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UNITED STATES
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 Commission File
December 31, 1998 No. 0-27652
REPUBLIC BANCSHARES, INC.
(Exact Name of Registrant As Specified In Its Charter)
FLORIDA 59-3347653
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
111 2nd Avenue N.E., St. Petersburg, FL 33701
(Address of Principal Office) (Zip Code)
(727) 823-7300
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each Class
Common Stock, par value $2.00
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the Registrant, based upon the average bid and asked prices,
was approximately $206,852,000, on March 19, 1999. As of that date, there were
10,473,504 shares of the Registrant's Common Stock, par value $2.00 per share,
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders are incorporated by reference into Parts I, II, III, and IV of
this report.
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TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
Background and Prior Operating History ................................ 1
Business of Republic Bancshares, Inc................................... 2
Sources of Funds....................................................... 3
Lending Activities..................................................... 3
Credit Administration.................................................. 5
Asset Quality.......................................................... 6
Investment Activities..................................................10
Employees..............................................................10
Market Area............................................................10
Market Risk............................................................11
Supervision and Regulation.............................................13
Effects of Inflation...................................................18
Year 2000 Issues.......................................................18
Changes in Accounting Standards........................................19
ITEM 2. PROPERTIES......................................................20
ITEM 3. LEGAL PROCEEDINGS...............................................28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................28
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years Ended December 31, 1998 and 1997.................................32
Years Ended December 31, 1997 and 1996.................................38
Asset/Liability Management and Liquidity...............................46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............49
ITEM 11. EXECUTIVE COMPENSATION..........................................50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K............................................50
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PART I
ITEM 1. BUSINESS
Republic Bancshares, Inc. (the "Company") is a registered bank holding company
whose principal subsidiary is Republic Bank (the "Bank"), a Florida-chartered
commercial bank headquartered in St. Petersburg, Florida. The Company also has
a St. Petersburg-based thrift subsidiary, chartered in 1998 under the name
Republic Bank, F.S.B. (the "Savings Bank"). The Bank and the Savings Bank
provide a broad range of traditional commercial banking services, emphasizing
commercial real estate and business lending. Previously, the Company's
mortgage banking activities comprised a significant portion of its business,
however, at the end of 1998, the Company significantly reduced the size and
scope of its mortgage banking operations. At December 31, 1998, the Bank's
branch network consisted of 61 branches throughout Florida. The Savings Bank
has two branches, one in Florida and one in Brunswick, Georgia. At December
31, 1998, the Company's consolidated assets totaled $2.5 billion, portfolio
loans totaled $1.9 billion, deposits totaled $2.2 billion and stockholders'
equity was $163.6 million. The Company is regulated by the Federal Reserve.
The Bank is regulated by the Florida Department of Banking and Finance (the
"Department") and the Federal Deposit Insurance Corporation (the "FDIC"). The
Savings Bank is regulated by the Office of Thrift Supervision (the "OTS"). The
Bank and the Savings Bank's deposits are insured by the FDIC up to applicable
limits, and the Bank is a member of the Federal Home Loan Bank of Atlanta (the
"FHLB").
BACKGROUND AND PRIOR OPERATING HISTORY OF THE BANK
In May 1993, William R. Hough and John W. Sapanski, the Company's two
principal shareholders, acquired from the prior controlling stockholder more
than 99.0% of the Bank's outstanding common stock (the "Change in Control").
After the Change in Control, the Bank began to implement a program of
expanding its branches and lines of business. In December 1993, the Bank
acquired 12 branches from Crossland Savings, F.S.B., a federal stock savings
bank, assumed deposit liabilities of $327.7 million and purchased loans
secured by real estate and other real estate ("ORE") amounting to $201.6
million. During the latter part of 1994 and throughout 1995, the Bank
continued to pursue a strategy of increasing its retail banking presence on
the West Coast of Florida. The Bank opened 13 new branches, increasing market
presence in existing counties and expanding into Pasco County. At the same
time, the Bank undertook a program of purchasing residential mortgage loans,
primarily from the FDIC at substantial discounts from face value, as a means
of deploying the excess liquidity from new deposits until internal loan growth
was sufficient.
Following the Bank's conversion to a holding company structure in February
1996, the Company focused on increasing its residential lending capabilities
by adding loan production offices in Florida, Boston, Massachusetts, and
Irvine, California. These offices expanded the Company's product line to
include government-insured first mortgage loans, and high loan-to-value debt
consolidation and home improvement loans secured by junior liens on real
estate ("High LTV Loans"). In the fourth quarter of 1996, the Bank also added
a wholesale lending operation that purchased loans from third-party
originators for resale. The Company sold or securitized a substantial portion
of the loans it originated from its mortgage banking division, and consummated
its first securitization of High LTV Loans in December 1997.
While building its mortgage banking operation, the Company continued expanding
its commercial banking operation and in January 1997, opened a new branch in
Hernando County. In April 1997, the Company acquired Firstate Financial,
F.A., a thrift institution headquartered in Orlando, Florida, for a cash
purchase price of $5.5 million (the "Firstate Acquisition"). The Firstate
Acquisition, in which the Company acquired $71.1 million in assets, $67.9
million in deposits, and a branch in each of Orange and Seminole Counties,
increased the Company's presence in central Florida, where the Company
previously operated a commercial loan production facility but had no branches.
In September 1997, F.F.O. Financial Group, Inc. ("FFO"), St. Cloud, Florida,
the holding company parent of First Federal Savings and Loan Association of
Osceola County, was merged into the Company in a stock-for-stock transaction
(the "FFO Merger"). The FFO Merger further increased the Company's presence
in central Florida by adding 11 branches in Brevard, Orange and Osceola
Counties. At the time of the merger, FFO had total assets of
$328.4 million, total loans of $222.4 million and total deposits of $281.3
million.
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In June 1998, the Company acquired three branch offices of NationsBank, N.A.
and four branch offices of NationsBank's then affiliate, Barnett Bank, N.A.,
all of which were located in Florida, including the loans and other assets
recorded at such offices. At acquisition, the seven branches had deposit
liabilities of $199.9 million and loans of $114.4 million. On August 20,
1998, the Company acquired an additional branch of Barnett located in
Brunswick (Glynn County), Georgia, with the office becoming an interstate
branch of the Company's newly-chartered Savings Bank. At acquisition, the
Georgia Branch had deposit liabilities of $16.9 million and loans of $7.5
million. The Company paid a combined deposit and loan premium of $24.0
million for all of the branches that were acquired.
On August 13, 1998, the Company purchased a branch office in Deerfield Beach
(Broward County), Florida from the Dime Savings Bank, F.S.B. In the
transaction, the Company acquired $61,000 of loans and $100,000 of personal
property and equipment located at the branch and assumed $206.7 million of
deposits. The Company's purchase price for the Dime Branch was $9.8 million.
On November 5, 1998, Bankers Savings Bank, F.S.B., Coral Gables, Florida
("BSB"), was acquired by the Company in a stock-for-stock transaction. At the
date of acquisition, BSB had total assets of $70.0 million, total loans of
$46.2 million, total deposits of $61.1 million and operated two branches in
Dade County.
On November 5, 1998, Lochaven Federal Savings and Loan Association, Orlando,
Florida, was also acquired by the Company in a stock-for-stock transaction. At
the date of acquisition, Lochaven had total assets of $56.5 million, total
loans of $44.8 million, total deposits of $54.0 million and operated one branch
in Orange County.
In the fourth quarter of 1998 the Company significantly reduced the size and
scope of its mortgage banking activities. Turmoil in financial markets,
particularly the High LTV and nonconforming mortgage loan segments, reduced
liquidity levels in the high LTV sector of the asset-backed securities markets
which in turn adversely affected the volume and pricing of mortgage loans in
the secondary markets. During the second half of November 1998, the Company's
normal conduits for sale and/or securitization of its High LTV Loans and
nonconforming first mortgage loans became unavailable due to those liquidity
problems. Rather than dispose of High LTV Loans and nonconforming mortgages at
distressed prices resulting from the illiquid market, the Company elected
during such period to forego sales or securitizations of those loans in the
fourth quarter of 1998 and to hold those loans in its portfolio. The Company
also ceased originating High LTV Loans and substantially reduced its
originations of nonconforming first mortgage loans. The Company also closed its
out-of-state loan production offices and ceased all telemarketing efforts that
were the source of the majority of the loan originations from its mortgage
banking unit. A restructuring charge of $6.7 million was recorded, primarily
for severance benefits payable to mortgage banking employees whose positions
were eliminated and an $818,000 charge was recorded for legal and other costs
not includable as part of the restructuring charge.
BUSINESS OF REPUBLIC BANCSHARES, INC.
Following the recent restructuring of its mortgage lending operations (the
"Restructuring"), the Company revised its principal business strategy to
include: (i) increasing the amount of its consumer and business loans held in
portfolio, with continued emphasis on commercial real estate and multifamily
residential loans; (ii) increasing market share and expanding its market area
primarily through de novo branching and internal growth; (iii) emphasizing
commercial and retail checking relationships; and (iv) increasing its range of
commercial banking and retail-oriented products and services. While pursuing
this strategy, management remains committed to improving asset quality,
managing interest rate risk and enhancing profitability.
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SOURCES OF FUNDS
Deposit accounts are the Company's primary source of funds for lending,
investment, and other general business purposes. In addition to deposits, funds
are derived principally from loan repayments. Scheduled loan payments on the
residential loan portfolio are a relatively stable source of funds, while
residential loan prepayments, deposit in-flows and out-flows are significantly
influenced by general interest rate and money market conditions. Additional
funding needs may be met through borrowings from the FHLB, which are secured by
a blanket lien on the Company's portfolio of residential loans. Current
funding requirements can be met through retail deposits, without reliance on
brokered deposits. To the extent there is a requirement for short-term
financing beyond liquid assets, the Company intends to rely on repurchase
agreements, FHLB advances, and other traditional money market sources of
funding. For additional discussion of asset/liability management policies and
strategies, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Asset/Liability Management."
The Company offers a full range of deposit services, including checking and
other transaction accounts, savings accounts, and time deposits. At December
31, 1998, the Company had no brokered deposits; time deposits in amounts of
$100,000 or more constituted 13.18% of total deposits.
The following table sets forth the principal types of deposit accounts offered
and the aggregate amounts of such accounts at December 31, 1998 (in thousands):
Weighted
Average Percent of
Interest Rate Amount Total Deposits
------------- ------------ --------------
Noninterest bearing 0.00% $ 138,934 6.35%
Interest checking .75 189,392 8.66
Passbook savings 4.25 292,324 13.36
Statement savings 1.98 74,493 3.41
Money market 3.48 159,868 7.31
Time deposits with original maturities of:
One year or less 4.87 146,659 6.70
Over 1 year through 5 years 5.55 1,010,031 46.17
Over 5 years 6.17 175,711 8.03
------ -------------- -------
Total time deposits (1) 5.55 1,332,401 60.91
====== ============== =======
Total deposits 4.63% $2,187,412 100.00%
====== ============== =======
(1) Includes time deposits in amounts of $100,000 or more of $288.3
million.
At December 31, 1998, scheduled maturities of total time deposits were as
follows (in thousands):
Year ended Percent of
December 31, Amount Total Time Deposits
------------ ------------ -------------------
1999 $ 993,455 74.6%
2000 212,031 15.9
2001 58,423 4.4
2002 19,957 1.5
2003 46,714 3.5
Thereafter 1,821 .1
------------ ------------------
Total time deposits $1,332,401 100.0%
============ ==================
LENDING ACTIVITIES
The Company originates a full range of lending products for its portfolio. The
Company's origination of High LTV and real estate-secured loans for sale in the
secondary market has been significantly reduced in amount and product selection
as a result of the Restructuring. Portfolio lending efforts are now focused on
customers located throughout
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Florida and in Brunswick, Georgia. The Company's portfolio objective has been
revised to reduce, over time, the reliance on residential mortgage loans and to
increase its consumer and business loans. The Company will also continue to
emphasize commercial real estate and multifamily residential lending.
For 1998, originations of first and second lien mortgage loans totaled $1.4
billion, including $1.3 billion in fixed-rate loans and $94.0 million of
adjustable-rate loans. Sales of first and second lien loans totaled $952.0
million for 1998. Residential mortgage loan originations are expected to amount
to less than $200.0 million in 1999. Originations of commercial real estate and
commercial (business) loans totaled $538.0 million for 1998 and are expected to
remain at this level in 1999.
The following tables set forth information concerning the loan portfolio, based
on total dollars and percent of portfolio, by collateral type as of the dates
indicated (in thousands):
Based on total dollars: At December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
-------- ---------- -------- ------- -------
Real estate mortgage loans:
One-to-four family residential $973,538 $686,661 $532,692 $512,751 $417,041
Multifamily residential 92,209 84,863 89,129 94,242 107,054
High LTV Loans 116,764 - - - -
Commercial real estate 379,797 278,951 234,043 184,050 144,233
Construction/land development 130,415 51,511 32,245 26,268 27,189
Home equity loans 75,707 47,365 15,014 7,939 7,568
---------- ---------- ---------- -------- --------
Total real estate mortgage loans 1,768,430 1,149,351 903,123 825,250 703,085
Commercial (business) loans 84,002 39,119 40,747 36,272 32,894
Consumer loans and other loans 43,857 27,430 32,352 24,320 17,383
---------- ---------- ---------- -------- --------
Total portfolio loans 1,896,289 1,215,900 976,222 885,842 753,362
Allowance for loan losses (28,077) (22,023) (19,774) (21,097) (16,322)
---------- ---------- ---------- -------- --------
Portfolio loans, net of allowance 1,868,212 1,193,877 956,448 864,745 737,040
Loans held for sale:
Residential first mortgage loans 184,176 141,556 92,838 84,311 61,214
High LTV Loans - 45,670 5,511 - -
---------- ---------- ---------- -------- --------
Loans held for sale 184,176 187,226 98,349 84,311 61,214
---------- ---------- ---------- -------- --------
Total loans $2,052,388 $1,381,103 $1,054,797 $949,056 $798,254
========== ========== ========== ======== ========
Based on percent of portfolio: December 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------- ------ ------ -----
Real estate mortgage loans:
One-to-four family residential 51.34% 56.47% 54.57% 57.88% 55.36%
Multifamily residential 4.86 6.98 9.13 10.64 14.21
Commercial real estate 20.03 22.94 23.97 20.78 19.14
High LTV Loans 6.16 0.00 0.00 0.00 0.00
Construction/land development 6.88 4.24 3.30 2.97 3.61
Home equity loans 3.99 3.90 1.54 0.89 1.00
------- ---------------- ------- -------
Total real estate mortgage loans 93.26 94.53 92.51 93.16 93.32
Commercial (business) loans 4.43 3.22 4.17 4.10 4.37
Consumer loans and other loans 2.31 2.25 3.32 2.74 2.31
------- ------- ------- ------- -------
Total portfolio loans 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
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The following table sets forth the contractual amortization of real estate and
commercial loans at December 31, 1998 and 1997. Loans having no stated schedule
of repayments and no stated maturity are reported as due in one year or less.
The table also sets forth the dollar amount of loans scheduled to mature after
one year, according to their interest rate characteristics (in thousands):
December 31, 1998 December 31, 1997
------------------------------------------------------------------
Type of loan: Real Estate Commercial Real Estate Commercial
--------------- --------------- --------------------------------
Amounts due:
One year or less $ 361,236 $13,369 $90,381 $15,597
After one through five years 296,670 55,375 281,528 20,142
More than five years 1,110,524 15,258 777,442 3,380
--------------- --------------- --------------- ---------------
Total $1,768,430 $84,002 $1,149,351 $39,119
=============== =============== =============== ===============
Interest rate terms on
amounts due after one year:
Adjustable $ 688,040 $51,229 $691,743 $9,220
Fixed 719,154 19,404 367,227 14,302
--------------- --------------- --------------- ---------------
Total $1,407,194 $70,633 $1,058,970 $23,522
=============== =============== =============== ===============
CREDIT ADMINISTRATION
The Company's loan approval process provides for various levels of lending
authority to loan officers, the Officers' Loan Committee, and the Chairman and
Chief Executive Officer. In addition, loans in excess of $1.5 million require
the approval of the Board of Directors' Loan Committee or a majority of the
full Board prior to funding. Loan purchases are made subject to the same
underwriting standards as loan originations. All loan purchases must be
approved in advance of funding by the Chief Executive Officer and are reported
to the full Board following purchase. To achieve consistency in underwriting
policies and procedures, the Company has centralized the supervision of all
credit decision functions.
The Company's real estate lending consists of extensions of credit secured by
liens on interests in real estate or made for the purpose of financing the
construction of a building or other improvements to real estate, regardless of
whether a lien has been taken on the property. Under applicable regulations,
the Company is required to adopt and maintain comprehensive written real estate
lending policies that are consistent with safe and sound banking practices.
These lending policies must reflect consideration of the Interagency Guidelines
for Real Estate Lending Policies adopted by the federal banking agencies in
December 1992 (the "Guidelines"). The Guidelines set forth regulations
prescribing standards for real estate lending, which the Company has
incorporated into its lending policy.
The Company's lending policy addresses certain lending considerations set forth
in the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards and
documentation, approval and reporting requirements. The LTV ratio framework,
with a LTV ratio being the total amount of credit to be extended divided by the
appraised value or purchase price of the property at the time the credit is
originated, has been established for each category of real estate loans. The
Company's policy, subject to certain approval exceptions, establishes, among
other things, the following LTV limits: raw land (65%); land development (75%);
construction (commercial, multifamily and non-residential) (80%); and improved
property (85%). For portfolio purposes, loans on one-to-four family
residential (owner occupied) mortgages where the LTV exceeds 95% are not made,
and any LTV ratio in excess of 80% generally requires appropriate insurance or
additional security from readily marketable collateral. Originations of High
LTV Loans has been discontinued. The Board of Directors reviews and approves
the Company's lending policies at least annually.
The Company's commercial (business) lending is based on a strategy of extending
credit to the Florida business community, with commercial loans being made to
corporate and commercial loans to borrowers with satisfactory cash flows.
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The Company manages its loan portfolio on an ongoing basis following written
portfolio management strategies, guidelines for underwriting standards and risk
assessment, and procedures for ongoing identification and management of credit
deterioration. Management undertakes regular portfolio reviews to estimate
loss exposure and ascertain compliance with policies (see -- "Asset Quality").
ASSET QUALITY
ALLOWANCE/PROVISION FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of an amount
adequate to provide for probable losses inherent in the loan portfolio based on
historical data for the Company and the current status of the loan portfolio.
However, there may be additional risks of losses in the future, which cannot be
quantified precisely or attributed to particular loans or classes of loans.
Because those risks include general economic trends, as well as available
information about conditions affecting individual borrowers, management's
estimate of the allowance needed is necessarily approximate and imprecise. The
allowance is also subject to regulatory examinations and determinations as to
adequacy, which may take into account such factors as the methodology used to
calculate the allowance and the size of the allowance in comparison to peers
identified by the regulatory agencies.
Management conducts an ongoing evaluation and grading of its loan portfolio
according to an eight-point rating system. The loan ratings serve as a
guideline in assessing the risk level of a particular loan and provide a basis
for the estimation of the overall allowance necessary based on historical
experience. The Loan Review Department independently rates loans and, on a
quarterly basis, meets with senior management and the loan officers to discuss
all loans which have been identified for potential credit quality problems.
The Loan Review Department also reports its findings to the Directors' Audit
Committee to ensure independence of the loan grading function.
The Company believes that its loan loss allowance policy is both consistent
with policies established by federal and state regulatory agencies and
commensurate with historical loss experience. Provisions for loan losses
charged to expense during each period are made based on management's assessment
of the adequacy of the allowance when compared to the inherent risk of the
existing portfolio. As part of the risk assessment for loans purchased from
Crossland in 1993 and for loans purchased from 1994 through 1997, management
allocated a portion of the discount on such loan purchases to the allowance in
amounts which are consistent with the Company's loan loss allowance policy
guidelines. Amounts resulting from discount allocation or loss provision to
the allowance related to specific pools of purchased loans are available to
absorb potential losses only on those purchased loans and are not available to
cover losses on other loans. At December 31, 1998, $1.2 million was allocated
to the March 1995 Purchase, $539,000 was allocated to loans purchased from
Crossland, $543,000 was allocated to the July 1997 Purchase, $1.0 million was
allocated to other loan purchases, and $24.8 million was allocated to
originated loans. At December 31, 1998, the amount of unearned discount on
purchased loans, which had not been allocated to the allowance, totaled $3.9
million.
Activity to the allowance during 1998 included a $14.3 million provision for
loan losses. Of this, $10.0 million represented provisions necessary to
maintain the adequacy of the allowance considering transfer of High LTV and
nonconforming residential loans to the portfolio. Other activity to the
allowance during 1998 included $3.9 million of loan charge-offs (net of
recoveries), and $4.3 million reallocated from the allowance to loan discounts
as a result of lower than expected charge-offs in these portfolios. Activity
to the allowance during 1997 included a $3.2 million provision for loan losses,
loan charge-offs (net of recoveries) of $1.2 million, $132,000 of reserves
related to the Firstate acquisition, and $39,000 transferred to unearned
discount.
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The following table sets forth information concerning the activity in the
allowance for loan losses during the periods indicated (in thousands):
Years Ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Allowance at beginning
of period: $22,023 $19,774 $21,097 $16,322 $17,346
Allowance from Firstate
Acquisition - 132 - - -
Loan discount (net) allocated
to/(from) the allowance for:
Loans purchased from Crossland (805) - - - (757)
Loans purchased in 1994 (689) - (202) - 1,400
Loans purchased in 1995 (2,605) (773) (1,541) 7,658 -
Loans purchased in 1996 - - 11 - -
Loans purchased in 1997 (204) 812 - - -
------- ------- ------ ------- -----
Total loan discount allocated
to/(from) the allowance (4,303) 39 (1,732) 7,658 643
Charge-offs:
Residential loans (1-4 family) (1,481) (974) (1,934) (553) (796)
Commercial real estate/
multi-family (266) (15) (170) (4,054) (1,612)
Commercial (business) (1,450) (125) (249) (1,000) (320)
Consumer and other loans (1,197) (288) (292) (207) (141)
------- ------- ------ ------ -----
Total charge-offs (4,394) (1,402) (2,645) (5,814) (2,869)
Recoveries:
Residential loans (1-4 family) 112 3 31 65 83
Commercial real estate/
multi-family 183 54 35 379 113
Commercial loans (business) 48 152 168 53 64
Consumer and other loans 147 24 62 10 1
------- ------- ------ ------ -----
Total recoveries 490 233 296 507 261
Net charge-offs (3,904) (1,169) (2,349) (5,307) (2,608)
Reclassification of allowance for
in substance foreclosures under
adoption of SFAS Nos.114 and 118 - - - - 537
Provisions for loan losses 14,261 3,247 2,758 2,424 404
------- ------- ------- ------- --------
Allowance at end of period $28,077 $22,023 $19,774 $21,097 $16,322
======= ======= ======= ======= ========
Charges to allocated loan discount 0.03% 0.04% 0.15% 0.09% 0.20%
Other net charge-offs 0.19 0.06 0.10 0.54 0.21
------- ------- ------ ----------- -----
Total net charge-offs to
average loans 0.22% 0.10% 0.24% 0.63% 0.40%
======= ======= ====== ====== =====
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The following table sets forth the allocation of the allowance based on
management's subjective estimates and the percent of the loan portfolio for
each category presented. The amount allocated to a particular segment should
not be construed as the only amount available for future charge-offs that might
occur within that segment. In addition, the amounts allocated by segment may
not be indicative of future charge-off trends. The allocation of the allowance
may change from year to year should management determine that the risk
characteristics of the loan portfolio and off-balance sheet commitments have
changed.
1998 1997
--------------------- ------------------
Allowance Allocation Percent of Percent of
Amount Portfolio Amount Portfolio
------- ---------- ------ ----------
(in thousands)
Performing/not classified:
Residential loans:
arch 1995 Purchase $ 49 1.2% $3,421 2.1%
All other residential 1,976 55.5 1,427 58.9
Debt consolidation & subprime loans 4,621 8.4 - -
Commercial (business) 830 4.0 358 2.5
Commercial real estate 3,602 19.2 3,481 27.6
Consumer & other 1,995 7.9 1,416 5.3
----- ---- ------ ----
Subtotal 13,073 96.2 10,103 96.4
Nonperforming/classified:
Special mention 587 1.4 200 .7
Substandard & nonperforming 7,272 2.3 5,663 2.7
Doubtful 871 .1 722 .1
Loss - - 992 .1
----- ---- ------ ----
Subtotal 8,730 3.8 7,577 3.6
Off balance sheet risk 1,553 - 946 -
Unallocated 4,721 - 3,397 -
----- ---- ------ ----
Total $28,077 100.0% $22,023 100.0%
======= ====== ======= ======
NONPERFORMING ASSETS
- --------------------
Nonperforming assets include: (i) loans which are 90 days or more past due and
have been placed into non-accrual status; (ii) restructured loans that have not
yet demonstrated a sufficient payment history to warrant return to performing
status and therefore, are not accruing interest; (iii) accruing loans that are
90 days or more delinquent that are deemed by management to be adequately
secured and in the process of collection; and (iv) ORE (i.e., real estate
acquired through foreclosure or deed in lieu of foreclosure). All delinquent
loans are reviewed on a regular basis and are placed on non-accrual status
when, in the opinion of management, the possibility of collecting additional
interest is deemed insufficient to warrant further accrual. As a matter of
policy, interest is not accrued on loans past due 90 days or more unless the
loan is both well secured and in process of collection. When a loan is placed
in non-accrual status, interest accruals cease and uncollected accrued interest
is reversed and charged against current income. Additional interest income on
such loans is recognized only when received.
Loans classified as non-accrual totaled $36.6 million at December 31, 1998,
compared with $30.4 million at December 31, 1997, an increase of $6.2 million.
Nonperforming one-to-four family residential loans at year-end 1998 increased
$7.0 million and commercial real estate and multifamily loans increased
$482,000, while nonperforming commercial (business) loans declined $1.0
million. The increase in residential nonperforming loans was primarily the
result of a $4.1 million increase in nonperforming loans originated by the
mortgage banking unit which were transferred to portfolio due to underwriting
weaknesses which caused the quality of the loans to fall below investor
standards. The loans later became delinquent. At December 31, 1998 and 1997,
the Company had nonperforming assets (including loans classified as
non-accrual) of $42.8 million or 1.71% of total assets and $38.8 million or
2.31% of total assets, respectively. Accruing loans, which were 90 days past
due amounted to $1.2 million at December 31, 1998 and $196,000 at December 31,
1997, and primarily consisted of loans in process of renewal. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Balance Sheets at December 31, 1998 and 1997.")
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The following table sets forth information regarding the components of
nonperforming assets at the dates indicated (in thousands):
At December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------
Non-accrual loans:
Residential loans (1-4 family) $24,149 $17,101 $12,495 $13,394 $12,134
Multi-family residential 183 194 55 129 1,160
Commercial real estate 9,614 9,121 8,140 4,119 3,907
Commercial (business) 1,027 2,031 1,604 1,059 1,179
Home equity and consumer 619 638 164 495 632
Other nonperforming receivables 1,010 1,319 - - -
------- ------- --------- --------- -----
Total non-accrual loans 36,602 30,404 22,458 19,196 19,012
ORE acquired through foreclosure 4,951 8,191 9,477 13,465 18,436
Accruing loans 90 days
past due 1,232 196 113 1,876 293
------- ------- --------- --------- -------
Nonperforming assets $42,785 $38,791 $32,048 $34,537 $37,741
======= ======= ========= ========= =======
Nonperforming loans
to loans 2.02% 2.52% 2.31% 2.38% 2.56%
Nonperforming assets
to total assets 1.71% 2.31% 2.35% 2.78% 3.64%
OTHER REAL ESTATE ACQUIRED THROUGH FORECLOSURE
All ORE assets are recorded at the lower of cost or estimated fair market value
less selling costs based on appraisal information that is updated when a
property is taken into ORE and, thereafter, when determined appropriate by
management but no less than annually. As of December 31, 1998, in no case did
the book value of any ORE property exceed 90% of the most recent appraisal.
The following table sets forth information regarding the Company's ORE
balances, net of allowances, as of the dates indicated (in thousands):
At December 31,
--------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------- -------
Vacant undeveloped residential land $ 6 $1,145 $1,334 $ 1,755 $ 2,444
Vacant developed residential lots 785 254 260 265 434
Residential houses 2,258 2,613 3,442 1,779 1,464
Vacant commercial undeveloped land 640 855 821 1,357 6,419
Commercial land developed for sale 890 2,835 3,450 4,823 6,771
Income-producing commercial buildings 310 427 12 2,801 80
Vacant commercial buildings 62 62 - 685 824
------ ------ ------ ------- -------
Total ORE $4,951 $8,191 $9,319 $13,465 $18,436
====== ====== ====== ======= =======
ORE to total assets 0.20% 0.49% 0.69% 1.08% 1.78%
====== ====== ====== ======= =======
The ORE amount has been reduced from $18.4 million at the end of 1994, which
includes assets acquired from Crossland, to $5.0 million at the end of 1998.
The largest ORE property is a tract of land in Holiday, Florida, currently
carried at $884,000. During 1998, the Company recorded $1.4 million of
valuation allowances on this property. The Company will be required to
write-off the remaining book value of this property, for regulatory purposes,
if it has not been sold by March 31, 1999. A contract for the sale of this
property has been approved by the Company and the purchaser for closing before
March 31, 1999 at a sales price of $1.5 million.
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TROUBLED DEBT RESTRUCTURINGS
In a troubled debt restructuring ("TDR") the creditor allows the debtor certain
concessions that would not normally be allowed, such as modifying the terms of
the debt to a basis more favorable than those offered to other creditors or
accepting third-party receivables in lieu of the debt. At December 31, 1998
and 1997, the loan portfolio included TDR's amounting to $411,000 and $7.5
million, respectively. Restructured, nonperforming loans (all in non-accrual
status), included in total TDR's for 1998 and 1997 were $0 and $4.9 million,
respectively.
INVESTMENT ACTIVITIES
State law requires that the Bank maintain a specified minimum amount of liquid
assets, based on the level of deposits, which are subject to certain
restrictions. At December 31, 1998, the amount of liquid assets maintained
exceeded the regulatory minimum.
EMPLOYEES
At December 31, 1998, there were 1,733 full-time equivalent employees, none of
whom were represented by a union or other collective bargaining agreement.
Included in this total were 997 employees assigned to the Company's commercial
banking operations and 736 employees assigned to its mortgage banking
operation. As a result of the restructuring of the mortgage banking unit
announced in December 1998, the Company expects to reduce the number of
employees assigned to this area to approximately 150.
MARKET AREA
At December 31, 1998, the Company had 61 branches throughout Florida and one
branch in Glynn County, Georgia. As a multi-branch institution, the Company's
market area encompasses all of the counties in which it operates.
Most of the Company's branches are in Metropolitan Statistical Areas ("MSA").
A MSA is defined by the U.S. Census Bureau as a geographic area with a
significant population nucleus, along with any adjacent communities that have
a high degree of economic and social integration with the nucleus. Of the
Company's branches, more than half are in the two MSA's which anchor the West
Coast of Florida: (i) Tampa-St. Petersburg-Clearwater, which includes
Hillsborough, Hernando, Pasco and Pinellas Counties; and (ii)
Sarasota-Bradenton, comprised of Manatee and Sarasota Counties. As of April
1998, the latest date estimates were available, the Tampa-St. Petersburg MSA
had a population of 2.28 million and the Sarasota-Bradenton MSA had a
population of 563,000. Together, the two MSA's had a combined population of
2.8 million residents, which would rank approximately 12th in the United
States. The economic base of the MSA's in which the Company has branches are
supported by a large and growing segment of retirees, tourism, which
contributes to the economic base throughout the year, and light industry.
Florida is a highly competitive state for financial services of all kinds.
Competition for deposits also exists from money market funds and credit unions.
Consumers can choose from a wide range of suppliers of personal credit,
including credit card companies, consumer finance companies, credit unions and
mortgage bankers, as well as from competing financial institutions.
The Company ranked 10th among banks and 15th among all depository institutions
in the state of Florida in terms of deposits held as of June 30, 1998, the
latest date for which data is available. As the table below indicates, market
share ranges from 12.5% in Osceola County to one-half of 1% in Orange County.
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Branch Deposits in Florida by County
(in millions)
At December 31, 1998,
------------------------
As of June 30, 1998
Number of ---------------------------------------
Branch Offices Amount The Company Total The Company
-------------- -------- ----------- ---------- -----------
Brevard 5 $182,338 $167,828 $4,011,965 4.2 %
Broward 4 204,749 - - -
Columbia 1 25,515 22,852 392,232 5.8
Dade 2 60,117
Hernando 1 19,806 16,108 1,669,828 1.0
Manatee 7 209,613 206,065 2,886,949 7.1
Marion 2 41,075
Monroe 3 97,868 35,988 2,520,364 1.4
Pasco 3 90,156 77,751 3,874,976 2.0
Pinellas 21 854,904 773,129 13,293,565 5.8
Osceola 5 134,330 134,637 1,077,156 12.5
Orange 3 93,092 42,142 8,470,761 .5
Sarasota 2 87,507 84,095 6,014,749 1.4
Seminole 1 42,530 42,766 2,681,015 1.6
Suwannee 1 28,239 27,719 271,667 10.2
-- ---------- ---------- ----------- -----
Total - Florida 61 $2,171,839 $1,631,080 $47,165,227 3.5%
== ========== ========== =========== =====
Glynn County, GA 1 15,573
-- ----------
Total 62 $2,187,412
== ==========
MARKET RISK
The market risk inherent in the Company's market sensitive instruments is the
potential loss arising from changes in interest rates and the changes in prices
of marketable equity securities. One of the primary objectives of the Company
is to reduce fluctuations in net interest income caused by changes in interest
rates. To manage interest rate risk, the Board of Directors has established
interest-rate risk policies and procedures which delegate to the
Asset/Liability Committee the responsibility to monitor and report on
interest-rate risk, devise strategies to manage interest-rate risk, monitor
loan originations and deposit activity, and approve pricing strategies.
Currently, all investments in the Company's portfolio are identified as
securities available for sale or as trading assets. Securities available for
sale, which are those securities that may be sold prior to maturity as part of
asset/liability management or in response to other factors, are carried at fair
value with any valuation adjustment reported in a separate component of
stockholders' equity, net of tax effect. Trading securities include mortgage-
backed securities resulting from the securitization of residential and High LTV
Loans, the resulting residual interest in cash flows from those
securitizations, where applicable, and the excess spread on interest
only-strips receivable. Trading securities are carried at market value with any
unrealized gains or losses included in the statement of operations under "Gain
on sale of securities, net".
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14
For a description of key assumptions used related to the Company's market risk,
see the discussion on interest sensitivity analysis under the caption
"Asset/Liability Management."
The table below represents principal amounts and related average interest
rates, by year of maturity, for the Company's market sensitive instruments as
of December 31, 1998 (in thousands).
Assets 1999 2000 2001 2002 2003 Thereafter Total
----- ----- ------ ------ ----- ---------- -------
Interest bearing
deposits in banks $ 3,467 $ - $ - $ - - $ - $3,467
Avg. interest rate 5.45% - - - - - 5.45%
Federal funds sold 93,000 - - - - - 93,000
Avg. interest rate 5.24% - - - - - 5.24%
U.S. treasuries and
government agencies 21,679 6,928 - - - - 28,607
Avg. interest rate 5.37% 3.74% - - - - 4.97%
Revenue bond - - 1,385 - - 1,011 2,396
Avg. interest rate - - 8.60% - - 6.23% 7.57%
Mortgage-backed
Securities - fixed 23,806 534 390 246 102 45,362 70,440
Avg. interest rate 5.85% - - - - 9.08% 7.82%
Mortgage-backed
Securities - variable 28,340 - - - - - 28,340
Avg. interest rate 6.35% - - - - - 6.35%
FHLB stock - - - - - 11,152 11,152
Avg. interest rate - - - - - 7.25% 7.25%
Loans portfolio - fixed 44,920 24,943 65,314 22,854 29,239 652,682 839,953
Avg. interest rate 8.95% 9.37% 8.73% 9.47% 8.41% 8.75 8.79%
Loans portfolio - variable 973,061 58,390 44,078 36,064 60,996 39,847 1,212,435
Avg. interest rate 8.34% 8.08% 8.63% 9.09% 8.15% 7.60 8.33%
Mortgage servicing
rights 2,350 2,063 1,814 1,598 1,411 13,694 22,930
Avg. interest rate - - - - - - -
Liabilities
Deposits 1,487,106 413,026 218,165 19,928 46,669 2,518 2,187,412
Avg. interest rate 4.34% 4.27% 3.79% 5.79% 5.81% 5.79% 4.32%
Securities sold under
agreements to repurch . 36,640 - - - - - 36,640
Avg. interest rate 4.69% - - - - - 4.69%
FHLB advances 25,000 - - - - - 25,000
Avg. interest rate 5.15% - - - - - 5.15%
Holding company senior
debt 25,000 - - - - - 25,000
Avg. interest rate 7.47% - - - - - 7.47%
Holding company
unsecured notes 7,000 - - - - - 7,000
Avg. interest rate 7.75% - - - - - 7.75%
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SUPERVISION AND REGULATION
The Company, the Bank and the Savings Bank are extensively regulated under both
federal and state law. The following is a brief summary of certain statutes,
rules, and regulations affecting the Company, the Bank and the Savings Bank.
This summary is qualified in its entirety by reference to the particular
statutory and regulatory provisions referenced below and is not intended to be
an exhaustive description of the statutes or regulations applicable to the
Company's business. Supervision, regulation, and examination of the Company,
the Bank, and the Savings Bank by the bank regulatory agencies are intended
primarily for the protection of depositors rather than stockholders.
REGULATION OF THE COMPANY
The Company is a bank holding company registered with the Federal Reserve under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As such, the
Company is subject to the supervision, examination, and reporting requirements
of the BHC Act and the regulations of the Federal Reserve.
The BHC Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before: (i) it may acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, the bank
holding company will directly or indirectly own or control more than five
percent of the voting shares of the bank; (ii) it or any of its subsidiaries,
other than a bank, may acquire all or substantially all of the assets of the
bank; or (iii) it may merge or consolidate with any other bank holding company.
Similar federal statues require bank holding companies and other companies to
obtain the prior approval of the OTS before acquiring ownership or control of a
savings association.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business
of banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anti-competitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community served. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the communities
to be served. Considerations of financial resources generally focuses on
capital adequacy, and consideration of convenience and needs issues includes
the parties' performance under the Community Reinvestment Act of 1977 (the
"CRA").
The BHC Act, as amended by the interstate banking provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking Act"), authorizes the Company, and any other bank holding company
located in Florida to acquire a bank located in any other state, and any bank
holding company located outside Florida may lawfully acquire any Florida-based
bank, regardless of state law to the contrary, in either case subject to
certain deposit-percentage, aging requirements, and other restrictions. The
Interstate Banking Act also generally provides that national and
state-chartered banks may branch interstate through acquisitions of banks in
other states, unless a state has "opted out" of the interstate branching
provisions of the Interstate Banking Act prior to June 1, 1997. Neither
Florida nor any other state in the southeastern United States has "opted out."
Accordingly, the Company would have the ability to acquire a bank in a state in
the Southeast and thereafter consolidate all of its bank subsidiaries into a
single bank with interstate branches.
The BHC Act generally prohibits the Company from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. While these activity restrictions are not
applicable to the Bank, they will apply to the Savings Bank. Thus, the Savings
Bank and its
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subsidiaries will not be able to engage in certain insurance and real estate
development-related activities that could otherwise be conducted if the thrift
were a stand-alone entity or were owned by a unitary savings and loan holding
company.
In determining whether a particular activity is permissible, the Federal
Reserve must consider whether the performance of such an activity reasonably
can be expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices. For example,
operating a thrift subsidiary, factoring accounts receivable, acquiring or
servicing loans, leasing personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and performing certain
insurance underwriting activities all have been determined by the Federal
Reserve to be permissible activities of bank holding companies. The BHC Act
does not place territorial limitations on permissible non-banking activities of
bank holding companies. Despite prior approval, the Federal Reserve has the
power to order a bank holding company or its non-bank subsidiaries to terminate
any activity or to terminate its ownership or control of any subsidiary when it
has reasonable cause to believe that continuation of such activity or such
ownership or control constitutes a serious risk to the financial safety,
soundness, or stability of any bank subsidiary of the holding company.
Under Federal Reserve policy, bank holding companies are expected to act as a
source of financial strength and support to their subsidiary banks. This
support may be required at times when, absent such Federal Reserve policy, the
holding company may not be inclined to provide it. In addition, any capital
loans by a bank holding company to any bank subsidiary are subordinate in right
of payment to deposits and to certain other indebtedness of such subsidiary
bank. In the event of a bank holding company's bankruptcy, any commitment by
the bank holding company to a federal bank regulatory agency to maintain the
capital of a subsidiary bank will be assumed by the bankruptcy trustee and
entitled to a priority payment.
REGULATION OF THE BANK AND THE SAVINGS BANK
The Bank is organized as a Florida-chartered commercial bank and is regulated
and supervised by the Department. In addition, the Bank is regulated and
supervised by the FDIC, which serves as its primary federal regulator and the
administrator of the fund that insures the Bank's deposits. Accordingly, the
Department and the FDIC conduct regular examinations of the Bank, reviewing the
adequacy of the loan loss reserves, quality of loans and investments, propriety
of management practices, compliance with laws and regulations, and other
aspects of the Bank's operations. In addition to these regular examinations,
the Bank must furnish to the FDIC quarterly reports containing detailed
financial statements and schedules. The Savings Bank is a nationally chartered
thrift and as such is subject to regulation, supervision and examination by the
OTS as its chartering authority and primary regulator, and by the FDIC as the
administrator of the Savings Bank's insurance fund. The OTS's examinations of
the Savings Bank are similar to the current examinations of the Bank by the
FDIC and the Department.
Federal and Florida banking laws and regulations govern all areas of the
operations of the Bank, including reserves, loans, mortgages, capital,
issuances of securities, payment of dividends, and establishment of branches.
As its primary regulators, the Department and the FDIC have authority to impose
penalties, initiate civil and administrative actions, and take other steps
intended to prevent the Bank from engaging in unsafe or unsound practices. The
Bank is a member of the Bank Insurance Fund and, as such, deposits in the Bank
are insured by the FDIC to the maximum extent permissible by law.
As a federally-chartered institution, the Savings Bank and its deposit-taking
and lending activities are governed primarily by federal law, although certain
aspects of Florida and Georgia law will be applicable to the Savings Bank and
its branch banking facility in Brunswick. The OTS exercises supervision and
enforcement authority over the Savings Bank similar to that exercised by the
FDIC with respect to the Bank. The Savings Bank is a member of the Savings
Association Insurance Fund (the "SAIF"), and deposits in the Savings Bank are
insured by the FDIC.
14
17
The Bank and the Savings Bank are subject to the provisions of the CRA. Under
the CRA, the Bank and the Savings Bank have a continuing and affirmative
obligation consistent with their safe and sound operation to help meet the
credit needs of their entire communities, including low- and moderate-income
individuals and neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit the
Bank's or the Savings Bank's discretion to develop the types of products and
services that it believes are best suited to their particular communities,
consistent with the CRA. The CRA requires the appropriate federal bank
regulatory agency (in the case of the Bank, the FDIC, and in the case of the
Savings Bank, the OTS), in connection with their regular examinations, to
assess a financial institution's record in meeting the credit needs of the
community serviced by it, including low- and moderate-income neighborhoods. A
federal banking agency's assessment of a financial institution's CRA record is
made available to the public. Further, such assessment is required whenever
the institution applies to, among other things, establish a new branch that
will accept deposits, relocate an existing office or merge or consolidate with,
or acquire the assets of or assume the liabilities of, a federally-regulated
financial institution. In the case where Republic applies for approval to
acquire a bank or other bank holding company, the federal regulator approving
the transaction will also assess the CRA records of the Bank and the Savings
Bank. The Bank received a "Satisfactory" CRA rating in its most recent
examination.
In April 1995, the federal banking agencies substantially revised their CRA
regulations. Among other things, the amended CRA regulations, which became
fully effective in 1997, substitute for the prior process-based assessment
factors a new evaluation system that will rate an institution based on its
actual performance in meeting community needs. In particular, the system will
focus on three tests: (i) a lending test, to evaluate the institution's record
of making loans in its service areas; (ii) an investment test, to evaluate the
institution's record of investing in community development projects; and (iii)
a service test, to evaluate the institution's delivery of services through its
branches and other offices. The amended CRA regulations also clarify how an
institution's CRA performance will be considered in the application process.
The Company does not anticipate that the revised CRA regulations will have any
material impact on the Bank's or the Savings Bank's operations or that they
will have any impact on either institution's CRA rating.
DEPOSIT INSURANCE
The Bank and the Savings Bank are subject to FDIC deposit insurance
assessments. In 1994, the Bank became subject to a new risk-based assessment
system for insured depository institutions that takes into account the risks
attributable to different categories and concentrations of assets and
liabilities. The new system assigns an institution to one of three capital
categories: (i) well capitalized; (ii) adequately capitalized; and (iii)
undercapitalized. An institution is also assigned, by the FDIC, to one of
three supervisory subgroups within each capital group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information which the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds (which
may include, if applicable, information provided by the institution's state
supervisor). An institution's insurance assessment rate is then determined
based on the capital category and posed to the deposit insurance funds (which
may include, if applicable, information provided by the institution's state
supervisor). An institution's insurance assessment rate is then determined
based on the capital category and supervisory category to which it is assigned.
Under the risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory
subgroups) to which different assessment rates are applied. Assessment rates
on deposits for an institution in the highest category (i.e., "well
capitalized" and "healthy") are less than assessment rates on deposits for an
institution in the lowest category (i.e., "undercapitalized" and "substantial
supervisory concern").
The Bank, as a state-chartered commercial bank, is a member of the Bank
Insurance Fund ("BIF"). However as part of the Crossland Purchase and
Assumption, the Bank acquired $327.7 million in deposits insured by the SAIF
and thereby became a so-called "Oakar Bank". Based on the Crossland Purchase
and Assumption and the Firstate acquisition, the Bank is required to pay
insurance premiums to the FDIC on a substantial portion of its deposits at the
SAIF assessment rate notwithstanding its status as a BIF member. As of
December 31, 1998, the most recent
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18
measurement date for assessment purposes, approximately 67% of the Bank's
deposits were treated as SAIF-insured deposits, with the remaining 33% of
deposits being assessed at the BIF rate. The Savings Bank is a member of the
SAIF. However, since all of its initial deposits were deposits assumed by the
Savings Bank from Barnett, a BIF-member bank, all of the Savings Bank's
deposits will be assessed at the BIF assessment rate.
Prior to enactment of the Deposit Insurance Funds Act of 1996 ( the "Funds
Act"), only assessments were available to pay interest on the so-called "FICO
Bonds", which were issued by the Financing Corporation (the "FICO") in the late
1980's to fund the resolution of troubled thrifts. The Funds Act shifted a
portion of the FICO funding obligations to the BIF- member institutions
beginning in 1997. Through the end of 1999, the FICO assessment rate on
BIF-assessable deposits is required by the statute to be one-fifth of the SAIF
rate. Legislation has recently been proposed that would extend the current
five-to-one ratio through 2002. In the event that such legislation is not
adopted, it is currently anticipated that the FDIC will equalize the FICO
assessment rates for members of both insurance funds. In 1998, the Bank's total
FICO payment obligation was $1.2 million, $918,000 of which was attributable to
the Bank's SAIF-assessable deposits and the balance of which was attributable
to its BIF-assessable deposits.
Currently, the FICO assessment rate for BIF assessable deposits is 0.013
percent (or 1.3 basis points) and the FICO assessment rate for SAIF assessable
deposits is 0.0648 percent or (6.48 basis points). The Savings Bank did not pay
a FICO assessment in 1998.
CAPITAL REQUIREMENTS
The Company, the Bank, and the Savings Bank are required to comply with the
capital adequacy standards established by the Federal Reserve (for the
Company), and the FDIC (for the Bank) and the OTS (for the Savings Bank). The
minimum capital requirements applicable to the Company, the Bank, and the
savings Bank are essentially the same. The only significant differences among
these requirements are that: (i) the Savings Bank must also have and maintain a
tangible capital-to-adjusted total assets ratio of at least 1.5%; and (ii) the
Savings Bank may have and maintain a leverage ratio of as low as 3.0% of
adjusted total assets if it has a composite CAMELS rating of "1". As of
December 31, 1998, the Company qualified as being "adequately capitalized" and
the Bank and the Savings Bank were "well capitalized" for purposes of the
agency's prompt corrective action guidelines.
For additional information regarding capital requirements applicable to the
Bank and the Savings Bank and their compliance with such requirements, see
"Note 16 of the Company's Consolidated Financial Statement."
PAYMENT OF DIVIDENDS
As a Florida-chartered commercial bank, the Bank is subject to the laws of
Florida as to the payment of dividends. Under the Florida Financial
Institutions Code, the prior approval of the Department is required if the
total of all dividends declared by a bank in any calendar year will exceed the
sum of a bank's net profits for that year and its retained net profits for the
preceding two years. For the years ended December 31, 1996, 1997 and 1998, the
aggregate net income of the Bank was $3.4 million while dividends paid to the
Company by the Bank for the same period totaled $4.5 million. The aggregate
retained net income for 1997 and 1998 was a $4.6 million deficit. Therefore,
the Bank will be required to obtain approval for dividend payments in 1999
until retained net income for 1999 exceeds the $4.6 million deficit.
As a federally chartered thrift institution, the Savings Bank is subject to the
OTS's regulations applicable to the payment of dividends and other capital
distributions by savings associations. Under these regulations, a thrift that
is well-capitalized (i.e., has risk-based capital of 10% or more, Tier 1
Capital of 5% or more and Tier 1 risk-based capital of 6% or more), both before
and after the proposed distribution, and that has not been designated by the
OTS as being "in need of more than normal supervision" may distribute in a
calendar year the greater of: (i) 100% of net income for the current calendar
year plus 50% of its "capital surplus"; or (ii) 75% of its net income over the
most recent four quarters. The percentages of income that may be distributed
are lower for thrifts that are "adequately capitalized". It is the Company's
current intention to maintain the Savings Bank at a "well-capitalized" level
such that it will be able to upstream as much of its net income as is not
required for the thrift's current operations and
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future growth.
Under Federal law, if, in the opinion of the federal banking regulator, a bank
or thrift under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
depository institution, could include the payment of dividends), such
regulation may require, after notice and hearing, that such institution cease
and desist from such practice. The federal banking agencies have indicated
that paying dividends that deplete a depository institution's capital base to
an inadequate level would be an unsafe and unsound banking practice. Under the
Prompt Corrective Action regulations adopted by the federal banking agencies in
December 1992, a depository institution may not pay any dividend to its holding
company if payment would cause it to become "undercapitalized" or if it already
is "undercapitalized".
FEDERAL RESERVE SYSTEM
The Federal Reserve regulations require banks to maintain noninterest earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts). The new Federal Reserve Board regulations, effective April 1, 1997,
generally require that reserves be maintained against aggregate transaction
accounts as follows: (i) for accounts aggregating $46.5 million or less
(subject to adjustment by the Federal Reserve) the reserve requirement is 3.0%;
and (ii) for accounts greater than $46.5 million, the reserve requirement is
$1.4 million plus 10.0% (subject to adjustment by the Federal Reserve between
8.0% and 14.0%) against that portion of total transaction accounts in excess of
$46.5 million. The first $4.9 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve) are exempted from the reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve may be used to satisfy liquidity requirements imposed by
the Department. Because required reserves must be maintained in the form of
either vault cash, a noninterest bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve, the effect of this
reserve requirement is to reduce the Bank's interest earning assets. FHLB
System members also are authorized to borrow from the Federal Reserve "discount
window," but Federal Reserve regulations require institutions to exhaust all
Federal Home Loan Bank sources before borrowing from a Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
The Bank and the Savings Bank are members of the FHLB system, which consists
of 12 regional Federal Home Loan Banks governed and regulated by the Federal
Housing Finance Board (the "FHFB"). The Federal Home Loan Banks provide a
central credit facility for member institutions. The Bank, as a member of the
FHLB, is required to acquire and hold shares of capital stock in the FHLB in an
amount at least equal to the greater of one percent of the aggregate principal
amount of its unpaid residential mortgage loans, home purchase contracts and
similar obligations as of the close of each calendar year, or five percent of
its borrowings from the FHLB (including advances and letters of credit issued
by the FHLB on the Bank's behalf ).
The FHLB makes advances to members in accordance with policies and procedures
periodically established by the FHFB and the Board of Directors of the FHLB.
Currently outstanding advances from the FHLB are required to be secured by a
member's shares of stock in the FHLB and by certain types of mortgages and
other assets. Interest rates charged for advances vary depending on maturity,
the cost of funds to the FHLB and the purpose of the borrowing. As of December
31, 1998, the Bank had $25.0 million of outstanding advances from the FHLB.
LIQUIDITY
Under Florida banking regulations, the Bank is required to maintain a daily
liquidity position equal to at least 15% of its total transaction accounts and
eight percent of its total non-transaction accounts, less those deposits of
public funds for which security has been pledged as provided by law. The Bank
may satisfy its liquidity requirements with cash on hand (including cash items
in process of collection), deposits held with the Federal Reserve, demand
deposits due from correspondent banks, federal funds sold, interest bearing
deposits maturing in 31 days or less and the market value of certain
unencumbered, rated, investment-grade securities and securities issued by
Florida or any
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county, municipality of other political subdivision within the State. The FDIC
also reviews the Bank's liquidity position as part of its examination and
imposes similar requirements on the Bank. Any Florida-chartered commercial
bank that fails to comply with its liquidity requirements generally may not
further diminish liquidity either by making any new loans (other than by
discounting or purchasing bills of exchange payable at sight) or by paying
dividends. At December 31, 1998, the Bank's net liquid assets exceeded the
minimum amount required under the applicable Florida regulations.
MONETARY POLICY AND ECONOMIC CONTROLS
The banking business is affected not only by general economic conditions, but
also by the monetary policies of the Federal Reserve. Changes in the discount
rate on member bank borrowing, availability of borrowing at the "discount
window," open market operations, the imposition of changes in reserve
requirements against bank deposits and the imposition of and changes in reserve
requirements against certain borrowings by banks and their affiliates are some
of the instruments of monetary policy available to the Federal Reserve. The
monetary policies have had a significant effect on the operating results of
commercial banks and are expected to continue to do so in the future. The
monetary policies of the Federal Reserve are influenced by various factors,
including inflation, unemployment and short and long-term changes in the
international trade balance and in the fiscal policies of the United States
Government. Future monetary policies and the effect of such policies on the
future business and earnings of the Bank cannot be predicted.
EFFECTS OF INFLATION
As a financial institution, the majorities of the Company's assets are monetary
in nature and, therefore, differ greatly from those of more industrial or
commercial companies that have significant investments in fixed assets. The
effects of inflation on the financial condition and results of operations,
therefore, are less significant than the effects of changes in interest rates.
The most significant effect of inflation is on noninterest expense, which tends
to rise during periods of general inflation.
YEAR 2000 ISSUES
In the next year, many companies, including financial institutions such as the
Company, will face potentially serious risks associated with the inability of
existing data processing hardware and software to appropriately recognize
calendar dates beginning in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered may read entries for
the year 2000 as the year 1900 and compute payment, interest or delinquency
based on the wrong date. If a company's critical internal systems do not
correctly recognize and process data information beyond the year 1999, there
could be a material adverse impact on business and operations.
In 1997, the Company began the process of identifying the many software
applications and hardware devices affected by Year 2000 issues. The Company
formed a Year 2000 Committee, consisting of the Bank's senior management and
essential data processing employees to address the year 2000 compliance
project. The Board of Directors is updated on the Company's progress towards
compliance on a monthly basis. In addition, as the Bank's primary federal
regulator, the FDIC conducts periodic examinations of the Bank's Year 2000
readiness.
Additional staffing for year 2000 compliance, including a full-time project
coordinator and other technically proficient employees, have been hired to
monitor the daily activities of the project for the Bank. Non-compliant
vendors have been and continue to be contacted for project progress reports.
The Bank is independently verifying significant vendors' Year 2000 readiness.
Communications with vendors, that have advised the Bank that they are already
Year 2000 compliant, to develop and implement testing plans is also ongoing.
The FDIC has set a target date of March 31, 1999 for financial institutions to
substantially complete testing of their main client loan and deposit
application systems. The Bank's systems are processed by ALLTEL Information
Services, Inc. ("ALLTEL"). As ALLTEL tests and certifies applications as year
2000 compliant, the test results are being forwarded to Bank personnel for
verification. All main client applications are expected to be compliant,
installed, and tested by the Bank and ALLTEL by March 31, 1999. The Bank's
vendors will be able to perform tests with ALLTEL during this time also. The
critical internal systems of BSB and Lochaven have been converted to the ALLTEL
loan and deposit application systems, and the day-to-day activities of BSB and
Lochaven have been fully
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integrated into those of the Bank. The Bank will continue its efforts toward
Year 2000 compliance with a goal of June 30, 1999 for completion of all testing
and Year 2000 readiness.
The Company estimates that the costs associated with replacing non-compliant
hardware and software will be approximately $1.4 million, the majority of which
will be incurred in the normal course of upgrading the Company's computer
systems. As of December 31, 1998, the Company's Year 2000 compliance
expenditures had totaled $345,000, with the balance of the $1.4 million to be
expended during 1999.
In the event that the Bank and ALLTEL's efforts are unsuccessful and/or that
one or more of the Company's critical internal systems should not properly
recognize January 1, 2000 and subsequent dates, the following could occur, any
of which could have a material adverse impact on the operations of the Bank and
the Company.
(a) Client service could deteriorate to the point that a substantial
number of the Bank's and Savings Bank's clients move their account
relationships to another financial institution;
(b) The Company, the Bank and the Savings Bank may be unable to provide
the public and the applicable regulatory authorities with timely and
accurate financial information; or
(c) The Company, the Bank and the Savings Bank may be unable to fulfill,
on a timely basis, their various contractual obligations.
The Bank and the Savings Bank have formulated a contingency plan for the remote
possibility that ALLTEL will not be year 2000 compliant. The plan addresses
among other things, the ability of the Bank and the Savings Bank to switch to
and utilize back-up sites for the loan and deposit application systems in a
timely fashion and the various strategies and resources available to rapidly
restore critical internal systems.
CHANGES IN ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") recently adopted or issued
proposals and guidelines that may have a significant impact on the accounting
practices of commercial enterprises in general and financial institutions in
particular.
Disclosures About Pensions and Other Postretirement Benefits
In February 1998, the FASB issued Statements of Financial Accounting Standards
("SFAS") No. 132 "Employers' Disclosure about Pensions and Other Retirement
Benefits"; SFAS No. 132 revises the disclosure requirements for employees'
pensions and other postretirement benefit plans. SFAS No. 132 was effective
for fiscal years beginning after December 15, 1997, earlier application was
encouraged. Management implemented SFAS No. 132 in the year ended December 31,
1997.
Accounting for Costs of Computer Software for Internal Use
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for capitalizing and expensing the costs of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. Management
believes the effect of adopting SOP 98-1 will not have a material impact on the
accompanying consolidated financial statements.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
"derivatives") and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. Management is currently assessing the financial implications of SFAS
No. 133 and has not yet determined if the adoption will have a material effect
upon the results of operations.
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Accounting for Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise". SFAS No. 134 amends SFAS Nos. 65, "Accounting
for Certain Mortgage Banking Activities" and SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 134 establishes
standards for the classification of securities and other beneficial interests
in accordance with SFAS No. 115. SFAS No. 134 allows an enterprise engaged in
mortgage banking activities to classify mortgage-backed securities and other
beneficial interests retained after the securitization of mortgage loans as
trading, available for sale or held to maturity, depending upon an entity's
intent and ability to hold those securities, except for those with sales
commitments in place which must be classified as trading. Previously, such
securities and beneficial interests retained after securitization of mortgage
loans held for sale by an entity engaged in mortgage banking activities were
required to be classified as trading. SFAS No. 134 is effective for periods
beginning after December 15, 1998 with early application permitted. Management
is currently assessing the financial implications of SFAS No. 134 but does not
believe the adoption will have a material financial effect on results of
operations.
ITEM 2. PROPERTIES
At December 31, 1998, the Company had 62 branch offices, of which 28 were
leased and 34 were owned. In addition, there were 11 loan production offices,
six operations centers and two facilities used for warehouse purposes, all of
which were leased. Substantially all furniture, fixtures and equipment items
are owned. The following table shows the name, location and lease expiration
date (if applicable) for each facility as of December 31, 1998:
Location Ownership/Lease Expiration Date
Florida:
Brevard County:
Causeway Office Facility Owned
450 East Eau Gallie Boulevard
Indian Harbour Beach, Florida 32937
Imperial Plaza Office September 30, 1999
6769 N. Wickham Road, Suite 100
Melbourne, Florida 32940-2019
Melbourne Office Facility Owned
1300 Babcock Street
Melbourne, Florida 32901
Melbourne Beach Office May 1, 2009
401 Ocean Avenue
Melbourne Beach, Florida 32951
Palm Bay Office May 31, 2004
6000 Babcock Street, SE
Palm Bay, Florida 32909
Broward County:
Deerfield Office April 30, 2003
1327 South Military Trail
Deerfield Beach, Florida 33442
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PROPERTIES (CONT'D)
Location Ownership/Lease Expiration Date
Hollywood Mall Office May 31, 2005
470 Hollywood Mall
Hollywood, Florida 33021
Pembroke Commons Office February 26, 2001
502 University Drive
Pembroke Pines, Florida 33024
Weston Office September 30, 2008
1290 Weston Road
Weston, Florida 33326
Lake City Office Facility Owned
100 North First Street
Lake City, Florida 32055
Dade County:
Coral Gables Office November 5, 2008
2222 Ponce DeLeon Boulevard
Coral Gables, Florida 33134
South Miami Office March 31, 2002
8211 South Dixie Highway
Miami, Florida 33143
Hernando County:
Spring Hill Office January 31, 2006
5331 Spring Hill Drive
Spring Hill, Florida 34606
Manatee County:
Pavilion Office Facility owned
1301 Sixth Avenue West
Bradenton, Florida 34205
Bayshore Office Facility owned
6204 14th Street West
Bradenton, Florida 34207
Westside Office Facility owned
5905 Manatee Avenue West
Bradenton, Florida 34209
Ironwood Office Facility owned
4302 Cortez Road West
Bradenton, Florida 34210
Mt. Vernon Office Facility owned
9819 Cortez Road West
Bradenton, Florida 34210
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PROPERTIES (CONT'D)
Location Ownership/Lease Expiration Date
53rd Avenue Office Facility owned
415 53rd Avenue, West
Bradenton, Florida 34207
Ellenton Office Facility owned
3510 U.S. Highway 301
Ellenton, Florida 34222
Orange County:
Downtown Orlando Office February 28, 2002
255 South Orange Avenue
Orlando, Florida 32801
Winter Garden Office Facility Owned
232 South Dillard Street
Winter Garden, Florida 34787
North Orange Office November 30, 2003
2415 North Orange Avenue
Orlando, Florida 32804
Osceola County:
Bermuda Office Facility Owned
1115 North Bermuda Avenue
Kissimmee, Florida 34741
Broadway Office Facility Owned
200 East Broadway
Kissimmee, Florida 34741
Mill Creek Office Facility Owned
1300 East Vine Street
Kissimmee, Florida 34744
Ninth Street Office December 31, 1999
1220 Ninth Street
St. Cloud, Florida 34769
Oak Park Office Facility Owned
4291 13th Street
St. Cloud, Florida 34769
Pasco County:
Holiday Office May 23, 1999
4649 Sunray Drive
Holiday, Florida 34691
Holiday Drive-up Facility owned
4649-A Sunray Drive
Holiday, Florida 34691
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PROPERTIES (CONT'D)
Location Ownership/Lease Expiration Date
New Port Richey Office Facility owned
6500 Massachusetts Avenue
New Port Richey, Florida 34653
Gulfview Square Mall Office April 30, 2005
9501 U.S. 19 North
Port Richey, Florida 34668
Pinellas County:
Corporate Headquarters and Branch December 13, 2004
111 Second Avenue N.E.
St. Petersburg, Florida 33701
Main Office Drive-up April 30, 2009
201 Second Avenue South
St. Petersburg, Florida 33701
Countryside Office April 30, 2005
28050 U.S. 19 North
Clearwater, Florida 33761
Northwood Office February 28, 2006
3024 Enterprise Road
Clearwater, Florida 33759
Missouri Office December 31, 2000
1235 South Missouri Avenue
Clearwater, Florida 33756
Highland Avenue Office Facility Owned
1831 Highland Avenue North
Clearwater, Florida 33755
ICOT Office December 31, 2003
5801 Ulmerton Road
Clearwater, Florida 33760
Seminole Office September 30, 2007 (Ground lease)
8000 113th Street North Facility Owned
Seminole, Florida 33772-4801
Palm Harbor Office October 31, 2002
33920 U.S. 19 North
Palm Harbor, Florida 34684
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PROPERTIES (CONT'D)
Location Ownership/Lease Expiration Date
Largo Mall Office February 28, 2004
10500 Ulmerton Road E, #816
Largo, Florida 33771
Pinellas Park Office Facility owned
7600 66th Street North
Pinellas Park, Florida 33781
St. Petersburg Office Facility owned
100 34th Street North
St. Petersburg, Florida 33713
Oldsmar Office March 31, 2001
3711 Tampa Road, Suite 101
Oldsmar, Florida 34677
Dunedin Office Facility owned
1478 Main Street
Dunedin, Florida 34698
Belleair Bluffs Office Facility owned
401 North Indian Rocks Road
Belleair Bluffs, Florida 33770
Caladesi Office Facility owned
2678 Bayshore Boulevard
Dunedin, Florida 34698
Walsingham Office Facility owned
14141 Walsingham Road
Largo, Florida 33774
Pinellas Point Office October 14, 2006 (Ground lease)
3000 54th Avenue South Facility owned
St. Petersburg, Florida 33712
Tyrone Office December 31, 2004
6900 22nd Avenue North
St. Petersburg, Florida 33710
Northeast Office December 31, 1999 (Facility)
250 37th Avenue North December 31, 2017 (Ground lease)
St. Petersburg, Florida
East Lake Woodlands March 31, 2007
3412 East Lake Road
Palm Harbor, Florida 34685
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PROPERTIES (CONT'D)
Location Ownership/Lease Expiration Date
Clearwater Loan Operations Center Facility Owned
28051 U.S. 19 North, Suite G
Clearwater, Florida 34621
Clearwater Loan Operations Center Facility Owned
28059 U.S. Highway 19 North
Suites A & E
Clearwater, Florida 34621
Bay Plaza July 31, 1999
25 Second Street North
St. Petersburg, Florida 33702
Tyrone Gardens October 31, 1999
1028 58th Street North
St. Petersburg, Florida 33710
Polk County:
Lakeland Loan Production Office October 1, 1999
1506 South Florida Avenue
Lakeland, Florida 33803
Sarasota County:
Sarasota Office & Loan Production Office Facility owned
1100 South Tamiami Trail
Sarasota, Florida 34236
Venice Office Facility owned
400 Venice By-pass North
Venice, Florida 34292
Seminole County:
Lake Howell Office Facility owned
1980 Howell Branch Road
Winter Park, Florida 32792
Suwannee County:
Live Oak Office Facility owned
535 Ohio Avenue South
Live Oak, Florida 32060
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PROPERTIES (CONT'D)
Location Ownership/Lease Expiration Date
Lee County:
Bonita Springs June 30, 2000
Loan Production Office
24830 Burnt Pine Drive, Suite 2
Bonita Springs, Florida 34134
Ft. Myers Loan Production Office October 31, 2001
12681 New Brittany Boulevard
Ft. Myers, Florida 33907
Cape Coral Loan Production Office April 30, 1999
3501 Del Prado Blvd., Suite 302
Cape Coral, Florida 33904
Marion County:
Forest Office Facility owned
15825 East Highway 40
Silver Springs, Florida 34488
Silver Springs Office Facility owned
5431-A Silver Springs Boulevard
Silver Springs, Florida 34488
Monroe County:
Key West Office Facility owned
1010 Kennedy Drive
Key West, Florida 33040
Marathon Office Facility owned
6090 Overseas Highway
Marathon, Florida 33050
Plantation Key Office Facility owned
90184 Overseas Highway
Tavernier, Florida 33070
Hillsborough County:
Tampa Loan Production Office December 1, 1999
1411 North Westshore Boulevard
Suite 300
Tampa, Florida 33607
Palm Beach County:
West Palm Beach Loan Production Office August 31, 1999
1645 Palm Beach Lakes Blvd., Suite 480
West Palm Beach, Florida 33401
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PROPERTIES (CONT'D)
Location Ownership/Lease Expiration Date
Other Florida Facilities:
Warehouse February 15, 2000
2718 24th Street North
St. Petersburg, Florida 33713
Warehouse - Midstate Month-to-Month lease
3215 13th Street, Units 13 & 19
St. Cloud, Florida 34769
Republic Bank Center Facility Owned
and Savings Bank Branch
1432 66th Street North
St. Petersburg, Florida 33710
Republic Bank Center Annex October 31, 2012
1500 66th Street North
St. Petersburg, Florida 33710
REPUBLIC SAVINGS, FSB
Georgia:
Glynn County:
Brunswick Office October 31, 2001
3420 Cypress Mill Road
Brunswick, Georgia 31520
FACILITIES CLOSED
Boston, Massachusetts:
Boston Loan Production Office July 31, 2000
137 Newbury Street
Boston, Massachusetts 02116
Boston Loan Production Office September 30, 2002
Commercial Loans
123 Moody Street
Waltham, Massachusetts 02109
Virginia Beach, Virginia:
Satellite Loan Production Office Month-to-Month lease
1206 Laskin Road
Birdneck Executive Centre, Suite 201E
Virginia Beach, Virginia 23451
Boca Raton Loan Production Office Month-to-Month lease
5355 Town Center Road, Suite 301
Boca Raton, Florida 33846
Irvine, California:
Loan Production Office March 31, 2003
18012 Sky Park Circle
Irvine, California 92614
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ITEM 3. LEGAL PROCEEDINGS
In December 1998, the Company received notice of a potential claim by certain
unnamed former directors and shareholders of BSB which alleges that the Company
failed to disclose information relating to the loss incurred by the Company in
the fourth quarter of 1998. No action has been initiated to date.
Also in December 1998, the Company received a claim from a former vendor that
provided printing and direct mailing services for the Company's mortgage
banking operation which alleges that the vendor is owed damages of
approximately $13 million for breach of contract. The claim is based on a term
contract executed by the former manager of the High LTV Loan origination unit
who was not an officer of the Company or the Bank at the time the contract was
executed. The Company has filed a lawsuit against the vendor and the former
manager alleging civil conspiracy and fraud in connection with the execution of
the contract. The vendor has, at this same time, filed an arbitration
proceeding against the Company relating to the same issues. This matter is in
the discovery phase.
The Company is also subject to various legal proceedings in the ordinary course
of its business. Based on information presently available, management does not
believe that the ultimate outcome in such proceedings, in the aggregate, would
have a material adverse effect on the Company's financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information required by this item is incorporated by reference from the
Company's Proxy Statement for its 1999 Annual Meeting.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TRADING MARKET
The Company's common stock is currently traded on the NASDAQ National Market
under the symbol "REPB." The table below sets forth, the high, low and closing
bid information for the common stock as regularly quoted on the NASDAQ National
Market for the periods indicated.
High Low Closing
-------- -------- -------
Quarter ended March 31, 1997 16 14 15 1/2
Quarter ended June 30, 1997 18 1/2 17 1/4 17 1/4
Quarter ended September 30, 1997 27 5/8 16 7/8 26 3/8
Quarter ended December 31, 1997 27 7/8 23 3/4 26 1/2
Quarter ended March 31, 1998 31 3/4 25 29 1/4
Quarter ended June 30, 1998 34 3/4 25 13/16 27 1/8
Quarter ended September 30, 1998 27 1/16 17 3/4 22 1/8
Quarter ended December 31, 1998 21 29/32 13 1/8 13 1/8
These over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission and may not necessarily reflect actual
transactions.
STOCKHOLDERS AND DIVIDENDS
As of December 31, 1998, the Company had approximately 5,348 beneficial owners
of common stock. As a Florida-chartered commercial bank, the Bank is subject
to the laws of Florida as to the payment of dividends. Under the
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Florida Financial Institutions Code, the prior approval of the Department is
required if the total of all dividends declared by a bank in any calendar year
will exceed the sum of the bank's net profits for that year and its retained
net profits for the preceding two years.
As a federally chartered thrift institution, the Savings Bank is subject to the
OTS's regulations applicable to the payment of dividends and other capital
distributions by savings associations. Under these regulations, a thrift that
is "well-capitalized" (i.e., has risk-based capital of 10% or more, Tier 1
Capital of 5% or more and Tier 1 risk-based capital of 6% or more), both before
and after the proposed distribution, and that has not been designated by the
OTS as being "in need of more than normal supervision" may distribute in a
calendar year the greater of: (i) 100% of net income for the current calendar
year plus 50% of its "capital surplus"; or (ii) 75% of its net income over the
most recent four quarters. The percentages of income that may be distributed
are lower for thrifts that are "adequately capitalized". It is the Company's
intention to maintain the Savings Bank as a "well-capitalized" thrift such, the
Savings Bank will be able to upstream to the Company as much of its net income
as is not required for the thrift's current operations and future growth.
Under Federal law, if, in the opinion of the federal banking regulator, a bank
or thrift under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
depository institution, could include the payment of dividends), such regulator
may require, after notice and hearing, that such institution cease and desist
from such practice. The federal banking agencies have indicated that paying
dividends that deplete a depository institution's capital base to an inadequate
level would be an unsafe and unsound banking practice. Under the Prompt
Corrective Action regulations adopted by the federal banking agencies in
December 1992, a depository institution may not pay any dividend to its holding
company if payment would cause it to become undercapitalized or if it already
is undercapitalized. (See Item 1. "Business -- Supervision and Regulation --
Payment of Dividends.")
To date, the Company has paid no dividends on its common stock and has no
present plans to do so. The only dividends that the Company declared in 1998
were quarterly dividends totalling $3.52 per share on its 75,000 shares of
noncumulative convertible perpetual preferred stock. (See Note 14,
"Stockholders' Equity").
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated operating data, per share data, balance
sheet data and selected financial ratios as of and for each of the years ended
December 31, 1994 through 1998, were derived from the audited consolidated
financial statements.
The BSB and Lochaven mergers, completed on November 5, 1998, were accounted for
as poolings of interest. This accounting treatment required that all prior
period financial information be restated as if the mergers had been completed
in the four preceding years. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements, related
notes and other financial information presented elsewhere.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT SHARE DATA, FINANCIAL RATIOS AND OTHER DATA)
Years Ended December 31,
-------------------------------------------------------------------
OPERATING DATA: 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Interest income $ 172,793 $ 117,834 $ 99,058 $ 88,848 $ 66,570
Interest expense 89,609 60,742 51,245 47,232 31,364
---------- ---------- ---------- ---------- ----------
Net interest income 83,184 57,092 47,813 41,616 35,206
Loan loss provision 14,261 3,247 2,758 2,424 404
---------- ---------- ---------- ---------- ----------
Net interest income after loan loss provision 68,923 53,845 45,055 39,192 34,802
Noninterest income 56,157 29,451 10,531 8,964 9,536
Gain on sale of ORE held for investment - - 1,207 - -
General and administrative ("G&A") expenses 129,017 65,420 44,788 39,287 35,736
Merger/acquisition expenses 3,233 1,144 - - -
Restructuring costs 6,673 - - - -
SAIF special assessment - - 4,818 - -
Provision for losses on ORE 1,603 530 111 240 -
Other noninterest (income) expense (40) 396 (490) 661 4,267
Amort. of goodwill & premium on deposits 1,930 479 491 450 1,269
---------- ---------- ---------- ---------- ----------
Net income (loss) before income taxes, negative
goodwill accretion & minority interest (17,336) 15,327 7,075 7,518 3,066
Accretion of negative goodwill - - - 1,578 2,705
---------- ---------- ---------- ---------- ----------
Net income (loss) before income taxes &
minority interest (17,336) 15,327 7,075 9,096 5,771
Income tax benefit (expense) 6,602 (6,165) (2,772) (2,231) 232
Minority interest in income from subsidiary trust (1,687) (701) - - -
Minority interest in FFO - ( 674) (505) (503) (131)
---------- ---------- ---------- ---------- ----------
Net income (loss) $(12,421) $ 7,787 $ 3,798 $ 6,362 $ 5,872
========== ========== ========== ========== ==========
Earnings (loss) per share - basic $(1.34) $ 1.16 $ .59 $ 1.05 $ 1.08
========== ========== ========== ========== ==========
Weighted average shares outstanding - basic 9,286,813 6,693,970 6,423,130 6,057,206 5,434,167
========== ========== ========== ========== ==========
Earnings (loss) per share - diluted $(1.34) $ 1.01 $ .53 $ .93 $ .95
========== ========== ========== ========== ==========
Weighted average shares outstanding - diluted 9,286,813 7,920,926 7,204,217 6,820,377 6,168,132
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Total assets $2,505,117 $1,678,831 $1,365,845 $1,241,967 $1,036,496
Investment & mortgage backed securities 129,783 115,769 170,392 164,387 110,076
Loans held for sale 184,176 187,226 98,349 84,311 61,214
Loans held in portfolio 1,896,289 1,215,900 976,222 885,841 753,362
Allowance for loan losses 28,077 22,023 19,774 (21,097) 16,322
Goodwill & premium on deposits 36,916 4,855 527 1,017 820
Deposits 2,187,412 1,471,679 1,237,211 1,110,293 914,829
Stockholders' equity 163,597 102,530 75,961 72,697 56,955
Book value per share (dollars) 14.77 12.28 10.59 10.13 8.90
SELECTED FINANCIAL RATIOS:
Return on average assets (.58)% .53% .29% .54% .60%
Return on average equity (7.91) 9.46 5.11 9.95 12.25
Equity to assets 6.53 6.11 5.56 6.85 5.49
Equity & minority interest in preferred
subsidiary to assets 7.68 7.82 5.56 5.85 5.49
Net interest spread 3.71 3.64 3.57 3.64 3.80
Net interest margin 4.12 4.08 3.93 3.96 4.05
G & A expense to average assets - Commercial
banking segment only 2.76 3.23 3.33 3.35 3.67
G & A efficiency ratio - Commercial
banking segment only 70.12 72.35 75.28 77.67 79.87
Loan/deposit ratio - Excludes loans held for sale 86.69 82.62 78.71 79.78 82.35
Nonperforming loans to loans 2.02 2.52 2.31 2.38 2.56
Nonperforming assets to total assets 1.71 2.31 2.35 2.78 3.64
Loan loss allowance to loans 1.48 1.81 2.03 2.26 2.17
Loan loss allowance to nonperforming loans:
Originated portfolio 74.71 82.81 66.79 89.17 137.65
March 1995 purchase 108.06 373.91 488.78 647.83 N/A
Crossland portfolio 43.50 421.88 126.12 41.77 23.73
July 1997 purchase 35.70 31.74 N/A N/A N/A
Other purchased portfolios 113.69 18.41 89.80 41.84 82.99
Total portfolio loans 74.21 71.97 87.61 100.12 84.55
OTHER DATA (AT PERIOD-END):
Number of branches 62 48 46 46 34
Number of full time equivalent employees 1,733 1,165 930 706 743
31
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The BSB and Lochaven Mergers, completed on November 5, 1998, were accounted for
as poolings of interests, which required that all prior period financial
information be restated as if the BSB and Lochaven Mergers had been completed
in those previous years. All financial data and Management's Discussion and
Analysis has been revised to incorporate those restatements. The following
discussion and analysis of the Company's balance sheets and statements of
operations should be read in conjunction with Item 6. "Selected Consolidated
Financial Data", the Consolidated Financial Statements and the related notes
included elsewhere therein.
YEARS ENDED DECEMBER 31, 1998 AND 1997
COMPARISON OF BALANCE SHEETS AT DECEMBER 31, 1998 AND 1997
OVERVIEW
Total assets of the Company were $2.5 billion at December 31, 1998, and $1.7
billion at December 31, 1997, an increase of $826.3 million or 49.2%. The
source of the Company's net growth in 1998 was the result of: (i) $330.0
million of internal growth; (ii) $423.5 million in deposits acquired from
NationsBank and Dime Savings; and (iii) the completion of a stock offering of
2.6 million shares in May 1998 with net proceeds of $72.9 million.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities, consisting of U.S. Treasury and
federal agency securities, were $129.8 million at December 31, 1998, compared
to $115.8 million at December 31, 1997, an increase of $14.0 million or 12.1%.
At December 31, 1998, all purchased investment and mortgage-backed securities
were carried in the "available for sale" category and all mortgage-backed
securities resulting from securitization of the Company's loans were carried in
the "trading" category. The Company has also included in the trading asset
category: (i) the excess spread on mortgage servicing rights, which amounted to
$4.4 million at year-end 1998; (ii) a $10.9 million subordinate tranche of
securities purchased from the Company's securitization of High LTV Loans in
June 1998; and (iii) $25.4 million in residual interests in cash flows from
that securitization and from a $60.0 million securitization completed in
December 1997. The Company has recorded these assets at values that it believes
are a reasonable approximation of their fair market value. However, the market
for High LTV Loan residuals and subordinate securities is extremely limited,
and there is no assurance that the Company could realize these values if such
assets were sold.
LOANS AND LOANS HELD FOR SALE
Total loans held for portfolio were $1.9 billion at December 31, 1998, and $1.2
billion at December 31, 1997, an increase of $680.4 million, or 56.0%.
One-to-four family first lien residential loans increased $286.9 million from
$686.7 million at December 31, 1997 to $973.5 million at year-end 1998. Of
this increase, $127.3 million resulted from retention in portfolio of
nonconforming first lien residential loans that were originated in 1998 or held
for sale at the end of 1998. Other changes in real estate-secured loans
included: (i) retention in portfolio of $116.8 million of High LTV Loans; (ii)
an increase of $187.1 million of commercial real estate, multifamily and
construction loans; and (iii) a $28.3 million increase in home equity loans
with loan-to-value ratios of less than 100%.
Loans held for sale at December 31, 1998 amounted to $184.2 million, the
majority of which was comprised of first lien residential loans of agency
quality. Loans held for sale at the end of 1997 amounted to $187.2 million.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $28.1 million at December 31, 1998,
compared with $22.0 million at December 31, 1997. At December 31, 1998, the
allowance for loan losses included $24.8 million allocated to loans originated
by the Company, $1.2 million allocated to the March 1995 Purchase, $539,000
allocated to loans purchased from Crossland, $543,000 allocated to the July
1997 Purchase, and $1.0 million allocated to other loan purchases. Activity to
the allowance in 1998 included $14.3 million of provisions for loan losses
including a $4.3 million provision due to growth in the loan portfolio and
replacement of credit losses and $10.0 million to provide allowances on $285.7
million loans transferred from held for sale to the portfolio category at
year-end 1998. Other
32
35
activity included $3.9 million of loan charge-offs (net of recoveries) and
$4.3 million reallocated from the allowance to loan discount.
NONPERFORMING ASSETS
Nonperforming assets amounted to $42.8 million or 1.71% of total assets at
December 31, 1998, compared with $38.8 million or 2.31% of total assets at
December 31, 1997. Nonperforming loans totaled $37.8 million at December 31,
1998, an increase of $7.2 million from December 31, 1997. Nonperforming
residential mortgage loans increased by $7.4 million primarily as a result of
loans originated by the Company's mortgage banking operations which were taken
into portfolio due to underwriting weaknesses which caused the quality of the
loans to fall below investor standards. The loans later became delinquent.
Such loans increased $4.1 million from $2.3 million at December 31, 1997, to
$6.5 million at year-end 1998. Nonperforming loans acquired through merger
activity increased $2.0 million while nonperforming loans originated by the
Company increased by $1.4 million. ORE decreased $3.2 million from $8.2
million at December 31, 1997, to $5.0 million at December 31, 1998. This
decline included ORE writedowns in 1998 of $1.6 million.
DEPOSITS
Total deposits were $2.2 billion at December 31, 1998, compared to $1.5 billion
at December 31, 1997, an increase of $715.7 million or 47.7% Internal growth
accounted for $292.2 million of the increase while deposits acquired in the
NationsBank and Dime Branch acquisitions contributed $423.5 million.
SENIOR DEBT
On September 24, 1998, the Company entered into a loan agreement ("Loan
Agreement") with SunTrust Bank, Central Florida, N.A. ("SunTrust"), pursuant to
which SunTrust extended a non-revolving line of credit for up to $25.0 million
to the Company. Interest on the loan made pursuant to the Senior Debt (the
"Senior Debt") is payable monthly, and the maturity date for the loan is
September 25, 1999. On September 25, 1998, the Company received the full $25.0
million balance under the line of credit. The Company contributed the proceeds
of the Senior Debt to the Bank in order to augment the regulatory capital of
the Bank.
Following the Company's disclosure that it expected to incur an operating loss
in the fourth quarter of 1998, the terms of the loan agreement were amended on
December 29, 1998 to require, among other things, that: (i) an interest rate of
LIBOR plus 1.50%, effective January 1, 1999 be paid; (ii) the Bank maintain a
supervisory rating of no less than '3' on the regulatory composite scale of '1'
to '5' ('1' being the highest rating, '5' being the lowest) and that the Bank
not become subject to a cease and desist order; and (iii) upon written request
from SunTrust at any time after March 31, 1999, for any reason whatsoever, Mr.
William R. Hough purchase the loan from SunTrust.
On March 19, 1999, the loan agreement was further amended to extend the date
for SunTrust's option to request purchase of the loan from March 31, 1999 to
September 24, 1999, the maturity date of the loan. The Company agreed to
establish an interest reserve account with SunTrust and to deposit in the
account sufficient funds to pay interest on the note through the maturity date.
SunTrust retained its right to request purchase of the loan in the event the
Bank failed to comply with financial convenants of the loan agreement which
require the Bank to: (i) maintain its ratio of nonperforming assets to assets
at no more than three percent; (ii) maintain its debt service coverage ratio at
no less than two to one; and (iii) eliminate the excess of dividends paid by
the Bank to the Holding Company over the Bank net income for the current and
two preceding years by June 30, 1999.
UNSECURED DEBT
On December 30, 1998, the directors of the Company executed unsecured notes
with an aggregate balance of $7.0 million with the Company to further augment
the regulatory capital of the Bank. Of the total amount, $5.0 million was
contributed to the Bank and $2.0 million was retained by the Company to cover
its debt servicing obligations. The unsecured notes mature on September 25,
1999.
STOCKHOLDERS' EQUITY
Stockholders' equity was $163.6 million at December 31, 1998, or 6.5% of total
assets, compared to $102.5 million or 6.1% of total assets at December 31,
1997. At December 31, 1998, the Bank's Tier 1 ("Leverage") Capital ratio was
6.66%, its Tier 1 Risk-Based Capital ratio was 9.27%, and its Total Risk-Based
Capital ratio was 10.56%, all in excess of minimum FDIC guidelines for an
institution to be considered a "well-capitalized" bank. The Company's ratios
were 5.49%, 7.72%, and 9.01%, respectively, which placed the Company in the
"adequately-capitalized" category.
33
36
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND
1997
OVERVIEW
The Company incurred a net loss of $12.4 million, or $1.34 per share, was
incurred for the year ended December 31, 1998 compared to net income of $7.8
million, or $1.16 per share, for the same period in 1997. Return on average
assets for the year ended December 31, 1998, was a negative .58%, compared with
a positive .53% for the same period in 1997, while the return on average equity
was a negative 7.91%, compared with a positive 9.46% for the same period in
1997. Results for 1998 were negatively impacted by a restructuring charge of
$6.7 million, $818,000 in other costs associated with legal and other issues
and $10.0 million in loss provisions for loans transferred to portfolio at
year-end 1998.
For the Company's commercial banking business segment, pretax net income before
minority interest reductions and reductions for non-operating items was $19.2
million for 1998 compared to $14.2 million for 1997, an increase of 35.1%. On
the same basis the company's mortgage banking segment incurred a loss of $15.0
million for 1998 compared to net income of $2.8 million for 1997.
BUSINESS SEGMENT INFORMATION
The Company's operations are divided into two business segments, commercial
banking and mortgage banking. Commercial banking activities include the
Company's lending for portfolio purposes, deposit gathering through the retail
branch network, investment and liquidity management. Mortgage banking
activities, which operated through a separate division of the Bank during 1998
and 1997, include originating, purchasing, and servicing mortgage loans. The
Bank provides support for its mortgage banking division in areas such as
secondary marketing and data processing. All funding for the mortgage banking
division is provided through the Bank. The following are the business segment
results of operation for the years ended December 31, 1998 and 1997. The
Company has elected to report its business segments before non-operating items
and without allocation of income taxes and minority interests.
COMMERCIAL BANKING ACTIVITIES
Income from commercial banking activities (before non-operating items, income
taxes and minority interests) was $19.2 million for 1998 compared to $14.2
million for 1997, an increase of $5.0 million. Net interest income in the
commercial banking segment increased by $17.8 million due to increased lending
volumes from expansion of the Bank's commercial lending activities. General
and Administrative ("G&A") expenses increased by $11.5 million, primarily due
to the bank's lending and branch expansion. Noninterest income, comprised
primarily of service fees and other charges on deposit accounts and servicing
fees on the loan portfolio, increased by $757,000 from $14.1 million to $14.9
million.
MORTGAGE BANKING ACTIVITIES
The Company incurred a net loss before non-operating items, income taxes and
minority interests from mortgage banking activities of $15.0 million for 1998
compared to net income of $2.8 million for 1997, on the same basis. The
expansion of the High LTV Loan origination function was the primary reason for
the $52.1 million increase in G&A expenses from $17.5 million for 1997 to $69.6
million for 1998. Noninterest income, primarily gains on sale of loans,
increased $25.9 million from $15.3 million for 1997 to $41.3 million for 1998.
In 1998, sales of High LTV Loans accounted for $36.2 million or 89.2% of total
noninterest income in the mortgage banking segment.
In the fourth quarter of 1998, the Company undertook a restructuring of its
mortgage banking operations, which significantly reduced the size and scope of
its mortgage origination activities. Due to their limited marketability, High
LTV Loans amounting to $116.8 million and nonconforming first lien mortgage
loans amounting to $127.3 million were transferred from the held for sale
category to the portfolio category. A loan loss provision of $10.0 million
was recorded upon transfer. Sales of High LTV Loans and nonconforming first
lien mortgage loans had been the predominant source of noninterest income for
the mortgage banking segment. Without revenues from sales of these loans,
noninterest income was significantly less than the cost of production,
primarily advertising, direct mail and postage for telemarketing activities.
The Bank ceased originating High LTV Loans and subsequently reduced its
34
37
originations of nonconforming first lien mortgage loans in December 1998. All
telemarketing and direct mail origination efforts were also eliminated. A
restructuring charge of $6.7 million was recorded, primarily for severance
benefits payable to mortgage banking employees whose positions were eliminated
and an $818,000 charge was recorded for legal and other costs not includable as
part of the restructuring charge.
BUSINESS SEGMENT DATA
YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
1998 1997
-------------------------------------- ----------------------------------
Commercial Mortgage Company Commercial Mortgage Company
Banking Banking Total Banking Banking Total
---------------- -------- ---------- ---------- ---------- -----------
BALANCE SHEET DATA (AT PERIOD END):
Total assets $2,320,941 $184,176 $2,505,117 $1,580,952 $97,879 $1,678,831
Nonperforming assets 36,301 6,484 42,785 36,453 2,338 38,791
OPERATING DATA:
Interest income 141,554 31,239 172,793 108,704 9,130 117,834
Interest expense 71,677 17,932 89,609 56,591 4,151 60,742
---------- -------- ---------- ---------- ---------- ----------
Net interest income 69,877 13,307 83,184 52,113 4,979 57,092
Loan loss provision (recurring) 4,266 - 4,266 3,247 - 3,247
---------- -------- ---------- ---------- ---------- ----------
Net interest income after
loan loss provision 65,611 13,307 78,918 48,866 4,979 53,845
Noninterest income 14,905 41,252 56,157 14,148 15,303 29,451
General and administrative
(G & A) expenses 59,447 69,570 129,017 47,938 17,482 65,420
Other noninterest (income) expense (40) - (40) 396 - 396
Amort. of goodwill & premium
on deposits 1,930 - 1,930 479 - 479
---------- -------- ---------- ---------- ---------- ----------
Net income (loss) before non-
operating items, income
taxes and minority interest $19,179 $(15,011) $4,168 $14,201 $2,800 $17,001
======= ======== ========== ==========
Non-operating items:
Loan loss provision on loans
transferred to portfolio (9,995) -
Merger/acquisition expenses (3,233) (1,144)
Restructuring cost (6,673) -
Provision for losses on ORE (1,603) (530)
---------- ----------
Net income (loss) before income
taxes and minority interest (17,336) 15,327
Income tax benefit (expense) 6,602 (6,165)
---------- ----------
Net income (loss) before minority interests (10,734) 9,162
Minority interest in income from
subsidiary trust (1,687) (701)
Minority interest in FFO - (674)
---------- ----------
Net (loss) income $(12,421) $ 7,787
========== ==========
35
38
ANALYSIS OF NET INTEREST INCOME
Net interest income for the year ended December 31, 1998, was $83.2 million,
compared to $57.1 million for the same period in 1997. This $26.1 million, or
45.7% increase was primarily due to growth in total interest earning assets.
For the year ended December 31, 1998, interest expense increased by $28.9
million to $89.6 million from $60.7 million for the same period in 1997.
Average asset yield increased 11 basis points from 8.46% for the year ended
December 31, 1997, to 8.57% for the same period in 1998 and average earning
assets increased $628 million from $1.4 billion for the year ended December 31,
1997, to $2.0 billion for the same period in 1998. During this same period,
the average cost of interest bearing liabilities increased three basis points
from 4.83% to 4.86%. Therefore, the Company's net interest spread increased
seven basis points to 3.71%. Net interest margin, which includes the benefit
of noninterest bearing funds, increased from 4.08% for the year ended December
31, 1997, to 4.12% for the same period in 1998.
NONINTEREST INCOME
Noninterest income for the year ended December 31, 1998, was $56.2 million
compared with $29.5 million for the same period in 1997, an increase of $26.7
million. This increase is primarily the result of higher income from mortgage
banking activities, which increased $25.6 million, and a $1.6 million increase
in loan fee income.
The following table reflects the components of noninterest income for the years
ended December 31, 1998 and 1997 (in thousands):
For the Years Ended December 31,
--------------------------------
Increase
1998 1997 (Decrease)
------- -------- ----------
Income from mortgage banking activities $40,600 $15,009 $25,591
Service charges on deposit accounts 4,472 3,701 771
Loan fee income 3,178 1,611 1,567
Gain on sale of loans, net 2,890 5,184 (2,294)
Recovery of unrealized loss
on loans held for sale - 150 (150)
Gain on sale of securities, net 867 544 323
Net trading account profit (loss) 173 764 (591)
Generations Gold fee income 970 517 453
Merchant charge card processing fees 466 265 201
Foreign exchange income 111 72 39
Other income 2,430 1,634 796
-------- ---------- --------
Total noninterest income $56,157 $29,451 $26,706
======== ========== ========
NONINTEREST EXPENSE
Total noninterest expenses for the year ended December 31, 1998, were $142.4
million, compared with $68.0 million for the same period in 1997, an increase
of $74.4 million. G&A expenses for the year ended December 31, 1998, included
in the noninterest expense total, were $129.0 million, compared with $65.4
million for the same period in 1997, an increase of $63.6 million. This
increase was primarily the result of increased costs from an overall expansion
of the Company's loan production and mortgage banking capabilities. Merger and
acquisition expenses, primarily employee severance benefits, were $3.2 million
for 1998 compared to $1.1 million in 1997. Also included in 1998 results was
the $6.7 million restructuring charge, $1.6 million in provisions for losses on
ORE and $1.9 million for amortization of premiums paid for branch acquisition
and amortization of goodwill.
36
39
The following table summarizes the average yields earned on interest earning
assets and the average rates paid on interest bearing liabilities for the years
ended December 31, 1998 and 1997 (in thousands):
Years Ended December 31,
---------------------------------------------------------------------
1998 1997
---------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- -------- ---- ---------- --------- -----
Summary of Average Rates
Interest earning assets:
Loans, net $1,773,697 $159,495 8.97% $1,188,796 $105,803 8.84%
Investment securities 38,430 2,364 6.15 43,599 2,598 5.96
Mortgage backed securities 23,171 1,669 7.20 80,381 5,252 6.54
Trading securities 56,160 2,859 5.09 1,505 59 3.92
Interest bearing deposits in banks 2,655 128 4.81 15,456 902 5.83
FHLB stock 11,337 843 7.44 8,786 642 7.26
Federal funds sold 105,783 5,435 5.07 44,746 2,579 5.69
---------- -------- ---------- ---------
Total interest earning assets 2,011,233 172,793 8.57 1,383,269 117,835 8.46
Noninterest earning assets 138,353 85,635
---------- ----------
Total assets $2,149,586 $1,468,904
========== ==========
Interest bearing liabilities:
Interest checking $151,460 $ 2,201 1.45 %$109,090 $1,168 1.07%
Money market 101,683 2,743 2.70 64,800 1,976 3.05
Savings 64,757 1,394 2.15 45,455 1,204 2.65
Passbook gold 270,045 12,904 4.78 222,957 10,901 4.89
Time deposits 1,106,167 61,916 5.60 761,188 42,600 5.60
FHLB advances 104,894 6,103 5.82 25,776 1,364 5.29
Other borrowings 43,976 2,348 5.34 27,105 1,529 5.29
---------- -------- ---------- ---------
Total interest bearing liabilities 1,842,982 89,609 4.86 1,256,371 60,742 4.83
Noninterest bearing liabilities 153,164 131,873
Stockholders' equity 153,440 80,660
---------- ----------
Total liabilities and equity $2,149,586 $1,468,904
========== ==========
Net interest income/net interest spread $ 83,184 3.71% $57,093 3.64%
======== ==== ========= ====
Net interest margin 4.12 4.08%
==== ====
Increase (Decrease) Due to
-----------------------------------
Changes in Net Interest Income Volume Rate Total
Interest earning assets:
Loans, net $ 52,082 $1,611 $53,693
Investment securities (316) 82 (234)
Mortgage backed securities (4,069) 486 (3,583)
Trading securities 2,778 22 2,800
Interest bearing deposits in banks (639) (135) (774)
FHLB stock 185 16 201
Federal funds sold 3,165 (309) 2,856
Total change in interest income 53,186 1,773 54,959
----------- --------- ---------
Interest bearing liabilities:
Interest checking 538 495 1,033
Money market 1,018 (251) 767
Savings 445 (255) 190
Passbook gold 2,255 (252) 2,003
Time deposits 19,336 (20) 19,316
FHLB advances 4,589 150 4,739
Other borrowings 875 (56) 819
----------- --------- ---------
Total change in interest expense 29,056 (189) 28,867
------------ --------- ---------
Increase (decrease) in net interest income $ 24,130 $1,962 $26,092
=========== ======== =========
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40
The following table reflects the components of noninterest expense for the
years ended December 31, 1998 and 1997 (in thousands):
For the Years Ended December 31,
--------------------------------
Increase
1998 1997 (Decrease)
----- ------- ----------
Salaries and benefits $ 53,257 $31,926 $21,331
Net occupancy expense 13,623 9,376 4,247
Advertising and marketing 18,776 4,712 14,064
FDIC and state assessments 1,190 1,034 156
Data processing fees and services 3,743 2,970 773
Telephone expense 2,693 1,686 1,007
Legal and professional 4,348 2,418 1,930
Postage and supplies 20,813 5,639 15,174
Other operating expense 10,574 5,659 4,915
-------- ---------- -------
G & A expenses 129,017 65,420 63,597
Merger & acquisition expenses 3,233 1,144 2,089
Restructuring cost 6,673 - 6,673
Provision for losses on ORE 1,603 530 1,073
ORE expense, net of ORE income (40) 396 (436)
Amortization of goodwill premium on deposits 1,930 479 1,451
-------- ---------- -------
Total noninterest expense $142,416 $67,969 $74,447
======== ========== =======
MINORITY INTERESTS
The minority interest reduction from subsidiary trust, which represents the
after-tax cost of borrowings through RBI Capital Trust 1 ("RBI Capital"),
formed in July 1997 in connection with the Company's trust preferred securities
offering, were $1.7 million and $701,000 for 1998 and 1997, respectively. The
minority interest reduction representing the portion of FFO's earnings
allocable to its minority shareholders, prior to the FFO Merger in September
1997, was $674,000.
YEARS ENDED DECEMBER 31, 1997 AND 1996
COMPARISON OF BALANCE SHEETS AT DECEMBER 31, 1997 AND 1996
OVERVIEW
Total assets of the Company were $1.7 billion at December 31, 1997 and $1.4
billion at December 31, 1996, an increase of $313.0 million. This growth was
primarily the result of the expansion of the Company's residential and
commercial real estate loan production and mortgage banking capabilities.
Total portfolio loans increased by $239.7 million from $976.2 million at the
end of 1996 to $1.2 billion at the end of 1997. Total deposits increased by
$234.5 million from $1.2 billion at year-end 1996 to $1.5 billion at year-end
1997.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Company's investment securities consisted of U.S. Treasury securities.
Total investment and mortgage-backed securities amounted to $115.8 million in
1997 compared to $170.4 million in 1996, a decrease of $54.6 million. The
decline was the result of investing excess liquidity into higher-yielding
loans.
LOANS AND LOANS HELD FOR SALE
Total loans at December 31, 1997, included $1.2 billion of loans held for
portfolio and $187.2 million of loans held for sale, a total of $1.4 billion.
At December 31, 1996, these amounts were $976.2 million and $98.3 million,
respectively. The $239.7 million increase in total portfolio loans was
primarily comprised of a $154.0 million increase in one-four family residential
loans and a $44.9 million increase in commercial real estate loans. At
December 31, 1997, loans secured by first liens on real estate constituted
56.6% of the total portfolio loans. Commercial (business) loans not secured by
real estate decreased $1.6 million while consumer loans, including retail home
equity loans, increased $27.4 million.
38
41
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses amounted to $22.0 million at December 31, 1997,
compared to $19.8 million at December 31, 1996. The Company made various loan
purchases totaling $157.4 million, $102.3 million, $8.2 million and $95.4
million in 1994, 1995, 1996, and 1997, respectively. The Company allocated a
portion of the discount on its purchased loans to the allowance in amounts
consistent with loan loss allowance policy guidelines and recorded the
remainder as an unearned discount to be accreted to income as a yield
adjustment. The overall allowance at year-end 1997 of $22.0 million was
comprised of $1.0 million allocated to loans purchased from Crossland, $5.9
million allocated to other loan purchases and $15.1 million allocated to
originated loans.
Activity to the allowance during 1997 included a $3.2 million provision for
loan losses, loan charge-offs (net of recoveries) of $1.2 million, and $39,000
allocated to the allowance from unearned discount. At December 31, 1997, the
amount of unearned discount on purchased loans not allocated to allowance
totaled $3.9 million.
NONPERFORMING ASSETS
Nonperforming assets amounted to $38.8 million, or 2.31% of total assets, at
December 31, 1997, compared with $32.0 million, or 2.35% of total assets, at
December 31, 1996. Nonperforming loans totaled $30.4 million at the end of
1997, an increase of $7.9 million from the prior year-end total of $22.5
million. The ratio of nonperforming loans to total loans increased from 2.31%
at the end of 1996 to 2.52% at year-end 1997. Nonperforming loans at December
31, 1997 and 1996 included troubled debt restructurings of $4.9 million and
$6.0 million, respectively. ORE acquired through foreclosure decreased by $1.2
million from $9.5 million at the end of 1996 to $8.2 million at year-end 1997.
DEPOSITS
Total deposits were $1.5 billion at December 31, 1997, compared with $1.2
billion at the prior year-end, an increase of $234.5 million. Noninterest
bearing deposits increased from $68.5 million in 1996 to $97.8 million in 1997.
Interest checking increased $52.5 million, from $89.9 million in 1996 to
$142.4 million in 1997. Time deposits increased $182.4 million. Other
interest bearing accounts decreased $29.7 million.
MINORITY INTEREST IN MANDATORILY-REDEEMABLE SECURITIES OF SUBSIDIARY TRUST
On May 29, 1997, the Company formed RBI Capital, a wholly owned subsidiary of
the Company, to issue Cumulative Trust Preferred Securities (the "Preferred
Security or Securities") to the public. The Preferred Securities, issued
through an underwritten public offering on July 28, 1997, were sold at their
$10 par value. RBI Capital issued 2,875,000 shares of the Preferred Securities
bearing a dividend rate of 9.10% for net proceeds of $27.4 million, after
deducting underwriting commissions and other costs. RBI Capital invested the
proceeds in junior subordinated debt of the Company, which had an interest rate
of 9.10%. The Company used the proceeds from the junior subordinated debt to
increase the equity capital of the Bank.
MINORITY INTEREST IN FFO
The FFO Merger, which was accounted for as a corporate reorganization, required
the restatement of periods prior to the September 19, 1997, merger date as if
the FFO Merger had been completed in prior years. A portion of FFO's net
income was allocated to FFO's minority shareholders. The cumulative amount of
that allocation was reflected on the balance sheet as a minority interest in
FFO. The balance was extinguished on the date of the FFO merger.
CONVERTIBLE SUBORDINATED DEBT
On December 27, 1996, the Company issued $6.0 million in convertible
subordinated debentures (the "Debentures") at a fixed rate of 6.00%, interest
payable semi-annually with a maturity of December 1, 2011. Under the terms of
the indenture the Company had the right to redeem, without payment of a
premium, all or any of the Debentures if the closing price of the Company's
common stock equals or exceeds 130% of the conversion price, which was
$17.78514, for not less than 20 consecutive trading days. During September
1997, the closing price of the common stock remained above that price for the
requisite number of consecutive trading days. The Company then exercised its
option to redeem all of the outstanding debentures on December 1, 1997. All of
the holders elected to convert their debentures into 336,000 shares of common
stock.
39
42
STOCKHOLDERS' EQUITY
Stockholders' equity of the Company was $102.5 million at December 31, 1997, or
6.11% of total assets, compared with $76.0 million, or 5.56% of total assets,
at December 31, 1996. At December 31, 1997, the Company and the Bank's capital
ratios were all in excess of minimum regulatory guidelines for an institution
to be considered "well-capitalized."
COMPARISON OF RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 1997 AND 1996
OVERVIEW
Consolidated net income for 1997 was $7.8 million, or $1.16 per share, basic,
compared with $3.8 million, or $0.59 per share, basic, for 1996.
BUSINESS SEGMENT INFORMATION
The Company's operations are divided into two business segments, commercial
banking and mortgage banking. Commercial banking activities include the
Company's lending for portfolio purposes, deposit gathering through the retail
branch network, investment and liquidity management. Mortgage banking
activities, which operated through a separate division of the Bank during 1997
and 1996, include originating, purchasing, and servicing mortgage loans. The
Bank provides support for its mortgage banking division in areas such as
secondary marketing and data processing. All funding for the mortgage banking
division is provided through the Bank. The following are the business segment
results of operation for the years ended December 31, 1997 and 1996. The
Company has elected to report its business segments before non-operating items
and without allocation of income taxes and minority interests.
COMMERCIAL BANKING ACTIVITIES
Income from commercial banking activities (before non-operating items, income
taxes and minority interests) was $14.2 million for 1997 compared to $11.3
million for 1997, an increase of $2.9 million. Net interest income in the
commercial banking segment increased by $4.8 million due to increased lending
volumes from expansion of the Bank's commercial lending activities. G&A
expenses increased by $5.2 million, primarily due to the bank's lending and
branch expansion which was partially offset by a $4.7 million increase in
noninterest income, comprised primarily of service fees and other charges on
deposit accounts.
MORTGAGE BANKING ACTIVITIES
Income from mortgage banking activities, which began in April 1996, improved
from a pre-tax net loss of $474,000 for 1996 to net income of $2.8 million for
1997. Net interest income for this segment increased by $4.5 million from
$508,000 in 1996 to $5.0 million in 1997. Noninterest income, primarily gains
on sale of loans, increased by $14.2 million from $1.1 million in 1996 to $15.3
million in 1997. The cost of producing mortgage loans for sale also increased
substantially, from $2.1 million in 1996 to $17.5 million in 1997.
[Balance of page intentionally left blank]
40
43
BUSINESS SEGMENT DATA
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
1997 1996
------------------------------ --------------------------------
Commercial Mortgage Company Commercial Mortgage Company
Banking Banking Total Banking Banking Total
---------- -------- ------- ---------- -------- --------
BALANCE SHEET DATA (AT PERIOD END):
Total assets $1,580,952 $97,879 $1,678,831 $1,319,252 $46,593 $1,365,845
Nonperforming assets 36,453 2,338 38,791 32,048 - 32,048
OPERATING DATA:
Interest income 108,704 9,130 117,834 97,587 1,471 99,058
Interest expense 56,591 4,151 60,742 50,282 963 51,245
---------- ------- ---------- ---------- ------- -------
Net interest income 52,113 4,979 57,092 47,305 508 47,813
Loan loss provision (recurring) 3,247 - 3,247 2,758 - 2,758
---------- ------- ---------- ---------- ------- -------
Net interest income after
loan loss provision 48,866 4,979 53,845 44,547 508 45,055
Noninterest income 14,148 15,303 29,451 9,457 1,074 10,531
General and administrative
(G & A) expenses 47,938 17,482 65,420 42,732 2,056 44,788
Other noninterest expense (income) 396 - 396 (490) - (490)
Amort. of goodwill & premium
on deposits 479 - 479 491 - 491
---------- ------- ---------- ---------- ------- -------
Net income (loss) before income
before non-operating items, income
taxes and minority interest $14,201 $2,800 $17,001 $11,271 $(474) $10,797
========== ======= ========== =======
Non-operating items:
Gain on sale of ORE held for investment - 1,207
SAIF special assessment - (4,818)
Merger/acquisition expenses (1,144) -
Provision for losses on ORE (530) (111)
------- -------
Net income (loss) before income
taxes and minority interest 15,327 7,075
Income tax expense (6,165) (2,772)
------- -------
Net income before minority interests 9,162 4,303
Minority interest in income from
subsidiary trust (701) -
Minority interest in FFO (674) (505)
------- -------
Net Income $ 7,787 $ 3,798
======= =======
41
44
ANALYSIS OF NET INTEREST INCOME
Net interest income for 1997 was $57.1 million compared to $47.8 million for
1996. This $9.3 million or 19.4% increase, was primarily the result of
additional income from balance sheet growth. Interest income was $117.8
million for 1997, an increase of $18.8 million over 1996. During the same
period, interest expense increased by $9.5 million from $51.2 million for 1996
to $60.7 million for 1997. Asset yield increased 29 basis points from 8.17%
for 1996 to 8.46% for 1997 and average-earning assets increased $173.3 million.
The average cost of interest bearing liabilities increased 23 basis points
from 4.60% to 4.83%. Net interest spread increased seven basis points from
3.57% for 1996 to 3.64% for 1997, and the net interest margin, which includes
the benefit of noninterest bearing funds, increased from 3.93% for 1996 to
4.08% for 1997.
NONINTEREST INCOME
Noninterest income for 1997 was $29.4 million compared with $11.7 million for
1996, an increase of $17.7 million. Income from the Company's expanded mortgage
banking activities increased $14.0 million, service fees on deposit accounts
and Generations Gold fee income increased $845,000, loan service and other
ancillary fees increased $226,000, and net gains on sale of investments and
trading account profits increased $1.0 million. Other sources of income
increased $595,000.
The following table reflects the components of noninterest income for the years
ended December 31, 1997 and 1996 (in thousands):
For the Years
Ended December 31,
-----------------------------
Increase
1997 1996 (Decrease)
------- ------- ----------
Income from mortgage banking operations $15,009 $ 1,002 $14,007
Service charges on deposit accounts 3,701 3,173 528
Loan fee income 1,611 1,385 226
Gain on sale of loans, net 5,184 3,456 1,728
Recovery of unrealized loss on loans
held for sale 150 (150) 300
Gain on sale of securities, net 544 457 87
Net trading account profit (loss) 764 (196) 960
Gain on sale of ORE held for investment - 1,207 (1,207)
Generations Gold fee income 517 200 317
Merchant charge card processing fees 265 108 157
Foreign exchange income 72 57 15
Other income 1,634 1,039 595
------- ------- ------
Total noninterest income $29,451 $11,738 $17,713
======= ======= =======
42
45
The following table summarizes the average yields earned on interest earning
assets and the average rates paid on interest bearing liabilities for the years
ended December 31, 1997 and 1996 (in thousands):
Years Ended December 31,
1997 1996
-------------------------- --------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ---- -------- -------- -----
Summary of Average Rates
Interest earning assets:
Loans net $1,188,796 $105,803 8.84 % $1,016,578 $87,781 8.61 %
Investment securities 43,599 2,598 5.96 48,319 2,549 5.27
Mortgage backed securities 80,381 5,252 6.54 87,258 5,378 6.16
Trading securities 1,505 59 3.92 - - 0.00
Interest bearing deposits in banks 15,456 902 5.83 15,184 909 5.78
FHLB stock 8,786 642 7.26 7,869 577 7.31
Federal funds sold 44,746 2,579 5.69 34,774 1,864 5.35
---------- ------- ---------- -------
Total interest earning assets 1,383,269 117,835 8.46 1,209,982 99,058 8.17
Noninterest earning assets 85,635 60,625
---------- ----------
Total assets $1,468,904 $1,270,607
========== ==========
Interest bearing liabilities:
Interest checking $109,090 $ 1,168 1.07 % $ 111,700 $ 1,369 1.22 %
Money market 64,800 1,976 3.05 77,437 2,762 3.56
Savings 45,455 1,204 2.65 68,555 1,277 1.87
Passbook gold 222,957 10,901 4.89 142,008 6,689 4.71
Time deposits 761,188 42,600 5.60 692,871 38,005 5.49
FHLB advances 25,776 1,364 5.29 11,363 650 5.72
Other borrowings 27,105 1,529 5.29 9,656 493 5.10
---------- ------- ---------- -------
Total interest bearing liabilities 1,256,371 60,742 4.83 1,113,590 51,245 4.60
Noninterest bearing liabilities 131,873 82,536
Stockholders' equity 80,660 74,481
---------- ----------
Total liabilities and equity $1,468,904 $1,270,607
========== ==========
Net interest income/net interest spread $ 57,093 3.64 % $47,813 3.57 %
======== ==== ======= ====
Net interest margin 4.08 % 3.93 %
==== ====
Increase (Decrease) Due to (1)
-------- --------- ----------
Changes in Net Interest Income Volume Rate Total
-------- --------- ----------
Interest earning assets:
Loans, net $12,971 $5,051 $18,022
Investment securities (264) 313 49
Mortgage backed securities (443) 317 (126)
Trading securities 59 - 59
Interest bearing deposits in banks (5) (2) (7)
FHLB stock 69 (4) 65
Federal funds sold 586 128 714
------- ------ -------
Total change in interest income 12,973 5,803 18,776
Interest bearing liabilities:
Interest checking (32) (169) (201)
Money market (419) (367) (786)
Savings (509) 436 (73)
Passbook gold 3,948 264 4,212
Time deposits 3,819 776 4,595
FHLB advances 766 (52) 714
Other borrowings 1,015 21 1,036
------- ------ -------
Total change in interest expense 8,588 909 9,497
------- ------ -------
Increase (decrease) in net interest income $ 4,385 $4,894 $ 9,279
======= ====== =======
(1) Changes in net interest income due to changes in rate and/or volume are
calculated at the individual product level
(i.e., residential, commercial, etc.). The amounts above represent the
sum of the individual amounts.
43
46
NONINTEREST EXPENSE
Total noninterest expenses for 1997 were $68.0 million compared with $49.7
million for the same period in 1996, an increase of $18.3 million. G & A
expenses for 1997, included in the noninterest expense total, were $65.4
million compared with $44.8 million, an increase of $20.6 million. The
increase was primarily the result of expanding the Company's mortgage banking
activities and related administrative support units.
The following table reflects the components of noninterest expense for the
years ended December 31, 1997 and 1996 (in thousands):
For the Years
Ended December 31,
--------------------------------
Increase
1997 1996 (Decrease)
------- ------- ----------
Salaries and benefits $31,926 $22,774 $ 9,152
Net occupancy expense 9,376 7,618 1,758
Advertising 4,712 973 3,739
FDIC and state assessments 1,034 1,959 (925)
Data processing fees 2,970 2,484 486
Telephone expense 1,686 1,271 415
Legal and professional 2,418 1,519 899
Postage and supplies 5,639 1,874 3,765
Other operating expense 5,659 4,316 1,343
------- ------- -------
Total G & A expenses 65,420 44,788 20,632
Merger expenses 1,144 - 1,144
SAIF special assessment - 4,818 (4,818)
Provision for losses on ORE 530 111 419
ORE expense, net of ORE income 396 (490) 886
Amortization of premium on deposits 479 491 (12)
------- ------- -------
Total noninterest expense $67,969 $49,718 $18,251
======= ======= =======
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44
47
SELECTED QUARTERLY FINANCIAL DATA
Summarized selected quarterly financial information for the years ended
December 31, 1998 and 1997 follows (in thousands except share data):
1998
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $35,960 $40,322 $50,777 $45,734
Interest expense 18,558 21,302 24,446 25,303
------- ------- ------- -------
Net interest income $17,402 $19,020 $26,331 $20,431
======= ======= ======= =======
Net income (loss) $ 3,065 $(1,514) $7,125 $(21,097)
======= ======= ======= =======
Earnings (loss) per share-diluted $ .36 $(.17) $.63 $(2.04)
======= ======= ======= =======
Earnings (loss) per share-basic $ .40 $(.17) $.69 $(2.04)
======= ======= ======= =======
1997
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $26,248 $27,664 $31,801 $32,121
Interest expense 13,577 14,252 16,185 16,728
------- ------- ------- -------
Net interest income $12,671 $13,412 $15,616 $15,393
======= ======= ======= =======
Net income $ 2,056 $ 1,011 $ 3,159 $ 1,561
======= ======= ======= =======
Earnings per share-diluted $ .28 $ .14 $ .40 $ .19
======= ======= ======= =======
Earnings per share-basic $ .32 $ .16 $ .47 $ .21
======= ======= ======= =======
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
Certain of the statements contained in this Annual Report on Form 10-K or
incorporated therein by reference (other than the financial statements and
statements of historical fact), including, without limitation, statements as to
management expectations and beliefs presented under the captions "Letters to
Our Stockholders" and "Management's Discussion and Analysis", may constitute
forward-looking statements. Forward-looking statements are made based upon
management's expectations and beliefs concerning future development and their
potential effect upon the Corporation. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on the Corporation will be those anticipated by
management.
The Corporation wishes to caution readers that the assumptions which form the
basis for forward-looking statements with respect to or that may impact
earnings for the year ended December 31, 1999 and thereafter include many
factors that are beyond the Corporation's ability to control or estimate
precisely. These risks and uncertainties include, but are not limited to, the
market demand and acceptance of the Corporation's existing and new loan and
deposit products, the impact of competitive products, the Company's ability to
achieve the desired consolidation efficiencies from its planned acquisitions,
and changes in economic conditions, such as inflation or fluctuations in
interest rates.
While the Corporation periodically reassesses material trends and uncertainties
affecting the Corporation's results of operations and financial condition in
connection with its preparation of the stockholders' letter and management's
discussion and analysis contained in its annual report, the Corporation does
not intend to review or revise any particular forward-looking statement
referenced herein in light of future events.
45
48
ASSET/LIABILITY MANAGEMENT AND LIQUIDITY
LIQUIDITY
The Asset/Liability Management Committee ("ALCO") reviews the Company's
liquidity, which is its ability to generate sufficient cash flow to meet the
funding needs of current loan demand, deposit withdrawals, and other cash
demands. The primary sources of funds consist of deposits, amortization and
prepayments of loans, sales of investments, other funds from operations and the
Company's capital. The Bank is a member of the FHLB and has the ability to
borrow to supplement its liquidity needs.
When the Company's primary sources of funds are not sufficient to meet its
liquidity needs, the Company may supplementally borrow funds from the FHLB and
from other sources. The FHLB acts as an additional source of funding for banks
and thrift institutions that make residential mortgage loans.
FHLB borrowings, known as "advances," are secured by the Bank's mortgage loan
portfolio, and the terms and rates charged for FHLB advances vary based on an
institution's loan portfolio and in response to general economic conditions.
As a shareholder of the FHLB, the Bank is authorized to apply for advances from
this bank. Varieties of borrowing plans are offered by the FHLB, each with its
own maturity and interest rate. The FHLB will consider various factors,
including an institution's regulatory capital position, net income, quality and
composition of assets, lending policies and practices, and level of current
borrowings from all sources, in determining the amount of credit to extend to
an institution. As of December 31, 1998, the Bank had $25.0 million of
outstanding advances from the FHLB. See "Business - Supervision and
Regulation - Federal Home Loan Bank System and Liquidity".
At December 31, 1998, the Bank's liquidity ratio, defined as net cash and
investments of $221.3 million divided by net deposits and short-term
liabilities of $183.3 million, was 10.24% as compared to 19.8% at December 31,
1997. Net liquid assets were $38.0 million in excess of the amount required by
Florida banking regulations.
ASSET/LIABILITY MANAGEMENT
One of the primary objectives of the Company is to reduce fluctuations in net
interest income caused by changes in interest rates. To manage interest rate
risk, the Board of Directors has established interest-rate risk policies and
procedures which delegate to ALCO the responsibility to monitor and report on
interest-rate risk, devise strategies to manage interest-rate risk, monitor
loan originations and deposit activity, and approve all pricing strategies.
The management of interest-rate risk is one of the most significant factors
affecting the ability to achieve future earnings. The measure of the mismatch
of assets maturing or re-pricing within certain periods, and liabilities
maturing or re-pricing within the same period, is commonly referred to as the
"gap" for such period. Controlling the maturity or re-pricing of an
institution's assets and liabilities in order to minimize interest rate risk is
commonly referred to as gap management. "Negative gap" occurs when, during a
specific time period, an institution's liabilities are scheduled to re-price
more rapidly than its assets, so that, barring other factors affecting interest
income and expense, in periods of rising interest rates the institution's
interest expense would increase more rapidly than its interest income, and in
periods of falling interest rates the institution's interest expense would
decrease more rapidly than its interest income. "Positive gap" occurs when an
institution's assets are scheduled to re-price more rapidly than its
liabilities, so that, barring other factors affecting interest income and
expense, in periods of falling interest rates the institution's interest income
would decrease more rapidly than its interest expense, and in periods of rising
interest rates the institution's interest income would increase more rapidly
than its interest expense. It is common to focus on the one-year gap, which is
the difference between the dollar amount of assets and the dollar amount of
liabilities maturing or re-pricing within the next 12 months.
ALCO uses an industry standard computer modeling system to analyze the impact
of financial strategies prior to their implementation. The system attempts to
simulate the asset and liability base and project future operating results
under a variety of interest rates and spread assumptions. Through this
management tool, management can also, among other things, project the effects
of changing its asset and liability mix and modifying its balance sheet, and
identify appropriate investment opportunities. The results of these
simulations are evaluated within the context of the interest-rate risk policy,
which sets out target levels for the appropriate level of interest-rate risk.
46
49
The policy is to maintain a cumulative one-year gap of no more than 15% of
total assets. Management attempts to conform to this policy primarily by
managing the maturity distribution of its investment portfolio and emphasizing
loan originations and loan purchases carrying variable interest rates tied to
interest-sensitive indices. Additionally, the Bank has joined the FHLB to
enhance its liquidity position and to provide it with the ability to utilize
long-term fixed-rate advances to improve the match between interest earning
assets and interest bearing liabilities in certain periods. Currently,
off-balance-sheet hedging instruments are not used to manage overall interest
rate risk but such instruments are used to limit the exposure to changes in the
value of residential loans held for resale and estimated loan commitments to
originate and close fixed rate residential and mortgage loans. However, there
continues to be a risk that such loan commitments do not close or are
renegotiated in a declining interest rate environment. Management may expand
its use of off-balance sheet hedging instruments to manage exposure to overall
interest rate risk in the future, subject to board approval.
The cumulative one-year gap at December 31, 1998, was a negative $206.0
million, or a negative 8.33% (expressed as a percentage of total assets).
Management will attempt to moderate any lengthening of the re-pricing structure
of earning assets by emphasizing variable-rate assets and, where appropriate,
match-funding longer-term fixed-rate loans with FHLB advances. See "Business
- -- Sources of Funds."
The following table presents the maturities or re-pricing of interest earning
assets and interest bearing liabilities at December 31, 1998. The balances
shown have been derived based on the financial characteristics of the various
assets and liabilities. Adjustable and floating-rate assets are included in the
period in which interest rates are next scheduled to adjust rather than their
scheduled maturity dates. Fixed-rate loans are shown in the periods in which
they are scheduled to be repaid according to contractual amortization and,
where appropriate, prepayment assumptions, based on the coupon rates in the
portfolio have been used to adjust the repayment amounts. Re-pricing of time
deposits is based on their scheduled maturities. Based on management's
experience in the markets in which the Company operates, statement savings
deposits are assumed to re-price at 8.30% of the total balance in the first
three months, 25% in the four-to-twelve month category, and the remaining 66.7%
from one to five years. Passbook savings deposits are assumed to re-price
equally over a 24-month period. Re-pricing of interest checking is assumed to
occur at 12.7% of the total balance for every three month interval over a
5-year period and re-pricing of money market accounts is assumed at 25% of the
total balance over a 12-month period.
[Balance of page intentionally left blank]
47
50
INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 1998
(IN THOUSANDS)
0-3 months 4-12 months 1-5 Years Over 5 Years
--------------- ------------------ ------------------ ---------------
Yield/ Yield/ Yield/ Yield/
Amount Rate Amount Rate Amount Rate Amount Rate
------- ------ --------- ------ -------- ------ -------- -----
Interest earning assets:
U.S. Treasury securities
and government agencies $ 3,501 5.46% $ 18,059 5.35% $ 7,047 3.72% $ - 0.00%
Revenue bonds - 0.00 - 0.00 1,545 8.60 753 6.22
Mortgage backed securities 2,751 5.55 48,681 6.24 - 0.00 4,632 6.18
Trading securities - 0.00 - 0.00 - 0.00 10,560 11.11
Residual - 0.00 - 0.00 - 0.00 25,715 0.01
Federal funds sold 93,000 5.24 - 0.00 - 0.00 - 0.00
Interest bearing deposits
in banks 3,467 5.45 - 0.00 - 0.00 - 0.00
FHLB stock - 0.00 - 0.00 - 0.00 11,010 7.25
Loans held for sale 165,144 7.96 20,826 8.36 - 0.00 - 0.00
Portfolio loans 556,444 6.07 280,828 8.06 346,553 8.49 701,810 8.39
-------- --------- --------- --------
Total interest earning
Assets $824,307 7.94 $ 368,394 7.70 $355,145 8.40 $754,480 7.85
Interest bearing liabilities:
Deposits
Interest checking $ 18,621 0.75 $ 55,863 0.75 $111,713 0.75 $ - 0.00
Money market 39,777 3.52 119,326 3.52 - 0.00 - 0.00
Savings 6,054 1.98 18,158 1.98 48,404 1.98 - 0.00
Passbook gold 24,345 4.25 73,035 4.25 194,744 4.25 - 0.00
Time deposits 294,130 5.52 685,097 5.47 342,923 5.74 2,518 5.79
FHLB advances 25,000 5.70 - 0.00 - 0.00 - 0.00
Outside borrowings 36,640 4.99 - 0.00 - 0.00 - 0.00
Fed funds purchased 2,415 5.25 - 0.00 - 0.00 - 0.00
Subordinated debt - 0.00 - 0.00 - 0.00 6,600 7.19
-------- --------- --------- --------
Total interest bearing
liabilities $446,982 4.99 $ 951,479 4.79 $697,784 4.27 $ 9,118 6.80
-------- --------- --------- --------
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities $377,325 2.94% $(583,085) 2.92% $(342,639) 4.13% $745,362 1.05%
======== ===== ========== ===== ========= ====== ======== =====
Cumulative excess (deficiency)
of interest earning assets
over interest bearing
liabilities $377,325 2.94% $(205,760) 3.01% $(548,399) 3.33% $196,963 3.27%
======== ===== ========= ===== ========= ====== ======== =====
Cumulative excess (deficiency)
of interest earning assets
over interest bearing
liabilities as a percent
of total assets 15.28% (8.33)% (22.20)% 7.98%
===== ===== ====== =====
48
51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is provided at pages 51 through 86 within the
Consolidated Financial Statements and notes thereto.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no such items to report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE COMPANY AND BANK
The information relating to the Directors of the Company and Bank appears in
the Company's Proxy Statement for its 1999 Annual Meeting of Stockholders under
the caption "Proposal One-Election of Directors" and is incorporated by
reference.
SENIOR EXECUTIVE OFFICERS OF THE COMPANY AND BANK
The following list sets forth the name and age of each executive officer of the
Company or the Bank as of December 31, 1998, and all positions held by each
such officer (and the period each such position has been held), a brief account
of each such officer's business experience during the past five years and
certain other information:
John W. Sapanski (68)-- Mr. Sapanski has been Chairman of the Board and
Chief Executive Officer of the Bank since June 1993 and Chairman of the Board,
Chief Executive Officer of the Company since March 1996. On March 12, 1999,
Mr. Sapanski announced his retirement as Chairman of the Bank and Chief
Executive Officer of the Company and the Bank effective March 31, 1999. Mr.
Sapanski will continue to serve on the boards of the Company and the Bank and
will stand for re-election to the Company's Board of Directors at the annual
meeting of shareholders. Mr. Sapanski has entered into a two year agreement to
continue to work for the Company as chairman of the board's Strategic Planning
Committee and as special transition officer of the Company and the Bank. He
has 45 years of banking experience, including service with the Dime Savings
Bank in New York, New York, from 1949 to 1987, where he served as President and
Chief Operating Officer from 1981 to 1987 and with Florida Federal Savings Bank
in St. Petersburg, Florida ("Florida Federal") from 1988 to 1991 where he
served as President and Chief Executive Officer from 1988 to 1991. Mr. Sapanski
was President and Chief Executive Officer of Florida Federal at the time the
Office of Thrift Supervision placed Florida Federal in conservatorship. Mr.
Sapanski was retained by the Resolution Trust Corporation (the "RTC"), the
conservator for Florida Federal, to assist in managing the institution in
conservatorship until it was sold by the RTC to First Union Corporation in
August 1991.
Fred Hemmer (44)-- Mr. Hemmer has served as Senior Executive Vice
President of the Bank in charge of Corporate Banking and Special Assets since
joining the Bank in 1991. He previously served as Executive Vice President of
Rutenberg Corporation, a real estate development company based in Clearwater,
Florida, from 1980 to 1991. Mr. Hemmer is a certified public accountant and
was employed by Arthur Andersen & Co. from 1976 to 1980. Mr. Hemmer is also a
licensed real estate broker and certified general contractor.
William R. Falzone (51)-- Mr. Falzone has served as Treasurer of the
Company since March 1996 and First Executive Vice President and Chief Financial
Officer of the Bank since February 1994. He was employed at Florida Federal
from 1983 through 1991 where he served as Senior Vice President and Controller
and as Director of Financial Services. Most recently, he was a Senior
Consultant for Stogniew and Associates, a nationwide consulting firm. He has
more than 20 years of banking experience and is a certified public accountant.
49
52
John W. Fischer, Jr. (50)-- Mr. Fischer has served as Executive Vice
President of the Bank in charge of Consumer Banking since December 1993. He
has more than 20 years of banking experience in retail branch management and
consumer and residential lending. Mr. Fischer formerly served as Regional
Marketing Director for Western Reserve Life in Clearwater, Regional Vice
President of Great Western Bank in Miami and Executive Vice President/Consumer
Financial Services for Florida Federal. Mr. Fischer holds a life, health,
annuity and Series 7 securities license.
Alfred T. May (60) -- Mr. May has served as interim Chief Operating
Officer and President since December 1998. Mr. May formerly served as Director
and Chairman of the Board with FFO and its subsidiary Firstate Federal Savings
and Loan of Osceola County, and President of Mid-State Federal Savings Bank.
Mr. May has more than 39 years experience in the banking industry.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item appears in the Company's Proxy Statement for
its 1999 Annual Meeting of Shareholders under the captions, "Executive
Compensation and Benefits" and "Certain Transactions", is incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by items 12 and 13 are incorporated by reference from the
Company's Proxy Statement for its 1999 Annual Meeting.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report at pages 51
through 86.
1. Financial Statements
Financial Statements of Republic Bancshares, Inc.
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements Of Operations, Stockholders' Equity and Cash
Flows for:
Years Ended December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All required schedules are included in the financial statements or related
notes.
(b) The following reports on Form 8-K filed during fiscal year ending
December 31, 1998, are hereby incorporated by reference.
2. Report on Form 8-K dated 11/24/98 - Announcement of
projected loss for 1998.
3. Report on Form 8-K dated 01/07/99 - Announcement of
reorganization of mortgage banking division and amendment of
projected loss for 1998.
4. Report on Form 8-K dated 02/01/99 - Announced the
retainment of an investment banker to evaluate strategic
alternatives for the Company for 1999.
(a) Exhibits:
23.0 Consent of Independent Certified Public Accountants
27.0 Financial Data Schedule
50
53
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Republic Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of Republic
Bancshares, Inc. (a Florida corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, comprehensive income, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We did not audit the financial statements of Bankers Savings Bank, FSB and
Lochaven Federal Savings and Loan Association, companies acquired during 1998
in transactions accounted for as a pooling of interests, as discussed in Note
1. Such statements are included in the consolidated financial statements of
Republic Bancshares, Inc. and reflect total assets of 7 percent and total net
interest income of 9 percent and 8 percent of the related consolidated totals
as of December 31, 1997 and for the years ended December 31, 1997 and 1996,
respectively. We did not audit the financial statements of F.F.O. Financial
Group, Inc., a company acquired during 1997 in a transaction accounted for as
a corporate reorganization, as discussed in Note 1. Such statements are
included in the consolidated financial statements of Republic Bancshares, Inc.
and reflect total net interest income of 21 percent of the related consolidated
totals for the year ended December 31, 1996. These statements were audited by
other auditors whose reports have been furnished to us and our opinion, insofar
as it relates to amounts included for Bankers Savings Bank, FSB, Lochaven
Federal Savings and Loan Association and F.F.O. Financial Group, Inc., is based
solely upon the reports of the other auditors.
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 and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Republic Bancshares, Inc. and subsidiaries
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida
March 19, 1999
51
54
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -DECEMBER 31, 1998 AND 1997
($in thousands, except share data)
December 31,
------------------------
1998 1997
----------- ----------
ASSETS
Cash and due from banks $ 46,143 $ 48,062
Interest bearing deposits in banks 3,467 6,817
Federal funds sold 93,000 33,191
Investment securities:
Available for sale 31,003 16,080
Held to maturity - 8,000
Mortgage-backed securities:
Held to maturity - 33
Available for sale 32,713 55,467
Trading 66,067 36,189
FHLB stock 11,152 9,016
Loans held for sale 184,176 187,226
Loans, net of allowance for loan losses 1,868,212 1,193,877
Premises and equipment, net 60,274 39,291
Other real estate owned acquired through foreclosure, net 4,951 8,191
Accrued interest receivable 13,452 10,307
Goodwill and premium on deposits 36,916 4,855
Other assets 53,591 22,229
------------ ----------
Total assets $2,505,117 $1,678,831
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits-
Noninterest bearing checking $ 138,934 $ 97,773
Interest checking 189,392 142,399
Money market 159,868 58,767
Savings 366,817 295,839
Time deposits 1,332,401 876,901
------------ ----------
Total deposits 2,187,412 1,471,679
Securities sold under agreements to repurchase 36,640 21,454
FHLB advances 25,000 39,300
Holding company senior debt 25,000 -
Holding company unsecured notes 7,000 -
Other liabilities 31,718 15,118
------------ ----------
Total liabilities 2,312,770 1,547,551
Company-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinated debentures of the Company 28,750 28,750
Stockholders' equity:
Perpetual preferred convertible stock ($20.00 par, 100,000 shares authorized,
75,000 shares issued and outstanding. Liquidation preference $6.6 million
at December 31, 1998 and 1997.) 1,500 1,500
Common stock ($2.00 par, 20,000,000 shares authorized, 10,323,194 and
7,602,992 shares issued and outstanding at December 31, 1998 and 1997,
respectively) 20,646 15,206
Capital surplus 125,364 56,553
Retained earnings 16,103 28,789
Net unrealized (losses) gains on available for sale securities, net of tax effect (16) 482
------------ ----------
Total stockholders' equity 163,597 102,530
------------ ----------
Total liabilities and stockholders' equity $2,505,117 $1,678,831
============ ==========
The accompanying notes are an integral part of these consolidated balance sheets
52
55
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except share data)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
INTEREST INCOME:
Interest and fees on loans $ 159,495 $ 105,803 $ 87,782
Interest on investment securities 2,364 2,598 2,549
Interest on mortgage-backed securities 1,669 5,252 5,378
Interest on trading securities 2,859 59 -
Interest on federal funds sold 5,435 2,578 1,863
Interest on other investments 971 1,544 1,486
--------- --------- ---------
Total interest income 172,793 117,834 99,058
--------- --------- ---------
INTEREST EXPENSE:
Interest on deposits 81,157 57,849 50,102
Interest on FHLB advances 6,103 1,364 650
Interest on holding company debt 507 392 5
Interest on other borrowings 1,842 1,137 488
--------- --------- ---------
Total interest expense 89,609 60,742 51,245
--------- --------- ---------
Net interest income 83,184 57,092 47,813
PROVISION FOR LOAN LOSSES 14,261 3,247 2,758
--------- --------- ---------
Net interest income after provision for
loan losses 68,923 53,845 45,055
--------- --------- ---------
NONINTEREST INCOME:
Income from mortgage banking activities 40,600 15,009 1,002
Gain on sale of loans 2,890 5,334 3,306
Service charges and fees on deposits 4,472 3,701 3,173
Loan fee income 3,178 1,611 1,385
Gain on sale of ORE-held for investment - - 1,207
Gain on sale of securities, net 1,040 1,308 261
Other operating income 3,977 2,488 1,404
--------- --------- ---------
Total noninterest income 56,157 29,451 11,738
NONINTEREST EXPENSES:
Salaries and employee benefits 53,257 31,926 22,774
Net occupancy expense 13,623 9,376 7,618
Data processing fees 3,743 2,970 2,484
Advertising 18,776 4,712 973
Other operating expense 39,618 16,436 10,939
--------- --------- ---------
Total general and administrative expenses 129,017 65,420 44,788
Merger expenses 3,233 1,144 -
Restructuring cost 6,673 - -
SAIF special assessment - - 4,818
Provisions for losses on ORE 1,603 530 111
ORE expense, net of ORE income (40) 396 (490)
Amortization of goodwill & premium on deposits 1,930 479 491
--------- --------- ---------
Total noninterest expenses 142,416 67,969 49,718
--------- --------- ---------
Income (loss) before income taxes and minority interest (17,336) 15,327 7,075
Income tax (provision) benefit 6,602 (6,165) (2,772)
Minority interests in income from subsidiary trust (1,687) (701) -
Minority interest - (674) (505)
--------- --------- ---------
NET INCOME (LOSS) $(12,421) $ 7,787 $ 3,798
========= ========= =========
PER SHARE DATA:
Net income (loss) per common share-basic $(1.34) $ 1.16 $ .59
========= ========= =========
Weighted average common shares outstanding-basic 9,286,813 6,693,970 6,423,130
========= ========= =========
Net income (loss) per common and common equivalent shares-diluted $(1.34) $ 1.01 $ .53
========= ========= =========
Weighted average common and common equivalent
shares outstanding-diluted 9,286,813 7,920,926 7,204,217
========= ========= =========
The accompanying notes are an integral part of these consolidated statements
53
56
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
($ in thousands)
PERPETUAL PREFERRED NET UNREALIZED
CONVERTIBLE STOCK COMMON STOCK GAINS/(LOSSES)
------------------- ------------------- -------- -------- ON AVAILABLE --------
SHARES SHARES CAPITAL RETAINED FOR SALE
ISSUED AMOUNT ISSUED AMOUNT SURPLUS EARNINGS SECURITIES TOTAL
------- ------ --------- ------- -------- -------- ------------- --------
BALANCE, DECEMBER 31, 1995 75,000 $1,500 6,429,858 $12,859 $40,505 $17,731 $102 $ 72,697
Net income - - - - - 3,798 - 3,798
Net unrealized losses on
available for sale securities,
net of tax effect - - - - - - (204) (204)
Dividends on preferred stock - - - - - (264) - (264)
Net change in minority interest - - (8,338) (17) (49) - - (66)
------- ------ ---------- ------- -------- ------- ---- --------
BALANCE, DECEMBER 31, 1996 75,000 1,500 6,421,520 12,842 40,456 21,265 (102) 75,961
Net income - - - - - 7,787 - 7,787
Net unrealized gains on
available for sale securities,
net of tax effect - - - - - - 584 584
Exercise of stock options - - 21,300 43 197 - - 240
Net change in minority interest - - (2,537) (5) (487) - - (492)
Issuance of common stock in
merger transaction - - 826,709 1,654 11,211 - - 12,865
Conversion of subordinated
debentures - - 336,000 672 5,176 - - 5,848
Dividends on preferred stock - - - - - (263) - (263)
------- ------ ---------- ------- -------- ------- ---- --------
BALANCE, DECEMBER 31, 1997 75,000 1,500 7,602,992 15,206 56,553 28,789 482 102,530
Net loss - - - - - (12,421) - (12,421)
Net unrealized losses on
available for sale securities - - - - - - (498) (498)
Exercise of stock options - - 78,052 156 662 - - 818
Issuance of common stock - - 2,642,150 5,284 67,598 - - 72,882
Additional paid-in capital from
performance stock options - - - - 551 - - 551
Dividends on preferred stock - - - - - (265) - (265)
------- ------ ---------- ------- -------- ------- ---- --------
BALANCE, DECEMBER 31, 1998 75,000 $1,500 10,323,194 $20,646 $125,364 $16,103 $(16) $163,597
======= ====== ========== ======= ======== ======= ===== ========
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ in thousands)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- ------ ------
Net income (loss) $(12,421) $7,787 $3,798
Unrealized gains on securities:
Unrealized holding gains, net of tax
effect during period 369 1,128 253
Less reclassification adjustment for
gains realized in net income (867) (544) (457)
-------- ------ ------
Net unrealized gains (losses) (498) 584 (204)
-------- ------ ------
Comprehensive income (loss) $(12,919) $8,371 $3,594
======== ====== ======
The accompanying notes are an integral part of these consolidated statements
54
57
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
OPERATING ACTIVITIES: 1998 1997 1996
------- ------ -------
Net income (loss) $(12,421) $ 7,787 $ 3,798
Reconciliation of net income to net cash (used in)
provided by operating activities:
Provision for loan and ORE losses 15,864 3,853 2,869
Depreciation and amortization, net 17,092 5,903 (554)
Amortization of premium (accretion) of fair value, net 1,943 (918) 712
(Gain) on sale of loans (43,490) (1,358) 2,423
Loss/(gain) on sale of investment securities (1,463) (724) (457)
(Gain)/loss on sale of other real estate owned 404 (118) (1,820)
Capitalization of mortgage servicing/residual interest (43,021) (6,826) (1,741)
Loss (gain) on disposal of premises and equipment (275) 14 (2)
Net (increase) in deferred tax benefit (24) (3,623) (998)
Net (increase) decrease in other assets (15,943) (4,194) 2,795
Net increase (decrease) in value of performance options 551 - -
Net increase (decrease) in other liabilities 15,530 1,611 216
-------- -------- --------
Net cash (used in) provided by operating activities (65,253) 1,407 7,241
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from excess of deposit liabilities assumed over assets
acquired, net of cash acquired 253,235 7,223 -
Proceeds from sales and maturities of:
Investment securities held to maturity 2,000 1,003 7,000
Investment securities available for sale 18,000 126,544 109,218
Mortgage-backed securities held to maturity - - 15,455
Mortgage-backed securities available for sale 37,055 50,627 6,393
Mortgage-backed securities in trading portfolio 33,778 2,764 13,496
Purchase of investment securities available for sale (28,150) (66,771) (156,036)
Purchase of mortgage backed securities available for sale (23,543) - -
Purchase of mortgage backed securities in trading portfolio (12,000) (4,468) (20,105)
Principal repayment on mortgage backed securities 34,529 9,809 27,212
Principal repayment on revenue bonds 245 - -
Purchase of FHLB stock (2,136) (131) (1,042)
Net increase in loans (573,912) (335,648) (120,557)
Purchase of premises and equipment, net (14,685) (10,437) (2,430)
Proceeds from sale of other real estate owned (4,485) 5,501 11,175
Investments in other real estate owned (net) 733 2,276 101
-------- -------- --------
Net cash used in investing activities (279,336) (211,708) (110,120)
-------- -------- --------
FINANCING ACTIVITIES:
Net increase in deposits 292,807 165,571 126,860
Net increase in repurchase agreements 15,186 5,048 11,475
Net change of minority interest in FFO - 645 -
Proceeds from issuance of common stock 73,700 240 -
Proceeds from minority interest in trust subsidiary - 28,750 -
Proceeds from issuance of debt 32,000 - 6,000
Repayment of proceeds from FHLB advances, net (14,300) 27,868 (23,543)
Dividends on perpetual preferred stock (264) (264) (264)
-------- --------- ---------
Net cash provided by financing activities 399,129 227,858 120,528
-------- -------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 54,540 17,557 17,649
CASH AND CASH EQUIVALENTS, beginning of year 88,070 70,513 52,864
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $142,610 $ 88,070 $ 70,513
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 72,610 $ 52,730 $ 1,409
Cash paid during the year for income taxes (7,618) 5,880 3,192
Non-cash transactions:
Conversion of subordinated debt - 5,888 -
Stock issued for minority interest in FFO - 5,307 -
The accompanying notes are an integral part of these consolidated statements
55
58
REPUBLIC BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS:
BASIS OF PRESENTATION AND ORGANIZATION
The consolidated financial statements of Republic Bancshares, Inc. (the
"Company") include the accounts of the Company and its wholly-owned
subsidiaries, RBI Capital Trust I ("RBI"), Republic Bank, F.S.B. (the "Savings
Bank") and Republic Bank (the "Bank") and the Bank's wholly-owned subsidiaries,
Republic Insurance Agency, Inc., RBREO, Inc., Tampa Bay Equities, Inc., and VQH
Development, Inc. All financial information has been restated for the
acquisitions of F.F.O. Financial Group, Inc. ("FFO") in 1997, Bankers Savings
Bank, F.S.B. ("BSB") and Lochaven Federal Savings and Loan Association
("Lochaven") both in 1998. All significant inter-company accounts and
transactions have been eliminated. The Company's primary source of income is
from its banking subsidiary, which operates 61 branches throughout Florida and
the Savings Bank which operates one branch in Florida and one branch in
Georgia. The Bank's primary source of revenue has been derived from net
interest income on loans and investments and income from mortgage banking
activities.
BUSINESS COMBINATIONS
Bankers Savings Bank, F.S.B.
On November 5, 1998, BSB, Coral Gables, Florida, was merged into the Company
(the "BSB Acquisition") in a stock transaction, with BSB stockholders receiving
396,872 shares of the Company's common stock (an exchange ratio of 0.5749 of a
share for each share of BSB common stock). There were also 212,000 options
outstanding for BSB common stock, which were exchanged for 121,853 options for
the Company common stock. At the date of acquisition, BSB had total assets of
$70.0 million, total loans of $46.2 million, total deposits of $61.1 million
and operated two branches in Dade County. The BSB Acquisition was accounted
for as a pooling of interests with the books and records of BSB combined with
those of the Company at historical cost.
Lochaven Federal Savings and Loan Association
On November 5, 1998, Lochaven, Orlando, Florida, was merged into the Company
(the "Lochaven Acquisition") in a stock transaction with Lochaven stockholders
receiving 169,084 shares of the Company's common stock (an exchange ratio of
0.2776 of a share for each share of Lochaven common stock). There were also
35,000 options outstanding for Lochaven common stock, which were exchanged for
9,716 options of the Company common stock. At the date of acquisition, Lochaven
had total assets of $56.5 million, total loans of $44.8 million, total deposits
of $54.0 million and operated one branch in Orange County. The Lochaven
Acquisition was accounted for as a pooling of interests with the books and
records of Lochaven combined with those of the Company at historical cost.
F.F.O. Financial Group, Inc.
On September 19, 1997, FFO, St. Cloud, Florida, the parent company for First
Federal Savings and Loan Association of Osceola County ("First Federal"), was
merged into the Company in a stock transaction (the "FFO Merger"). At the time
of the FFO Merger, Mr. William R. Hough owned a majority interest in the
Company and FFO.
The FFO Merger was accounted for as a corporate reorganization in which Mr.
Hough's interest in FFO was combined at historical cost in a manner similar to
a pooling of interests while the minority interest in FFO was combined using
purchase accounting rules. The excess of the purchase price of the minority
interest over the market value was first assigned to individual assets and
liabilities with the remaining $4.5 million considered unidentifiable goodwill,
which will be amortized over 10 years. The Company issued 1,668,370 shares of
common stock to the controlling interest and 826,709 shares of common stock to
the minority interest.
56
59
Firstate Financial, F.A.
On April 18, 1997, the Company acquired Firstate Financial, F.A. ("Firstate"),
a thrift institution headquartered in Orlando, Florida, for a cash purchase of
$5.5 million. At acquisition, Firstate had total assets of $71.1 million,
total deposits of $67.9 million and operated a branch in each of Orange and
Seminole Counties. The acquisition was accounted for using the purchase
accounting rules, which do not require prior period restatement. The amount of
goodwill recorded was $130,000. Accordingly, the Consolidated Statements of
Operations only reflect activity subsequent to the acquisition date.
Prior Period Pooling Restatements
The pooling of interests method of accounting, which was used to account for
the controlling interest in the FFO merger, and the BSB and Lochaven
Acquisitions, requires the restatement of financial results for all prior
periods presented. The Company's previously reported components of
consolidated income and the amounts reflected in the accompanying consolidated
statements of operations for the interim ten month period ended October 31,
1998 and two years ended December 31, 1997 and 1996, are as follows (in
thousands):
Ten months ended Years Ended December 31,
Net Interest Income: October 31, 1998 1997 1996
- -------------------- ---------------- ----------- ------------
Republic Bancshares, Inc $66,065 $53,534 $34,021
F.F.O. Financial Group, Inc. - - 9,974
------- ------- -------
Combined as restated in 1997 66,065 53,534 43,995
Bankers Savings Bank, F.S.B. 1,318 1,557 1,356
Lochaven Savings and Loan Association 1,590 2,001 2,462
------- ------- -------
Combined as restated in 1998 $68,973 $57,092 $47,813
======= ======= =======
Net Income:
Republic Bancshares, Inc. $ 3,923 $ 8,571 $ 3,784
F.F.O. Financial Group, Inc - - 1,600
Minority interest decrease - - (505)
------- ------- -------
Combined as restated in 1997 3,923 8,571 4,879
=======
Bankers Savings Bank, F.S.B. 657 156 (733)
Lochaven Savings and Loan Association (10) (940) (348)
------- ------- -------
Combined as restated in 1998 $ 4,570 $ 7,787 $ 3,798
======= ======= =======
CONSUMMATED AND PENDING ACQUISITIONS
NationsBank and Barnett Branches (consummated June 19, 1998 and August 20,
1998)
In December 1997, the Company entered into two agreements with BankAmerica
Corporation ("BankAmerica", formerly NationsBank Corporation) to acquire eight
branch offices of BankAmerica's subsidiary banks, NationsBank, N.A.
("NationsBank") and Barnett Bank N.A. ("Barnett"), including the loans and
other assets recorded at those branches, and to assume the deposits and other
liabilities assigned to the branches. The first agreement (the "Florida
Agreement"), was consummated on June 19, 1998, representing the acquisition of
three NationsBank branches and four Barnett branches, collectively, located
throughout Florida (the "Florida Branches"). The second agreement (the
"Georgia Agreement"), was consummated August 20, 1998, for a Barnett branch
located in Brunswick, Georgia (the "Georgia Branch"). When acquired on June
19, 1998, the Florida Branches had deposit liabilities of $199.9 million and
loans of $114.4 million, and the Georgia Branch, at acquisition, had deposit
liabilities of $16.9 million and loans of $7.5 million. The Company paid a
deposit premium of $24.0 million and loan premium of $3.2 million, and a $5.5
million premium for real and personal property for the NationsBank and Barnett
branches. These purchases were both accounted for using purchase accounting
rules, with deposit premiums being amortized using the straight-line method
over a 10-year period and the loan and property premiums being amortized over
the life of the underlying assets.
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Dime Savings Bank (consummated August 13, 1998)
In March 1998, the Company entered into an agreement with Dime Savings Bank,
F.S.B. ("DSB"), to acquire DSB's branch in Deerfield Beach, Florida (Broward
County) and to assume the deposit liabilities, at acquisition date, of
approximately $206.7 million and purchase the personal property and equipment
of the branch for $100,000. The transaction, which was consummated on August
13, 1998, was accounted for using purchase accounting rules, with a deposit
premium of $9.8 million to be amortized over 10 years.
BankAmerica (formerly NationsBank) and Barnett Branch Lease Assumptions and
Facility Purchases
The Company and BankAmerica entered into a series of purchase, lease assumption
and sublease agreements under which the Company purchased three former
NationsBank branch offices and leased 22 former branches of NationsBank and
Barnett Bank that were closed in connection with the merger of NationsBank and
Barnett. These branch office sites are located throughout the State of
Florida. Two of the purchased branch offices are in Hillsborough County and
the third is in Lee County. The leased offices are in Broward, Clay, Collier,
Dade, Marion, Palm Beach, Pinellas and Volusia Counties. The Company paid
BankAmerica $3.8 million for the three purchased offices and, in addition to
assuming the lease obligations, paid approximately $3.0 million (for furniture,
fixtures and equipment and certain real estate and as a premium) in connection
with the lease assumption transactions.
RBI CAPITAL TRUST I ("RBI")
RBI is a wholly owned subsidiary of the Company, which was formed on May 29,
1997, to issue Cumulative Trust Preferred Securities (the "Preferred Security
or Securities"), to the public. The Preferred Securities, issued through an
underwritten public offering on July 28, 1997, were sold at their $10 par
value. RBI issued 2,875,000 shares of the Preferred Securities bearing a
dividend rate of 9.10% for net proceeds of $27.4 million, after deducting
underwriting commissions and other costs. RBI invested the proceeds in junior
subordinated debt of the Company, which also has an interest rate of 9.10%.
The Company used the proceeds from the junior subordinated debt to increase the
equity capital of the Bank. Interest on the junior subordinated debentures and
distributions on the Preferred Securities are payable quarterly in arrears,
with the first payment having been paid on September 30, 1997. Distributions on
the Preferred Securities are cumulative and based upon the liquidation value of
$10 per Preferred Security. The Company has the right, at any time, so long as
no event of default has occurred and is continuing, to defer payments of
interest on the junior subordinated debentures, which will require deferral of
distribution on the Preferred Securities, for a period not exceeding 20
consecutive quarters, provided, that such deferral may not extend beyond the
stated maturity of the junior subordinated debentures. If payments are
deferred, the Company will not be permitted to declare cash dividends. The
Preferred Securities are subject to mandatory redemption, in whole or in part,
upon repayment of the junior subordinated debentures at maturity or their
earlier redemption. The Company has the right to redeem the junior
subordinated debentures in whole (but not in part) within 180 days following
certain events whether occurring before or after June 30, 2002. The exercise
of such right is subject to the Company having received regulatory approval to
do so if then required under applicable capital guidelines or regulatory
policies. In addition, the Company has the right, at any time, to shorten the
maturity of the junior subordinated debentures to a date not earlier than June
30, 2002. Exercise of this right is also subject to the Company having
received regulatory approval to do so if then required under applicable capital
guidelines or regulatory policies.
The Company has reported its obligation, with respect to the holders of the
Preferred Securities, as a separate line item on its audited Consolidated
Balance Sheets under the caption "Company-obligated mandatorily redeemable
capital securities of the subsidiary trust holding solely junior subordinated
debentures of the Company". The related dividend expense, net of the tax
benefit, is reported as a separate line item on the Consolidated Statements of
Operations under the caption "Minority interest in income from subsidiary
trust."
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ESTIMATES, APPRAISALS AND EVALUATIONS
The financial statements include, in conformity with generally accepted
accounting principles, estimates, appraisals and evaluations of loans, other
real estate owned and other assets and liabilities, and disclosure of
contingent assets and liabilities. Changes in such estimates, appraisals and
evaluations might be required because of rapidly changing economic conditions,
changing economic prospects of borrowers and other factors. Actual results may
differ from those estimates.
INVESTMENT SECURITIES
Securities that the Company has both the positive intent and ability to hold to
maturity are classified as "Held to Maturity" and are carried at historical
cost, adjusted for amortization of premiums and accretion of discounts.
Securities "Available for Sale", which are those securities that may be sold
prior to maturity as part of asset/liability management or in response to other
factors, are carried at fair value with any valuation adjustment reported in a
separate component of stockholders' equity, net of tax effect. Investments
identified as "Trading", include mortgage-backed securities resulting from the
securitization of residential and High LTV Loans, the resulting residual
interest in cash flows from those securitizations, where applicable, and the
excess spread, interest only-strip. Trading securities are carried at market
value with any unrealized gains or losses included in the Consolidated
Statements of Operations under "Gain on sale of securities, net."
Interest and dividends on investment securities and amortization of premiums
and accretion of discounts are reported in interest on investment securities.
Gains (losses) realized on sales of investment securities are generally
determined on the specific identification method and are reported as a
component of other noninterest income.
LOANS
Interest on commercial and real estate loans and substantially all installment
loans is recognized monthly on the loan balance outstanding. The Company's
policy is to discontinue accruing interest on loans 90 days or more delinquent
and restructured loans that have not yet demonstrated a sufficient payment
history, which, in the opinion of management, may be doubtful as to the
collection of interest or principal. These loans are designated as
"non-accrual" and any accrued but unpaid interest previously recorded is
reversed against current period interest revenue.
Loan origination and commitment fees net of certain costs are deferred, and the
amount is amortized as an adjustment to the related loan's yield, generally
over the contractual life of the loan. Unearned discounts and premiums on loans
purchased are deferred and amortized as an adjustment to interest income on a
basis that approximates level rates of return over the term of the loan.
HEDGING CONTRACTS AND LOANS HELD FOR SALE
The Company manages its interest rate market risk on the loans held for sale
and its estimated future commitments to originate and close mortgage loans for
borrowers at fixed prices ("Locked Loans") through hedging techniques which
include listed options and fixed price forward delivery commitments ("Forward
Commitments") to sell mortgage-backed securities or specific whole loans to
investors on a mandatory or best efforts basis. The Company records the
inventory of loans held for sale at the lower of cost or market on an aggregate
basis after considering any market value changes in the loans held for sale,
Locked Loans, and Forward Commitments. Transfers of loans held for sale, to
the portfolio category, are recorded at the lower of cost or market value.
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ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT
OF LIABILITIES
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," which was effective for
the Company's fiscal year beginning January 1, 1997. SFAS No. 125 provides
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. In addition to providing further
guidance related to the recording of mortgage servicing rights ("MSRs"), SFAS
No. 125 required that the Company classify loans held for sale which are
securitized and retained in the Company's portfolio, residual interest retained
and excess spread interest only-strip as trading assets. Consequently, the
Company is required to carry these assets at their current market value as of
the balance sheet date with the resulting valuation adjustments recorded in the
Consolidated Statements of Operations.
The Company uses an automated portfolio analysis system to value its MSR's at
the individual loan level. The model uses current market assumptions for
default probabilities and prepayment speeds based upon individual loan factors,
including interest rate, age, loan type, geography and demographics. The
analysis also takes into consideration the historical aggregate characteristics
of borrowers based on their geographic location. These factors are applied to
each loan based on its own individual characteristics. The Company had no
valuation allowances recorded for the years ended December 31, 1998 and 1997.
The following table shows the amount of servicing assets which were capitalized
and amortized, and the fair value of those assets as of December 31, for the
periods indicated (in thousands):
1998 1997 1996
------- ------ ------
Balance, beginning of year $ 7,172 $2,011 $ 113
Rights acquired through Firstate Acquisition - 225 -
Capitalized servicing assets 20,418 5,517 1,970
Amortization (4,660) (581) (72)
------- ------ ------
Balance, end of year $22,930 $7,172 $2,011
======= ====== ======
Fair value of assets $29,608 $7,552 $2,332
======= ====== ======
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses provides for risks of losses inherent in the
credit extension process. Losses and recoveries are either charged or credited
to the allowance. The Company's allowance is an amount that management believes
will be adequate to absorb probable losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. The evaluations are periodically
reviewed and adjustments are recorded in the period in which changes become
known.
ACCOUNTING FOR IMPAIRMENT OF LOANS
The Company's identificaiton of impaired loans considers those loans which are
nonperforming and have been placed on non-accrual status and those loans which
are performing according to all contractual terms of the loan agreement but may
have substantive indication of potential credit weakness. As of December 31,
1998, $22.0 million of loans were considered impaired by the Company.
Approximately $11.9 million of these loans required valuation allowances,
totaling $1.4 million, which are included within the overall allowance for loan
losses at December 31, 1998. Residential mortgages and consumer loans and
leases outside the scope of SFAS No. 114 are collectively evaluated for
impairment.
As of December 31, 1997, $23.3 million of loans were considered impaired by the
Company. Approximately $16.5 million of these loans required valuation
allowances, totaling $2.9 million, which were included within the overall
allowance for loan losses at December 31, 1997.
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PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets,
except for leasehold improvements for which the lesser of the estimated useful
life of the asset or the term of the lease is used. The useful lives used in
computing depreciation and amortization are as follows:
YEARS
-----
Buildings and improvements 39
Furniture and equipment 7
Leasehold improvements 5-15
Gains and losses on routine dispositions are reflected in current operations.
Maintenance, repairs and minor improvements are charged to operating expenses,
and major replacements and improvements are capitalized.
OTHER REAL ESTATE
Other real estate owned ("ORE") represents property acquired through
foreclosure proceedings held for sale and real estate held for investment. ORE
is net of a valuation allowance established to reduce cost to fair value.
Losses are charged to the valuation allowance and recoveries are credited to
the allowance. Declines in market value and gains and losses on disposal are
reflected in current operations in ORE expense. Recoverable costs relating to
the development and improvement of ORE are capitalized whereas routine holding
costs are charged to expense. The sales of these properties are dependent upon
various market conditions. Management is of the opinion that such sales will
result in net proceeds at least equal to present carrying values.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," which was effective for
the Company's fiscal year beginning January 1, 1996. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles to be held and used
be reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. If the sum of the
expected future cash flows from the use of the asset and its eventual
disposition is less than the carrying amount of the asset, an impairment loss
is recognized. SFAS No. 121 also requires that certain assets to be disposed
of be measured at the lower of carrying amount or the net realizable value.
The impact of adopting SFAS No. 121 upon the results of operations of the
Company was not material.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," SFAS No.
128 simplifies the method for computing and presenting earnings per share
("EPS") previously required by APB Opinion No. 15, "Earnings Per Share", and
makes them comparable to international EPS standards. SFAS No. 128 was
effective for periods ending after December 15, 1997, and required restatement
of all prior period EPS data. It replaced the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
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INCOME TAXES
The Company follows the liability method which establishes deferred tax assets
and liabilities for the temporary differences between the financial reporting
bases and the tax bases of the Company's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or settled. Net
deferred tax assets, whose realization is dependent on taxable earnings of
future years, are recognized when a more-likely-than-not criterion is met, that
is, unless a greater than 50% probability exists that the tax benefits will not
actually be realized sometime in the future.
The Company and its subsidiaries file consolidated tax returns with the federal
and state taxing authorities. A tax sharing agreement exists between the
Company and its subsidiaries whereby taxes for the subsidiaries are computed as
if the subsidiaries were separate entities. Amounts to be paid or credited with
respect to current taxes are paid to or received from the Company.
PREMIUM ON DEPOSITS
A premium on deposits is recorded for the difference between cash received and
the carrying value of deposits acquired in purchase transactions. This premium
is being amortized on a straight-line basis over three to ten years.
Approximately $32.7 million and $202,000 was included in other assets in the
accompanying financial statements, as of December 31, 1998, and 1997.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Effective in 1996, the Company adopted the disclosure option of SFAS No. 123,
"Accounting for Stock-Based Compensation", which requires that companies not
electing to account for stock-based compensation as prescribed by the
statement, disclose the pro forma effects on earnings and earnings per share as
if SFAS No. 123 had been adopted. Additionally, certain other disclosures are
required with respect to stock compensation and the assumptions used are to
determine the pro forma effects of SFAS No. 123.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which was effective for the Company's fiscal year beginning January 1, 1998.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income, its components and accumulated balances in the financial statements.
Management implemented SFAS No. 130 in the year ended December 31, 1997.
DISCLOSURES ABOUT BUSINESS SEGMENTS
In June 1997, the FASB adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which was effective for the Company's
fiscal year beginning January 1, 1998. SFAS No. 131 establishes standards for
the way the Company reports information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements. The Company's commercial
banking and mortgage banking activities constitute operating segments for which
the Company has provided additional disclosure regarding their respective
assets, revenues, profit or loss and other operating data. Management
implemented SFAS No. 131 in the year ended December 31, 1997.
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DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits". SFAS No. 132 revises the
disclosure requirements for employees' pensions and other post-retirement
benefit plans. SFAS No. 132 was effective for fiscal years beginning after
December 15, 1997, earlier application was encouraged. Management implemented
SFAS No. 132 in the year ended December 31, 1997.
ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE FOR INTERNAL USE
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for capitalizing and expensing the costs of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. Management
believes the effect of adopting SOP 98-1 will not have a material impact on the
accompanying consolidated financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that entities recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. Management is currently assessing the financial implications of SFAS No.
133 and has not yet determined if the adoption will have a material effect
upon the results of operations.
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF
MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise". SFAS No. 134 amends SFAS Nos. 65, "Accounting
for Certain Mortgage Banking Activities" and SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 134 establishes
standards for the classification of securities and other beneficial interests
in accordance with SFAS No. 115. SFAS No. 134 allows an enterprise engaged in
mortgage banking activities to classify mortgage-backed securities and other
beneficial interests retained after the securitization of mortgage loans as
trading, available for sale or held to maturity, depending upon an entity's
intent and ability to hold those securities, except for those with sales
commitments in place which must be classified as trading. Previously, such
securities and beneficial interests retained after securitization of mortgage
loans held for sale by an entity engaged in mortgage banking activities were
required to be classified as trading. SFAS No. 134 is effective for periods
beginning after December 15, 1998 with early application permitted. Management
is currently assessing the financial implication of SFAS No. 134 but has not
yet determined if the adoption will have a material financial effect on results
of operations.
CASH EQUIVALENTS
For purposes of preparing the Consolidated Statements of Cash Flows, cash
equivalents are defined to include cash and due from banks and federal funds
sold.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial statements
to conform to the 1998 financial statement presentation.
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3. INVESTMENT SECURITIES:
The Company's investment securities consisted primarily of U.S. Treasury Bills,
Notes, and Agencies. The investment securities of the Company at December 31,
1998 and 1997, are summarized as follows (in thousands):
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
AT DECEMBER 31, 1998:
Available for sale securities:
U.S. Government Treasuries $23,564 $ 137 $ - $23,701
U.S. Agencies 5,000 - (94) 4,906
Revenue bond 2,298 98 - 2,396
---------- ---------- ------- -------
Total $30,862 $ 235 $(94) $31,003
========== ========== ======== =======
AT DECEMBER 31, 1997:
Available for sale securities:
U.S. Government Treasuries $10,512 $ 9 $ - $10,521
U.S. Agencies 4,000 14 - 4,014
Revenue bond 1,545 - - 1,545
---------- ---------- ------- -------
Total $16,057 $ 23 $ - $16,080
========== ========== ======= =======
Held to maturity securities:
U.S. Agencies 8,000 - (172) 7,828
---------- ---------- ------- -------
Total $24,057 $ 23 $ (172) $23,908
========== ========== ======= =======
BOOK VALUE AT DECEMBER 31: 1998 1997
---------- -------
Available for sale securities $31,003 $16,080
Held to maturity securities - 8,000
---------- -------
Total $31,003 $24,080
========== =======
The amortized cost and estimated market value of investment securities at
December 31, 1998, by contractual maturity are shown below (in thousands):
Available-for-Sale
----------------------------
Weighted
Amortized Market Average
Cost Value Yield
--------- ------ --------
Due in 1 year or less $21,560 $21,679 5.37%
Due after 1 year through 5 years 8,304 8,313 5.10
Due after 5 years 998 1,011 6.23
------- -------
Total $30,862 $31,003 5.32%
======= =======
There were no sales of U.S. Treasury and Federal Agency Notes during the year
ended 1998. Proceeds from sales of U.S. Treasury and Federal Agency Notes
during the years ended 1997 and 1996, were $55.1 million and $7.5 million,
respectively. Gross losses of $7,100 and $0 were realized for the years ended
December 31, 1997 and 1996, respectively. Gross gains of $193,200 and $45,400,
were realized during the years ended December 31, 1997 and 1996, respectively.
U.S. Treasuries and Federal Agency Notes with a book value of $27.5 million and
$10.5 million at December 31, 1998 and 1997, respectively, were pledged to
secure public deposits and for other purposes.
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4. MORTGAGE-BACKED AND HIGH LTV LOAN SECURITIES:
Mortgage-backed securities ("MBS") sometimes referred to as pass-through
certificates, represent an interest in a pool of loans. The securities are
issued by three government agencies or corporations: (i) the Government
National Mortgage Association ("GNMA"); (ii) the Federal Home Loan Mortgage
Corporation ("FHLMC"); and (iii) the Federal National Mortgage Association
("FNMA"). During 1998 and 1997 the Company securitized conventional and
government insured first lien mortgage loans with carrying values at
securitization of $67.3 million and $17.9 million, respectively. The Company
also securitized High LTV Loans in 1998 and 1997 with carrying values at
securitization of $240.0 million and $60.0 million, respectively. Securities
held to maturity are recorded at amortized cost, while securities available for
sale and trading are recorded at estimated market value. Mortgage-backed and
High LTV Loan securities that were retained on the balance sheet at December
31, 1998 and 1997 are summarized as follows (in thousands):
Amortized Unrealized Unrealized Market
Costs Gains Losses Value
-------------- -------------- ---------- -------
AT DECEMBER 31, 1998:
Available for sale securities:
GNMA securities $ 1,939 $ 11 $ - $ 1,950
FHLMC securities 10,025 26 (61) 9,990
FNMA securities 15,615 44 (136) 15,523
Other MBS securities 5,282 5 (37) 5,250
-------------- -------------- --------- -------
Total MBS available for sale $32,861 $ 86 $ (234) $32,713
============== ============== ========= =======
Trading securities:
GNMA securities $24,695 $ 651 $ - $25,346
Republic Bank Owner Trust 1998-1 B2 10,863 - - 10,863
Republic Bank Owner Trust 1997-1:
Overcollateralization 5,101 - - 5,101
Residual interest 2,645 - - 2,645
Republic Bank Owner Trust 1998-1:
Overcollateralization 5,827 - - 5,827
Residual interest 11,839 - - 11,839
Excess servicing, interest only-strip 4,446 - - 4,446
-------------- -------------- --------- -------
Total MBS trading securities $65,416 $ 651 $ - $66,067
============== ============== ========= =======
AT DECEMBER 31, 1997:
Held to maturity securities:
FHLMC securities $ 33 $ - $ - $ 33
-------------- -------------- --------- -------
Total MBS securities held to maturity $ 33 $ - $ - $ 33
============== ============== ========= =======
Available for sale securities:
GNMA securities $41,395 $ 648 $ - $42,043
FHLMC securities 5,963 - (9) 5,954
FNMA securities 6,644 104 (2) 6,746
Other MBS securities 716 8 - 724
-------------- -------------- --------- -------
Total MBS available for sale $54,718 $ 760 $ (11) $55,467
============== ============== ========= =======
Trading securities:
GNMA securities $16,346 $ 478 $ - $16,824
FNMA Title 1 securities 1,200 - - 1,200
Republic Bank Owner Trust 1997-1 M2 4,350 - - 4,350
Republic Bank Owner Trust 1997-1 B 4,350 - - 4,350
Republic Bank Owner Trust 1997-1
Overcollateralization 2,400 - - 2,400
Residual interest 4,988 - - 4,988
Excess servicing, interest only-strip 2,077 - - 2,077
-------------- -------------- --------- -------
Total MBS trading securities $35,711 $ 478 $ - $36,189
============== ============== ========= =======
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BOOK VALUE AT DECEMBER 31: 1998 1997
----- -------
Held to maturity securities $ - $ 33
Available for sale securities 32,713 55,467
Trading securities 66,067 36,189
------- -------
Total MBS $98,780 $91,689
======= =======
At December 31, 1998, the trading asset category included the following
securities as a result of the Company's securitization of High LTV Loans: (i) a
$10.9 million subordinate tranche purchased from the Company's securitization
of High LTV Loans in June 1998; and (ii) $25.4 million in overcollateralization
and residual interests in cash flows from securitizations in December 1997 and
June 1998. The Company has recorded these assets at what it believes to be
their fair market value; however, there is currently no ready market for
subordinate tranches and residual interests in cash flows from securitization
of High LTV Loans.
The amortized cost and estimated market value of the MBS portfolio at December
31, 1998, based on stated maturities and/or re-pricing characteristics are
shown below (in thousands):
Less Than One - Five Over Five
One Year Years Years Total
--------- ---------- --------- ------
AMORTIZED COST:
Available for sale securities:
GNMA securities - fixed rate $ - $- $ 1,939 $ 1,939
FHLMC securities - fixed rate 3,208 - 5,809 9,017
FHLMC securities - variable rate 1,008 - - 1,008
FNMA securities - fixed rate - - 13,632 13,632
FNMA securities - variable rate 1,983 - - 1,983
Other MBS securities - fixed rate - - 5,282 5,282
Trading securities:
GNMA securities - variable rate 24,695 - - 24,695
ortgage related residual assets - fixed rate - - 40,721 40,721
------- ---- ------- -------
Total MBS trading securities $30,894 $- $67,383 $98,277
======= ==== ======= =======
FAIR VALUE:
Available for sale securities:
GNMA securities - fixed rate $ - $- $ 1,950 $ 1,950
FHLMC securities - fixed rate 3,205 - 5,751 8,956
FHLMC securities - variable rate 1,034 - - 1,034
FNMA securities - fixed rate - - 13,563 13,563
FNMA securities - variable rate 1,960 - - 1,960
Other MBS securities - fixed rate - - 5,250 5,250
Trading securities:
GNMA securities - variable rate 25,346 - - 25,346
Mortgage related residual assets - fixed rate - - 40,721 40,721
------- ---- ------- -------
Total MBS trading securities $31,545 $- $67,235 $98,780
======= ==== ======= =======
The amortized cost and estimated market value of the MBS portfolio at December
31, 1998 by contractual maturity are shown below (in thousands). Actual
maturities may differ from contractual maturities because of prepayments of the
underlying mortgages:
Estimated Weighted
Amortized Market Average
Cost Value Yield
---------- -------- --------
Due 1 year or less $3,208 $ 3,205 6.89%
Due 5 - 10 years 43,749 43,797 8.14%
Due after 10 years 51,320 51,778 6.08%
------- -------
Total $98,277 $98,780 7.02%
======= =======
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Proceeds from sales of MBS securities during the years ended December 31, 1998,
1997 and 1996 were $79.1 million, $59.1 million and $47.8 million,
respectively. Gross gains of $1.2 million, $359,500 and $495,800 and gross
losses of $363,000, $1,900 and $85,800, respectively, were realized on these
sales. MBS with a book value of $37.8 million and a market value of $38.3
million were pledged to secure repurchase agreements at December 31, 1998. Net
unrealized holding gains on trading securities of $173,000, $764,000, and
$26,000 were included in income during 1998, 1997, and 1996, respectively.
5. LOANS AND LOANS HELD FOR SALE:
Loans and loans held for sale at December 31, 1998 and 1997, are summarized as
follows (in thousands):
1998 1997
--------- ---------
Real estate mortgage loans:
One-to-four family residential $ 977,227 $ 689,106
Multi-family residential 97,264 88,396
Commercial real estate 379,797 278,951
High LTV Loans 116,744 -
Construction/land development 130,415 51,511
Home equity loans 76,261 46,091
Commercial loans 84,267 39,387
Consumer loans 43,227 27,146
--------- ---------
Total gross portfolio loans 1,905,202 1,220,588
Less-allowance for loan losses (28,077) (22,023)
Less-undisbursed loans in process - (357)
Less-premiums and unearned discounts on loans purchased 275 (3,273)
Less-unamortized loan fees, net (9,188) (1,058)
--------- ---------
Total loans held for portfolio 1,868,212 1,193,877
Residential loans held for sale: Residential
first mortgage loans 184,176 141,556
Title 1/High LTV Loans - 45,670
---------- ----------
Total loans $2,052,388 $1,381,103
========== ==========
Mortgage loans serviced for others as of December 31, 1998 and 1997, were $1.5
billion and $381.9 million, respectively. Loans on which interest was not being
accrued totaled approximately $35.6 million, $29 million, and $25.5 million at
December 31, 1998, 1997 and 1996, respectively. Had interest been accrued on
these loans at their originally contracted rates, interest income would have
been increased by approximately $3.2 million, $2.3 million, and $1.8 million in
the years ended December 31, 1998, 1997 and 1996, respectively. Loans past due
90 days or more and still accruing interest at December 31, 1998 and 1997,
totaled approximately $1.2 million and $196,000, respectively. The Company
restructured loans totaling $411,000 and $0 during 1998 and 1997, respectively.
6. ALLOWANCE FOR LOAN LOSSES:
Changes in the allowance for loan losses were as follows (in thousands):
For the Years Ended December 31,
--------------------------------
1998 1997 1996
------- ------- -------
BALANCE, beginning of year $22,023 $19,774 $21,097
Provision for possible loan losses 14,261 3,247 2,758
Allowance from Firstate Acquisition - 132 -
Discount on purchased loans allocated
to (from) allowance for loan losses (4,303) 39 (1,732)
Loans charged-off (4,394) (1,402) (2,645)
Recoveries of loans charged-off 490 233 296
------- ------- -------
BALANCE, end of year $28,077 $22,023 $19,774
======= ======= =======
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While management believes that the allowance for loan losses is adequate at
December 31, 1998, based on currently available information, future provisions
to the allowance may be necessary due to changes in economic conditions,
deterioration of creditworthiness of the borrower, the value of underlying
collateral or other factors. Additionally, the Florida Department of Banking
and Finance, the FDIC, and the Federal Reserve, as an integral part of their
regular examination process, periodically review the allowance for loan losses.
These agencies may require additions to the allowance based on their judgments
about information available to them at the time of examination.
Included in the $14.3 million of provisions for loan losses for 1998 was $10.0
million which represented provisions necessary to maintain the adequacy of the
allowance considering transfer of High LTV Loans and nonconforming residential
loans to the portfolio. The portion of the allowance for loan losses, that
were created through the allocation of discounts on purchased loans may only be
used to absorb losses on the related acquired loans. As of December 31, 1998
and 1997, approximately $2.3 million and $7.0 million of the allowance remained
from the allocation of discounts on purchased loans.
7. PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1998 and 1997, included (in thousands):
1998 1997
------- -------
Land $10,524 $ 8,402
Buildings and improvements 31,414 22,828
Furniture and equipment 31,035 20,421
Leasehold improvements 4,504 3,043
Construction in progress 2,302 1,138
------- -------
Total premises and equipment 79,779 55,832
Less-accumulated depreciation and amortization (19,505) (16,541)
------- -------
Premises and equipment, net $60,274 $39,291
======= =======
8. OTHER REAL ESTATE ("ORE"):
State banking regulations require the Company to dispose of all ORE acquired
through foreclosure within five years of acquisition, with a possibility for
additional extensions, each of up to five years. There were two ORE properties
with book values totaling approximately $1.1 million at December 31, 1998,
which were required to be disposed of by year-end. The largest piece of these
properties is a tract of land carried at $884,000 acquired through foreclosure
in 1988 that has partially been developed as a shopping center site. During
1998, the Company recorded $1.4 million of valuation allowances on this
property. The Company will be required to write-off the remaining book value of
this property, for regulatory purposes, if it has not been sold by March 31,
1999. Negotiations for the sale of this property are currently in process.
The Company has been granted an extension on the second piece of property, with
a book value of $191,500, until November 30, 1999. This property, consisting
of residential lots, is currently under contract with closings to begin in the
first quarter of 1999.
Loans converted to ORE through foreclosure proceedings totaled $4.9 million,
and $6.5 million, for the years ended December 31, 1998 and 1997, respectively.
Sales of ORE that were financed by the Company totaled $86,000 and $113,000
for the years ended December 31, 1998 and 1997, respectively.
Changes in the valuation allowance for ORE were as follows (in thousands):
For the Years Ended December 31,
--------------------------------
1998 1997 1996
------ ------ ------
BALANCE, beginning of year $3,279 $2,672 $2,090
Provision 1,603 530 111
Charge-offs, net (477) 77 471
------ ------ ------
BALANCE, end of year $4,405 $3,279 $2,672
====== ====== ======
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9. INCOME TAXES:
Income taxes are comprised of the following (in thousands):
For the Years Ended
December 31,
---------------------------------
1998 1997 1996
------ ------ ------
Current (benefit)/provision $(4,272) $ 7,916 $3,762
Deferred provision/(benefit) (2,330) (1,751) (990)
------- ------- ------
$(6,602) $ 6,165 $2,772
======= ======= ======
At December 31, 1998, the Company had approximately $18.2 million of remaining
federal and $38.2 million of state net operating loss carry-forwards. These
carry-forwards expire in the years 2005 through 2018. Following the change of
ownership in 1993, and the four acquisitions in 1997 and 1998, recognition of
net operating loss carry-forwards are limited to approximately $732,000 each
year under the rules of IRC Section 382. If the full amount of the limitation
is not used in any years, the amount not used increases the allowable limit in
the subsequent year.
A portion of the net operating loss incurred during 1998 will be carried back
to the previous two years for federal income tax purposes. The remaining 1998
federal and state carry-forwards of $10.6 million and $28.2 million,
respectively, which are included above are not subject to any annual
limitations.
Deferred tax assets and liabilities were comprised of the following at December
31, 1998 and 1997 (in thousands):
1998 1997
------ ------
Gross deferred tax assets:
Tax bases over financial bases for loans
(loan loss allowance and discounts) $ 10,217 $ 6,134
Financial amortization of premium over tax amortization 722 701
Interest on non-accrual loans 584 560
Tax bases over financial bases for ORE 2,202 1,597
Net operating losses and tax credit carry-forward 7,859 3,249
Mark-to-market-loans held for sale 1,192 1,268
Accrued restructuring and other costs 2,192 263
Other 169 400
-------- -------
Gross deferred tax asset 25,137 14,172
-------- -------
Gross deferred tax liabilities:
Gains on sale of loans-financial bases
greater than tax bases (12,814) (3,202)
Fixed assets - financial bases greater
than tax bases (1,272) (1,230)
Purchased assets - FMV adjustments (368) (227)
Other (979) (1,551)
-------- -------
Gross deferred tax liabilities (15,433) (6,210)
Less valuation allowance (523) (827)
-------- -------
Net deferred tax asset $ 9,182 $ 7,135
======== =======
The net deferred tax asset relating to the unrealized gain on available for
sale securities which is recorded directly to stockholders' equity, decreased
during 1998 by $283,000 and increased during 1997 by $352,000.
Through the merger of FFO in 1997, and Bankers and Lochaven in 1998, the
Company acquired unrecognized deferred tax liabilities of approximately
$3,191,000, $17,000 and $69,000, respectively, related to base year reserves
calculated under the thrift bad debt percentage method. If during any taxable
year, the Company ceases to be a bank, these reserves shall be taken into
account ratably over the six taxable year period beginning with such taxable
year.
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The Company's effective tax rate varies from the statutory rate of 34%. The
reasons for this difference are as follows (in thousands):
For the Years Ended December 31,
--------------------------------
1998 1997 1998
------- ------ ------
Computed "expected" tax provision (benefit) $(5,894) $5,226 $2,406
Increase (reduction) of taxes:
Tax-exempt interest income (18) (20) (22)
Valuation allowance on deferred tax asset - 286 294
Goodwill amortization 162 47 -
State taxes (624) 550 285
Other (228) 76 (191)
------- ------ ------
Total $(6,602) $6,165 $2,772
======= ====== ======
10. OTHER BORROWINGS:
FHLB ADVANCES
At December 31, 1998, the Company was required by its collateral agreement with
the FHLB to maintain qualifying first mortgage loans in an amount equal to at
least 100% of the FHLB advances outstanding as collateral. The FHLB advances
at December 31, 1998 and 1997 were collateralized by such loans and securities
totaling $25.0 million and $39.3 million, respectively. In addition, all of
the Company's FHLB stock is pledged as collateral for such advances.
Maturities and average interest rates of advances from the FHLB as of December
31, 1998 and 1997, were as follows (in thousands):
Maturities in Balance at
Year Ending Weighted December 31,
December 31, Average Rate ---------------------
------------ ------------ 1998 1997
1998 6.44% $ - $39,300
1999 5.15 25,000 -
---------- -------
TOTAL $25,000 $39,300
========== =======
SENIOR DEBT
On September 24, 1998, the Company entered into a loan agreement ("Loan
Agreement") with SunTrust Bank, Central Florida, N.A. ("SunTrust"), pursuant to
which SunTrust extended a non-revolving line of credit ("Senior Debt") for up
to $25.0 million to the Company. Interest on the loan made pursuant to the
Senior Debt is payable monthly and the maturity date for the loan is September
25, 1999. Certain terms of the Loan Agreement, including the interest rate to
be paid, was contingent upon the Company reducing its investment in assets
related to High LTV Loans. On September 25, 1998, the Company received the
full $25.0 million balance under the line of credit. The Company contributed
the proceeds of the Senior Debt to the Bank in order to maintain the regulatory
capital of the Bank at "well capitalized" levels and to support the Bank's
planned branch expansion activities. The Company paid an average rate of 7.58%
during 1998. On December 30, 1998, the loan agreement was modified to avoid
default under debt service coverage requirements of the Loan Agreement (the
"Modification"). The terms of the Modification included that: (i) on and after
January 1, 1999, the loan shall bear interest equal to LIBOR plus 1.50%; (ii)
the Loan Agreement will be considered in default if, at any time during the
term of the loan, the borrower's regulatory rating falls below a "3" on a scale
of 1 to 5 ("1" being the highest, "5" being the lowest) or the borrower or any
of its subsidiaries become subject to a 'cease and desist' order imposed by a
regulatory authority; and (iii) Mr. William R. Hough, a director and principal
stockholder of the Company, agreed that at any time on or after March 31, 1999,
upon the written request of SunTrust, to purchase the loan from SunTrust at
face value, plus accrued and unpaid interest and any and all other costs or
expenses due SunTrust pursuant to the Loan Agreement.
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On March 19, 1999, the loan agreement was further amended to extend the date
for SunTrust's option to request purchase of the loan from March 31, 1999 to
September 24, 1999, the maturity date of the loan. The Company agreed to
establish an interest reserve account with SunTrust and to deposit in the
account sufficient funds to pay interest on the note through the maturity date.
SunTrust retained its right to request purchase of the loan in the event the
Bank failed to comply with financial covenants of the loan agreement which
require the Bank to: (i) maintain its ratio of nonperforming assets to assets
at no more than three percent; (ii) maintain its debt service coverage ratio at
no less than two to one; and (iii) eliminate the excess of dividends paid by
the Bank to the Holding Company over the Bank net income for the current and
preceding two years by June 30, 1999.
HOLDING COMPANY UNSECURED NOTES
On December 30, 1998, the Company entered into loan agreements with certain
members of its Board of Directors to borrow $7.0 million in unsecured notes.
Interest on these notes is payable monthly at a variable rate, changing every
90 days, equal to the three month LIBOR rate plus 2.50%. The initial rate was
7.747%. The notes mature on September 25, 1999. The Company contributed $5.0
million of the proceeds from these unsecured notes to the Bank in order to
maintain the regulatory capital of the Bank at "well-capitalized" levels. The
remaining $2.0 million of the proceeds was retained by the Company to service
the Company's debt. The repayment of principal and interest on these notes is
subordinate to the payment of all principal and interest on the Senior Debt,
and the payment of interest on the Company-obligated mandatorily redeemable
capital securities of the subsidiary trust holding solely the junior
subordinated debentures of the Company.
11. OFF-BALANCE-SHEET RISK, COMMITMENTS AND CONTINGENCIES:
CONCENTRATION OF CREDIT RISK
The Company's core customer loan origination base is located along the West
Coast and in central Florida. The majority of the Company's purchased loan
portfolio is concentrated in the states of Florida, California, Texas, and in
the northeastern United States. At December 31, 1998 and 1997, approximately
93% and 95%, respectively, of the Company's loan portfolio was secured by real
estate. Mortgage loans secured by one-to-four family properties comprised
approximately 51% and 56%, respectively, of total mortgage loans at December
31, 1998 and 1997.
OFF-BALANCE-SHEET ITEMS
The Company enters into financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to limit exposure to changes in the value of loans held for sale. These
financial instruments include commitments to extend credit, commercial and
standby letters of credit, and forward contracts for the delivery of loans.
These instruments involve, to varying degrees, elements of credit and
interest-rate risks that are not recognized in the accompanying consolidated
balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments discussed above is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
A summary of financial instruments with off-balance-sheet risk at December 31,
1998, is as follows (in thousands):
Contractual
Amount
-----------
Commitments to extend credit $255,329
Unfunded lines of credit 201,959
Commercial and standby letters of credit 11,396
-----------
Total $468,684
===========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the agreement.
Commitments generally have fixed expiration dates or other termination clauses
and
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may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary upon extension of credit is based on management's
credit evaluation of the counter party. Collateral held varies but may include
premises and equipment, inventory and accounts receivable. Unfunded lines of
credit represent the undisbursed portion of lines of credit, which have been
extended to customers.
Commercial and standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party, which
typically do not extend beyond one year. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Company typically holds certificates of deposit
as collateral supporting those commitments, depending on the strength of the
borrower. Outstanding, unsecured standby letters of credit at December 31,
1998 totaled approximately $2.6 million.
At December 31, 1998, in connection with managing the interest rate market risk
on its loans held for sale of $184.2 million and Locked Loans (without
consideration for any fallout) of $126.1 million, the Company had outstanding
$86.0 million (estimated fair value of $85.2 million) of Forward Commitments
which expire over the next two months, the period when the loans are expected
to be sold and Locked Loans are expected to close.
The Company reduces its risk of nonperformance under the hedging contracts by
entering into those contracts with reputable security dealers and investors and
evaluating their financial condition. However, there is a risk that certain of
the Locked Loans do not close or are renegotiated in a declining interest rate
market and close at lower prices. The Company reduces this risk by collecting
nonrefundable commitment fees on certain of the Locked Loans and enters into
Forward Commitments to deliver loans to investors primarily on a best efforts
basis.
COMMITMENTS
The Company has entered into a number of noncancelable operating leases
primarily for branch banking locations. At December 31, 1998, minimum rental
commitments based on the remaining noncancelable lease terms were as follows
(in thousands):
1999 $4,375
2000 4,142
2001 3,697
2002 3,241
2003 2,882
Thereafter 7,281
-------
Gross operating lease commitments 25,618
Less-sublease rentals (1,702)
Net operating lease commitments $23,916
=======
Total rent expense for the years ended December 31, 1998, 1997 and 1996, was
$4.0 million, $3.0 million, and $2.5 million, respectively. Total rental
income from subleases for the years ended December 31, 1998, 1997 and 1996, was
$1.2 million, $1.2 million, and $1.6 million, respectively.
During 1994, a capital lease obligation of approximately $981,000 was incurred
related to the leasing of data processing equipment with an implicit rate of
7.49%. Minimum lease payments under this capital lease are approximately
$107,000 in 1999. In addition, the Company is obligated to make processing
payments in relation to its computer facilities of approximately $2.0 million
in 1999 and 2000 and $328,000 in 2001.
CONTINGENCIES
In December 1998, the Company received a claim from a former vendor that
provided printing and direct mailing services for the Company's mortgage
banking operation which alleges that the vendor is owed damages of
approximately $13 million for breach of contract. The claim is based on a term
contract executed by the former manager of the High LTV Loan origination unit
who was not an officer of the Company or the Bank at the time the
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contract was executed. The Company has filed a lawsuit against the vendor and
the former manager alleging civil conspiracy and fraud in connection with the
execution of the contract. The vendor has, at this same time, filed an
arbitration proceeding against the Company relating to the same issue. This
matter is in the discovery phase.
The Company is also subject to various other legal proceedings and claims which
arise in the normal course of business. Based on information presently
available, in the opinion of management, the amount of liability with respect
to these other proceedings would not have a material effect on the financial
statements.
12. EMPLOYEE BENEFIT PLANS:
On January 1, 1987, a retirement plan was adopted, covering substantially all
employees, which includes a 401(k) arrangement. The Company's contributions
were $683,800, $437,200, and $186,900 in the years ended December 31, 1998,
1997 and 1996, respectively.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Generally, the Company's practice and intent is to hold its financial
instruments to maturity, unless otherwise designated. Where available, quoted
market prices are used to determine fair value. However, many of the Company's
financial instruments lack quoted market prices. Although the Company has
incorporated what it considers appropriate estimation methodologies for those
financial instruments which lack quoted market prices, a significant number of
assumptions must be used in determining such estimated fair values. Such
assumptions include subjective assessments of current market conditions,
perceived risks associated with these financial instruments and other factors.
Different assumptions might be considered by the user of the financial
statements to be more appropriate, and the use of alternative assumptions or
estimation methodologies could have a significant effect on the resulting
estimated fair values. The estimated fair values presented neither include nor
give effect to the values associated with the Company's business, existing
customer relationships, and branch banking network, among other things.
The following estimates of the fair value of certain financial instruments held
by the Company include only instruments that could reasonably be evaluated.
The investment and mortgage backed securities portfolio was evaluated using
market quotes, where available or fair market values calculations as of
December 31, 1998 and 1997. The fair value of the loan portfolio was evaluated
using market quotes for similar financial instruments, where available.
Otherwise, discounted cash flows at current market, after adjusting for credit
deterioration and an average prepayment assumption, were used based upon
current rates the Company would use in extending credit with similar
characteristics. These rates may not necessarily be the same as those, which
might be used by other financial institutions for similar loans. Cash and due
from banks and federal funds sold were valued at cost. The fair values
disclosed for checking accounts, savings accounts, securities sold under
agreements to repurchase, and certain money market accounts are, by definition,
equal to the amount payable on demand at the reporting date, i.e., their
carrying amounts. Fair values for time deposits are estimated using a
discounted cash flow calculation that applies current interest rates to
aggregated expected maturities. Standby letters of credit and commitments to
extend credit were valued at book value as the majority of these instruments
are based on variable rates. The value of the Company's mortgage servicing
rights was determined using the discounted cash flows from servicing less the
carrying value of those servicing rights.
These evaluations may incorporate specific value to the Company in accordance
with its asset/liability strategies, interest rate projections and business
plans at a specific point in time and therefore, should not necessarily be
viewed as liquidation value. They should also not be used in determining
overall value of the Company due to undisclosed and intangible aspects such as
business and franchise value, and due to changes to assumptions of interest
rates and expected cash flows which might need to be made to reflect
expectations of returns to be earned on instruments with higher credit risks.
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The table below illustrates the estimated fair value of the Company's financial
instruments as of December 31 using the assumptions described above (in
thousands):
1998 1997
--------- ---------
Financial Assets:
Cash and due from banks $ 46,143 $ 48,062
========= =========
Interest bearing deposits in banks 3,467 6,817
========= =========
Federal funds sold 93,000 33,191
========= =========
Investment and mortgage backed securities 129,783 115,597
========= =========
Loans and loans held for sale 2,100,862 1,408,174
========= =========
Mortgage servicing rights 29,608 7,552
========= =========
Financial Liabilities:
Deposits 2,200,203 1,477,038
========= =========
Securities sold under agreements to repurchase 36,640 21,454
========= =========
FHLB advances 25,000 39,254
========= =========
Holding company senior debt 25,000 -
========= =========
Holding company unsecured notes 7,000 -
========= =========
Standby letters of credit 11,396 12,168
========= =========
Commitments to extend credit and unfunded lines of credit 457,288 232,711
========= =========
14. STOCKHOLDERS' EQUITY
PERPETUAL PREFERRED CONVERTIBLE STOCK
The Company has 75,000 outstanding shares of perpetual preferred convertible
stock. The preferred stock has a liquidation preference of $88 per share and
carries a noncumulative dividend of $3.52 per year, payable quarterly.
Dividends on the preferred stock must be paid before any dividends on common
stock can be paid. Beginning December 16, 1994, and thereafter, the preferred
stock can be converted by the holders into 10 shares of common stock for each
share of preferred stock. The holders of the preferred stock vote with the
holders of the common stock and are entitled to 10 votes per share of preferred
stock.
DIVIDENDS
Florida statutes limit the amount of dividends the Bank can pay in any given
year to that year's net income plus retained net income from the two preceding
years. Additionally, the Bank and the Company cannot pay dividends, which
would cause either to be undercapitalized as defined by federal regulations.
1993 NON-QUALIFIED STOCK OPTION PLAN
On May 28, 1993, the Company adopted a non-qualified stock option plan (the
"Option Plan") which reserved 80,000 shares of common stock for future issuance
under the Option Plan to eligible employees of the Company. As of December 31,
1998, 80,000 options were granted under the Option Plan and 20,000 were
outstanding. The per share exercise price of each stock option is determined
by the Board of Directors at the date of grant vesting over a five year period.
The plan terminates in the year 2003 or at the discretion of the Board of
Directors.
1995 INCENTIVE STOCK OPTION PLAN
On April 29, 1994, the shareholders approved a qualified incentive stock option
plan to certain key employees. In connection with the Company's holding
company reorganization and share exchange in which all of the Bank's
stockholders became stockholders of the Company, the Company adopted the
Republic Bancshares, Inc. 1995 Stock Option Plan (the "Plan") as a replacement
for the Company's 1994 Stock Option Plan. The Plan was approved by the
stockholders of the Bank at the Bank's Special Meeting held on February 27,
1996. On April 23, 1996 and April
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28, 1998, the shareholders approved certain amendments to the Plan (the
"Amendments"). Under the Amendments, the total number of shares that may be
purchased pursuant to the Plan cannot exceed 1,125,000 shares over the life of
the Plan and provides that the maximum number of options granted to any one
individual in any fiscal year under the Plan cannot exceed 62,000. There is no
limitation on the annual aggregate number of options to be granted in any
fiscal year. Each option granted under the Plan will be exercisable by the
grantee during a term, not to exceed 10 years, fixed by the compensation
committee of the Board of Directors ("the Committee"). However, no more than
20% of the shares subject to such options shall vest annually beginning at date
of grant. However, in the event of a change in control, or termination of
employment without cause, all options granted become exercisable immediately.
Performance options under the plan, which have been granted to the employees of
the mortgage banking division of the Company, vest at the rate of 20% at the
end of each 12-month period over five years, contingent upon that division
meeting specified net income performance goals as set by the Board of
Directors. If the performance goal for each year is not met, then the options
that would have become exercisable at the end of the 12-month period shall
expire and be null and void.
Upon the grant of an option to a key employee, the Committee will fix the
number of shares of common stock that the grantee may purchase upon exercise of
the option, and the price at which the shares may be purchased. The exercise
price for all options shall not be less than the fair market value. During
1998, 1997 and 1996, options to purchase 167,896, 172,785 and 351,557 shares,
respectively, under the Plan were granted. Of the options previously granted,
105,704 shares have expired, thereby making these options available for future
grants. As of December 31, 1998, 623,039 options remained outstanding under
this plan, with 381,962 shares available to be granted at a future time.
1997 STOCK APPRECIATION RIGHTS PLAN
On October 21, 1997, the Board of Directors of the Company approved a Stock
Appreciation Rights Plan (the "SAR Plan"). Under the SAR Plan, certain key
employees have been granted the right to receive cash equal to the excess of
the fair market value of a share of the Company's common stock at the time of
exercise, over the fair market value of a share of the Company's common stock
at date of grant, times the number of rights exercised. As of December 31,
1998, 40,250 SAR's had been granted at the then current market value of
$26.675. No more than 20% of the shares may vest annually by beginning at date
of grant. The term of a SAR may vary, but shall not be less than one year or
more than 10 years from the date of grant.
The Company records compensation expense equal to the appreciation of the fair
market value of the stock times the number of outstanding SAR's. As of
December 31, 1998, there had been no appreciation of the Company's common stock
over the fair market value at date of grant. Therefore, compensation expense
has been recorded only for those rights, which have been exercised.
AGGREGATE STOCK OPTION ACTIVITY
The Company adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No.
123 purposes, the fair value of each option grant has been estimated as of the
date of grant using the Black-Scholes option pricing model with the following
assumptions (weighted averages) for 1998, 1997 and 1996: risk-free interest
rate of 4.66%, 5.35% and 6.50%, respectively, expected life of seven years,
dividend rate of zero percent, and expected volatility of 70.1% for 1998, 30.9%
for 1997 and 25% for 1996. The approximate fair value of the stock options
granted in 1998, 1997, and 1996 is $3.4 million, $1.6 million and $1.9 million,
respectively, which would be amortized as compensation expense over the vesting
period of the options. Options vest over five years. Had compensation cost
been determined consistent with SFAS No. 123, utilizing the assumptions
detailed above, the Company's net income (loss) and earnings (loss) per share
as reported would have been the following pro forma amounts (in thousands
except per share data):
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1998 1997 1996
------- ------ ------
Net Income (loss)
As reported $(12,421) $7,787 $3,798
Pro forma (13,176) 7,444 3,573
Earnings (loss) per share-diluted
As reported (1.34) 1.01 .53
Pro forma (1.42) .97 .50
Earnings (loss) per share-basic
As reported (1.34) 1.16 .59
Proforma (1.42) 1.11 .56
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that expected in future years. A summary of the
status of the Company's stock option plans at December 31, 1998, 1997 and 1996,
and for the years then ended is presented in the table below:
1998 1997 1996
----------------- ------------------ ------------------
Wtd Avg. Wtd Avg. Wtd Avg.
Shares Ex Price Shares Ex Price Shares Ex Price
------ -------- ------ -------- ------ --------
FIXED OPTIONS
Outstanding - beg. of year 407,995 $15.10 281,217 $ 11.68 142,164 $11.55
Granted 167,896 28.58 160,385 20.67 151,557 11.91
Exercised (61,552) 9.65 (21,300) 11.79 - -
Forfeited/Expired (10,400) 20.55 (12,307) 15.32 (12,504) 13.01
------- ------- -------
Outstanding - end of year 503,939 20.15 407,995 15.10 281,217 11.68
======= ======= =======
Exercisable - end of year 284,579 13.36 253,425 11.61 177,277 10.91
Wtd. avg. fair value
of options granted 20.04 9.45 5.51
PERFORMANCE OPTIONS
Outstanding - beg. of year 172,400 14.56 200,000 13.63 - -
Granted- - 12,400 26.68 200,000 13.63
Exercised (16,500) 13.63 - - - -
Forfeited/Expired (16,800) 13.63 (40,000) 13.63 - -
------- ------- -------
Outstanding - end of year 139,100 14.79 172,400 14.56 200,000 13.63
======= ======= =======
Exercisable - end of year 68,900 14.79 - - - -
Wtd. avg. fair value
of options granted - 11.91 5.84
Options Outstanding Options Exercisable
- -------------------------------------------------------------------- --------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Price at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- -------------- ------------ ----------------- ---------------- ----------- -----------------
$10.00-10.50 143,847 7.49 years $ 10.09 143,847 $ 10.09
13.63-16.32 221,275 7.23 years 13.73 118,695 13.80
20.00-28.94 277,917 9.09 years 27.88 90,937 27.09
15. EARNINGS (LOSS) PER SHARE:
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
In 1997 the Company adopted SFAS No. 128, "Earnings Per Share," effective
December 15, 1997. Diluted earnings (loss) per common and common equivalent
shares have been computed by dividing net income (loss) by the weighted average
common and common equivalent shares outstanding during the periods. The
weighted average common and common equivalent shares outstanding has been
adjusted to include the number of shares that would have been
76
79
outstanding if the stock options had been exercised, at the average market
price for period, with the proceeds being used to buy shares from the market
(i.e., the treasury stock method) and the perpetual preferred stock and the
convertible subordinated debentures had been converted to common stock at the
earlier of the beginning of the year or the issue date (i.e., the if-converted
method). Basic earnings (loss) per common share was computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year. During 1998, there were 643,039 of stock options
and 750,000 shares of convertible preferred stock which were not included in
the calculation of dilutive earnings per share because they were antidilutive.
The table below reconciles the calculation of diluted and basic earnings per
share for 1997 and 1996 (in thousands, except per share data):
1997
--------------------------------
Weighted Earnings
Net Shares Per
Income Outstanding Share
-------- ------------ --------
Net Income $7,787 6,693,970
Basic earnings per share $1.16
Options exercised during the
period - incremental effect
prior to exercise - 5,198
Options outstanding at end of
period - 171,306
Convertible perpetual preferred
stock - 750,000
Convertible subordinated debentures
- incremental effect prior to
conversion 245 300,452
-------- --------- -----
Diluted earnings per share $8,032 7,920,926 $1.01
======== ========= =====
1997
--------------------------------
Weighted Earnings
Net Shares Per
Income Outstanding Share
-------- ------------ --------
Net Income $3,798 6,423,130
Basic earnings per share $0.59
Options exercised during the
period - incremental effect
prior to exercise - -
Options outstanding at end
of period - 31,087
Convertible perpetual preferred
stock - 750,000
-------- --------- -----
Diluted earnings per share $3,798 7,204,217 $0.53
======== ========= =====
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16. REGULATORY CAPITAL REQUIREMENTS
The Company, the Bank, and the Savings Bank are required to comply with the
capital adequacy standards established by the Federal Reserve (for the
Company), the FDIC (for the Bank), and the OTS (for the Savings Bank). There
are three basic measures of capital adequacy that have been promulgated by the
Federal Reserve and FDIC, two risk-based measures and a leverage measure. All
applicable capital standards must be satisfied for a bank holding company to be
considered in compliance. The OTS promulgated measures to include a risk-based
measure, a core capital requirement and a tangible capital requirement.
The minimum guidelines for the ratio ("Risk-Based Capital Ratio") of total
capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8.0%. At least
half of Total Capital (i.e., 4.0% of risk-weighted assets) must comprise common
stock, minority interests in the equity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less goodwill and certain other intangible assets
("Tier 1 Capital"). The remainder may consist of subordinated debt, other
preferred stock, and a limited amount of loan loss reserves ("Tier 2 Capital").
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3.0% for banks that meet certain
specified criteria, including having the highest regulatory rating. All other
bank holding companies generally are required to maintain a Leverage Ratio of
at least 3.0%, plus an additional cushion of 100 to 200 basis points. The
guidelines also provide that bank holding companies experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the Federal Reserve
has indicated that it will consider a "tangible Tier I Capital leverage ratio"
(deducting all intangibles) and other indicators of capital strength in
evaluating proposals for expansion or new activities.
Failure to meet capital guidelines could subject the Company, Bank or the
Savings Bank to a variety of enforcement remedies, including issuance of a
capital directive, the termination of deposit insurance by the FDIC, a
prohibition on the taking of brokered deposits, and certain other restrictions
on its business. Substantial additional restrictions can be imposed upon
FDIC-insured depository institutions that fail to meet applicable capital
requirements under the federal prompt corrective action regulations.
As of December 31, 1998 and 1997, the Bank and the Savings Bank were considered
"well capitalized" under the federal banking agencies for prompt corrective
action regulations. Regulatory capital ratios for 1997 have not been restated
to include BSB and Lochaven, as the accounting methodology for a pooling of
interest does not apply under regulatory guidelines. The table which follows
sets forth the amounts of capital and capital ratios of the Company, the Bank,
and the Savings Bank as of December 31, 1998 and 1997, and the applicable
regulatory minimums (in thousands):
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COMPANY BANK
--------------- ----------------
AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- -----
As of December 31, 1998:
RISK-BASED CAPITAL:
Tier 1 Capital
Actual $133,137 7.72% $158,876 9.27%
Minimum required to be "Adequately Capitalized" 68,983 4.00 68,584 4.00
Excess over minimum to be "Adequately Capitalized" 64,154 3.72 90,292 5.27
To be "Well Capitalized" N/A N/A 102,876 6.00
Excess over "Well Capitalized" requirements N/A N/A 56,000 3.27
Total Capital
Actual 155,435 9.01 181,046 10.56
Minimum required to be "Adequately Capitalized" 137,966 8.00 137,168 8.00
Excess over minimum to be "Adequately Capitalized" 17,469 1.01 43,205 2.56
To be "Well Capitalized" N/A N/A 171,460 10.00
Excess over/under "Well Capitalized" requirements N/A N/A 9,586 0.56
TIER 1 CAPITAL TO TOTAL ASSETS (LEVERAGE):
Actual 133,137 5.49 158,876 6.66
Minimum required to be "Adequately
Capitalized" 96,944 4.00 95,425 4.00
Excess over minimum to be "Adequately Capitalized" 36,193 1.49 63,451 2.66
To be "Well Capitalized" N/A N/A 119,282 5.00
Excess over "Well Capitalized" requirements N/A N/A 39,594 1.66
As of December 31, 1997:
RISK-BASED CAPITAL:
Tier 1 Capital
Actual $101,350 10.05% $103,162 10.25%
Minimum required to be "Adequately Capitalized" 40,329 4.00 40,265 4.00
Excess over minimum to be "Adequately Capitalized" 61,021 6.05 62,897 6.25
To be "Well Capitalized" N/A N/A 60,398 6.00
Excess over "Well Capitalized" requirements N/A N/A 42,764 4.25
Total Capital
Actual 117,603 11.66 115,983 11.52
Minimum required to be "Adequately Capitalized" 80,658 8.00 80,530 8.00
Excess over minimum to be "Adequately Capitalized" 36,945 3.66 35,453 3.52
To be "Well Capitalized" N/A N/A 100,663 10.00
Excess over "Well Capitalized" requirements N/A N/A 15,320 1.52
TIER 1 CAPITAL TO TOTAL ASSETS (LEVERAGE):
Actual 101,350 6.94 103,162 7.07
Minimum required to be "Adequately Capitalized" 58,456 4.00 58,392 4.00
Excess over minimum to be "Adequately Capitalized" 42,894 2.94 44,770 3.07
To be "Well Capitalized" N/A N/A 72,990 5.00
Excess over "Well Capitalized" requirements N/A N/A 30,172 2.07
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RISK BASED CAPITAL
-----------------------------------------------
TIER 1 CAPITAL TOTAL CAPITAL
------------------ ---------------------
THE SAVINGS BANK AMOUNT RATIO AMOUNT RATIO
------ ----- ------- ------
As of December 31, 1998:
Actual $2,342 30.19% $2,402 30.97%
Minimum required N/A N/A 620 8.00
Excess over minimum N/A N/A 1,782 22.97
To be "Well Capitalized" 465 6.00 776 10.00
Excess over "Well Capitalized" requirements 1,877 24.19 1,626 20.97
TIER 1 CAPITAL TO TOTAL TANGIBLE EQUITY
TOTAL ASSETS (LEVERAGE) TO ASSETS
----------------------- ---------------------
THE SAVINGS BANK AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
Actual $2,342 12.15% $2,402 12.43%
Minimum required 778 4.00 1,507 8.00
Excess over minimum 1,564 8.15 835 4.43
To be "Well Capitalized" 973 5.00 N/A N/A
Excess over "Well Capitalized" requirements 1,369 7.15 N/A N/A
17. RELATED PARTY TRANSACTIONS
Mr. William R. Hough, a director and one of the two controlling shareholders,
is President and the controlling shareholder of William R. Hough & Co.
("WRHC"), a NASD-member investment-banking firm. As part of the normal course
of business, the Company solicits competitive bids for the sales of mortgage
securities from approved broker/dealers, including WRHC. During 1998 and 1997,
the Company placed $547.2 million and $115.4 million, respectively, of forward
sales on mortgage backed securities through WRHC. Additionally, the Company
periodically purchased securities under agreement to repurchase at a rate based
on the prevailing federal funds rate and one-eighth 1% per an agreement entered
into on August 15, 1995.
In May 1998, WRHC acted as co-underwriters for an offering of 2.6 million
shares of the Company's common stock and as such was entitled to receive fees
in an amount equal to $1.5 million. In addition, during 1998, WRHC was engaged
to act as one of the underwriters in connection with a Private Placement
Offering of approximately $240.0 million in securities backed by High LTV
Loans. The Company also reimbursed WRHC for reasonable out-of-pocket expenses.
In December 1997, the Company completed a securitization of $60 million of High
LTV home equity loans. WRHC participated as co-underwriters and was paid
one-half of an amount equal to 1.5% of the principal amount of senior
securities; 1.5% of the principal amount of subordinated securities; and 2.5%
of the gross proceeds from the sale of interest only securities totaling
$450,000. The Company also reimbursed WRHC for reasonable out-of-pocket
expenses.
In July 1997, in connection with an offering of trust preferred securities,
WRHC participated as co-manager, and as such was entitled to receive one-half
of an underwriting fee of 3.75% of the dollar amount of preferred stock issued
in an amount equal to approximately $539,000. In addition, the Company agreed
to reimburse WRHC for certain expenses and legal fees not to exceed $65,000.
During the year ended December 31, 1996, FFO purchased approximately $53.3
million of securities through WRHC. FFO sold approximately $46.0 million of
securities through WRHC also in 1996. In connection with such transactions,
FFO paid WRHC an aggregate of $118,000 in commissions.
80
83
In December 1996, the Company offered $6.0 million of convertible subordinated
debentures through a private placement on a "best efforts" basis exclusively
through WRHC as "Sales Agent" for the Company. The sales agent agreement
provided for the payment to WRHC of a fee of 1.50% for each $1,000 principal
amount of debentures sold to directors of the Company or their spouses and 3%
for each $1,000 of debentures sold to all others. The total amount of fees paid
to WRHC for the sale of the debentures was $162,000. In addition, the Company
agreed to indemnify the sales agent against and contribute toward certain
liabilities, including liabilities under the Securities Act, and to reimburse
WRHC for certain expenses and legal fees related to the sale of the debentures
of approximately $51,000.
In July 1996, WRHC began offering sales of insurance and mutual fund products
and investment advisory services on the premises of the Company. The Company
was paid a monthly fee of $300 for each banking office participating in the
program plus a fee of 15% of the gross commissions earned from sales of
non-insurance products. On January 1, 1997, this agreement was terminated and
replaced with a new agreement where the Company is paid 50% of the net profits
earned from sales of investment products on the Company's premises.
Certain directors and executive officers of the Company and the Bank, members
of their immediate families, and entities with which such persons are
associated are customers of the Bank. As such, they had transactions in the
ordinary course of business with the Bank. All loans and commitments to lend
included in those transactions were made in the ordinary course of business,
upon substantially the same terms. Features including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and, in the opinion of management, have not involved more than
the normal risk of collectibility or presented other unfavorable features.
[Balance of page intentionally left blank]
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18. BANK HOLDING COMPANY FINANCIAL STATEMENTS:
Condensed financial statements of the Company at December 31 are presented
below. Amounts shown as investment in the wholly owned subsidiaries and equity
in earnings of subsidiaries are eliminated in consolidation.
REPUBLIC BANCSHARES, INC.
PARENT-ONLY CONDENSED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31,
--------------------------
1998 1997
-------- --------
ASSETS
Cash $ 1,210 $ -
Investment in wholly-owned subsidiaries 221,968 131,306
Other assets 1,207 -
-------- --------
Total $224,385 $131,306
======== ========
LIABILITIES
Holding company senior debt $ 25,000 $ -
Holding company unsecured notes 7,000 -
Junior subordinated debt to subsidiary 28,750 28,750
Intercompany payable to subsidiary - 26
Accrued interest on debt 38 -
-------- --------
Total liabilities 60,788 28,776
STOCKHOLDERS' EQUITY
Perpetual preferred convertible stock 1,500 1,500
Common stock 20,646 15,206
Capital surplus 125,364 56,553
Retained earnings 16,103 28,789
Unrealized gains (losses) on available
for sale securities (16) 482
-------- --------
Total stockholders' equity 163,597 102,530
-------- --------
Total $224,385 $131,306
======== ========
REPUBLIC BANCSHARES, INC.
PARENT-ONLY CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
1998 1997
-------- ------
Dividends from bank $2,499 $ 828
Interest expense on holding company debt (507) (392)
Interest on borrowings from subsidiary (2,616) (1,090)
Equity in undistributed net income (loss)
of subsidiary (13,004) 8,441
Income tax benefit 1,207 -
-------- ------
Net income (loss) $(12,421) $7,787
======== ======
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REPUBLIC BANCSHARES, INC.
PARENT-ONLY CONDENSED CASH FLOW STATEMENTS
(IN THOUSANDS)
FOR THE YEARS
ENDED DECEMBER 31,
------------------
1998 1997
------- -------
OPERATING ACTIVITIES:
Net income (loss) $(12,421) $ 7,787
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Equity in undistributed net income (loss) of subsidiary 13,004 (8,441)
Expense on performance options 551 -
Net (increase) decrease in other assets (1,207) 325
Net increase in other liabilities 12 22
-------- -------
Net cash used in operating activities: (61) (307)
-------- --------
INVESTMENT ACTIVITIES:
Equity investment in banking subsidiary (104,164) (33,322)
Equity investment in trust subsidiary - (889)
Equity investment in insurance subsidiary (10)
-------- --------
Net cash used in investing activities: (104,164) (34,221)
-------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 72,882 -
Proceeds from holding company debt 32,000 -
Proceeds of borrowings from subsidiary - 28,750
Issuance of stock in merger - 12,374
Decrease in minority interest - (6,421)
Increase in retained earnings from merger - 1
Conversion/Issuance of subordinated debt - (152)
Proceeds from exercise of stock options 818 240
Dividend payments on perpetual preferred stock (265) (264)
-------- -------
Net cash provided by financing activities 105,435 34,528
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 1,210 $ -
======= =======
Cash balance beginning - -
======= =======
Cash balance ending $ 1,210 $ -
======= =======
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19. BUSINESS SEGMENTS
The Company's operations, through December 31, 1998, were divided into two
business segments; commercial banking and mortgage banking. Commercial banking
activities include the Company's lending for portfolio purposes, deposit
gathering through the retail branch network, investment and liquidity
management. Mortgage banking activities, which began in 1996, operated through
a separate division of the Bank, include originating and purchasing mortgage
loans for sale as well as selling those loans. The Company provided support
for its mortgage banking division in areas such as secondary marketing and data
processing. All funding for the mortgage banking division was provided through
the Bank. The following are business segment results of operation for the years
ended December 31, 1998, 1997 and 1996. The Company has elected to report its
business segments before non-operating items and without allocation of income
taxes and minority interests.
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BUSINESS SEGMENT DATA
YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
1998 1997
-------------------------------------- -----------------------------------
Commercial Mortgage Company Commercial Mortgage Company
Banking Banking Total Banking Banking Total
---------- -------- ---------- ---------- ---------- ----------
ASSETS:
Total assets (at period-end) $2,320,941 $184,176 $2,505,117 $1,580,952 $97,879 $1,678,831
Nonperforming assets 36,301 6,484 42,785 36,453 2,338 38,791
OPERATING DATA:
Interest income 141,554 31,239 172,793 108,704 9,130 117,834
Interest expense 71,677 17,932 89,609 56,591 4,151 60,742
---------- -------- ---------- ---------- ---------- ----------
Net interest income 69,877 13,307 83,184 52,113 4,979 57,092
Loan loss provision (recurring) 4,266 - 4,266 3,247 - 3,247
---------- -------- ---------- ---------- ---------- ----------
Net interest income after
loan loss provision 65,611 13,307 78,918 48,866 4,979 53,845
Noninterest income 14,905 41,252 56,157 14,148 15,303 29,451
General and administrative
(G & A) expenses 59,447 69,570 129,017 47,938 17,482 65,420
Other noninterest (income) expense (40) - (40) 396 - 396
Amort. of goodwill & premium
on deposits 1,930 - 1,930 479 - 479
---------- -------- ---------- ---------- ---------- ----------
Net income (loss) before non-operating
items, income taxes and minority
interest $19,179 $(15,011) $4,168 $14,201 $2,800 $17,001
======= ======== ========== ==========
NON-OPERATING ITEMS:
Loan loss provision on loans
transferred to portfolio (9,995) -
Merger/acquisition expenses (3,233) (1,144)
Restructuring cost (6,673) -
Provision for losses on ORE (1,603) (530)
-------- ----------
Net (loss) income before income
taxes and minority interest (17,336) 15,327
Income tax benefit (expense) 6,602 (6,165)
-------- ----------
Net (loss) income before minority interests (10,734) 9,162
Minority interest in income from
subsidiary trust (1,687) (701)
Minority interest in FFO - (674)
-------- ----------
Net (loss) income $(12,421) $ 7,787
======== ==========
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BUSINESS SEGMENT DATA
YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
1998 1997
-------------------------------------- -----------------------------------
Commercial Mortgage Company Commercial Mortgage Company
Banking Banking Total Banking Banking Total
---------- -------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA (AT PERIOD END):
Total assets $1,580,952 $97,879 $1,678,831 $1,319,252 $46,593 $1,365,845
Nonperforming assets 36,453 2,338 38,791 32,048 - 32,048
OPERATING DATA:
Interest income 108,704 9,130 117,834 97,587 1,471 99,058
Interest expense 56,591 4,151 60,742 50,282 963 51,245
---------- -------- ---------- ---------- ---------- ----------
Net interest income 52,113 4,979 57,092 47,305 508 47,813
Loan loss provision (recurring) 3,247 - 3,247 2,758 - 2,758
---------- -------- ---------- ---------- ---------- ----------
Net interest income after
loan loss provision 48,866 4,979 53,845 44,547 508 45,055
Noninterest income 14,148 15,303 29,451 9,457 1,074 10,531
General and administrative
(G & A) expenses 47,938 17,482 65,420 42,732 2,056 44,788
Other noninterest expense (income) 396 - 396 (490) - (490)
Amort. of goodwill & premium
on deposits 479 - 479 491 - 491
---------- -------- ---------- ---------- ---------- ----------
Net income (loss) before
non-operating items, income
taxes and minority interest $14,201 $2,800 $17,001 $11,271 $(474) $10,797
---------- -------- ---------- ---------- ---------- ----------
Non-operating items:
Gain on sale of ORE held for investment - 1,207
SAIF special assessment - (4,818)
Merger/acquisition expenses (1,144) -
Provision for losses on ORE (530) (111)
------- -------
Net income (loss) before income
taxes and minority interest 15,327 7,075
Income tax expense (6,165) (2,772)
------- -------
Net income before minority interests 9,162 4,303
Minority interest in income from
subsidiary trust (701) -
Minority interest in FFO (674) (505)
------- -------
Net Income $ 7,787 $ 3,798
======= =======
20. RESTRUCTURING COSTS AND OTHER RELATED CHARGES
In the fourth quarter of 1998 the Company significantly reduced the size and
scope of its mortgage banking activities. The Company ceased originating High
LTV Loans and substantially reduced its originations of nonconforming first
mortgage loans. The Company also closed its out-of-state lending offices and
ceased all telemarketing efforts that were the source of the majority of the
loan originations from its mortgage banking unit.
In connection with this reorganization of mortgage banking activities, a
restructuring charge of approximately $6.7 million was recorded, which included
severance benefits payable to mortgage banking employees whose positions were
eliminated, outplacement services for those employees, write-downs for
abandoned assets, costs related to the consolidation of facilities and legal
costs directly related to the restructuring. In addition, an $818,000 charge
was recorded for legal and other costs related to the reorganization but not
includable in the restructuring charge. The Company estimates it will be
completed with the restructuring process by June 30, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REPUBLIC BANCSHARES, INC.
By:/s/ John W. Sapanski
--------------------
John W. Sapanski
Chairman and Chief Executive Officer
Date: March 23, 1999
---------------
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90
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE DATE TITLE
/s/John W. Sapanski March 23, 1999 Chairman, Chief Executive Officer
- --------------------------- and Director (principal executive officer)
John W. Sapanski
/s/William R. Falzone March 23, 1999 Treasurer (principal financial and accounting
- --------------------------- officer)
William R. Falzone
/s/Fred Hemmer March 23, 1999 Director
- ---------------------------
Fred Hemmer
/s/Marla Hough March 23, 1999 Director
- ---------------------------
Marla Hough
/s/William R. Hough March 23, 1999 Director
- ---------------------------
William R. Hough
/s/Alfred T. May March 23, 1999 Director, Chief Operating Officer
- --------------------------- and President
Alfred T. May
/s/William J. Morrison March 23, 1999 Director
- ---------------------------
William J. Morrison
88
91
INDEX TO EXHIBITS
23.0 Consent of Independent Certified Public Accountants
27.0 Financial Data Schedule
89