SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File Number 0-22608
FFLC BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-3204891
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 North Boulevard West, Post Office Box 490420,
Leesburg, Florida 34749-0420
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (352) 787-3311
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was $50,006,603 and is based upon the last sales price as quoted on
the NASDAQ Stock Market for March 7, 1997.
The Registrant had 2,365,937 shares outstanding as of March 7, 1997.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1996. (Part II and IV)
2. Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders.
(Part III) (Proxy to be filed separately on or about April 7, 1997).
<PAGE>
INDEX
PART I
Item I. Description of Business
Business
Market Area and Competition
Lending Activities
Asset Quality
Investment Activities
Mortgage-Backed Securities
Investment Securities
Sources of Funds
Borrowings
Subsidiary Activities
Personnel
Regulation and Supervision
Federal and State Taxation
Impact of New Accounting Issues
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business
The registrant, FFLC Bancorp, Inc. ("FFLC" or the "Company"), completed its
public offering of 2,761,819 shares of its common stock and acquired First
Federal Savings Bank of Lake County ("the Savings Bank") in connection with the
Savings Bank's conversion from a federally chartered mutual savings association
to a federally chartered stock savings bank on January 4, 1994. The net
conversion proceeds totaled $26.6 million of which $13.3 million was invested in
the Savings Bank and $13.3 million was retained by the registrant. The
registrant loaned $2.2 million to the Employee Stock Ownership Plan and the
remaining $11.1 million has been invested through the Savings Bank. The
registrant, which was incorporated in Delaware on September 16, 1993, is a
savings and loan holding company and is subject to regulation by the Office of
Thrift Supervision ("OTS"). The registrant has not transacted any material
business other than through its subsidiary, the Savings Bank. At December 31,
1996, the Company had total assets of $346.4 million and stockholders' equity of
$53.6 million.
The Savings Bank was established in 1934 as a federally-chartered mutual savings
and loan association. The Savings Bank is a member of the Federal Home Loan Bank
("FHLB") System and its deposit accounts are insured to the maximum allowable
amount by the Federal Deposit Insurance Corporation ("FDIC"). At December 31,
1996, the Savings Bank had total assets of $346.4 million and stockholders'
equity of $41.7 million.
The principal business of the Savings Bank is attracting retail deposits from
the general public and investing those deposits, together with payments and
repayments on loans and investments and funds generated from operations,
primarily in mortgage loans secured by one-to-four-family owner-occupied homes
and mortgage-backed securities, and, to a lesser extent, construction loans,
consumer and other loans, and multi-family residential mortgage loans. In
addition, the Savings Bank holds investments permitted by federal laws and
regulations including securities issued by the U.S. Government and agencies
thereof. The Savings Bank's revenues are derived principally from interest on
its mortgage loan and mortgage-backed securities portfolios and interest and
dividends on its investment securities.
Market Area and Competition
The Savings Bank is a community-oriented savings institution offering a variety
of financial services to meet the needs of the communities it serves. The
Savings Bank's deposit gathering and lending markets are primarily concentrated
in the communities surrounding its full service offices located in Lake and
Sumter counties in central Florida. The Savings Bank's competition for loans
comes principally from commercial banks, savings institutions, and mortgage
banking companies. The Savings Bank's most direct competition for savings has
historically come from commercial banks, savings institutions and credit unions.
The Savings Bank faces additional competition for savings from money market
mutual funds and other corporate and government securities funds. The Savings
Bank also faces increased competition for deposits from other financial
intermediaries such as securities brokerage firms and insurance companies.
<PAGE>
Lending Activities
Loan Portfolio. The Savings Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one-to-four-family residences. At
December 31, 1996, the Savings Bank's total loans outstanding were $236.9
million, of which $191.8 million or 80.95% of the Savings Bank's total loan
portfolio were one-to-four-family residential first mortgage loans. Of the
one-to-four-family residential mortgage loans outstanding at that date, 25.80%
were fixed rate loans and 74.20% were adjustable-rate ("ARM") loans. At the same
date, commercial real estate loans and other loans on improved real estate
totaled $13.6 million, or 5.73% of the Savings Bank's total loan portfolio;
construction (excluding construction/permanent loans) and land loans totaled
$5.5 million or 2.32% of the Savings Bank's total loan portfolio; and
multi-family mortgage loans totaled $4.2 million or 1.76% of the Savings Bank's
total loan portfolio. Consumer and other loans held by the Savings Bank, which
principally consist of home equity loans, deposit, consumer and other loans,
totaled $21.9 million or 9.2% of the Savings Bank's total loan portfolio at
December 31, 1996.
<PAGE>
The following table sets forth the composition of the Savings Bank's loan
portfolio in dollar amounts and percentages at the dates indicated:
<TABLE>
<CAPTION>
1992 1993 1994
----------------------- ----------------------- -------------------
% of % of % of
Amount Total Amount Total Amount Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four-family $ 98,388 83.61% $ 107,228 82.91% $ 130,195 82.80%
Construction and land 2,198 1.87% 2,886 2.23% 6,332 4.03%
Multi-family 2,232 1.90% 2,160 1.67% 3,068 1.95%
Commercial real estate 5,604 4.76% 6,713 5.19% 6,153 3.91%
-------- ------- -------- ------- -------- -------
Total mortgage
loans 108,422 92.14% 118,987 92.00% 145,748 92.69%
Consumer loans 8,027 6.82% 9,298 7.19% 10,581 6.73%
Other loans 1,224 1.04% 1,054 0.81% 915 0.58%
--------- ------- --------- ------- --------- -------
Total loans
receivable 117,673 100.00% 129,339 100.00% 157,244 100.00
====== ====== ======
Less:
Loans in process 2,385 5,969 7,833
Unearned discounts,
premiums and
deferred loan fees,
net 421 424 256
Allowance for loan losses 520 735 869
-------- -------- --------
Loans receivable,
net $ 114,347 $ 122,211 $ 148,286
========= ========= =========
<PAGE>
<CAPTION>
1995 1996
---------------------- ---------------------
% of % of
Amount Total Amount Total
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
One-to-four-family $ 159,170 84.32% $ 191,788 80.95%
Construction and land 5,343 2.83% 5,489 2.32%
Multi-family 3,098 1.64% 4,180 1.76%
Commercial real estate 6,654 3.53% 13,565 5.73%
------- ------ ------- -----
Total mortgage
loans 174,265 92.32% 215,022 90.76%
Consumer loans 13,375 7.09% 21,016 8.87%
Other loans 1,118 .59% 883 .37%
--------- ------ ---------
Total loans
receivable 188,758 100.00% 236,921 100.0%
====== =====
Less:
Loans in process 4,267 8,007
Unearned discounts,
premiums and
deferred loan fees,
net 66 (97)
Allowance for loan losses 977 1,063
--------- ---------
Loans receivable,
net $ 183,448 $ 227,948
========= =========
</TABLE>
<PAGE>
Purchase of Mortgage Loans. The Savings Bank has, from time to time, purchased
mortgage loans originated by other lenders, primarily loans secured by
one-to-four-family homes. At December 31, 1996, $4.3 million, or 1.8% of the
Savings Bank's total loan portfolio consisted of purchased mortgage loans or
loan participations. Purchased mortgage loans consisted primarily of
one-to-four-family residential mortgage loans.
Secondary Market Activities. The Savings Bank participates in the secondary
market through a correspondent relationship, originating loans (primarily
30-year fixed-rate loans) which are funded by the investor correspondent rather
than by making and selling the loans, thereby eliminating the Savings Bank's
interest rate risk on such loans. Such loans are closed on the Savings Bank's
documents with funds provided by the investor correspondent at closing with all
credit conditions established by the investor correspondent being satisfied
prior to the issuance of a loan commitment. The Savings Bank receives a fee for
originating, processing and closing the loans and reports the loans to the OTS
as loans originated and sold. In the year ended December 31, 1996, such loans
amounted to $2.4 million or 3.2% of total mortgage loans originated.
<PAGE>
Loan Originations, Purchases, Sales and Principal Repayments. The following
table sets forth the Savings Bank's loan originations, purchases, sales and
principal repayments for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of year ........................ $ 118,987 145,748 174,265
Mortgage loans originated:
One-to-four-family (1) ................. 40,649 46,082 62,906
Construction and land .................. 3,899 2,104 2,292
Multi-family ........................... 2,003 1,026 1,222
Commercial real estate ................. 876 1,047 7,982
--------- --------- ---------
Total mortgage loans originated (1) 47,427 50,259 74,402
Mortgage loans purchased .................... -- -- 2,106
--------- --------- ---------
Total mortgage loans originated and
purchased ............... 47,427 50,259 76,508
Transfer of loans to real estate owned ...... (232) (478) (287)
Principal repayments ........................ (19,236) (20,113) (31,540)
Sales of loans (1) .......................... (1,198) (1,151) (3,924)
--------- --------- ---------
At end of year .................... $ 145,748 174,265 215,022
========= ========= =========
Consumer loans (gross):
At beginning of year ........................ 9,298 10,581 13,375
Loans originated ............................ 4,631 6,141 12,399
Principal repayments ........................ (3,348) (3,347) (4,758)
--------- --------- ---------
At end of year .................... $ 10,581 13,375 21,016
========= ========= =========
Other loans (gross):
At beginning of year ........................ 1,054 915 1,118
Loans originated ............................ 389 732 622
Principal repayments ........................ (528) (529) (857)
--------- --------- ---------
At end of year .................... $ 915 1,118 883
========= ========= =========
(1) Includes loans originated for and funded by correspondents of $1.2 million,
$1.2 million and $2.4 million for 1994, 1995 and 1996, respectively.
</TABLE>
<PAGE>
Maturities of Loans. The following table shows the contractual maturities of the
Savings Bank's loan portfolio at December 31, 1996. Loans that have adjustable
rates are shown as amortizing to final maturity rather than when the interest
rates are next subject to change. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on the Savings Bank's loans totaled $23.1 million, $24.8 million and $35.7
million for the years ended December 31, 1994, 1995 and 1996, respectively.
<TABLE>
<CAPTION>
Mortgage Loans
One-to- Total
Four- Other Loans
Family Other Loans Receivable
--------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Amounts due:
Within 1 year .................. $ 144 425 1,679 2,248
--------- --------- --------- ---------
1 to 3 years ................... 2,661 1,638 9,060 13,359
3 to 5 years ................... 2,184 1,150 3,958 7,292
5 to 10 years .................. 13,625 619 5,751 19,995
10 to 20 years ................. 28,310 8,481 1,451 38,242
Over 20 years .................. 144,864 10,921 -- 155,785
--------- --------- --------- ---------
Total due after 1 year ......... 191,644 22,809 20,220 234,673
--------- --------- --------- ---------
Total amounts due .............. 191,788 23,234 21,899 236,921
Less:
Loans in process ............... 5,326 2,673 8 8,007
Unearned discounts, premiums and
deferred loan fees, net ... (97) -- -- (97)
Allowance for loan losses ...... 302 486 275 1,063
--------- --------- --------- ---------
Loans receivable, net ............... $ 186,257 20,075 21,616 227,948
========= ========= ========= =========
</TABLE>
<PAGE>
Loans Due After December 31, 1996. The following table sets forth at December
31, 1996 the dollar amount of all loans due or scheduled to reprice after
December 31, 1997, classified according to whether such loans have fixed or
adjustable interest rates.
<TABLE>
<CAPTION>
Due after December 31, 1997
Fixed Adjustable Total
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to-four-family ........... $49,437 142,207 191,644
Construction and land ........ 5,489 -- 5,489
Multi-family ................. 80 4,100 4,180
Commercial real estate ....... 718 12,422 13,140
Consumer loans .................... 20,141 -- 20,141
Other loans ....................... 79 -- 79
------- ------- -------
Total ................... $75,944 158,729 234,673
======= ======= =======
</TABLE>
<PAGE>
One-to-Four-Family Mortgage Lending. The Savings Bank's primary lending emphasis
is on the origination of first mortgage loans secured by one-to-four-family
residences within its primary lending area. Such residences are primarily single
family homes, including condominium and townhouses, that serve as the primary
residence of the owner. To a lesser degree, the Savings Bank makes loans on
residences used as second homes or as investments. The Savings Bank also offers
second mortgage loans which are underwritten applying the same standards as for
first mortgage loans.
In the years ended December 31, 1994, 1995 and 1996, the Savings Bank's total
mortgage loan originations amounted to $47.4 million, $50.3 million and $74.4
million, respectively, of which $40.6 million, $46.1 million and $62.9 million,
respectively, were secured by one-to-four-family properties.
At December 31, 1996, 81.0% of total loans receivable consisted of
one-to-four-family residential loans, of which 74.2% were ARM loans. The Savings
Bank's ARM loans may carry an initial interest rate which is less than the fully
indexed rate for the loan. The initial discounted rate is determined by the
Savings Bank in accordance with market and competitive factors. The Savings Bank
offers one-, three- and five-year ARM loans which adjust by a maximum of 2% per
adjustment period, with a lifetime cap on increases of 5% to 6%, depending upon
the program chosen.
The Savings Bank's policy on one-to-four-family residential mortgage loans
generally is to lend up to 80% of the appraised value of property securing the
loan, or up to 95% if private mortgage insurance is obtained on the amount of
the loan which exceeds 80%.
Commercial and Multi-Family Real Estate Lending. As of December 31, 1996, $13.6
million, or 5.73% of the Savings Bank's total loan portfolio consisted of
commercial real estate loans and $4.2 million, or 1.80% of the Savings Bank's
total loan portfolio, consisted of multi-family residential loans.
The commercial real estate loans in the Savings Bank's portfolio consist of
fixed-rate and ARM loans which were originated at prevailing market rates. The
Savings Bank's policy has been to originate commercial or multi-family loans
only in its primary market area. Commercial and multi-family residential loans
are generally made in amounts up to 75% of the appraised value of the property.
In making such loans, the Savings Bank primarily considers the net operating
income generated by the real estate to support the debt service, the financial
resources and income level and managerial expertise of the borrower, the
marketability of the property and the Savings Bank's lending experience with the
borrower.
Construction and Land Loans. The Savings Bank originates loans to finance the
construction of one-to-four-family homes and, to a much lesser extent,
originates loans for the acquisition and development of land (either unimproved
land or improved lots) on which the purchaser can then build. At December 31,
1996, construction (excluding construction/permanent loans) and land loans
totaled $5.5 million or 2.3% of the Savings Bank's total loan portfolio.
<PAGE>
At December 31, 1996, the Savings Bank had loans in process (undisbursed loan
proceeds of construction loans) of $8.0 million. Of that amount, $4.9 million
was secured by residential mortgages $2.8 million secured by commercial
mortgages, and $230,000 represented loans in process on three
construction/permanent loans to churches. The Savings Bank makes residential
construction loans to homeowners on a long-term basis with amortization
beginning at the conclusion of construction, usually a period of about six
months. Such loans are carried in the one-to-four-family category and are not
separately classified as construction loans. Residential construction loans to
builders are carried in the construction and land category.
Construction and land loans also include construction loans for
one-to-four-family residential property for which the borrower will obtain
permanent financing from another lender. Such loans bear a fixed rate of
interest that equals prime plus 2.0% during the construction period. The Savings
Bank obtains a commitment for the permanent financing from the other lender
prior to originating the construction loan.
Consumer and Other Lending. At December 31, 1996, $21.9 million or 9.2% of the
Savings Bank's total loan portfolio consisted of consumer and other loans,
including home equity loans and lines of credit for consumer purposes and, to a
lesser extent, home improvement loans and secured and unsecured personal loans.
The Savings Bank's home equity loans are originated on one-to-four-family
residences, either on a fixed-rate basis with terms of up to 10 years or as a
balloon loan with terms up to five years with fifteen year amortization periods.
Those loans are generally limited to aggregate outstanding indebtedness on the
property securing the loan of 80% of the loan to value ratio. The Savings Bank
also offers home equity lines of credit, which bear prime-based adjustable
interest rates with terms up to fifteen years. Such loans generally require
monthly payments of interest plus 1.5% of the balance outstanding.
Consumer loans are offered primarily on a fixed-rate, short-term basis. Except
for second mortgage loans which are underwritten pursuant to the standards
applicable to one-to-four-family residential loans, the underwriting standards
employed by the Savings Bank for consumer loans include a determination of the
applicant's payment history on other debts and an assessment of the borrower's
ability to make payments on the proposed loan and other indebtedness.
Loan Approval and Authority. Mortgage loan approval authority for loans
exceeding $100,000 has been retained by the Board of Directors which meets
weekly in its capacity as the Executive Committee of the Board to consider loan
recommendations of the Loan Committee. The Loan Committee is comprised of two
outside directors, the President and the Senior Lending Officer of the Savings
Bank. Management has been delegated authority to approve mortgage loans, home
equity loans, home equity lines of credit, consumer loans and other loans up to
$100,000.
The Savings Bank's policy is to require title and hazard insurance on all real
estate loans, except home equity loans for which a title search is conducted in
lieu of obtaining title insurance. Borrowers may be permitted to pay real estate
taxes and hazard insurance premiums applicable to the secured property for a
mortgage loan. In some instances, borrowers may be required to advance funds
together with each payment of principal and interest to a mortgage escrow
account from which the Savings Bank makes disbursements for items such as real
estate taxes, hazard insurance premiums and private mortgage insurance premiums.
<PAGE>
Asset Quality
Delinquent Loans and Nonperforming Assets. Loans are generally placed on
nonaccrual status when the collection of principal or interest is 90 days or
more past due, or earlier if collection is deemed uncertain. The Savings Bank
provides an allowance for accrued interest deemed uncollectible. Accrued
interest receivable is reported net of the allowance for uncollected interest.
Loans may be reinstated to accrual status when all payments are brought current
and, in the opinion of management, collection of the remaining balance can be
reasonably expected.
<PAGE>
At December 31, 1994, 1995 and 1996, delinquencies in the Savings Bank's loan
portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1994 At December 31, 1995
----------------------------------------- ---------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------ ----------------- -------------------- ----------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
----- ----- -------- ----- -------- ----- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four-family .................... 7 276 8 324 6 244 1 52
Construction and land ................. 1 47 -- -- -- -- 3 115
Multi-family .......................... 1 75 -- -- -- -- -- --
Commercial real estate ................ -- -- -- -- -- -- -- --
--- --- --- --- --- --- --- ---
Total mortgage loans ......... 9 398 8 324 6 244 4 167
Consumer loans ........................ -- -- 1 5 7 35 2 7
Other loans ........................... -- -- -- -- -- -- -- --
--- --- --- --- --- --- --- ---
Total loans .................. 9 398 9 329 13 279 6 174
=== === === === === === === ===
Delinquent loans to total loans ....... .25% .21% .15% .09%
=== === === ===
<PAGE>
<CAPTION>
At December 31, 1996
----------------------------------------
60-89 Days 90 Days or More
------------------ -------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
----- -------- ----- --------
<S> <C> <C> <C> <C>
One-to-four-family .............. 3 77 8 545
Construction and land ........... -- 1 68
Multi-family .................... -- -- --
Commercial real estate .......... -- -- -- --
--- --- ---
Total mortgage loans ... 3 77 9613
Consumer loans .................. 2 46 4 53
Other loans ..................... -- -- -- --
--- --- --- -----
Total loans ............ 5 123 13 666
=== === === ====
Delinquent loans to total loans . .05% .28%
=== ===
</TABLE>
<PAGE>
Nonperforming Assets. The following table sets forth information with respect to
the Savings Bank's nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual mortgage loans .................. $ 381 588 324 70 613
Nonaccrual consumer loans .................. 17 18 5 104 53
Nonaccrual other loans ..................... -- -- -- -- --
----- ----- ----- ----- -----
Total nonperforming loans .................. 398 606 329 174 666
Real estate owned and insubstance foreclosed
loans, net of related allowance for
losses (1) ............................ 70 72 84 165 361
----- ----- ----- ----- -----
Total nonperforming assets ....... $ 468 678 413 339 1,027
===== ===== ===== ===== =====
Nonperforming loans to total loans ......... .34% .47% .21% .09% .28%
===== ===== ===== ===== =====
Total nonperforming assets to total assets . .17% .23% .13% .10% .30%
===== ===== ===== ===== =====
</TABLE>
(1) The Savings Bank has no insubstance foreclosed loans.
At December 31, 1996, the Savings Bank had no accruing loans which were
contractually past due 90 days or more as to principal and interest and no
troubled debt restructurings as defined by Statement of Financial Accounting
Standards No. 15. Nonaccrual loans for which interest has been reduced totalled
approximately $666,000, $174,000 and $329,000 at December 31, 1996, 1995, and
1994, respectively. For the year ended December 31, 1996, interest income that
would have been recorded under the original terms of nonaccrual loans at
December 31, 1996 and interest income actually recognized is summarized below:
Interest income that would have been recorded $ 58,112
Interest income recognized (35,474)
--------
Interest income foregone $ 22,638
========
<PAGE>
Classified Assets. Federal regulations and the Savings Bank's policy require the
classification of loans and other assets, such as debt and equity securities,
considered to be of lesser quality as "substandard", "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full", on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. In
addition, the Savings Bank's policies require that assets which do not currently
expose the insured institution to sufficient risk to warrant classification as
substandard but possess other weaknesses are designated "special mention" by
management.
If an asset is classified, the estimated fair value of the asset is determined
and if that value is less than the then carrying value of the asset, the
difference is established as a specific reserve. If an asset is classified as
loss, the amount of the asset classified as loss is reserved. General reserves
or general valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities
but, unlike specific reserves, are not allocated to particular assets.
The following table sets forth information concerning the number and dollar
amount of loans and real estate owned classified as "substandard" or "special
mention" at the dates indicated. No loans or real estate owned were classified
"doubtful" or "loss" at those dates.
<TABLE>
<CAPTION>
Substandard Special Mention
Number Amount Number Amount
------ ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
At December 31, 1996:
Loans ................................... 23 $1,114 - $ --
Real estate owned:
One-to-four-family properties ...... 1 208 - --
Other .............................. 3 153 - --
------ ------ -- ------
Total ......................... 27 $1,475 - $ --
====== ====== == ======
At December 31, 1995:
Loans ................................... 22 785 - --
Real estate owned:
One-to-four-family properties ...... 1 135 - --
Other .............................. 2 30 - --
------ ------ -- ------
Total ......................... 25 $ 950 - $ --
====== ====== == ======
</TABLE>
<PAGE>
Allowance for Loan Losses. The Savings Bank's allowance for loan losses is
established and maintained through a provision for loan losses based on
management's evaluation of the risk inherent in its loan portfolio and the
condition of the local economy in the Savings Bank's market area. Such
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers, among other matters, the estimated
fair value of the underlying collateral, economic and regulatory conditions, and
other factors that warrant recognition in providing for an adequate loan loss
allowance. Although management believes it uses the best information available
to make determinations with respect to the Savings Bank's allowance for loan
losses, future adjustments may be necessary if economic conditions vary
substantially from the economic conditions in the assumptions used in making the
initial determinations or if other circumstances change.
The following table sets forth the Savings Bank's allowance for loan losses at
the dates indicated, the provisions made and the charge-offs and recoveries
effected during the years indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ........... $ 305 520 735 869 977
Provision for loan losses .............. 232 250 138 125 107
Charge-offs:
One-to-four-family ................ 3 21 2 -- 9
Construction and land ............. -- -- -- 17 --
Multi-family ...................... -- -- -- -- --
Commercial real estate ............ -- -- -- -- --
Consumer loans .................... 14 14 -- -- 12
Other loans ....................... -- -- 2 -- --
----- ----- ----- ----- -----
Total charge-offs by category 17 35 4 17 21
Recoveries ............................. -- -- -- -- --
----- ----- ----- ----- -----
Balance at end of year ................. 520 735 869 977 1,063
===== ===== ===== ===== =====
</TABLE>
<PAGE>
The following table sets forth the ratios of the Savings Bank's charge-offs and
allowances for losses for the years indicated.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net charge-offs during the year
as a percentage of average loans
outstanding during the year ........ 0.02% 0.02% --% .01% .01%
Allowance for loan losses as a
percentage of total loans receivable
at end of year ..................... 0.45% 0.57% 0.55% .52% .45%
Allowance for loan losses as a
percentage of total nonperforming
assets at end of year .............. 111.11% 108.41% 210.41% 288.48% 103.51%
Allowance for loan losses as a
percentage of nonperforming loans
at end of year ..................... 130.65% 121.29% 264.13% 561.49% 159.61%
</TABLE>
<PAGE>
The following table sets forth the Savings Bank's specific and general allowance
for possible loan losses by type of loan for the years indicated.
<TABLE>
<CAPTION>
At December 31,
1992 1993 1994 1995
------------------ ------------------ ----------------- -----------------
% of % of % of % of
Loans to Loans to Loans to Loans to
Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ------ ------ -------- ------ -------- ------ --------
(Dollars in thousands)
At end of year allocated to:
One-to-four-family $ 100 83.61% $ 175 82.91% $ 240 82.80% $ 275 84.32%
Construction and land 80 1.87 95 2.23 106 4.03 146 2.83
Multi-family 100 1.90 140 1.67 165 1.95 183 1.64
Commercial real estate 100 4.76 120 5.19 135 3.91 150 3.53
Consumer loans 140 6.82 205 7.19 223 6.73 223 7.09
Other loans - 1.04 - .81 - .58 - .59
----- ------ ----- ------ ----- ------ ----- ------
Total $ 520 100.00% $ 735 100.00% $ 869 100.00% $ 977 100.00%
===== ====== ===== ====== ===== ====== ===== ======
<CAPTION>
1996
------------------
% of
Loans to
Total
Amount Loans
------- --------
(Dollars in thousands)
<S> <C> <C>
At end of year allocated to:
One-to-four-family $ 302 80.95%
Construction and land 152 2.32
Multi-family 169 1.76
Commercial real estate 165 5.73
Consumer loans 275 8.87
Other loans - .37
------- -----
Total $ 1,063 100.00%
======= ======
</TABLE>
<PAGE>
Investment Activities
The investment policy of the Savings Bank, which is established by the Board of
Directors and implemented by the Chief Executive Officer who is designated as
the Investment Officer, is designed primarily to provide and maintain liquidity,
to generate a favorable return on investments without incurring undue interest
rate and credit risk, and to complement the Savings Bank's lending activities.
In establishing its investment strategies, the Savings Bank considers its
business and growth plans, the economic environment, the types of securities to
be held and other factors. Federally chartered savings institutions have the
authority to invest in various types of assets, including U.S. Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers acceptances,
repurchase agreements, loans on federal funds, and, subject to certain limits,
commercial paper and mutual funds.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115. That statement requires investment and mortgage-backed
securities that the Company has the positive intent and ability to hold to
maturity to be classified as held-to-maturity securities and reported at
amortized cost. Securities that are held principally for selling in the near
term are to be classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. Securities not classified as
either held-to-maturity securities or trading securities are to be classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported in a separate component of
stockholders' equity.
Mortgage-Backed Securities
The Savings Bank invests in collateralized mortgage obligations ("CMOs") and
mortgage-backed securities such as government pass-through certificates. At
December 31, 1996, the Savings Bank's mortgage-backed securities portfolio
totaled $65.7 million, or 19.0% of total assets. The weighted-average interest
rate on the total mortgage-backed securities portfolio at December 31, 1996 was
6.45%. The mortgage-backed securities are not due at a single maturity date, and
accordingly, contractual maturity information is not presented herein. CMOs, net
of related premiums and discounts, totaled $34.2 million or 52.0% of total
mortgage-backed securities.
CMOs are typically issued by a special purpose entity, which may be organized in
any of a variety of legal forms, such as a trust, a corporation or a
partnership. The entity combines pools of pass-through securities, which are
used to collateralize the mortgage related securities. Once combined, the cash
flows can be divided into different "tranches" or "classes" of securities,
thereby creating more predictable average lives for each security than the
underlying pass-through pools. Under this security structure all principal
repayments from the various mortgage pools can be allocated to a
mortgage-related securities class or classes structured to have priority until
it has been paid off. Thus, these securities are designed to address the
reinvestment concerns associated with mortgage-backed security pass-throughs,
namely that they tend to pay off more rapidly when interest rates fall. The
Savings Bank's CMOs have coupon rates ranging from 4.00% to 7.51% and had a
weighted average yield of 5.91% at December 31, 1996.
The Savings Bank's policy is to purchase CMOs rated AA or better by nationally
recognized rating services. The majority of the CMOs owned by the Savings Bank
are insured or guaranteed either directly or indirectly, through mortgage-backed
securities underlying the obligations issued by the FNMA, FHLMC or GNMA.
<PAGE>
At December 31, 1996, the Savings Bank had $34.2 million in CMOs representing
9.9% of total assets. Of that amount, $12.4 million or 36.3% had floating rates
with caps ranging from 8.50% to 12.65% and which adjust on a monthly basis.
Other mortgage-backed securities, net, totaled $31.5 million or 48.0% of total
mortgage-backed securities. Other mortgage-backed securities consist of
pass-through certificates issued by the Government National Mortgage Association
("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA").
At December 31, 1996, the Savings Bank had mortgage-backed securities available
for sale with an aggregate carrying value of $18.8 million, consisting of CMOs,
FHLMC five year balloons and FNMA certificates.
The following table sets forth mortgage-backed security purchases, sales,
amortization and repayments during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1994 1995 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
At beginning of year .................... $ 109,077 117,003 93,883
Purchases ............................... 44,096 6,038 8,596
Amortization and repayments ............. (35,407) (29,883) (36,617)
Change in unrealized loss on securities
available for sale ................. (763) 725 (126)
--------- --------- ---------
At end of year ................ $ 117,003 93,883 65,736
========= ========= =========
</TABLE>
Investment Securities
At December 31, 1996, the Savings Bank held $32.8 million in investment
securities consisting of $20.2 million in U.S. Government and agency securities,
classified as available for sale, and $8.9 million in mutual funds, $3.2 million
in SBA-related investment securities, classified as held to maturity, and
$497,000 in other investment securities, classified as available for sale. In
addition, the Savings Bank holds $4.1 million in interest-earning deposits and
$1.9 million of FHLB of Atlanta stock.
<PAGE>
The following table sets forth certain information regarding the amortized cost
and market values of the Savings Bank's interest-earning deposits, FHLB stock
and investment securities at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1994 1995 1996
------------------ -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits 4,732 4,732 8,924 8,924 4,077 4,077
====== ====== ====== ====== ====== ======
FHLB stock 1,928 1,928 1,928 1,928 1,939 1,939
====== ====== ====== ====== ====== ======
Investment securities:
Held-to-maturity:
U.S. Government and
agency securities 8,000 7,606 - - - -
SBA-related investment securities 4,014 3,818 3,441 3,472 3,239 3,271
Available-for-sale:
U.S. Government and
agency securities 3,000 2,986 11,475 11,392 20,208 20,176
Other investment securities 4,118 4,051 1,523 1,532 495 497
Investment in mutual funds 9,127 8,799 8,939 8,900 9,035 8,920
Total investment securities 28,259 27,260 25,378 25,296 32,977 32,864
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
The following table sets forth information concerning the amortized cost and
weighted average yields by maturity on investment securities and FHLB stock at
December 31, 1996.
<TABLE>
<CAPTION>
Due After Due After
One Through Five Through
Due Within One Year Five Years 10 Years
----------------------- ------------------------ -------------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---------- --------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB stock
Investment securities:
U.S. Government
and agency
obligations $ 2,000 7.35% 18,208 6.01% - -
Other investment
securities 205 5.58 85 6.50 205 7.88
Mutual funds - - - - - -
------- ---- -------- ---- ----- ----
Total investment
securities $ 2,205 7.19% $ 18,293 6.01% $ 205 7.88%
======= ==== ======== ==== ===== ====
<CAPTION>
Due After
10 Years Total
------------------------ ------------------------
Annualized
Weighted Approximate
Amortized Average Amortized Market
Cost Yield Cost Value
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
FHLB stock $ 1,939 6.00% $ 1,939 1,939
========= ==== ========= =====
Investment securities:
U.S. Government
and agency
obligations - - 20,208 20,176
Other investment
securities 3,239 6.38 3,734 3,768
Mutual funds 9,035 6.10 9,035 8,920
-------- ---- -------- -----
Total investment
securities $ 12,274 6.17% $ 32,977 32,864
======== ==== ======== ======
</TABLE>
<PAGE>
Sources of Funds
General. Repayments of mortgage-backed securities, loan repayments, deposits and
cash flows generated from operations are the primary sources of the Savings
Bank's funds for use in lending, investing and for other general purposes.
Deposits. The Savings Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Savings Bank's deposits consist of regular
savings, non-interest-bearing checking, NOW checking, money market and
certificate accounts. Of the deposit accounts at December 31, 1996, $25.4
million or 8.9% consist of individual retirement accounts ("IRAs").
The Savings Bank has maintained a relatively high level of core deposits
consisting of passbook and statement savings, money market, non-interest-bearing
checking, and NOW checking, which has contributed to a low cost of funds. Such
core deposits represented 30.40%, 25.24% and 25.02% of total deposits at
December 31, 1994, 1995, and 1996, respectively.
<PAGE>
The following table shows the distribution of the Savings Bank's deposits by
type at the dates indicated and the weighted average nominal interest rates on
each category of deposits presented at December 31, 1996 (dollars in thousands).
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------
1994 1995 1996
----------------------- ---------------------- -----------------------------------
Percent Percent Percent Weighted
of Total of Total of Total Average
Amount Deposits Amount Deposits Amount Deposits Rate
--------- ------ --------- ------ ------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
Noninterest bearing
checking $ 3,653 1.45% $ 3,482 1.30% $ 4,103 1.46% 0.00%
NOW and money
market accounts 41,914 16.65 37,272 13.92 39,203 13.86 2.38
Passbook and
statement
savings 30,967 12.30 26,811 10.02 27,412 9.70 2.74
--------- ------ --------- ------ ------- ------ ----
Total 76,534 30.40 67,565 25.24 70,718 25.02 2.38
--------- ------ --------- ------ ------- ------ ----
Certificate accounts:
1-3 months 7,353 2.92 5,866 2.19 8,204 2.90 4.57
91 days 506 0.20 421 0.16 518 .18 4.40
182 day 27,361 10.87 20,565 7.68 15,904 5.63 4.91
9 months - - 14,593 5.45 17,173 6.07 5.31
12 months 50,919 20.23 59,925 22.38 53,577 18.96 5.10
12 month IRA 15,343 6.09 15,574 5.82 16,473 5.83 5.30
18 month 4,459 1.77 3,931 1.47 3,136 1.11 5.19
24 month 11,150 4.43 19,946 7.45 46,770 16.55 5.84
30 month 18,816 7.47 15,225 5.69 10,628 3.76 5.53
60 month 39,311 15.62 44,092 16.47 39,563 13.99 5.98
------- ------ ------- ------ ------- ------ -----
Total 175,218 69.60 200,138 74.76 211,946 74.98 5.45
------- ------ ------- ------ ------- ------ -----
Total deposits $ 251,752 100.00% $ 267,703 100.00% 282,664 100.00% 4.67%
========= ====== ========= ====== ======= ====== ====
</TABLE>
<PAGE>
The following table presents the deposit activity of the Savings Bank for the
years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1995 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Deposits ................................ $434,805 472,591 542,019
Withdrawals ............................. 430,664 465,235 536,051
-------- -------- --------
Deposits in excess of withdrawals ....... 4,141 7,356 5,968
Interest credited on deposits ........... 6,610 8,596 8,993
-------- -------- --------
Total increase in deposits .............. $ 10,751 15,952 14,961
======== ======== ========
</TABLE>
The following table presents the amount of time deposit accounts in amounts of
$100,000 or more at December 31, 1996 maturing as follows (in thousands):
Maturity Period
- ---------------
One month through three months $ 1,907
Over three through six months 1,172
Over six through 12 months 2,749
Over 12 months 3,148
-------
Total $ 8,976
=======
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1994, 1995, and 1996 and the
periods to maturity of the certificate accounts outstanding at December 31,
1996.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1996
At December 31, -----------------------------------------------------------
---------------------------------- Within 1 to 2 to 3 to
1994 1995 1996 1 Year 2 Years 3 Years 4 Years Total
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3.01% to 4.00% $ 29,044 -- -- -- -- -- -- --
4.01% to 5.00% 79,213 30,297 49,542 49,542 -- -- -- 49,542
5.01% to 6.00% 47,077 108,867 137,394 72,815 55,514 9,065 -- 137,394
6.01% to 8.00% 19,884 60,974 25,010 13,221 -- -- 11,789 25,010
8.01% to 9.00% -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
$175,218 200,138 211,946 135,578 55,514 9,065 11,789 211,946
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Borrowings
The Savings Bank is authorized to obtain advances from the FHLB of Atlanta which
generally would be collateralized by a blanket lien against the Savings Bank's
mortgage portfolio. Such advances may be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB of Atlanta will advance to member
institutions, including the Savings Bank, for purposes other than meeting
withdrawals, fluctuates from time to time in accordance with the policies of the
OTS and the FHLB of Atlanta.
From time to time, the Savings Bank enters into agreements with nationally
recognized primary securities dealers under which the Savings Bank sells
securities subject to repurchase agreements. Such agreements are accounted for
as borrowings by the Savings Bank and are secured by the securities sold. At
December 31, 1996, the Savings Bank had $8.0 million of such borrowings
outstanding.
<PAGE>
The following table sets forth certain information relating to the Savings
Bank's borrowings at the dates indicated.
<TABLE>
<CAPTION>
At or For the Year Ended
Ended December 31,
----------------------------------
1994 1995 1996
---------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding .................. $ 150 $ 150 $ 150
========== ========== ======
Maximum amount outstanding at any month end
during the year ......................... $ 150 $ 150 $ 150
========== ========== ======
Balance outstanding at end of year ........... $ 150 $ 150 $ 150
========== ========== ======
Weighted average interest rate during the year 7.17% 7.17% 7.17%
========== ========== ======
Weighted average interest rate at end of year 7.17% 7.17% 7.17%
========== ========== ======
Securities sold under agreements to repurchase
Average balance outstanding .................. $ 107 $ 470 $ 849
========== ========== ======
Maximum amount outstanding at any month end
during the year ......................... $ 3,000 $ 2,031 $8,048
========== ========== ======
Balance outstanding at end of year ........... $ 3,000 $ -- $8,048
========== ========== ======
Weighted average interest rate during the year 6.50% 6.20% 5.65%
========== ========== ======
Weighted average interest rate at end of year 6.50% -- 5.63
========== ========== ======
<PAGE>
<CAPTION>
At or For the Year Ended
Ended December 31,
----------------------------------
1994 1995 1996
---------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Total borrowings:
Average balance outstanding .................. $ 257 $ 620 $ 999
========== ========== ======
Maximum amount outstanding at any month end
during the year ......................... $ 3,150 $ 2,181 $8,198
========== ========== ======
Balance outstanding at end of year ........... $ 3,150 $ 150 $8,198
========== ========== ======
Weighted average interest rate during the year 6.53% 6.44% 5.68%
========== ========== ======
Weighted average interest rate at end of year 6.53% 7.17% 5.66%
========== ========== ======
</TABLE>
Subsidiary Activities
The Savings Bank has one wholly-owned subsidiary, Lake County Service
Corporation. Lake County Service Corporation was formed to develop a 100-lot
subdivision and is now substantially inactive, having sold all but one lot. Lake
County Service Corporation also owns an 8.4 acre commercial parcel and a one
acre lot adjoining the Savings Bank's main office.
Personnel
As of December 31, 1996, the Savings Bank had 104 full-time employees and 8
part-time employees. The employees are not represented by a collective
bargaining unit, and the Savings Bank considers its relationship with its
employees to be good.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file certain
reports with, and otherwise comply with the rules and regulations of the Office
of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended (the
"HOLA"). In addition, the activities of savings institutions, such as the
Savings Bank, are governed by the HOLA and the Federal Deposit Insurance Act
("FDI Act").
<PAGE>
The Savings Bank is subject to extensive regulation, examination and supervision
by the OTS, as its primary federal regulator, and the FDIC, as the deposit
insurer. The Savings Bank is a member of the Federal Home Loan Bank ("FHLB")
System and its deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Savings
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The OTS and/or the FDIC conduct periodic
examinations to test the Savings Bank's safety and soundness and compliance with
various regulatory requirements. Regulation and supervision establish a
comprehensive framework of activities in which an institution can engage and are
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress, could have a material adverse impact on the Company and
the Savings Bank and their operations. Certain of the regulatory requirements
applicable to the Savings Bank and to the Company are referred to below or
elsewhere herein. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth in this
Form 10-K does not purport to be a complete description of such statutes and
regulations and their effects on the Savings Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company within
the meaning of the HOLA. As a unitary savings and loan holding company, the
Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Savings Bank
continues to be a qualified thrift lender ("QTL"). See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation.
<PAGE>
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution or holding company thereof, without prior
written approval of the OTS; acquiring or retaining, with certain exceptions,
more than 5% of a nonsubsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Savings Bank must notify the OTS 30
days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3%
leverage (core) capital ratio and an 8% risk-based capital ratio. In addition,
the prompt corrective action standards discussed below also establish, in
effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier I risk-based capital standard. Core capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
purchased mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the tangible, leverage (core) and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank.
<PAGE>
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by risk-weight factors of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt, intermediate
preferred stock and the allowance for loan and lease losses with the latter
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1996, the
Savings Bank met each of its capital requirements, in each case on a fully
phased-in basis and it is anticipated that the Savings Bank will not be subject
to the interest rate risk component.
<PAGE>
The following table presents the Savings Bank's capital position at December 31,
1996 relative to fully phased-in regulatory requirements.
<TABLE>
<CAPTION>
Capital Ratios
Excess ---------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $41,651 5,198 36,453 12.02% 1.50%
Core (leverage) 41,651 10,395 31,256 12.02 3.00
Risk-based:
Tier I (core) 41,651 6,338 35,313 26.29 4.00
Total 42,714 12,676 30,038 26.96 8.00
</TABLE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier
I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
<PAGE>
Insurance of Deposit Accounts. Deposits of the Savings Bank are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the
deposit insurance fund that covers most commercial bank deposits), are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve in 1995, whereas the SAIF was not expected to meet or exceed the
required level until 2002 at the earliest, due in part to the statutory
requirement that SAIF members make payments on bonds issued in the late 1980s by
the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF.
Once the BIF achieved the 1.25% ratio, the FDIC adopted a new assessment rate
schedule of from 0 to 27 basis points under which 92% of BIF members paid an
annual premium of only $2,000, but retained the previously existing assessment
rate schedule applicable to SAIF member institutions of 23 to 31 basis points.
Thus, SAIF members, such as the Savings Bank were placed at a substantial
competitive disadvantage to BIF members with respect to pricing of loans and
deposits and the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Savings Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Savings Bank as an expense in the
quarter ended September 30, 1996 and is generally tax deductible. The SAIF
Special Assessment recorded by the Savings Bank amounted to $1.7 million on a
pre-tax basis and $1.0 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds across
all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits will be
assessed for FICO payment of 1.3 basis points, while SAIF deposits will pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on
January 1, 1999, provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC lowered SAIF assessments to 0 to 27 basis
points as of January 1, 1997, a range comparable to that of BIF members. SAIF
members will also continue to make the FICO payments described above. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Savings Bank's assessment rate for fiscal 1996 was 23 basis points and the
premium paid for 1996, excluding the SAIF special assessment, was $624,000. A
significant increase in SAIF insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of the Savings Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Savings Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
<PAGE>
Thrift Rechartering Legislation. The Funds Act provides that the BIF and SAIF
will merge on January 1, 1999 if there are no more savings associations as of
that date. That legislation also requires that the Department of Treasury submit
a report to Congress by March 31, 1997 that makes recommendations regarding a
common financial institutions charter, including whether the separate charters
for thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date (January 1, 1998 in one bill, June 30, 1998 in the
other) or they would automatically become national banks. Converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company activities. The Savings Bank is unable to predict whether
such legislation would be enacted, the extent to which the legislation would
restrict or disrupt its operations or whether the BIF and SAIF funds will
eventually merge.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1996, the Savings Bank's limit on loans to one borrower was $6.4 million. At
December 31, 1996, the Savings Bank's largest aggregate outstanding balance of
loans to one borrower was $1.8 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under the
QTL test, a savings and loan association is required to maintain at least 65% of
its "portfolio assets" (total assets less: (i) specified liquid assets up to 20%
of total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) in at least 9 months out of each 12 month period.
A savings institution that fails the QTL test is subject to certain operating
restrictions and may be required to convert to a bank charter. As of December
31, 1996, the Savings Bank maintained 93.6% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test.
<PAGE>
Limitation on Capital Distributions. OTS regulations impose limitations upon all
capital distributions by savings institutions, such as cash dividends, payments
to repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged against
capital. The rule establishes three tiers of institutions, which are based
primarily on the institutions' capital levels. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Savings Bank's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, the Savings Bank's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. In December 1994, the OTS proposed amendments to its
capital distribution regulation that would generally authorize the payment of
capital distributions without OTS approval provided that the payment does not
cause the institution to be undercapitalized within the meaning of the prompt
corrective action regulation. However, institutions in a holding company
structure would still have a prior notice requirement. At December 31, 1996, the
Savings Bank was a Tier 1 Bank.
Liquidity. The Savings Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 5% but may be changed from time to time
by the OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions. OTS regulations also
require each member savings institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Savings Bank's liquidity and short-term liquidity ratios for
December 31, 1996 were 13.5% and 4.3% respectively, which exceeded the
applicable requirements. The Savings Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the Savings Bank's latest quarterly
thrift financial report. The assessments paid by the Savings Bank for the fiscal
years ended December 31, 1996 and 1995 totalled $83,000 and $79,000,
respectively.
<PAGE>
Branching. OTS regulations permit nationwide branching by federally chartered
savings institutions to the extent allowed by federal statute. This permits
federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Savings Bank's authority to engage in
transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Savings Bank's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and not to involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
executive officers over other employees. Regulation O also places individual and
aggregate limits on the amount of loans the Savings Bank may make to insiders
based, in part, on the Savings Bank's capital position and requires certain
board approval procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility
over savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. Under
the FDI Act, the FDIC has the authority to recommend to the Director of the OTS
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
<PAGE>
Standards for Safety and Soundness. The federal banking agencies have adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by the FDI Act. The final rule establishes
deadlines for the submission and review of such safety and soundness compliance
plans when such plans are required.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). During fiscal 1996, the Federal Reserve Board
regulations generally required that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $52.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts aggregating greater than $52.0 million, the reserve
requirement is $1.6 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $52.0 million. The first $4.3 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) were
exempted from the reserve requirements. The Savings Bank is in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Savings Bank report their income on a consolidated
basis using the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Savings Bank's reserve for bad debts discussed below.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Savings Bank or the Company. The Savings Bank was last audited by the IRS for
the year ended December 31, 1989. For its 1996 taxable year, the Savings Bank is
subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to January 1, 1996, thrift
institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986, as amended (the "Code") were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally
secured by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 2, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. For
fiscal years beginning after December 31, 1995, thrift institutions that would
be treated as small banks are allowed to utilize the Experience Method
applicable to such institutions, while thrift institutions that are treated as
large banks (those generally exceeding $500 million in assets) are required to
use only the specific charge-off method. Thus, the PTI Method of accounting for
bad debts is no longer available for any financial institution.
Use of the PTI Method had the effect of reducing the marginal rate of federal
tax on the Savings Bank's income to 31.3%, exclusive of any minimum or
environmental tax, as compared to the maximum corporate federal income tax rate
of 34%.
A thrift institution required to change its method of computing reserves for bad
debts will treat such change as a change in method of accounting, initiated by
the taxpayer, and having been made with the consent of the IRS. Any adjustment
required to be taken into income with respect to such change in method of
accounting generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after December 31, 1995,
subject to the residential loan requirement. At December 31, 1996, the Savings
Bank had approximately $900,000 of deferred tax liabilities recorded for the
recapture of its bad debt reserves.
<PAGE>
Under the residential loan requirement provision, the recapture of the
applicable excess reserves required by the 1996 Act will be suspended for each
of two successive taxable years, beginning with the Savings Bank's current
taxable year, in which the Savings Bank originates in that year a minimum of
certain residential loans based upon the average of the principal amounts of
such loans made by the Savings Bank during its six taxable years preceding its
current taxable year. Also for its current and future taxable years, the Savings
Bank is permitted to make additions to its tax bad debt reserves. In addition,
the Savings Bank is required to recapture (i.e., take into income) over a six
year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987.
Distributions. Under the 1996 Act, if the Savings Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Savings Bank's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Savings Bank's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Savings Bank's income.
Non-dividend distributions include distributions in excess of the Savings Bank's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Savings Bank's current or
accumulated earnings and profits will not be so included in the Savings Bank's
income.
The amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Thus, if the Savings Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Savings Bank does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7 cent fee on every
$100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment of $1.7 million before taxes was recorded by the
Savings Bank as an expense for the quarter ended September 30, 1996. The Funds
Act includes a provision which states that the amount of any special assessment
paid to capitalize SAIF under this legislation is deductible under Section 162
of the Code in the year of payment.
<PAGE>
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum
taxable income ("AMTI") at a rate of 20%. For fiscal years beginning prior to
January 1, 1996, the excess of the bad debt reserve deduction using the
percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers. The adjustment to AMTI based on book income is an amount equal
to 75% of the amount by which a corporation's adjusted current earnings exceeds
its AMTI (determined without regard to this adjustment and prior to reduction
for net operating losses). In addition, for taxable years through 1995, an
environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Savings Bank,
whether or not an Alternative Minimum Tax ("AMT") is paid. The Savings Bank does
not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude from its
income 100% of dividends received from the Savings Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Savings Bank will not file a consolidated tax
return, except that if the Company and the Savings Bank own more than 20% of the
stock of a corporation distributing a dividend, 80% of any dividends received
may be deducted.
Florida Taxation. The Savings Bank files Florida franchise tax returns. For
Florida franchise tax purposes, savings institutions are presently taxed at a
rate equal to 5.5% of taxable income. For this purpose, "taxable income"
generally means federal taxable income, subject to certain adjustments
(including the addition of interest income on State and municipal obligations).
The Savings Bank is not currently under audit with respect to its Florida
franchise tax returns.
<PAGE>
IMPACT OF NEW ACCOUNTING ISSUES
The FASB has issued Statement of Financial Accounting Standards No. 125 ("SFAS
125"). The statement provides accounting and reporting standards for transfers
and servicing of financial assets as well as extinguishments of liabilities. The
statement also provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
125 is effective for transfers and servicing of financial assets as well as
extinguishments of liabilities occurring in 1997. Management does not anticipate
SFAS 125 will have a material impact on the Company.
<PAGE>
ITEM 2. PROPERTIES
The Savings Bank conducts its business through its main office and 8 branch
offices. The following table sets forth certain information regarding the
Savings Bank's office properties:
<TABLE>
<CAPTION>
Book Value
of Land and
Date Buildings at
Location Acquired December 31, 1996
- -------- -------- -----------------
(Dollars in thousands)
<S> <C> <C>
Main Office
800 North Boulevard, West
Leesburg, Florida 34749-0420 1961 $ 395
Wildwood
837 South Main Street
Wildwood, Florida 34785-0006 1967 245
Main Street
1409 West Main Street
Leesburg, Florida 34749-0330 1972 183
Clermont
481 East Highway 50
Clermont, Florida 34712-0730 1982 608
Eustis
2901 South Bay Street
Eustis, Florida 32727-1270 1979 385
Fruitland Park
410 Palm Street
Fruitland Park, Florida 34731 1983 340
Lady Lake
431 US Highway 441/27
Lady Lake, Florida 32158 1995 1,340
Lake Square
10105 US Highway 441
Leesburg, Florida 34788 1995 524
South Leesburg (1)
27405 US Highway 27, Suite 123
Leesburg, Florida 34748 1996 27
South Leesburg (2)
US Highway 27
Leesburg, Florida 34748 1996 375
</TABLE>
(1) Leased branch office opened February, 1997.
(2) Parcel of land purchased by the Savings Bank for a future branch office
location.
<PAGE>
The Savings Bank owns and operates personal computers, teller terminals and
associated equipment. At December 31, 1996, such equipment had a net book
value of $326,735.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which FFLC Bancorp, Inc., or
any of its subsidiaries is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 1996, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The above-captioned information appears under "Common Stock Prices and
Dividends" in the Registrant's 1996 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The above-captioned information appears under "Selected Consolidated Financial
Data" on page 6 of the Registrant's 1996 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders on pages 7 through 17 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of FFLC Bancorp, Inc. and Subsidiary,
together with the report thereon by Hacker, Johnson, Cohen & Grieb appear in the
Registrant's 1996 Annual Report to Stockholders on pages 18 through 47 and are
incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no disagreements with the Registrant's accountants on any
matters of accounting principles or practices or financial statement
disclosures.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information related to Directors and Executive Officers of the Registrant is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 8, 1997 at pages 4 through 7.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 8, 1997 at pages 13 through 16.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information relating to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 8, 1997 at
pages 5 through 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions is
incorporated herein by reference to page 16 of the Registrant's Proxy Statement
for the Annual Meeting of Stockholders to be held on May 8, 1997.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference from the following indicated pages of the 1996 Annual Report to
Stockholders.
Page
----
Independent Auditor's Report 47
Consolidated Balance Sheets as of December 31, 1996 and 1995 18
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 19
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 20-22
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 23-24
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1996, 1995, and 1994 25-46
The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
<S> <C>
3.1 Certificate of Incorporation of FFLC Bancorp, Inc.*
3.2 Bylaws of FFLC Bancorp, Inc.*
4.0 Stock Certificate of FFLC Bancorp, Inc.*
10.1 First Federal Savings Bank of Lake County Recognition and Retention Plan**
10.2 First Federal Savings Bank of Lake County Recognition and Retention Plan
for Outside Directors**
10.3 FFLC Bancorp, Inc. Incentive Stock Option Plans for Officers and Employees**
10.4 FFLC Bancorp, Inc. Stock Option Plan for Outside Directors**
13.0 Annual Report to Stockholders (filed herewith)
99 Proxy Statement for Annual Meeting (filed herewith)
</TABLE>
<PAGE>
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, initially filed on September 27,
1993, Registration No. 33-69466.
** Incorporated herein by reference into this document from the Proxy
Statement for the Annual Meeting of Stockholders filed pursuant to
Regulation 14A within 120 days of the Registrant's fiscal year end.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
fourth quarter.
<PAGE>
Pursuant to the requirements of Section 13 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.
FFLC BANCORP, INC.
By: /s/ Stephen T. Kurtz
---------------------
Stephen T. Kurtz
Chief Executive Officer and President
Dated:
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ James R. Gregg Chairman of the Board March 20, 1997
- ------------------
James R. Gregg
/s/ Joseph J. Junod Vice Chairman of the Board March 20, 1997
- -------------------
Joseph J. Junod
/s/ James P. Logan Director March 20, 1997
- ------------------
James P. Logan
/s/ Ted R. Ostrander, Jr. Director March 20, 1997
- -------------------------
Ted R. Ostrander
/s/ Claron D. Wagner Director March 20, 1997
- --------------------
Claron D. Wagner
/s/ Stephen T. Kurtz Chief Executive Officer,
Stephen T. Kurtz President and Director March 20, 1997
/s/ Paul K. Mueller Executive Vice President, Chief
Paul K. Mueller Operating Officer and Treasurer
and Director March 20, 1997
</TABLE>
[FFLC LOGO HERE]
1996 ANNUAL REPORT
CONTENTS
Page
Corporate Profile, Corporate Organization and General Information ............1
Office Locations and Common Stock Prices and Dividends .......................2
Consolidated Financial Highlights ............................................3
Letter to Stockholders .....................................................4-5
Selected Consolidated Financial Data and Financial Ratios.....................6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................7-17
Consolidated Financial Statements ........................................18-46
Independent Auditors' Report.................................................47
Directors and Officers of FFLC Bancorp, Inc. ................................48
Directors and Officers of First Federal Savings Bank of Lake County..........49
Employees ...................................................................50
<PAGE>
[Inside Cover]
<PAGE>
CORPORATE PROFILE
FFLC Bancorp, Inc. ("FFLC" or the "Holding Company") became the holding company
for First Federal Savings Bank of Lake County (the "Savings Bank") (together,
the "Company") on January 4, 1994 upon the Savings Bank's conversion from a
federally chartered mutual savings association to a federally chartered stock
savings bank. The acquisition of the Savings Bank by the Holding Company was
accounted for as a pooling-of-interest. The Savings Bank is a community-oriented
savings institution offering a variety of financial services to meet the needs
of the communities it serves. The deposit accounts of the Savings Bank are
insured by the Federal Deposit Insurance Corporation.
CORPORATE ORGANIZATION
Holding Company
FFLC Bancorp, Inc.
Thrift Subsidiary
First Federal Savings Bank of Lake County
Affiliate of Thrift Subsidiary
Lake County Service Corporation
GENERAL INFORMATION
Corporate Headquarters
800 North Boulevard West, Post Office Box 490420, Leesburg, Florida
34749-0420
Annual Meeting
The Annual Meeting of the Stockholders will be held at the Leesburg
Community Building located at 109 East Dixie Avenue in Leesburg at 2:00 p.m.
on May 8, 1997.
Form 10-K
A copy of the Form 10-K, as filed with the Securities and Exchange
Commission, may be obtained by stockholders without charge upon written
request to Sandra L. Rutschow, Vice President - Secretary, FFLC Bancorp,
Inc., Post Office Box 490420, Leesburg, Florida 34749-0420.
Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
800-368-5948
Corporate Counsel
George W. Murphy, Jr.
Muldoon, Murphy & Faucette
5101 Wisconsin Avenue
Washington, D.C. 20016
<PAGE>
Independent Auditors
Hacker, Johnson, Cohen & Grieb
Certified Public Accountants
930 Woodcock Road, Suite 211
Orlando, Florida 32803
Visit First Federal's World-wide Web Site at http://www.1stfederal.com. This
site provides up-to-date rates for certificates of deposit and mortgage loans,
as well as access to FFLC's current stock quotes and SEC filings.
1
<PAGE>
[FIRST FEDERAL LOGO HERE]
OFFICE LOCATIONS
[MAP INSERT MAP - HALF PAGE]
COMMON STOCK PRICES AND DIVIDENDS
FFLC's common stock is traded in the over-the-counter market and is quoted on
the National Association of Securities Dealers Automated Quotation - National
Market System ("NASDAQ - National Market System") under the symbol FFLC. The
following table sets forth market price information, based on closing prices, as
reported by the NASDAQ National Market System for the common stock high and low
closing sales prices and the amount of dividends paid on the common stock for
the periods indicated. See Note 20 of the Consolidated Financial Statements for
a summary of quarterly financial data.
<TABLE>
<CAPTION>
Cash
Dividends
Paid
High Low Per Share
---- --- ---------
<S> <C> <C> <C>
Quarter Ended:
March 31, 1995............................................... 17 1/4 14 1/4 .06
June 30, 1995................................................ 17 15 3/4 .08
September 30, 1995........................................... 20 1/4 16 1/4 .08
December 31, 1995............................................ 20 1/4 18 3/4 .08
March 31, 1996............................................... 19 1/8 17 1/4 .08
June 30, 1996................................................ 18 3/4 17 1/4 .10
September 30, 1996........................................... 19 18 .10
December 31, 1996............................................ 22 18 1/4 .10
As of January 27, 1997, the Company had 941 holders of record of common stock.
2
<PAGE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
AT YEAR END: 1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Total assets ........................................................... $ 346,442 325,832 310,622
Loans receivable, net .................................................. $ 227,948 183,448 148,286
Investment securities .................................................. $ 32,832 25,265 27,851
Mortgage-backed securities ............................................. $ 65,736 93,883 117,003
Deposits ............................................................... $ 282,664 267,703 251,752
Equity, substantially restricted ....................................... $ 53,626 55,360 53,762
Book value per share ................................................... $ 22.00 20.99 19.47
Shares outstanding ..................................................... 2,437,737 2,637,356 2,761,819
Equity-to-assets ratio ................................................. 15.48% 16.99% 17.31%
Nonperforming assets to total assets ................................... 0.30% 0.10% 0.13%
FOR THE YEAR:
Interest income ........................................................ $ 24,218 22,493 19,480
Net interest income after provision for loan losses .................... $ 11,152 10,186 10,083
Net income ............................................................. $ 2,184 3,093 3,570
Earnings per share ..................................................... $ .85 1.16 1.35
Loan originations ...................................................... $ 83,569 56,751 49,190
Return on average assets ............................................... .65% .98% 1.19%
Return on average equity ............................................... 3.94% 5.59% 6.81%
Average equity to average assets ratio ................................. 16.62% 17.46% 17.47%
Noninterest expense to average assets .................................. 2.49% 1.85% 1.74%
YIELDS AND RATES:
<CAPTION>
Weighted Average
Rate or Yield Average Rate or Yield During
at December 31, Year Ended December 31,
----------------- ------------------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Mortgage loans, net ............................................... 8.08% 8.18% 8.20% 8.29% 8.21%
Collateralized mortgage obligations ............................... 5.91% 5.92% 5.76% 5.73% 5.34%
Other mortgage-backed securities .................................. 7.04% 6.84% 6.87% 6.41% 5.51%
All interest-earning assets ....................................... 7.62% 7.42% 7.52% 7.31% 6.66%
Deposits .......................................................... 4.72% 4.87% 4.72% 4.71% 3.78%
All interest-bearing liabilities .................................. 4.74% 4.87% 4.72% 4.71% 3.78%
Interest-rate spread (1) .......................................... 2.87% 2.55% 2.80% 2.60% 2.88%
Net yield on average interest-earning assets (2) .................. N/A N/A 3.50% 3.35% 3.50%
(1) Average yield on all interest-earning assets less average rate paid on all interest-bearing liabilities.
(2) Net interest income divided by average interest-earning assets.
</TABLE>
3
<PAGE>
[LOGO HERE]
Dear Stockholders:
In each year's annual report, I like to mention some of the important events for
our Company during the past year, and reflect upon things we might expect during
the new year.
The year 1996 will be remembered as a very important year in our Company's
history. Significant progress was made during the year in increasing the loan
portfolio and total deposits of the Company's subsidiary, First Federal Savings
Bank of Lake County. For the year, the Bank's mortgage loan originations were
$74.4 million, an increase of more than 48% above the prior year. Consumer loan
originations totaled $12.4 million, for an increase of 101%. All told, the
Bank's loan portfolio at the end of 1996 stood at $236.9 million, a gain of 26%
when compared to the end of 1995. Deposit growth was also good, with total
deposits at year-end being 282.7 million. This represents a gain in total
deposits of $15 million, or 6%.
The single largest impact on our financial statements came from the one-time
payment all savings institutions were required to make to the Federal Deposit
Insurance Corporation (FDIC). In the case of First Federal, the required payment
to the FDIC was $1.7 million ($1.0 million after-tax). In exchange for this
one-time payment, we expect First Federal will enjoy a 72% reduction in its
deposit insurance premium in 1997. While the financial data within this annual
report fully reflects the cost of the one-time payment to the FDIC, I would like
stockholders to know what some of these figures would have been, absent the FDIC
payment.
Without the one-time payment to the FDIC, our Company's earnings for the year
would have been $3.2 million, or $123,000 more than 1995. On an earnings per
share basis, the Company would have reported earnings of $1.25 per share, a 7.8%
increase from the prior year. The return on average assets would have been
0.96%, the return on average equity would have been 5.80%, and the operating
efficiency ratio would have been 55.05%. If we were to exclude the one-time
payment to the FDIC, the Company's price-to-earnings ratio at year-end would
have been 17.2.
During the year, the Company's Board of Directors conducted a strategic planning
session in which ways to better prepare the Company for the future were
discussed. The greatest challenge for the Company is to produce a reasonable
return on equity. At year-end, the Company had a capital ratio of 15.48%. With a
capital ratio at that level, it is difficult to produce a strong return on
equity. The strategic planning session produced a plan of action that we believe
will better utilize the capital that we have and will produce improved results
in the future. It is worth noting that rather than one simple approach, the plan
of action addresses several areas.
First, we believe the repurchase of outstanding shares of stock should continue.
By the end of 1996, FFLC Bancorp had repurchased a total of nearly 340,000
shares of stock. In January, 1997, the Board of Directors approved the
repurchase of an additional 10% of the Company's outstanding shares, or more
than 238,000 shares of stock. By continuing to repurchase stock, we expect to
improve earnings per share.
<PAGE>
With our Company's high level of capital, we have the means to grow in several
ways. We recently opened our third branch office within the past eighteen
months, and we continue to consider locations in which to open new offices.
Growth can also occur by way of acquiring another financial institution. To date
that has not occurred, but it remains an alternative.
4
<PAGE>
Our Company is also moving toward increased involvement in commercial lending.
Two local financial institutions in the Lake County market have recently sold to
out-of-state regional banks, and we believe the timing is right for us to become
more involved in local commercial lending. To that end, we recently brought on
board a commercial loan officer with extensive lending experience in the Lake
County area. We believe added commercial lending will diversify our loan
portfolio, and will provide us with new opportunities both in lending and
deposits.
Growth is also possible through wholesale transactions in which the Company
finances the purchase of securities by borrowing the necessary funds. To date,
we have made two such transactions, and we have maintained a positive spread
between the earnings of the securities and the cost of the borrowing.
Looking to 1997, there are two important events that will positively influence
the Company's earnings. First, as mentioned above, the Bank's deposit insurance
premium rate has been dramatically lowered. In addition, the stock benefit
program known as the Recognition and Retention Plan (RRP) was fully expensed as
of the end of 1996. Expenses related to these two items will be substantially
reduced during 1997.
The Bank's newest branch office, located south of Leesburg at the Lake Harris
Square shopping center, opened in February 1997. We believe continued expansion
of our branch network will provide long-term benefits to the Company. Of course,
by opening new branch offices, the Company increases its current expenses.
However, we believe that by undertaking the expense of new branch locations now,
we will be enhancing the Company's profitability and franchise value for the
future.
The performance of the Company's stock is of great importance to stockholders.
The price per share of FFLC Bancorp's stock began the year at $18.75 and ended
it at $21.50. When combined with the dividends paid during 1996, the result is a
total rate of return of 16.9%. FFLC Bancorp originally issued shares of stock at
$10.00 per share on January 4, 1994. As of December 31, 1996, the stock has
enjoyed an annualized total rate of return of 31.6% from its initial public
offering.
The directors, officers and staff of FFLC Bancorp appreciate the support of our
stockholders over the past three years. We are dedicated to profitably serving
the banking needs of our local communities, and to meeting the investment goals
of our stockholders. We firmly believe our Company is on the right track to
accomplishing these goals.
Cordially yours,
Stephen T. Kurtz
President and Chief Executive Officer
5
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
At December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Total assets ................................................. $ 346,442 325,832 310,622 292,254 271,148
Loans receivable, net ........................................ 227,948 183,448 148,286 122,211 114,347
Cash and cash equivalents .................................... 10,157 13,929 10,255 24,875 8,162
Investment securities ........................................ 32,832 25,265 27,851 29,370 26,782
Mortgage-backed securities ................................... 65,736 93,883 117,003 109,077 115,331
Deposits ..................................................... 282,664 267,703 251,752 241,000 245,436
Borrowed funds ............................................... 8,198 150 3,150 150 150
Conversion stock subscriptions ............................... -- -- -- 21,834 --
Stockholders' equity ......................................... 53,626 55,360 53,762 27,246 23,705
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest income .............................................. $ 24,218 22,493 19,480 18,453 20,388
Interest expense ............................................. 12,959 12,183 9,259 9,268 11,649
Net interest income .......................................... 11,259 10,310 10,221 9,184 8,739
Provision for loan losses .................................... 107 124 138 250 232
Net interest income after provision for loan losses .......... 11,152 10,186 10,083 8,935 8,507
Noninterest income ........................................... 809 709 647 619 848
Noninterest expense .......................................... 8,299 5,874 5,212 3,936 3,721
Income before provision for income taxes ..................... 3,662 5,021 5,518 5,618 5,634
Provision for income taxes ................................... 1,478 1,928 1,948 2,114 2,120
Net income ................................................... 2,184 3,093 3,570 3,504 3,514
Earnings per share ........................................... .85 1.16 1.35 -- (1) --(1)
Weighted average number of common
shares outstanding ..................................... 2,560,795 2,656,259 2,645,829 -- (1) --(1)
</TABLE>
- ---------------------------
(1) The Company issued stock and acquired the Savings Bank during 1994,
therefore, earnings per share prior to 1994 is not available.
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL RATIOS
AND OTHER DATA:
At or For the Year Ended December 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
Return on average assets ................................. 0.65% 0.98% 1.19% 1.29% 1.32%
Return on average equity ................................. 3.94% 5.59% 6.81% 13.72% 16.00%
Dividend payout ratio (1) ................................ 44.71% 25.86% 13.33% N/A N/A
Average equity to average assets ......................... 16.62% 17.46% 17.47% 9.40% 8.25%
Total equity to total assets ............................. 15.48% 16.99% 17.31% 9.32% 8.74%
Interest rate spread during year(2) ...................... 2.80% 2.60% 2.88% 3.15% 3.02%
Net interest margin (3) .................................. 3.50% 3.35% 3.50% 3.48% 3.36%
Nonperforming assets to total assets (4) ................. 0.30% 0.10% 0.13% 0.23% 0.17%
Nonperforming loans to total loans (5) ................... 0.28% 0.09% 0.21% 0.47% 0.34%
Allowance for loan losses to non-performing loans ........ 159.61% 561.49% 264.13% 121.29% 130.65%
Allowance for loan and REO
losses to nonperforming assets ..................... 103.51% 288.48% 210.41% 108.41% 111.11%
Allowance for loan losses to total loans ................. 0.45% 0.52% 0.55% 0.57% 0.45%
Operating expenses to average assets ..................... 2.49% 1.85% 1.74% 1.45% 1.40%
Average interest-earning assets to
average interest-bearing liabilities ............... 1.17 1.19 1.19 1.09 1.08
Net interest income to operating expenses ................ 1.36 1.76 1.96 2.33 2.35
Total shares outstanding (1) ............................. 2,437,737 2,637,356 2,761,819 -- (1) -- (1)
Book value per common share outstanding (1) .............. $ 22.00 20.99 19.47 -- (1) -- (1)
Number of banking offices (all full-service) ............. 9 8 6 6 6
</TABLE>
- ------------------
(1) Item is only presented at December 31, 1996, 1995 and 1994 since there was
no outstanding common stock in prior years.
(2) Difference between weighted average yield on all interest-earning assets
and weighted average rate on all interest-bearing liabilities.
(3) Based upon net interest income before provision for loan losses divided by
average interest-earning assets.
(4) Nonperforming assets consist of nonperforming loans and real estate owned.
(5) Nonperforming loans consist of loans 90 days or more delinquent.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
First Federal Savings Bank of Lake County, the subsidiary of FFLC, was organized
in 1934 as a federally chartered savings and loan association and converted to a
federally chartered stock savings bank on January 4, 1994. The Savings Bank's
principal business continues to be attracting retail deposits from the general
public and investing those deposits, together with principal repayments on loans
and investments and funds generated from operations, primarily in mortgage loans
secured by one-to-four-family, owner-occupied homes, mortgage-backed securities
and, to a lesser extent, construction loans, consumer and other loans, and
multi-family residential mortgage loans. In addition, the Savings Bank holds
investments permitted by federal laws and regulations including securities
issued by the U.S. Government and agencies thereof. The Savings Bank's revenues
are derived principally from interest on its mortgage loan and mortgage-backed
securities portfolios and interest and dividends on its investment securities.
The Savings Bank is a community-oriented savings institution offering a variety
of financial services to meet the needs of the communities it serves. The
Savings Bank's deposit gathering and lending markets are primarily concentrated
in the communities surrounding its full service offices located in Lake and
Sumter counties in central Florida. Management believes that its offices are
located in communities that generally can be characterized as rural service and
retirement communities with residential neighborhoods comprised predominately of
one-to-four-family residences. The Savings Bank is the oldest and largest (by
asset size) locally-based savings institution in Lake County, and serves its
market area with a wide selection of residential mortgage loans and other retail
financial services. Management considers the Savings Bank's reputation for
financial strength and customer service as a major advantage in attracting and
retaining customers in its market area and believes it benefits from its
community orientation as well as its established deposit base and level of core
deposits.
The Savings Bank had net earnings of $2.2 million for the year ended December
31, 1996, compared to net earnings of $3.1 million for the year ended December
31, 1995. At December 31, 1996, the Savings Bank had total assets of $346.4
million, an increase of 6.3% over total assets of $325.8 million at December 31,
1995. That increase resulted primarily from a $44.5 million, or 24.3%, increase
in loans receivable from $183.4 million at December 31, 1995 to $227.9 million
at December 31, 1996, reflecting increased local loan demand. Cash and cash
equivalents decreased $3.8 million or 27.1% from $13.9 million to $10.1 million.
Mortgage-backed securities also decreased $28.1 million while investment
securities increased $7.7 million for a net decrease of $20.4 million or 17.6%
in investment and mortgage-backed securities. Deposits increased $15.0 million,
or 5.6%, from $267.7 million at December 31, 1995 to $282.7 million at December
31, 1996. Stockholders' equity decreased $1.7 million primarily due to
repurchases of Holding Company stock during 1996, partially offset by income
from operations.
7
<PAGE>
REGULATION AND LEGISLATION
General
The operating results of the Savings Bank are affected by Federal laws and
regulations and the Savings Bank is subject to extensive regulation, examination
and supervision by the Office of Thrift Supervision ("OTS"), as its chartering
agency, and the Federal Deposit Insurance Corporation ("FDIC"), as the deposit
insurer. The Savings Bank is a member of the Federal Home Loan Bank ("FHLB")
System and its deposit accounts are insured up to applicable limits by the FDIC
under the SAIF ("Savings Association Insurance Fund"). The Savings Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to test
the Savings Bank's compliance with various regulatory requirements. The
activities of savings institutions are governed by the Home Owner's Loan Act, as
amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act
(the "FDIA"). The HOLA and the FDIA were amended by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit
Insurance Corporation Improvement Act of 1991("FDICIA"). A more complete
description of the HOLA and FDIA as amended by FIRREA and FDICIA is included in
the Form 10-K.
Capital Requirements
The OTS capital regulations require savings institutions to meet three capital
standards: a 1.5% tangible capital standard; a 3% leverage (core capital) ratio;
and an 8% risk-based capital standard. Under the OTS final rule implementing
FDICIA, generally, a well-capitalized institution is defined as one that meets
the following capital standards: a 5% tangible capital standard; a 6% leverage
(core capital) ratio; and a 10% risk-based capital standard, and has not been
notified by its federal banking agency that it is in a "troubled condition." At
December 31, 1996, the Savings Bank met each of its capital requirements, in
each case on a fully phased-in basis, and met the criteria of a
"well-capitalized" institution as defined above.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based deposit insurance system that assesses deposit
insurance premiums according to the level of risk involved in an institution's
activities. An institution's risk category is based upon whether the institution
is classified as "well capitalized," "adequately capitalized" or "less than
adequately capitalized" and one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation and information which the FDIC determines to
be relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Based on its capital and supervisory subgroups, each
SAIF member institution was assigned an annual FDIC assessment rate for 1996
between 23 basis points for an institution in the highest category (i.e.,
well-capitalized and healthy) and 31 basis points for an institution in the
lowest category (i.e., undercapitalized and posing substantial supervisory
concern). The Savings Bank's assessment rate for 1996 was .23% of deposits.
Effective January 1, 1997, the FDIC lowered the annual assessment rates for SAIF
members to 0 to 27 basis points, as discussed below. The FDIC has authority to
further raise premiums if deemed necessary. If such action is taken, it could
have an adverse effect on the earnings of the institution.
8
<PAGE>
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF member institutions, including the
Savings Bank, to recapitalize the SAIF and spread the obligations for payments
of Financing Corporation ("FICO") bonds across all SAIF and Bank Insurance Fund
("BIF") members. The FDIC special assessment levied amounted to 65.7 basis
points on SAIF assessable deposits held as of March 31, 1995. The special
assessment of $1.7 million before taxes was recognized by the Savings Bank in
the third quarter and is tax deductible. That legislation eliminated the
substantial disparity between the amount that BIF and SAIF members had been
paying for deposit insurance premiums.
Beginning on January 1, 1997, BIF members will pay a portion of the FICO payment
equal to 1.3 basis points on BIF-insured deposits, compared to 6.48 basis points
payable by SAIF members on SAIF-insured deposits, and will pay a pro rata share
of the FICO payment on the earlier of January 1, 2000 or the date upon which the
last savings association, such as the Savings Bank, ceases to exist. The
legislation also requires BIF and SAIF to be merged by January 1, 1999 provided
that subsequent legislation is adopted to eliminate the savings association
charter and no savings associations remain as of that time.
Effective January 1, 1997, the FDIC has lowered annual SAIF assessment rates to
0 to 27 basis points, a range comparable to those of BIF members, although SAIF
members will continue to be subject to the higher FICO payments described above.
Management cannot predict the level of FDIC insurance assessments on an ongoing
basis or whether the BIF and SAIF will eventually be merged.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Savings Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
CREDIT RISK
The Savings Bank's primary business is lending on residential real estate, an
activity with the inherent risk of generating potential loan losses the
magnitude of which depend on a variety of factors affecting borrowers which are
beyond the control of the Savings Bank. The Savings Bank has underwriting
guidelines and credit review procedures designed to minimize such credit losses.
RESULTS OF OPERATIONS
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its
interest-earning assets, primarily its loans, mortgage-backed securities and
investment securities, and its interest-bearing liabilities, consisting of
deposits and borrowings. The Company's operating expenses principally consist of
employee compensation, occupancy expenses, federal deposit insurance premiums
and other general and administrative expenses. The Company's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory authorities.
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the volume of interest-earning assets and interest-bearing liabilities and
the interest rates earned or paid on them.
9
<PAGE>
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest and dividend income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (iii) net interest/dividend income; (iv) interest-rate spread;
(v) net interest margin; and (vi) weighted average yields and rates at December
31, 1996. Yields and costs were derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods shown.
The average balance of loans receivable includes loans on which the Company has
discontinued accruing interest. The yields and costs include fees which are
considered to constitute adjustments to yields.
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------ -------------------------
Yield At Average Average Average
December 31, Average Yield/ Average Yield/ Average Yield/
1996 Balance Interest Cost Balance Interest Cost Balance Interest Cost
---- ------- -------- ---- ------- ------------- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable 8.20% $ 201,840 16,813 8.33% $ 163,961 13,817 8.43% $ 132,165 10,988 8.31%
Mortgage-backed securities 6.45 80,355 5,020 6.25 106,574 6,403 6.01 116,906 6,312 5.40
Investment securities and other
interest-earning assets (1) 6.19 39,745 2,385 6.00 37,138 2,273 6.12 43,343 2,180 5.03
--------- ------ --------- ------ --------- ------
Total interest-earning
assets 7.62 321,940 24,218 7.52 307,673 22,493 7.31 292,414 19,480 6.66
------ ------ ------
Noninterest-earning assets 11,727 9,107 7,605
--------- --------- ---------
Total assets $ 333,667 $ 316,780 $ 300,019
========= ========= =========
Interest-bearing liabilities:
NOW and money market
accounts 2.38 42,682 960 2.25 42,425 967 2.28 48,205 1,063 2.21
Passbook and statement savings
accounts 2.74 24,218 629 2.60 26,802 721 2.69 29,472 745 2.53
Certificates 5.45 206,471 11,311 5.48 188,806 10,455 5.54 166,818 7,433 4.46
FHLB advances 7.17 150 11 7.33 150 11 7.33 150 11 7.33
Securities sold under agreement
to repurchase 5.63 849 48 5.65 470 29 6.17 107 7 6.54
--------- ------ --------- ------ --------- ------
Total interest-bearing
liabilities 4.74 274,370 12,959 4.72 258,653 12,183 4.71 244,752 9,259 3.78
------ ------ ------
<PAGE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------ -------------------------
Yield At Average Average Average
December 31, Average Yield/ Average Yield/ Average Yield/
1996 Balance Interest Cost Balance Interest Cost Balance Interest Cost
---- ------- -------- ---- ------- ------------- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing liabilities 3,836 2,812 2,851
Stockholders' equity 55,461 55,315 52,416
--------- --------- ---------
Total liabilities and equity $ 333,667 $ 316,780 $ 300,019
========= ========= =========
Net interest-earning assets and
interest rate spread (2) 2.87% $ 47,570 2.80% $ 49,020 2.60% $ 47,662 2.88%
===== ========= ==== ========= ==== ========= ====
Net interest income and net
margin (3) $ 11,259 3.50% $ 10,310 3.35% $ 10,221 3.50%
======== ==== ======== ==== ======== ====
Ratio of interest-earning assets
to interest-bearing liabilities 1.17 1.19 1.19
===== ==== ====
(1) Includes interest-bearing deposits and FHLB Stock.
(2) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest- bearing
liabilities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
</TABLE>
10
<PAGE>
The following table discloses the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), (iii) changes attributable to changes in
rate/volume (changes in rate multiplied by changes in volume), and (iv) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Increase (Decrease)
------------------------------------ ------------------------------------
Due to Due to
------------------------------------ ------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan receivable, net ........................... $ (164) 3,193 (33) 2,996 159 2,642 28 2,829
Mortgage-backed securities ..................... 253 (1,576) (60) (1,383) 713 (558) (64) 91
Investment securities
and other interest-earning
assets (1) ................................. (44) 159 (3) 112 472 (312) (67) 93
------ ------ ------ ------ ------ ------ ------ ------
Total ................................... 45 1,776 (96) 1,725 1,344 1,772 (103) 3,013
------ ------ ------ ------ ------ ------ ------ ------
Interest-bearing liabilities:
NOW and money market accounts .................. (13) 6 -- (7) 34 (128) (2) (96)
Passbook and
statement savings accounts ................. (25) (69) 2 (92) 47 (67) (4) (24)
Certificates ................................... (117) 979 (6) 856 1,801 981 240 3,022
FHLB advances .................................. -- -- -- -- -- -- -- --
Securities sold under agreement
to repurchase .............................. (2) 23 (2) 19 (1) 24 (1) 22
------ ------ ------ ------ ------ ------ ------ ------
Total ................................... (157) 939 (6) 776 1,881 810 233 2,924
------ ------ ------ ------ ------ ------ ------ ------
Net change in net interest
income ......................................... $ 202 837 (90) 949 (537) 962 (336) 89
====== ====== ====== ====== ====== ====== ====== ======
(1) Includes interest-bearing deposits and FHLB Stock.
</TABLE>
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. That requirement, which varies periodically
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The current required ratio is 5%. The
Savings Bank historically has maintained a level of liquid assets in excess of
the regulatory requirement. Liquid assets consist of cash, cash equivalents and
short- and intermediate-term U.S. Government and government agency securities.
The maintenance of liquid assets allows for the possibility of disintermediation
when interest rates fluctuate. The Savings Bank's liquidity ratios were 13.5%
and 13.8% at December 31, 1996 and December 31, 1995, respectively.
The Savings Bank's sources of funds include proceeds from payments and
prepayments on mortgage loans and mortgage-backed securities, proceeds from the
maturities of investment securities, sales of securities and deposits. While
maturities and scheduled amortization of loans and investment securities are
predictable sources of funds, deposit inflows and mortgage prepayments are
greatly influenced by local conditions, general interest rates, and regulatory
changes.
At December 31, 1996, the Savings Bank had outstanding commitments to originate
$4.4 million of loans and to fund the undisbursed portion of loans in process of
$8.0 million. The Savings Bank believes that it will have sufficient funds
available to meet its commitments. At December 31, 1996, certificates of deposit
which were scheduled to mature in one year or less totaled $135.6 million.
Management believes, based on past experience, that a significant portion of
these funds will remain with the Savings Bank.
REGULATORY CAPITAL REQUIREMENTS
As a federally-chartered financial institution, the Savings Bank is required to
maintain certain minimum amounts of regulatory capital. Regulatory capital is
not a valuation allowance and has not been created by charges against earnings.
The following table is a summary of the capital requirements, the Savings Bank's
regulatory capital and the amounts in excess at December 31, 1996:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
----------------- --------------------- ------------------
% of % of % of Risk-
Adjusted Adjusted Weighted
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital....................... $ 41,651 12.02% $ 41,651 12.02% $ 42,714 26.96%
Requirement.............................. 5,198 1.50 10,395 3.00 12,676 8.00
-------- ----- -------- ---- -------- -----
Excess................................... $ 36,453 10.52% $ 31,256 9.02% $ 30,038 18.96%
======== ===== ======== ==== ======== =====
</TABLE>
12
<PAGE>
ASSET /LIABILITY MANAGEMENT
The Savings Bank's primary mission is to provide home ownership by offering
permanent and construction residential mortgage loans and consumer financing and
by providing conveniently located depository facilities with transaction,
savings and certificate accounts. The Savings Bank's goal is to continue to be a
well-capitalized and profitable operation that provides service that is
professional, efficient and courteous. The Savings Bank seeks to fulfill its
mission and accomplish its goals by pursuing the following strategies: (i)
emphasizing lending in the one-to-four-family residential mortgage market; (ii)
controlling interest-rate risk; (iii) managing deposit pricing and asset growth;
(iv) emphasizing cost control; and (v) maintaining asset quality by investing in
mortgage-backed securities which, in management's judgment, provide a balance
between yield and safety in a home mortgage related investment. It is
management's intention to continue to employ these strategies over the
foreseeable future.
The Savings Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans, mortgage-backed securities and investment securities, and its interest
expense on interest-bearing liabilities, such as deposits and other borrowings.
Financial institutions continue to be affected by general changes in levels of
interest rates and other economic factors beyond their control. At December 31,
1996, the Savings Bank's one-year interest sensitivity gap (the difference
between the amount of interest-earning assets anticipated by the Savings Bank,
based on certain assumptions, to mature or reprice within one year and the
amount of interest-bearing liabilities anticipated by the Savings Bank, based on
certain assumptions, to mature or reprice within one year) as a percentage of
total assets was a positive 5.64%. Generally, an institution with a positive gap
would experience an increase in net interest income in a period of rising
interest rates. However, certain shortcomings are inherent in the sensitivity
analysis presented above. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
manners to changes in market interest rates. Therefore, no assurance can be
given that the Savings Bank will be able to maintain its net interest-rate
spread as market interest rates fluctuate.
The Savings Bank monitors its interest rate risk through the Asset/Liability
Committee which meets weekly and reports the results of such monitoring
quarterly to the Board of Directors. The Savings Bank's policy is to seek to
maintain a balance between interest-earning assets and interest-bearing
liabilities so that the Savings Bank's cumulative one-year gap ratio is within a
range which management believes is conducive to maintaining profitability
without incurring undue risk. Considering the current interest rate environment,
the Savings Bank has increased its investment in adjustable-rate and shorter
average life, fixed-rate mortgage-related securities and, generally, has not
retained in its portfolio 30 year fixed-rate loans, in order to position itself
against the consequences of rising interest rates. The Savings Bank also
maintains liquid assets in excess of the regulatory requirement, allowing for
the possibility of disintermediation when interest rates fluctuate. The Savings
Bank's liquidity ratio of 13.5% at December 31, 1996 is significantly higher
than the regulatory requirement of 5%. In addition, the Savings Bank's large
stable core deposit base resulting from its continuing commitment to quality
customer service has historically provided it with a steady source of funds.
13
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996 that are expected
to reprice or mature, based upon certain assumptions, in each of the future
periods shown. (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
More More More More More
than than than than than
Three Six One Three Five More
Three Months Months Year Years Years than
Months to Six to 12 to 3 to 5 to 10 Ten
or Less Months Months Years Years Years Years Other (1) Total
-------- ------ ------- ------ ------ ----- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Mortgage loans, net $ 44,526 23,518 32,163 76,240 12,947 11,669 5,960 (691) 206,332
Consumer and other loans 3,226 1,891 3,108 7,282 3,714 2,641 29 (275) 21,616
Mortgage-backed securities
and related securities
and mortgage-backed
and related securities
held for sale, net 35,196 15,531 8,964 4,556 842 705 143 (201) 65,736
Interest-earning deposits 4,077 -- -- -- -- -- -- -- 4,077
Investment securities and
investment securities
held for sale............. 5,231 - - 17,450 1,000 85 205 (59) 23,912
Mutual funds................. 103 7,187 - 1,745 - - - (115) 8,920
FHLB stock................... 1,939 - - - - - - - 1,939
-------- ------ ------- ------ ------ ----- ----- ------ ------
Total interest-earning
assets............... 94,298 48,127 44,235 107,273 18,503 15,100 6,337 (1,341) 332,532
-------- ------ ------- ------ ------ ----- ----- ------ ------
Rate-sensitive liabilities:
Deposits:
Passbook and statement
savings................. 2,610 2,363 4,072 10,122 4,544 3,201 500 - 27,412
NOW accounts.............. 2,652 2,401 4,136 10,283 4,616 3,252 508 - 27,848
Money market.............. 1,473 1,333 2,296 5,708 2,562 1,805 281 - 15,458
Certificates.............. 41,956 44,482 49,141 64,578 11,789 - - - 211,946
Borrowed funds............... - 3,198 5,000 - - - - - 8,198
-------- ------ ------- ------ ------ ----- ----- ------ ------
Total interest-bearing
liabilities.......... 48,691 53,776 64,646 90,691 23,511 8,258 1,289 - 290,862
-------- ------ ------- ------ ------ ----- ----- ------ ------
<PAGE>
<CAPTION>
More More More More More
than than than than than
Three Six One Three Five More
Three Months Months Year Years Years than
Months to Six to 12 to 3 to 5 to 10 Ten
or Less Months Months Years Years Years Years Other (1) Total
-------- ------ ------- ------ ------ ----- ----- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest sensitivity gap...... $ 45,607 (5,649) (20,411) 16,582 (5,008) 6,842 5,048 (1,341) 41,670
======== ====== ======= ====== ====== ===== ===== ====== ======
Cumulative interest-
sensitivity gap.............. $ 45,607 39,958 19,547 36,130 31,121 37,963 43,011
======== ====== ====== ====== ====== ====== ======
Cumulative interest-sensitivity
gap as a percentage of
total assets................. 13.16% 11.53% 5.64% 10.43% 8.98% 10.96% 12.42%
===== ===== ==== ===== ==== ===== =====
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities 193.67% 139.00% 111.70% 114.01% 111.06% 113.11% 114.79%
====== ====== ====== ====== ====== ====== ======
- --------------------------
(1) Represents premiums, discounts, market value adjustments and provision for
loan losses.
</TABLE>
14
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 TO DECEMBER 31, 1995
General Operating Results. Net income for the year ended December 31, 1996, was
$2.2 million or $.85 per share, compared to net income for the year ended
December 31, 1995 of $3.1 million or $1.16 per share. The decrease in net
income was primarily the result of the effect of the one-time SAIF
assessment of $1.7 million before taxes, included in noninterest expense,
partially offset by an increase of $949,000 in net interest income before
provision for loan losses.
Interest Income. Interest income increased $1.7 million, or 7.7% from $22.5
million for the year ended December 31, 1995 to $24.2 million for the year
ended December 31, 1996. The increase was due to an increase in the average
balance of total interest-earning assets from $307.7 million for the year
ended December 31, 1995 to $321.9 million for the year ended December 31,
1996, an increase of $14.2 million, or 4.6%, primarily as a result of new
branch openings, and an increase in the average yield on interest-earning
assets from 7.31% for the year ended December 31, 1995 to 7.52% for the year
ended December 31, 1996. The yield on loans decreased from 8.43% for the
year ended December 31, 1995 to 8.33% for the year ended December 31, 1996.
The yield on mortgage-backed securities increased from 6.01% for the year
ended December 31, 1995 to 6.25% for the year ended December 31, 1996. The
yield on investment securities and other interest earning assets decreased
from 6.12% for the year ended December 31, 1995 to 6.00% for the year ended
December 31, 1996.
Interest Expense. Interest expense increased $776,000 from $12.2 million at
December 31, 1995 to $13.0 million at December 31, 1996, as the weighted
average rate paid on interest-bearing liabilities increased from 4.71%
during 1995 to 4.72% in 1996.
Net Interest Income Before Provision for Loan Losses. Net interest income before
provision for loan losses increased $949,000 or 9.2% from $10.3 million for
the year ended December 31, 1995 to $11.3 million for the comparable period
ended December 31, 1996.
Provision for Loan Losses. The Savings Bank's provision for loan losses
decreased from $124,000 for the year ended December 31, 1995 to $107,000 for
the year ended December 31, 1996. The decrease of $17,000 reflects the
Savings Bank's continuing policy of evaluating the adequacy of its allowance
for loan losses and prevailing standards within the thrift industry.
Generally, such evaluation includes consideration of the level of
nonperforming loans and the level and composition of the Savings Bank's loan
portfolio.
Noninterest Income. Noninterest income increased from $709,000 for the year
ended December 31, 1995 to $809,000 for the year ended December 31, 1996.
The increase was due to an increase in other service charges and fees of
$93,000, and deposit account fees of $12,000 for the year ended December 31,
1996.
<PAGE>
Noninterest Expense. Noninterest expense consists primarily of salaries and
employee benefits, occupancy expense and deposit insurance premiums.
Noninterest expense increased $2.4 million for the year ended December 31,
1996 compared to 1995. That increase was primarily due to the one-time SAIF
recapitalization expense of $1.7 million and increases in salaries and
employee benefits of $356,000 and occupancy expense of $233,000, due to the
opening of two new branches. The remaining items in noninterest expense
increased $136,000 for the year ended December 31, 1996 compared to the year
ended December 31, 1995 primarily due to the growth of the Company.
Provision for Income Taxes. The provision for federal and state income taxes
decreased from $1.9 million for the year ended December 31, 1995 to $1.5
million for the year ended December 31, 1996. The effective tax rate
decreased from 38.4% for the year ended December 31, 1995 to 40.4% for the
year ended December 31, 1996.
15
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 TO DECEMBER 31, 1994
General Operating Results. Net income for the year ended December 31, 1995, was
$3.1 million or $1.16 per share, compared to net income for the year ended
December 31, 1994 of $3.6 million or $1.35 per share. The decrease in net
income was due to an increase in noninterest expense of $662,000 partially
offset by an increase of $89,000 in net interest income before provision for
loan losses.
Interest Income. Interest income increased $3.0 million, or 15.5% from $19.5
million for the year ended December 31, 1994 to $22.5 million for the year
ended December 31, 1995. The increase was due primarily to an increase in
the average balance of total interest-earning assets from $292.4 million for
the year ended December 31, 1994 to $307.7 million for the year ended
December 31, 1995, an increase of $15.3 million, or 5.2%. That increase is
primarily the result of new branch openings and an increase in the average
yield on interest-earning assets from 6.66% for the year ended December 31,
1994 to 7.31% for the year ended December 31, 1995. The 65 basis point
increase represented a 9.8% increase and was primarily due to an increase in
interest rates on loans and mortgage-backed securities. The yield on loans
increased from 8.31% for the year ended December 31, 1994 to 8.43% for the
year ended December 31, 1995. The yield on mortgage-backed securities
increased from 5.40% for the year ended December 31, 1994 to 6.01% for the
year ended December 31, 1995 because of increases in the rates at which new
loans were originated and existing ARM loans repriced. The yield on
investment securities and other interest earning assets increased from 5.03%
for the year ended December 31, 1994 to 6.12% for the year ended December
31, 1995.
Interest Expense. Interest expense increased $2.9 million from $9.3 million at
December 31, 1994 to $12.2 million at December 31, 1995 as the weighted
average rate paid on interest-bearing liabilities increased from 3.78%
during 1994 to 4.71% in 1995.
Net Interest Income Before Provision for Loan Losses. Net interest income before
provision for loan losses increased $89,000 or .87% from $10.2 million for
the year ended December 31, 1994 to $10.3 million for the comparable period
ended December 31, 1995.
Provision for Loan Losses. The Savings Bank's provision for loan losses
decreased from $138,000 for the year ended December 31, 1994 to $125,000 for
the year ended December 31, 1995. The decrease of $13,000 reflects the
Savings Bank's continuing policy of evaluating the adequacy of its allowance
for loan losses and prevailing standards within the thrift industry.
Generally, such evaluation includes consideration of the level of
nonperforming loans and the level and composition of the Savings Bank's loan
portfolio.
Noninterest Income. Noninterest income increased from $647,000 for the year
ended December 31, 1994 to $709,000 for the year ended December 31, 1995.
The increase was due to an increase in other service charges and fees of
$55,000, and deposit account fees of $26,000 for the year ended December 31,
1995 as compared to 1994, partially offset by a gain on sale of investment
securities available-for-sale of $27,000 during the year ended December 31,
1994 compared to none during the year ended December 31, 1995.
<PAGE>
Noninterest Expense. Noninterest expenses consist primarily of employee
compensation and benefits, occupancy and equipment expense and FDIC
insurance premiums. Noninterest expenses increased $662,000 for the year
ended December 31, 1995 compared to 1994. Compensation and benefits expense
increased from $3.0 million for the year ended December 31, 1994 to $3.4
million for the year ended December 31, 1995, primarily related to the
growth of the Company and normal salary increases. The remaining items in
noninterest expenses increased $238,000 for the year ended December 31, 1995
compared to the year ended December 31, 1994 primarily due to the growth of
the Company.
Provision for Income Taxes. The provision for federal and state income taxes
remained substantially the same and was $1.9 million for the years ended
December 31, 1994 and December 31, 1995. The effective tax rate increased
from 35.3% for the year ended December 31, 1994 to 38.4% for the year ended
December 31, 1995.
16
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the
Savings Bank's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Savings Bank are monetary in nature. As a result,
interest rates have a greater impact on the Savings Bank's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
FUTURE ACCOUNTING REQUIREMENTS
The FASB has issued Statement of Financial Accounting Standards No. 125 ("SFAS
125"). The statement provides accounting and reporting standards for transfers
and servicing of financial assets as well as extinguishments of liabilities. The
statement also provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. SFAS
125 is effective for transfers and servicing of financial assets as well as
extinguishments of liabilities occurring in 1997. Management does not anticipate
SFAS 125 will have a material impact on the Company.
17
<PAGE>
FFLC BANCORP, INC.
(Parent Company of First Federal Savings Bank of Lake County and Subsidiary)
Leesburg, Florida
Audited Consolidated Financial Statements
December 31, 1996 and 1995
and for each of the Years in the
Three Years Ended December 31, 1996
(Together with Independent Auditors' Report)
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Balance Sheets
($ in thousands, except per share amounts)
December 31,
1996 1995
--------- -------
<S> <C> <C>
Assets
Cash and due from banks ........................................................................ $ 6,080 5,005
Interest-bearing deposits ...................................................................... 4,077 8,924
--------- -------
Cash and cash equivalents .......................................................... 10,157 13,929
--------- -------
Investment securities held to maturity, at cost
(market value of $3,271 in 1996 and $3,472 in 1995) ........................................ 3,239 3,441
Investment securities available for sale, at market ............................................ 29,593 21,824
Mortgage-backed and related securities held to maturity, at cost (market value
of $47,396 in 1996 and $75,257 in 1995) .................................................... 46,892 74,925
Mortgage-backed and related securities available for sale, at market ........................... 18,844 18,958
Loans receivable, net of allowance for loan losses of $1,063 in 1996
and $977 in 1995 ........................................................................... 227,948 183,448
Accrued interest receivable:
Investment securities ...................................................................... 577 643
Mortgage-backed securities ................................................................. 243 291
Loans receivable ........................................................................... 1,199 1,012
Premises and equipment, net .................................................................... 5,144 4,817
Foreclosed real estate ......................................................................... 361 165
Real estate held for development ............................................................... 122 122
Restricted securities - Federal Home Loan Bank stock, at cost................................... 1,939 1,928
Other assets ................................................................................... 184 329
--------- -------
Total .............................................................................. $ 346,442 325,832
========= =======
<PAGE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Balance Sheets
($ in thousands, except per share amounts)
December 31,
1996 1995
--------- -------
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities:
NOW and money market accounts .............................................................. 43,306 40,755
Passbook and statement savings accounts .................................................... 27,412 26,811
Certificates ............................................................................... 211,946 200,137
--------- -------
Total deposits ..................................................................... 282,664 267,703
--------- -------
Advances from Federal Home Loan Bank ........................................................... 150 150
Securities sold under agreements to repurchase ................................................. 8,048 --
Deferred income taxes .......................................................................... 930 1,105
Accrued expenses and other liabilities ......................................................... 1,024 1,514
--------- -------
Total liabilities .................................................................. 292,816 270,472
--------- -------
Commitments and contingencies (Notes 5, 10 and 13)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none outstanding ....................................................................... -- --
Common stock, $.01 par value, 4,500,000 shares authorized,
2,761,819 shares issued ................................................................ 28 28
Additional paid-in-capital ................................................................. 27,386 27,041
Retained income ............................................................................ 33,962 32,704
Unrealized loss on securities available for sale, net of tax of
$116 in 1996 and $57 in 1995 ........................................................... (193) (94)
Treasury stock, at cost (339,656 shares in 1996 and
132,044 shares in 1995) ................................................................ (6,295) (2,373)
Stock held by Incentive Plan Trusts ........................................................ (1,262) (1,946)
--------- -------
Total stockholders' equity ......................................................... 53,626 55,360
--------- -------
Total .............................................................................. $ 346,442 325,832
========= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
18
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Income
($ in thousands, except per share amounts)
Year Ended December 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans receivable .................................. $ 16,813 13,817 10,988
Mortgage-backed securities ........................ 5,020 6,403 6,312
Investment securities and time deposits ........... 2,385 2,273 2,180
---------- --------- ---------
Total interest income ......................... 24,218 22,493 19,480
---------- --------- ---------
Interest expense:
Deposits .......................................... 12,900 12,143 9,241
Borrowed funds .................................... 59 40 18
---------- --------- ---------
Total interest expense ........................ 12,959 12,183 9,259
---------- --------- ---------
Net interest income ................................... 11,259 10,310 10,221
Provision for loan losses ............................. 107 124 138
---------- --------- ---------
Net interest income after provision for loan losses 11,152 10,186 10,083
---------- --------- ---------
Noninterest income:
Deposit account fees .............................. 489 477 451
Other service charges and fees .................... 266 173 119
Gain on sale of securities available for sale ..... -- -- 27
Other ............................................. 54 59 50
---------- --------- ---------
Total noninterest income ...................... 809 709 647
---------- --------- ---------
Noninterest expense:
Salaries and employee benefits .................... 3,740 3,384 2,960
Occupancy expense ................................. 812 579 527
Deposit insurance premium ......................... 624 579 553
SAIF recapitalization assessment .................. 1,655 -- --
Advertising and promotion ......................... 122 120 123
Data processing expense ........................... 384 322 290
Professional services ............................. 270 259 230
Other ............................................. 692 631 529
---------- --------- ---------
Total noninterest expense ..................... 8,299 5,874 5,212
---------- --------- ---------
<PAGE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Income
($ in thousands, except per share amounts)
Year Ended December 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income before income taxes ............................ 3,662 5,021 5,518
Income taxes .......................................... 1,478 1,928 1,948
---------- --------- ---------
Net income ............................................ $ 2,184 3,093 3,570
========== ========= =========
Net income per share of common stock .................. $ .85 1.16 1.35
========== ========= =========
Weighted average number of shares outstanding ......... 2,560,795 2,656,529 2,645,829
========== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Stockholders' Equity
($ in thousands, except per share amounts)
Stock
Unrealized Held
Retained Loss on By
Additional Income, Securities Incentive Total
Common Paid-In Substantially Available Treasury Plan Stockholders'
Stock Capital Restricted For Sale Stock Trusts Equity
----- ------- ---------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993 ................. $ - - 27,259 (14) - - 27,245
Net proceeds from the
issuance of 2,761,819
shares of common
stock ................ 28 26,563 - - - - 26,591
Purchase of 331,418
shares of common
stock by incentive
plans ................ - - - - - (3,314) (3,314)
Shares committed to
participants in
incentive plans
(194,216 shares
remain uncommitted
at December 31,
1994) ................ - 161 - - - 684 845
Dividends paid, net of
$40 of dividends
on ESOP shares recorded
as compensation
expense .............. - - (457) - - - (457)
Net income ................ - - 3,570 - - - 3,570
Unrealized gains on
investment and mortgage-
backed securities
available for sale, net
of income taxes of $172
upon implementation of
SFAS No. 115 as of
January 1, 1994 ...... - - - 276 - - 276
(continued)
20
<PAGE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Stockholders' Equity, Continued
($ in thousands, except per share amounts)
Stock
Unrealized Held
Retained Loss on By
Additional Income, Securities Incentive Total
Common Paid-In Substantially Available Treasury Plan Stockholders'
Stock Capital Restricted For Sale Stock Trusts Equity
----- ------- ---------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Change in unrealized gains
(losses) on investment
and mortgage-backed
securities available
for sale, net of income
taxes of $613 - - - (994) - - (994)
------ -------- ---------- ------- ------- ------- -----------
Balance at December 31,
1994 28 26,724 30,372 (732) - (2,630) 53,762
Net proceeds from the
issuance of 7,581
shares of common
stock............... $ - 76 - - - - 76
Shares committed to
participants in
incentive plans
(164,980 shares
remain uncommitted
at December 31,
1995)............... - 241 - - - 684 925
Dividends paid, net of
$56 of dividends
on ESOP shares
recorded as
compensation
expense............. - - (761) - - - (761)
Purchase of treasury
stock, 132,044
shares.............. - - - - (2,373) - (2,373)
Net income............... - - 3,093 - - - 3,093
(continued)
21
<PAGE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Stockholders' Equity, Continued
($ in thousands, except per share amounts)
Stock
Unrealized Held
Retained Loss on By
Additional Income, Securities Incentive Total
Common Paid-In Substantially Available Treasury Plan Stockholders'
Stock Capital Restricted For Sale Stock Trusts Equity
----- ------- ---------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Change in unrealized
gains (losses) on
investment and
mortgage-backed
securities available
for sale, net of
income taxes of
$384................ - - - 638 - - 638
------- ---------- ---------- ------- ------- ------- -----------
Balance at December 31,
1995................ 28 27,041 32,704 (94) (2,373) (1,946) 55,360
Net proceeds from the
issuance of 7,993
shares of common
stock............... - 80 - - - - 80
Shares committed to
participants in
incentive plans
(130,217 shares
remain uncommitted
at December 31,
1996)............... - 265 - - - 684 949
Dividends paid, net of
$60 of dividends
on ESOP shares
recorded as
compensation
expense............. - - (926) - - - (926)
Purchase of treasury
stock, 207,612
shares.............. - - - - (3,922) - (3,922)
Net income............... - - 2,184 - - - 2,184
(continued)
<PAGE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Stockholders' Equity, Continued
($ in thousands, except per share amounts)
Stock
Unrealized Held
Retained Loss on By
Additional Income, Securities Incentive Total
Common Paid-In Substantially Available Treasury Plan Stockholders'
Stock Capital Restricted For Sale Stock Trusts Equity
----- ------- ---------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Change in unrealized
gains (losses) on
investment and
mortgage-backed
securities available
for sale, net of
income taxes of
$59................. - - - (99) - - (99)
------ --------- ----------- -------- -------- -------- ----------
Balance at December 31,
1996................ $ 28 27,386 33,962 (193) (6,295) (1,262) 53,626
====== ========= =========== ======== ======== ======== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Cash Flows
($ in thousands)
Year Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................................ $ 2,184 3,093 3,570
Adjustments to reconcile net income
to net cash provided by operations:
Provision for loan losses ................................................. 107 124 138
Depreciation .............................................................. 345 212 184
Gain on sale of securities available for sale ............................. -- -- (27)
Gain on sale of foreclosed real estate .................................... -- (7) (3)
(Credit) provision for deferred income taxes .............................. (116) 152 (265)
Shares committed and dividends to incentive
plan participants ..................................................... 1,009 981 885
Amortization of premiums or discounts
on investment and mortgage-backed securities .......................... (106) (12) 66
Accretion of deferred loan fees and unearned interest ..................... (18) (96) (251)
Deferral of loan fees collected, net of costs deferred .................... 157 80 (85)
Dividends on FHLB stock ................................................... (11) -- (24)
Increase in accrued interest receivable ................................... (73) (181) (217)
Decrease (increase) in other assets ....................................... 145 (112) 183
(Decrease) increase in accrued expenses and other liabilities ............. (490) 125 640
-------- -------- --------
Net cash provided by operating activities ......................... 3,133 4,359 4,794
-------- -------- --------
Cash flows from investing activities:
Purchase of investment securities held to maturity ................................ -- (475) (3,692)
Proceeds from maturities of investment securities held to maturity ................ 202 290 3,319
Purchase of investment securities available for sale .............................. (22,743) (2,562) (5,744)
Proceeds from maturities of investment securities available for sale .............. 14,953 5,633 3,194
Proceeds from sales of investment securities available for sale ................... -- -- 4,087
Purchase of mortgage-backed securities held to maturity ........................... -- (4,275) (40,100)
Principal repayments on mortgage-backed securities
held to maturity .............................................................. 28,098 27,013 28,603
Purchase of mortgage-backed securities available for sale ......................... (8,596) (1,762) (3,996)
Principal repayments on mortgage-backed securities
available for sale ............................................................ 8,614 2,878 6,726
Purchase of loans receivable ...................................................... (2,106) -- --
Proceeds from sale of loans receivable ............................................ 1,557 -- --
Loan disbursements ................................................................ (83,569) (56,751) (49,190)
Principal repayments on loans ..................................................... 39,106 21,302 23,274
Purchase of premises and equipment, net ........................................... (672) (1,918) (621)
Proceeds from sales of foreclosed real estate ..................................... 70 104 30
-------- -------- --------
Net cash used in investing activities ............................. (25,086) (10,523) (34,110)
-------- -------- --------
(continued)
23
<PAGE>
FFLC BANCORP, INC.
Consolidated Statements of Cash Flows, Continued
($ in thousands)
Year Ended December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing demand, savings,
NOW and money market accounts ................................................. 3,152 (8,968) (1,624)
Net increase in certificate accounts .............................................. 11,809 24,920 12,375
Net increase (decrease) in securities sold under agreements
to repurchase ................................................................. 8,048 (3,000) 3,000
Net proceeds from the sale of common stock ........................................ -- -- 1,442
Stock options exercised ........................................................... 80 76 --
Purchase of treasury stock ........................................................ (3,922) (2,373) --
Cash dividends paid ............................................................... (986) (817) (497)
-------- -------- --------
Net cash provided by financing activities ............................. 18,181 9,838 14,696
-------- -------- --------
Net (decrease) increase in cash and cash equivalents .................................. (3,772) 3,674 (14,620)
Cash and cash equivalents at beginning of year ........................................ 13,929 10,255 24,875
-------- -------- --------
Cash and cash equivalents at end of year .............................................. $ 10,157 13,929 10,255
======== ====== ======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest ...................................................................... $ 12,937 12,082 9,253
======== ====== ======
Income taxes .................................................................. $ 1,500 2,009 2,252
======== ====== ======
Noncash investing and financing activities:
(Decrease) increase in equity valuation allowance
for market value of investments ........................................... $ (99) 638 (718)
======== ====== ======
Common stock issued for subscriptions
outstanding ............................................................... $ -- -- 21,834
======== ====== ======
Transfers from loans to foreclosed real estate ................................ $ 287 478 232
======== ====== ======
Loans originated on sales of foreclosed real estate ........................... $ 21 300 193
======== ====== ======
Loans funded by and sold to correspondent ..................................... $ 2,368 1,151 1,198
======== ====== ======
Transfer of investment and mortgage-backed
securities to available-for-sale category, upon
adoption of SFAS No. 115 .................................................. $ -- -- 16,852
======== ====== ======
Transfer of investment and mortgage-backed
securities from held-to-maturity category
to available-for-sale category, as permitted
under SFAS No. 115 Implementation Guide ................................... $ -- 14,759 --
======== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
FFLC BANCORP, INC.
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
FFLC Bancorp, Inc. (the "Holding Company") was incorporated in Delaware on
September 16, 1993 as a unitary savings and loan holding company. The
Holding Company completed its public offering of 2,761,819 shares of common
stock on January 4, 1994 and acquired First Federal Savings Bank of Lake
County (the "Savings Bank") in connection with the Savings Bank's conversion
from a federally-chartered mutual savings association to a
federally-chartered stock savings bank. The Holding Company's acquisition of
the Savings Bank was accounted for as a pooling-of-interest. The Savings
Bank was established in 1934 as a federally-chartered mutual savings and
loan association. The Savings Bank is a community-oriented savings
institution which offers a variety of financial services to individuals and
businesses primarily located in Lake County and Sumter County, Florida. The
deposits of the Savings Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") through the Savings Association Insurance Fund
("SAIF").
Principles of Consolidation. The consolidated financial statements include
the accounts of the Holding Company, the Savings Bank, and the Savings
Bank's wholly-owned subsidiary, Lake County Service Corporation (the
"Service Corporation"). All significant intercompany transactions and
balances have been eliminated in consolidation.
General. The accounting and reporting policies of FFLC Bancorp, Inc. and its
subsidiaries (together, the "Company") conform to generally accepted
accounting principles and to general practices within the thrift industry.
The following summarizes significant accounting policies of the Company.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents. For the purpose of presentation in the
consolidated statements of cash flows, cash and cash equivalents are defined
as those amounts included in the balance-sheet caption "cash and cash
equivalents."
The Savings Bank is required to maintain certain average reserve balances
pursuant to regulations of the Federal Reserve Board. These balances must be
maintained in the form of vault cash or noninterest bearing deposits at a
Federal Reserve Bank. The Savings Bank exceeded this requirement, which was
$680,000 and $550,000 at December 31, 1996 and 1995, respectively.
Trading Securities. Securities which are held principally for resale in the
near term are classified as trading and carried at their fair values.
Unrealized gains and losses on trading securities are included immediately
in income.
<PAGE>
Securities Held to Maturity. Securities for which the Company has the
positive intent and ability to hold to maturity are reported at cost,
adjusted for premiums and discounts that are recognized in interest income
using the interest method over the period to maturity.
Securities Available for Sale. Available-for-sale securities consist of
securities not classified as trading securities nor as held-to-maturity
securities.
25
<PAGE>
Securities Available for Sale, Continued. Unrealized holding gains and
losses, net of tax, on available-for-sale securities are reported as a net
amount in a separate component of stockholders' equity until realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary
have resulted in write-downs of the individual securities to their fair
value. There were no such write-downs included in earnings as realized
losses during the three years ended December 31, 1996.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Loans Receivable. Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off are
reported at their outstanding principal adjusted for any charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated
loans.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions.
Foreclosed Real Estate. Real estate properties acquired through, or in lieu
of, loan foreclosure are to be sold and are initially recorded at fair value
at the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation allowance
are included in the consolidated statements of income.
Income Taxes. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
Premises and Equipment. Land is carried at cost. The Company's premises,
furniture and equipment and leasehold improvements are carried at cost, less
accumulated depreciation and amortization computed principally by the
straight-line method.
26
<PAGE>
Off-Balance Sheet Instruments. In the ordinary course of business, the
Company has entered into off-balance-sheet instruments consisting of
commitments to extend credit and commitments under lines of credit. Such
financial instruments are recorded in the financial statements when they are
funded.
Fair Values of Financial Instruments. The following methods and assumptions
were used by the Company in estimating fair values of financial instruments:
Cash and Cash Equivalents. The carrying amounts of cash and short-term
instruments approximate their fair value.
Investment and Mortgage-Backed Securities. Fair values for securities
are based on quoted market prices. If quoted market prices are not
available, fair value is based on quoted market prices for similar
securities.
Loans Receivable. For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain fixed-rate mortgage (e.g.
one-to-four family residential), commercial real estate and commercial
loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Federal Home Loan Bank Stock. Fair value of the Bank's investment in
FHLB stock is based on its redemption value, which is its cost of $100
per share.
Deposit Liabilities. The fair values disclosed for demand, NOW, money
market and savings deposits are, by definition, equal to the amount
payable on demand at the reporting date (that is, their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Borrowed Funds. The carrying amounts of borrowings under repurchase
agreements approximate their fair values. Fair values of other
borrowings are estimated using discounted cash flow analysis based on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Accrued Interest. The carrying amounts of accrued interest approximate
their fair values.
Off-Balance-Sheet Instruments. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing.
27
<PAGE>
Net Income Per Share of Common Stock. Net income per share of common stock
has been computed since the date of conversion from a mutual to a capital
stock company, by dividing the net income for the year by the weighted
average number of shares outstanding. Shares of common stock purchased by
the Employee Stock Option Plan ("ESOP") and the Retention and Recognition
Plan ("RRP") incentive plans (see Note 17) are only considered outstanding
when the shares are released or committed to be released for allocation to
participants. The ESOP initially purchased 220,945 shares, of which 2,630
shares were released for allocation to participants each month beginning in
January, 1994. At December 31, 1996, 126,254 shares remain uncommitted and
are not considered outstanding for purposes of the computation of net income
per share of common stock. The RRP initially purchased 110,473 shares, of
which 106,838 and 106,510 were allocated to participants and are considered
outstanding for December 31, 1995 and 1996, respectively. The remaining
unallocated RRP shares were not considered outstanding during 1995 and 1996.
For the year ended December 31, 1995 and 1996, the weighted average number
of shares outstanding includes common stock equivalents (stock options-see
Note 17) computed using the treasury stock method. The following table
presents the calculation of net income per share of common stock:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares of common stock issued
and outstanding before adjustments for ESOP,
RRP and common stock options ...................................................... 2,590,500 2,719,435 2,761,819
Adjustment to reflect the effect of unallocated
ESOP and RRP shares ............................................................... (148,605) (179,936) (209,999)
--------- --------- ---------
Weighted average shares outstanding before adjustments
for common stock options .......................................................... 2,441,895 2,539,499 2,551,820
Shares assumed outstanding to reflect the
dilutive effect of common stock options ........................................... 118,900 116,760 94,009
--------- --------- ---------
Weighted average shares, including common
stock equivalents for primary earnings per share .................................. 2,560,795 2,656,259 2,645,829
========= ========= =========
Primary earnings per share ............................................................ $ .85 1.16 1.35
========= ==== ====
Total weighted average common shares and equivalents
outstanding for primary earnings per share
computation ....................................................................... 2,560,795 2,656,259 2,645,829
Additional dilutive shares using the higher of the end of period
market value versus average market value for the period
utilizing the treasury stock method regarding stock options ....................... 20,495 8,588 --
--------- --------- ---------
Weighted average common shares and equivalents
outstanding for fully diluted earnings per share .................................. 2,581,290 2,664,847 2,645,829
========= ========= =========
Fully-diluted earnings per share ...................................................... $ .85 1.16 1.35
========= ==== ====
</TABLE>
28
<PAGE>
Future Accounting Requirements. The FASB has issued Statement of Financial
Accounting Standards No. 125 ("SFAS 125"). This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets as well as extinguishments of liabilities. This Statement also
provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS 125
is effective for transfers and servicing of financial assets as well as
extinguishments of liabilities occurring in 1997. Management does not
anticipate SFAS 125 will have a material impact on the Company.
Reclassifications. Certain amounts in the 1994 and 1995 consolidated
financial statements have been reclassified to conform to the presentation
for 1996.
(2) Investment Securities
Investment securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amounts of securities
and their approximate fair values at December 31, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
At December 31, 1996:
Investment securities held to maturity-
SBA-related investment securities ...................... $ 3,239 32 -- 3,271
======= ======= ======= =======
Investment securities available for sale:
Mutual funds ........................................... 9,035 -- 115 8,920
U.S. Government and agency securities .................. 20,208 2 34 20,176
Other investment securities ............................ 495 3 1 497
------- ------- ------- -------
Total .............................................. $29,738 5 150 29,593
======= ======= ======= =======
At December 31, 1995:
Investment securities held to maturity-
SBA-related investment securities ...................... 3,441 31 -- 3,472
======= ======= ======= =======
Investment securities available for sale:
Mutual funds ........................................... 8,939 -- 39 8,900
U.S. Government and agency securities .................. 11,475 55 138 11,392
Other investment securities ............................ 1,523 9 -- 1,532
------- ------- ------- -------
Total .............................................. $21,937 64 177 21,824
======= ======= ======= =======
</TABLE>
Gross realized gains on sales of available-for-sale securities were $27,000
during the year ended December 31, 1994. There were no gross realized losses
during the year ended December 31, 1994. There were no sales of investment
securities during 1996 and 1995.
29
<PAGE>
The scheduled maturities of investment securities held to maturity and
investment securities (other than equity) available for sale at December 31,
1996 were as follows:
<TABLE>
<CAPTION>
Held-to-Maturity Securities Available-for-Sale Securities
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ----- ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Due within one year.............................. $ - - 2,000 2,002
Due from one year to five years.................. - - 18,413 18,378
Due from five years to ten years................. - - 85 85
Due after ten years.............................. 3,239 3,271 205 208
------- ----- ------ ------
Total $ 3,239 3,271 20,703 20,673
======= ===== ====== ======
</TABLE>
Investment securities carried at approximately $3.0 million and $1.0 million
at December 31, 1996 and 1995, respectively, were pledged to secure public
funds and tax deposits.
(3) Mortgage-Backed Securities
The principal balance, amortized cost and estimated market values of
mortgage-backed securities were as follows:
<TABLE>
<CAPTION>
Principal Unamortized Unearned Amortized Fair
Balance Premiums Discounts Cost Value
------- -------- --------- ---- -----
<S> <C> <C> <C> <C> <C>
At December 31, 1996: (In thousands)
Securities held to maturity:
FHLMC certificates..................$ 9,505 3 10 9,498 9,752
GNMA certificates................... 9,520 1 41 9,480 9,791
FNMA certificates................... 5,561 - 3 5,558 5,637
Collateralized mortgage
obligations..................... 22,365 7 16 22,356 22,216
-------- -- -- ------ ------
$ 46,951 11 70 46,892 47,396
======== == == ====== ======
Securities available for sale:
FHLMC certificates.................. 5,081 4 2 5,083 4,995
FNMA certificates................... 1,973 20 - 1,993 1,998
Collateralized mortgage
obligations..................... 11,933 20 21 11,932 11,851
-------- -- -- ------ ------
$ 18,987 44 23 19,008 18,844
======== == == ====== ======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Principal Unamortized Unearned Amortized Fair
Balance Premiums Discounts Cost Value
------- -------- --------- ---- -----
<S> <C> <C> <C> <C> <C>
(In thousands)
At December 31, 1995:
Securities held to maturity:
FHLMC certificates..................$ 12,963 5 14 12,954 13,122
GNMA certificates................... 11,237 3 50 11,190 11,503
FNMA certificates................... 7,140 - 6 7,134 7,175
Collateralized mortgage
obligations..................... 43,661 38 52 43,647 43,457
-------- -- -- ------ ------
$ 75,001 46 122 74,925 75,257
======== == === ====== ======
Securities available for sale:
FHLMC certificates.................. 5,999 8 5 6,002 5,990
FNMA certificates................... 1,272 - - 1,272 1,284
Collateralized mortgage
obligations..................... 11,724 33 35 11,722 11,684
-------- -- -- ------ ------
$ 18,995 41 40 18,996 18,958
======== == == ====== ======
</TABLE>
The amortized cost, gross unrealized gains and losses and estimated market
values of mortgage-backed securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
At December 31, 1996: (In thousands)
<S> <C> <C> <C> <C>
Securities held to maturity:
FHLMC certificates.................................. $ 9,498 268 14 9,752
GNMA certificates................................... 9,480 315 4 9,791
FNMA certificates................................... 5,558 86 7 5,637
Collateralized mortgage
obligations..................................... 22,356 8 148 22,216
-------- --- --- ------
$ 46,892 677 173 47,396
======== === === ======
Securities available for sale:
FHLMC certificates.................................. 5,083 8 96 4,995
FNMA certificates................................... 1,993 24 19 1,998
Collateralized mortgage
obligations..................................... 11,932 - 81 11,851
-------- --- --- ------
$ 19,008 32 196 18,844
======== === === ======
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
At December 31, 1995:
<S> <C> <C> <C> <C>
Securities held to maturity:
FHLMC certificates.................................. 12,954 168 - 13,122
GNMA certificates................................... 11,190 314 1 11,503
FNMA certificates................................... 7,134 55 14 7,175
Collateralized mortgage
obligations..................................... 43,647 24 214 43,457
-------- -- --- ------
$ 74,925 561 229 75,257
======== === === ======
Securities available for sale:
FHLMC certificates.................................. 6,002 28 40 5,990
FNMA certificates................................... 1,272 12 - 1,284
Collateralized mortgage
obligations..................................... 11,722 35 73 11,684
-------- -- --- ------
$ 18,996 75 113 18,958
======== == === ======
</TABLE>
There were no sales of mortgage-backed securities during the years ended
December 31, 1996, 1995 and 1994.
The Company's portfolio of mortgage-backed securities include collateralized
mortgage obligations (CMOs). CMOs are generally divided into tranches
whereby principal repayments from the underlying mortgages are used
sequentially to retire the securities according to the priority of the
tranches. The Company invests in the following collateralized mortgage
obligation tranches: sequential, planned amortization class, targeted
amortization class or support or companion floating-rate tranches. Such
tranches have stated maturities ranging from 1-28 years; however, because of
prepayments, the expected weighted average life of these securities at
December 31, 1996 is approximately 2.1 years. The majority of the CMOs owned
by the Company are insured or guaranteed, either directly or indirectly,
through mortgage-backed securities underlying the obligations by either the
FNMA, FHLMC or GNMA. Depending on the amount of the Company's
available-for-sale mortgage-backed securities, fluctuations in the interest
rate environment and other factors, the Company may experience material
effects on its capital resources due to categorizing these securities as
available for sale. The Company's CMOs may be subject to price movements
which typically result from prepayment on the underlying obligations. The
Company's CMOs have coupon rates ranging from 4.00% to 7.51% and had a
weighted average rate of 5.91% at December 31, 1996. The Company purchases
only CMOs rated AA or better by nationally recognized rating services.
32
<PAGE>
(4) Loans Receivable
The components of loans were as follows:
<TABLE>
<CAPTION>
At December 31,
1996 1995
---- ----
(In thousands)
<S> <C> <C>
First mortgage loans secured by:
One-to-four-family residential............................................. $ 191,788 159,170
Construction and land...................................................... 5,489 5,343
Multi-family units......................................................... 4,180 3,098
Commercial real estate, churches and other................................. 13,565 6,654
Consumer loans................................................................. 21,016 13,375
Other loans.................................................................... 883 1,118
--------- -------
Subtotal............................................................... 236,921 188,758
Undisbursed portion of loans in process.................................... (8,007) (4,267)
Net deferred loan costs (fees)............................................. 97 (66)
Allowance for loan losses.................................................. (1,063) (977)
--------- -------
Loans receivable, net.................................................. $ 227,948 183,448
========= =======
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Balance at January 1.............................................. $ 977 869 735
Loans charged off................................................. (21) (17) (4)
Provision for loan losses......................................... 107 125 138
------- --- ---
Balance at December 31............................................ $ 1,063 977 869
======= === ===
</TABLE>
There were no impaired loans recognized under SFAS 114 and 118 during the
years ended December 31, 1996 and 1995.
The Company originates or purchases nonresidential real property loans.
These loans are considered by management to be of somewhat greater risk of
uncollectibility due to the dependency on income production or future
development of the real estate. Nearly all of the Company's real property
loans were collateralized by real property in Lake and Sumter Counties,
Florida.
Nonaccrual loans at December 31, 1996 and 1995 totaled $666,000 and
$174,000, respectively. For the year ended December 31, 1996, interest
income on loans would have been increased approximately $23,000 if the
interest on nonaccrual loans at December 31, 1996 had been recorded under
the original terms of such loans. All of the nonaccrual loans at December
31, 1996 were first-mortgage, single-family residential loans or consumer
loans. There have been no loans restructured during any of the periods
presented.
33
<PAGE>
(5) Premises and Equipment
Components of properties and equipment were as follows:
<TABLE>
<CAPTION>
At December 31,
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Cost:
Land....................................................................... $ 1,754 1,378
Building and improvements.................................................. 4,041 4,045
Furniture and equipment.................................................... 2,145 1,974
Construction in progress................................................... 112 19
------- -----
Total cost............................................................. 8,052 7,416
Less accumulated depreciation.................................................. 2,908 2,599
------- -----
Net book value............................................................. $ 5,144 4,817
======= =====
</TABLE>
Certain company facilities are leased under various operating leases. Rental
expense was $22,000 in 1996. No related rental expense was incurred during
1995 and 1994. At December 31, 1996, future minimum rental commitments under
noncancellable leases were as follows (in thousands):
Year Ending
December 31, Amount
------------ ------
1997............................... $ 43
1998............................... 46
1999............................... 46
2000............................... 31
2001............................... 8
-----
$ 174
=====
(6) Deposits
The aggregate amount of short-term jumbo CDs, each with a minimum
denomination of $100,000, was approximately $9.0 million and $8.3 million in
1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of CDs were as follows (in
thousands):
1997.............................. $ 135,579
1998.............................. 55,513
1999.............................. 9,065
2000.............................. 9,879
2001 and thereafter............... 1,910
---------
$ 211,946
=========
34
<PAGE>
(7) Advances from Federal Home Loan Bank and Other Borrowings
The $150,000 community investment fund advance outstanding at December 31,
1996 and 1995 bears interest at 7.17% and matures February 28, 1997. This
advance was obtained in accordance with the Community Reinvestment Act to
provide lower interest rate financing to developers of low-income housing.
The Savings Bank is required by its collateral agreement with the Federal
Home Loan Bank of Atlanta ("FHLB") to maintain qualifying first mortgage
loans in an amount equal to at least 150% of the advance as collateral. The
Savings Bank has also pledged its FHLB stock for such advances.
The Savings Bank also has $60 million of credit availability from the FHLB
under the same collateral conditions discussed above. The Savings Bank did
not draw funds on this line of credit at any time during the years ended
December 31, 1996 and 1995.
Mortgage-backed securities sold under dollar reverse repurchase agreements
were delivered to the broker-dealers who arranged the transactions. The
broker-dealers may have sold, loaned, or otherwise disposed of such
securities to other parties in the normal course of their operations, and
have agreed to resell to the Company substantially identical securities at
the maturities of the agreements. The agreements at December 31, 1996 mature
within forty-five days.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Average balance during the year........................................... $ 849 470
======= =====
Average interest rate during the year..................................... 5.65% 6.20%
======= =====
Maximum month-end balance
during the year....................................................... $ 8,048 2,031
======= =====
Mortgage-backed securities underlying the agreements at year end:
Carrying value........................................................ $ 8,245 -
======= =====
Fair value............................................................ $ 8,237 -
======= =====
</TABLE>
(8) Income Taxes
The Holding Company and its subsidiaries file a consolidated federal income
tax return. Income taxes are allocated proportionally to the Holding Company
and each of the subsidiaries as though separate income tax returns were
filed.
35
<PAGE>
The income tax provision is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current .............................. $ 1,594 1,776 2,213
Deferred.............................. (116) 152 (265)
------- ----- -----
$ 1,478 1,928 1,948
======= ===== =====
</TABLE>
The effective tax rate on income before income taxes differs from the U.S.
statutory rate of 34%. The following summary reconciles taxes at the U.S.
statutory rate with the effective rates:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ------------------
Amount % Amount % Amount %
---------------------- ---------------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxes on income at U.S.
statutory rate........... $ 1,245 34.0% $ 1,707 34.0% $ 1,876 34.0%
State income taxes, net of
federal tax benefit...... 131 3.6 181 3.6 200 3.6
Other - net.................. 102 2.8 40 .8 (128) (2.3)
------- ---- ------- ---- ------- ----
Taxes on income at
effective rates.......... $ 1,478 40.4% $ 1,928 38.4% $ 1,948 35.3%
======= ==== ======= ==== ======= ====
</TABLE>
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that gave rise to significant portions
of the deferred tax liability relate to the following:
<TABLE>
<CAPTION>
At December 31,
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred loan fees.................................................. $ 111 201
Bad debt expense.................................................... 501 559
FHLB stock dividends................................................ 304 304
Depreciation........................................................ 186 151
Certain accrued interest............................................ 24 34
Other............................................................... 128 93
----- -----
Gross deferred tax liabilities.......................................... 1,254 1,342
----- -----
Deferred tax assets:
Unrealized loss on securities available for sale.................... 116 57
Employee stock option plan.......................................... 208 180
----- -----
Gross deferred tax assets............................................... 324 237
----- -----
Net deferred tax liabilities............................................ $ 930 1,105
======= =====
</TABLE>
36
<PAGE>
Retained earnings at December 31, 1996 and 1995 includes approximately
$5,810,000 for which no deferred federal income tax liability has been
recognized. This amount represents an allocation of income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments arising from
carryback of net operating losses would create income for tax purposes only,
which would be subject to the then current corporate income tax rate. The
unrecorded deferred income tax liability on the above amount was
approximately $2,186,000 at December 31, 1996 and 1995.
The Small Business Job Protection Act of 1996 (the "1996 Act") enacted on
August 2, 1996 requires savings institutions, such as the Savings Bank, to
recapture certain portions of their accumulated bad debt reserves, and
eliminated the Percentage of Taxable Income Method of accounting for bad
debts for tax purposes. The Savings Bank will be required to change its
method of accounting for bad debts for tax purposes effective January 1,
1996. In addition, the Savings Bank will be required to recapture the excess
of its bad debt reserves at December 31, 1995 over its base year reserves at
December 31, 1987, ratably over a six-year period beginning in 1996. At
December 31, 1996, the Savings Bank had approximately $900,000 of deferred
tax liabilities recorded for the recapture of its excess bad debt reserves.
As provided under the 1996 Act, the Savings Bank may defer the recapture of
the excess reserves for tax purposes for each of two successive taxable
years in which the Savings Bank originates a defined minimum level of
certain residential loans. Management believes that the Savings Bank will be
able to originate such minimum levels, and accordingly expects to defer the
recapture of the excess reserves for the two years allowed under the 1996
Act.
(9) Pension Plan
Prior to 1996, the Company participated in a multi-employer defined benefit
pension plan (the "Pension Plan") which covered substantially all of its
employees. The Company's funding policy with respect to the Pension Plan was
to make an annual contribution determined by the Pension Plan's actuaries
that would not be less than the minimum required contribution, nor greater
than the maximum federal income tax deductible limit. The Company's
contributions for the Pension Plan for the years ended December 31, 1995 and
1994 were $65,000 and $31,000, respectively. During 1996, the Company
decided to withdraw from participation in the Pension Plan, and accordingly,
participants' benefits were frozen and participants became fully vested at
that date. The Company did not make a contribution to the Pension Plan for
1996.
In connection with the above, the Company adopted a new defined contribution
profit sharing 401(k) plan (the "401(k) Plan") effective April 1, 1996. All
employees who have met a minimum service requirement (1,000 hours of service
in a twelve-month period) may participate in the Plan. Under the 401(k)
Plan, a participant may elect to contribute up to 15% of their annual
compensation, subject to IRS limitations on total annual contributions. The
Company will make contributions to the 401(k) Plan on a monthly basis at two
percent of participants' compensation. Contributions to the 401(k) Plan for
the year ended December 31, 1996 were $23,000.
<PAGE>
(10) Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments are commitments to extend credit and may
involve, to varying degrees, elements of credit and interest-rate risk in
excess of the amount recognized in the consolidated balance sheet. The
contract amounts of these instruments reflect the extent of involvement the
Company has in these financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments as it does for
on-balance-sheet instruments.
37
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of
credit is based on management's credit evaluation of the counterparty.
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.........................$ 10,157 10,157 13,929 13,929
Investment securities............................. 32,832 32,865 25,265 25,296
Mortgage-backed securities........................ 65,736 66,240 93,883 94,215
Loans receivable.................................. 227,948 224,177 183,448 186,360
Accrued interest receivable....................... 2,019 2,019 1,946 1,946
Federal Home Loan Bank stock...................... 1,939 1,939 1,928 1,928
Financial liabilities:
Deposit liabilities............................... 282,664 284,034 267,704 270,660
Advance from FHLB................................. 150 150 150 152
Securities sold under agreements
to repurchase................................. 8,048 8,048 - -
</TABLE>
A summary of the notional amounts of the Company's financial instruments
which approximates fair value, with off-balance-sheet risk at December 31,
1996, follows-
Notional
Amount
------
(in thousands)
Commitments to extend credit.............. $ 4,376
=======
(11) Significant Group Concentration of Credit Risk
The Company grants real estate and consumer loans to customers primarily in
the State of Florida with the majority of such loans in the Lake and Sumter
County area. Therefore, the Company's exposure to credit risk is
significantly affected by changes in the economy of the Lake and Sumter
County area.
The contractual amounts of credit related financial instruments such as
commitments to extend credit represent the amounts of potential accounting
loss should the contract be fully drawn upon, the customer default and the
value of any existing collateral become worthless.
38
<PAGE>
(12) Related Parties
Loans to directors and executive officers of the Company, which were made
at market rates, were made in the ordinary course of business and did not
involve more than normal risk of collectibility or present other
unfavorable features. Activity in loans to directors and executive officers
were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Beginning balance.......................................................... $ 1,038 541
Amounts related to new officers and directors.............................. - 402
Loans originated........................................................... 111 226
Principal repayments....................................................... (119) (131)
------- -----
Ending balance......................................................... $ 1,030 1,038
======= =====
</TABLE>
(13) Commitments and Contingencies
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is
a defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the consolidated financial condition of
the Company.
(14) Restrictions on Retained Earnings
The Savings Bank is subject to certain restrictions on the amount of
dividends that it may declare without prior regulatory approval. At December
31, 1996, approximately $15 million of retained earnings were available for
dividend declaration without prior regulatory approval.
(15) Regulatory Matters
The Savings Bank is subject to various regulatory capital requirement
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Savings Bank must meet specific capital guidelines that involve
quantitative measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Savings Bank's capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December 31,
1996, that the Savings Bank meets all capital adequacy requirements to which
it is subject.
As of December 31, 1996, the most recent notification from the OTS
categorized the Savings Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Savings Bank must maintain minimum tangible, tier I (core),
tier I (risk-based) and total risk-based capital ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the institution's category.
39
<PAGE>
The Savings Bank's actual capital amounts and ratios at December 31, 1996
are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized
For Capital For Prompt
Adequacy Corrective Action
Actual Purposes Provisions
----------------- ----------------- -----------------
Ratio Amount Ratio Amount Ratio Amount
----- ------ ----- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity,
and ratio to total
assets..................... 12.05% $ 41,731
Less: investment in
nonincludable
subsidiary................. (201)
Add back: unrealized loss on
available-for-sale
securities................. 121
---
Tangible capital,
and ratio to adjusted
total assets............... 12.02% $ 41,651 1.5% $ 5,198
========= ========
Tier 1 (core) capital, and
ratio to adjusted total
assets..................... 12.02% $ 41,651 3.0% $ 10,395 5.0% $ 17,326
========= ======== ========
Tier 1 capital, and ratio
to risk-weighted assets.... 26.29% 41,651 4.0% $ 6,338 6.0% $ 9,507
======== ========
Tier 2 capital (allowance for
loan losses)............... 1,063
-----
Total risk-based capital,
and ratio to risk-
weighted assets............ 26.96% $ 42,714 8.0% $ 12,676 10.0% $ 15,846
========= ======== ========
Total assets................... $ 346,442
=========
Adjusted total assets.......... $ 346,511
=========
Risk-weighted assets........... $ 158,456
=========
</TABLE>
40
<PAGE>
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF member institutions, including
the Savings Bank, to recapitalize the SAIF and spread the obligations for
payments of Financing Corporation ("FICO") bonds across all SAIF and BIF
members. The FDIC special assessment levied amounted to 65.7 basis points on
SAIF assessable deposits held as of March 31, 1995. The special assessment
was recognized in the third quarter and is tax deductible. The Savings Bank
recorded a charge of $1.7 million before taxes as a result of the FDIC
special assessment. That legislation eliminated the substantial disparity
between the amount that BIF and SAIF members had been paying for deposit
insurance premiums.
Beginning on January 1, 1997, BIF members will pay a portion of the FICO
payment equal to 1.3 basis points on BIF-insured deposits, compared to 6.48
basis points payable by SAIF members on SAIF-insured deposits, and will pay
a pro rata share of the FICO payment on the earlier of January 1, 2000 or
the date upon which the last savings association, such as the Savings Bank,
ceases to exist. The legislation also requires BIF and SAIF to be merged by
January 1, 1999 provided that subsequent legislation is adopted to eliminate
the savings association charter and no savings associations remain as of
that time.
The FDIC recently lowered SAIF assessments to a range comparable to those of
BIF members, although SAIF members will continue to pay the higher FICO
payments described above. Management cannot predict the level of FDIC
insurance assessments on an ongoing basis or whether the BIF and SAIF will
eventually be merged.
(16) Conversion to Stock Savings Bank
The Savings Bank successfully completed a conversion from a federally
chartered mutual savings association to a federally chartered stock savings
bank on January 4, 1994 pursuant to the Plan of Conversion adopted by the
Savings Bank's Board of Directors on June 17, 1993 and subsequently approved
by regulatory authorities and members of the Bank. FFLC Bancorp, Inc. was
created as the holding company for the Savings Bank as part of this
conversion, generating proceeds of $23.3 million (net of shares purchased by
the Savings Bank for employee stock incentive plans) from the sale of
2,761,819 shares of stock at the price of $10 per share in a subscription
and community offering.
The Plan of Conversion provided for the establishment of a Liquidation
Account equal to the retained income of the Savings Bank as of September 30,
1993 (the date of the most recent financial statement presented in the final
conversion prospectus). The Liquidation Account is established to provide a
limited priority claim to the assets of the Savings Bank to qualifying
depositors as of September 30, 1992 (Eligible Account Holders) who continue
to maintain deposits in the Savings Bank after conversion. In the unlikely
event of a complete liquidation of the Savings Bank, and only in such event,
each Eligible Account Holder would receive from the Liquidation Account a
liquidation distribution based on their proportionate share of the then
total remaining qualifying deposits.
Current regulations allow the Savings Bank to pay dividends on its stock
after the conversion if its regulatory capital would not thereby be reduced
below the amount then required for the aforementioned Liquidation Account.
Also, capital distribution regulations limit the Savings Bank's ability to
make capital distributions which include dividends, stock redemptions and
repurchases, cash-out mergers, interest payments on certain convertible debt
and other transactions charged to the capital account based on their capital
level and supervisory condition. Federal regulations also preclude any
repurchase of the stock by the Savings Bank or its holding company for three
years after conversion except for purchases of qualifying shares of a
director and repurchases pursuant to an offer made on a pro rata basis to
all stockholders and with prior approval of the Office of Thrift Supervision
or pursuant to an open-market stock repurchase program that complies with
certain regulatory criteria. See also Note 19 for information regarding the
Savings Bank's Stock Repurchase Program.
41
<PAGE>
(17) Stock Benefit Plans
During 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 123 applies to stock-based compensation under the
Company's incentive stock option plan (the "Option Plan") and under the
Company's Recognition and Retention Plan discussed below. As allowed by SFAS
No. 123, the Company elected to continue to measure compensation cost for
the options or shares granted under either plan using the intrinsic value
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS No. 123 does not apply to the Employee Stock
Ownership Plan discussed below.
During the years ended December 31, 1996 and 1995, 5,000 and 3,021 options
were granted under the Option Plan, and 3,600 and 2,709 shares were awarded
under the Recognition and Retention Plan. If compensation cost for the
Option Plan and the Recognition and Retention Plan had been determined based
on the fair value of the awards at the grant date, using the fair value
method defined in SFAS No. 123, the Company's net income and earnings per
share for 1996 and 1995 would not have been materially reduced.
Stock Option Plan. During 1993, the Company adopted and the shareholders
approved the Option Plan. On January 4, 1994, upon conversion of the Savings
Bank to a stock association, stock options for 276,182 common shares were
authorized to be granted to directors, officers and employees of the Savings
Bank including 39,801 shares reserved for future directors, officers and
employees. Shares granted under the Option Plan are exercisable at the
market price at the date of grant. Such incentive stock options granted to
officers and employees are exercisable in three equal annual installments,
with the first installment becoming exercisable one year from the date of
grant. Options granted to outside directors are exercisable immediately, but
any common shares obtained from exercise of the options may not be sold
prior to one year from the date of grant. All options expire at the earlier
of ten years from the date of grant or one year following the date which the
outside director, officer or employee ceases to serve in such capacity. At
December 31, 1996, the Company is authorized to grant options for future
directors, officers and employees for 41,114 shares.
<PAGE>
The following is a summary of option transactions:
<TABLE>
<CAPTION>
Option
Number Prices Per
of Shares Shares
--------- ------
<S> <C> <C> <C>
Granted.............................................................. 237,881 $10.00-13.50
Forfeited............................................................ (8,500) $10.00-13.50
-------
Outstanding, December 31, 1994....................................... 229,381 $10.00
Granted.............................................................. 3,021 $15.88
Forfeited............................................................ (667) $10.00
Exercised............................................................ (7,581) $10.00
-------
Outstanding, December 31, 1995....................................... 224,154 $10.00-15.88
Granted.............................................................. 5,000 $20.00
Forfeited............................................................ (1,667) $10.00
Exercised............................................................ (7,993) $10.00
-------
Outstanding, December 31, 1996....................................... 219,494 $10.00-20.00
=======
</TABLE>
42
<PAGE>
Employee Stock Ownership Plan. The Company sponsors a leveraged ESOP that
covers eligible employees who have a twelve-month period of employment with
the Savings Bank during which they worked at least 1,000 hours and who have
attained age 21. The Savings Bank makes quarterly contributions to the ESOP
equal to the ESOP's debt service. The ESOP Trust purchased 220,945 shares of
common stock in the Company's initial public offering with the proceeds from
a loan from the Company. This loan bears interest at a fixed-rate of six
percent with principal and interest payable in equal quarterly installments
over seven years. The ESOP shares initially were pledged as collateral for
its debt. As the debt is repaid, shares are released from collateral and
allocated to active employees based on the proportion of debt service paid
during the year. The Company accounts for its ESOP in accordance with
Statement of Position 93-6. Accordingly, the debt of the ESOP is recorded as
debt and the cost of the shares pledged as collateral are reported as a
contra equity account. As shares are released from collateral, the Company
records compensation expense, and an offsetting credit to capital, equal to
the current market price of the shares, and the shares become outstanding
for earnings per share computations. Dividends on all ESOP shares are
recorded as compensation expense as it is management's intention to allocate
the dividends along with the shares when allocated. Compensation expense for
the years ended December 31, 1996, 1995 and 1994 included the following ESOP
related costs:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Amortization of the original cost, $10 per share............................ $ 315 315 315
Market appreciation of the FFLC shares...................................... 265 242 160
Dividends on ESOP shares.................................................... 60 56 39
----- --- ---
Total................................................................... $ 640 613 514
===== === ===
</TABLE>
The ESOP shares were as follows:
<TABLE>
<CAPTION>
At December 31,
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Allocated shares and shares released for allocation.................... $ 91,731 62,070
Unreleased shares...................................................... 126,254 157,817
--------- -------
Total ESOP shares...................................................... 217,985 219,887
========= =======
Fair value of unreleased shares........................................ $ 2,714 2,959
========= =======
</TABLE>
Recognition and Retention Plan. The Company adopted, and the shareholders
approved, an RRP for directors, officers and employees to enable the Savings
Bank to attract and retain experienced and capable personnel. On January 4,
1994, the conversion date, 110,473 shares of common stock were purchased for
the RRP which included 4,840 shares reserved for future directors, officers
and employees. The shares are granted in the form of restricted stock to be
earned in three equal annual installments beginning April 4, 1995. The RRP
shares purchased in the conversion initially are excluded from stockholders'
equity. The Company will recognize compensation expense in the amount of the
fair market value of the common stock at the grant date of $10 per share,
pro rata over the years during which the shares are earned and payable and
is recorded as a credit to shareholders' equity. Compensation expense
attributable to the RRP amounted to $368,000 in 1996, 1995 and 1994. The
shares are entitled to all voting and other shareholder rights, except that
the shares, while restricted, cannot be sold, pledged or otherwise disposed
of, and are required to be held in escrow.
43
<PAGE>
If a holder of restricted stock under the RRP terminated employment for
reasons other than death, disability, retirement or change of control in the
Company, such employee forfeits all rights to any allocated shares which are
still restricted. If termination is caused by death, disability, retirement
or change in control of the Company, all allocated shares become
unrestricted. Forfeitures are reallocated to eligible participants annually.
At December 31, 1996, 3,963 shares remain reserved for future directors,
officers and employees.
(18) Parent Company Only Financial Statements
Condensed financial statements of the Holding Company as of and for the
years ended December 31, 1996 and 1995 are presented below. Amounts shown as
investment in subsidiary, loans to subsidiary and equity in earnings of
subsidiary are eliminated in consolidation.
<TABLE>
<CAPTION>
Condensed Balance Sheets
At December 31,
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Assets
Cash, deposited with subsidiary............................................ $ 645 1,129
Investment in subsidiary................................................... 41,731 41,667
Loans to subsidiary........................................................ 11,262 12,578
Other assets............................................................... - 6
-------- ------
Total assets....................................................... $ 53,638 55,380
======== ======
Liabilities and Stockholders' Equity
Current income taxes....................................................... - 4
Accrued expense and other liabilities...................................... 12 16
Stockholders' equity....................................................... 53,626 55,360
-------- ------
Total liabilities and stockholders' equity......................... $ 53,638 55,380
======== ======
<PAGE>
<CAPTION>
Condensed Statements of Income
Year Ended December 31,
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues..................................................................... $ 772 871 621
Expenses..................................................................... 396 432 317
------- ----- -----
Income before earnings of subsidiary................................. 376 439 304
Earnings of subsidiary............................................... 1,808 2,654 3,266
------- ----- -----
Net income $ 2,184 3,093 3,570
======= ===== =====
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Year Ended December 31,
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 2,184 3,093 3,570
Adjustments to reconcile net income to net cash
provided by operations:
Equity in earnings of subsidiary.......................................... (1,808) (2,654) (3,266)
Decrease (increase) in other assets....................................... 6 8 (14)
(Decrease) increase in current income taxes payable....................... (4) (27) 30
(Decrease) increase in accrued expenses and
other liabilities..................................................... (4) 7 9
------ ------ ------
Net cash provided by operating activities............................. 374 427 329
------ ------ ------
Cash flows from investing activities:
Purchase of common stock of subsidiary.................................... - - (13,295)
Loans to subsidiary....................................................... - - (13,209)
Repayment of loan to subsidiary........................................... 1,316 316 316
------ ------ ------
Net cash provided by investing activities............................. 1,316 316 (26,188)
------ ------ ------
Cash flows from financing activities:
Purchase of treasury stock................................................ (3,922) (2,373) -
Proceeds from sale of common stock........................................ 80 76 26,590
Cash dividends paid....................................................... (986) (817) (497)
Cash dividends received................................................... 2,654 3,266 -
------ ------ ------
Net cash (used in) provided by financing activities................... (2,174) 152 26,093
------ ------ ------
Net (decrease) increase in cash................................................... (484) 895 234
Cash at beginning of year......................................................... 1,129 234 -
------ ------ ------
Cash at end of year............................................................... $ 645 1,129 234
======= ====== =======
</TABLE>
(19) Stock Repurchase Program
In December 1994, the Company's Board of Directors approved a Stock
Repurchase Program ("Program") which allows the Company to acquire its
outstanding common stock in the open market. The Company subsequently
received OTS approval for the Program, and began repurchasing shares early
in 1995. Under the Program, the Company was limited to repurchasing no more
than 5%, or approximately 138,000 shares of its publicly-held common stock
over a one-year period ending January 16, 1996. During the year ended
December 31, 1995, 132,044 shares or 95.6% of the maximum number of shares
approved under the Program were repurchased.
45
<PAGE>
In January and August 1996, the Company's Board of Directors approved
programs which allow the Company to acquire additional common stock in the
open market. The Company received OTS approval for the programs and began
repurchasing shares within one month of approval. During the year ended
December 31, 1996, all 132,000 shares approved under the January 1996
program were repurchased. Under the August 1996 program, the Company is
limited to repurchasing no more than 5% or approximately 126,000 shares of
its publicly held common stock over a one year period ending September 25,
1997. During the year ended December 31, 1996, 76,000 shares or 60.3% of the
maximum number of shares approved under that program were repurchased.
(20) Quarterly Financial Data (unaudited)
The following tables present summarized quarterly data (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest income ........................................ $5,946 5,939 6,086 6,247 24,218
Interest expense ....................................... 3,215 3,168 3,240 3,336 12,959
------ ------ ------ ------ ------
Net interest income .................................... 2,731 2,771 2,846 2,911 11,259
Provision for loan losses .............................. 14 15 34 44 107
------ ------ ------ ------ ------
Net interest income after provision
for loan losses .................................... 2,717 2,756 2,812 2,867 11,152
------ ------ ------ ------ ------
Other income ........................................... 182 195 208 224 809
Other expense .......................................... 1,563 1,636 3,334 1,766 8,299
------ ------ ------ ------ ------
Income (loss) before income taxes ...................... 1,336 1,315 (314) 1,325 3,662
Income taxes (credit) .................................. 525 519 (91) 525 1,478
------ ------ ------ ------ ------
Net income (loss) ...................................... $ 811 796 (223) 800 2,184
====== ====== ====== ====== ======
Net income (loss) per common share ..................... $ .31 .31 (.09) .32 .85
====== ====== ====== ====== ======
<PAGE>
<CAPTION>
Year Ended December 31, 1995
-------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest income ........................................ $5,372 5,569 5,728 5,824 22,493
Interest expense ....................................... 2,709 3,041 3,200 3,233 12,183
------ ------ ------ ------ ------
Net interest income .................................... 2,663 2,528 2,528 2,591 10,310
Provision for loan losses .............................. 30 30 33 31 124
------ ------ ------ ------ ------
Net interest income after provision
for loan losses .................................... 2,633 2,498 2,495 2,560 10,186
------ ------ ------ ------ ------
Other income ........................................... 157 171 163 218 709
Other expense .......................................... 1,364 1,490 1,433 1,587 5,874
------ ------ ------ ------ ------
Income before income taxes ............................. 1,426 1,179 1,225 1,191 5,021
Income taxes ........................................... 534 442 457 495 1,928
------ ------ ------ ------ ------
Net income ............................................. $ 892 737 768 696 3,093
====== ====== ====== ====== ======
Net income per common share ............................ $ .33 .28 .29 .26 1.16
====== ====== ====== ====== ======
</TABLE>
46
<PAGE>
Independent Auditors' Report
The Board of Directors
FFLC Bancorp, Inc.
Leesburg, Florida:
We have audited the accompanying consolidated balance sheets of FFLC Bancorp,
Inc. and Subsidiary (the "Company") (the parent company of First Federal Savings
Bank of Lake County) as of December 31, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
HACKER, JOHNSON, COHEN & GRIEB
Orlando, Florida
January 10, 1997
47
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
DIRECTORS AND OFFICERS
Directors: Occupation
- ---------- ----------
<S> <C>
James R. Gregg President, Jarol Company
Chairman of the Board
Joseph J. Junod Retired, General Manager, Avesta andvik Tube
Vice Chairman
James P. Logan President/Owner, Logan Sitework Contractors, Inc.
Ted R. Ostrander, Jr. President, Lassiter-Ware, Inc.
Claron D. Wagner President, Woody Wagner, Inc.
Stephen T. Kurtz President, FFLC Bancorp, Inc. & Subsidiary
Paul K. Mueller Executive Vice President, FFLC Bancorp, Inc. &
Subsidiary
Advisory Directors:
- -------------------
Frank L. Cogburn Retired, Past President, First Federal of Lake County
James H. Herlong General Partner, A.S. Herlong, Ltd.
Horace D. Robuck President, Romac Lumber
Officers:
- ---------
Stephen T. Kurtz
President and
Chief Executive Officer
Paul K. Mueller
Executive Vice President,
Chief Operating Officer and
Treasurer
Dwight L. Hart
Senior Vice President
Sandra L. Rutschow
Vice President and Secretary
Judith M. Maddox
Vice President
Lawrence E. Hoag
Vice President
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
FIRST FEDERAL SAVINGS BANK
OF LAKE COUNTY
DIRECTORS AND OFFICERS
<S> <C>
DIRECTORS
James R. Gregg Doris E. Hyatt
Chairman of the Board Assistant Secretary
Joseph J. Junod Susan L. Berkebile
Vice Chairman Vice President
Clermont Branch Manager
James P. Logan
Ted R. Ostrander, Jr. Donna L. Boyett
Claron D. Wagner Assistant Vice President
Stephen T. Kurtz Wildwood Branch Manager
Paul K. Mueller
Carlos E. Colon
Advisory Directors Assistant Vice President
Fruitland Park Branch Manager
Frank L. Cogburn
Horace D. Robuck Vickie S. Baxter
James H. Herlong Assistant Vice President
Eustis Branch Manager
OFFICERS Pamela S. Hayton
Main Street Branch Manager
Stephen T. Kurtz
President Connie J. Rhode
Chief Executive Officer Lake Square Office Manager
Paul K. Mueller Sandra L. Seaton
Executive Vice President Assistant Vice President
Chief Operating Officer and Treasurer South Leesburg Branch Manager
Area Loan Manager
Dwight L. Hart
Senior Vice President Jay Bartholomew
Assistant Vice President
Sandra L. Rutschow Lady Lake Branch Manager
Vice President and Corporate Secretary
Jankie Dhanpat
Judith M. Maddox Assistant Vice President
Vice President SEC Reporting and Compliance Officer
Human Resource Manager
Karen Hollister
Lawrence E. Hoag Assistant Vice President
Vice President Loan Operations Manager
Deposit Accounts Manager
Charles L. Lee
Michael J. Cox Security Officer
Vice President and Area Loan Manager
Janet L. Glessner
Brian R. Hofer Marketing Officer
Vice President and Commercial Loan Officer
Dennis R. Rogers
Lynda F. Wemple Assistant Vice President
Vice President and Accounting Manager Area Loan Manager
Yvonne K. Ross Debra L. McFarlane
Vice President and Loan Officer Main Office Branch Manager
Brenda M. Grubb Sandra A. Rowe
Assistant Vice President Assistant Secretary and Loan Servicing Manager
Linda N. Landers Carmen C. Passwaters
Assistant Secretary Assistant Secretary
</TABLE>
49
<PAGE>
FIRST FEDERAL SAVINGS BANK OF LAKE COUNTY
is Proud of the Outstanding Service its
Employees Provide to the Community and the People it Serves
MAIN OFFICE:
Pamela Ali Leslie A. Leach
Barbara J. Boscana Charles L. Lee
Navena M. Brown Pamela J. Linville
Shu Een Chen Judith M. Maddox
Camilla R. Clark Debra L. McFarlane
Adriane M. Connelly Constance L. Merrell
Diane S. Cook Paul K. Mueller
Barbara A. Cordes Lillian Y. Niles
Jewel M. Correll Carmen C. Passwaters
Jennifer Culberson Debra L. Possee
Robert Cumm Michael J. Price
Cheryl A. Davis Yvonne K. Ross
Dawn Rene Davison Sandra A. Rowe
Jankie Dhanpat Landa A. Russell
Janene S. Dickerson Sandra L. Rutschow
Ruth E. Fielding Stephanie D. Salmon
Joan P. Gibson Sonja G. Sanders
Janet L. Glessner James Schaeffer
Jennifer L. Grovesteen Margaret M. Siegel
Brenda M. Grubb Cheryl L. Shepherd
Andrea Hanson Leigh S. Skehan
Dwight L. Hart Lynn P. Stoffel
Angela D. Hicks Tracy P. Storts
Lawrence E. Hoag Michelle Strickland
Penny M. Hollis Joyce H. Sutton
Karen L. Hollister Michelle M. Thompson
Stephanie Hodges Virginia D. Vann
Doris E. Hyatt Theresa R. Wells
Patricia B. Inman Lynda F. Wemple
Juanita F. Jackson Louise E. Whitlock
Kristina Keel Rhonda L. Carris-Wilkerson
Jennifer E. Kitchens Shirley Williams
Erin Klink Betty L. Wolcott
Stephen T. Kurtz Lisa K. Woolwine
Linda N. Landers
Cynthia M. Lay
<PAGE>
FRUITLAND PARK OFFICE: CLERMONT OFFICE:
Carlos E. Colon Susan L. Berkebile
Melissa J. Judd Donna L. Franklin
Julie Misty Weirich Linda C. Gallop
Delphine C. Williams Brenda Heisner
Brian R. Hofer
Tammy R. Imundi
LADY LAKE: Trinia C. McClendon
Glenda S. Riggs
Jay R. Bartholomew Jeanne A. Sheiman
Deede A. Dye Sharon M. Slack
Julie A. Laws
Marilyn A. Leugers EUSTIS OFFICE:
Mary E. Rutz
Patricia L. Sizemore Vickie S. Baxter
Margaret A. Slimm Bernice E. Cooper
Michael J. Cox
MAIN STREET OFFICE: Kasandra L. Curry
Peggy L. Harris
Lori Cook Hilda Lozano
Casey Giordano Veronica L. Turner
Pamela S. Hayton
Sondra Jones WILDWOOD OFFICE:
Dawn M. Loth
Donna L. Boyett
LAKE SQUARE: Suzanne E. Busenlehner
Julie Elaine Glenn
Linda J. Giggey Krystal Hammond
Arthur E. Middleton Vaneeda F. Potter
Angela Nicole Phillips Dennis R. Rogers
Connie J. Rhode Ledora Smith
Willie Lee Smith
Paula D. Williams
Wendy Williams
SOUTH LEESBURG
Amy M. Eaton
Edmund J. Laclair, Jr.
Sandra L. Seaton
Eva J. Snead
Stacey L. Wrightam
50
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,080
<INT-BEARING-DEPOSITS> 4,077
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,437
<INVESTMENTS-CARRYING> 50,131
<INVESTMENTS-MARKET> 50,667
<LOANS> 227,948
<ALLOWANCE> 1,063
<TOTAL-ASSETS> 346,442
<DEPOSITS> 282,664
<SHORT-TERM> 8,198
<LIABILITIES-OTHER> 1,954
<LONG-TERM> 0
0
0
<COMMON> 28
<OTHER-SE> 53,598
<TOTAL-LIABILITIES-AND-EQUITY> 346,442
<INTEREST-LOAN> 16,813
<INTEREST-INVEST> 7,405
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,218
<INTEREST-DEPOSIT> 12,900
<INTEREST-EXPENSE> 12,959
<INTEREST-INCOME-NET> 11,259
<LOAN-LOSSES> 107
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,299
<INCOME-PRETAX> 3,662
<INCOME-PRE-EXTRAORDINARY> 2,184
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,184
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
<YIELD-ACTUAL> 7.52
<LOANS-NON> 666
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 977
<CHARGE-OFFS> (21)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,063
<ALLOWANCE-DOMESTIC> 1,063
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
