758) 183,337
----------------------- -------------------------
Total other income (21,758) 402,439
----------------------- -------------------------
Salaries and employee benefits 1,194,223
Occupancy and equipment, net (19,600) 370,564
Data processing 111,948
Federal insurance premium 194,661
Legal and professional fees 211,888
Real estate owned expenses 0
Printing, supplies and postage 96,344
Telephone 62,302
Supervisory examinations 40,731
Intangible and personal property loans 1,871
Bank service charges 35,710
Other miscellaneous 226,069
----------------------- -------------------------
Total other expenses (19,600) 2,546,311
----------------------- -------------------------
Net income (loss) $ 0 $ 114,820
======================= =========================
</TABLE>
26
<PAGE> 1
EXHIBIT 99.4
LIBERTY NATIONAL BANK
-----------
Fiancial Statements
For the Years Ended
December 31, 1995 and 1994
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditor's Report................................... 1
Financial Statements
Balance Sheets............................................... 2
Statements of Income......................................... 3
Statements of Stockholders' Equity........................... 4
Statements of Cash Flows..................................... 5
Notes to Financial Statements................................ 6
</TABLE>
<PAGE> 3
[VARNADORE
TYLER &
HAWTHORNE, P.A.
Certified Public Accountants LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Liberty National Bank
Bradenton, Florida
We have audited the balance sheets of Liberty National Bank as of December 31,
1995 and 1994, and the related statements of income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the over all financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Liberty National Bank as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Varnadore, Tyler & Hawthorne, P.A.
--------------------------------------
Varnadore, Tyler & Hawthorne, P.A.
Certified Public Accountants
February 9, 1996
<PAGE> 4
<TABLE>
<CAPTION>
Liberty National Bank
Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
1995 1994
------------ -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 5,147,435 $ 6,277,180
Federal funds sold 1,102,144
------------ ------------
Total cash and cash equivalents 6,249,579 6,277,180
Investment and mortgage-backed securities 21,293,514 21,470,889
Loans receivable, net 65,743,808 49,338,523
Bank premises and equipment, net 1,741,739 1,128,033
Accrued interest receivable 667,664 561,973
Other real estate owned, net 145,337 92,824
Prepaid expenses and other assets 217,187 634,530
------------ ------------
Total Assets $ 96,068,828 $ 79,503,952
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing deposits $ 11,388,254 $ 11,154,295
Money market deposits 6,404,854 5,842,877
Savings and NOW deposits 11,405,502 10,157,946
Time deposits 58,756,097 45,561,821
------------ ------------
Total deposits 87,954,707 72,716,939
Accrued interest payable 395,420 255,033
Accrued expenses and other liabilities 369,899 245,785
------------ ------------
Total liabilities 88,720,026 73,217,757
Commitments and Contingencies
Stockholders' Equity
Common stock - $4 and $5 par value,
respectively; authorized 10,000,000
shares; issued and outstanding,
1,199,282 and 845,606 shares, respectively 4,797,128 4,228,030
Additional paid-in capital 1,751,497 2,233,630
Unrealized gain (loss) on securities (64,238) (478,312)
Retained earnings 864,415 302,847
------------ ------------
Total stockholders' equity 7,348,802 6,286,195
------------ ------------
Total Liabilities and Stockholders' Equity $ 96,068,828 $ 79,503,952
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
<TABLE>
<CAPTION>
Liberty National Bank
Statements of Income
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended
December 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Interest Income
Interest and fees on loans $ 5,281,899 $ 3,654,822
Interest on federal funds sold 134,735 39,425
Interest on investment securities-
U.S. Treasury and Government agencies 1,428,601 1,047,694
Other 11,622 11,625
------------ ------------
Total Interest Income 6,856,857 4,753,566
Interest Expense
Interest on deposits 3,677,228 2,209,809
Interest on other borrowings 5,001 2,036
------------ ------------
Total Interest Expense 3,682,229 2,211,845
Net Interest Income 3,174,628 2,541,721
Provision for Loan Losses 362,263 275,713
------------ ------------
Net Interest Income After Provision for 2,812,365 2,266,008
Loan Losses
Other Income 584,328 451,555
Other Expense 2,483,690 2,664,387
------------ ------------
Income Before Income Taxes 913,003 53,176
Income Tax Provision
Current income tax provision 370,000 1,211
Deferred income tax provision (benefit) (18,565) (52,394)
------------ ------------
Total Income Tax Provision (Benefit) 351,435 (51,183)
------------ ------------
Net Income $ 561,568 $ 104,359
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 6
<TABLE>
<CAPTION>
Liberty National Bank
Statements of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Gain (Loss)
Common Stock on Investment
Issued and Additional Securities
Outstanding Paid-In Available for Retained
Shares Amount Capital Sale, Net Earnings Total
---------- ----------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 844,981 $ 4,224,905 $ 2,231,755 $ -- $ 198,488 $ 6,655,148
Stock options exercised 625 3,125 1,875 5,000
Net unrealized losses on
securities available
for sale (478,312) (478,312)
Net Income 104,359 104,359
--------- ----------- ----------- --------- --------- -----------
Balance, December 31, 1994 845,606 4,228,030 2,233,630 (478,312) 302,847 6,286,194
Stock options exercised 13,459 54,998 33,002 88,000
Stock split 5/4 211,692 --
Stock split -
partial shares (103) (412) (623) (1,035)
Warrant issue 128,628 514,512 (514,512) --
Net unrealized gains
on securities
available for sale 414,074 414,074
Net Income 561,568 561,568
--------- ----------- ----------- --------- --------- -----------
Balance, December 31, 1995 1,199,282 $ 4,797,128 $ 1,751,497 $ (64,238) $ 864,415 $ 7,348,802
========= =========== =========== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
<TABLE>
<CAPTION>
Liberty National Bank
Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended
December 31,
------------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 561,568 $ 104,359
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 89,606 71,993
Amortization/accretion of premium/discount (14,111) 55,840
(Gain) loss on sale of investment 6,498 (1,540)
Provision for loan losses 362,263 275,713
Deferred income taxes 18,565 (52,394)
Change in assets and liabilities:
(Increase) decrease in accrued
interest receivable (115,691) (132,398)
(Increase) decrease in prepaid expenses
and other assets (16,046) 814,013
Increase (decrease) in accrued
interest payable 140,387 75,621
Increase (decrease) in accrued expenses
and other liabilities 316,538 68,777
----------- -----------
Net Cash Provided By Operating Activities 1,349,577 1,279,984
Cash Flows From Investing Activities
Purchase of premises and equipment (703,312) (55,408)
Purchase of investment securities (11,282,648) (8,971,225)
Proceeds from sales of investment securities 1,487,310 506,719
Loan originations, net (16,852,026) (13,211,198)
Proceeds on other real estate owned 31,965 446,185
----------- -----------
Net Cash Used in Investing Activities (16,701,911) (16,354,974)
Cash Flows from Financing Activities
Net increase in noninterest bearing deposits 233,959 2,453,710
Net increase in money market deposits 561,977 1,044,540
Net increase in savings and NOW deposits 1,247,556 2,890,164
Net increase in time deposits 13,194,276 11,436,442
Proceeds from sale of common stock 86,965 5,000
----------- -----------
Net Cash Provided By Financing Activities 15,324,733 17,829,856
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (27,601) 2,754,866
Cash and Cash Equivalents at Beginning of Year 6,277,180 3,522,314
----------- -----------
Cash and Cash Equivalents at End of Year $ 6,249,579 $ 6,277,180
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest Paid $ 3,541,842 $ 2,136,224
=========== ===========
Income taxes paid $ 173,000 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 8
LIBERTY NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE BANK - Liberty National Bank (the Bank) is a nationally chartered
bank regulated by the Office of Comptroller of the Currency and
is engaged in community banking. The Bank is a member of the Federal
Reserve System and began operations in 1989. The accounting and
reporting policies of the Bank are in accordance with generally
accepted accounting principles and conform to general practices within
the banking industry. The financial statements are dependent upon
estimates, appraisals and evaluations of loans that could require
changes because of changing economic conditions and the economic
prospects of borrowers. The Bank operates facilities in both Manatee
and Sarasota Counties, Florida. At times the Bank maintains funds in
federally insured financial institutions in excess of federally insured
limits. Management monitors the soundness of these financial
institutions and believes the Bank's risk is negligible.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the
Bank considers cash and cash equivalents to include cash on
hand, amounts due from banks, interest-bearing deposits with maturities
of less than ninety days and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods. The Bank maintains
its due from banks and federal funds sold with correspondent banking
relationships as determined by the Bank's board of directors. At
December 31, 1995, the primary correspondent banks were NationsBank and
the Federal Reserve Bank.
INVESTMENT SECURITIES - The Bank's investment in securities is
classified and accounted for as follows:
- SECURITIES AVAILABLE FOR SALE. Securities to be held
for indefinite periods of time and not intended
to be held to maturity or on a long-term basis are
classified as available for sale and carried at fair
value. Securities held for indefinite periods of time
include securities that management intends to use as
part of its asset and liability management strategy and
that may be sold in response to changes in interest
rates, resultant prepayment risk and other factors
related to interest rate and resultant prepayment risk
changes.
Unrealized gains and losses on investment securities available
for sale, net of taxes, are reported as a separate component of
stockholder's equity.
LOANS AND ALLOWANCE FOR LOAN LOSSES - Loans are stated at the amount of
unpaid principal, net of deferred loan fees and/or origination
costs, less an allowance for loan losses. Interest income is
recognized using the simple interest method on daily balances of
principal amounts outstanding.
The allowance for loan losses is established through a provision for
loan losses charged to operations. Loans are charged against
the allowance for loan losses when management believes that
collectibility of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb possible
losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current
economic conditions that may affect the borrower's ability to pay.
-6-
<PAGE> 9
LIBERTY NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such
that collection of interest is doubtful. Classification of a loan as
nonaccrual is not necessarily indicative of a potential loss of
principal.
Loan origination fees and certain direct loan origination costs are
deferred and amortized as a yield adjustment, using the interest
method, over the lives of the related loans. Amortization of deferred
loan fees is discontinued when a loan is placed on nonaccrual status.
BANK PREMISES AND EQUIPMENT, NET - Bank premises and equipment are
carried at cost, less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over
the estimated useful lives of the related assets, which range from
seven to ten years for office furniture and equipment and forty years
form the Bank's buildings. Amortization of leasehold improvements is
computed using the straight-line method over the term the Bank expects
to lease the related property. Maintenance and repairs are charged to
expense as incurred. Renewals and betterments which materially
increase the value of the property are capitalized. When office
property or equipment is sold, or otherwise disposed of, the cost and
related depreciation or amortization are removed from the respective
accounts and the respective gains and losses are included in earnings.
OTHER REAL ESTATE OWNED - Other real estate owned includes foreclosed
and in-substance foreclosed property and premises no longer used for
business operations.
Other real estate owned is carried at the lower of the recorded
amount of the loan or lease for which the foreclosed property
previously served as collateral, or the fair value of the property
minus estimated costs to sell. Prior to foreclosure, the recorded
amount of the loan or lease is written down, if necessary, to the fair
value, minus estimated costs to sell, of the real estate to be acquired
by charging the allowance for credit losses.
Subsequent to foreclosure, gains or losses on the sale of and
losses on the periodic revaluation of other real estate owned are
credited or charged to expense. Net costs of maintaining and operating
foreclosed properties are expenses as incurred.
INCOME TAXES - Provisions for income taxes are based on taxes
payable or refundable for the current year (after exclusion of
non-taxable income such as interest on state and municipal securities)
and deferred income taxes on temporary differences arising from
differences between the amount of taxable income and pretax financial
income and between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or
settled as prescribed in FASB Statement No. 109, Accounting for Income
Taxes. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes in the period of enactment.
-7-
<PAGE> 10
LIBERTY NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
FUTURE ACCOUNTING REQUIREMENTS - The Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 114
(SFAS 114), Accounting By Creditors for Impairment of a Loan, in May
1993. (SFAS 114), Accounting By Creditors for Impairment of a Loan, in
May 1993. SFAS 114 requires creditors to measure loan impairment based
on the present value of expected future cash flows, observable market
prices, or the fair value of the collateral if the loan is collateral
dependent. SFAS 114 was amended by Statement of Financial Accounting
Standards No. 118 (SFAS 118), Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures, in October 1994. SFAS 118
allows creditors to use existing methods for recognizing interest income
on impaired loans. SFAS 114 and SFAS 118 are effective for the Bank's
year ending December 31, 1996. Management does not anticipate that the
adoption of SFAS 114 and SFAS 118 will have a material impact on the
Bank.
The FASB issued SFAS 119 Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments in October 1994.
SFAS 119 expands existing disclosure requirements by distinguishing
between derivative financial instruments held or issued for trading
purposes and those held for other than trading purposes. Entities
holding derivative financial instruments for purposes other than trading
will be required to disclose a description of the entity's objectives
for holding or issuing the derivative financial instruments. SFAS 119
is effective for the Bank's year ending December 31, 1996. SFAS 119
requires only additional disclosures and will not have a financial
impact on the Bank.
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of, issued by the FASB in March 1995,
is effective for fiscal years beginning on or after December 15, 1995.
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity, be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In performing
the review for recoverability, the entity should estimate the future
cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying
amount of the asset, an impairment loss is recognized. Measurement of
an impairment loss for long-lived assets and identifiable intangibles
that an entity expects to hold and use should be based on the fair
value of the asset. Management has not determined the impact of SFAS
121 on the Bank's financial statements.
In May 1995, the FASB issued SFAS 122, Accounting for Mortgage Servicing
Rights an Amendment of FASB Statement No. 65. SFAS 122 amends SFAS 65
Accounting for Certain Mortgage Banking Activities, to require that a
mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others however those servicing rights are
acquired. SFAS 122 is effective for the Bank's year-ending December
31, 1996. Management does not anticipate that the adoption of SFAS
122 will have a material impact on the Bank.
In October 1995, the FASB issued SFAS 123, Accounting for Stock Based
Compensation, effective for fiscal years beginning after December 15,
1995. SFAS 123 requires a fair value-based method of accounting for
stock-based compensation. Since the Bank does not utilize any
stock-based compensation plans, SFAS 123 is not expected to have a
material impact on the financial position or results of operations of
the Bank.
Reclassifications - Certain amounts in 1994 have been reclassified to
conform with the 1995 presentation.
-8-
<PAGE> 11
Liberty National Bank
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. INVESTMENTS
The carrying amounts of investment securities as shown on the balance
sheets of the Bank and their approximate market values at December 31,
were as follow:
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 2,849,720 $ 14,612 $ (7,847) $ 2,856,485
U. S. Government agencies 15,972,297 71,115 (163,005) 15,880,407
State and Municipals 413,461 413,461
----------------------------------------------------------------------
Total debt securities 19,235,478 85,727 (170,852) 19,150,353
Mortgage-backed securities 1,944,974 3,502 (17,215) 1,931,261
Other investments 211,900 211,900
----------------------------------------------------------------------
Total available for sale $21,392,352 $ 89,229 $ (188,067) $21,293,514
======================================================================
<CAPTION>
1994
----------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 5,646,622 $ -- $ (123,398) $ 5,523,224
U.S. Government agencies 13,846,217 3,340 (457,100) 13,392,457
State and Municipals 419,156 419,156
----------------------------------------------------------------------
Total debt securities 19,911,995 3,340 (580,498) 19,334,837
Mortgage-backed securities 2,100,356 (158,154) 1,942,202
Other investments 193,850 193,850
----------------------------------------------------------------------
Total available for sale $22,206,201 $ 3,340 $ (738,652) $21,470,889
======================================================================
</TABLE>
The book value and approximate market value of investments at December 31,
1995, by contractual maturity are shown below. Expected maturities may differ
from contractual maturities due to borrowers having the right to call or repay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Securities Available for Sale
-----------------------------------
Amortized Cost Fair Value
-----------------------------------
<S> <C> <C>
Due in one year or less $ 5,607,793 $ 5,558,863
Due from one year to five years 15,097,572 15,046,280
Due from five to ten years 475,087 476,471
Other 211,900 211,900
-----------------------------------
$ 21,392,352 $ 21,293,514
===================================
</TABLE>
-9-
<PAGE> 12
LIBERTY NATIONAL BANK
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONT'D)
Gross proceeds from the sale of investment securities during 1995
approximated $1,487,000. A gross loss of $6,498 was realized on the
sale. Gross proceeds from the sale of investment securities during 1994
approximated $506,700. A gross gain of $1,540 was realized on the sale.
Securities with a carrying value of approximately $1,840,000 and market
value of approximately $1,845,000 are pledged at December 31, 1995.
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
A summary of loan distribution at December 31, is as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------- ------------------
<S> <C> <C>
Residential mortgage loans,
substantially all single-family $ 29,403,328 $ 14,446,799
Commercial and commercial
real estate loans 31,920,325 31,885,559
Consumer loans 5,126,829 3,437,581
-------------------- ------------------
$ 66,450,482 $ 49,769,939
Less allowance for loan losses 706,674 431,416
-------------------- ------------------
$ 65,743,808 $ 49,338,523
==================== ==================
</TABLE>
The Bank grants and purchases real estate and commercial and
installment loans throughout Florida, with a majority in the
Sarasota and Manatee County area. Although the Bank has a diversified
loan portfolio, a significant portion of its debtors' ability to honor
their contracts is dependent primarily upon the economy of Sarasota and
Manatee Counties, Florida and general economic conditions.
Loans on which accrual of interest has been discontinued amounted to
approximately $696,000 at December 31, 1995. If interest on those loans
had been accrued, such income would have approximated $33,000. Loans on
which interest was not accrued totaled approximately $260,900 at
December 31, 1994.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------- ------------------
<S> <C> <C>
Allowance at beginning of year $ 431,416 $ 369,894
Additions:
Provision 362,263 275,713
Recoveries on loans previously charged off 5,877 9,186
Loans charged off (92,882) (223,377)
-------------------- -----------------
Allowance at end of year $ 706,674 $ 431,416
==================== =================
</TABLE>
In management's opinion, the allowance is adequate to reflect the risk
in the loan portfolio.
-10-
<PAGE> 13
LIBERTY NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT'D)
LOANS WITH OFFICERS AND DIRECTORS - In the course of its business, the
Bank has granted loans to executive officers, directors and principal
stockholders of the Company and to their related interests. At December
31, 1995 and 1994, loans to such parties were as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------
<S> <C> <C>
Balance at beginning of year $ 1,711,928 $ 1,479,626
New loans 1,259,656 2,468,167
Repayments on loans (1,384,992) (2,235,865)
----------- -----------
Balance at end of year $ 1,586,592 $ 1,711,928
=========== ===========
</TABLE>
In addition, overdraft line commitments total $14,500 of $2,805 was used as of
December 31, 1995.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment and their related accumulated depreciation and
amortization consisted of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land and improvements $ 409,322 $ 455,296
Building 690,704 660,756
Furniture and equipment 337,469 212,447
Leasehold improvements 20,738 20,738
Construction in progress 576,881 --
----------- -----------
2,035,114 1,349,237
Less accumulated depreciation 293,375 221,204
----------- -----------
Bank premises and equipment, net $ 1,741,739 $ 1,128,033
=========== ===========
</TABLE>
5. OFF-BALANCE-SHEET RISK, COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK - The Bank's core customer loan base is
located in Manatee and Sarasota Counties, Florida. However, this base is
diversified over a number of different industries. Collateral for secured
loans varies but includes real estate, premises and equipment, inventory,
and accounts receivable.
OFF-BALANCE-SHEET ITEMS - The Bank 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. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest-rate risk that are not recognized on the accompanying balance
sheet.
The Bank's exposure to credit loss is limited to the contractual amount of
these instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
-11-
<PAGE> 14
LIBERTY NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
5. OFF-BALANCE-SHEET RISK, COMMITMENTS AND CONTINGENCIES (CONT'D)
A summary of financial instruments with off-balance-sheet risk at December
31, 1995 is as follows:
<TABLE>
<CAPTION>
Contract Amount
---------------
<S> <C>
Commitments to extend credit $ 8,987,000
Standby letters of credit 137,000
-----------
$ 9,124,000
===========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Bank upon extension of credit is based on
management's credit evaluation of the counter-party. Collateral held may
include certificates of deposit, premises and equipment, inventory, and accounts
receivable.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. The Bank's policy for obtaining collateral, and
the nature of the collateral, is essentially the same as involved in making
commitments to extend credit.
COMMITMENTS AND CONTINGENCIES - The Bank has entered into a 10-year
noncancelable operating lease for its Sarasota branch facility. The Bank also
leases substantially all of its furniture, fixtures and equipment. In addition
to base rental payments, the furniture, fixtures and equipment lease also
includes a quarterly rent adjustment (increase or decrease) based on the
difference between the effective and assumed interest rates for a given
quarter. Rent expense for the period ended December 31, 1995 and 1994, was
approximately $72,000 and $54,000, respectively, and is included in net
occupancy expense in the accompanying statements of income. Future lease
commitments at December 31, 1995, were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31 Amount
------------- --------
<S> <C>
1996 $ 98,300
1997 72,000
1998 72,000
1999 72,000
2000 72,000
Thereafter 72,000
</TABLE>
-12-
<PAGE> 15
Liberty National Bank
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY
During 1995, the Board of Directors authorized a 5 for 4 stock split.
Concurrently, the Bank's shareholders approved changing the par value
from $5.00 to $4.00 per share. As a result, 211,692 additional shares
of stock were issued.
Restriction of Dividends and Regulatory Matters - The Bank, as a
national bank, is subject to the dividend restrictions set forth by the
Comptroller of the Currency. Under such restrictions, the Bank may
not, without the prior approval of the Comptroller of the Currency,
declare dividends in excess of the sum of the current year's earnings
plus the retained earnings from the prior two years. The Bank is also
required to maintain minimum amounts of capital to total "risk
weighted" assets, as defined by the banking regulators. At December
31, 1995, the Bank was in compliance with minimum Tier 1 and total
capital ratios of 4.00 percent and 8.00 percent, respectively.
7. INCOME TAXES
Significant components of the provisions for income taxes for the years
ended December 31, are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Current:
Federal $ 344,000 $ 1,211
State 26,000 --
---------- ---------
Total current 370,000 1,211
Deferred (benefit):
Federal (17,505) (49,400)
State (1,060) (2,994)
---------- ---------
Total deferred (benefit) (18,565) (52,394)
---------- ---------
$ 351,435 $ (51,183)
========== =========
</TABLE>
The difference between federal income tax computed at the statutory
rate and the actual tax provision is shown below:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Income before taxes $ 913,003 $ 53,176
========== =========
Tax at the statutory rate (35%) $ 319,600 $ 18,612
Increase (decrease) in taxes:
State income tax, net of federal benefit 16,200 (1,946)
Net utilization of operating loss carryforward (73,449)
Non deductible expenses 14,700 5,600
Other 935
---------- ---------
Total Income Tax (Benefit) $ 351,435 $ (51,183)
========== =========
</TABLE>
Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recorded for financial
reporting purposes and such amounts as measured in accordance with
tax laws. In general, these temporary differences are more inclusive
than timing differences recognized under previously applicable
accounting principles. The items which comprise a significant portion
of deferred tax assets and liabilities at December 31, are as follows:
-13-
<PAGE> 16
LIBERTY NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
7. INCOME TAXES (CONT'D)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 152,500 $ 52,500
Benefit of operating loss carryforward - 64,750
Cash to accrual adjustment 28,000 -
--------- ---------
Gross deferred tax assets 180,500 117,250
Less valuation allowance (17,500) -
--------- ---------
Gross deferred tax assets, net of
valuation allowance 163,000 117,250
--------- ---------
Deferred tax liabilities:
Cash to accrual adjustment 92,000 (64,856)
--------- ---------
Gross deferred tax liabilities 92,000 (64,856)
--------- ---------
Net deferred tax assets $ 71,000 $ 52,394
========= =========
</TABLE>
Deferred taxes include the tax impact of net operating loss carryforwards
and the deductibility of bad debts. Realization of these assets is
contingent on future taxable earnings and allowance for doubtful accounts.
In accordance with the provisions of SFAS No. 109, a valuation allowance of
$17,500 at December 31, 1995, is deemed adequate for these and other items
which are not considered probable of realization.
8. STOCK OPTION AND STOCK WARRANT PLANS
STOCK OPTION PLAN - During 1991, the Bank adopted a Nonqualified
Employee Stock Option Plan. Under the Plan, a committee designated by the
Board of Directors is authorized to grant options to purchase up to 78,125
shares of common stock to officers and employees of the Bank. The committee
administers the Plan and designates the optionee and all terms.
The option price per share with respect to each option shall be determined
by the committee but will, in no instance, be less than $6.40 per share. As
of December 31, 1995 and 1994, 78,125 options to purchase stock had been
granted under the Plan. Options for 14,531 shares have been exercised and
options for 2,187 shares have expired. The number of options outstanding at
December 31, 1995 totals 61,407. The options granted must be exercised by
March 14, 2000.
STOCK WARRANT PLAN - In 1989, certain shareholders received one warrant to
purchase one share of the Bank's stock for each share purchased by that
shareholder in the initial offering of the Bank's stock. The exercise price
of the warrants was $8 per share, and the warrants were to expire on
January 1, 2000. During the year ended December 31, 1995, the Bank
implemented a warrant exchange program, whereby each warrant holder could
exchange the warrants for common stock at the ratio of .5066 shares of stock
for each warrant surrendered. All of the 253,906 warrants outstanding were
exchanged for 128,638 shares of common stock.
-14-
<PAGE> 17
LIBERTY NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
===============================================================================
<TABLE>
<S> <C> <C>
9. INTERESTS ON DEPOSITS
Interests on deposits is summarized as follows:
1995 1994
---------- ----------
Savings and NOW deposits $ 300,862 $ 182,644
Money Market deposits 202,545 118,953
Time deposits 3,173,821 1,908,212
---------- ----------
$3,677,228 $2,209,809
========== ==========
10. OTHER INCOME
Other income consisted of the following:
1995 1994
---------- ----------
Recoveries $ 131,794 $ --
Service charges on deposit accounts 314,408 288,898
Gain on sale of securities 4,813 1,499
Gain on sale of loans -- 12,685
Other miscellaneous 133,313 148,473
---------- ----------
$ 584,328 $ 451,555
========== ==========
11. OTHER EXPENSE
1995 1994
---------- ----------
Salaries and employee benefits $1,015,158 $ 778,905
Occupancy and equipment, net 438,749 393,992
Data processing 179,467 127,652
Federal insurance premium 112,036 172,400
Legal and professional fees 206,831 147,857
Printing, supplies, and postage 132,603 111,904
Intangible and personal property taxes 39,887 35,779
Bank service charges 37,887 49,809
Loss on insurance settlement -- 599,077
Other miscellaneous 321,072 247,012
---------- ----------
$2,483,625 $2,664,387
========== ==========
</TABLE>
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial
condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
-15-
<PAGE> 18
LIBERTY NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONT'D)
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial statements:
Cash and cash equivalents: The carrying amounts reported in the statement
of financial condition for cash and cash equivalents approximate those
assets' fair values.
Investment and mortgage-backed securities: Fair values for investment
securities 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.
Loans: For residential mortgage loans, fair value is estimated using
quoted market prices for sales of whole loans with similar
characteristics, such as repricing dates, product type, and size. For
other homogeneous categories of loans, fair value is estimated using
quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics.
The fair value of other types of loans, such as commercial, commercial
real estate, construction, and consumer loans for which quoted market
prices are not available, is estimated by discounting expected future
cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. For non-accruing loans, fair value is estimated by
discounting expected future principal cash flows only.
Deposit liabilities: The fair value of demand deposits and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated
using rates currently offered for deposits of similar remaining
maturities.
Other liabilities: Commitments to extend credit were evaluated and fair
value was estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed
rates.
The estimated fair values of the Bank's financial instruments at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------------ -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 6,249,579 $ 6,249,579
Investment securities 21,293,514 21,293,514
Loans, net of allowance 65,743,808 66,349,978
Financial liabilities:
Deposits 87,954,707 88,542,268
Unrecognized financial instruments:
Commitments to extend credit - 8,987,000
Standby letters of credit - 137,000
</TABLE>
-16-
<PAGE> 19
LIBERTY NATIONAL BANK
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. MERGER AND REORGANIZATION
During 1995, the Board of Directors entered into an Agreement and Plan of
Reorganization with Key Florida Bancorp, Inc., whereby Key Florida Bank, F.S.B.
and Liberty would be merged into one bank and Liberty shareholders would
exchange their common stock for shares of common stock in Key Florida Bancorp,
Inc. It is anticipated the transaction will be a tax free exchange of stock
and will be completed in 1996. The merger will require the approval of the
Office of the Comptroller of the Currency, the Office of Thrift Supervision,
the Federal Reserve System and other regulatory authorities.
-17-
<PAGE> 20
[VARNADORE
TYLER &
HAWTHORNE, P.A.
Certified Public Accountants LETTERHEAD]
KEY FLORIDA BANCORP, INC.
AND SUBSIDIARIES
-----------
Financial Statements
For the Year Ended
September 30, 1995
<PAGE> 21
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT .............................................. 1
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET ............................................. 2
CONSOLIDATED STATEMENT OF INCOME ....................................... 3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ......................... 4
CONSOLIDATED STATEMENT OF CASH FLOWS ................................... 5
NOTES TO FINANCIAL STATEMENTS .......................................... 7
SUPPLEMENTAL INFORMATION
ACCOUNTANT'S REPORT ON SUPPLEMENTAL INFORMATION ........................ 19
CONSOLIDATING BALANCE SHEET ............................................ 20
CONSOLIDATING STATEMENT OF OPERATIONS .................................. 21
</TABLE>
<PAGE> 22
[LETTERHEAD] VARNADORE TYLER & HAWTHORNE, P.A.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Key Florida Bancorp, Inc.
Bradenton, Florida
We have audited the accompanying consolidated balance sheet of Key Florida
Bancorp, Inc. and subsidiaries (the Company) as of September 30, 1995 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the over all financial
statement presentation. We believe that our audit 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 Key Florida
Bancorp, Inc. and subsidiaries as of September 30, 1995, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ Varnadore, Tyler & Hawthorne, P.A.
----------------------------------------
Varnadore, Tyler & Hawthorne, P.A.
Certified Public Accountants
October 27, 1995
<PAGE> 23
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Cash and cash equivalents
Cash and due from banks $ 620,511
Interest bearing deposits 2,349,170
------------
Total cash and cash equivalents 2,969,681
Investment Securities
Securities held to maturity (market value approximates $9,325,700) 9,610,555
Securities available for sale 969,220
------------
Total Investment Securities 10,579,775
Loans receivable, net 72,106,000
Bank premises and equipment, net 1,037,313
Accrued interest receivable 511,655
Other real estate owned, net 612,405
Federal Home Loan Bank stock, at cost 500,000
Loan servicing rights acquired and excess servicing fees receivable 252,373
Deferred tax asset 183,000
Prepaid expenses and other assets 374,497
------------
TOTAL ASSETS $ 89,126,699
============
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Noninterest bearing deposits $ 2,394,823
Interest bearing demand deposits 5,147,064
Money market deposits 4,127,937
Savings deposits 6,816,729
Time deposits 64,729,597
------------
Total Deposits 83,216,150
Federal Home Loan Bank advances 1,000,000
Notes payable 172,081
Accrued interest payable 33,763
Amounts due on loans serviced 24,385
Accrued expenses and other liabilities 130,833
------------
Total Liabilities 84,577,212
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A, variable rate cumulative convertible preferred stock, $.01 par
value and $10 state value, 1,000,000 shares
authorized, 43,025 shares issued and outstanding 430,250
Common stock, $.01 par value, 4,000,000 shares authorized,
940,986 shares issued and outstanding 9,411
Additional paid-in capital 5,720,080
Unrealized gain (loss) on securities (28,964)
Accumulated deficit (1,580,010)
Less treasury stock at cost (216 shares of preferred stock
at September 30, 1995) (1,280)
------------
Total Stockholders' Equity 4,549,487
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 89,126,699
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 25
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Income
For the Year Ended September 30, 1995
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INTEREST INCOME $ 5,763,241
Interest and fees on loans
Interest on investment securities-
U.S. Treasury and Government agencies 398,662
Other 342,390
------------
Total Interest Income 6,504,293
INTEREST EXPENSE
Interest on deposits 3,917,827
Interest on notes payable 41,713
Interest on Federal Home Loan Bank advances 534,644
------------
Total Interest Expense 4,494,184
------------
NET INTEREST INCOME 2,010,109
Provision for loan losses 102,004
------------
Net Interest Income After Provision for Loan Losses 1,908,10
Other Income 185,554
Other expense 2,243,436
------------
NET INCOME (LOSS) BEFORE INCOME TAX PROVISION (149,777)
Current income tax provision 3,000
Deferred income tax provision (benefit) (183,000)
------------
(180,000)
------------
NET INCOME $ 30,223
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 26
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Year Ended September 30, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Treasury Stock
----------------- ----------------- ----------------
Shares Amount Shares Amount Shares Amount
------ -------- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 43,025 $430,250 801,093 $ 8,011 1,018 $(4,907)
Net income
Preferred dividends paid
Change in unrealized gain (loss) on
securities available for sale
Common stock issued 139,893 1,400
Purchase of Treasury stock:
Common stock 280 (861)
Preferred stock 132 (787)
Treasury stock issued (1,214) 5,275
------ -------- ------- ------- ----- -------
BALANCE, SEPTEMBER 30, 1995 43,025 $430,250 940,986 $ 9,411 216 $(1,280)
====== ======== ======= ======= ===== =======
<CAPTION>
Additional Unrealized
Paid-in Gain (Loss) Accumulated
Capital on Securities Deficit Total
---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 $5,091,962 $ -- $ (1,570,413) $ 3,954,903
Net income 30,223 30,223
Preferred dividends paid (39,820) (39,820)
Change in unrealized gain (loss) on
securities available for sale (28,964) (28,964)
Common stock issued 628,118 629,518
Purchase of Treasury stock:
Common stock (861)
Preferred stock (787)
Treasury stock issued 5,275
---------- --------- ------------ -----------
BALANCE, SEPTEMBER 30, 1995 $5,720,080 $ (28,964) $ (1,580,010) $ 4,549,487
========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
-4-
<PAGE> 27
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Year Ended September 30, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 30,223
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment 133,541
Provision for possible loan losses 102,004
Amortization of premium on investment and mortgage-backed securities 20,750
Amortization of loan servicing rights and excess servicing fees 114,063
Net loss on disposition of bank premises 219
Net loss on sale of other real estate owned 157
Deferred income taxes (183,000)
Change in assets and liabilities
(Increase) in accrued interest receivable (8,930)
(Increase) in prepaid expenses and other assets (90,017)
(Decrease) in accrued interest payable (37,388)
(Increase) in amounts due on loans serviced 6,769
(Decrease) in accrued expenses and other liabilities (43,748)
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 44,643
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of Federal Home Loan Bank stock 436,000
Loan originations, net (1,740,854)
Proceeds on other real estate sold 582,000
Proceeds from maturities and repayments of
investment securities held to maturity 402,374
Purchase of bank premises and equipment (180,597)
Proceeds from sale of bank premises and equipment 2,225
-----------
NET CASH (USED IN) INVESTING ACTIVITIES (498,852)
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 28
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Cont'd)
For the Year Ended September 30, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in non-interest bearing deposits $ (778,911)
Net increase in interest bearing deposits 3,931
Net (decrease) in money market deposits (166,177)
Net increase in savings deposits 5,177,189
Net increase in time deposits 5,296,940
Proceeds from Federal Home Loan Bank advances 6,500,000
Repayment from Federal Home Loan Bank advances (14,750,000)
Repayments on notes payable (322,992)
Cash dividends paid on preferred stock (39,820)
Proceeds from sale of common stock 629,518
Purchase of Treasury stock 3,627
-----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,553,305
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,099,096
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,870,585
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR 2,969,681
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest $ 4,531,572
===========
Cash payments for income taxes $ --
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE> 29
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Key Florida Bancorp, Inc. (the "Holding Company") is the sole
shareholder of Key Florida Bank, F.S.B. (the "Bank"'). The Holding
Company operates as a unitary savings and loan holding company. The
Holding Company's primary business activity is the operation of the
Bank. The accounting and reporting policies of the Key Florida Bancorp,
Inc. and Subsidiaries (the "Company") are in accordance with generally
accepted accounting principles and conform to general practices within
the thrift industry. The financial statements are dependent upon
estimates, appraisals and evaluations of loans that could require
changes because of changing economic conditions and the economic
prospects of borrowers. The Bank operates facilities in Manatee County,
Florida. At times the Bank maintains funds in federally insured
financial institutions in excess of federally insured limits.
Management monitors the soundness of these financial institutions and
believes the bank's risk is negligible. The following summarizes the
more significant of these policies and practices.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Holding Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the
Company considers cash and cash equivalents to include cash on hand,
amounts due from banks, interest-bearing deposits with maturities of
less than ninety days and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods. The Company maintains its
due from banks and federal funds sold with correspondent banking
relationships as determined by the Company's board of directors. At
September 30, 1995, the primary correspondent banks were NationsBank
and the Federal Home Loan Bank.
INVESTMENT SECURITIES - The Company's investment in securities
are classified in two categories and accounted for as follows:
- SECURITIES TO BE HELD TO MATURITY. Securities for which the
Company has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in
interest income using the interest method over the period to
maturity.
- SECURITIES AVAILABLE FOR SALE. Securities to be held for
indefinite periods of time and not intended to be held to
maturity or on a long-term basis are classified as available
for sale and carried at fair value. Securities held for
indefinite periods of time include securities that management
intends to use as part of its asset and liability management
strategy and that may be sold in response to changes in
interest rates, resultant prepayment risk and other factors
related to interest rate and resultant prepayment risk
changes.
Realized gains and losses on dispositions are based on the net proceeds
and the adjusted book value of the securities sold, using the specific
identification method. Unrealized gains and losses on investment
securities available for sale are based on the difference between book
value and fair value of each security. These gains and losses are
credited or charged to shareholder's equity, whereas realized gains and
losses flow through the Company's yearly operations.
LOAN ORIGINATION COSTS, NET - The Company accounts for loan
origination fees in accordance with Statement of Financial Accounting
Standards No. 91. Loan origination and commitment fees, as well as
certain direct origination costs, are deferred and amortized as a yield
adjustment over the lives of the related loans using the interest
method.
-7-
<PAGE> 30
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
LOANS AND ALLOWANCE FOR LOAN LOSSES - Loans are stated at the amount of
unpaid principal, plus deferred loan fees, less an allowance for loan
losses. Interest income is recognized using the simple interest method
on daily balances of principal amounts outstanding.
The allowance for loan losses is established through a provision for
loan losses charged to operations. Loans are charged against the
allowance for loan losses when management believes that collectibility
of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on
existing loans that may become uncollectible, based on evaluations of
the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the
nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that
collection of interest is doubtful. Classification of a loan as
nonaccrual is not necessarily indicative of a potential loss of
principal.
BANK PREMISES AND EQUIPMENT, NET - Bank premises and equipment are
carried at cost, less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets, which range from seven to
ten years for office furniture and equipment and forty years for the
Company's buildings. Amortization of leasehold improvements is computed
using the straight-line method over the term the Company expects to
lease the related property. Maintenance and repairs are charged to
expense as incurred. Renewals and betterments which materially increase
the value of the property are capitalized. When office property or
equipment is sold, or otherwise disposed of, the cost and related
depreciation or amortization are removed from the respective accounts
and the respective gains and losses are included in earnings.
OTHER REAL ESTATE OWNED, NET - Other real estate owned includes
foreclosed assets held for sale and in-substance foreclosed assets.
In-substance foreclosed assets are those assets for which the Company
has taken possession, regardless of whether formal foreclosure
proceedings have taken place. At the time of foreclosure, foreclosed
real estate is recorded at the lower of cost or the asset's fair value,
less estimated costs to sell, which becomes the property's new basis.
Any write-downs based on the asset's fair value at date of acquisition
are charged to the allowance for loan losses. Costs incurred in
maintaining foreclosed real estate and subsequent write-downs to
reflect declines in the fair value of the property are included in
income (loss) on foreclosed real estate.
LOAN-SERVICING RIGHTS ACQUIRED AND EXCESS SERVICING FEES RECEIVABLE -
The cost of loan-servicing rights acquired is amortized in proportion
to, and over the period of, estimated net servicing revenues. When
loans sold have an average contractual interest rate, adjusted for
normal servicing fees, that differs from the agreed yield to the
purchaser, gains or losses are recognized equal to the present value of
such differential over the estimated remaining life of such loans. The
resulting "excess servicing fees receivable" is amortized over the
estimated life using a method approximating the level-yield method.
-8-
<PAGE> 31
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
The cost of loan-servicing rights purchased, the excess servicing fees
receivable, and the amortization thereon are periodically evaluated in
relation to estimated future net servicing revenues. The Company
evaluates the carrying value of the servicing portfolio by estimating
the future net servicing income of the portfolio based on management's
best estimate of remaining loan lives.
Income Taxes - Provisions for income taxes are based on taxes payable
or refundable for the current year (after exclusion of non-taxable
income such as interest on state and municipal securities) and deferred
income taxes on temporary differences arising from differences between
the amount of taxable income and pretax financial income and between
the tax bases of assets and liabilities and their reported amounts in
the financial statements. Deferred tax assets and liabilities are
included in the financial statements at currently enacted income tax
rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled as prescribed in
FASB Statement No. 109, Accounting for Income Taxes. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes in the period of
enactment.
Future Accounting Requirements - The Financial Accounting Standards
Board (FASB) issued Statement of financial Accounting Standards No. 107
("SFAS 107"), which extends existing fair value disclosure practices
for some instruments by requiring all entities to disclose the fair
value of financial instruments, both assets and liabilities recognized
and not recognized in the balance sheet, for which it is practicable to
estimate fair value. SFAS 107 is effective for the Company's year
ending September 30, 1996. SFAS 107 requires only additional disclosure
and will not have a financial impact on the Company.
The FASB issued Statement of Financial Standards No. 114 ("SFAS 114"),
Accounting By Creditors for Impairment of a Loan, in May 1993. SFAS
114 requires creditors to measure loan impairment based on the present
value of expected future cash flows, observable market prices, or the
fair value of the collateral if the loan is collateral dependent. SFAS
114 was amended by SFAS 118 in October 1994. SFAS 118 allows creditors
to use existing methods for recognizing interest income on impaired
loans. SFAS 118 is effective for the Company's year ending September
30, 1996. Management does not anticipate that the adoption of SFAS 118
will have a material impact on the Company.
The FASB issued SFAS 119 Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments in October 1994.
SFAS 119 expands current disclosure requirements by distinguishing
between derivative financial instruments held or issued for trading
purposes and those held for other than trading purposes. Entities
holding derivative financial instruments for purposes other than
trading will be required to disclose a description of the entity's
objectives for holding or issuing the derivative financial instruments.
SFAS 119 is effective for the Company's year ending September 30,
1996. SFAS 119 requires only additional disclosures and will not have a
financial impact on the Company.
-9-
<PAGE> 32
<PAGE> 33
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. REGULATORY MATTERS
On May 13, 1991, the Bank entered into an Operating Agreement with the
Office of Thrift Supervision (OTS). Management agreed to establish and
maintain certain written policies and procedures in accordance with
applicable regulations and to classify certain assets under certain
prescribed conditions. On March 19, 1992, the Operating Agreement was
terminated and replaced by a Supervisory Agreement. The Board of
Directors, among other things, agreed that it will provide independent and
effective oversight over all operations and activities of the Bank,
including compliance with the Supervisory Agreement and will review and
strengthen senior management. The Bank may not declare or pay a cash
dividend on, or repurchase any of, its capital stock if the effect thereof
would cause the regulatory capital of the Bank to be reduced below the
amount required for the regulatory capital requirement imposed by
regulatory authorities.
Failure by the Bank to comply with the Supervisory Agreement could
result in more restrictive actions taken by the OTS. The Bank's ability to
comply with the Supervisory Agreement is dependent on future events and
cannot be determined at the present time.
In management's opinion the Bank is in compliance, in all material respects,
with the Supervisory Agreement.
The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of
1989 requires institutions to have a minimum regulatory tangible capital
equal to 1.5% of adjusted total assets, a minimum 4% core capital ratio
and a 8% risk-based capital ratio.
The following is a summary of the capital requirements, the Bank's capital
and the amounts in excess as of September 30, 1995:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
-------------------- ------------------------ -----------------------------
($ in thousands) % of
Risk-Weighted
Amount % of Assets Amount % of Assets Amount Assets
-------------------- ------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital $4,347,651 4.88% $4,318,686 4.84% $4,926,136 9.62%
Requirement 1,336,956 1.50% 3,568,148 4.00% 4,097,014 8.00%
---------- --------- ---------- ----------- ---------- ----------
Excess $3,010,695 3.38% $ 750,538 .84% $ 829,122 $ 1.62%
========== ========= ========== =========== ========== ==========
</TABLE>
FIRREA stipulates that an institution that does not meet any of the
capital standards must submit a capital plan to the OTS that outlines the
institution's plans for attaining the required levels of regulatory
capital. Failure to obtain approval of its capital plan or maintain
compliance with an approved capital plan could result in OTS regulatory
action. An institution not in compliance with regulatory capital standards
or its capital plan will be precluded from asset growth unless approval is
specifically granted by the OTS. If growth is allowed, it will be
restricted generally to the amount of net interest credited on deposit
accounts. The Bank was in compliance with the minimum regulatory
requirements at September 30, 1995, the date of these financial statements.
-10-
<PAGE> 34
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. INVESTMENT SECURITIES
The book value and approximate market value of investments at September
30, 1995 are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1995
----------------------------------------------------------------------------------
Gross Gross Approximate
Book Value Unrealized Gains Unrealized Losses Market Value
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
GNMA certificates $3,170,484 $ -- $ (16,361) $3,154,123
Collateralized mortgage obligations 6,388,220 (233,238) 6,154,982
Other 51,851 51,851
----------------------------------------------------------------------------------
$9,610,555 $ -- $ (249,599) $9,360,956
==================================================================================
Available for sale:
U.S. Treasury $ 998,184 $ -- $ (28,964) $ 969,220
==================================================================================
</TABLE>
The book value and approximate market value of investments at September 30,
1995, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities due to borrowers having the right to call or repay
obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
--------------------------------------- -----------------------------------
Approximate Approximate
Book Value Market Value Book Value Market Value
------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 51,851 $ 51,851 $ -- $ --
Due from one year to five years -- -- 998,184 969,220
Mortgage backed securities 9,558,704 9,309,105
--------------------------------------- -----------------------------------
$ 9,610,555 $ 9,360,956 $ 998,184 $ 969,220
======================================= ===================================
</TABLE>
There were no sales or redemption of investments in debt securities at
September 30, 1995.
Securities with an approximate book value of $3,170,484 and approximate
market value of $3,109,602 were pledged at September 30, 1995 for Federal
Home Loan Bank advances.
4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
A summary of the loan distribution at September 30, 1995 follows:
<TABLE>
<S> <C>
Commercial $ 2,768,831
Commercial real estate 11,418,690
Residential real estate 47,835,515
Real estate - construction 8,620,817
Installment 1,698,385
Loan origination costs, net 371,212
------------
72,713,450
Allowance for loan losses (607,450)
------------
$ 72,106,000
============
</TABLE>
-11-
<PAGE> 35
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT'D)
The Company grants and purchases real estate and commercial and
installment loans throughout Florida, with a majority in the Sarasota and
Manatee County area. Although the Company has a diversified loan portfolio,
a significant portion of its debtors' ability to honor their contracts is
dependent primarily upon the economy of Sarasota and Manatee Counties,
Florida and general economic conditions.
Loans on which accrual of interest has been discontinued amounted to
approximately $642,000 at September 30, 1995. If interest on those loans
had been accrued, such income would have approximated $17,000.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<S> <C>
Allowance at beginning of year $ 612,601
Additions:
Provision 102,004
Recoveries on loans previously charged off 25,026
----------
Total additions 127,030
Loans charged off 132,181
----------
Allowance at end of year $ 607,450
==========
</TABLE>
In management's opinion, the allowance is adequate to reflect the risk
in the loan portfolio.
Loans with Officers and Directors - In the course of its business, the
Bank has granted loans to executive officers, directors and principal
stockholders of the Company and to their related interests. At September
30, 1995, loans to such parties were as follows:
<TABLE>
<S> <C>
Balance at beginning of year $ 874,238
New loans 516,500
Repayments on loans (845,517)
-----------
Balance at end of year $ 545,221
===========
</TABLE>
Loan Servicing - Mortgage loans serviced for others are not included in
the accompanying balance sheet. The Company has purchased servicing rights
from other lenders and has retained servicing from loans the Company sold to
other investors. Management does not plan to purchase servicing rights in
the future but does expect to continue to originate and sell certain loans
and retain the rights to service such loans. The unpaid principal balances
of these loans as of September 30, 1995 are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1995
----------------------------------------------------------------------------
Number Approximate Unpaid Weighted Average Weighted Average
of Loans Principal Balance Service Fee Remaining Maturity
-------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Fixed rate mortgages 445 $ 17,117,000 0.42% 227 months
Variable rate mortgages 169 11,647,000 0.38% 263 months
-------- ------------------
614 $ 28,764,000
======== ==================
</TABLE>
-12-
<PAGE> 36
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONT'D)
The following is an analysis of the changes in loan servicing rights
purchased and excess servicing fees retained asset balances at September 30,
1995:
<TABLE>
<CAPTION>
Purchased Retained Total
--------- --------- ---------
<S> <C> <C> <C>
Balance, October 1, 1994 $ 348,373 $ 18,063 $ 366,436
Amortization (96,000) (18,063) (114,063)
--------- --------- ---------
Balance, September 30, 1995 $ 252,373 $ -- $ 252,373
========= ========= =========
</TABLE>
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment and their related accumulated depreciation
and amortization consisted of the following:
<TABLE>
<S> <C>
Land $ 189,542
Building 487,176
Leasehold improvements 149,008
Office machines and equipment 273,635
Signs and displays 60,699
Furniture and fixtures 686,430
Vehicles 39,534
----------
Total, at cost 1,886,024
Less accumulated depreciation and amortization 848,711
----------
Bank premises and equipment, net $1,037,313
==========
</TABLE>
6. OTHER REAL ESTATE OWNED:
A summary of the Company's other real estate owned at September 30, 1995 is
as follows:
<TABLE>
<CAPTION>
Bank Holding Company Consolidated
------------ ---------------- ------------
<S> <C> <C> <C>
Acquired through foreclosure $ 612,405 $ -- $ 612,405
Less valuation allowance -- -- --
------------ ---------------- ------------
$ 612,405 $ -- $ 612,405
============ ================ ============
</TABLE>
-13-
<PAGE> 37
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
===============================================================================
7. FEDERAL HOME LOAN BANK ADVANCES
A summary of advances from the Federal Home Loan Bank as of September 30,
1995 follows:
<TABLE>
<CAPTION>
MATURING IN WEIGHTED AVERAGE ADVANCE OUTSTANDING
YEAR ENDED INTEREST RATE AT BALANCE AT
SEPTEMBER 30, SEPTEMBER 30, 1995 SEPTEMBER 30, 1995
------------- ------------------ -------------------
<S> <C> <C>
1996 5.60% $1,000,000
==========
</TABLE>
At September 30, 1995, advances from the Federal Home Loan Bank were
collaterized by certain investment securities with an approximate book
value of $3,170,000 and approximate market value of $3,154,000. As of
September 30, 1995, the Company has an unused line of credit with the
Federal Home Loan Bank of $4,500,000.
8. NOTES PAYABLE
The notes payable at September 30, 1995 consisted of the following:
<TABLE>
<S> <C>
9% note payable, original face amount of
$65,772 payable in equal monthly
installments of $827 with a final balloon
payment due June 1994; renegotiated in
May 1994, interest of prime +1%, payable
in equal monthly installments of $537
plus interest, with a final balloon
payment due in May 1997 $43,879
9% note payable, original face amount of
$188,515 payable in equal monthly
installments of $2,370, due June 2001 128,202
--------
$172,081
========
</TABLE>
Maturities of notes payable for the five years subsequent to September
30, 1995 are as follows:
<TABLE>
<CAPTION>
Year Ending September 30,
-------------------------
<S> <C>
1996 $23,956
1997 56,590
1998 20,951
1999 22,917
2000 25,066
</TABLE>
9. PREFERRED STOCK
During 1991, the Holding Company sold 44,025 shares of Series A variable
rate cumulative convertible preferred stock for $10 per share. Issuance
costs of $100,417 were deducted from additional paid-in capital. During
1992, the Holding Company repurchased 1,000 shares of preferred stock in
a recision offering. In the event that dividends payable on the share
are in arrears for three quarters or more or anytime after seven years,
each share of preferred stock is convertible, at the option of the
holder, into .67 shares of the Holding Company's common stock. Dividends
on the preferred stock will be paid at a rate equal to one percent over
the prime interest rate at the time of payment, but not less than 7% per
annum or more than 13.5% per annum.
-14-
<PAGE> 38
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES
The Holding Company and subsidiaries file a consolidated federal income tax
return on a calendar-year basis.
Significant components of the provisions for income taxes for the year ended
September 30, 1995 are as follows:
<TABLE>
<S> <C>
Current:
Federal $ 3,000
State --
Total current 3,000
Deferred: ---------
Federal (183,000)
State --
Total deferred (183,000)
---------
$(180,000)
=========
</TABLE>
The difference between federal income tax computed at the statutory rate and
the actual tax provision is shown below:
<TABLE>
<S> <C>
Income (loss) before taxes $ (149,777)
==========
Tax (benefit) at the statutory rate (34%) $ 50,924)
Increase (decrease) in taxes:
Non deductible expenses 4,881
Temporary differences, primarily loan losses provision
and depreciation (5,055)
Loss carry forward to future periods 51,098
Alternative minimum tax provision 3,000
----------
Total Current Income Tax Expense $ 3,000
==========
</TABLE>
Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recorded for financial reporting purposes and
such amounts as measured in accordance with tax laws. In general, these
temporary differences are more inclusive than timing differences recognized
under previously applicable accounting principles. The items which comprise a
significant portion of deferred tax assets and liabilities at September 30,
1995 are as follows:
<TABLE>
<S> <C>
Gross deferred tax assets:
Allowance for doubtful accounts $ 180,000
Benefit of operating loss carryforwards 257,000
Cash to accrual adjustment 3,000
----------
Total 440,000
Less valuation allowance 180,000
----------
Net deferred tax assets 260,000
----------
Gross deferred tax liabilities:
Book basis in excess of tax basis for investments 68,000
Cash to accrual adjustment 9,000
----------
Gross deferred tax liabilities 77,000
----------
Net deferred tax asset $ 183,000
==========
</TABLE>
-15-
<PAGE> 39
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
===============================================================================
10. INCOME TAXES (CONT'D)
Deferred taxes include the tax impact of net operating loss carryforwards
and the deductibility of bad debts. Realization of these assets is
contingent on future taxable earnings and allowance for doubtful
accounts. In accordance with the provisions of SAFS No. 109, a valuation
allowance of $180,000 at September 30, 1995 is deemed adequate for these
and other items which are not considered probable of realization. The
net change in the valuation allowance for deferred tax assets was a
decrease of $126,311 related to the benefits arising from operating loss
carryforwards.
At September 30, 1995, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $600,000, which are
available to offset future taxable income.
11. INTEREST ON DEPOSITS
Interest on deposits is summarized as follows:
<TABLE>
<S> <C> <C>
Interest bearing demand deposits $ 316,134
Savings deposits 85,955
Time deposits 3,515,738
----------
$3,917,827
==========
12. OTHER INCOME
Other income consisted of the following:
Net gain on sale of loans $ 106,522
Loan servicing expenses, net (93,165)
Mortgage loan underwriting fees 5,975
Service charges on deposit accounts 76,286
Service charges on loans 20,526
Other miscellaneous 69,410
----------
$ 185,554
==========
13. OTHER EXPENSE
Salaries and employee benefits $1,064,816
Occupancy and equipment, net 344,846
Data processing 111,360
Federal insurance premium 212,060
Legal and professional fees 101,110
Printing, supplies, and postage 83,053
Telephone 33,269
Supervisory examinations 34,837
Intangible and personal property taxes 30,000
Bank service charges 26,935
Other miscellaneous 201,150
----------
$2,243,436
==========
</TABLE>
-16-
<PAGE> 40
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
14. LEASE COMMITMENTS
The Company is obligated under noncancellable operating leases for its
administrative office and three branch offices. Approximate future minimum
lease payments on these leases at September 30, 1995 are as follows:
<TABLE>
<CAPTION>
Year Ending September 30,
<S> <C>
1996 $ 94,818
1997 61,389
1998 10,232
--------
$166,439
========
</TABLE>
Rent expense for the year ended September 30, 1995 approximated $115,245.
15. EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 1, 1989, the Company established an Employee Stock
Ownership Plan (ESOP). The Plan has purchased 12,000 preferred shares and
4,130 shares of common stock of the Holding Company. These stock purchases
were partially funded by a $100,000 borrowing by the ESOP. The Company has
not guaranteed the loan and is not obligated to make annual contributions
to enable the ESOP to repay the loan principal and interest; however, it
intends to make such contributions. Interest incurred on this loan was
approximately $5,015. Shares that have been allocated to employees are
4,130 common shares and 7,308 preferred shares. No contributions were made
during the nine months ended September 30, 1995. The current loan balance
at September 30, 1995 is $42,875.
16. STOCK OPTION PLAN
The Company has an incentive stock option plan for officers and key
employees. The plan, which expires in 1998, provides that no options are
exercisable more than five years after the grant date. At September 30,
1995, 38,999 shares remain available for grant under the incentive stock
option plan.
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company has various outstanding
commitments to extend credit, which are not reflected in the accompanying
financial statements, including approximately $8,000,000 of unfunded lines
of credit, revolving credit and unfunded loan commitments at September 30,
1995. The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for loan commitments and
unfunded lines of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Since many of the loan commitments may expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral required, if deemed necessary, is based on
management's credit evaluation of the customer. Collateral varies, but may
include accounts receivable, inventory, fixed assets, and residential and
commercial real estate.
-17-
<PAGE> 41
KEY FLORIDA BANCORP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
18. MERGER AND PLAN ORGANIZATION
During 1995, the Board of Directors entered into an Agreement and Plan
of Reorganization with Liberty National Bank, Inc., whereby Key Florida
Bank, F.S.B. and Liberty would be merged into one bank and Liberty
shareholders would exchange their stock for shares of stock in Key Florida
Bancorp, Inc. It is anticipated the transaction will be a tax free
exchange of stock and will be completed in 1996. The merger will require
the approval of the Office of the Comptroller of the Currency, the Office
of Thrift Supervision, the Federal Reserve System and other regulatory
authorities.
-18-
<PAGE> 42
SUPPLEMENTAL INFORMATION
<PAGE> 43
[VARNADORE TYLER & HAWTHORNE, P.A. LETTERHEAD]
Certified Public Accountants
ACCOUNTANT'S REPORT
ON SUPPLEMENTAL INFORMATION
Board of Directors
Key Florida Bancorp, Inc.
Our report on the audit of the basic consolidated financial statements of Key
Florida Bancorp, Inc. and subsidiaries, as of September 30, 1995 and for the
year then ended appears on page 1. This audit was conducted for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The supplementary consolidating information accompanying the
consolidated financial statements is not necessary for fair presentation of the
consolidated financial position and results of operations of Key Florida
Bancorp, Inc. and subsidiaries in conformity with generally accepted accounting
principles. The supplemental consolidating information accompanying the
consolidated financial statements is not necessary for fair presentation of the
consolidated financil position and results of operations of Key Florida
Bancorp, Inc. and subsidiaries in conformity with generally accepted accounting
principles. The supplemental information is presented only for purposes of
additional analysis and is not a required part of the basic consolidated
financial statements. The supplemental consolidating information has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements, and, in our opinion, is fairly stated, in
all material respects, in relation to the basic consolidated financial
statements taken as a whole.
/s/ Varnadore, Tyler & Hawthorne, P.A.
-----------------------------------------
Varnadore, Tyler & Hawthorne, P.A.
Certified Public Accountants
October 27, 1995
<PAGE> 44
Key Florida Bancorp, Inc. and Subsidiaries
Consolidating Balance Sheet
<TABLE>
September 30, 1995
====================================================================================================================================
Consolidated
Key Florida Key Florida Key Florida Key Florida
Funding Corp. Bank Bancorp, Inc. Eliminations Bancorp, Inc.
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash and due from banks $ -- $ 620,511 $ 378,771 $ (378,771) $ 620,511
Interest bearing deposits 2,349,170 2,349,170
Investment securities 10,579,775 10,579,775
Loans receivable 72,342,238 72,342,238
Loan origination costs, net 371,212 371,212
Allowance for loan losses (607,450) (607,450)
Bank premises and equipment, net 1,037,313 1,037,313
Accrued interest receivable 511,655 511,655
Other real estate owned, net 612,405 -- 612,405
Federal Home Loan Bank stock, at cost 500,000 500,000
Loan servicing rights acquired and excess
servicing fees receivable 252,373 252,373
Prepaid expenses and other assets 78,921 374,497 (78,921) 374,497
Deferred tax asset 183,000 183,000
Investment in subsidiary 4,422,773 (4,422,773) --
-------- ------------ ------------ ------------ ------------
$ 78,921 $ 89,126,699 $ 4,801,544 $ (4,880,465) $ 89,126,699
======== ============ ============ ============ ============
Non-interest bearing deposits $ -- $ 2,394,823 $ -- $ -- $ 2,394,823
Interest bearing demand deposits 5,147,064 5,147,064
Money market deposits 4,127,937 4,127,937
Savings deposits 6,816,729 6,816,729
Time deposits 65,108,368 (378,771) 64,729,597
Federal Home Loan Bank advances 1,000,000 1,000,000
Notes payable 172,081 172,081
Accrued interest payable 33,763 33,763
Amounts due on loans serviced 24,385 24,385
Accrued expenses and other liabilities 72 129,706 79,976 (78,921) 130,833
-------- ------------ ------------ ------------ ------------
72 84,782,775 252,057 (457,692) 84,577,212
Series A preferred stock 430,250 430,250
Common stock 397,570 9,411 (397,570) 9,411
Additional paid-in capital 57,860 5,233,270 5,720,080 (5,291,130) 5,720,080
Unrealized gain (loss) on securities (28,964) (28,964) 28,964 (28,964)
Accumulated deficit 20,989 (1,257,952) (1,580,010) 1,236,963 (1,580,010)
Treasury stock -- (1,280) -- (1,280)
-------- ------------ ------------ ------------ ------------
78,849 4,343,924 4,549,487 (4,422,773) 4,549,487
-------- ------------ ------------ ------------ ------------
$ 78,921 $ 89,126,699 $ 4,801,544 $ (4,880,465) $ 89,126,699
======== ============ ============ ============ ============
</TABLE>
-20-
<PAGE> 45
Key Florida Bancorp, Inc. and Subsidiaries
Consolidating Statement of Income
For the Year Ended September 30, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated
Key Florida Key Florida Key Florida Key Florida
Funding Corp. Bank Bancorp, Inc. Eliminations Bancorp, Inc.
------------ ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ -- $ 5,763,241 $ 1,895 $ (1,895) $ 5,763,241
Interest and dividends on Investment securities
U.S. Treasury securities 48,045 48,045
U.S. Government agencies and mortgage-backed
securities 350,617 350,617
Other securities 342,390 342,390
-- 6,504,293 1,895 (1,895) 6,504,293
------------ ----------- --------- -------- -----------
Interest expense:
Interest on deposits 3,919,722 (1,895) 3,917,827
Interest on notes payable 41,713 41,713
Interest on Federal Home Loan Bank advance 534,644 534,644
------------ ----------- --------- -------- -----------
-- 4,454,366 41,713 (1,895) 4,494,184
------------ ----------- --------- -------- -----------
Net interest income -- 2,049,927 (39,818) -- 2,010,109
------------ ----------- --------- -------- -----------
Provision for loan losses 102,004 102,004
------------ ----------- --------- -------- -----------
Net interest income after provision for loan losses -- 1,947,923 (39,818) -- 1,908,105
------------ ----------- --------- -------- -----------
Net gain on sale of loans 106,522 106,522
Loan servicing expense, net (93,165) (93,165)
Mortgage loan underwriting fees 5,975 5,975
Service charges on deposits accounts 76,286 76,286
Service charges on loans 20,526 20,526
Other miscellaneous 60,888 8,522 69,410
------------ ----------- --------- -------- -----------
Total other income -- 177,032 8,522 -- 185,554
------------ ----------- --------- -------- -----------
Salaries and employee benefits 1,064,816 1,064,816
Occupancy and equipment, net 344,356 490 344,846
Data processing 111,360 111,360
Federal Insurance premium 212,060 212,060
Legal and professional fees 101,110 101,110
Printing, supplies and postage 83,053 83,053
Telephone 33,269 33,269
Supervisory examinations 30,743 4,094 34,837
Intangible and personal property taxes 30,000 30,000
Bank service charges 26,935 26,935
Other miscellaneous 197,970 3,180 201,150
------------ ----------- --------- -------- -----------
-- 2,235,672 7,764 -- 2,243,436
------------ ----------- --------- -------- -----------
Income (loss) before provision for income taxes -- (110,717) (39,060) -- (149,777)
Current income tax provision 3,000 3,000
Deferred income tax provison (183,000) (183,000)
------------ ----------- --------- -------- -----------
-- (180,000) -- -- (180,000)
------------ ----------- --------- -------- -----------
Net Income (Loss) $ -- $ 69,283 $ (39,060) $ -- $ 30,223
============ =========== ========= ======== ===========
</TABLE>
-21-
<PAGE> 46
[VARNADORE TYLER & HAWTHORNE, P.A. Certified Public Accountants LETTERHEAD]
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Key Florida Bancorp, Inc. Liberty National Bank
6016 - 26th Street West, Suite 1 6001 - 26th Street West
Bradenton, FL 34207 Bradenton, FL 34207
Gentlemen:
We consent to the incorporation by reference into the Registration Statement on
Form 10-SB filed by Key Florida Bancorp, Inc., of our report dated March 6,
1996 (except for Note 10, which is dated May 10, 1996) with respect to the
consolidated financial statements of Key Florida Bancorp, Inc. for the years
ended September 30, 1995 and 1994, and to the incorporation by reference
therein of our report dated February 9, 1996 (except for Notes 1, 3 and 8,
which are dated May 9, 1996) with respect to the financial statements of
Liberty National Bank for the years ended December 31, 1995 and 1994.
Varnadore, Tyler & Hawthorne, P.A.
By: /s/ William H Hawthorne CPA
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Bradenton, Florida
December 31, 1996
