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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 0-22608
FFLC BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-3204891
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 North Boulevard West, Post Office Box 490420,
Leesburg, Florida 34749-0420
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (352) 787-3311
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was $57,497,496 and is based upon the last sales price as quoted on
the NASDAQ Stock Market for March 9, 1998.
The Registrant had 3,742,673 shares outstanding as of March 9, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997. (Part II and IV)
2. Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders.
(Part III)
INDEX
PART I Page
Item I. Description of Business
Business 3
Market Area and Competition 3
Market Risk 4
Lending Activities 4-10
Asset Quality 10-15
Investment Activities 16
Mortgage-Backed Securities 16-17
Investment Securities 17-19
Sources of Funds 20-22
Borrowings 23
Subsidiary Activities 23
Personnel 24
Regulation and Supervision 24-30
Year 2000 30
Federal and State Taxation 31-32
Item 2. Properties 33
Item 3. Legal Proceedings 34
Item 4. Submission of Matters to a Vote of Security Holders 34
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 34
Item 6. Selected Financial Data 34
Item 7. Management's Discussion and Analysis of
Financial Condition
and Results of Operations 34
Item 8. Financial Statements and Supplementary Data 34
Item 9. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure 34
PART III
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management 35
Item 13. Certain Relationships and Related Transactions 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 36
SIGNATURES 37
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business
The registrant, FFLC Bancorp, Inc. ("FFLC" or the "Company"), completed its
public offering of 4,603,032 shares (adjusted for stock split) of its common
stock and acquired First Federal Savings Bank of Lake County ("the Savings
Bank") in connection with the Savings Bank's conversion from a federally
chartered mutual savings association to a federally chartered stock savings bank
on January 4, 1994. The net conversion proceeds totaled $26.6 million of which
$13.3 million was invested in the Savings Bank and $13.3 million was retained by
the registrant. The registrant loaned $2.2 million to the Employee Stock
Ownership Plan and the remaining $11.1 million has been invested through the
Savings Bank. The registrant, which was incorporated in Delaware on September
16, 1993, is a savings and loan holding company and is subject to regulation by
the Office of Thrift Supervision ("OTS"). The registrant has not transacted any
material business other than through its subsidiary, the Savings Bank. At
December 31, 1997, the Company had total assets of $400.2 million and
stockholders' equity of $51.4 million.
The Savings Bank was established in 1934 as a federally-chartered mutual savings
and loan association. The Savings Bank is a member of the Federal Home Loan Bank
("FHLB") System and its deposit accounts are insured to the maximum allowable
amount by the Federal Deposit Insurance Corporation ("FDIC"). At December 31,
1997, the Savings Bank had total assets of $400.2 million and stockholders'
equity of $44.5 million.
The principal business of the Savings Bank is attracting retail deposits from
the general public and investing those deposits, together with payments and
repayments on loans and investments and funds generated from operations,
primarily in mortgage loans secured by one-to-four-family owner-occupied homes
and mortgage-backed securities, and, to a lesser extent, construction loans,
consumer and other loans, and multi-family residential mortgage loans. In
addition, the Savings Bank holds investments permitted by federal laws and
regulations including securities issued by the U.S. Government and agencies
thereof. The Savings Bank's revenues are derived principally from interest on
its mortgage loan and mortgage-backed securities portfolios and interest and
dividends on its investment securities.
Market Area and Competition
The Savings Bank is a community-oriented savings institution offering a variety
of financial services to meet the needs of the communities it serves. The
Savings Bank's deposit gathering and lending markets are primarily concentrated
in the communities surrounding its full service offices located in Lake and
Sumter counties in central Florida. The Savings Bank's competition for loans
comes principally from commercial banks, savings institutions, and mortgage
banking companies. The Savings Bank's most direct competition for savings has
historically come from commercial banks, savings institutions and credit unions.
The Savings Bank faces additional competition for savings from money market
mutual funds and other corporate and government securities funds. The Savings
Bank also faces increased competition for deposits from other financial
intermediaries such as securities brokerage firms and insurance companies.
3
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest-rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest-rate risk exposure. The measurement of market
risk associated with financial instruments is meaningful only when all related
and offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified. Disclosures about the fair value of
financial instruments, which reflect changes in market prices and rates, can be
found in Note 10 of Notes to Consolidated Financial Statements.
The Company's primary objective is managing interest-rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital, while adjusting the Company's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Company relies
primarily on its asset-liability structure to control interest-rate risk.
However, a sudden and substantial increase in interest rates may adversely
impact the Company's earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same extent, or
on the same basis. The Company does not engage in trading activities.
Lending Activities
Loan Portfolio. The Savings Bank's loan portfolio consists primarily of
conventional first mortgage loans secured by one-to-four-family residences. At
December 31, 1997, the Savings Bank's total loans outstanding were $329.0
million, of which $245.5 million or 74.6% of the Savings Bank's total loan
portfolio were one-to-four-family residential first mortgage loans. Of the
one-to-four-family residential mortgage loans outstanding at that date, 22.6%
were fixed rate loans and 77.4% were adjustable-rate ("ARM") loans. At the same
date, commercial real estate loans and other loans on improved real estate
totaled $38.0 million, or 11.5% of the Savings Bank's total loan portfolio;
construction (excluding construction/permanent loans) and land loans totaled
$3.5 million or 1.1% of the Savings Bank's total loan portfolio; and
multi-family mortgage loans totaled $4.5 million or 1.4% of the Savings Bank's
total loan portfolio. Consumer, commercial and other loans held by the Savings
Bank, which principally consist of home equity loans, deposit, consumer,
commercial and other loans, totaled $37.5 million or 11.4% of the Savings Bank's
total loan portfolio at December 31, 1997.
4
The following table sets forth the composition of the Savings Bank's loan
portfolio in dollar amounts and percentages at the dates indicated:
1993 1994 1995
---------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
(Dollars in thousands)
Mortgage loans:
One-to-four-family $ 107,228 82.91% $ 130,195 82.80% $ 159,170 84.32%
Construction and land 2,886 2.23% 6,332 4.03% 5,343 2.83%
Multi-family 2,160 1.67% 3,068 1.95% 3,098 1.64%
Commercial real estate 6,713 5.19% 6,153 3.91% 6,654 3.53%
-------- ------- -------- ------- ------- --------
Total mortgage
loans 118,987 92.00% 145,748 92.69% 174,265 92.32%
Consumer loans 10,352 8.00% 11,496 7.31% 14,493 7.68%
Commercial loans - - - - - -
---------- --------- ----------- --------- ---------- ---------
Total loans
receivable 129,339 100.00% 157,244 100.00% 188,758 100.00%
====== ====== ======
Less:
Loans in process 5,969 7,833 4,267
Unearned discounts,
premiums and
deferred loan fees,
net 424 256 66
Allowance for loan losses 735 869 977
-------- -------- -------
Loans receivable,
net $ 122,211 $ 148,286 $ 183,448
======= ======= =======
1996 1997
-------------------------------------------------
% of % of
Amount Total Amount Total
Mortgage loans:
One-to-four-family $ 191,788 80.95% $ 245,524 74.64%
Construction and land 5,489 2.32% 3,528 1.07%
Multi-family 4,180 1.76% 4,464 1.36%
Commercial real estate 13,565 5.73% 37,975 11.54%
------- ------- ------- ------
Total mortgage
loans 215,022 90.76% 291,491 88.61%
Consumer loans 21,899 9.24% 32,834 9.98%
Commercial loans - - 4,632 1.41%
--------- --------- --------- -------
Total loans
receivable 236,921 100.0% 328,957 100.0%
===== =====
Less:
Loans in process 8,007 12,253
Unearned discounts,
premiums and
deferred loan fees,
net (97) (333)
Allowance for loan losses 1,063 1,684
------- --------
Loans receivable, $ 227,948 $ 315,353
net ======= =======
5
Purchase of Mortgage Loans. The Savings Bank has, from time to time, purchased
mortgage loans originated by other lenders. At December 31, 1997, $3.7 million,
or 1.1% of the Savings Bank's total loan portfolio consisted of purchased
mortgage loans or loan participations. Purchased mortgage loans consisted
primarily of one-to-four-family residential mortgage loans.
Secondary Market Activities. The Savings Bank participates in the secondary
market through a correspondent relationship, originating loans (primarily
30-year fixed-rate loans) which are funded by the investor correspondent.
Funding by the correspondent eliminates the Savings Bank's interest-rate risk on
such loans. Such loans are closed on the Savings Bank's documents with funds
provided by the investor correspondent at closing with all credit conditions
established by the investor correspondent being satisfied prior to the issuance
of a loan commitment. The Savings Bank receives a fee for originating,
processing and closing the loans and reports the loans to the OTS as loans
originated and sold. In the year ended December 31, 1997, such loans amounted to
$2.5 million or 2.1% of total mortgage loans originated.
6
Loan Originations, Purchases, Sales and Principal Repayments. The following
table sets forth the Savings Bank's loan originations, purchases, sales and
principal repayments for the periods indicated.
Year Ended December 31,
1995 1996 1997
--------- --------- ---------
(In thousands)
Mortgage loans (gross):
At beginning of year $ 145,748 174,265 215,022
Mortgage loans originated:
One-to-four-family (1) 46,082 62,906 86,976
Construction and land 2,104 2,292 2,502
Multi-family 1,026 1,222 2,759
Commercial real estate 1,047 7,982 25,142
--------- --------- ---------
Total mortgage loans originated (1) 50,259 74,402 117,379
Mortgage loans purchased -- 2,106 --
--------- --------- ---------
Total mortgage loans originated and
purchased 50,259 76,508 117,379
Transfer of loans to real estate owned (478) (287) (444)
Principal repayments (20,113) (31,540) (37,997)
Sales of loans (1) (1,151) (3,924) (2,469)
--------- --------- ---------
At end of year $ 174,265 215,022 291,491
========= ========= =========
Consumer loans (gross):
At beginning of year 11,496 14,493 21,899
Loans originated 6,873 13,021 18,356
Principal repayments (3,876) (5,615) (7,421)
--------- --------- ---------
At end of year $ 14,493 21,899 32,834
========= ========= =========
Commercial loans (gross):
At beginning of year -- -- --
Loans originated -- -- 9,022
Principal repayments -- -- (4,390)
--------- --------- ---------
At end of year $ -- -- 4,632
========= ========= =========
(1) Includes loans originated for and funded by correspondents of $1.2 million,
$2.4 million and $2.5 million for 1995, 1996 and 1997, respectively.
7
Maturities of Loans. The following table shows the contractual maturities of the
Savings Bank's loan portfolio at December 31, 1997. Loans that have adjustable
rates are shown as amortizing to final maturity rather than when the interest
rates are next subject to change. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on the Savings Bank's loans totaled $24.0 million, $37.2 million and $49.8
million for the years ended December 31, 1995, 1996 and 1997, respectively.
Mortgage Loans
------------------------
One-to- Total
Four- Commercial Consumer Loans
Family Other Loans Loans Receivable
(In thousands)
Amounts due:
Within 1 year $ 246 3,952 2,327 2,214 8,739
--------- --------- --------- --------- ---------
1 to 3 years 2,699 4,886 346 7,162 15,093
3 to 5 years 2,807 6,688 1,537 7,420 18,452
5 to 10 years 11,382 8,882 422 8,614 29,300
10 to 20 years 30,223 16,683 -- 7,424 54,330
Over 20 years 198,167 4,876 -- -- 203,043
--------- --------- --------- --------- ---------
Total due after 1 year 245,278 42,015 2,305 30,620 320,218
--------- --------- --------- --------- ---------
Total amounts due 245,524 45,967 4,632 32,834 328,957
Less:
Loans in process 9,267 2,982 -- 4 12,253
Unearned discounts, premiums
and deferred loan fees, net (333) -- -- -- (333)
Allowance for loan losses 747 651 57 229 1,684
--------- --------- --------- --------- ---------
Loans receivable, net $ 235,409 43,534 3,809 32,601 315,353
========= ========= ========= ========= =========
Loans Due After December 31, 1998. The following table sets forth at December
31, 1997 the dollar amount of all loans due or scheduled to reprice after
December 31, 1998, classified according to whether such loans have fixed or
adjustable interest rates.
Due after December 31, 1998
-------------------------------------
Fixed Adjustable Total
------- ------- -------
(In thousands)
Mortgage loans:
One-to-four-family $55,699 189,579 245,278
Construction and land 3,212 662 3,874
Multi-family 136 4,026 4,162
Commercial real estate 10,543 23,436 33,979
Consumer loans 26,025 4,595 30,620
Commercial loans 710 1,595 2,305
------- ------- -------
Total $96,325 223,893 320,218
======= ======= =======
8
One-to-Four-Family Mortgage Lending. The Savings Bank's primary lending emphasis
is on the origination of first mortgage loans secured by one-to-four-family
residences within its primary lending area. Such residences are primarily single
family homes, including condominium and townhouses, that serve as the primary
residence of the owner. To a lesser degree, the Savings Bank makes loans on
residences used as second homes or as investments. The Savings Bank also offers
second mortgage loans which are underwritten applying the same standards as for
first mortgage loans.
In the years ended December 31, 1995, 1996 and 1997, the Savings Bank's total
mortgage loan originations amounted to $50.3 million, $74.4 million and $118.1
million, respectively, of which $46.1 million, $62.9 million and $87.7 million,
respectively, were secured by one-to-four-family properties.
At December 31, 1997, 74.6% of total loans receivable consisted of
one-to-four-family residential loans, of which 77.4% were ARM loans. The Savings
Bank's ARM loans may carry an initial interest rate which is less than the fully
indexed rate for the loan. The initial discounted rate is determined by the
Savings Bank in accordance with market and competitive factors. The Savings Bank
offers one-, three- and five-year ARM loans which adjust by a maximum of 2% per
adjustment period, with lifetime caps on increases of 5% to 6%, depending upon
the program chosen.
The Savings Bank's policy on one-to-four-family residential mortgage loans
generally is to lend up to 80% of the appraised value of property securing the
loan, or up to 95% if private mortgage insurance is obtained on the amount of
the loan which exceeds 80%.
Commercial and Multi-Family Real Estate Lending. As of December 31, 1997, $38.0
million, or 11.5% of the Savings Bank's total loan portfolio consisted of
commercial real estate loans and $4.5 million, or 1.4% of the Savings Bank's
total loan portfolio, consisted of multi-family residential loans.
The commercial real estate loans in the Savings Bank's portfolio consist of
fixed-rate and ARM loans which were originated at prevailing market rates. The
Savings Bank's policy has been to originate commercial or multi-family loans
only in its primary market area. Commercial and multi-family residential loans
are generally made in amounts up to 75% of the appraised value of the property.
In making such loans, the Savings Bank primarily considers the net operating
income generated by the real estate to support the debt service, the financial
resources and income level and managerial expertise of the borrower, the
marketability of the property and the Savings Bank's lending experience with the
borrower.
Commercial Loans. As of December 31, 1997, $4.6 million or 1.4% of the Savings
Bank's total loan portfolio, consisted of commercial loans.
Construction and Land Loans. The Savings Bank originates loans to finance the
construction of one-to-four-family homes and, to a much lesser extent,
originates loans for the acquisition and development of land (either unimproved
land or improved lots) on which the purchaser can then build. At December 31,
1997, construction (excluding construction/permanent loans) and land loans
totaled $3.5 million or 1.1% of the Savings Bank's total loan portfolio.
At December 31, 1997, the Savings Bank had loans in process (undisbursed loan
proceeds of construction loans) of $12.3 million. Of that amount, $9.3 million
was secured by residential mortgages and $3.0 million secured by commercial
mortgages. The Savings Bank makes residential construction loans to homeowners
on a long-term basis with amortization beginning at the conclusion of
construction, usually a period of about six months. Such loans are carried in
the one-to-four-family category and are not separately classified as
construction loans. Residential construction loans to builders are carried in
the construction and land category.
9
Construction and land loans also include construction loans for
one-to-four-family residential property for which the borrower will obtain
permanent financing from another lender. Such loans bear a fixed rate of
interest that equals prime plus 2.0% during the construction period. The Savings
Bank obtains a commitment for the permanent financing from the other lender
prior to originating the construction loan.
Consumer Lending. At December 31, 1997, $32.8 million or 10.0% of the Savings
Bank's total loan portfolio consisted of consumer loans, including home equity
loans and lines of credit for consumer purposes and, to a lesser extent, home
improvement loans and secured and unsecured personal loans.
The Savings Bank's home equity loans are originated on one-to-four-family
residences, either on a fixed-rate basis with terms of up to 10 years or as a
balloon loan with terms up to five years with fifteen year amortization periods.
Those loans are generally limited to aggregate outstanding indebtedness on the
property securing the loan of 80% of the loan to value ratio. The Savings Bank
also offers home equity lines of credit, which bear prime-based adjustable
interest rates with terms up to fifteen years. Such loans generally require
monthly payments of interest plus 1.5% of the balance outstanding.
Consumer loans are offered primarily on a fixed-rate, short-term basis. Except
for second mortgage loans which are underwritten pursuant to the standards
applicable to one-to-four-family residential loans, the underwriting standards
employed by the Savings Bank for consumer loans include a determination of the
applicant's payment history on other debts and an assessment of the borrower's
ability to make payments on the proposed loan and other indebtedness.
Loan Approval and Authority. Mortgage loan approval authority for loans
exceeding $750,000 has been retained by the Board of Directors which meets
weekly in its capacity as the Executive Committee of the Board to consider loan
recommendations of the Loan Committee. The Loan Committee is comprised of two
outside directors, the President and the Senior Lending Officers of the Savings
Bank. Management has been delegated authority to approve mortgage loans, home
equity loans, home equity lines of credit and secured consumer loans up to
$750,000.
The Savings Bank's policy is to require title and hazard insurance on all real
estate loans, except home equity loans for which a title search is conducted in
lieu of obtaining title insurance. Borrowers may be permitted to pay real estate
taxes and hazard insurance premiums applicable to the secured property for a
mortgage loan. In some instances, borrowers may be required to advance funds
together with each payment of principal and interest to a mortgage escrow
account from which the Savings Bank makes disbursements for items such as real
estate taxes, hazard insurance premiums and private mortgage insurance premiums.
Asset Quality
Delinquent Loans and Nonperforming Assets. Loans are generally placed on
nonaccrual status when the collection of principal or interest is 90 days or
more past due, or earlier if collection is deemed uncertain. The Savings Bank
provides an allowance for accrued interest deemed uncollectible. Accrued
interest receivable is reported net of the allowance for uncollected interest.
Loans may be reinstated to accrual status when all payments are brought current
and, in the opinion of management, collection of the remaining balance can be
reasonably expected.
10
At December 31, 1995, 1996 and 1997, delinquencies in the Savings Bank's loan
portfolio were as follows:
At December 31, 1995 At December 31, 1996
---------------------------------------- ----------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- ----------------- -------------------- -----------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
----- -------- ----- -------- ----- -------- ----- --------
(Dollars in thousands)
One-to-four-family 6 244 1 52 3 77 8 545
Construction and land - - 3 115 - - 1 68
Multi-family - - - - - - - -
Commercial real estate - - - - - - - -
--- ----- --- ----- -- ---- --- ----
Total mortgage loans 6 244 4 167 3 77 9 613
Consumer loans 7 35 2 7 2 46 4 53
-- -- - ---- - --- -- ---
Total loans 13 279 6 174 5 123 13 666
== === = === = === == ===
Delinquent loans to total loans .15% .09% .05% .28%
==== ==== === ===
At December 31, 1997
-------------------------------------
60-89 Days 90 Days or More
-------------------- ----------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
----- -------- ----- --------
One-to-four-family 7 341 8 240
Construction and land - - 1 2
Multi-family - - - -
Commercial real estate - - - -
--- ----- -- ---
Total mortgage loans 7 341 9 242
Consumer loans 4 24 - -
-- --- - ----
Total loans 11 365 9 242
== === = ===
Delinquent loans to total loans .11% .07%
=== ===
11
Nonperforming Assets. The following table sets forth information with respect to
the Savings Bank's nonperforming assets at the dates indicated.
At December 31,
-------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual mortgage loans $ 588 324 70 613 242
Nonaccrual consumer loans 18 5 104 53 --
----- ----- ----- ----- -----
Total nonperforming loans 606 329 174 666 242
Real estate owned 72 84 165 361 507
----- ----- ----- ----- -----
Total nonperforming assets $ 678 413 339 1,027 749
===== ===== ===== ===== =====
Nonperforming loans to total loans .47% .21% .09% .28% .07%
===== ===== ===== ===== =====
Total nonperforming assets to total assets .23% .13% .10% .30% .19%
===== ===== ===== ===== =====
At December 31, 1997, the Savings Bank had no accruing loans which were
contractually past due 90 days or more as to principal and interest and no
troubled debt restructurings as defined by Statement of Financial Accounting
Standards No. 15. Nonaccrual loans for which interest has been reduced totaled
approximately $242,000, $666,000 and $174,000 at December 31, 1997, 1996, and
1995, respectively. For the year ended December 31, 1997, interest income that
would have been recorded under the original terms of nonaccrual loans at
December 31, 1997 and interest income actually recognized is summarized below:
Interest income that would have been recorded $ 21,192
Interest income recognized 11,842
------
Interest income foregone $ 9,350
======
Classified Assets. Federal regulations and the Savings Bank's policy require the
classification of loans and other assets, such as debt and equity securities,
considered to be of lesser quality as "substandard", "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full", on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. In
addition, the Savings Bank's policies require that assets which do not currently
expose the insured institution to sufficient risk to warrant classification as
substandard but possess other weaknesses are designated "special mention" by
management.
12
If an asset is classified, the estimated fair value of the asset is determined
and if that value is less than the then carrying value of the asset, the
difference is established as a specific reserve. If an asset is classified as
loss, the amount of the asset classified as loss is reserved. General reserves
or general valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities
but, unlike specific reserves, are not allocated to particular assets.
The following table sets forth information concerning the number and dollar
amount of loans and real estate owned classified as "substandard" at the dates
indicated. No loans or real estate owned were classified "special mention,"
"doubtful" or "loss" at those dates.
Substandard
---------------------
Number Amount
(Dollars in thousands)
At December 31, 1997:
Loans 26 $ 1,141
Real estate owned:
One-to-four-family properties 4 285
Other 3 222
--- ------
Total 33 $ 1,648
== =====
At December 31, 1996:
Loans 23 1,114
Real estate owned:
One-to-four-family properties 1 208
Other 3 153
--- -----
Total 27 $ 1,475
== =====
Allowance for Loan Losses. The Savings Bank's allowance for loan losses is
established and maintained through a provision for loan losses based on
management's evaluation of the risk inherent in its loan portfolio and the
condition of the local economy in the Savings Bank's market area. Such
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers, among other matters, the estimated
fair value of the underlying collateral, economic and regulatory conditions, and
other factors that warrant recognition in providing for an adequate loan loss
allowance. Although management believes it uses the best information available
to make determinations with respect to the Savings Bank's allowance for loan
losses, future adjustments may be necessary if economic conditions vary
substantially from the economic conditions in the assumptions used in making the
initial determinations or if other circumstances change.
13
The following table sets forth the Savings Bank's allowance for loan losses at
the dates indicated, the provisions made and the charge-offs and recoveries
effected during the years indicated.
At or For the Year Ended December 31,
--------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of year $ 520 735 869 977 1,063
Provision for loan losses 250 138 124 107 649
Charge-offs:
One-to-four-family 21 2 -- 9 12
Construction and land -- -- 16 -- --
Multi-family -- -- -- -- --
Commercial real estate -- -- -- -- --
Consumer loans 14 2 -- 12 16
----- ----- ----- ----- -----
Total charge-offs by category 35 4 16 21 28
Recoveries -- -- -- -- --
----- ----- ----- ----- -----
Balance at end of year $ 735 869 977 1,063 1,684
===== ===== ===== ===== =====
The following table sets forth the ratios of the Savings Bank's charge-offs and
allowances for losses for the years indicated.
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Net charge-offs during the year
as a percentage of average loans
outstanding during the year 0.02% - % .01% .01% .01%
Allowance for loan losses as a
percentage of total loans receivable
at end of year 0.57% 0.55% .52% .45% .51%
Allowance for loan losses as a
percentage of total nonperforming
assets at end of year 108.41% 210.41% 288.48% 103.51% 224.83%
Allowance for loan losses as a
percentage of nonperforming loans
at end of year 121.29% 264.13% 561.49% 159.61% 695.87%
14
The following table sets forth the Savings Bank's specific and general allowance
for possible loan losses by type of loan for the years indicated.
At December 31,
-----------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------------- ----------------- ------------------ -------------------- -----------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
At end of year allocated to:
One-to-four-family $ 175 82.91% $ 240 82.80% $ 275 84.32% $ 302 80.95% $ 507 74.64
Construction and land 95 2.23 106 4.03 146 2.83 152 2.32 240 1.07
Multi-family 140 1.67 165 1.95 183 1.64 169 1.76 268 1.36
Commercial real estate 120 5.19 135 3.91 150 3.53 165 5.73 383 11.54
Consumer loans 205 8.00 223 7.31 223 7.68 275 9.24 229 9.98
Commercial loans - - - - - - - - 57 1.41
Total $ 735 100.00% $ 869 100.00% $ 977 100.00% $ 1,063 100.00% $ 1,684 100.00%
=== ====== === ====== === ====== ===== ====== ===== ======
15
Investment Activities
The investment policy of the Savings Bank, which is established by the Board of
Directors and implemented by the Chief Executive Officer who is designated as
the Investment Officer, is designed primarily to provide and maintain liquidity,
to generate a favorable return on investments without incurring undue interest
rate and credit risk, and to complement the Savings Bank's lending activities.
In establishing its investment strategies, the Savings Bank considers its
business and growth plans, the economic environment, the types of securities to
be held and other factors. Federally chartered savings institutions have the
authority to invest in various types of assets, including U.S. Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers acceptances,
repurchase agreements, loans on federal funds, and, subject to certain limits,
commercial paper and mutual funds.
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115. That statement requires investment and mortgage-backed
securities that the Company has the positive intent and ability to hold to
maturity to be classified as held-to-maturity securities and reported at
amortized cost. Securities that are held principally for selling in the near
term are to be classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. Securities not classified as
either held-to-maturity securities or trading securities are to be classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported in a separate component of
stockholders' equity.
Mortgage-Backed Securities
The Savings Bank invests in collateralized mortgage obligations ("CMOs") and
mortgage-backed securities such as government pass-through certificates. At
December 31, 1997, the Savings Bank's mortgage-backed securities portfolio
totaled $38.3 million, or 9.6% of total assets. The weighted-average interest
rate on the total mortgage-backed securities portfolio at December 31, 1997 was
6.78%. The mortgage-backed securities are not due at a single maturity date, and
accordingly, contractual maturity information is not presented herein. CMOs, net
of related premiums and discounts, totaled $15.3 million or 39.9% of total
mortgage-backed securities.
CMOs are typically issued by a special purpose entity, which may be organized in
any of a variety of legal forms, such as a trust, a corporation or a
partnership. The entity combines pools of pass-through securities, which are
used to collateralize the mortgage related securities. Once combined, the cash
flows can be divided into different "tranches" or "classes" of securities,
thereby creating more predictable average lives for each security than the
underlying pass-through pools. Under this security structure all principal
repayments from the various mortgage pools can be allocated to a
mortgage-related securities class or classes structured to have priority until
it has been paid off. Thus, these securities are designed to address the
reinvestment concerns associated with mortgage-backed security pass-throughs,
namely that they tend to pay off more rapidly when interest rates fall. The
Savings Bank's CMOs have coupon rates ranging from 4.00% to 7.53% and had a
weighted average yield of 6.14% at December 31, 1997.
The Savings Bank's policy is to purchase CMOs rated AA or better by nationally
recognized rating services. The majority of the CMOs owned by the Savings Bank
are insured or guaranteed either directly or indirectly, through mortgage-backed
securities underlying the obligations issued by the FNMA, FHLMC or GNMA.
At December 31, 1997, the Savings Bank had $15.3 million in CMOs representing
3.8% of total assets. Of that amount, $9.1 million or 59.4% had floating rates
with caps ranging from 8.50% to 12.65% and which adjust on a monthly basis.
16
Other mortgage-backed securities, net, totaled $23.0 million or 60.1% of total
mortgage-backed securities. Other mortgage-backed securities consist of
pass-through certificates issued by the Government National Mortgage Association
("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA").
At December 31, 1997, the Savings Bank had mortgage-backed securities available
for sale with an aggregate carrying value of $9.3 million, consisting of CMOs,
FHLMC five year balloons and FNMA certificates.
The following table sets forth mortgage-backed security purchases, sales,
amortization and repayments during the periods indicated:
Year Ended December 31,
1995 1996 1997
--------- --------- ---------
(In thousands)
At beginning of year $ 117,003 93,883 65,736
Purchases 6,038 8,596 --
Amortization and repayments (29,883) (36,617) (27,566)
Change in unrealized loss on securities
available for sale 725 (126) 121
--------- --------- ---------
At end of year $ 93,883 65,736 38,291
========= ========= =========
Investment Securities
At December 31, 1997, the Savings Bank held $20.3 million in investment
securities consisting of $7.9 million in U.S. Government and agency securities,
classified as available for sale, and $9.2 million in mutual funds, $3.0 million
in SBA-related investment securities, classified as held to maturity, and
$156,000 in other investment securities, classified as available for sale. In
addition, the Savings Bank holds $8.6 million in interest-earning deposits and
$2.3 million of FHLB of Atlanta stock.
17
The following table sets forth certain information regarding the amortized cost
and market values of the Savings Bank's interest-earning deposits, FHLB stock
and investment securities at the dates indicated:
At December 31,
----------------------------------------------------------------------
1995 1996 1997
----------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------ ------ ------ ------ ------ ------
(In thousands)
Interest-earning deposits $ 8,924 8,924 4,077 4,077 8,562 8,562
====== ====== ====== ====== ====== ======
FHLB stock $ 1,928 1,928 1,939 1,939 2,304 2,304
====== ====== ====== ====== ====== ======
Investment securities:
Held-to-maturity:
SBA-related investment securities $ 3,441 3,472 3,239 3,271 3,031 3,077
====== ====== ====== ====== ====== ======
Available-for-sale:
U.S. Government and
agency securities 11,475 11,392 20,208 20,176 7,965 7,937
Other investment securities 1,523 1,532 495 497 151 156
Investment in mutual funds 8,939 8,900 9,035 8,920 9,258 9,183
------ ------ ------ ------ ------ ------
Total available-for-sale $ 21,937 21,824 29,738 29,593 17,374 17,276
====== ====== ====== ====== ====== ======
18
The following table sets forth information concerning the amortized cost
and weighted average yields by maturity on investment securities and FHLB
stock at December 31, 1997.
Due After Due After
One Through Five Through Due After
Due Within One Year Five Years 10 Years 10 Years Total
-------------------- -------------------- ------------------- -------------------- --------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted Approximate
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
FHLB stock $ 2,304 7.25% $ 2,304 $ 2,304
======= ======== ========
Investment securities:
U.S. Government
and agency
obligations $ 2,000 5.66% $ 4,979 5.80% $ 986 5.93% $ - - % $ 7,965 7,937
Other investment
securities - - - - - - 3,182 6.68 3,182 3,233
Mutual funds - - - - - - 9,258 5.92 9,258 9,183
------- ---- ------- ---- ----- ---- ------- -------- -------
Total investment
securities $ 2,000 5.66% $ 4,979 5.80% $ 986 5.93% $12,440 6.11% $ 20,405 $ 20,353
======= ==== ======= ==== ===== ==== ======= ==== ======== ========
19
Sources of Funds
General. Repayments and maturities of mortgage-backed and investment securities,
loan repayments, deposits and cash flows generated from operations are the
primary sources of the Savings Bank's funds for use in lending, investing and
for other general purposes.
Deposits. The Savings Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Savings Bank's deposits consist of regular
savings, non-interest-bearing checking, NOW checking, money market and
certificate accounts. Of the deposit accounts at December 31, 1997, $26.6
million or 8.4% consist of individual retirement accounts ("IRAs").
The Savings Bank has maintained core deposits consisting of passbook and
statement savings, money market, non-interest-bearing checking, and NOW
checking, which has contributed to a low cost of funds. Such core deposits
represented 25.2%, 25.0% and 23.8% of total deposits at December 31, 1995, 1996,
and 1997, respectively.
The following table shows the distribution of the Savings Bank's deposits by
type at the dates indicated and the weighted-average nominal interest rates on
each category of deposits presented at December 31, 1997 (dollars in thousands).
At December 31,
1995 1996 1997
--------------------- ----------------------- -------------------------------------
Percent Percent Percent Weighted-
of Total of Total of Total Average
Amount Deposits Amount Deposits Amount Deposits Rate
------ ------ ------- ------ ------ ----- ----
Demand accounts:
Noninterest bearing
checking $ 3,482 1.30% $ 4,103 1.46% $ 6,968 2.20% - %
NOW and money
market accounts 37,272 13.92 39,203 13.86 43,629 13.84 2.24
Passbook and
statement
savings 26,811 10.02 27,412 9.70 24,503 7.77 2.74
------ ------ ------- ------ ------ ----- ----
Total 67,565 25.24 70,718 25.02 75,100 23.81 2.38
------ ------ ------- ------ ------ ----- ----
At December 31,
1995 1996 1997
--------------------- ----------------------- -------------------------------------
Percent Percent Percent Weighted-
of Total of Total of Total Average
Amount Deposits Amount Deposits Amount Deposits Rate
------ ------ ------- ------ ------ ----- ----
Certificate accounts:
1-3 months 5,866 2.19 8,204 2.90 9,834 3.12 4.86
91 days 421 0.16 518 .18 538 .17 4.35
182 day 20,565 7.68 15,904 5.63 12,171 3.86 4.75
9 months 14,593 5.45 17,173 6.07 16,554 5.25 5.51
10 months - - - - 18,791 5.95 5.76
12 months 59,925 22.38 53,577 18.96 39,975 12.67 5.22
12 month IRA 15,574 5.82 16,473 5.83 14,431 4.58 5.44
18 months 3,931 1.47 3,136 1.11 2,824 .90 5.36
20 months - - - - 23,152 7.34 5.98
24 months 19,946 7.45 46,770 16.55 60,477 19.18 5.86
30 months 15,225 5.69 10,628 3.76 8,841 2.80 5.35
60 months 44,092 16.47 39,563 13.99 32,702 10.37 5.96
------- ------ ------- ------ ------- ------ ----
Total 200,138 74.76 211,946 74.98 240,290 76,19 4.57
------- ------ ------- ------ ------- ------ ----
Total deposits $ 267,703 100.00% 282,664 100.00% 315,390 100.00% 4.83%
======= ======= ======= ====== ======= ====== ====
20
The following table presents the deposit activity of the Savings Bank for the
years indicated.
Year Ended December 31,
---------------------------------------
1995 1996 1997
--------- --------- ---------
(In thousands)
Deposits $ 472,591 542,019 744,064
Withdrawals (465,235) (536,051) (721,501)
--------- --------- ---------
Deposits in excess of withdrawals 7,356 5,968 22,563
Interest credited on deposits 8,596 8,993 10,163
--------- --------- ---------
Total increase in deposits $ 15,952 14,961 32,726
========= ========= =========
The following table presents the amount of time deposit accounts in amounts of
$100,000 or more at December 31, 1997 maturing as follows (in thousands):
Maturity Period
One month through three months $ 3,228
Over three through six months 659
Over six through 12 months 3,556
Over 12 months 4,753
------
Total $ 12,196
======
21
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1995, 1996, and 1997 and the
periods to maturity of the certificate accounts outstanding at December 31,
1997.
Period to Maturity from December 31, 1997
At December 31, ----------------------------------------------------------
--------------------------------- Within 1 to 2 to 3 to 4 to
1995 1996 1997 1 Year 2 Years 3 Years 4 Years 5 Years Total
--------- ------- ------- ------- ------ ------ ----- ----- -------
(In thousands)
4.01% to 5.00% $ 30,297 49,542 23,215 23,215 - - - - 23,215
5.01% to 6.00% 108,867 137,394 187,028 143,947 38,960 - 1,909 2,212 187,028
6.01% to 8.00% 60,974 25,010 30,047 - 18,938 11,094 15 - 30,047
--------- ------- ------- ------- ------ ------ ----- ----- -------
$ 200,138 211,946 240,290 167,162 57,898 11,094 1,924 2,212 240,290
======= ======= ======= ======= ====== ====== ===== ===== =======
22
Borrowings
The Savings Bank is authorized to obtain advances from the FHLB of Atlanta which
generally would be collateralized by a blanket lien against the Savings Bank's
mortgage portfolio. Such advances may be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB of Atlanta will advance to member
institutions, including the Savings Bank, for purposes other than meeting
withdrawals, fluctuates from time to time in accordance with the policies of the
OTS and the FHLB of Atlanta. At December 31, 1997, the Savings Bank had $30.0
million in FHLB advances outstanding.
From time to time, the Savings Bank enters into agreements with nationally
recognized primary securities dealers under which the Savings Bank sells
securities subject to repurchase agreements. Such agreements are accounted for
as borrowings by the Savings Bank and are secured by the securities sold. At
December 31, 1997, the Savings Bank did not have any such borrowings
outstanding.
The following table sets forth certain information relating to the Savings
Bank's borrowings at the dates indicated:
At or For the Year Ended
Ended December 31,
---------------------------------------
1995 1996 1997
------- ---------- -----------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $ 150 $ 150 $ 13,226
======= ========== ===========
Maximum amount outstanding at any month end
during the year $ 150 $ 150 $ 30,000
======= ========== ===========
Balance outstanding at end of year $ 150 $ 150 $ 30,000
======= ========== ===========
Weighted average interest rate during the year 7.17% 7.17% 6.15%
======= ========== ===========
Weighted average interest rate at end of year 7.17% 7.17% 6.01%
======= ========== ===========
At or For the Year Ended
Ended December 31,
---------------------------------------
1995 1996 1997
------- ---------- -----------
(Dollars in thousands)
Securities sold under agreements to repurchase:
Average balance outstanding $ 470 $ 849 $ 5,629
======= ========== ===========
Maximum amount outstanding at any month end
during the year $ 2,031 $ 8,048 $ 11,952
======= ========== ===========
Balance outstanding at end of year $ -- $ 8,048 $ --
======= ========== ===========
Weighted average interest rate during the year 6.20% 5.65% 5.74%
======= ========== ===========
Weighted average interest rate at end of year - % 5.63% --%
======= ========== ===========
Total borrowings:
Average balance outstanding $ 620 $ 999 $ 18,855
======= ========== ===========
Maximum amount outstanding at any month end
during the year $ 2,181 $ 8,198 $ 41,952
======= ========== ===========
Balance outstanding at end of year $ 150 $ 8,198 $ 30,000
======= ========== ===========
Weighted average interest rate during the year 6.44% 5.68% 6.03%
======= ========== ===========
Weighted average interest rate at end of year 7.17% 5.66% 6.01%
======= ========== ===========
Subsidiary Activities
The Savings Bank has one wholly-owned subsidiary, Lake County Service
Corporation. Lake County Service Corporation was formed to develop a 100-lot
subdivision and is now substantially inactive, having sold all but one lot. Lake
County Service Corporation also owns an 8.4 acre commercial parcel and a one
acre lot adjoining the Savings Bank's main office.
23
Personnel
As of December 31, 1997, the Savings Bank had 127 full-time employees and 9
part-time employees. The employees are not represented by a collective
bargaining unit and the Savings Bank considers its relationship with its
employees to be good.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file certain
reports with, and otherwise comply with the rules and regulations of the Office
of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended (the
"HOLA"). In addition, the activities of savings institutions, such as the
Savings Bank, are governed by the HOLA and the Federal Deposit Insurance Act
("FDI Act").
The Savings Bank is subject to extensive regulation, examination and supervision
by the OTS, as its primary federal regulator, and the FDIC, as the deposit
insurer. The Savings Bank is a member of the Federal Home Loan Bank ("FHLB")
System and its deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Savings
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other savings institutions. The OTS and/or the FDIC conduct periodic
examinations to test the Savings Bank's safety and soundness and compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress, could have a material adverse impact on the Company, the
Savings Bank and their operations. Certain of the regulatory requirements
applicable to the Savings Bank and to the Company are referred to below or
elsewhere herein. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth in this
Form 10-K does not purport to be a complete description of such statutes and
regulations and their effects on the Savings Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company within
the meaning of the HOLA. As a unitary savings and loan holding company, the
Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Savings Bank
continues to be a qualified thrift lender ("QTL"). See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"),
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation, and no multiple savings and loan holding company may acquire
more than 5% the voting stock of a company engaged in impermissible activities.
24
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution or holding company thereof, without prior
written approval of the OTS or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Savings Bank must notify the OTS
thirty days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3%
leverage (core) capital ratio and an 8% risk-based capital ratio. In addition,
the prompt corrective action standards discussed below also establish, in
effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier I risk-based capital standard. Core capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The OTS regulations
also require that, in meeting the tangible, leverage (core) and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of Tier I
(core) capital are equivalent to those discussed earlier. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
25
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1997, the
Savings Bank met each of its capital requirements and it is anticipated that the
Savings Bank will not be subject to the interest rate risk component.
The following table presents the Savings Bank's capital position at December 31,
1997.
Excess Capital Ratios
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ ------- -------
(Dollars in thousands)
Tangible $ 44,349 6,003 38,346 11.08% 1.50%
Core (leverage) $ 44,349 12,006 32,343 11.08 3.00
Risk-based:
Tier I (core) $ 44,349 8,486 35,863 20.90 4.00
Total $ 46,033 16,973 29,060 21.70 8.00
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to risk-weighted assets of less than 8%, a ratio of Tier
I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions,
26
including the issuance of a capital directive and the replacement of senior
executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Savings Bank are presently
insured by the SAIF. On September 30, 1996, the President signed into law the
Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things,
imposed a special one-time assessment on SAIF member institutions, including the
Savings Bank, to recapitalize the SAIF. The SAIF was undercapitalized due
primarily to a statutory requirement that SAIF members make payments on bonds
issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize
the predecessor to the SAIF. As required by the Funds Act, the FDIC imposed a
special assessment of 65.7 basis points on SAIF assessable deposits held as of
March 31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The
SAIF Special Assessment was recognized by the Savings Bank as an expense in the
quarter ended September 30, 1996 and was generally tax deductible. The SAIF
Special Assessment recorded by the Savings Bank amounted to $1.7 million on a
pre-tax basis and $1.0 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds across
all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the fund which
primarily insures commercial bank deposits. Beginning on January 1, 1997, BIF
deposits were assessed for a FICO payment of 1.3 basis points, while SAIF
deposits pay 6.4 basis points. Full pro rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF
will be merged on January 1, 1999, provided no savings associations remain as of
that time.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue to make the FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings association charter will
be eliminated or whether the BIF and SAIF will eventually be merged.
The Savings Bank's assessment rate for fiscal 1997 was 6.4 basis points and the
premium paid for 1997 was $147,000. A significant increase in SAIF insurance
premiums would likely have an adverse effect on the operating expenses and
results of operations of the Savings Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Savings Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and SAIF
will merge on January 1, 1999 if there are no more savings associations as of
that date. Various proposals to eliminate the federal thrift charter, create a
uniform financial institutions charter and abolish the OTS have been introduced
in Congress. Some bills would require federal savings institutions to convert to
a national bank or some type of state charter by a specified date or they would
automatically become national banks. Under some proposals, converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one-year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. A more recent bill passed by the House
Banking Committee would allow savings institutions to continue to exercise
activities being conducted when they convert to a bank regardless of whether a
national bank could engage in the activity. Holding companies for savings
institutions would become subject to the same regulation as holding companies
that control commercial banks, with some limited grandfathering, including some
savings and loan holding company activities. The grandfathering would be lost
under certain circumstances such as a change in control of the Company. The
Savings Bank is unable to predict whether such legislation would be enacted, the
28
extent to which the legislation would restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1997, the Savings Bank's limit on loans to one borrower was $6.9 million. At
December 31, 1997, the Savings Bank's largest aggregate outstanding balance of
loans to one borrower was $4.2 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under the
QTL test, a savings and loan association must either qualify as a "domestic
building and loan association" as defined in the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the QTL test is subject to certain operating
restrictions and may be required to convert to a bank charter. As of December
31, 1997, the Savings Bank maintained 82.9% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test. Recent legislation has
expanded the extent to which education loans, credit card loans and small
business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon all
capital distributions by savings institutions, such as cash dividends, payments
to repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged against
capital. The rule establishes three tiers of institutions, which are based
primarily on the institution's capital levels. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Savings Bank's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, the Savings Bank's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. In December 1994, the OTS proposed amendments to its
capital distribution regulation that would generally authorize the payment of
capital distributions without OTS approval provided that the payment does not
cause the institution to be undercapitalized within the meaning of the prompt
corrective action regulation. However, institutions in a holding company
structure would still have a prior notice requirement. At December 31, 1997, the
Savings Bank was a Tier 1 Bank.
Liquidity. The Savings Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement was 5% for fiscal 1997, but is subject to change from
time to time by the OTS to any amount within the range of 4% to 10% depending
upon economic conditions and the savings flows of member institutions. In 1997,
OTS regulations also required each savings institution to maintain an average
daily balance of short-term liquid assets of at least 1% of the total of its net
withdrawable deposit accounts and borrowings
28
payable in one year or less. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The OTS has recently lowered the liquidity
requirement from 5% to 4% and eliminated the 1% short-term liquid asset
requirement. The Savings Bank's liquidity ratio for December 31, 1997 was 8.7%,
which exceeded the applicable requirement. The Savings Bank has never been
subject to monetary penalties for failure to meet its liquidity requirement.
Assessments. Savings institutions are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the Savings Bank's latest quarterly
thrift financial report. The assessments paid by the Savings Bank for the fiscal
years ended December 31, 1997 and 1996 totalled $87,000 and $83,000,
respectively.
Branching. OTS regulations permit nationwide branching by federally chartered
savings institutions to the extent allowed by federal statute. This permits
federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Savings Bank's authority to engage in
transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Savings Bank's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and not to involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Savings Bank may make to insiders based, in
part, on the Savings Bank's capital position and requires certain board approval
procedures to be followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility
over savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. Under
the FDI Act, the FDIC has the authority to recommend to the Director of the OTS
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
29
Standards for Safety and Soundness. The federal banking agencies have adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve Board regulations generally
required for most of 1997 that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement was
3%; and for accounts aggregating greater than $49.3 million, the reserve
requirement was $1.48 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $49.3 million. The first $4.4 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) were
exempted from the reserve requirements. The Savings Bank is in compliance with
the foregoing requirements. For 1998, the Federal Reserve Board has decreased
from $49.3 to $47.8 million the amount of transaction accounts subject to the 3%
reserve requirement and increased the amount of exempt reservable balances from
$4.4 million to $4.7 million. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
Year 2000
Management has an ongoing program designed to ensure that its operational and
financial systems will not be adversely affected by year 2000 software failures,
due to processing errors arising from calculations using the year 2000 date.
Based on current estimates, the Savings Bank does not expect to incur a material
amount of expenses over the next two years on its program to redevelop, replace,
or repair its computer applications to make them "year 2000 compliant." While
management believes it is doing everything technologically possible to assure
year 2000 compliance, it is to some extent dependent upon vendor cooperation.
Management is requiring its computer system and software vendors to represent
that the products provided are, or will be, year 2000 compliant, and has planned
a program of testing for compliance. It is recognized that any year 2000
compliance failures could result in additional expense to the Bank.
30
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Savings Bank report their income on a consolidated
basis using the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Savings Bank's reserve for bad debts discussed below.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Savings Bank or the Company. The Savings Bank was last audited by the IRS for
the year ended December 31, 1989. For its 1997 taxable year, the Savings Bank is
subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995, thrift
institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves for bad
debts will treat such change as a change in method of accounting, initiated by
the taxpayer, and having been made with the consent of the IRS. Any Section
481(a) adjustment required to be taken into income with respect to such change
generally will be taken into income ratably over a six-taxable year period,
beginning with the first taxable year beginning after 1995, subject to the
residential loan requirement.
Under the residential loan requirement provision, the recapture required by the
1996 Act is suspended for each of two successive taxable years, beginning with
1996, in which the Savings Bank originates a minimum of certain residential
loans based upon the average of the principal amounts of such loans made by the
Savings Bank during its six taxable years preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Savings Bank
is permitted to make additions to its tax bad debt reserves. In addition, the
Savings Bank is required to recapture (i.e., take into income) over a six year
period the excess of the balance of its tax bad debt reserves as of December 31,
1995 over the balance of such reserves as of December 31, 1987. At December 31,
1997, the Savings Bank had approximately $910,000 of deferred tax liabilities
recorded for the recapture of its bad debt reserves.
Distributions. Under the 1996 Act, if the Savings Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Savings Bank's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Savings Bank's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Savings Bank's income.
Non-dividend distributions include distributions in excess of the Savings Bank's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Savings Bank's current or
accumulated
31
earnings and profits will not be so included in the Savings Bank's income.
The amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Thus, if the Savings Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Savings Bank does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7 cent fee on every
$100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act included a provision which stated that the
amount of any special assessment paid to capitalize SAIF under this legislation
was deductible under Section 162 of the Code in the year of payment.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum
taxable income ("AMTI") at a rate of 20%. For fiscal years beginning prior to
January 1, 1996, the excess of the bad debt reserve deduction using the
percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers. The adjustment to AMTI based on book income is an amount equal
to 75% of the amount by which a corporation's adjusted current earnings exceeds
its AMTI (determined without regard to this adjustment and prior to reduction
for net operating losses). In addition, for taxable years through 1995, an
environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Savings Bank,
whether or not an Alternative Minimum Tax ("AMT") is paid. The Savings Bank does
not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude from its
income 100% of dividends received from the Savings Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Savings Bank will not file a consolidated tax
return, except that if the Company and the Savings Bank own more than 20% of the
stock of a corporation distributing a dividend, 80% of any dividends received
may be deducted.
Florida Taxation. The Savings Bank files Florida franchise tax returns. For
Florida franchise tax purposes, savings institutions are presently taxed at a
rate equal to 5.5% of taxable income. For this purpose, "taxable income"
generally means federal taxable income, subject to certain adjustments
(including the addition of interest income on State and municipal obligations).
The Savings Bank is not currently under audit with respect to its Florida
franchise tax returns.
32
ITEM 2. PROPERTIES
The Savings Bank conducts its business through its main office and 8 branch
offices. The following table sets forth certain information regarding the
Savings Bank's office properties:
Book Value
of Land and
Date Buildings at
Location Acquired December 31, 1997
- -------- -------- -----------------
(Dollars in thousands)
Main Office
800 North Boulevard, West
Leesburg, Florida 34749-0420 1961 $ 397
Wildwood
837 South Main Street
Wildwood, Florida 34785-0006 1967 253
Main Street
1409 West Main Street
Leesburg, Florida 34749-0330 1972 182
Clermont
481 East Highway 50
Clermont, Florida 34712-0730 1982 647
Eustis
2901 South Bay Street
Eustis, Florida 32727-1270 1979 374
Fruitland Park
410 Palm Street
Fruitland Park, Florida 34731 1983 353
Lady Lake
431 US Highway 441/27
Lady Lake, Florida 32158 1995 1,288
Lake Square
10105 US Highway 441
Leesburg, Florida 34788 1995 500
South Leesburg (1)
27405 US Highway 27, Suite 123
Leesburg, Florida 34748 1996 181
South Leesburg (2)
US Highway 27
Leesburg, Florida 34748 1996 375
(1) Leased branch office opened February, 1997.
(2) Parcel of land purchased by the Savings Bank for a future branch office
location.
The Savings Bank owns and operates personal computers, teller terminals and
associated equipment. At December 31, 1997, such equipment had a net book
value of $739,000.
33
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which FFLC Bancorp, Inc., or
any of its subsidiaries is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the stockholders during the fourth
quarter of the fiscal year ended December 31, 1997, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The above-captioned information appears under "Common Stock Prices and
Dividends" in the Registrant's 1997 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The above-captioned information appears under "Selected Consolidated Financial
Data" on page 6 and 7 of the Registrant's 1997 Annual Report to Stockholders and
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1997 Annual Report to Stockholders on pages 8 through 18 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of FFLC Bancorp, Inc. and Subsidiary,
together with the report thereon by Hacker, Johnson, Cohen & Grieb PA appear in
the Registrant's 1997 Annual Report to Stockholders on pages 19 through 51 and
are incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no disagreements with the Registrant's accountants on any
matters of accounting principles or practices or financial statement
disclosures.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information related to Directors and Executive Officers of the Registrant is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 7, 1998 at pages 5 through 8.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 7, 1998 at pages 13 through 16.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information relating to security ownership of certain beneficial owners and
management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 7, 1998 at
pages 6 through 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions is
incorporated herein by reference to pages 16 and 17 of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 7, 1998.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference from the following indicated pages of the 1997 Annual Report to
Stockholders.
Page
----
Independent Auditor's Report 51
Consolidated Balance Sheets as of December 31, 1997 and 1996 19
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 20
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 21-23
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 24-25
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997, 1996, and 1995 26-49
The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of FFLC Bancorp, Inc.*
3.2 Bylaws of FFLC Bancorp, Inc.*
4.0 Stock Certificate of FFLC Bancorp, Inc.*
10.1 First Federal Savings Bank of Lake County Recognition
and Retention Plan**
10.2 First Federal Savings Bank of Lake County Recognition
and Retention Plan for Outside Directors**
10.3 FFLC Bancorp, Inc. Incentive Stock Option Plans for
Officers and Employees**
10.4 FFLC Bancorp, Inc. Stock Option Plan for Outside
Directors**
13.0 Annual Report to Stockholders (filed herewith)
99 Proxy Statement for Annual Meeting (filed herewith)
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, initially filed on September 27,
1993, Registration No. 33-69466.
** Incorporated herein by reference into this document from the Proxy
Statement for the Annual Meeting of Stockholders held on May 12, 1994.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the
fourth quarter.
36
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FFLC BANCORP, INC.
By: /s/ Stephen T. Kurtz
--------------------
Stephen T. Kurtz
Chief Executive Officer and President
Dated: March 19, 1998
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
- ---- ----- ----
/s/ Joseph J. Junod Chairman of the Board March 19, 1998
- -------------------
Joseph J. Junod
/s/ Claron D. Wagner Vice Chairman of the Board March 19, 1998
- --------------------
Claron D. Wagner
/s/ James P. Logan Director March 19, 1998
- ------------------
James P. Logan
/s/ Ted R. Ostrander, Jr. Director March 19, 1998
- -------------------------
Ted R. Ostrander
/s/ H.D. Robuck, Jr. Director March 19, 1998
- --------------------
H.D. Robuck, Jr.
/s/ Stephen T. Kurtz Chief Executive Officer,
Stephen T. Kurtz President and Director March 19, 1998
/s/ Paul K. Mueller Executive Vice President, Chief
Paul K. Mueller Operating Officer and Treasurer
and Director March 19, 1998
37