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, 1997 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 $57,497,496 and is based upon the last sales price as quoted on
the NASDAQ Stock Market for March 9, 1998.
The Registrant had 3,742,673 shares outstanding as of March 9, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997. (Part II and IV)
2. Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders.
(Part III)
<PAGE>
INDEX
PART I Page
Item I. Description of Business
Business 3
Market Area and Competition 3
Market Risk 4
Lending Activities 4-10
Asset Quality 10-15
Investment Activities 16
Mortgage-Backed Securities 16-17
Investment Securities 17-19
Sources of Funds 20-22
Borrowings 23
Subsidiary Activities 23
Personnel 24
Regulation and Supervision 24-30
Year 2000 30
Federal and State Taxation 31-32
Item 2. Properties 33
Item 3. Legal Proceedings 34
Item 4. Submission of Matters to a Vote of Security Holders 34
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 34
Item 6. Selected Financial Data 34
Item 7. Management's Discussion and Analysis of
Financial Condition
and Results of Operations 34
Item 8. Financial Statements and Supplementary Data 34
Item 9. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure 34
PART III
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management 35
Item 13. Certain Relationships and Related Transactions 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 36
SIGNATURES 37
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business
The registrant, FFLC Bancorp, Inc. ("FFLC" or the "Company"), completed its
public offering of 4,603,032 shares (adjusted for stock split) 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, 1997, the Company had total assets of $400.2 million and
stockholders' equity of $51.4 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,
1997, the Savings Bank had total assets of $400.2 million and stockholders'
equity of $44.5 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.
3
<PAGE>
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest-rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest-rate risk exposure. The measurement of market
risk associated with financial instruments is meaningful only when all related
and offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified. Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be
found in Note 10 of Notes to Consolidated Financial Statements.
The Company's primary objective is managing interest-rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital, while adjusting the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability structure to control interest-rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact the Company's earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis. The Company does not engage in trading activities.
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, 1997, the Savings Bank's total loans outstanding were $329.0
million, of which $245.5 million or 74.6% 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, 22.6%
were fixed rate loans and 77.4% were adjustable-rate ("ARM") loans. At the same
date, commercial real estate loans and other loans on improved real estate
totaled $38.0 million, or 11.5% of the Savings Bank's total loan portfolio;
construction (excluding construction/permanent loans) and land loans totaled
$3.5 million or 1.1% of the Savings Bank's total loan portfolio; and
multi-family mortgage loans totaled $4.5 million or 1.4% of the Savings Bank's
total loan portfolio. Consumer, commercial and other loans held by the Savings
Bank, which principally consist of home equity loans, deposit, consumer,
commercial and other loans, totaled $37.5 million or 11.4% of the Savings Bank's
total loan portfolio at December 31, 1997.
4
<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>
1993 1994 1995
---------------------------------------------------------------------------
% 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 $ 107,228 82.91% $ 130,195 82.80% $ 159,170 84.32%
Construction and land 2,886 2.23% 6,332 4.03% 5,343 2.83%
Multi-family 2,160 1.67% 3,068 1.95% 3,098 1.64%
Commercial real estate 6,713 5.19% 6,153 3.91% 6,654 3.53%
-------- ------- -------- ------- ------- --------
Total mortgage
loans 118,987 92.00% 145,748 92.69% 174,265 92.32%
Consumer loans 10,352 8.00% 11,496 7.31% 14,493 7.68%
Commercial loans - - - - - -
---------- --------- ----------- --------- ---------- ---------
Total loans
receivable 129,339 100.00% 157,244 100.00% 188,758 100.00%
====== ====== ======
Less:
Loans in process 5,969 7,833 4,267
Unearned discounts,
premiums and
deferred loan fees,
net 424 256 66
Allowance for loan losses 735 869 977
-------- -------- -------
Loans receivable,
net $ 122,211 $ 148,286 $ 183,448
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1997
-------------------------------------------------
% of % of
Amount Total Amount Total
<S> <C> <C> <C> <C>
Mortgage loans:
One-to-four-family $ 191,788 80.95% $ 245,524 74.64%
Construction and land 5,489 2.32% 3,528 1.07%
Multi-family 4,180 1.76% 4,464 1.36%
Commercial real estate 13,565 5.73% 37,975 11.54%
------- ------- ------- ------
Total mortgage
loans 215,022 90.76% 291,491 88.61%
Consumer loans 21,899 9.24% 32,834 9.98%
Commercial loans - - 4,632 1.41%
--------- --------- --------- -------
Total loans
receivable 236,921 100.0% 328,957 100.0%
===== =====
Less:
Loans in process 8,007 12,253
Unearned discounts,
premiums and
deferred loan fees,
net (97) (333)
Allowance for loan losses 1,063 1,684
------- --------
Loans receivable, $ 227,948 $ 315,353
net ======= =======
</TABLE>
5
<PAGE>
Purchase of Mortgage Loans. The Savings Bank has, from time to time, purchased
mortgage loans originated by other lenders. At December 31, 1997, $3.7 million,
or 1.1% 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.
Funding by the correspondent eliminates 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, 1997, such loans amounted to
$2.5 million or 2.1% of total mortgage loans originated.
6
<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,
1995 1996 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of year $ 145,748 174,265 215,022
Mortgage loans originated:
One-to-four-family (1) 46,082 62,906 86,976
Construction and land 2,104 2,292 2,502
Multi-family 1,026 1,222 2,759
Commercial real estate 1,047 7,982 25,142
--------- --------- ---------
Total mortgage loans originated (1) 50,259 74,402 117,379
Mortgage loans purchased -- 2,106 --
--------- --------- ---------
Total mortgage loans originated and
purchased 50,259 76,508 117,379
Transfer of loans to real estate owned (478) (287) (444)
Principal repayments (20,113) (31,540) (37,997)
Sales of loans (1) (1,151) (3,924) (2,469)
--------- --------- ---------
At end of year $ 174,265 215,022 291,491
========= ========= =========
Consumer loans (gross):
At beginning of year 11,496 14,493 21,899
Loans originated 6,873 13,021 18,356
Principal repayments (3,876) (5,615) (7,421)
--------- --------- ---------
At end of year $ 14,493 21,899 32,834
========= ========= =========
Commercial loans (gross):
At beginning of year -- -- --
Loans originated -- -- 9,022
Principal repayments -- -- (4,390)
--------- --------- ---------
At end of year $ -- -- 4,632
========= ========= =========
</TABLE>
(1) Includes loans originated for and funded by correspondents of $1.2 million,
$2.4 million and $2.5 million for 1995, 1996 and 1997, respectively.
7
<PAGE>
Maturities of Loans. The following table shows the contractual maturities of the
Savings Bank's loan portfolio at December 31, 1997. 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 $24.0 million, $37.2 million and $49.8
million for the years ended December 31, 1995, 1996 and 1997, respectively.
<TABLE>
<CAPTION>
Mortgage Loans
------------------------
One-to- Total
Four- Commercial Consumer Loans
Family Other Loans Loans Receivable
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within 1 year $ 246 3,952 2,327 2,214 8,739
--------- --------- --------- --------- ---------
1 to 3 years 2,699 4,886 346 7,162 15,093
3 to 5 years 2,807 6,688 1,537 7,420 18,452
5 to 10 years 11,382 8,882 422 8,614 29,300
10 to 20 years 30,223 16,683 -- 7,424 54,330
Over 20 years 198,167 4,876 -- -- 203,043
--------- --------- --------- --------- ---------
Total due after 1 year 245,278 42,015 2,305 30,620 320,218
--------- --------- --------- --------- ---------
Total amounts due 245,524 45,967 4,632 32,834 328,957
Less:
Loans in process 9,267 2,982 -- 4 12,253
Unearned discounts, premiums
and deferred loan fees, net (333) -- -- -- (333)
Allowance for loan losses 747 651 57 229 1,684
--------- --------- --------- --------- ---------
Loans receivable, net $ 235,409 43,534 3,809 32,601 315,353
========= ========= ========= ========= =========
</TABLE>
<PAGE>
Loans Due After December 31, 1998. The following table sets forth at December
31, 1997 the dollar amount of all loans due or scheduled to reprice after
December 31, 1998, classified according to whether such loans have fixed or
adjustable interest rates.
<TABLE>
<CAPTION>
Due after December 31, 1998
-------------------------------------
Fixed Adjustable Total
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to-four-family $55,699 189,579 245,278
Construction and land 3,212 662 3,874
Multi-family 136 4,026 4,162
Commercial real estate 10,543 23,436 33,979
Consumer loans 26,025 4,595 30,620
Commercial loans 710 1,595 2,305
------- ------- -------
Total $96,325 223,893 320,218
======= ======= =======
</TABLE>
8
<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, 1995, 1996 and 1997, the Savings Bank's total
mortgage loan originations amounted to $50.3 million, $74.4 million and $118.1
million, respectively, of which $46.1 million, $62.9 million and $87.7 million,
respectively, were secured by one-to-four-family properties.
At December 31, 1997, 74.6% of total loans receivable consisted of
one-to-four-family residential loans, of which 77.4% 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 lifetime caps 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, 1997, $38.0
million, or 11.5% of the Savings Bank's total loan portfolio consisted of
commercial real estate loans and $4.5 million, or 1.4% 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.
Commercial Loans. As of December 31, 1997, $4.6 million or 1.4% of the Savings
Bank's total loan portfolio, consisted of commercial loans.
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,
1997, construction (excluding construction/permanent loans) and land loans
totaled $3.5 million or 1.1% of the Savings Bank's total loan portfolio.
<PAGE>
At December 31, 1997, the Savings Bank had loans in process (undisbursed loan
proceeds of construction loans) of $12.3 million. Of that amount, $9.3 million
was secured by residential mortgages and $3.0 million secured by commercial
mortgages. 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.
9
<PAGE>
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 Lending. At December 31, 1997, $32.8 million or 10.0% of the Savings
Bank's total loan portfolio consisted of consumer 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 $750,000 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 Officers of the Savings
Bank. Management has been delegated authority to approve mortgage loans, home
equity loans, home equity lines of credit and secured consumer loans up to
$750,000.
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.
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.
10
<PAGE>
At December 31, 1995, 1996 and 1997, delinquencies in the Savings Bank's loan
portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1995 At December 31, 1996
---------------------------------------- ----------------------------------------
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 6 244 1 52 3 77 8 545
Construction and land - - 3 115 - - 1 68
Multi-family - - - - - - - -
Commercial real estate - - - - - - - -
--- ----- --- ----- -- ---- --- ----
Total mortgage loans 6 244 4 167 3 77 9 613
Consumer loans 7 35 2 7 2 46 4 53
-- -- - ---- - --- -- ---
Total loans 13 279 6 174 5 123 13 666
== === = === = === == ===
Delinquent loans to total loans .15% .09% .05% .28%
==== ==== === ===
<CAPTION>
At December 31, 1997
-------------------------------------
60-89 Days 90 Days or More
-------------------- ----------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
----- -------- ----- --------
<C> <C> <C> <C>
<S>
One-to-four-family 7 341 8 240
Construction and land - - 1 2
Multi-family - - - -
Commercial real estate - - - -
--- ----- -- ---
Total mortgage loans 7 341 9 242
Consumer loans 4 24 - -
-- --- - ----
Total loans 11 365 9 242
== === = ===
Delinquent loans to total loans .11% .07%
=== ===
</TABLE>
11
<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,
-------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual mortgage loans $ 588 324 70 613 242
Nonaccrual consumer loans 18 5 104 53 --
----- ----- ----- ----- -----
Total nonperforming loans 606 329 174 666 242
Real estate owned 72 84 165 361 507
----- ----- ----- ----- -----
Total nonperforming assets $ 678 413 339 1,027 749
===== ===== ===== ===== =====
Nonperforming loans to total loans .47% .21% .09% .28% .07%
===== ===== ===== ===== =====
Total nonperforming assets to total assets .23% .13% .10% .30% .19%
===== ===== ===== ===== =====
</TABLE>
At December 31, 1997, 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 totaled
approximately $242,000, $666,000 and $174,000 at December 31, 1997, 1996, and
1995, respectively. For the year ended December 31, 1997, interest income that
would have been recorded under the original terms of nonaccrual loans at
December 31, 1997 and interest income actually recognized is summarized below:
Interest income that would have been recorded $ 21,192
Interest income recognized 11,842
------
Interest income foregone $ 9,350
======
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
<PAGE>
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.
12
<PAGE>
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" at the dates
indicated. No loans or real estate owned were classified "special mention,"
"doubtful" or "loss" at those dates.
<TABLE>
<CAPTION>
Substandard
---------------------
Number Amount
(Dollars in thousands)
<S> <C> <C>
At December 31, 1997:
Loans 26 $ 1,141
Real estate owned:
One-to-four-family properties 4 285
Other 3 222
--- ------
Total 33 $ 1,648
== =====
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
== =====
</TABLE>
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.
13
<PAGE>
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,
--------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 520 735 869 977 1,063
Provision for loan losses 250 138 124 107 649
Charge-offs:
One-to-four-family 21 2 -- 9 12
Construction and land -- -- 16 -- --
Multi-family -- -- -- -- --
Commercial real estate -- -- -- -- --
Consumer loans 14 2 -- 12 16
----- ----- ----- ----- -----
Total charge-offs by category 35 4 16 21 28
Recoveries -- -- -- -- --
----- ----- ----- ----- -----
Balance at end of year $ 735 869 977 1,063 1,684
===== ===== ===== ===== =====
</TABLE>
The following table sets forth the ratios of the Savings Bank's charge-offs and
allowances for losses for the years indicated.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net charge-offs during the year
as a percentage of average loans
outstanding during the year 0.02% - % .01% .01% .01%
Allowance for loan losses as a
percentage of total loans receivable
at end of year 0.57% 0.55% .52% .45% .51%
Allowance for loan losses as a
percentage of total nonperforming
assets at end of year 108.41% 210.41% 288.48% 103.51% 224.83%
Allowance for loan losses as a
percentage of nonperforming loans
at end of year 121.29% 264.13% 561.49% 159.61% 695.87%
</TABLE>
14
<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,
-----------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------------- ----------------- ------------------ -------------------- -----------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of year allocated to:
One-to-four-family $ 175 82.91% $ 240 82.80% $ 275 84.32% $ 302 80.95% $ 507 74.64
Construction and land 95 2.23 106 4.03 146 2.83 152 2.32 240 1.07
Multi-family 140 1.67 165 1.95 183 1.64 169 1.76 268 1.36
Commercial real estate 120 5.19 135 3.91 150 3.53 165 5.73 383 11.54
Consumer loans 205 8.00 223 7.31 223 7.68 275 9.24 229 9.98
Commercial loans - - - - - - - - 57 1.41
Total $ 735 100.00% $ 869 100.00% $ 977 100.00% $ 1,063 100.00% $ 1,684 100.00%
=== ====== === ====== === ====== ===== ====== ===== ======
</TABLE>
15
<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, 1997, the Savings Bank's mortgage-backed securities portfolio
totaled $38.3 million, or 9.6% of total assets. The weighted-average interest
rate on the total mortgage-backed securities portfolio at December 31, 1997 was
6.78%. 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 $15.3 million or 39.9% 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 7.53% and had a
weighted average yield of 6.14% at December 31, 1997.
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, 1997, the Savings Bank had $15.3 million in CMOs representing
3.8% of total assets. Of that amount, $9.1 million or 59.4% had floating rates
with caps ranging from 8.50% to 12.65% and which adjust on a monthly basis.
16
<PAGE>
Other mortgage-backed securities, net, totaled $23.0 million or 60.1% 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, 1997, the Savings Bank had mortgage-backed securities available
for sale with an aggregate carrying value of $9.3 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,
1995 1996 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
At beginning of year $ 117,003 93,883 65,736
Purchases 6,038 8,596 --
Amortization and repayments (29,883) (36,617) (27,566)
Change in unrealized loss on securities
available for sale 725 (126) 121
--------- --------- ---------
At end of year $ 93,883 65,736 38,291
========= ========= =========
</TABLE>
Investment Securities
At December 31, 1997, the Savings Bank held $20.3 million in investment
securities consisting of $7.9 million in U.S. Government and agency securities,
classified as available for sale, and $9.2 million in mutual funds, $3.0 million
in SBA-related investment securities, classified as held to maturity, and
$156,000 in other investment securities, classified as available for sale. In
addition, the Savings Bank holds $8.6 million in interest-earning deposits and
$2.3 million of FHLB of Atlanta stock.
17
<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,
----------------------------------------------------------------------
1995 1996 1997
----------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ 8,924 8,924 4,077 4,077 8,562 8,562
====== ====== ====== ====== ====== ======
FHLB stock $ 1,928 1,928 1,939 1,939 2,304 2,304
====== ====== ====== ====== ====== ======
Investment securities:
Held-to-maturity:
SBA-related investment securities $ 3,441 3,472 3,239 3,271 3,031 3,077
====== ====== ====== ====== ====== ======
Available-for-sale:
U.S. Government and
agency securities 11,475 11,392 20,208 20,176 7,965 7,937
Other investment securities 1,523 1,532 495 497 151 156
Investment in mutual funds 8,939 8,900 9,035 8,920 9,258 9,183
------ ------ ------ ------ ------ ------
Total available-for-sale $ 21,937 21,824 29,738 29,593 17,374 17,276
====== ====== ====== ====== ====== ======
</TABLE>
18
<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, 1997.
<TABLE>
<CAPTION>
Due After Due After
One Through Five Through Due After
Due Within One Year Five Years 10 Years 10 Years Total
-------------------- -------------------- ------------------- -------------------- --------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted Approximate
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHLB stock $ 2,304 7.25% $ 2,304 $ 2,304
======= ======== ========
Investment securities:
U.S. Government
and agency
obligations $ 2,000 5.66% $ 4,979 5.80% $ 986 5.93% $ - - % $ 7,965 7,937
Other investment
securities - - - - - - 3,182 6.68 3,182 3,233
Mutual funds - - - - - - 9,258 5.92 9,258 9,183
------- ---- ------- ---- ----- ---- ------- -------- -------
Total investment
securities $ 2,000 5.66% $ 4,979 5.80% $ 986 5.93% $12,440 6.11% $ 20,405 $ 20,353
======= ==== ======= ==== ===== ==== ======= ==== ======== ========
</TABLE>
19
<PAGE>
Sources of Funds
General. Repayments and maturities of mortgage-backed and investment 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, 1997, $26.6
million or 8.4% consist of individual retirement accounts ("IRAs").
The Savings Bank has maintained 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 25.2%, 25.0% and 23.8% of total deposits at December 31, 1995, 1996,
and 1997, respectively.
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, 1997 (dollars in thousands).
<TABLE>
<CAPTION>
At December 31,
1995 1996 1997
--------------------- ----------------------- -------------------------------------
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 $ 3,482 1.30% $ 4,103 1.46% $ 6,968 2.20% - %
NOW and money
market accounts 37,272 13.92 39,203 13.86 43,629 13.84 2.24
Passbook and
statement
savings 26,811 10.02 27,412 9.70 24,503 7.77 2.74
------ ------ ------- ------ ------ ----- ----
Total 67,565 25.24 70,718 25.02 75,100 23.81 2.38
------ ------ ------- ------ ------ ----- ----
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31,
1995 1996 1997
--------------------- ----------------------- -------------------------------------
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>
Certificate accounts:
1-3 months 5,866 2.19 8,204 2.90 9,834 3.12 4.86
91 days 421 0.16 518 .18 538 .17 4.35
182 day 20,565 7.68 15,904 5.63 12,171 3.86 4.75
9 months 14,593 5.45 17,173 6.07 16,554 5.25 5.51
10 months - - - - 18,791 5.95 5.76
12 months 59,925 22.38 53,577 18.96 39,975 12.67 5.22
12 month IRA 15,574 5.82 16,473 5.83 14,431 4.58 5.44
18 months 3,931 1.47 3,136 1.11 2,824 .90 5.36
20 months - - - - 23,152 7.34 5.98
24 months 19,946 7.45 46,770 16.55 60,477 19.18 5.86
30 months 15,225 5.69 10,628 3.76 8,841 2.80 5.35
60 months 44,092 16.47 39,563 13.99 32,702 10.37 5.96
------- ------ ------- ------ ------- ------ ----
Total 200,138 74.76 211,946 74.98 240,290 76,19 4.57
------- ------ ------- ------ ------- ------ ----
Total deposits $ 267,703 100.00% 282,664 100.00% 315,390 100.00% 4.83%
======= ======= ======= ====== ======= ====== ====
</TABLE>
20
<PAGE>
The following table presents the deposit activity of the Savings Bank for the
years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1995 1996 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Deposits $ 472,591 542,019 744,064
Withdrawals (465,235) (536,051) (721,501)
--------- --------- ---------
Deposits in excess of withdrawals 7,356 5,968 22,563
Interest credited on deposits 8,596 8,993 10,163
--------- --------- ---------
Total increase in deposits $ 15,952 14,961 32,726
========= ========= =========
</TABLE>
The following table presents the amount of time deposit accounts in amounts of
$100,000 or more at December 31, 1997 maturing as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Maturity Period
One month through three months $ 3,228
Over three through six months 659
Over six through 12 months 3,556
Over 12 months 4,753
------
Total $ 12,196
======
</TABLE>
21
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1995, 1996, and 1997 and the
periods to maturity of the certificate accounts outstanding at December 31,
1997.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1997
At December 31, ----------------------------------------------------------
--------------------------------- Within 1 to 2 to 3 to 4 to
1995 1996 1997 1 Year 2 Years 3 Years 4 Years 5 Years Total
--------- ------- ------- ------- ------ ------ ----- ----- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4.01% to 5.00% $ 30,297 49,542 23,215 23,215 - - - - 23,215
5.01% to 6.00% 108,867 137,394 187,028 143,947 38,960 - 1,909 2,212 187,028
6.01% to 8.00% 60,974 25,010 30,047 - 18,938 11,094 15 - 30,047
--------- ------- ------- ------- ------ ------ ----- ----- -------
$ 200,138 211,946 240,290 167,162 57,898 11,094 1,924 2,212 240,290
======= ======= ======= ======= ====== ====== ===== ===== =======
</TABLE>
22
<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. At December 31, 1997, the Savings Bank had $30.0
million in FHLB advances outstanding.
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, 1997, the Savings Bank did not have any such borrowings
outstanding.
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,
---------------------------------------
1995 1996 1997
------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding $ 150 $ 150 $ 13,226
======= ========== ===========
Maximum amount outstanding at any month end
during the year $ 150 $ 150 $ 30,000
======= ========== ===========
Balance outstanding at end of year $ 150 $ 150 $ 30,000
======= ========== ===========
Weighted average interest rate during the year 7.17% 7.17% 6.15%
======= ========== ===========
Weighted average interest rate at end of year 7.17% 7.17% 6.01%
======= ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended
Ended December 31,
---------------------------------------
1995 1996 1997
------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase:
Average balance outstanding $ 470 $ 849 $ 5,629
======= ========== ===========
Maximum amount outstanding at any month end
during the year $ 2,031 $ 8,048 $ 11,952
======= ========== ===========
Balance outstanding at end of year $ -- $ 8,048 $ --
======= ========== ===========
Weighted average interest rate during the year 6.20% 5.65% 5.74%
======= ========== ===========
Weighted average interest rate at end of year - % 5.63% --%
======= ========== ===========
Total borrowings:
Average balance outstanding $ 620 $ 999 $ 18,855
======= ========== ===========
Maximum amount outstanding at any month end
during the year $ 2,181 $ 8,198 $ 41,952
======= ========== ===========
Balance outstanding at end of year $ 150 $ 8,198 $ 30,000
======= ========== ===========
Weighted average interest rate during the year 6.44% 5.68% 6.03%
======= ========== ===========
Weighted average interest rate at end of year 7.17% 5.66% 6.01%
======= ========== ===========
</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.
23
<PAGE>
Personnel
As of December 31, 1997, the Savings Bank had 127 full-time employees and 9
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").
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. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
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, 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
<PAGE>
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, and no multiple savings and loan holding company may acquire
more than 5% the voting stock of a company engaged in impermissible activities.
24
<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 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
thirty 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
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 as principal that are not permissible for
a national bank.
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 at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor 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
and intermediate preferred stock and the allowance for loan and lease losses
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.
25
<PAGE>
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, 1997, the
Savings Bank met each of its capital requirements and it is anticipated that the
Savings Bank will not be subject to the interest rate risk component.
The following table presents the Savings Bank's capital position at December 31,
1997.
<TABLE>
<CAPTION>
Excess Capital Ratios
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $ 44,349 6,003 38,346 11.08% 1.50%
Core (leverage) $ 44,349 12,006 32,343 11.08 3.00
Risk-based:
Tier I (core) $ 44,349 8,486 35,863 20.90 4.00
Total $ 46,033 16,973 29,060 21.70 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
<PAGE>
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,
26
<PAGE>
including the issuance of a capital directive and the replacement of senior
executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Savings Bank are presently
insured by the SAIF. 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. The SAIF was undercapitalized due
primarily to a 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. 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 was 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 Bank Insurance Fund ("BIF") members. The BIF is the fund which
primarily insures commercial bank deposits. Beginning on January 1, 1997, BIF
deposits were assessed for a FICO payment of 1.3 basis points, while SAIF
deposits pay 6.4 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 voted to effectively lower 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 1997 was 6.4 basis points and the
premium paid for 1997 was $147,000. 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.
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. Various proposals to eliminate the federal thrift charter, create a
uniform financial institutions charter and abolish the OTS have been introduced
in Congress. Some bills would require federal savings institutions to convert to
a national bank or some type of state charter by a specified date or they would
automatically become national banks. Under some proposals, converted federal
<PAGE>
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. A more recent bill passed by the House
Banking Committee would allow savings institutions to continue to exercise
activities being conducted when they convert to a bank regardless of whether a
national bank could engage in the activity. Holding companies for savings
institutions would become subject to the same regulation as holding companies
that control commercial banks, with some limited grandfathering, including some
savings and loan holding company activities. The grandfathering would be lost
under certain circumstances such as a change in control of the Company. The
Savings Bank is unable to predict whether such legislation would be enacted, the
28
<PAGE>
extent to which the legislation would restrict or disrupt its operations.
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,
1997, the Savings Bank's limit on loans to one borrower was $6.9 million. At
December 31, 1997, the Savings Bank's largest aggregate outstanding balance of
loans to one borrower was $4.2 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under the
QTL test, a savings and loan association must either qualify as a "domestic
building and loan association" as defined in the Internal Revenue Code or
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, 1997, the Savings Bank maintained 82.9% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test. Recent legislation has
expanded the extent to which education loans, credit card loans and small
business loans may be considered "qualified thrift investments."
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 institution's 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, 1997, the
Savings Bank was a Tier 1 Bank.
<PAGE>
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 was 5% for fiscal 1997, but is subject to change 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. In 1997,
OTS regulations also required each savings institution to maintain an average
daily balance of short-term liquid assets of at least 1% of the total of its net
withdrawable deposit accounts and borrowings
28
<PAGE>
payable in one year or less. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The OTS has recently lowered the liquidity
requirement from 5% to 4% and eliminated the 1% short-term liquid asset
requirement. The Savings Bank's liquidity ratio for December 31, 1997 was 8.7%,
which exceeded the applicable requirement. The Savings Bank has never been
subject to monetary penalties for failure to meet its liquidity requirement.
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, 1997 and 1996 totalled $87,000 and $83,000,
respectively.
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
insiders 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.
<PAGE>
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.
29
<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; asset quality; earnings; 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). The Federal Reserve Board regulations generally
required for most of 1997 that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement was
3%; and for accounts aggregating greater than $49.3 million, the reserve
requirement was $1.48 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 $49.3 million. The first $4.4 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. For 1998, the Federal Reserve Board has decreased
from $49.3 to $47.8 million the amount of transaction accounts subject to the 3%
reserve requirement and increased the amount of exempt reservable balances from
$4.4 million to $4.7 million. 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.
Year 2000
Management has an ongoing program designed to ensure that its operational and
financial systems will not be adversely affected by year 2000 software failures,
due to processing errors arising from calculations using the year 2000 date.
Based on current estimates, the Savings Bank does not expect to incur a material
amount of expenses over the next two years on its program to redevelop, replace,
or repair its computer applications to make them "year 2000 compliant." While
management believes it is doing everything technologically possible to assure
year 2000 compliance, it is to some extent dependent upon vendor cooperation.
Management is requiring its computer system and software vendors to represent
that the products provided are, or will be, year 2000 compliant, and has planned
a program of testing for compliance. It is recognized that any year 2000
compliance failures could result in additional expense to the Bank.
30
<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 1997 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 December 31, 1995, thrift
institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (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 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves for bad
debts will treat such change as a change in method of accounting, initiated by
the taxpayer, and having been made with the consent of the IRS. Any Section
481(a) adjustment required to be taken into income with respect to such change
generally will be taken into income ratably over a six-taxable year period,
beginning with the first taxable year beginning after 1995, subject to the
residential loan requirement.
Under the residential loan requirement provision, the recapture required by the
1996 Act is suspended for each of two successive taxable years, beginning with
1996, in which the Savings Bank originates 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.
Under the 1996 Act, 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. At December 31,
1997, the Savings Bank had approximately $910,000 of deferred tax liabilities
recorded for the recapture of its bad debt reserves.
<PAGE>
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
31
<PAGE>
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 was reported as an expense for the quarter ended
September 30, 1996. The Funds Act included a provision which stated that the
amount of any special assessment paid to capitalize SAIF under this legislation
was deductible under Section 162 of the Code in the year of payment.
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.
32
<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:
Book Value
of Land and
Date Buildings at
Location Acquired December 31, 1997
- -------- -------- -----------------
(Dollars in thousands)
Main Office
800 North Boulevard, West
Leesburg, Florida 34749-0420 1961 $ 397
Wildwood
837 South Main Street
Wildwood, Florida 34785-0006 1967 253
Main Street
1409 West Main Street
Leesburg, Florida 34749-0330 1972 182
Clermont
481 East Highway 50
Clermont, Florida 34712-0730 1982 647
Eustis
2901 South Bay Street
Eustis, Florida 32727-1270 1979 374
Fruitland Park
410 Palm Street
Fruitland Park, Florida 34731 1983 353
Lady Lake
431 US Highway 441/27
Lady Lake, Florida 32158 1995 1,288
Lake Square
10105 US Highway 441
Leesburg, Florida 34788 1995 500
South Leesburg (1)
27405 US Highway 27, Suite 123
Leesburg, Florida 34748 1996 181
South Leesburg (2)
US Highway 27
Leesburg, Florida 34748 1996 375
(1) Leased branch office opened February, 1997.
(2) Parcel of land purchased by the Savings Bank for a future branch office
location.
The Savings Bank owns and operates personal computers, teller terminals and
associated equipment. At December 31, 1997, such equipment had a net book
value of $739,000.
33
<PAGE>
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, 1997, 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 1997 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 and 7 of the Registrant's 1997 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
1997 Annual Report to Stockholders on pages 8 through 18 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 PA appear in
the Registrant's 1997 Annual Report to Stockholders on pages 19 through 51 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.
34
<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 7, 1998 at pages 5 through 8.
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 7, 1998 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 7, 1998 at
pages 6 through 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions is
incorporated herein by reference to pages 16 and 17 of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 7, 1998.
35
<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 1997 Annual Report to
Stockholders.
Page
----
Independent Auditor's Report 51
Consolidated Balance Sheets as of December 31, 1997 and 1996 19
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 20
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 21-23
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 24-25
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997, 1996, and 1995 26-49
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.
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)
* 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 held on May 12, 1994.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
fourth quarter.
36
<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: March 19, 1998
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/ Joseph J. Junod Chairman of the Board March 19, 1998
- -------------------
Joseph J. Junod
/s/ Claron D. Wagner Vice Chairman of the Board March 19, 1998
- --------------------
Claron D. Wagner
/s/ James P. Logan Director March 19, 1998
- ------------------
James P. Logan
/s/ Ted R. Ostrander, Jr. Director March 19, 1998
- -------------------------
Ted R. Ostrander
/s/ H.D. Robuck, Jr. Director March 19, 1998
- --------------------
H.D. Robuck, Jr.
/s/ Stephen T. Kurtz Chief Executive Officer,
Stephen T. Kurtz President and Director March 19, 1998
/s/ Paul K. Mueller Executive Vice President, Chief
Paul K. Mueller Operating Officer and Treasurer
and Director March 19, 1998
</TABLE>
37
FFLC
1997 ANNUAL REPORT
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 evidences Congress'
determination that the disclosure of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by corporate management. This Annual Report,
including the Letter to Shareholders and the Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements that involve risk and uncertainty. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, growth projections and results of the
Company's business include, but are not limited to, the growth of the economy,
interest rate movements, timely development by the Company of technology
enhancements for its products and operating systems, the impact of competitive
products, services and pricing, customer business requirements, Congressional
legislation and similar matters. Readers of this report are cautioned not to
place undue reliance on forward-looking statements which are subject to
influence by the named risk factors and unanticipated future events. Actual
results, accordingly, may differ materially from management expectations.
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.................6-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................8-18
Consolidated Financial Statements ......................................19-50
Independent Auditors' Report...............................................51
Directors and Officers of FFLC Bancorp, Inc. ..............................52
Directors and Officers of First Federal Savings Bank of Lake County........53
Employees .................................................................54
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 7, 1998.
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.
Shareholder Assistance
Shareholders requiring a change of address, records or information about
lost certificates or dividend checks should contact:
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
Independent Auditors
Hacker, Johnson, Cohen & Grieb PA
Certified Public Accountants
930 Woodcock Road, Suite 211
Orlando, Florida 32803
<PAGE>
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
[GRAPHIC-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. All per share amounts have been restated
to give effect to the five-for-three stock split in November, 1997.
Cash
Dividends
Paid
High Low Per Share
---- --- ---------
Quarter Ended:
March 31, 1996............. 11 1/2 10 3/8 .05
June 30, 1996.............. 11 1/4 10 3/8 .06
September 30, 1996......... 11 3/8 10 7/8 .06
December 31, 1996.......... 13 1/4 11 .06
March 31, 1997............. 16 1/2 12 1/4 .07
June 30, 1997.............. 17 1/8 15 .07
September 30, 1997......... 19 3/8 16 3/8 .07
December 31, 1997.......... 23 1/2 18 1/2 .07
As of January 26, 1998, the Company had 879 holders of record of common stock.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share amounts)
AT YEAR END: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total assets.................................................................. $ 400,237 346,442 325,832
Loans receivable, net......................................................... $ 315,353 227,948 183,448
Investment securities ........................................................ $ 20,307 32,832 25,265
Mortgage-backed securities ................................................... $ 38,291 65,736 93,883
Deposits...................................................................... $ 315,390 282,664 267,703
Equity, substantially restricted.............................................. $ 51,429 53,626 55,360
Book value per share.......................................................... $ 13.74 13.20 12.59
Shares outstanding ........................................................... 3,743,988 4,062,895 4,395,593
Equity-to-assets ratio........................................................ 12.85% 15.48% 16.99%
Nonperforming assets to total assets.......................................... .19% 0.30% 0.10%
FOR THE YEAR:
Interest income............................................................... $ 28,156 24,218 22,493
Net interest income after provision for loan losses........................... $ 12,091 11,152 10,186
Net income.................................................................... $ 3,754 2,184 3,093
Basic income per share........................................................ $ 1.01 .54 .73
Diluted income per share...................................................... $ .96 .51 .70
Loan originations............................................................. $ 143,538 83,569 56,751
Return on average assets...................................................... 1.00% .65% .98%
Return on average equity...................................................... 7.18% 3.94% 5.59%
Average equity to average assets ratio........................................ 13.93% 16.62% 17.46%
Noninterest expense to average assets......................................... 1.99% 2.49% 1.85%
YIELDS AND RATES:
<CAPTION>
Weighted Average
Rate or Yield Average Rate or Yield During
at December 31, Year Ended December 31,
------------------ ------------------------------
1997 1996 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Mortgage loans, net.................................. 7.97% 8.08% 7.82% 8.20% 8.29%
Collateralized mortgage obligations.................. 6.14% 5.91% 5.82% 5.76% 5.73%
Other mortgage-backed securities..................... 7.21% 7.04% 6.99% 6.87% 6.41%
All interest-earning assets ......................... 7.87% 7.62% 7.80% 7.52% 7.31%
Deposits .......................................... 4.83% 4.72% 4.78% 4.72% 4.71%
All interest-bearing liabilities .................... 4.94% 4.74% 4.85% 4.72% 4.71%
Interest-rate spread (1)............................. 2.93% 2.87% 2.94% 2.80% 2.60%
Net yield on average interest-earning assets (2)..... N/A N/A 3.53% 3.50% 3.35%
</TABLE>
(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.
3
<PAGE>
LOGO HERE
Dear Stockholders:
The annual report is an important way in which your Company keeps you informed
about the Company's performance. I am pleased to have this opportunity to share
with our stockholders and friends information about the Company's operations
during the past year.
The year 1997 was very eventful. The Company enjoyed record profits, continued
growth, and improved performance. First Federal Savings Bank of Lake County, the
Company's subsidiary, finished the year with its highest loan volume, highest
amount of total assets, and highest level of deposits.
The Company's total assets increased by $53.8 million or 15.5% during the year,
exceeding $400 million for the first time. The Bank's total loan origination
volume in 1997 was $145.5 million, a 62.5% increase above the prior year. The
groundwork for this achievement was laid some years earlier. At a strategic
planning session in 1991, a decision was reached to place a greater emphasis on
originating local loans. At that time, the Bank was ranked 5th in mortgage loan
origination in Lake County. As of September 1997, the most recent data
available, First Federal is the top ranked mortgage lender in Lake County, and
we are understandably proud of that accomplishment. Our goal now is to continue
our leadership in mortgage lending. In keeping with the Bank's strategic plan,
First Federal created a Commercial Loan Department during 1997 on which we are
focusing substantial effort. I am happy to report that our commercial lenders
generated $35 million in new loans for the bank in 1997. Our goal is to
duplicate the success of our mortgage lending in the area of commercial lending.
In the deposit area, the Bank's total deposits grew by $32.7 million or 11.6%,
ending the year at $315.4 million. This is the first time that deposits at the
bank have exceeded the $300 million level. The Bank is placing a greater
emphasis on attracting checking accounts, and in January, 1998, introduced an
entirely new slate of checking products. It is our desire to attract a
significant number of new checking accounts, which are considered to be the core
of a customer's banking relationship.
The Bank understands the
importance of continued growth. In that vein, a new
branch office was opened in February, 1997. The office is located south of
Leesburg, in a shopping center anchored by a Winn-Dixie grocery store. In an
effort to continue the Bank's expansion, we recently acquired an outparcel at a
new Winn-Dixie shopping center in the southernmost area of Lake County. We will
be constructing a new branch office on this site and expect the office to be
opened in late 1998.
<PAGE>
In terms of financial performance, 1997 was a solid year for the Company. A
dramatic decline in the cost of federal deposit insurance, along with a strong
increase in net interest income, resulted in improved financial results. Higher
earnings per share were accomplished during 1997, increasing to $1.01 from $.54
per share the prior year. The return on average assets for the year was 1.00%,
up from .65% in 1996. The return on average equity, boosted by higher earnings
and the continued repurchase of shares, improved to 7.18% from 3.94%. At the
same time, noninterest expense as a percentage of average assets declined to
1.99% from 2.49% and the operating efficiency ratio improved to 53.54% from
68.77%. In October 1997, the Company announced a five-for-three stock split. The
purpose of the split was to enhance the value of a stockholder's investment by
increasing the liquidity of the Company's stock. Further, in January, 1998, FFLC
announced a $.09 per share quarterly cash dividend, an increase of 25% above the
previous dividend.
During 1997, the Company made significant progress in reducing its high ratio of
capital to assets. As a result of stock repurchases and continued growth, the
Company was able to reduce its ratio of capital to total assets to 12.9% at
December 31, 1997, from 15.5% at the prior year-end. Book value per share
increased to $13.74 at December 31, 1997, from $13.20 at December 31, 1996.
4
<PAGE>
In looking out for events that will influence our 1998 performance, we know that
the level of interest rates will play a major role. Over the last several
months, long-term interest rates have fallen faster than short-term interest
rates. That results in a relatively flat yield curve (the difference between
short-term rates and long-term rates). Since banks generally borrow funds from
depositors on a short-term basis and lend funds to borrowers on a medium term
basis, a flat yield curve tends to impair interest income. The financial crisis
in Asia has also had a major impact on interest rates, having the effect of
boosting the value of the dollar and lowering long-term interest rates. The
market's ongoing reaction to that situation will continue to influence interest
rates.
At year-end, there was a change in the membership of the Board of the Company
and the Bank. After serving since 1974, the past three years as Chairman of the
Board, James R. Gregg retired as a director and was succeeded as a director by
H.D. Robuck, Jr. Joseph J. Junod, the previous Vice Chairman and a Board member
since 1987, was elected to succeed Mr. Gregg as Chairman. Claron D. Wagner, also
a member of the Board since 1987, was elected Vice Chairman. Mr. Gregg served
the Company and the Bank in an excellent fashion during his tenure and will
continue as an Advisory Director.
During the past four years, our stockholders have provided strong support to the
Company. We remain committed to profitably serving the banking needs of our
communities and, as a result, provide for the investment goals of our
stockholders. We believe FFLC Bancorp is on course to meeting those goals and we
appreciate the continued support of our stockholders and the communities we
serve.
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,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets................................................... $ 400,237 346,442 325,832 310,622 292,254
Loans receivable, net.......................................... 315,353 227,948 183,448 148,286 122,211
Cash and cash equivalents...................................... 15,684 10,157 13,929 10,255 24,875
Investment securities.......................................... 20,307 32,832 25,265 27,851 29,370
Mortgage-backed securities..................................... 38,291 65,736 93,883 117,003 109,077
Deposits .................................................... 315,390 282,664 267,703 251,752 241,000
Borrowed funds................................................. 30,000 8,198 150 3,150 150
Conversion stock subscriptions................................. - - - - 21,834
Stockholders' equity........................................... 51,429 53,626 55,360 53,762 27,246
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income................................................ $ 28,156 24,218 22,493 19,480 18,453
Interest expense............................................... 15,416 12,959 12,183 9,259 9,268
Net interest income............................................ 12,740 11,259 10,310 10,221 9,184
Provision for loan losses...................................... 649 107 124 138 250
Net interest income after provision for loan losses............ 12,091 11,152 10,186 10,083 8,935
Noninterest income............................................. 1,219 809 709 647 619
Noninterest expense............................................ 7,473 8,299 5,874 5,212 3,936
Income before provision for income taxes....................... 5,837 3,662 5,021 5,518 5,618
Provision for income taxes..................................... 2,083 1,478 1,928 1,948 2,114
Net income..................................................... 3,754 2,184 3,093 3,570 3,504
Basic income per share (2)..................................... 1.01 .54 .73 .84 - (1)
Weighted average number of common
shares outstanding for basic (2)......................... 3,700,220 4,069,825 4,232,498 4,253,033 - (1)
Diluted income per share (2)................................... $ .96 .51 .70 .81 - (1)
Weighted average number of common shares
outstanding for diluted (2).............................. 3,911,256 4,267,992 4,427,098 4,409,715 - (1)
</TABLE>
(1) The Company issued stock and acquired the Savings Bank during 1994,
therefore, earnings per share prior to 1994 is not available.
(2) All per share amounts have been restated to reflect the five-for-three
stock split in November, 1997.
6
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL RATIOS
AND OTHER DATA:
At or For the Year Ended December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets....................................... 1.00% 0.65% 0.98% 1.19% 1.29%
Return on average equity....................................... 7.18% 3.94% 5.59% 6.81% 13.72%
Dividend payout ratio (1)...................................... 28.51% 44.71% 25.86% 13.33% N/A
Average equity to average assets............................... 13.93% 16.62% 17.46% 17.47% 9.40%
Total equity to total assets................................... 12.85% 15.48% 16.99% 17.31% 9.32%
Interest rate spread during year(2)............................ 2.95% 2.80% 2.60% 2.88% 3.15%
Net interest margin (3)........................................ 3.53% 3.50% 3.35% 3.50% 3.48%
Nonperforming assets to total assets (4)....................... .19% 0.30% 0.10% 0.13% 0.23%
Nonperforming loans to total loans (5)......................... .07% 0.28% 0.09% 0.21% 0.47%
Allowance for loan losses to non-performing loans.............. 695.87% 159.61% 561.49% 264.13% 121.29%
Allowance for loan and REO
losses to nonperforming assets........................... 224.83% 103.51% 288.48% 210.41% 108.41%
Allowance for loan losses to total loans....................... 0.51% 0.45% 0.52% 0.55% 0.57%
Operating expenses to average assets........................... 1.99% 2.49% 1.85% 1.74% 1.45%
Average interest-earning assets to
average interest-bearing liabilities..................... 1.14 1.17 1.19 1.19 1.09
Net interest income to noninterest expenses.................... 1.70 1.36 1.76 1.96 2.33
Total shares outstanding (1) (6)............................... 3,743,988 4,062,895 4,395,593 4,603,032 - (1)
Book value per common share outstanding (1)(6)................. $ 13.74 $ 13.20 12.59 11.68 - (1)
Number of banking offices (all full-service)................... 9 9 8 6 6
- ----------
</TABLE>
(1) Item is only presented at December 31, 1997, 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) All per share amounts have been restated to reflect the five-for-three
stock split in November, 1997.
7
<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 $3.8 million for the year ended December
31, 1997, compared to net earnings of $2.2 million for the year ended December
31, 1996. At December 31, 1997, the Savings Bank had total assets of $400.2
million, an increase of 15.5% over total assets of $346.4 million at December
31, 1996. That increase resulted primarily from an $87.4 million, or 38.3%,
increase in loans receivable from $227.9 million at December 31, 1996 to $315.4
million at December 31, 1997, reflecting increased local loan demand. Cash and
cash equivalents increased $5.5 million or 54.4% from $10.2 million to $15.7
million. Mortgage-backed and investment securities decreased $39.9 million or
40.6% during 1997. Deposits increased $32.7 million, or 11.6%, from $282.7
million at December 31, 1996 to $315.4 million at December 31, 1997. Advances
from Federal Home Loan Bank increased $29.9 million, while securities sold under
agreements to repurchase decreased $8.1 million for a net increase of $21.8
million or 265.9% in borrowings. Stockholders' equity decreased $2.2 million
primarily due to repurchases of Holding Company stock during 1997, partially
offset by income from operations.
8
<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, 1997, 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.
9
<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 of 1996 and was tax deductible. That legislation eliminated
the substantial disparity between the amount that BIF and SAIF members had been
paying for deposit insurance premiums.
Beginning January 1, 1997, BIF members 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 lowered annual SAIF assessment rates to 0 to
27 basis points, a range comparable to those of BIF members, although SAIF
members 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.
YEAR 2000 COMPLIANCE
Management has an ongoing program designed to ensure that its operational and
financial systems will not be adversely affected by year 2000 software failures,
due to processing errors arising from calculations using the year 2000 date.
Based on current estimates, the Savings Bank does not expect to incur a material
amount of expenses over the next two years on its program to redevelop, replace,
or repair its computer applications to make them "year 2000 compliant." While
management believes it is doing everything technologically possible to assure
year 2000 compliance, it is to some extent dependent upon vendor cooperation.
Management is requiring its computer system and software vendors to represent
that the products provided are, or will be, year 2000 compliant, and has planned
a program of testing for compliance. It is recognized that any year 2000
compliance failures could result in additional expense to the Savings Bank.
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.
<PAGE>
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.
10
<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, 1997. 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>
Year Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------
Yield At Average Average Average
December 31, Average Yield/ Average Yield/ Average Yield/
1997 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 (1)............... 8.18% $268,425 22,318 8.31% $201,840 16,813 8.33% $163,961 13,817 8.43%
Mortgage-backed securities......... 6.78 53,170 3,431 6.45 80,355 5,020 6.25 106,574 6,403 6.01
Investment securities and other
interest-earning assets (2)..... 6.07 39,550 2,407 6.09 39,745 2,385 6.00 37,138 2,273 6.12
-------- ------ -------- ------ -------- ------
Total interest-earning assets. 7.87 361,145 28,156 7.80 321,940 24,218 7.52 307,673 22,493 7.31
------ ------ ------
Noninterest-earning assets............. 14,160 11,727 9,107
-------- -------- --------
Total assets.................. $375,305 $333,667 $316,780
======== ======== ========
Interest-bearing liabilities:
NOW and money market
accounts........................ 1.95 46,656 991 2.12 42,682 960 2.25 42,425 967 2.28
Passbook and statement savings
accounts........................ 2.74 24,963 687 2.75 24,218 629 2.60 26,802 721 2.69
Certificates....................... 5.60 227,271 12,601 5.54 206,471 11,311 5.48 188,806 10,455 5.54
FHLB advances...................... 6.01 13,226 814 6.15 150 11 7.33 150 11 7.33
Securities sold under agreement
to repurchase................... - 5,629 323 5.74 849 48 5.65 470 29 6.17
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities................. 4.94 317,746 15,416 4.85 274,370 12,959 4.72 258,653 12,183 4.71
------ ------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------
Yield At Average Average Average
December 31, Average Yield/ Average Yield/ Average Yield/
1997 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........ 5,285 3,836 2,812
Stockholders' equity................... 52,274 55,461 55,315
-------- -------- --------
Total liabilities and equity.. $375,305 $333,667 $316,780
======== ======== ========
Net interest-earning assets and
interest rate spread (3)........... 2.93% $ 43,399 2.95% $ 47,570 2.80% $ 49,020 2.60%
==== ======== ==== ======== ==== ======== ====
Net interest income and net
margin (4)......................... $12,740 3.53% $ 11,259 3.50% $10,310 3.35%
======= ==== ======== ==== ======= ====
Ratio of interest-earning assets
to interest-bearing liabilities.... 1.14 1.17 1.19
======= ======= ========
</TABLE>
(1) Includes nonaccrual loans.
(2) Includes interest-bearing deposits and FHLB Stock.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest- bearing
liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
11
<PAGE>
The following table discloses the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume) and (iii) changes attributable to changes in
rate/volume (changes in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------- ---------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan receivable, net....................$ (31) 5,546 (10) 5,505 (164) 3,193 (33) 2,996
Mortgage-backed securities.............. 165 (1,698) (56) (1,589) 253 (1,576) (60) (1,383)
Investment securities
and other interest-earning
assets (1).......................... 34 (12) - 22 (44) 159 (3) 112
---- ------ ----- ------ --- ----- -- -----
Total............................ 168 3,836 (66) 3,938 45 1,776 (96) 1,725
--- ----- --- ----- --- ----- -- -----
Interest-bearing liabilities:
NOW and money market accounts........... (53) 89 (5) 31 (13) 6 - (7)
Passbook and
statement savings accounts.......... 37 20 1 58 (25) (69) 2 (92)
Certificates............................ 137 1,139 14 1,290 (117) 979 (6) 856
FHLB advances........................... (2) 959 (154) 803
Securities sold under agreement
to repurchase....................... 1 270 4 275 (2) 23 (2) 19
---- ------ ---- ------ ---- ------ -- -----
Total............................ 120 2,477 (140) 2,457 (157) 939 (6) 776
--- ----- --- ----- --- ----- -- -----
Net change in net interest
income.................................$ 48 1,359 74 1,481 202 837 (90) 949
==== ===== ==== ===== === ===== == =====
</TABLE>
(1) Includes interest-bearing deposits and FHLB Stock.
12
<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 4%. 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 8.7% and
13.5% at December 31, 1997 and December 31, 1996, 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, 1997, the Savings Bank had outstanding commitments to originate
$22.6 million of loans, to fund unused lines of credit of $11.5 million and to
fund the undisbursed portion of loans in process of $12.3 million. The Savings
Bank believes that it will have sufficient funds available to meet its
commitments. At December 31, 1997, certificates of deposit which were scheduled
to mature in one year or less totaled $168.3 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, 1997:
<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.......... $ 44,349 11.08% $ 44,349 11.08% $ 46,033 21.70%
Requirement................. 6,003 1.50 12,006 3.00 16,973 8.00
------- ----- ------ ----- ------ ------
Excess...................... $ 38,346 9.58% $ 32,343 8.08% $ 29,060 13.70%
====== ===== ====== ===== ====== =====
</TABLE>
<PAGE>
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest-rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure. The measurement of market
risk associated with financial instruments is meaningful only when all related
and offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified. Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be
found in Note 10 of Notes to Consolidated Financial Statements.
The Company's primary objective is managing interest-rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital, while adjusting the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability structure to control interest rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact the Company's earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis. The Company does not engage in trading activities.
13
<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,
1997, 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 9.78%. 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 8.7% at December 31, 1997 is significantly higher than
the regulatory requirement of 4%. 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.
14
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997 that are expected
to reprice or mature, based upon certain assumptions, in each of the future
periods shown.
<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..........$ 69,212 34,153 47,329 103,582 11,524 9,546 3,835 (1,123) 278,058
Consumer and other loans..... 14,630 3,624 4,801 9,379 3,872 1,118 100 (229) 37,295
Mortgage-backed
securities................ 23,158 9,934 3,153 1,057 550 481 11 (53) 38,291
Interest-earning deposits.... 8,562 - - - - - - - 8,562
Investment securities........ 3,023 - 2,000 5,000 - 1,000 151 (50) 11,124
Mutual funds................. 325 7,187 - 1,745 - - - (74) 9,183
FHLB stock................... 2,304 - - - - - - - 2,304
--------- ------ ------ ------- ------ ------ ----- ------ -------
Total interest-earning
assets............... 121,214 54,898 57,283 120,763 15,946 12,145 4,097 (1,529) 384,817
--------- ------ ------ ------- ------ ------ ----- ====== =======
Rate-sensitive liabilities:
Deposits:
Passbook and statement
savings................. 2,335 2,112 3,639 9,048 4,061 2,862 446 - 24,503
NOW accounts.............. 3,319 3,004 5,175 12,864 5,775 4,067 635 - 34,839
Money-market.............. 1,496 1,359 2,341 5,821 2,613 1,841 287 - 15,758
Certificates.............. 52,168 51,329 65,961 66,756 4,076 - - - 240,290
Borrowed funds............... - - - - 30,000 - - - 30,000
--------- ------ ------ ------- ------ ------ ----- ------ -------
Total interest-bearing
liabilities.......... 59,318 57,804 77,116 94,489 46,525 8,770 1,368 - 345,390
--------- ------ ------ ------- ------ ------ ----- ------ -------
Interest-sensitivity gap.........$ 61,896 (2,906) (19,833) 26,274 (30,579) 3,375 2,729 (1,529) 39,427
========= ====== ======= ======= ======= ====== ===== ====== =======
Cumulative interest-
sensitivity gap..............$ 61,896 58,990 39,157 65,431 34,852 38,227 40,956
========= ====== ====== ====== ====== ====== ======
Cumulative interest-sensitivity
gap as a percentage of
total assets................. 15.46% 14.74% 9.78% 16.35% 8.71% 9.55% 10.23%
========= ====== ====== ====== ====== ====== ======
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities. 204.35% 150.37% 120.16% 122.66% 110.40% 111.11% 111.86%
========= ====== ====== ====== ====== ====== ======
</TABLE>
(1) Represents premiums, discounts, market value adjustments and provision for
loan losses.
15
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 TO DECEMBER 31, 1996
General Operating Results. Net income for the year ended December 31, 1997, was
$3.8 million or $1.01 per share, compared to net income for the year ended
December 31, 1996 of $2.2 million or $.54 per share. The increase in net
income was primarily the result of an increase of $1.5 million in net
interest income before provision for loan losses for 1997, and the effect of
the one-time SAIF assessment during 1996 of $1.7 million before taxes.
Interest Income. Interest income increased $3.9 million, or 16.3%, from $24.2
million for the year ended December 31, 1996 to $28.2 million for the year
ended December 31, 1997. The increase was due to an increase in the average
balance of total interest-earning assets from $321.9 million for the year
ended December 31, 1996 to $361.1 million for the year ended December 31,
1997, an increase of $39.2 million, or 12.2% and an increase in the average
yield on interest-earning assets from 7.52% for the year ended December 31,
1996 to 7.80% for the year ended December 31, 1997. The average yield on
loans decreased from 8.33% for the year ended December 31, 1996 to 8.31% for
the year ended December 31, 1997. The average yield on mortgage-backed
securities increased from 6.25% for the year ended December 31, 1996 to
6.45% for the year ended December 31, 1997. The average yield on investment
securities and other interest earning assets increased from 6.00% for the
year ended December 31, 1996 to 6.09% for the year ended December 31, 1997.
Interest Expense. Interest expense increased $2.5 million from $13.0 million at
December 31, 1996 to $15.4 million at December 31, 1997. The increase was
due to a $43.4 million or 15.8% increase in the average balance of total
interest-bearing liabilities from $274.4 million for the year ended December
31, 1996 to $317.7 million for the year ended December 31, 1997 and an
increase in the weighted-average rate paid on interest-bearing liabilities
from 4.72% during 1996 to 4.85% in 1997.
Provision for Loan Losses. The Savings Bank's provision for loan losses
increased from $107,000 for the year ended December 31, 1996 to $649,000 for
the year ended December 31, 1997. The increase of $542,000 is due to the
growth of the commercial loan portfolio and 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 $809,000 for the year
ended December 31, 1996 to $1.2 million for the year ended December 31,
1997. The increase was due to a gain on the sale of other assets during 1997
of $302,000, with no corresponding amount during 1996 and an increase in
other service charges and fees of $94,000 for the year ended December 31,
1997.
<PAGE>
Noninterest Expense. Noninterest expense consists primarily of salaries and
employee benefits, occupancy expense and deposit insurance premiums.
Noninterest expense decreased $826,000 for the year ended December 31, 1997
compared to 1996. This decrease was primarily due to the one-time SAIF
recapitalization expense of $1.7 million during 1996 and a related decrease
in deposit insurance premium of $477,000 during 1997, partially offset by
increases in salaries and employee benefits of $934,000 and occupancy
expense of $118,000. The remaining items in noninterest expense increased
$254,000 for the year ended December 31, 1997 compared to the year ended
December 31, 1996 primarily due to the growth of the Company.
Provision for Income Taxes. The provision for federal and state income taxes
increased from $1.5 million for the year ended December 31, 1996 to $2.1
million for the year ended December 31, 1997. The effective tax rate
decreased from 40.4% for the year ended December 31, 1996 to 35.7% for the
year ended December 31, 1997.
16
<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 $.54 per share, compared to net income for the year ended
December 31, 1995 of $3.1 million or $.73 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 average 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 average 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 average 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.
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.
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
increased from 38.4% for the year ended December 31, 1995 to 40.4% for the
year ended December 31, 1996.
17
<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 recently issued the following Statements of Financial Accounting
Standards which are relevant to the Company:
Financial Accounting Standards 130 - Reporting Comprehensive Income
establishes standards for reporting comprehensive income. The Standard
defines comprehensive income as the change in equity of an enterprise except
those resulting from stockholder transactions. All components of
comprehensive income are required to be reported in a new financial
statement that is displayed with equal prominence as existing financial
statements. The Company will be required to adopt this Standard effective
January 1, 1998. As the Statement addresses reporting and presentation
issues only, there will be no impact on operating results from the adoption
of this Standard.
Financial Accounting Standards 131 - Disclosures about Segments of an
Enterprise and Related Information establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company will be required to adopt this Standard effective
January 1, 1998. As the Standard addresses reporting and disclosure issues
only, there will be no impact on operating results from adoption of this
Standard.
18
<PAGE>
FFLC BANCORP, INC.
(Parent Company of First Federal Savings Bank of Lake County and Subsidiary)
Leesburg, Florida
Audited Consolidated Financial Statements
December 31, 1997 and 1996
and for each of the Years in the
Three Years Ended December 31, 1997
(Together with Independent Auditors' Report)
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Balance Sheets
($ in thousands, except per share amounts)
December 31,
--------------------------
1997 1996
-------- --------
Assets
<S> <C> <C>
Cash and due from banks........................................................... $ 7,122 6,080
Interest-bearing deposits......................................................... 8,562 4,077
-------- --------
Cash and cash equivalents............................................. 15,684 10,157
------- --------
Investment securities held to maturity, at cost
(market value of $3,077 in 1997 and $3,271 in 1996)........................... 3,031 3,239
Investment securities available for sale, at market............................... 17,276 29,593
Mortgage-backed and related securities held to maturity, at cost (market value
of $29,443 in 1997 and $47,396 in 1996)....................................... 28,986 46,892
Mortgage-backed and related securities available for sale, at market.............. 9,305 18,844
Loans receivable, net of allowance for loan losses of $1,684 in 1997
and $1,063 in 1996............................................................ 315,353 227,948
Accrued interest receivable:
Investment securities......................................................... 348 577
Mortgage-backed securities.................................................... 189 243
Loans receivable.............................................................. 1,597 1,199
Premises and equipment, net....................................................... 5,313 5,144
Foreclosed real estate............................................................ 507 361
Real estate held for development.................................................. 122 122
Restricted securities - Federal Home Loan Bank stock, at cost..................... 2,304 1,939
Other assets .................................................................. 222 184
--------- ---------
Total................................................................. $ 400,237 346,442
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
-------- --------
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities:
NOW and money market accounts................................................. 50,597 43,306
Savings accounts.............................................................. 24,503 27,412
Certificates.................................................................. 240,290 211,946
------- -------
Total deposits........................................................ 315,390 282,664
------- -------
Advances from Federal Home Loan Bank.............................................. 30,000 150
Securities sold under agreements to repurchase.................................... - 8,048
Deferred income taxes............................................................. 737 930
Accrued expenses and other liabilities............................................ 2,681 1,024
-------- --------
Total liabilities..................................................... 348,808 292,816
------- -------
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,
4,312,146 in 1997 and 2,777,393 in 1996 shares issued..................... 43 28
Additional paid-in-capital.................................................... 28,265 27,386
Retained income............................................................... 36,622 33,962
Unrealized loss on securities available for sale, net of tax of
$53 in 1997 and $116 in 1996.............................................. (88) (193)
Treasury stock, at cost (568,158 shares in 1997 and
339,656 shares in 1996)................................................... (12,466) (6,295)
Stock held by Incentive Plan Trusts........................................... (947) (1,262)
--------- --------
Total stockholders' equity............................................ 51,429 53,626
-------- --------
Total................................................................. $ 400,237 346,442
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Income
($ in thousands, except per share amounts)
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 22,318 16,813 13,817
Mortgage-backed securities 3,431 5,020 6,403
Investment securities and time deposits 2,407 2,385 2,273
---------- ---------- ----------
Total interest income 28,156 24,218 22,493
---------- ---------- ----------
Interest expense:
Deposits 14,279 12,900 12,143
Borrowed funds 1,137 59 40
---------- ---------- ----------
Total interest expense 15,416 12,959 12,183
---------- ---------- ----------
Net interest income 12,740 11,259 10,310
Provision for loan losses 649 107 124
---------- ---------- ----------
Net interest income after provision for loan losses 12,091 11,152 10,186
---------- ---------- ----------
Noninterest income:
Deposit account fees 485 489 477
Other service charges and fees 360 266 173
Gain on sale of securities available for sale 11 -- --
Gain on sale of other assets 302 -- --
Other 61 54 59
---------- ---------- ----------
Total noninterest income 1,219 809 709
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 4,674 3,740 3,384
Occupancy expense 930 812 579
Deposit insurance premium 147 624 579
SAIF recapitalization assessment -- 1,655 --
Advertising and promotion 224 122 120
Data processing expense 429 384 322
Professional services 229 270 259
Other 840 692 631
---------- ---------- ----------
Total noninterest expense 7,473 8,299 5,874
---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income before income taxes 5,837 3,662 5,021
Income taxes 2,083 1,478 1,928
---------- ---------- ----------
Net income $ 3,754 2,184 3,093
========== ========== ==========
Basic income per share of common stock $ 1.01 .54 .73
========== ========== ==========
Weighted average number of shares outstanding for basic 3,700,220 4,069,825 4,232,448
========== ========== ==========
Diluted income per share of common stock $ .96 .51 .70
========== ========== ==========
Weighted average number of shares outstanding for diluted 3,911,256 4,267,992 4,427,098
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Stockholders' Equity
($ in thousands, except per share amounts)
Stock
Unrealized Held
Loss on By
Additional Securities Incentive Total
Common Paid-In Retained Available Treasury Plan Stockholders'
Stock Capital Income For Sale Stock Trusts Equity
------- ----------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Change in unrealized
gains (losses) on
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
==== ====== ====== ==== ====== ====== ======
</TABLE>
(continued)
21
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Stockholders' Equity, Continued
($ in thousands, except per share amounts)
Stock
Unrealized Held
Loss on By
Additional Securities Incentive Total
Common Paid-In Retained Available Treasury Plan Stockholders'
Stock Capital Income For Sale Stock Trusts Equity
------- ----------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Change in unrealized
gains (losses) on
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>
(continued)
22
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Stockholders' Equity, Continued
($ in thousands, except per share amounts)
Stock
Unrealized Held
Loss on By
Additional Securities Incentive Total
Common Paid-In Retained Available Treasury Plan Stockholders'
Stock Capital Income For Sale Stock Trusts Equity
------- ----------- -------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................ $ 28 27,386 33,962 (193) (6,295) (1,262) 53,626
Net proceeds from the
issuance of 34,825
shares of common
stock............... - 283 - - - - 283
Shares committed to
participants in
incentive plans
(162,399 shares
remain uncommitted
at December 31,
1997)............... - 596 - - - 315 911
Dividends paid, net of
$61 of dividends on
ESOP shares recorded
as compensation
expense............. - - (1,079) - - - (1,079)
Purchase of treasury
stock, 228,502
shares.............. - - - - (6,171) - (6,171)
Net income............... - - 3,754 - - - 3,754
Change in unrealized
gains (losses) on
securities available
for sale, net of
income taxes of
$63................. - - - 105 - - 105
Five-for-three stock
split in November,
1997................ 15 - (15) - - - -
---- ------ ------ ---- ------- ---- ------
Balance at December 31,
1997................ $ 43 28,265 36,622 (88) (12,466) (947) 51,429
===== ====== ====== ==== ======= ==== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Cash Flows
($ in thousands)
Year Ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 3,754 2,184 3,093
Adjustments to reconcile net income
to net cash provided by operations:
Provision for loan losses........................................ 649 107 124
Depreciation..................................................... 395 345 212
Gain on sale of securities available for sale.................... (11) - -
Gain on sale of foreclosed real estate........................... (11) - (7)
(Credit) provision for deferred income taxes..................... (256) (116) 152
Shares committed and dividends to incentive
plan participants............................................ 972 1,009 981
Amortization of premiums or discounts
on investment and mortgage-backed securities................. (44) (106) (12)
Deferral (accretion) of deferred loan fees and unearned interest. 254 139 (16)
Purchase of Federal Home Loan Bank stock......................... (365) (11) -
Increase in accrued interest receivable.......................... (115) (73) (181)
(Increase) decrease in other assets.............................. (38) 145 (112)
Increase (decrease) in accrued expenses and other liabilities.... 1,657 (490) 125
------- ------ -------
Net cash provided by operating activities................ 6,841 3,133 4,359
------- ------ ------
Cash flows from investing activities:
Purchase of investment securities held to maturity....................... - - (475)
Proceeds from maturities of investment securities held to maturity....... 208 202 290
Purchase of investment securities available for sale..................... (7,490) (22,743) (2,562)
Proceeds from maturities of investment securities available for sale..... 18,924 14,953 5,633
Proceeds from sales of investment securities available for sale.......... 958 - -
Purchase of mortgage-backed securities held to maturity.................. - - (4,275)
Principal repayments on mortgage-backed securities
held to maturity..................................................... 17,927 28,098 27,013
Purchase of mortgage-backed securities available for sale................ - (8,596) (1,762)
Principal repayments on mortgage-backed securities
available for sale................................................... 9,666 8,614 2,878
Purchase of loans receivable............................................. - (2,106) -
Proceeds from sale of loans receivable................................... - 1,557 -
Loan disbursements....................................................... (143,538) (83,569) (56,751)
Principal repayments on loans............................................ 54,840 39,106 21,302
Purchase of premises and equipment, net.................................. (564) (672) (1,918)
Proceeds from sales of foreclosed real estate............................ 255 70 104
-------- ------- -------
Net cash used in investing activities.................... (48,814) (25,086) (10,523)
------- ------ ------
</TABLE>
(continued)
24
<PAGE>
<TABLE>
<CAPTION>
FFLC BANCORP, INC.
Consolidated Statements of Cash Flows, Continued
($ in thousands)
Year Ended December 31,
--------------------------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing demand, savings,
NOW and money market accounts........................................ 4,382 3,152 (8,968)
Net increase in certificate accounts..................................... 28,344 11,809 24,920
Net increase in Federal Home Loan Bank advances.......................... 29,850 - -
Net (decrease) increase in securities sold under agreements
to repurchase........................................................ (8,048) 8,048 (3,000)
Stock options exercised.................................................. 283 80 76
Purchase of treasury stock............................................... (6,171) (3,922) (2,373)
Cash dividends paid...................................................... (1,140) (986) (817)
------ ------- -------
Net cash provided by financing activities.................... 47,500 18,181 9,838
------ ------ ------
Net increase (decrease) in cash and cash equivalents......................... 5,527 (3,772) 3,674
Cash and cash equivalents at beginning of year............................... 10,157 13,929 10,255
------ ------ ------
Cash and cash equivalents at end of year..................................... $ 15,684 10,157 13,929
====== ====== ======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest.......................................................... $ 15,125 12,937 12,082
====== ====== ======
Income taxes...................................................... $ 2,212 1,500 2,009
====== ====== ======
Noncash investing and financing activities:
Increase (decrease) in equity valuation allowance
for market value of investments............................... $ 105 (99) 638
======= ====== =======
Transfers from loans to foreclosed real estate.................... $ 444 287 478
======= ====== =======
Loans originated on sales of foreclosed real estate............... $ 54 21 300
======== ======= =======
Loans funded by and sold to correspondent......................... $ 2,469 2,368 1,151
========= ======= =======
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.
25
<PAGE>
FFLC BANCORP, INC.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
FFLCBancorp, 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 4,603,032 shares
(adjusted for stock split) 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. All per share amounts presented reflect the effect of the
five-for-three stock split in November, 1997. The following summarizes
the significant accounting policies of the Company:
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cashand 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 $843,000 and $680,000 at December 31, 1997
and 1996, respectively.
<PAGE>
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.
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.
26
<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, 1997.
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.
<PAGE>
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.
Stock-Based Compensation. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" establishes a "fair
value" based method of accounting for stock-based compensation plans and
encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." The Company has
elected to follow APB Opinion 25 and related interpretations in
accounting for its employee stock options.
27
<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.
FairValues 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.
28
<PAGE>
Net Income Per Share of Common Stock. During 1997, the Company adopted the
provisions of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS No. 128). SFAS No. 128 provides accounting and reporting
standards for calculating earnings per share. Basic income per share of
common stock has been computed 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
368,242 shares, of which 4,383 shares were released for allocation to
participants each month beginning in January, 1994. At December 31,
1997, 162,399 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 184,122 shares, of which
178,063, 177,517 and 179,541 were allocated to participants and are
considered outstanding for December 31, 1995, 1996 and 1997,
respectively. The remaining unallocated RRP shares were not considered
outstanding during 1995, 1996 and 1997. Diluted income per share is
computed by dividing net income by the weighted average number of shares
outstanding including the dilutive effect of stock options (see Note 17)
computed using the treasury stock method prescribed by SFAS No. 128. The
following table presents the calculation of net income per share of
common stock:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares of common stock issued
and outstanding before adjustments for ESOP,
RRP and common stock options................................ 3,890,019 4,317,500 4,532,392
Adjustment to reflect the effect of unallocated
ESOP and RRP shares......................................... (189,799) (247,675) (299,894)
--------- --------- ---------
Weighted average shares for basic income per share.............. 3,700,220 4,069,825 4,232,498
========= ========= =========
Basic income per share.......................................... $ 1.01 .54 .73
========== ========== =========
Total weighted average common shares and equivalents
outstanding for basic income per share
computation................................................. 3,700,220 4,069,825 4,232,498
Additional dilutive shares using the average market value
for the period utilizing the treasury stock method
regarding stock options..................................... 211,036 198,167 194,600
---------- ---------- ----------
Weighted average common shares and equivalents
outstanding for diluted income per share.................... 3,911,256 4,267,992 4,427,098
========= ========= =========
Diluted income per share........................................ $ .96 .51 .70
========== ========= ==========
</TABLE>
29
<PAGE>
Future Accounting Requirements. The FASB has recently issued the following
Statements of Financial Accounting Standards which are relevant to the
Company:
Financial Accounting Standards 130 - Reporting Comprehensive Income
establishes standards for reporting comprehensive income. The
Standard defines comprehensive income as the change in equity of an
enterprise except those resulting from stockholder transactions. All
components of comprehensive income are required to be reported in a
new financial statement that is displayed with equal prominence as
existing financial statements. The Company will be required to adopt
this Standard effective January 1, 1998. As the Statement addresses
reporting and presentation issues only, there will be no impact on
operating results from the adoption of this Standard.
Financial Accounting Standards 131 - Disclosures about Segments of
an Enterprise and Related Information establishes standards for
related disclosures about products and services, geographic areas,
and major customers. The Company will be required to adopt this
Standard effective January 1, 1998. As the Standard addresses
reporting and disclosure issues only, there will be no impact on
operating results from adoption of this Standard.
Reclassifications. Certain amounts in the 1995 and 1996 consolidated
financial statements have been reclassified to conform to the
presentation for 1997.
(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
---- ----- ------ -----
At December 31, 1997: (In thousands)
<S> <C> <C> <C> <C>
Investment securities held to maturity-
SBA-related investment securities...................$ 3,031 46 - 3,077
====== == ===== ======
Investment securities available for sale:
Mutual funds........................................ 9,258 - (75) 9,183
U.S. Government and agency securities............... 7,965 2 (30) 7,937
Other investment securities......................... 151 5 - 156
------- --- ----- ------
Total...........................................$ 17,374 7 (105) 17,276
====== == === ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<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
====== == === ======
</TABLE>
Gross realized gains on sales of available-for-sale securities were $11,000
during the year ended December 31, 1997. There were no gross realized
losses during the year ended December 31, 1997. There were no sales of
investment securities during 1996 and 1995.
30
<PAGE>
The scheduled maturities of investment securities held to maturity and
investment securities (other than equity) available for sale at December
31, 1997 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 2,000
Due from one year to five years -- -- 4,979 4,952
Due from five years to ten years -- -- 986 985
Due after ten years 3,031 3,077 151 156
------ ------ ------ ------
Total $3,031 3,077 8,116 8,093
====== ===== ===== =====
</TABLE>
Investment securities carried at approximately $3.4 million and $3.0 million
at December 31, 1997 and 1996, respectively, were pledged to secure
public funds and tax deposits.
(3) Mortgage-Backed Securities
The principal balance, amortized cost and estimated market values of
mortgage-backed securities were as follows:
<TABLE>
<CAPTION>
Principal Unamortized Unearned Amortized Fair
Balance Premiums Discounts Cost Value
------- -------- --------- ---- -----
At December 31, 1997: (In thousands)
<S> <C> <C> <C> <C> <C>
Securities held to maturity:
FHLMC certificates..................$ 8,051 2 (8) 8,045 8,226
GNMA certificates................... 7,834 1 (28) 7,807 8,044
FNMA certificates................... 3,951 - (2) 3,949 4,009
Collateralized mortgage
obligations..................... 9,187 1 (3) 9,185 9,164
------ -- -- ------- ------
$ 29,023 4 (41) 28,986 29,443
====== == == ====== ======
Securities available for sale:
FHLMC certificates.................. 1,482 1 - 1,483 1,462
FNMA certificates................... 1,730 18 - 1,748 1,766
Collateralized mortgage
obligations..................... 6,109 9 (1) 6,117 6,077
------ -- -- ------- ------
$ 9,321 28 (1) 9,348 9,305
====== == == ======= ======
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Principal Unamortized Unearned Amortized Fair
Balance Premiums Discounts Cost Value
------- -------- --------- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
At December 31, 1996:
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>
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, 1997: (In thousands)
<S> <C> <C> <C> <C>
Securities held to maturity:
FHLMC certificates....................... $ 8,045 183 (2) 8,226
GNMA certificates........................ 7,807 237 - 8,044
FNMA certificates........................ 3,949 61 (1) 4,009
Collateralized mortgage
obligations.......................... 9,185 - (21) 9,164
------ ----- -- ------
$ 28,986 481 (24) 29,443
====== === == ======
Securities available for sale:
FHLMC certificates....................... 1,483 - (21) 1,462
FNMA certificates........................ 1,748 25 (7) 1,766
Collateralized mortgage
obligations.......................... 6,117 - (40) 6,077
------ ----- -- ------
$ 9,348 25 (68) 9,305
====== === == ======
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
At December 31, 1996:
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>
There were no sales of mortgage-backed securities during the years ended
December 31, 1997, 1996 and 1995.
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 1-27 years; however,
because of prepayments, the expected weighted average life of these
securities at December 31, 1997 is approximately 2.2 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 7.53% and had a weighted average rate of 6.14% at
December 31, 1997. The Company purchases only CMOs rated AA or better by
nationally recognized rating services.
33
<PAGE>
(4) Loans Receivable
The components of loans were as follows:
<TABLE>
<CAPTION>
At December 31,
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
First mortgage loans secured by:
One-to-four-family residential $ 245,524 191,788
Construction and land 3,528 5,489
Multi-family units 4,464 4,180
Commercial real estate, churches and other 37,975 13,565
Consumer loans 32,834 21,899
Commercial loans 4,632 --
--------- ---------
Subtotal 328,957 236,921
Undisbursed portion of loans in process (12,253) (8,007)
Net deferred loan costs 333 97
Allowance for loan losses (1,684) (1,063)
--------- ---------
Loans receivable, net $ 315,353 227,948
========= =========
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at January 1 $ 1,063 977 869
Loans charged off (28) (21) (16)
Provision for loan losses 649 107 124
------- ------- -------
Balance at December 31 $ 1,684 1,063 977
======= ======= =======
</TABLE>
There were no impaired loans recognized under SFAS 114 and 118 during the
years ended December 31, 1997 and 1996.
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.
<PAGE>
Nonaccrual loans at December 31, 1997 and 1996 totaled $242,000 and
$666,000, respectively. For the year ended December 31, 1997, interest
income on loans would have been increased approximately $9,000 if the
interest on nonaccrual loans at December 31, 1997 had been recorded
under the original terms of such loans. All of the nonaccrual loans at
December 31, 1997 and 1996 were first-mortgage, single-family
residential loans or consumer loans. There have been no loans
restructured during any of the periods presented.
34
<PAGE>
(5) Premises and Equipment
Components of premises and equipment were as follows:
<TABLE>
<CAPTION>
At December 31,
----------------------
1997 1996
------ -----
(In thousands)
<S> <C> <C>
Cost:
Land....................................... $ 1,754 1,754
Building and improvements.................. 4,380 4,041
Furniture and equipment.................... 2,152 2,145
Construction in progress................... 11 112
------ -----
Total cost............................. 8,297 8,052
Less accumulated depreciation.................. 2,984 2,908
----- -----
Net book value............................. $ 5,313 5,144
===== =====
</TABLE>
Certain company facilities are leased under various operating leases. Rental
expense was $51,000 and $22,000 in 1997 and 1996, respectively. No
related rental expense was incurred during 1995. At December 31, 1997,
future minimum rental commitments under noncancellable leases were as
follows (in thousands):
Year Ending
December 31, Amount
------------ ------
1998.......................................... $ 68
1999.......................................... 73
2000.......................................... 21
2001.......................................... 18
2002.......................................... 18
----
$ 190
=====
(6) Deposits
The aggregate amount of short-term jumbo CDS, each with a minimum
denomination of $100,000, was approximately $12.2 million and $9.0
million in 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of CDS were as follows (in
thousands):
1998............................................... $ 167,162
1999............................................... 57,898
2000............................................... 11,094
2001............................................... 1,924
2002 and thereafter................................ 2,212
---------
$ 240,290
=========
35
<PAGE>
(7) Advances from Federal Home Loan Bank and Other Borrowings
As of December 31, 1997, the Savings Bank had $30.0 million in Federal Home
Loan Bank of Atlanta ("FHLB") advances outstanding. These advances had a
weighted average interest rate of 6.01% and will mature during the year
ended December 31, 2002. The security agreement with FHLB includes a
blanket floating lien requiring the Savings Bank to maintain first
mortgage loans as pledged collateral in an amount equal to at least,
when discounted at 75% of the unpaid principal balances, 100% of these
advances. The FHLB stock is also pledged as collateral for these
advances.
The Savings Bank had $30 million of additional credit availability via a
FHLB line of credit. The Savings Bank did not draw funds on this line of
credit at any time during the years ended December 31, 1997 and 1996.
The $150,000 community investment fund advance outstanding at December 31,
1996 and 1995 bears interest at 7.17% and matured 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.
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.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Average balance during the year..................................... $ 5,629 849
======== =====
Average interest rate during the year............................... 5.74% 5.65%
-======= =====
Maximum month-end balance
during the year................................................. $ 11,952 8,048
======== =====
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.
36
<PAGE>
The income tax provision is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
------ ----- -----
(In thousands)
<S> <C> <C> <C>
Current....................... $ 2,339 1,594 1,776
Deferred...................... (256) (116) 152
------- ----- -----
$ 2,083 1,478 1,928
====== ===== =====
</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,
--------------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- ---------------------
Amount % Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxes on income at U.S.
statutory rate........ $ 1,985 34.0% $ 1,245 34.0% $ 1,707 34.0%
State income taxes, net of
federal tax benefit... 192 3.3 131 3.6 181 3.6
Other - net............... (94) (1.6) 102 2.8 40 .8
------ ---- ----- ---- ----- ----
Taxes on income at
effective rates....... $ 2,083 35.7% $ 1,478 40.4% $ 1,928 38.4%
======= ==== ======= ==== ======= ====
</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:
<PAGE>
<TABLE>
<CAPTION>
At December 31,
------------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred loan fees..................................... $ 27 111
Allowance for loan losses.............................. 256 501
FHLB stock dividends................................... 304 304
Depreciation........................................... 222 186
Certain accrued interest............................... 17 24
Other.................................................. 82 128
------ -----
Gross deferred tax liabilities............................. 908 1,254
------ -----
Deferred tax assets:
Unrealized loss on securities available for sale....... 53 116
RRP incentive plan..................................... 118 208
------ -----
Gross deferred tax assets.................................. 171 324
------ -----
Net deferred tax liabilities............................... $ 737 930
====== =====
</TABLE>
37
<PAGE>
Retained earnings at December 31, 1997 and 1996 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, 1997 and 1996.
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 was 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 1998. At December 31, 1997, the Savings Bank had approximately
$910,000 of deferred tax liabilities recorded for the recapture of its
excess bad debt reserves.
(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 year ended December
31, 1995 was $65,000. 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, 1997
and 1996 were $37,000 and $23,000, respectively.
(10) Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments are commitments to extend credit and
may involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recognized in the consolidated balance
sheet. The contract amounts of these instruments reflect the extent of
involvement the Company has in these financial instruments.
<PAGE>
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments as it does
for on-balance-sheet instruments.
38
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the
Company upon extension of credit is based on management's credit
evaluation of the counterparty.
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents.........................$ 15,684 15,684 10,157 10,157
Investment securities............................. 20,307 20,353 32,832 32,865
Mortgage-backed securities........................ 38,291 38,748 65,736 66,240
Loans receivable.................................. 315,353 316,528 227,948 224,177
Accrued interest receivable....................... 2,134 2,134 2,019 2,019
Federal Home Loan Bank stock...................... 2,304 2,304 1,939 1,939
Financial liabilities:
Deposit liabilities............................... 315,390 316,689 282,664 284,034
Advances from FHLB................................ 30,000 30,376 150 150
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, 1997, follows:
<TABLE>
<CAPTION>
Notional
Amount
(In thousands)
<S> <C>
Commitments to extend credit.................... $ 22,607
======
Unused lines of credit.......................... $ 11,528
======
Undisbursed portion of loans in process ........ $ 12,253
======
</TABLE>
<PAGE>
(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.
39
<PAGE>
(12) Related Parties
Loans to directors and executive officers of the Company 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,
---------------------
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Beginning balance................................... $ 1,030 1,038
Amounts related to new officers and directors....... 135 -
Loans originated.................................... 725 111
Principal repayments................................ (162) (119)
------ -----
Ending balance.................................. $ 1,728 1,030
===== =====
</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, 1997, approximately $16.0 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.
<PAGE>
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, 1997, that the Savings Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, 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.
40
<PAGE>
The Savings Bank's actual capital amounts and ratios at December 31, 1997
and 1996 are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized
For Capital For Prompt
Adequacy Corrective Action
Actual Purposes Provisions
-------------------- --------------------- ---------------------
% Amount % Amount % Amount
----- ---------- ------ ----------- ----- ----------
As of December 31, 1997: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity,
and ratio to total
assets..................... 11.12% $ 44,502
Less: investment in
nonincludable
subsidiary................. (195)
Add back: unrealized loss on
available-for-sale
securities................. 42
--------
Tangible capital,
and ratio to adjusted
total assets............... 11.08% $ 44,349 1.5% $ 6,003
======= ======
Tier 1 (core) capital, and
ratio to adjusted total
assets..................... 11.08% $ 44,349 3.0% $ 12,006 5.0% $ 20,009
======= ====== ======
Tier 1 capital, and ratio
to risk-weighted assets.... 20.90% 44,349 4.0% $ 8,486 6.0% $ 12,730
====== ======
Tier 2 capital (allowance for
loan losses)............... 1,684
-------
Total risk-based capital,
and ratio to risk-
weighted assets............ 21.70% $ 46,033 8.0% $ 16,973 10.0% $ 21,216
======= ====== ======
Total assets................... $ 400,339
=======
Adjusted total assets.......... $ 400,186
=======
Risk-weighted assets........... $ 212,162
=======
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Minimum Capitalized
For Capital For Prompt
Adequacy Corrective Action
Actual Purposes Provisions
-------------------- --------------------- ---------------------
% Amount % Amount % Amount
----- ---------- ------ ----------- ----- ----------
As of December 31, 1996: (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>
42
<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 of 1996 and
was tax deductible. The Savings Bank recorded a charge of $1.7 million
before taxes during 1996 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 substantially 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 4,603,032 shares of stock at the
price of $6 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.
<PAGE>
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.
43
<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, 1997, 1996 and 1995, 10,867, 8,332 and
5,035 options were granted under the Option Plan, and 2,014, 6,000 and
4,515 shares were awarded under the Recognition and Retention Plan.
SFAS No. 123 requires pro forma fair value disclosures if the intrinsic
value method is being utilized. In order to calculate the fair value of
the options, it was assumed that the risk-free interest rate was 7.0%
for each period, an annualized dividend yield of approximately 2% would
apply over the exercise period, the expected life of the options would
be the entire exercise period and the expected stock volatility was
23%, 14% and 26%, respectively, for 1997, 1996 and 1995. For purposes
of pro forma disclosures, the estimated fair value was included in
expense in the period vesting occurs. The following information
pertains to the options granted to purchase common stock and shares
awarded in 1997, 1996 and 1995 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted-average grant-date fair value of options
issued during the year.......................... $ 84 39 21
====== ====== ======
Proforma net earnings................................ $3,663 2,149 3,064
====== ====== ======
Proforma basic earnings per share.................... $ .99 .53 .72
====== ====== ======
</TABLE>
<PAGE>
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 460,303 common
shares were authorized to be granted to directors, officers and
employees of the Savings Bank including 66,343 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, 1997, 57,666 shares remain available for
grant to future directors, officers and employees.
44
<PAGE>
The following is a summary of option transactions:
<TABLE>
<CAPTION>
Weighted-
Range of Average
Number Per Share Per Share
of Shares Option Price Price
--------- ------------ -----
<S> <C> <C> <C>
Outstanding, December 31, 1994...................... 382,293 $6.00 6.00
Granted............................................. 5,035 $9.52 9.52
Forfeited........................................... (1,112) $6.00 6.00
Exercised........................................... (12,636) $6.00 6.00
-------
Outstanding, December 31, 1995...................... 373,580 $6.00-9.52 6.05
Granted............................................. 8,332 $12.00 12.00
Forfeited........................................... (2,778) $6.00 6.00
Exercised........................................... (13,321) $6.00 6.00
-------
Outstanding, December 31, 1996...................... 365,813 $6.00-12.00 6.19
Granted............................................. 10,867 $15.30-21.25 18.06
Exercised........................................... (46,252) $6.00-9.52 6.13
-------
Outstanding, December 31, 1997...................... 330,428 $ 6.00-21.25 6.58
======= ============ =====
</TABLE>
The weighted-average remaining contractual life of the outstanding stock
options at December 31, 1997, 1996 and 1995 was 6.2, 7.1 and 8.3 years,
respectively.
The outstanding options at December 31, 1997 were exercisable as follows:
<TABLE>
<CAPTION>
Number Weighted-Average
of Weighted-Average Remaining
Year Ending Shares Exercise Price Contractual Life
(In years)
<S> <C> <C> <C>
Currently exercisable................... 319,042 $ 6.33 3.7
1998.................................... 4,721 13.36 9.0
1999.................................... 4,721 13.36 9.0
2000.................................... 1,944 15.30 9.0
-------
330,428 $ 6.58 6.2
======= ===== ===
</TABLE>
45
<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
368,242 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, 1997, 1996 and
1995 included the following ESOP related costs:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Amortization of the original cost, $6 per share....... $ 315 315 315
Market appreciation of the FFLC shares................ 597 265 242
Dividends on ESOP shares.............................. 61 60 56
---- ---- ---
Total............................................. $ 973 640 613
=== === ===
</TABLE>
The ESOP shares were as follows:
<TABLE>
<CAPTION>
At December 31,
---------------------------
1997 1996
---- ----
($ in thousands)
<S> <C> <C>
Allocated shares and shares released for allocation... $ 199,479 152,884
Unreleased shares..................................... 157,818 210,424
------- -------
Total ESOP shares..................................... 357,297 363,308
======= =======
Fair value of unreleased shares....................... $ 3,433 2,714
======== ========
</TABLE>
<PAGE>
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, 184,122 shares of common stock
were purchased for the RRP which included 8,067 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 were excluded from stockholders' equity. The Company
recognized compensation expense in the amount of the fair market value
of the common stock at the grant date of $6 per share, pro rata over the
years (1996, 1995 and 1994) during which the shares were earned and
payable and recorded a credit to shareholders' equity. Compensation
expense attributable to the RRP amounted to $368,000 in 1996, 1995 and
1994. No compensation expense attributable to the RRP was recognized in
1997. 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.
46
<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, 1997, 4,581 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, 1997 and 1996 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,
--------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Assets
Cash, deposited with subsidiary $ 477 645
Investment in subsidiary 44,503 41,731
Loans to subsidiary 6,447 11,262
Other assets 2 --
------- -------
Total assets $51,429 53,638
======= =======
Liabilities and Stockholders' Equity
Current income taxes -- --
Accrued expense and other liabilities -- 12
Stockholders' equity 51,429 53,626
------- -------
Total liabilities and stockholders' equity $51,429 53,638
======= =======
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Income
Year Ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues........................................ $ 532 772 871
Expenses........................................ 280 396 432
------ ------ ------
Income before earnings of subsidiary.... 252 376 439
Earnings of subsidiary.................. 3,502 1,808 2,654
----- ----- -----
Net income $ 3,754 2,184 3,093
======= ===== =====
<CAPTION>
Condensed Statements of Cash Flows
Year Ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,754 2,184 3,093
Adjustments to reconcile net income to net cash
provided by operations:
Equity in earnings of subsidiary (3,502) (1,808) (2,654)
(Increase) decrease in other assets (2) 6 8
(Decrease) increase in current income taxes payable -- (4) (27)
(Decrease) increase in accrued expenses and
other liabilities (12) (4) 7
------- ------- -------
Net cash provided by operating activities 238 374 427
------- ------- -------
Cash flows from investing activities-
Repayment of loan to subsidiary 4,815 1,316 316
------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from financing activities:
Purchase of treasury stock (6,171) (3,922) (2,373)
Proceeds from sale of common stock 283 80 76
Cash dividends paid (1,141) (986) (817)
Cash dividends received 1,808 2,654 3,266
------- ------- -------
Net cash (used in) provided by financing activities (5,221) (2,174) 152
------- ------- -------
Net (decrease) increase in cash (168) (484) 895
Cash at beginning of year 645 1,129 234
------- ------- -------
Cash at end of year $ 477 645 1,129
======= ======= =======
</TABLE>
48
<PAGE>
(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.
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. During the years ended December 31, 1996
and 1997, all 126,000 shares approved under the August 1996 program were
repurchased.
In January 1997, the Company's Board of Directors approved a program which
allows the Company to acquire additional common stock in the open
market. During the year ended December 31, 1997, 178,690 shares or 60.6%
of the 294,928 shares approved under that program were repurchased.
<PAGE>
(20) Quarterly Financial Data (unaudited)
The following tables present summarized quarterly data (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Interest income............................... $ 6,483 6,880 7,264 7,529 28,156
Interest expense.............................. 3,439 3,741 4,051 4,185 15,416
----- ----- ----- ----- ------
Net interest income........................... 3,044 3,139 3,213 3,344 12,740
Provision for loan losses..................... 68 70 364 147 649
------ ------ ------ ------ --------
Net interest income after provision
for loan losses........................... 2,976 3,069 2,849 3,197 12,091
----- ----- ----- ----- ------
Other income.................................. 198 216 541 264 1,219
Other expense................................. 1,631 1,883 1,917 2,042 7,473
----- ----- ----- ----- ------
Income before income taxes.................... 1,543 1,402 1,473 1,419 5,837
Income taxes.................................. 570 500 547 466 2,083
------ ----- ------ ------ ------
Net income.................................... $ 973 902 926 953 3,754
====== ===== ====== ====== ======
Basic income per common share................. $ .26 .24 .25 .26 1.01
====== ====== ====== ====== =======
Diluted income per common share............... $ .24 .23 .24 .25 .96
====== ====== ====== ====== ========
</TABLE>
49
<PAGE>
<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
====== ===== ====== ===== ======
Basic income (loss) per common share.......... $ .20 .19 (.05) .20 .54
====== ===== ====== ===== ======
Diluted income (loss) per common share........ $ .19 .18 (.05) .19 .51
====== ===== ====== ===== ======
</TABLE>
50
<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, 1997 and 1996 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, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We 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, 1997 and 1996 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/HACKER, JOHNSON, COHEN & GRIEB PA
- ------------------------------------
HACKER, JOHNSON, COHEN & GRIEB PA
Orlando, Florida
January 16, 1998
51
<PAGE>
FFLC BANCORP, INC.
DIRECTORS AND OFFICERS
Directors: Occupation
Joseph J. Junod Retired, General Manager, Avesta Sheffield Pipe
Chairman of the Board
Claron D. Wagner President, Woody Wagner, Inc.
Vice Chairman
President/Owner, Logan Sitework Contractors, Inc.
James P. Logan President, Lassiter-Ware, Inc.
Ted R. Ostrander, Jr. Attorney, CEO Ro-Mac Lumber Supply, Inc.
H.D. Robuck, Jr. President, FFLC Bancorp, Inc. & Subsidiary
Stephen T. Kurtz Executive Vice President, FFLC Bancorp, Inc. &
Paul K. Mueller Subsidiary
Advisory Directors:
Frank L. Cogburn Retired, Past President, First Federal Savings Bank
of Lake County
James R. Gregg President, Jarol Company
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 and Treasurer
Dwight L. Hart
Senior Vice President
Danny A. Schmid
Senior Vice President
Sandra L. Rutschow
Vice President and Secretary
Lawrence E. Hoag
Vice President
52
<PAGE>
FIRST FEDERAL SAVINGS BANK
OF LAKE COUNTY
DIRECTORS AND OFFICERS
DIRECTORS
Joseph J. Junod
Chairman of the Board
Claron D. Wagner
Vice Chairman
James P. Logan
Ted R. Ostrander, Jr.
H.D. Robuck, Jr.
Stephen T. Kurtz
Paul K. Mueller
Advisory Directors
Frank L. Cogburn
James R. Gregg
Horace D. Robuck
James H. Herlong
OFFICERS
Stephen T. Kurtz
President
Chief Executive Officer
Paul K. Mueller
Executive Vice President
and Treasurer
Dwight L. Hart
Senior Vice President and Mortgage Lending Manager
Danny A. Schmid
Senior Vice President and Commercial Lending Manager
Sandra L. Rutschow
Vice President and Corporate Secretary
Lawrence E. Hoag
Vice President
Deposit Accounts Manager
Michael J. Cox
Vice President and Area Loan Manager
Brian R. Hofer
Vice President and Commercial Loan Officer
Lynda F. Wemple
Vice President and Accounting Manager
<PAGE>
Yvonne K. Ross
Vice President and Loan Officer
Brenda M. Grubb
Vice President and Human Resource Manager
Linda C. Gallop
Clermont Branch Manager
<PAGE>
Doris E. Hyatt
Assistant Secretary
Susan L. Berkebile
Vice President - Area Loan Manager
Dennis Rogers
Assistant Vice President - Area Loan Manager
Wildwood Branch Manager
Vaneeda F. Potter
Fruitland Park Office Manager
Vickie S. Baxter
Assistant Vice President
Eustis Branch Manager
Sonja G. Sanders
Main Street Office Manager
Arthur Middleton
Lake Square Office Manager
Sandra L. Seaton
Assistant Vice President
South Leesburg Branch Manager
Area Loan Originator
Jay Bartholomew
Assistant Vice President
Lady Lake Branch Manager
Jankie Dhanpat
Assistant Vice President
SEC Reporting and Compliance Officer
Karen Hollister
Assistant Vice President
Loan Operations Manager
Charles L. Lee
Security Officer
Janet L. Glessner
Marketing Officer
Debra L. McFarlane
Main Office Branch Manager
Sandra A. Rowe
Assistant Secretary and Loan Servicing Manager
Carmen C. Passwaters
Assistant Secretary
53
<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
Barbara J. Boscana
Norma J. Caron
Maryann D. Chantos
Constance A. Poitier-Christian
Shu Een Chen
Joseph D. Cioppa
Camilla R. Clark
Sheila C. Coffey
Carlos E. Colon
Diane S. Cook
Lori Cook
Barbara A. Cordes
Jewel M. Correll
Jennifer Culberson
Robert Cumm
Cheryl A. Davis
Dawn Rene Davison
Carla J. Devey
Carol A. Dewey
Jankie Dhanpat
Janine S. Dickerson
Deborah S. Edwards
Ruth E. Fielding
Joan P. Gibson
Linda J. Giggey
Janet L. Glessner
Zoann Goodman
Jennifer L. Grovesteen
Brenda M. Grubb
Andrea Hanson
Dwight L. Hart
Lawrence E. Hoag
Stephanie Hodges
Penny M. Hollis
Karen L. Hollister
Stephanie Hodges
Doris E. Hyatt
Patricia B. Inman
Juanita F. Jackson
Sondra Jones
Constance L. Merrell-Kasch
Kristina Keel
Erin Klink
Stephen T. Kurtz
Adriane M. Lacey
Linda N. Landers
Cynthia M. Lay
<PAGE>
Leslie A. Leach
Charles L. Lee
Pamela J. Linville
Cynthia A. Lord
Judith M. Maddox
Annette McCullough
Debra L. McFarlane
Paul K. Mueller
Pamela A. O'Neal
Carmen C. Passwaters
Debra L. Possee
Leslie Robinson
Beverly L. Ross
Yvonne K. Ross
Sandra A. Rowe
Sheri K. Runnels
Landa A. Russell
Sandra L. Rutschow
James Schaeffer
Danny A. Schmid
Margaret M. Siegel
Leigh S. Skehan
Lynn P. Stoffel
Michelle M. Strickland
Joyce H. Sutton
Michelle M. Thompson
Virginia D. Vann
Theresa R. Wells
Lynda F. Wemple
Margaret R. White
Louise E. Whitlock
Rhonda L. Wilkerson
Shirley N. Williams
Betty L. Wolcott
Lisa K. Woolwine
FRUITLAND PARK OFFICE:
Julie Elaine Glenn
Melissa J. Judd
Vaneeda F. Potter
Delphine C. Williams
LADY LAKE:
Jay R. Bartholomew
Deede A. Dye
Julie A. Laws
Marilyn A. Leugers
Tamara J. Lloyd
Mary E. Rutz
Patricia L. Sizemore
Margaret A. Slimm
<PAGE>
MAIN STREET OFFICE:
Aimee N. Barto
Kristy L. Lawrence
Dawn M. Loth
Sonja G. Sanders
Orpha M. Vogt
LAKE SQUARE:
Sheila M. Heitmeyer
Arthur E. Middleton
Melissa J. Miller
Angela Nicole Phillips
CLERMONT OFFICE:
Susan L. Berkebile
Sharon S. Dziorney
Annette S. Demeree
Donna L. Franklin
Linda C. Gallop
Brenda Heisner
Brian R. Hofer
Tammy R. Imundi
Trinia C. McClendon
Glenda S. Riggs
Sharon M. Slack
EUSTIS OFFICE:
Vickie S. Baxter
Michael J. Cox
Peggy L. Harris
Taneria N. O'Neal
Natasha L. Pender
Michael J. Price
Bernice E. Watkins
Juanita L. Wright
WILDWOOD OFFICE:
Donna L. Boyett
Angela B. Christopher
Jennifer Kitchens
Rebecca D. Moreno
Dennis R. Rogers
Gina R. Rusu
Karen Seybold
Ledora Smith
Willie Lee Smith
Paula D. Williams
SOUTH LEESBURG
Hilda Lozano
Sandra L. Seaton
Carol A. Sieder
Eva J. Snead
54
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,122
<INT-BEARING-DEPOSITS> 8,562
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,581
<INVESTMENTS-CARRYING> 32,017
<INVESTMENTS-MARKET> 32,520
<LOANS> 315,353
<ALLOWANCE> 1,684
<TOTAL-ASSETS> 400,237
<DEPOSITS> 315,390
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,418
<LONG-TERM> 30,000
0
0
<COMMON> 43
<OTHER-SE> 51,386
<TOTAL-LIABILITIES-AND-EQUITY> 315,353
<INTEREST-LOAN> 22,318
<INTEREST-INVEST> 5,838
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 28,156
<INTEREST-DEPOSIT> 14,279
<INTEREST-EXPENSE> 15,416
<INTEREST-INCOME-NET> 12,740
<LOAN-LOSSES> 649
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 7,473
<INCOME-PRETAX> 5,387
<INCOME-PRE-EXTRAORDINARY> 3,754
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,754
<EPS-PRIMARY> 1.01
<EPS-DILUTED> .96
<YIELD-ACTUAL> 7.80
<LOANS-NON> 242
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,063
<CHARGE-OFFS> (28)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,684
<ALLOWANCE-DOMESTIC> 1,684
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
