U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2003
------------------------------
- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission File Number: 0-32139
FLORIDAFIRST BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Florida 59-3662010
- ----------------------------------------------------- ------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
205 East Orange Street, Lakeland, Florida 33801-4611
- ----------------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (863) 688-6811
---------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $ .10 par value
-----------------------------
(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 information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
YES X NO
--- ---
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based on the closing price of the Registrant's Common Stock as
quoted on the Nasdaq National Market on March 31, 2003 of $21.56 per share, was
$98.6 million. For purposes of this statement, affiliates include the executive
officers and directors, 10% stockholders, if any, and employee benefit plans.
As of December 5, 2003 there were issued and outstanding 5,374,115 shares of the
Registrant's Common Stock.
PART I
Item 1. Description of Business
- ------- -----------------------
General
The Registrant, FloridaFirst Bancorp, Inc. (the "Company") is the parent company
of and conducts most of its business operations through FloridaFirst Bank (the
"Bank"). The Bank, a federally-chartered savings bank headquartered in Lakeland,
Florida, is a community-oriented retail savings bank offering a full range of
deposit services to both consumers and commercial entities. The Bank's lending
activities include residential real estate mortgage loans, commercial real
estate loans, other commercial loans and consumer loans. The Bank has operated
within its market areas since 1934 and delivers its products and services
through nineteen offices located in Florida's Highlands, Manatee, Polk and
Sumter Counties.
On April 6, 1999, the Bank reorganized from a mutual savings association into a
mutual holding company named FloridaFirst Bancorp MHC and formed FloridaFirst
Bancorp, a middle-tier holding company, whereby the Bank became a wholly-owned
subsidiary of FloridaFirst Bancorp. In connection with the reorganization,
FloridaFirst Bancorp sold 2,703,851 shares of its Common Stock to the public and
the remaining 3,049,024 shares were held by FloridaFirst Bancorp MHC.
On December 21, 2000, the Company completed its stock offering in connection
with the conversion and reorganization of FloridaFirst Bank and its holding
company, FloridaFirst Bancorp, from the mutual holding company form of
organization to a full stock company. As part of the conversion and
reorganization, the shares formerly held by FloridaFirst Bancorp MHC were
cancelled, the Company sold 3,147,952 new shares to the public and the shares
held by stockholders of FloridaFirst Bancorp were exchanged for 2,372,048 shares
of the Company.
The Company provides commercial and retail banking services, with an emphasis on
one-to-four family residential mortgage loans, home equity loans and lines of
credit and consumer loans as well as certificates of deposit, checking accounts,
money-market accounts and savings accounts. In addition, the Company originates
commercial real estate loans and offers checking accounts and other credit
facilities to businesses within its market area. At September 30, 2003, the
Company had total assets, deposits and equity of $818.5 million, $552.9 million,
and $102.0 million, respectively.
The Company attracts deposits from the general public and uses these deposits
primarily to originate loans and to purchase mortgage-backed and other
securities. The principal sources of funds for the Company's lending and
investing activities are deposits, Federal Home Loan Bank ("FHLB") advances, the
sale of loans held for sale, loan repayments and sale, maturity, and call of
securities. The principal source of income is interest on loans and securities.
The principal expense is interest paid on deposits and FHLB advances.
On February 15, 2002, the Bank acquired seven Florida branches (the "Branch
Acquisition") from SunTrust Bank ("SunTrust") coincident with SunTrust's
acquisition of such branches from Huntington National Bank ("Huntington"). Four
of the Huntington branches are located in Lakeland, Florida, and one each in
Avon Park, Sebring and Wildwood, Florida. In this transaction, the Bank assumed
approximately $162 million in deposits and the purchase of approximately $26
million in loans related to the seven branches.
On October 2, 2002, the Company signed a definitive agreement with BB&T
Corporation ("BB&T"), Winston-Salem, North Carolina, whereby BB&T would acquire
100% of the outstanding stock of the Company. However, pursuant to discussion
with regulatory officials, BB&T and the Company terminated the agreement on
October 31, 2002 so that BB&T could submit the proper application to request
permission to acquire control of the Company within three years of its second
step conversion pursuant to regulatory guidelines. The application was filed on
November 4, 2002 with the Office of Thrift Supervision ("OTS"). On March 17,
2003, BB&T withdrew its application to acquire control of the Company within the
three-year period, citing rigorous regulatory standards that are being applied
to recently converted thrifts. As a result of the application being withdrawn,
the Company wrote-off capitalized merger costs of $504,000 ($312,000 after tax)
which were not recoverable or refundable.
Competition
The competition for deposit products comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in the Company's market area of Highlands, Manatee,
Polk and Sumter Counties, Florida. Deposit competition also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Loan competition,
which varies depending upon market conditions, comes from other insured
financial institutions such as commercial banks, thrift institutions, credit
unions, multi-state regional banks, and mortgage bankers and brokers.
Lending Activities
General. The Company primarily originates one-to-four family residential real
estate loans, commercial real estate loans, consumer loans and other loans.
Consumer loans consist primarily of direct and indirect automobile loans, home
equity loans and lines of credit, and other consumer loans. The Company's
commercial real estate loans consist primarily of mortgage loans secured by
small commercial office/retail space, warehouses, small and medium sized
apartment buildings and residential real estate acquisition and development
projects.
2
Loan Portfolio Composition. The following table analyzes the composition of the
Company's loan portfolio by loan category and in percentages of the total loan
portfolios at the dates indicated ($ in thousands).
September 30,
-------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------- ----------------- ------------------ ------------------ ---------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Mortgage loans:
Residential:
Permanent................ $ 270,463 51.3% $ 301,622 57.7% $ 312,309 61.7% $ 304,419 66.1% $ 276,115 65.6%
Construction............. 32,871 6.2 29,058 5.6 35,516 7.0 27,996 6.1 32,974 7.8
Commercial real estate...... 56,078 10.6 58,177 11.1 58,371 11.6 31,786 6.9 25,570 6.1
Land........................ 18,699 3.6 15,806 3.0 8,907 1.8 12,886 2.8 9,548 2.3
Commercial...................... 11,600 2.2 10,806 2.1 5,061 1.0 2,533 .5 1,374 .3
Consumer loans:
Home equity loans (1)....... 73,184 13.9 50,240 9.6 33,200 6.5 28,926 6.3 22,545 5.4
Auto loans.................. 32,921 6.3 39,989 7.6 42,293 8.3 40,717 8.8 42,181 10.0
Other....................... 31,293 5.9 17,352 3.3 10,439 2.1 11,396 2.5 10,318 2.5
------- ----- -------- ----- ------- ----- -------- ----- ------- -----
Total loans..................... 527,109 100.0% 523,050 100.0% 506,096 100.0% 460,659 100.0% 420,625 100.0%
===== ===== ===== ===== =====
Net deferred loan costs......... 23 69 - - -
Less:
Construction loans in
process.................. 25,969 19,167 28,289 16,952 19,774
Allowance for loan losses... 4,479 4,519 3,652 3,321 2,941
--------- -------- -------- -------- ---------
Total loans, net................ $ 496,684 $ 499,433 $ 474,155 $ 440,386 $ 397,910
======= ======= ======= ======= =======
- -------------
(1) Includes home equity lines of credit.
3
Loan Maturity Schedule. The following table sets forth the maturity or repricing
of the Company's loan portfolio at September 30, 2003. Demand loans, loans
having no stated maturity, and overdrafts are shown as due in one year or less
(in thousands).
Commercial
Real Estate
Residential (1) and Land Consumer Commercial Total
--------------- -------- -------- ---------- -----
Amounts Due:
Within 1 Year............... $ 33,954 34,543 16,589 7,392 92,478
--------- ------ ------- ------ -------
After 1 Year:
1 to 3 years............. 19,237 8,727 13,344 2,272 43,580
3 to 5 years............. 6,625 10,934 35,032 1,811 54,402
Over 5 years............. 243,518 20,573 72,433 125 336,649
--------- ------ ------- ------ -------
Total due after one year.... 269,380 40,234 120,809 4,208 434,631
--------- ------ ------- ------ -------
Total amount due............ $ 303,334 74,777 137,398 11,600 527,109
========= ====== ======= ====== =======
- ----------
(1) Includes $32,871 in construction loans.
The following table sets forth the dollar amount of all loans due after
September 30, 2004, which have predetermined interest rates or which have
floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rates Rates Total
----- ----- -----
(In thousands)
Residential......................... $ 244,813 24,567 269,380
Commercial real estate and land..... 38,772 1,462 40,234
Consumer............................ 120,809 - 120,809
Commercial.......................... 4,208 - 4,208
--------- ------ -------
Total............................... $ 408,602 26,029 434,631
========= ====== =======
Residential Lending. The Company's primary lending activity consists of the
origination of one-to-four family residential mortgage loans secured by property
located in the Company's market area. The Company generally originates
one-to-four family residential mortgage loans in amounts up to 80% of the lesser
of the appraised value or selling price of the mortgaged property without
requiring private mortgage insurance. The Company will originate a mortgage loan
in an amount up to 95% of the lesser of the appraised value or selling price of
a mortgaged property, however, private mortgage insurance for the borrower is
generally required on the amount financed in excess of 80%. The Company
currently originates shorter-term fixed-rate and adjustable-rate loans for
retention in its portfolio. Longer-term fixed-rate mortgages are generally sold
to correspondent lenders on a servicing released basis. A mortgage loan
originated by the Company, whether fixed-rate or adjustable-rate, can have a
term of up to 30 years. Adjustable-rate loans limit the periodic interest rate
adjustment and the minimum and maximum rates that may be charged over the term
of the loan.
The majority of the Company's one-to-four family residential loans (both
fixed-rate and adjustable-rate) are underwritten in accordance with Fannie Mae
or Freddie Mac guidelines, regardless of whether they will be held in portfolio
or sold in the secondary market. Substantially all of the Company's residential
mortgages include "due on sale" clauses, which give the Company the right to
declare a loan immediately payable if the borrower sells or otherwise transfers
an interest in the property to a third party.
4
Property appraisals on real estate securing the Company's residential loans are
made by state certified and licensed independent appraisers approved by the
Board of Directors. Appraisals are performed in accordance with applicable
regulations and policies. The Company obtains title insurance policies on all
first mortgage real estate loans originated. Borrowers generally advance funds,
with each monthly payment of principal and interest, to a loan escrow account
from which the Company makes disbursements for such items as real estate taxes,
hazard insurance premiums and mortgage insurance premiums as they become due.
Construction Lending. The Company is an active lender in the construction of
one-to-four family houses. The residential construction loans are made both to
individual homeowners for the construction of their primary residence and to
local builders for the construction of pre-sold houses or houses that are being
built for speculative purposes.
As of September 30, 2003, 86% of all the Company's residential construction
loans were made to individual homeowners. After the house is constructed, the
loan terms are modified to terms that apply to permanent residential loans. The
underwriting guidelines for the construction to permanent loans are the same as
the permanent loans, but additional construction administration procedures and
inspections are followed during the construction process to assure that
satisfactory progress is being made prior to funding the construction draw
requests.
Construction lending is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. The Company's
risk of loss on a construction loan depends largely on the accuracy of the
initial estimate of the property's value at completion of construction and the
estimated cost of construction. If the estimate of construction cost and the
marketability of the property after the project is completed prove to be
inaccurate, the Company may be compelled to advance additional funds to complete
the construction. Furthermore, if the final value of the completed property is
less than the estimated amount, the value of the property might not be
sufficient to assure the repayment of the loan.
The Company limits its exposure for construction loans made to local builders
through periodic credit analysis on the individual builder and a series of
inspections throughout the construction phase. In addition, the Company limits
the amount and number of loans made to an individual builder for the
construction of pre-sold and speculative houses based on the financial strength
of the builder. At September 30, 2003, approximately 14% of the Company's
construction loans were to local builders.
Commercial Real Estate and Other Mortgage Loans. The Company originates
commercial real estate mortgage loans and loans on multi-family dwellings and
developed and undeveloped land. The Company's commercial real estate mortgage
loans are primarily permanent loans secured by improved property such as office
buildings, retail stores, commercial warehouses and apartment buildings. The
terms and conditions of each loan are tailored to the needs of the borrower and
based on the financial strength of the project and any guarantors. The average
loan size is approximately $275,000 and loans are typically made at fixed rates
of interest with five to ten year maturities, at which point the loan is repaid
or the terms and conditions are renegotiated. Essentially all originated
commercial real estate loans are within the Company's market area and all are
within the State of Florida. The Company's largest commercial real estate loan
had a balance of $4.8 million on September 30, 2003 and was secured by a Class A
office building. Typically, commercial real estate loans are originated in
amounts up to 80% of the appraised value of the mortgaged property.
Commercial real estate, multi-family and land loans generally have a
significantly greater risk than loans on single family real estate. The
repayment of these loans typically depends on the successful operations and
income stream of the commercial real estate and the borrower. Such risks can be
significantly affected by economic conditions. In addition, commercial real
estate lending generally requires substantially greater oversight efforts
compared to residential real estate lending.
Commercial Loans. To accomplish its mission to become a full-service community
bank, the Company has expanded its products and services offerings to the small-
to medium-size businesses within its market area. Experienced personnel have
been hired to assist in reaching the Company's objectives. Sales call programs,
credit analysis guidelines, loan grading systems, technology upgrades and new
products and services have been implemented to improve our lending capabilities.
The Company not only satisfies the borrowing needs of
5
prospective business customers, but provides the full complement of deposit
services and customer services related to the checking, savings, and cash
management needs of these businesses.
Unlike residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other income
and which are secured by real property with a value that tends to be more easily
ascertainable, commercial business loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself, which is likely to be dependent upon the general economic environment.
The Company's commercial business loans are sometimes, but not always, secured
by business assets, such as accounts receivable, equipment and inventory, as
well as real estate. However, the collateral securing the loans may depreciate
over time, may be difficult to appraise, and may fluctuate in value based on the
success of the business.
The Company recognizes the generally increased risks associated with commercial
business lending. The Company's commercial business lending policy emphasizes
the following:
> credit file documentation,
> analysis of the borrower's capacity to repay the loan,
> adequacy of the borrower's capital and collateral,
> analysis of the borrower's character, and
> evaluation of the industry conditions affecting the borrower.
Analysis of the borrower's past, present and future cash flows is also an
important aspect of the Company's credit analysis. The Company plans to expand
its commercial business lending, subject to market conditions.
The Company generally obtains annual financial statements from borrowers for
commercial business loans. These statements are analyzed to monitor the quality
of the loan. As of September 30, 2003, the commercial business loans ranged from
$1,000 to $4.8 million, with an average balance outstanding of $188,000.
Consumer Loans. Consumer loans consist primarily of home equity loans,
manufactured housing loans and automobile loans. The Company also originates
unsecured lines of credit, loans secured by savings accounts and other consumer
loans. Consumer loans are originated in the Company's market area and generally
have maturities up to 15 years. For savings account loans, the Company will lend
up to 90% of the account balance.
During the past two years the Company has focused its origination efforts on
home equity loans to attract additional loan customers. In fiscal 2003, the
Company revamped its home equity program through special rate incentives based
on the term of the loan and concentrated its marketing efforts for these loans.
The additional advertising and special pricing contributed to the 45.7% growth
in the home equity loan balances in fiscal 2003.
Consumer loans have a shorter term and generally provide higher interest rates
than residential loans. The consumer loan market can be helpful in improving the
spread between average loan yield and costs of funds and at the same time
improve the matching of the rate sensitive assets and liabilities.
Consumer loans entail greater risks than one-to-four family residential mortgage
loans, particularly consumer loans secured by depreciable assets such as
automobiles or loans that are unsecured. In such cases, any repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance, since there is a greater likelihood of damage,
loss or depreciation of the underlying collateral. Further, consumer loan
collections depend on the borrower's continuing financial stability, and
therefore are more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy. Even for consumer loans secured by real estate, the risk
to the Company is greater than in the single-family loan portfolio, in that the
security for consumer loans is generally not the first lien on the property and
ultimate collection of amounts due may depend on whether any value remains after
collection by a holder with a higher priority than the Company. Finally, the
application of various federal laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans after
a default.
6
At September 30, 2003, 57% of the Company's automobile loans outstanding were
loans originated through local automobile dealerships. Although this type of
lending generally carries a greater risk factor, the Company has experienced
personnel to handle this type of lending. The dealer arrangements are limited
primarily to a few local dealers where long-term relationships have been
established and the loans acquired typically are those made to higher-credit
quality borrowers.
The underwriting standards employed by the Company for consumer loans include a
determination of the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the applicant is of
primary consideration; however, the underwriting process also includes a
comparison of the value of the collateral in relation to the proposed loan
amount.
Loan Solicitation and Processing. The Company's customary sources of mortgage
loan applications include repeat customers, walk-ins, and referrals from home
builders and real estate brokers. Commercial customer relationships are
developed through the officer call program and from referrals developed through
the branch network.
After receiving a loan application from a prospective borrower, a credit report
and verifications are ordered to confirm specific information relating to the
loan applicant's employment, income and credit standing. An appraisal of the
real estate intended to secure the proposed loan is undertaken by an independent
fee appraiser. In connection with the loan approval process, the Company's staff
analyzes the loan applications and the property involved. Officers and lenders
are granted lending authority based on the loan types they handle and their
level of experience. Generally, a management loan committee approves loans
exceeding individual authorities, with the Executive Committee or the full Board
of Directors approving loans in excess of management's authority.
Loan applicants are promptly notified of the decision of the Company by a letter
setting forth the terms and conditions of the decision. If approved, these terms
and conditions include the amount of the loan, interest- rate basis,
amortization term, a brief description of real estate to be mortgaged to the
Company, tax escrow and the notice of requirement of insurance coverage to be
maintained to protect the Company's interest. The Company requires title
insurance on first mortgage loans and fire and casualty insurance on all
properties securing loans, which insurance must be maintained during the entire
term of the loan.
Loan Commitments. The Company generally grants commitments to fund fixed- and
adjustable-rate single family mortgage loans for periods of 60 days at a
specified term and interest rate. The total amount of the Company's commitments
to extend credit, including letters of credit, unfunded construction and line of
credit loans, as of September 30, 2003 was $62.5 million.
Loan Origination and Other Fees. In addition to interest earned on loans, the
Company may charge loan origination and commitment fees for originating or
purchasing certain loans. Since most loans are originated without points being
charged, the Company has assessed customers certain fees related to underwriting
and document preparation. The Company believes these fees approximate the costs
to originate the loans. Therefore, net deferred costs or fees are minimal and
deferrals have an immaterial effect on operating results.
The Company also receives other fees and charges relating to existing loans,
which include late charges and fees collected in connection with a change in
borrower or other loan modifications. These fees and charges have not
constituted a material source of income.
7
Nonperforming Loans and Problem Assets
Collection Procedures. The Company's collection procedures provide that when a
loan is 15 days delinquent, the borrower is notified. If the loan becomes 30
days delinquent, the borrower is sent a written delinquency notice requiring
payment. If the delinquency continues, subsequent efforts are made to contact
the delinquent borrower. In certain instances, the Company may modify the loan
or grant a limited moratorium on loan payments to enable the borrower to
reorganize his financial affairs and the Company attempts to work with the
borrower to establish a repayment schedule to cure the delinquency. As to
mortgage loans, if the borrower is unable to cure the delinquency or reach a
payment agreement with the Company within 90 days, the Company will institute
foreclosure actions. If a foreclosure action is taken and the loan is not
reinstated, paid in full or refinanced, the property is sold at judicial sale at
which the Company may be the buyer if there are no adequate offers to satisfy
the debt. Any property acquired as the result of foreclosure or by deed in lieu
of foreclosure is classified as foreclosed assets until such time as it is sold
or otherwise disposed of by the Company. When foreclosed assets are acquired,
they are recorded at the lower of the unpaid principal balance of the related
loan or its fair market value less estimated selling costs. The initial
writedown of the property is charged against the allowance for loan losses.
As to commercial-related loans, the main thrust of the Company's collection
efforts is through telephone contact and a sequence of collection letters. If
the Company is unable to resolve the delinquency within 90 days or in some
situations shorter time periods, the Company will pursue all available legal
remedies. The Company's commercial lenders are required to evaluate each
assigned account on a case-by-case basis, within the parameters of the Company's
policies.
Loans are reviewed on a regular basis and are placed on a nonaccrual status when
they are more than 90 days delinquent. Loans may be placed on a nonaccrual
status at any time if, in the opinion of management, the collection of
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on nonaccrual status is charged against interest income. Subsequent
payments are either applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate collectibility of
the loan.
8
Nonperforming Assets. The following table provides information regarding the
Company's non-performing loans and other nonperforming assets as of the end of
each of the last five fiscal years. As of each of the dates indicated, the
Company did not have any troubled debt restructurings within the meaning of
Statement of Financial Accounting Standards ("SFAS") No. 15.
September 30,
-----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
($ in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
Residential loans ............................. $ 406 483 320 33 581
Other mortgage loans .......................... 153 190 489 638 103
Commercial loans .................................. 41 - - 45 -
Consumer loans:
Home equity loans ............................. 181 210 69 - -
Other consumer loans .......................... 259 190 82 46 146
------ ------ ------ ------ ------
Total ............................................. $1,040 1,073 960 762 830
====== ====== ====== ====== ======
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Residential loans............................. $ - - - - -
Other mortgage loans .......................... - - - - -
Commercial loans .................................. - - - - -
Consumer loans:
Home equity loans ............................. - - - - -
Other consumer loans .......................... - - - - -
------ ------ ------ ------ ------
Total ........................................... $ - - - - -
====== ====== ====== ====== ======
Total nonperforming loans ......................... $1,040 1,073 960 762 830
====== ====== ====== ====== ======
Foreclosed assets ................................. $ 418 347 276 203 203
====== ====== ====== ====== ======
Total nonperforming assets ........................ $1,458 1,420 1,236 965 1,033
====== ====== ====== ====== ======
Total nonperforming loans to gross loans
less LIP ...................................... .21% .22% .20% .17% .21%
====== ====== ====== ====== ======
Total nonperforming loans to total assets ......... .13% .13% .15% .13% .17%
====== ====== ====== ====== ======
Total nonperforming assets to total assets ........ .18% .17% .19% .17% .21%
====== ====== ====== ====== ======
During the year ended September 30, 2003, approximately $59,000 of interest
would have been recorded on loans accounted for on a nonaccrual basis if such
loans had been current according to the original loan agreements for the entire
period. Approximately $27,000 of interest was recognized as income on these
nonaccrual loans during the year.
9
Classified Assets. Management, in compliance with regulatory guidelines, has
instituted an internal loan review program whereby loans are classified as
special mention, substandard, doubtful or loss. When a loan is classified as
substandard or doubtful, management is required to establish a valuation
allowance for loan losses in an amount that is deemed prudent. When management
classifies a loan as a loss asset, a reserve equal to 100% of the loan balance
is required to be established or the loan is charged-off. This allowance for
loan losses is composed of an allowance for both inherent risk associated with
lending activities and particular problem assets.
An asset is considered "substandard" if it is inadequately protected by the
paying capacity and net worth of the borrower or the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
the insured 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, highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a loss
reserve is not warranted. Assets which do not currently expose the insured
institution to a sufficient degree of risk to warrant classification in one of
the aforementioned categories, but possess credit deficiencies or potential
weaknesses, are required to be designated special mention by management. In
addition, each loan that exceeds $500,000 and each group of loans to one
borrower that exceeds $500,000 is monitored more closely due to the potentially
greater losses from such loans.
Management's evaluation of the classification of assets and the adequacy of the
allowance for loan losses is reviewed by the Board on a regular basis and by the
regulatory agencies as part of their examination process. At September 30, 2003,
the Company's classified assets were as follows (in thousands):
Special mention............. $ 5,483
Substandard................. 3,622
Doubtful.................... -
Loss........................ -
-------
Total....................... $ 9,105
=======
A brief description of the significant items in classified assets at September
30, 2003 follows:
Special Mention
- ---------------
> $1.3 million of commercial loans (consisting of 12 loans) acquired in the
Branch Acquisition have been classified due to the poor financial
information, creating an increased level of risk concerning the repayment
on these loans.
> $3.3 million, consisting of seven commercial loans, have been classified
due to certain concerns involving the lack of current financial
information, vacancy rates or potentially inadequate cash flows.
Substandard
- -----------
> $875,000 for vacant land that was originally purchased for the construction
of a retail sales office. However, a change in plans has caused the Company
to actively market the land. Therefore, as a nonearning asset, the land has
been classified as substandard for regulatory reporting purposes.
> $1.3 million of commercial loans (consisting of 34 loans) that have been
graded internally as substandard due to poor financial information or lack
of adequate collateral. Approximately 50% of these loans were acquired in
the Branch Acquisition.
> The remaining substandard assets consist of normal mortgage foreclosures,
repossessed consumer assets and loans that are in nonaccrual status.
10
Foreclosed Assets. Assets acquired by the Company as a result of foreclosure, by
deed in lieu of foreclosure or through repossession are classified as foreclosed
assets until such time as they are sold. When assets are acquired, they are
recorded at the lower of the unpaid balance of the related loan or its fair
value less disposal costs. Any further write-down of these assets is charged to
earnings.
Allowance for Losses on Loans. It is the policy of management to provide for
losses on unclassified loans in its portfolio in addition to classified loans. A
provision for loan losses is charged to earnings based on management's
evaluation of the potential losses that may be incurred in the Company's loan
portfolio.
Management will continue to review the entire loan portfolio to determine the
extent, if any, to which further additional loan loss provisions may be deemed
necessary. There can be no assurance that the allowance for loan losses will be
adequate to cover losses which may be realized in the future. In addition, there
can be no assurance that additional provisions for losses on loans and
foreclosed assets will not be required.
The following table sets forth information with respect to the Company's
allowance for loan losses at the dates indicated:
At or During the Year Ended September 30,
-------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
($ in thousands)
Allowance for loan losses, beginning of year.... $ 4,519 3,652 3,321 2,941 2,564
-------- -------- -------- -------- --------
Provision for loan losses ...................... 660 680 615 630 540
-------- -------- -------- -------- --------
Allowance acquired during Branch
Acquisition ........................... - 1,000 - - -
-------- -------- -------- -------- --------
Charge-offs:
Residential ................................ - (25) (15) (32) (37)
Commercial and commercial real estate ...... (221) (450) (45) - -
Consumer ................................... (673) (433) (326) (256) (214)
-------- -------- -------- -------- --------
Total charge-offs .............................. (894) (908) (386) (288) (251)
Recoveries ..................................... 194 95 102 38 88
-------- -------- -------- -------- --------
Net charge-offs ................................ (700) (813) (284) (250) (163)
-------- -------- -------- -------- --------
Allowance for loan losses, end of year.......... $ 4,479 4,519 3,652 3,321 2,941
======== ======== ======== ======== ========
Total loans less LIP outstanding................ $501,140 503,883 477,807 443,707 400,851
======== ======== ======== ======== ========
Average loans less LIP outstanding.............. $490,973 482,809 463,569 423,409 368,513
======== ======== ======== ======== ========
Allowance for loan losses as a percent
of total loans less LIP outstanding ........ .89% .90% .76% .75% .73%
Net loans charged off as a percent of
average loans less LIP outstanding ......... .14% .17% .06% .06% .04%
11
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the Company's allowance for loan losses by loan category and the
percent of loans in each category to total net loans at the dates indicated. The
portion of the allowance for loan losses allocated to each loan category does
not represent the total available for future losses which may occur within the
loan category since the total allowance for loan losses is a valuation allowance
applicable to the entire loan portfolio.
September 30,
--------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------- ----------------- ------------------ ----------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
($ in thousands)
At end of period allocated to:
Residential........................ $ 1,888 57.5% $ 1,796 63.3% $ 1,846 68.7% $ 1,804 72.2% $ 1,689 73.4%
Commercial real estate and land.... 806 14.2 727 14.1 748 13.4 568 9.7 309 8.4
Commercial......................... 395 2.2 826 2.1 76 1.0 25 .5 17 .3
Consumer .......................... 1,390 26.1 1,170 20.5 982 16.9 924 17.6 926 17.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total allowance.................... $ 4,479 100.0% $ 4,519 100.0% $ 3,652 100.0% $ 3,321 100.0% $ 2,941 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
12
Investment Activities
General. Federally-chartered savings banks have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various Federal agencies (including securities collateralized by
mortgages), certain certificates of deposits of insured banks and savings
institutions, municipal securities, corporate debt securities and loans to other
banking institutions.
The Company maintains liquid assets which may be invested in specified
short-term securities and certain other investments. Liquidity levels may be
increased or decreased depending on:
> yields on investment alternatives,
> management's judgment as to the attractiveness of the yields then available
in relation to other opportunities,
> expectation of future yield levels, and
> management's projections as to the short-term demand for funds to be used
in the Company's loan origination and other activities.
At September 30, 2003, the Company had a securities portfolio of $252.9 million
(30.9% of total assets).
Investment Policies. The investment policy of the Company, which is established
by the Board of Directors, is designed to foster earnings and liquidity within
prudent interest-rate risk guidelines, while complementing the Company's lending
activities. The policy provides for available for sale, held to maturity and
trading classifications. However, the Company does not currently use a trading
classification and does not anticipate doing so in the future. The policy
permits investments in high credit quality instruments with diversified cash
flows while permitting the Company to maximize total return within the
guidelines set forth in the Company's interest-rate risk and liquidity
management policy. Permitted investments include but are not limited to U. S.
government obligations, government agency or government-sponsored agency
obligations, state, county and municipal obligations, mortgage-backed securities
and collateralized mortgage obligations, investment grade corporate debt
securities, commercial paper and common stock. The Company also invests in FHLB
overnight deposits and federal funds, but these instruments are not considered
part of the investment portfolio.
The policy also includes several specific guidelines and restrictions to insure
adherence with safe and sound activities. The policy prohibits investments in
high risk mortgage derivative products (as defined within its policy) without
prior approval from the Board of Directors. Management must demonstrate the
business advantage of such investments. In addition, the policy limits the
maximum amount of the investment in a specific investment category. The Company
does not participate in hedging programs, interest-rate swaps, or other
activities involving the use of off-balance sheet derivative financial
instruments. Further, the Company does not invest in securities that are not
investment grade.
The Board through its Investment and Asset Liability Committee ("ALCO") has
charged the Chief Financial Officer to implement the policy. All transactions
are reported to the Board of Directors monthly, with the entire portfolio
reported quarterly, including market values and unrealized gains (losses).
Securities. The Company maintains a portfolio of securities that are all
classified as available for sale to enhance total return on investments. At
September 30, 2003, the Company's securities included U.S. government agency
obligations with varying characteristics as to rate, maturity and call
provisions, corporate bonds, and municipal bonds. Callable agency securities,
representing 93% of the Company's U.S. government agency obligations at
September 30, 2003, could reduce the Company's investment yield if these
securities are called prior to maturity.
13
Mortgage-backed Securities ("MBSs"). The Company invests in MBSs to provide
earnings, liquidity, cash flows, and diversification to the Company's overall
balance sheet. These MBSs are classified as available for sale and represent
participation certificates, issued and guaranteed by Ginnie Mae, Fannie Mae and
Freddie Mac, that are secured by interests in pools of mortgages. MBSs typically
represent a participation interest in a pool of single-family or multi-family
mortgages, although the Company focuses its investments on MBSs secured by
single-family mortgages.
MBSs typically are issued with stated principal amounts. The securities are
backed by pools of mortgages that have loans with interest rates that are within
a set range and have varying maturities. The underlying pool of mortgages can be
composed of either fixed-rate or adjustable-rate mortgage loans. The
interest-rate risk characteristics of the underlying pool of mortgages (i.e.,
fixed-rate or adjustable-rate) and the prepayment risk, are passed on to the
security holder. The life of a mortgage-backed pass-through security is equal to
the life of the underlying mortgages.
Collateralized Mortgage Obligations ("CMOs"). The Company also invests in CMOs,
issued or sponsored by Fannie Mae, Freddie Mac or private issuers. CMOs are a
type of debt security that aggregates pools of mortgages and MBSs and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and MBSs as opposed to MBSs where cash flows are
distributed pro rata to all security holders. Unlike MBSs from which cash flow
is received and prepayment risk is shared pro rata by all securities holders,
cash flows from the mortgages and MBSs underlying CMOs are paid in accordance
with a predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche or class may carry prepayment
risk that may be different from that of the underlying collateral and other
tranches. Investing in CMOs allows the Company to moderate reinvestment risk
resulting from unexpected prepayment activity associated with conventional MBSs.
Management believes these securities represent attractive alternatives relative
to other investments due to the wide variety of maturity, repayment and interest
rate options available.
Corporate Bonds. Corporate bonds (including capital trust securities) generally
have longer-term maturities, but include call provisions at earlier dates
(generally after five to ten years). The call provisions usually contain a
premium price to exercise the call feature. The Company has invested in these
longer maturity bonds and securities with fixed rates of interest to provide
higher yields to protect part of its assets from the possible decline in
interest rates over the life of the bond. Although interest rates may rise over
the life of these securities, management believes these securities provide a
good complement to those assets (loans and securities) which are subject to
periodic principal repayments and payoffs before contractual maturities.
Municipal Bonds. Municipal bonds have remaining maturities from 7 to 25 years
with premium call provisions after two to eight years. These bonds are exempt
from federal income taxes, therefore, have lower stated interest rates. All
municipal bonds owned by the Bank have fixed rates of interest. The yields
included in the investment tables reflect the tax equivalent yields for the
municipal bonds.
Other Interest-Earning Assets. Other interest-earning assets owned by the
Company, but not included in the security portfolio, consist of FHLB stock,
interest-earning deposits and federal funds sold. As a member of the FHLB of
Atlanta, ownership of FHLB of Atlanta common shares is required. The remaining
securities provide diversification and complement the Company's overall
investment strategy.
14
The following table sets forth the carrying value of the Company's securities
portfolio at the dates indicated.
September 30,
-----------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Securities available for sale (at fair value):
U.S. government agency securities............... $ 40,749 28,184 8,850
Collateralized mortgage obligations............. 28,377 46,391 44,045
Mortgage-backed securities...................... 136,270 145,982 29,551
Corporate bonds................................. 25,722 31,341 29,554
Municipal bonds................................. 21,216 20,345 17,533
Common stock.................................... 563 381 -
--------- ------- -------
Total........................................... $ 252,897 272,624 129,533
========= ======= =======
15
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities (or repricing terms for variable
rate securities) of the Company's securities portfolio at September 30, 2003.
Expected maturities will differ from contractual maturities due to scheduled
repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
September 30, 2003
------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Securities
-------------------- ----------------- ------------------- ------------------- ---------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
($ in thousands)
U.S. government agency
securities.............. $ 4,992 3.38% $ 20,275 4.09% $ 10,377 2.98% $ 5,105 3.65% $ 40,749 3.66%
Collateralized mortgage
obligations............. - - - 28,377 3.54 28,377 3.54
Mortgage-backed
securities.............. 11,160 3.14 36,713 3.23 47,505 4.46 40,892 4.61 136,270 4.06
Corporate bonds............ 7,063 4.48 3,029 4.40 602 8.04 15,028 8.50 25,722 6.91
Municipal bonds............ - - 3,027 5.76 18,189 7.49 21,216 7.24
Common stock............... 563 .81 - - - - 563 .81
-------- -------- -------- --------- ---------
Total...................... $ 23,778 3.53% $ 60,017 3.58% $ 61,511 4.31% $ 107,591 5.31% $ 252,897 4.49%
======== ======== ======== ========= =========
16
Sources of Funds
General. Deposits are the major source of the Company's funds for lending and
other investment purposes. Borrowings (principally from the FHLB) are used to
compensate for reductions in the availability of funds from other sources and to
adjust the maturities of its liabilities for asset-liability management
purposes. In addition to deposits and borrowing, the Company derives funds from
loan and MBSs principal repayments, and proceeds from the maturity, call and
sale of MBSs and other securities. Loan and MBSs payments are a relatively
stable source of funds, while deposit inflows are significantly influenced by
general interest rates and money market conditions.
Deposits. The Company offers a variety of deposit accounts, although a majority
of deposits are in fixed-term, market-rate certificate accounts. Deposit account
terms vary, primarily as to the required minimum balance, the time that the
funds must remain on deposit and the applicable interest rate.
The Company's current deposit products include certificate accounts ranging in
terms from 90 days to five years as well as checking, savings and money market
accounts. Individual retirement accounts (IRAs) are included in these accounts,
depending on the customer's investment preference.
Deposits are obtained primarily from residents of Highlands, Manatee, Polk and
Sumter Counties. The Company attracts deposit accounts by offering outstanding
service, competitive interest rates, and convenient locations and service hours.
The Company uses traditional methods of advertising to attract new customers and
deposits, including radio, cable television, direct mail, print media
advertising and the posting of certain rate information on its website. The
Company utilizes the services of deposit brokers from time to time and
management believes that an insignificant number of deposit accounts are held by
nonresidents of Florida.
The Company pays interest on its deposits that are competitive in its market.
Interest rates on deposits are set weekly by management, based on a number of
factors, including:
> projected cash flow;
> a current survey of a selected group of competitors' rates for similar
products;
> external data which may influence interest rates;
> investment opportunities and loan demand; and
> scheduled certificate maturities and loan and securities repayments.
Because of the large percentage of certificate accounts in the deposit portfolio
(54% at September 30, 2003), the Company's liquidity could be reduced if a
significant amount of these accounts, maturing within a short period of time,
were not renewed. Historically, a significant portion of the certificate
accounts remain with the Company after they mature and the Company believes that
current renewal patterns will continue. However, the need to retain these
accounts could result in an increase in the Company's cost of funds.
The following table shows the amount (in thousands) of the Company's certificate
accounts of $100,000 or more by time remaining until maturity as of September
30, 2003.
Maturity Period Amount
--------------- ------
Within three months.......................... $ 5,386
Three through six months..................... 8,438
Six through twelve months.................... 38,614
Over twelve months........................... 36,968
--------
Total............................... $ 89,406
========
17
Borrowings. Deposits are the primary source of funds of the Company's lending
and investment activities and for general business purposes. The Company, as the
need arises or in order to take advantage of funding opportunities, may borrow
funds in the form of advances from the FHLB, short-term borrowings through the
Federal Reserve's Treasury Investment Program or reverse repurchase agreements
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB are secured by stock in the FHLB and a
blanket lien over the Company's residential mortgage loans. Other borrowings are
secured by other assets, principally securities. The Company typically has
funded loan demand and investment opportunities out of current loan and MBSs
repayments, securities maturities and new deposits. However, the Company
utilizes FHLB advances and other borrowings to supplement these sources and as a
match against certain assets in order to better manage interest-rate risk. The
following table sets forth the maximum month-end balance and the average balance
of these types of borrowings for the periods indicated.
Year Ended September 30,
------------------------------------------------
2003 2002 2001
---- ---- ----
($ in thousands)
Borrowings outstanding at the end of reporting period:
Advances from FHLB.............................. $ 136,175 129,500 149,500
Weighted interest rate.......................... 4.68% 5.23% 5.22%
Short-term Federal Reserve borrowings........... 6,309 15,000 11,048
Weighted interest rate.......................... .78% 1.51% 2.50%
Reverse repurchase agreements................... 14,334 19,834 -
Weighted interest rate.......................... 2.38% 2.26% -
Maximum amount of borrowings outstanding at any month end:
Advances from FHLB.............................. 136,175 149,500 151,250
Short-term Federal Reserve borrowings........... 12,368 15,000 11,049
Reverse repurchase agreements................... 19,834 19,834 -
Average borrowings outstanding:
Advances from FHLB.............................. 120,604 130,430 140,120
Weighted interest rate.......................... 5.39% 5.45% 5.74%
Short-term Federal Reserve borrowings........... 2,618 6,031 1,670
Weighted interest rate.......................... .98% 1.61% 3.46%
Reverse repurchase agreements................... 18,153 3,004 -
Weighted interest rate.......................... 2.32% 2.27% -
See Note 7 to the consolidated financial statements for additional information.
Personnel
As of September 30, 2003 the Company had 238 full-time employees and 15
part-time employees. The employees are not represented by a collective
bargaining unit. The Company believes its relationship with its employees to be
satisfactory.
18
Regulation
Set forth below is a brief description of certain laws relating to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Company
General. The Company is registered as a savings and loan holding company with
the OTS. The Company is required to file reports with the OTS and is subject to
supervision and periodic examination by the OTS. In addition, the OTS has
enforcement authority over the Company and any non-savings institution
subsidiaries. The OTS can restrict or prohibit activities that it determines to
be a serious risk to the Company. OTS regulations are intended primarily for the
protection of the depositors and not for the benefit of the Company's
stockholders.
As a unitary savings and loan holding company, the Company generally is not
subject to any restrictions on its business activities. While the
Gramm-Leach-Bliley Act (the "GLB Act"), enacted in November 1999, terminated the
"unitary thrift holding company" exemption from activity restrictions on a
prospective basis, the Company enjoys grandfathered status under this provision
of the GLB Act because it acquired the Bank prior to May 4, 1999. As a result,
the Company's freedom from activity restrictions as a unitary savings and loan
holding company was not affected by the GLB Act. However, if the Company were to
acquire control of an additional savings association, its business activities
would be subject to restriction under the Home Owners' Loan Act. Furthermore, if
the Company were in the future to sell control of the Bank to any other company,
such company would not succeed to the Company's grandfathered status under the
GLB Act and would be subject to the same activity restrictions. The continuation
of the Company's exemption from restrictions on business activities as a unitary
savings and loan holding company is also subject to the Company's continued
compliance with the Qualified Thrift Lender ("QTL") test. See "- Regulation of
the Bank - Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, insured savings bank of the Savings
Association Insurance Fund ("SAIF"), the Bank is subject to extensive regulation
by the OTS and the Federal Deposit Insurance Corporation ("FDIC"). Lending
activities and other investments must comply with federal statutory and
regulatory requirements. The Bank is also subject to reserve requirements of the
Federal Reserve System. Federal regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. This
regulatory structure gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies regarding the classification of assets and the
establishment of an adequate allowance for loan losses.
The OTS regularly examines the Bank and prepares reports to Bank's board of
directors on deficiencies, if any, found in its operations. The Bank's
relationship with its depositors and borrowers is also regulated by federal law,
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its activities
and financial condition, and must obtain regulatory approvals prior to entering
into certain transactions such as mergers with or acquisitions of other
financial institutions. Any change in applicable statutory and regulatory
requirements, whether by the OTS, the FDIC or the United States Congress, could
have a material adverse impact on the Bank or the Company, and their operations.
Insurance of Deposit Accounts. The FDIC administers two separate deposit
insurance funds. Generally, the Bank Insurance Fund ("BIF") insures the deposits
of commercial banks and the SAIF insures the deposits of savings institutions.
The FDIC is authorized to increase deposit insurance premiums if it determines
such increases are appropriate to maintain the reserves of either the SAIF or
the BIF or to fund the administration of the FDIC. In addition, the FDIC is
authorized to levy emergency special assessments on BIF and SAIF members.
19
The FDIC has set the deposit insurance assessment rates for SAIF member
institutions for the second half of 2003 at 0% to .027 % of insured deposits on
an annualized basis, with the assessment rate for most savings institutions set
at 0%.
In addition, all insured institutions with FDIC-insured deposits are required to
pay assessments to the FDIC to fund interest payments on bonds issued by the
Financing Corporation, an agency of the Federal government established to
recapitalize the predecessor to the SAIF. These assessments, the current annual
rate of which is approximately .0152% of insured deposits, will continue until
the Financing Corporation bonds mature in 2017.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards:
> tangible capital equal to at least 1.5% of total adjusted assets;
> "Tier 1" or "core" capital equal to at least 3% of total adjusted assets
for savings institutions that receive the highest supervisory rating for
safety and soundness and 4% of total adjusted assets for all other thrifts;
and
> risk-based capital equal to 8% of total risk-weighted assets.
The Bank's capital ratios are set forth in Note 10 to the consolidated financial
statements.
For purposes of the OTS capital regulations, tangible capital is defined as core
capital less all intangible assets except for certain mortgage servicing rights.
Tier 1 and core capital are defined as common stockholders' equity,
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of consolidated subsidiaries, certain nonwithdrawable
accounts and pledged deposits of mutual savings associations and qualifying
supervisory goodwill. Tier 1 and core capital are reduced by an institution's
intangible assets, with limited exceptions for core deposit intangibles, certain
servicing rights, purchased credit card relationships and other qualifying
intangible assets. Both core and tangible capital are further reduced by an
amount equal to the savings institution's debt and equity investments in
"nonincludable" subsidiaries engaged in activities not permissible to national
banks other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital of 8% of risk-weighted assets. Total
risk-based capital equals the sum of core capital plus supplementary capital.
The components of supplementary capital include, among other items, cumulative
perpetual preferred stock, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, and the portion of the
allowance for loan losses not designated for specific loan losses. The portion
of the allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary
capital is limited to 100% of core capital. A savings institution's risk-based
capital is reduced by the amount of capital instruments held by other depository
institutions pursuant to reciprocal arrangements and by the amount of the
institution's equity investments, other than those deducted from core and
tangible capital, and its high loan-to-value ratio land loans and
non-residential construction loans.
A savings institution's risk-based capital requirement is measured against
risk-weighted assets, which equal the sum of each on-balance-sheet asset and the
credit-equivalent amount of each off-balance-sheet item after being multiplied
by an assigned risk weight. These risk weights range from 0% for cash to 100%
for delinquent loans, property acquired through foreclosure, commercial loans,
and certain other assets.
Dividend and Other Capital Distribution Limitations. The OTS imposes various
restrictions or requirements on the ability of savings institutions to make
capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan holding
company, such as the Bank, must file an application or a notice with the OTS at
least 30 days before making a capital distribution. A savings institution must
file an application for prior approval of a capital distribution if:
> it is not eligible for expedited treatment under the applications
processing rules of the OTS;
20
> the total amount of all capital distributions, including the proposed
capital distribution, for the applicable calendar year would exceed an
amount equal to the savings bank's net income for that year to date plus
the institution's retained net income for the preceding two years;
> it would not adequately be capitalized after the capital distribution; or
> the distribution would violate an agreement with the OTS or applicable
regulation.
The Bank will be required to file a capital distribution notice or application
with the OTS before paying any dividend to the Company. However, capital
distributions by the Company, as a savings and loan holding company, will not be
subject to the OTS capital distribution rules. The OTS may disapprove a notice
or deny an application for a capital distribution by the Bank if:
> the savings institution would be undercapitalized following the capital
distribution;
> the proposed capital distribution raises safety and soundness concerns; or
> the capital distribution would violate a prohibition contained in any
statute, regulation or agreement.
In addition, a federal savings institution that has converted from mutual to
stock form cannot distribute regulatory capital that is required for its
liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet a qualified
thrift lender test or they become subject to the business activity restrictions
and branching rules applicable to national banks. To qualify as a qualified
thrift lender, a savings institution must either:
> be deemed a "domestic building and loan association" under the Internal
Revenue Code by maintaining at least 60% of its total assets in specified
types of assets, including cash, certain government securities, loans
secured by and other assets related to residential real property,
educational loans and investments in premises of the institution; or
> satisfy the statutory qualified thrift lender test set forth in the Home
Owners' Loan Act by maintaining at least 65% of its "portfolio assets" in
certain qualified thrift investments, defined to include residential
mortgages and related equity investments, certain mortgage-related
securities, small business loans, student loans and credit card loans, and
50% of certain community development loans. For purposes of the statutory
qualified thrift lender test, portfolio assets are defined as total assets
minus intangible assets, property used by the institution in conducting its
business, and liquid assets equal to 10% of total assets. A savings
institution must maintain its status as a qualified thrift lender on a
monthly basis in at least nine out of every 12 months. The Bank met the
qualified thrift lender test as of September 30, 2003 and in each of the
last 12 months and, therefore, qualifies as a qualified thrift lender.
21
Loans to One Borrower. Under federal law, savings institutions have, subject to
certain exemptions, lending limits to one borrower in an amount equal to the
greater of $500,000 or 15% of the institution's unimpaired capital and surplus.
As of September 30, 2003, the Bank's legal lending limit to one borrower was
$11.4 million.
FHLB System. The Bank is a member of the FHLB of Atlanta, which is one of 12
regional FHLBs. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
financial institutions and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members pursuant to policies
and procedures established by the board of directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Atlanta in an amount equal to the greater of 1% of our aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of FHLB advances. The Bank is in compliance
with this requirement. The FHLB imposes various limitations on advances such as
limiting the amount of certain types of real estate related collateral generally
to 30% of a member's capital and limiting total advances to a member.
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest-bearing reserves at specified levels
against their checking accounts and non-personal certificate accounts. At
September 30, 2003 the Bank was in compliance with these requirements.
22
Item 2. Description of Property
- ------- -----------------------
The Company's corporate office is located at 205 East Orange Street in Lakeland,
Florida and conducts its business through nineteen offices, which are located in
Highlands, Manatee, Polk and Sumter Counties in Florida. The following table
sets forth the location of each of our offices, the year the office was opened
and the net book value (in thousands) of each office and its related equipment.
Year
opened or Leased or Net book value at
Building/Office Location acquired Owned September 30, 2003
------------------------ -------- ----- ------------------
Corporate Headquarters and Downtown Lakeland
Office 1957 Owned $ 2,531
Offices:
Avon Park 2002 Owned 363
Combee 2002 Owned 366
Cortez (Bradenton) 1972 Leased (1) 31
Edgewood 2002 Owned 480
Grove Park 1961 Owned 348
Harden 2002 Owned 531
Highlands 1972 Owned 557
Interstate 1985 Owned 412
Lakewood Ranch 2001 Owned (2) 2,389
Marcum 2002 Owned 431
Plantation 2002 Owned 1,796
Scott Lake 1997 Owned 483
Sebring 2002 Owned 522
Town and Country 2000 Leased (3) 179
West Bradenton 1989 Owned 815
Wildwood 2002 Owned 360
Winter Haven North 1978 Owned 413
Winter Haven South 1995 Owned 718
Operations Center 1964 Owned 221
Residential Lending Office 1999 Leased (4) 32
- ------------
(1) First renewal option has been exercised, extending the lease termination to
December 31, 2006, and there is one additional three-year renewal option.
(2) Approximately one-third of the usable square footage is occupied by the
Company's retail office and the remainder is available for lease.
Approximately one-half of the leasable space has been leased and the
Company is seeking additional tenants.
(3) Ten year lease with two five year options.
(4) Three-year lease that terminates April 30, 2005, but has five one-year
renewal options.
23
Item 3. Legal Proceedings
- ------- -----------------
From time to time the Company and the Bank are involved as plaintiff or
defendant in various legal actions arising in the normal course of business.
Presently, neither the Company nor the Bank is a party to any material pending
legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ------- -----------------------------------------------------------------------
Matters
-------
The Company's common stock has traded on the Nasdaq National Market under the
symbol FFBK. The following table sets forth market price information, based on
closing prices, as reported by the Nasdaq National Market for the common stock
high and low sales prices for the periods indicated.
Cash Dividends
High Low Per Share Declared
---- --- ------------------
Fiscal 2003
- -----------
First Quarter.................. $ 24.51 $ 17.46 $ .06
Second Quarter................. 24.30 20.46 .07
Third Quarter.................. 24.00 21.70 .07
Fourth Quarter................. 27.16 23.47 .07
Fiscal 2002
- -----------
First Quarter.................. $ 16.60 $ 14.70 $ .05
Second Quarter................. 18.40 16.20 .06
Third Quarter.................. 20.07 18.10 .06
Fourth Quarter................. 19.59 16.46 .06
The number of stockholders of record of common stock as of September 30, 2003
was approximately 800, which does not include the number of persons or entities
who held stock in nominee or "street" name through various brokerage firms.
24
Item 6. Selected Financial Data
- ------- -----------------------
Selected Financial Highlights
(In thousands, except per share data)
At September 30: 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Assets................................... $ 818,482 859,446 660,369 582,180 498,358
Loans, net............................... 496,684 499,433 474,155 440,386 397,910
Securities............................... 252,897 272,624 129,534 106,348 80,876
Cash and cash equivalents................ 13,775 30,628 21,676 6,734 2,598
Deposits................................. 552,909 587,431 399,537 354,554 339,224
FHLB advances and other borrowings....... 156,818 164,334 160,548 160,937 92,472
Stockholders' equity..................... 101,972 98,978 93,814 61,081 61,337
Full service offices..................... 19 18 11 9 9
For the year ended September 30:
Interest income.......................... $ 45,730 48,910 44,846 39,840 32,648
Interest expense......................... 20,843 24,948 25,895 23,575 17,128
--------- ------- ------- ------- ------
Net interest income...................... 24,887 23,962 18,951 16,265 15,520
Provision for loan losses................ 660 680 615 630 540
--------- ------- ------- ------- ------
Net interest income after provision
for loan losses........................ 24,227 23,282 18,336 15,635 14,980
Noninterest income....................... 7,060 5,196 2,487 2,114 1,473
Noninterest expenses..................... 22,527 20,517 13,776 11,813 11,448
--------- ------- ------- ------- ------
Income before income taxes............... 8,760 7,961 7,047 5,936 5,005
Income taxes............................. 2,739 2,357 2,178 2,094 1,748
--------- ------- ------- ------- ------
Net income............................... $ 6,021 5,604 4,869 3,842 3,257
========= ======= ======= ======= =======
Basic earnings per share (1) (2)......... $ 1.19 1.10 .92 .71 .33
========= ======= ======= ======= =======
Diluted earnings per share (1) (2)....... $ 1.13 1.05 .90 .70 .33
========= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding: (1) (2)
Basic (3).......................... 5,062 5,095 5,293 5,424 5,727
Diluted (3)........................ 5,322 5,339 5,429 5,516 5,727
- -----------------
(1) Year 2001 includes $30.6 million in net proceeds from the issuance of
common stock in connection with the conversion from a mutual holding
company to a full stock company on December 21, 2000.
(2) Years 2000 and 1999 include $25.7 million in net proceeds from the
reorganization on April 6, 1999. Prior to April 6, 1999, the Bank was a
mutual institution. Therefore, earnings per share and weighted average
shares outstanding in 1999 are for the six months ended September 30, 1999
(period subsequent to the reorganization.)
(3) Shares outstanding for the years ended 2000 and 1999 have been adjusted as
of the beginning of the periods to give effect to the 1.0321 exchange ratio
of previously issued shares in conjunction with the conversion that was
effective December 21, 2000.
25
Selected Financial Ratios
At or For the Year Ended September 30,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Performance Ratios:
Return on average assets (net income
divided by average total assets).............. .73% .74% .80% .70% .72%
Return on average equity (net income
divided by average equity).................... 5.94 5.92 5.61 6.43 6.65
Net interest-rate spread (1)...................... 3.07 3.04 2.51 2.54 2.95
Net interest margin on average
interest-earnings assets (1).................. 3.36 3.47 3.30 3.13 3.56
Average interest-earning assets to
average interest-bearing liabilities.......... 110 112 118 113 116
Efficiency ratio.................................. 70 67 64 64 67
Asset Quality Ratios:
Nonperforming loans to total loans, net........... .21 .22 .20 .17 .21
Nonperforming assets to total assets.............. .18 .17 .30 .17 .21
Net charge-offs to average loans less LIP
outstanding................................... .14 .17 .06 .06 .04
Allowance for loan losses to total loans
less LIP...................................... .89 .90 .76 .75 .74
Capital Ratios:
Average equity to average assets
(average equity divided by average
total assets)................................. 12.32 12.57 14.17 10.94 10.84
Equity to assets at period end.................... 12.46 11.52 14.21 10.49 12.31
Dividend payout ratio............................. 24 22 19 10 12
Book value at year end............................ $ 18.93 18.38 17.10 11.07 10.33
(1) Presented on taxable equivalent basis.
26
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the Selected
Financial Highlights, Selected Financial Ratios and the Consolidated Financial
Statements - See Part II, Items 6 and 8 of this report.
Overview
On April 6, 1999, FloridaFirst Bank reorganized from a mutual savings
association into a mutual holding company named FloridaFirst Bancorp MHC and
formed FloridaFirst Bancorp, a middle-tier holding company, whereby FloridaFirst
Bank became a wholly-owned subsidiary of FloridaFirst Bancorp. In connection
with the reorganization, FloridaFirst Bancorp sold 2,703,851 shares of its
Common Stock to the public and the remaining 3,049,024 shares were held by
FloridaFirst Bancorp MHC.
On December 21, 2000, FloridaFirst Bancorp, Inc. (the "Company") completed its
stock offering in connection with the conversion and reorganization of
FloridaFirst Bank (the "Bank") and its holding company, FloridaFirst Bancorp,
from the mutual holding company form of organization to a full stock company. As
part of the conversion and reorganization, the shares formerly held by
FloridaFirst Bancorp MHC were cancelled, the Company sold 3,147,952 new shares
to the public and the shares held by stockholders of FloridaFirst Bancorp were
exchanged for 2,372,048 shares of the Company. The conversion and reorganization
was accounted for in a manner similar to a pooling of interests, whereby the
assets and liabilities of FloridaFirst Bancorp became the Company's assets and
liabilities.
On February 15, 2002, the Company finalized the purchase of seven Florida retail
sales offices from SunTrust Bank coincident with SunTrust Bank's acquisition of
such offices from Huntington National Bank ("Huntington"). The transaction
resulted in the Company receiving approximately $120.9 million in cash, and
included approximately $162.1 million in deposits and approximately $26.1
million in loans related to those seven offices. The Company paid a premium of
approximately 7.6%. This premium, along with additional acquisition costs,
resulted in a core deposit intangible asset of $12.7 million being recorded
which is subject to periodic amortization over a period of twelve years. The
cash received from the purchase was primarily used to reduce $30.0 million in
short-term fixed-rate and adjustable-rate FHLB advances and fund the purchase of
approximately $85.0 million in securities. The securities were primarily
mortgage-backed securities with average lives less than five years that provide
cash flow from the time of purchase. This strategy allows the Company to
immediately earn a fair rate of return on the invested funds and utilize the
cash flow from the securities to fund new loan originations.
On October 2, 2002, the Company signed a definitive agreement with BB&T
Corporation ("BB&T"), Winston-Salem, North Carolina, whereby BB&T would acquire
100% of the outstanding stock of the Company. However, pursuant to discussion
with regulatory officials, BB&T and the Company terminated the agreement on
October 31, 2002 so that BB&T could submit the proper application to request
permission to acquire control of the Company within three years of its second
step conversion pursuant to regulatory guidelines. The application was filed on
November 4, 2002 with the Office of Thrift Supervision ("OTS"). On March 17,
2003, BB&T withdrew its application to acquire control of the Company within the
three-year period, citing rigorous regulatory standards that are being applied
to recently converted thrifts. As a result of application being withdrawn, the
Company wrote-off capitalized merger costs of $504,000 ($312,000 after tax)
which were not recoverable or refundable.
Application of Critical Accounting Policies
Management's discussion and analysis of the Company's financial condition and
results of operations are based on the consolidated financial statements which
are prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of such financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its estimates,
including those related to the allowance for loan losses. Management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis in making judgments about the carrying values of assets that are not
readily apparent from other
27
sources. Actual results could differ from the amount derived from management's
estimates and assumptions under different assumptions or conditions.
Management believes the allowance for loan losses policy is a critical
accounting policy that required the most significant estimates and assumptions
used in the preparation of the consolidated financial statements. The allowance
for loan losses is based on management's evaluation of the level of the
allowance required in relation to the estimated loss exposure in the loan
portfolio. Management believes the allowance for loan losses is a significant
estimate and therefore regularly evaluates it for adequacy by taking into
consideration factors such as prior loan loss experience, the character and size
of the loan portfolio, business and economic conditions and management's
estimation of future losses. The use of different estimates or assumptions could
produce different provisions for loan losses. Refer to the discussion of
allowance for loan losses in the Lending Activities section and Notes 1 and 4 to
consolidated financial statements for a detailed description of management's
estimation process and methodology related to the allowance for loan losses.
Forward-Looking Statements
The following discussions contain forward-looking statements that are based on
assumptions and describe future plans, strategies, and expectations of the Bank
and the Company. These forward-looking statements are generally identified by
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar expressions. The Company's ability to predict results or
the actual effect of future plans or strategies is inherently uncertain. Factors
that could have a material adverse effect on the operations of the Company and
its subsidiaries include, but are not limited to, changes in interest rates,
general economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality and composition of the loan and investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area, and changes in relevant
accounting principles. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. The Company does not undertake--and specifically disclaims--any
obligation to publicly release the results of any revisions after the date of
the statements or to reflect the occurrence of anticipated or unanticipated
events.
Comparison of Financial Condition at September 30, 2003 and September 30, 2002
Assets. Total assets decreased $41.0 million, or 4.8%, to $818.5 million at
September 30, 2003 from $859.4 million at September 30, 2002. The decrease in
total assets resulted primarily from:
> a $19.7 million decrease in securities available for sale. Strong mortgage
refinancing activities, resulting from the continued decline in longer-term
interest rates, has accelerated the repayments on many mortgage-related
securities. The Company elected not to reinvest certain funds to provide
the liquidity to repay FHLB advances in January 2003,
> a $2.7 million net decrease in the loan portfolio. The decrease in loans
resulted from increased refinance activity in the residential mortgage loan
portfolio throughout the year, resulting in increased loan repayments, as
longer-term interest rates continued to decline. In addition, during the
first three months of the period, the Company's residential mortgage
strategy was to originate and sell longer-term, fixed-rate loans in order
to minimize future interest rate risk. The reduction in the residential
mortgage loan portfolio was almost entirely offset by continued growth in
the consumer and commercial loans outstanding. While new residential
mortgage loan originations achieved a record level of production at $149.2
million for the year, $133.2 million in loans were paid-off during the
period. Management continues to focus on commercial and consumer loan
originations, where new loan production totaled $122.1 million for the
period.
> a $16.9 million decrease in cash and cash equivalents. The decision to
retain the majority of residential mortgage originations during the last
two quarters, together with increased commercial and consumer loan
originations has caused the decline in the balance of cash and cash
equivalents.
> core deposit intangible decreased $1.6 million during the year due to
normal amortization.
28
Liabilities. Total liabilities decreased $44.0 million, or 5.8%, to $716.5
million at September 30, 2003 from $760.5 million at September 30, 2002. The
decrease in total liabilities resulted primarily from:
> a $34.5 million decrease in deposits. The decrease in deposits was
primarily attributable to a $59.0 million decrease in certificate accounts,
partially offset by a $24.5 million increase in transaction accounts. We
believe that the decrease in certificate accounts in recent months has been
caused by certain retail customers moving maturing certificate accounts
into more liquid checking and money-market accounts due to due to the low
interest-rate environment, or seeking higher yielding alternative
investments. In addition, $22.5 million from the State of Florida
certificate program matured during the period.
> a $7.5 million decrease in FHLB advances and other borrowings, primarily
due to the maturity and repayment of $15.0 million of FHLB term advances
and maturity of $5.5 million of reverse repurchase agreements. In addition,
an $8.7 million decrease of funds borrowed under the Treasury Investment
Program was replaced with $21.7 million of FHLB overnight borrowings.
Stockholder's Equity. The $3.0 million increase in the stockholders' equity
includes:
> $6.0 million in net income;
> repurchase shares of Company stock at a cost of $126,000;
> net distribution of $971,000 from the restricted stock plan for vesting of
certain awards;
> decrease in accumulated other comprehensive income of $3.5 million;
> additional paid-in-capital of $566,000 resulting from exercise of stock
options and capital adjustments related to stock plans;
> repayment of $541,000 on the Employee Stock Ownership Plan ("ESOP") loan;
and
> dividends paid totaling $1.5 million.
The decreased value in accumulated other comprehensive income resulted from the
fluctuation in market value of the Company's securities available for sale.
Because of continued interest rate volatility, accumulated other comprehensive
income and stockholders' equity could materially fluctuate for each interim and
year-end period.
Liquidity and Capital Resources
The liquidity of a savings institution reflects its ability to provide funds to
meet loan requests, to accommodate possible outflows in deposits, and to take
advantage of market opportunities. Funding loan requests, providing for
liability outflows, and managing interest rate fluctuations require continuous
analysis in order to match the maturities of short-term loans and investments
with specific types of deposits and borrowings. An institution's liquidity is
normally considered in terms of the nature and mix of the institution's sources
and uses of funds.
Assets providing liquidity are generated through loan repayments, loan sales and
the management of maturity distributions for loans and securities. An important
aspect of liquidity management lies in maintaining sufficient levels of loans
and mortgage-backed securities that generate monthly cash flows.
29
Cash and cash equivalents decreased $16.9 million to $13.8 million for the year
ended September 30, 2003. Significant cash flows or uses (amounts shown in
parentheses) were as follows (in millions):
Cash provided by operations............................................ $ 13.3
Net repayment of Federal Home Loan Bank advances and other borrowings.. (7.5)
Decrease in deposits................................................... (34.5)
Sales, maturities of and repayments on securities...................... 197.7
Purchases of securities................................................ (183.2)
Purchases of premises and equipment.................................... (.8)
Net increase in loans.................................................. (1.4)
Dividends paid......................................................... (1.5)
Other, net............................................................. 1.0
-------
Net decrease in cash and cash equivalents.............................. $ (16.9)
=======
The Company is subject to federal regulations that impose certain minimum
capital requirements. For a discussion on such capital levels, see Note 10 in
the consolidated financial statements.
Management is not aware of any known trends, events or uncertainties that will
have or are reasonably likely to have a material effect on the Company's
liquidity, capital or operations nor is management aware of any current
recommendation by regulatory authorities, which if implemented, would have such
an effect.
Analysis of Net Interest Income
Historically, the Company's earnings have depended primarily on its net interest
income, which is the difference between interest income earned on its loans and
securities ("interest-earning assets") and interest paid on its deposits and any
borrowed funds ("interest-bearing liabilities"). Net interest income is affected
by:
> the interest-rate spread - the difference between rates of interest earned
on interest-earning assets and rates paid on its interest-bearing
liabilities; and
> the aggregate amounts of its interest-earning assets and interest-bearing
liabilities.
30
Average Balance Sheet. The following table sets forth certain information
relating to the Company for the periods indicated. The average yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily average balances.
Year Ended September 30,
---------------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------- ------------------------------- -------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Residential $ 293,520 19,531 6.65% $ 314,686 23,066 7.33% $ 322,388 24,544 7.61%
Consumer 114,965 8,674 7.54 95,926 7,838 8.17 82,966 7,233 8.72
Commercial 82,488 5,341 6.47 72,197 5,344 7.40 58,215 4,894 8.41
--------- ------ --------- ------ --------- ------
Total loans (1) 490,973 33,546 6.83 482,809 36,248 7.51 463,569 36,671 7.91
Securities and other (2)(6) 263,912 12,671 4.80 220,793 13,128 5.95 121,925 8,552 7.01
--------- ------ --------- ------ --------- ------
Total interest-earning
assets 754,885 46,217 6.12 703,602 49,376 7.02 585,494 45,223 7.72
------ ------ ------
Noninterest-earning assets 68,052 49,113 26,915
--------- --------- ---------
Total assets $ 822,937 $ 752,715 $ 612,409
========= ========= =========
Interest-bearing liabilities:
Checking accounts $ 81,592 706 0.87 $ 58,195 844 1.45 $ 32,937 590 1.79
Savings accounts 54,716 578 1.06 44,832 722 1.61 27,940 486 1.74
Money-market accounts 77,082 1,117 1.45 54,762 1,404 2.56 28,766 1,205 4.19
Certificate accounts 329,084 11,579 3.52 329,291 14,874 4.52 263,512 15,519 5.89
--------- ------ --------- ------ --------- ------
Total interest-bearing
deposits 542,474 13,980 2.58 487,080 17,844 3.66 353,155 17,800 5.04
FHLB advances and other
borrowings 141,375 6,863 4.85 139,482 7,104 5.09 142,536 8,018 5.63
--------- ------ --------- ------ --------- ------
Total interest-bearing
liabilities 683,849 20,843 3.05 626,562 24,948 3.98 495,691 25,818 5.21
------ ------
Noninterest-bearing
liabilities (3)(7) 37,664 31,534 29,960 77
--------- --------- ---------
Total liabilities 721,513 658,096 525,651 25,895
------
Stockholders' equity 101,424 94,619 86,758
--------- --------- ---------
Total liabilities and
stockholders' equity $ 822,937 $ 752,715 $ 612,409
========= ========= =========
Net interest income (6) $ 25,374 $ 24,428 $ 19,328
====== ====== ======
Interest rate spread (4) 3.07% 3.04% 2.51%
==== ==== ====
Net margin on interest-
earning assets (5) 3.36% 3.47% 3.30%
==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities 110% 112% 118%
=== === ===
- --------------
(1) Average balances include nonaccrual loans.
(2) Securities and other includes securities available for sale and held to
maturity, interest-earning deposits and FHLB stock.
(3) Includes noninterest-bearing checking accounts.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net margin on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(6) Interest income and net interest income do not agree to the consolidated
statement of earnings because the tax equivalent income (based on effective
tax rate of 34%) on municipal bonds is included in this schedule.
(7) Interest in 2001 includes interest expense on $80.9 million of funds
received from the public stock offering.
31
Rate/Volume Analysis. The relationship between the volume and rates of the
Company's interest-earning assets and interest-bearing liabilities affects the
Company's net interest income. The following table reflects the sensitivity of
the Company's interest income and interest expense to changes in volume and in
prevailing interest rates during the periods indicated. Each category reflects
the: (1) changes in volume (changes in volume multiplied by old rate); (2)
changes in rate (changes in rate multiplied by old volume); and (3) net change.
The net change attributable to the combined impact of volume and rate has been
allocated proportionally to the absolute dollar amounts of change in each.
Year Ended September 30,
----------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
------------------------------- -------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in thousands)
Interest income:
Residential ............ $(1,491) (2,044) (3,535) (578) (900) (1,478)
Consumer ............... 1,470 (634) 836 1,079 (474) 605
Commercial ............. 711 (714) (3) 1,086 (636) 450
------- ------- ------- ------- ------- -------
Total loans ......... 690 (3,392) (2,702) 1,587 (2,010) (423)
Securities and other ... 2,350 (2,807) (457) 6,034 (1,458) 4,576
------- ------- ------- ------- ------- -------
Total interest income .. $ 3,040 (6,199) (3,159) 7,621 (3,468) 4,153
======= ======= ======= ======= ======= =======
Interest expense:
Checking accounts ...... $ 270 (408) (138) 384 (130) 254
Savings accounts ....... 138 (282) (144) 274 (38) 236
Money-market accounts .. 452 (739) (287) 796 (597) 199
Certificates of deposit (9) (3,286) (3,295) 3,407 (4,052) (645)
------- ------- ------- ------- ------- -------
Total deposits ...... 851 (4,715) (3,864) 4,861 (4,817) 44
------- ------- ------- ------- ------- -------
FHLB advances and other
borrowings ........... 97 (338) (241) (170) (821) (991)
------- ------- ------- ------- ------- -------
Total interest expense . $ 948 (5,053) (4,105) 4,691 (5,638) (947)
======= ======= ======= ======= ======= =======
Change in net interest
income ............... $ 2,092 (1,146) 946 2,930 2,170 5,100
======= ======= ======= ======= ======= =======
32
Comparison of Operating Results for the Years Ended September 30, 2003 and
September 30, 2002
Net Income. Net income for the year ended September 30, 2003 increased $417,000,
or 7.4% to $6.0 million, compared to $5.6 million for the year ended September
30, 2002.
> Net interest income increased $925,000, or 3.9%, for the year ended
September 30, 2003 compared to the same period in 2002. This increase
resulted primarily from a $4.1 million decrease in interest expense,
partially offset by $3.2 million decrease in interest income.
> Noninterest income increased by $1.9 million from 2002 to 2003 due mainly
to:
o increased fees and service charges mainly related to the Branch
Acquisition;
o gains on sale of mortgage loans;
o net gains on sale of securities.
> Noninterest expenses increased $2.0 million to $22.5 million for the year
ended September 30, 2003 from $20.5 million for the year ended September
30, 2002, due to increases in several expense categories, as discussed
below.
Interest Income. The following discussion highlights the major factors that
impacted the changes in interest income during the year ended September 30, 2003
compared to the prior year. Detailed changes are contained in the Average
Balance Sheet table.
> While the amount of residential loans outstanding decreased, consumer loan
balances increased significantly, due to a special home equity loan program
during the year, and commercial loan balances showed steady growth
throughout the year. While average consumer and commercial loans grew $29.3
million during the year, approximately $9.8 million, or 33.4%, of the
growth was attributable to loans acquired in the Branch Acquisition being
included in the average balances for the entire year compared to seven and
one-half months for 2002.
> The average yield on loans decreased 68 basis points to 6.83% during the
year. The decrease in loan yields is directly attributable to the continued
decline in market rates of interest for loans that we retain in our
portfolio. The high level of refinance activity not only impacts the
residential loan yields, it also creates pricing pressure on new and
existing loans in the commercial area. Consumer loans have relatively short
average lives historically; therefore, the lower interest rate environment
has caused yield on the consumer loan portfolio to decline from last year,
as new loans are generated in this lower interest rate environment to
replace the loans being paid off.
> The average balances in the securities portfolio grew 20% as the Company
invested approximately $85 million from the funds received from the Branch
Acquisition.
> The lower yield in the securities portfolio resulted from a shift to
shorter duration and adjustable-rate securities in fiscal 2003 to manage
the interest-rate risk profile of the Company, as well as the overall
reduction in interest rates as previously discussed.
Interest Expense. The following discussion highlights the major factors that
impacted the changes in interest expense during the year ended September 30,
2003 when compared to the prior year. Detailed changes are contained in the
Average Balance Sheet table.
> The increase in average deposits is mainly attributable to $162.0 million
in deposits assumed in the Branch Acquisition. Also, the increased sales
effort to attract and retain new deposits, as well as customer concerns
about equity investments, provided additional deposit growth. Although
average deposits grew, interest expense was lower due to the change in the
mix of deposits and the overall reduction in market interest rates. The
average balances in interest checking, savings and money-market accounts
grew 35%. Since these deposit typically pay lower interest rates, together
with certificate accounts renewing at lower rates in the current interest
rate environment, the overall cost of interest-bearing deposits declined by
108 basis points.
> Average FHLB advances and other borrowings increased slightly in 2003,
compared to 2002. Certain FHLB fixed-rate advances were either prepaid or
repaid at maturity, causing the advance balances to decline. However,
leveraging transactions involving U.S. agency securities were funded with
borrowings through
33
lower-cost reverse repurchase agreements.
> Actions by the Federal Reserve to decrease short-term interest rates over
the past two years has provided immediate reduction in the cost of
deposits, as well as advances and other borrowings.
Provision for Loan Losses. The provision for loan losses is charged to earnings
to bring the total allowance for loan losses to an amount that represents
management's best estimates of the losses inherent in the loan portfolio at the
balance sheet date, based on historical experience, volume and type of lending
conducted by the Company, industry standards, the level and status of past due
and nonperforming loans, the general economic conditions in the Company's
lending area and other factors affecting the ability to collect on the loans in
its portfolio. The allowance for loan losses is maintained at a level that
represents management's best estimates of losses in the loan portfolio at the
balance sheet date. However, there can be no assurance that the allowance for
losses will be adequate to cover losses, which may be realized in the future,
and that additional provisions for losses will not be required.
The provision for loan losses was $660,000 for the year ended September 30, 2003
compared to $680,000 for fiscal 2002. The provision for loan losses decreased
for the current year primarily due to lower than expected net charge-offs for
the year. The allowance for loan losses was $4.5 million at September 30, 2003
and 2002, since current year provision for loan losses and net charge-offs were
comparable. The current allowance represents .89% of loans outstanding at
September 30, 2003. The Company had net charge-offs of $700,000, approximately
17% of which related to loans acquired in the Branch Acquisition, for the year
ended September 30, 2003 compared to net charge-offs of $813,000 for fiscal
2002. In addition, while Classified Assets increased $311,000, special mention
assets increased $438,000 and substandard assets decreased $127,000 as further
discussed at page 10. The Company intends to maintain its allowance for loan
losses commensurate with its loan portfolio and classified assets, especially
its commercial real estate and consumer loan portfolio.
Noninterest Income. Noninterest income increased by $1.9 million to $7.1 million
for the year ended September 30, 2003. The major components of the increase was
due to the following:
> gains of $712,000 recognized on the sale of $39.0 million in long term
fixed-rate mortgage loans, an increase of $438,000, or 160% from fiscal
2002,
> an increase in net gain on sale of securities available for sale of $1.2
million. During fiscal 2003 the Company recognized $1.9 million in net
gains on the sales of $52.2 million securities available for sale.
> a decrease of $260,000 in earnings on bank-owned life insurance. In fiscal
2002 the Company recognized income of $381,000 related to the value of
equity securities received in the demutualization of an insurance company
where the Company was a policyholder. This was offset by increased earnings
on premiums of $4.5 million for additional policies purchased in March and
April 2002,
> an increase of $313,000 in account fees and service charges, primarily
related to the overall increase in accounts from the Branch Acquisition.
> an increase of $175,000 in other noninterest income, primarily due to
$558,000 of commission income from the Company's annuity sales program that
began in September 2002. The commission income more than offset the
following 2002 income items:
o $140,000 in loan related fees,
o $201,000 gain on the sale of a former bank property during the prior
period.
Noninterest Expense. Noninterest expense increased by $2.0 million to $22.5
million for the year ended September 30, 2003 from $20.5 million for the year
ended September 30, 2002. The major components of the increase was due to the
following:
> Compensation and employee benefits increased $179,000 due primarily to:
o increase of $590,000 due to the addition of the seven retail sales
offices (66 staff members) related to the Branch Acquisition, and
$110,000 in additional costs for the full year operation of one new
branch office opened during the past year;
34
o 4% average salary increases due to merit and cost of living
adjustments, partially offset by staff reductions;
o increase in commissions of $724,000 as residential mortgage loan
origination production increased over 47%, a revised retail incentive
plan resulted in increased sales of products and services, and annuity
sales generated incentive payments during the year;
o a $465,000 increase for health insurance costs due to the growth in
the employee base, including the Branch Acquisition, as well as
increased claims experience.
> The increases noted above were partially offset by:
o a $69,000 decrease in overtime compensation;
o the deferral of an additional $1.4 million in estimated direct cost of
originating loans due to increased loan volume and estimates of the
costs.
> Occupancy and equipment costs increased $397,000, due primarily to the
addition of seven new offices in the Branch Acquisition and the opening of
one new retail sales office in November 2002.
> Data processing expense increased $131,000 due to the expanded branch
network resulting from the Branch Acquisition and the opening of one new
retail sales office in November.
> Professional fees increased $199,000, primarily due to the write-off of
$242,000 in merger-related legal expenses resulting from the cancellation
of the merger agreement between the Company and BB&T.
> Amortization of core deposit intangible resulting from the Branch
Acquisition increased $480,000 as a full year's amortization was recorded
in 2003 versus the partial year amortization in 2002
> Other expenses increased by $581,000 primarily due to:
o the write-off of $262,000 of merger-related investment banking
expenses resulting from the cancellation of the merger agreement
between the Company and BB&T;
o a $251,000 increase in loan expenses, primarily attributable to the
"no closing costs" consumer loan program during the year;
o a $119,000 increase in telecommunication expenses related to the
expanded branch network and communication channel upgrades;
o a $102,000 increase in marketing costs due primarily to the promotion
of the "no closing costs" consumer loan program during the year.
o a $110,000 increase in insurance expense due to higher premiums that
prevail in the commercial insurance marketplace;
o a $239,000 decrease in deposit charge-offs and miscellaneous deposit
losses primarily attributable to the Branch Acquisition and the proof
of deposit (POD) conversion in 2002;
o a $63,000 increase in security guard expense for increased protection
of customers and employees after the Company experienced a series of
robberies during fiscal 2002. The actual dollar losses from the
robberies were not significant;
o increase of $63,000 in correspondent bank charges primarily relating
to the higher costs relating to the POD conversion and the Branch
Acquisition creating an increased volume of items processed;
o decrease of $324,000 in other operating expense primarily due to the
2002 write-down of a Winter Haven property, that was originally
scheduled to be a retail sales office, but is now being actively
marketed for sale;
o increase of $106,000 in debit card expenses related to increased
volume from additional cardholders acquired in the Branch Acquisition.
35
Comparison of Operating Results for the Years Ended September 30, 2002 and
September 30, 2001
Net Income. Net income for the year ended September 30, 2002 increased $735,000,
or 15.1% to $5.6 million, compared to $4.9 million for the year ended September
30, 2001.
> Net interest income increased $5.0 million, or 26.4%, for the year ended
September 30, 2002 compared to the same period in 2001. This increase
resulted primarily from interest income increasing $4.1 million, together
with a decrease in interest expense of $947,000,
> Noninterest income increased by $2.7 million from 2001 to 2002 due mainly
to:
o increased fees and service charges mainly related to the Branch
Acquisition;
o earnings related to bank owned life insurance policies;
o gains on sale of mortgage loans;
o net gains on sale of securities.
> Noninterest expenses increased $6.7 million to $20.5 million for the year
ended September 30, 2002 from $13.8 million for the year ended September
30, 2001, due to increases in several expense categories, as discussed
below.
Interest Income. The following discussion highlights the major factors that
impacted the changes in interest income during the year ended September 30, 2002
compared to the prior year. Detailed changes are contained in the Average
Balance Sheet table.
> While residential loan balances decreased as a result of loan sales and
accelerated repayments, consumer and commercial loan balances increased
primarily due to the addition of the loans acquired in the Branch
Acquisition. The Company continues to emphasize commercial and consumer
loan growth in an effort to restructure its loan portfolio.
> The average yield on loans decreased, as the sharp decrease in shorter-term
interest rates throughout calendar 2001 had a major impact on consumer and
commercial loan yields. The decrease in the commercial loan yield can also
be attributed to a change in the mix of the portfolio and the intense
competition for these loans. Increased refinance activity, due to the
overall lower interest rate environment, brought about a decrease in
residential loan yields.
> The average balances in the securities portfolio grew 111% as the Company
invested funds received from the Branch Acquisition, while it continued to
pursue the strategy of leveraging the capital raised in April 1999 and
December 2000.
> The lower yield in the securities portfolio resulted from a shift to
shorter duration and adjustable-rate securities in fiscal 2002 to manage
the interest-rate risk profile of the Company, as well as the previously
mentioned Federal Reserve policy to reduce short-term interest rates.
Interest Expense. The following discussion highlights the major factors that
impacted the changes in interest expense during the year ended September 30,
2002 when compared to the prior year. Detailed changes are contained in the
Average Balance Sheet table.
> Deposit growth of 47% was primarily attributable to the Branch Acquisition.
However, our increased sales effort to attract new and retain current
deposits, as well as customer concerns about equity investments, provided
additional deposit growth.
> Average FHLB advances and other borrowings decreased due to the repayment
of short-term fixed-rate and adjustable-rate advances with funds provided
by the Branch Acquisition.
> The growth in average balances in interest checking and money-market
accounts helped to reduce the overall cost of deposits, which is reflective
of the significant decrease in interest rates over the past year.
> The reduction in cost of funds related to the FHLB advances and other
borrowings reflects the Company's decision to replace short-term fixed-rate
advances with short-term daily rate credit advances and advances utilizing
the Treasury Investment Program. Actions by the Federal Reserve to decrease
short-term interest rates has provided a reduction in the cost of
adjustable-rate credit advances; however, greater declines in the overall
cost of advances were not achieved due to higher-rate convertible advances
taken out in 2000 when the consensus of opinion at that time was that rates
would continue to increase.
36
Provision for Loan Losses. The provision for loan losses was $680,000 for the
year ended September 30, 2002 compared to $615,000 for fiscal 2001. The
provision for loan losses increased for the current year primarily as a result
of increased consumer loan growth from the seven new retail sales offices. The
allowance for loan losses increased to $4.5 million at September 30, 2002 from
$3.7 million at September 30, 2001. An additional $1.0 million was added to the
allowance for loan losses related to loans acquired in the Branch Acquisition
due to the loans being underwritten on a different basis than the Company's
guidelines. A higher charge-off percentage is anticipated on the loans acquired.
The current allowance represents .90% of loans outstanding at September 30,
2002. The Company had net charge-offs of $813,000, approximately 50% of which
related to loans acquired in the branch acquisition, for the year ended
September 30, 2002 compared to net charge-offs of $284,000 for fiscal 2001. In
addition, our classified assets increased $5.1 million as further discussed at
page 10. The Company intends to maintain its allowance for loan losses
commensurate with its loan portfolio and classified assets, especially its
commercial real estate and consumer loan portfolio.
Noninterest Income. Noninterest income increased by $2.7 million to $5.2 million
for the year ended September 30, 2002. The major components of the increase was
due to the following:
> gains of $274,000 recognized on the sale of $19.4 million in long term
fixed-rate mortgage loans, an increase of $65,000 from fiscal 2001,
> an increase in net gain on sale of securities available for sale of
$919,000, including $679,000 in net gains on the sales of $48.2 million
securities available for sale. The current year gains include the recovery
of $88,000 on a corporate bond previously written down due to a decline
that was deemed to be other than temporary,
> an increase of $651,000 in earnings on bank-owned life insurance due to the
purchase of an additional $9.5 million in insurance contracts in 2001 and
2002 and the recognition of $381,000 in equity securities received in the
demutualization of an insurance company where the Company was a policy
holder,
> an increase of $813,000 in account fees and service charges, primarily due
to the overall increase in deposit accounts, the majority of which relate
to the Branch Acquisition.
> an increase of $261,000 in other noninterest income, primarily due to
recognition a $201,000 deferred gain related to the sale of a former Bank
property (previously deferred due to possible environmental cleanup
concerns).
Noninterest Expense. Noninterest expense increased by $6.7 million to $20.5
million for the year ended September 30, 2002 from $13.8 million for the year
ended September 30, 2001. The major components of the increase was due to the
following:
> Compensation and employee benefits increased $3.1 million due primarily to:
o increase of $808,000 due to the addition of the seven retail sales
offices (56 staff members) related to the Branch Acquisition, and
$106,000 in additional costs for the full year operation of two
branches opened in the past two years;
o 5% average salary increases due to merit and cost of living
adjustments;
o increase in mortgage loan commissions of $224,000 due to a change in
commission structure, and a $26.4 million increase in loan origination
volume over the prior year;
o a $303,000 increase for health insurance costs due to the growth in
the employee base, including the Branch Acquisition, as well as
increased claims experience;
o increased costs of $481,000 related to the 2002 Restricted Stock Plan;
o increase of $240,000 related to the cost of the ESOP due to the
increase in the Company's stock price.
> Occupancy and equipment costs increased $838,000, due primarily to:
o full year utilization of new customer delivery software, including an
internet banking package;
o the opening of two new retail sales offices;
o operation of seven new retail sales offices acquired in the Branch
Acquisition; and
o extensive remodeling at several retail sales offices.
37
> Postage and office supplies expense increased $164,000, primarily
attributable to the Branch Acquisition and the conversion to proof of
deposit ("POD").
> Amortization of $1.1 million of the core deposit intangible that was
established in the Branch Acquisition transaction.
> Other expenses increased by $1.4 million primarily due to the following:
o increase of $202,000 for the 2002 Restricted Stock Plan for Directors;
o increase of $160,000 in correspondent bank charges primarily relating
to the higher costs relating to the POD conversion and the Branch
Acquisition creating an increased volume of items processed;
o increase of $319,000 in other operating expense primarily due to the
write-down of a Winter Haven property that was originally scheduled to
be a retail sales office, but is now being actively marketed for
sale;.
o increase of $128,000 in security guard expenses related to a series of
robberies that occurred during the year;
o increase of $128,000 in debit card expenses related to increased
volume from additional card holders acquired in the Branch
Acquisition;
o $120,000 in acquisition related costs that could not be capitalized;
o $138,000 in additional telephone and data communication costs due to
the expanded branch network and upgrade of communication channels.
38
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, unused lines
of credit and construction loans and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amounts recognized in the consolidated balance sheet. The
contract or notional amounts of those instruments reflect the extent of the
Company's involvement in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit, unused
lines of credit and construction loans and standby letters of credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments.
Purchase obligations represent commitments to purchase securities.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed-expiration dates or other termination clauses and may
require payment of a fee. Since certain commitments expire without being drawn
upon, the total committed amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed necessary
by the Company upon extension of credit, is based on management's credit
evaluation of the counter party.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
The Company also has recourse obligations on loans sold in the secondary market.
These recourse obligations require the Company to repurchase the loans if the
borrower defaults within a certain time period after the loan is sold, usually
three to twelve months. The Company has not had to repurchase any loan sold in
the secondary market in relation to these recourse obligations.
The following is a summary of the Company's contractual obligations, including
certain on-balance sheet obligations, at September 30, 2003 (in thousands):
Payments Due by Period
-------------------------------------------
Less More
Than 1 1-3 3-5 Than 5
Contractual Obligations Total Year Years Years Years
----- ---- ----- ----- -----
FHLB advances ........................... $136,175 26,675 25,000 20,000 64,500
Other borrowings ........................ 20,643 20,643 - - -
Operating leases ........................ 964 190 352 270 152
Purchase obligations .................... 10,000 10,000 - - -
Loan commitments ........................ 7,938 7,938 - - -
Standby letters of credit ............... 751 751 - - -
Loans sold with recourse obligations .... 38,039 38,039 - - -
Undisbursed construction and line of
credit loans ....................... 53,765 53,765 - - -
-------- -------- -------- -------- --------
Total ................................... $268,275 158,001 25,352 20,270 64,652
======== ======== ======== ======== ========
39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------- ----------------------------------------------------------
Management of Interest Rate-Risk and Market Risk
Market risk is the risk of loss due to adverse changes in market prices and
rates. The Company's market risk arises primarily from interest-rate risk
inherent in its lending and deposit gathering 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 14 of the Notes to Consolidated Financial
Statements.
The Company does not engage in trading or hedging activities and does not invest
in interest-rate derivatives or enter into interest-rate swaps. The Company's
primary objective in managing interest-rate risk is to minimize the adverse
impact of changes in interest rates on the Company'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.
Qualitative Analysis. Because the majority of the Company's assets and
liabilities are sensitive to changes in interest rates, its most significant
form of market risk is interest-rate risk, or changes in interest rates. The
Company is vulnerable to an increase in interest rates to the extent that
interest-bearing liabilities mature or reprice more rapidly than
interest-earning assets. Its lending activities have historically emphasized the
origination of long-term, fixed-rate loans secured by single-family residences.
The primary source of funds has been deposits with substantially shorter
maturities. While having interest-bearing liabilities that reprice more
frequently than interest-earning assets is generally beneficial to net interest
income during a period of declining interest rates, such an asset-liability
mismatch is generally detrimental during periods of rising interest rates. In
addition, the customers' optionality to repay a loan or renegotiate the interest
rate on the loan when interest rates move in their favor creates an additional
variable in managing the asset-liability structure of the Bank.
The Board of Directors has established an asset-liability committee that
consists of the Company's president and senior banking officers. The committee
meets on a monthly basis to review loan and deposit pricing and production
volumes, interest-rate risk analysis, liquidity and borrowing needs, and a
variety of other asset and liability management issues.
To reduce the effect of interest rate changes on net interest income, the
Company has adopted various strategies to improve the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include:
> the origination of commercial and consumer loans with adjustable-rate
features or fixed-rate loans with shorter term maturities;
> lengthening the maturities of liabilities when deemed cost effective
through the pricing and promotion of certificates of deposit and
utilization of Federal Home Loan Bank advances;
> attracting low cost checking and transaction accounts which tend to be less
sensitive to rising rates;
> when market conditions permit, to originate and hold in its portfolio
adjustable-rate mortgage loans which have periodic interest rate
adjustments; and
> maintaining a securities portfolio that provides a stable cash flow,
thereby providing investable funds in varying interest rate cycles.
The Company has also made a significant effort to maintain its level of lower
cost deposits as a method of enhancing profitability. At September 30, 2003, the
Company had 46% of its deposits in savings, checking and money-market accounts.
These deposits have traditionally remained relatively stable and are expected to
be only moderately affected in a period of rising interest rates. This stability
has enabled the Company to offset the impact of rising rates in other deposit
accounts.
Quantitative Analysis. Exposure to interest-rate risk is actively monitored by
management. The Company's objective is to maintain a consistent level of
profitability within acceptable risk tolerances across a broad range of
potential interest rate environments. The Company uses the OTS Net Portfolio
Value ("NPV") Model to monitor its exposure to interest rate risk, which
calculates changes in NPV. The NPV Model measures interest-rate risk
40
by computing estimated changes in the NPV of cash flow from assets, liabilities
and off-balance sheet items in the event of a range of assumed changes in market
interest rates. The NPV Model shows the degree to which balance sheet line items
and NPV are potentially affected by a 100 to 300 basis point change. One basis
point equals 1/100th of a percentage point. Reports generated by the NPV Model
are reviewed by the Asset/Liability Management Committee and reported to the
Board of Directors quarterly.
The NPV Model uses an option-based pricing approach to value one-to-four family
mortgages, mortgages serviced by or for others, and firm commitments to buy,
sell, or originate mortgages. This approach makes use of an interest rate
simulation program to generate numerous random interest rate paths that, in
conjunction with a prepayment model, are used to estimate mortgage cash flows.
Prepayment options and interest rate caps and floors contained in mortgages and
mortgage-related securities introduce significant uncertainty in estimating the
timing of cash flows for these instruments that warrants the use of this
sophisticated methodology. All other financial instruments are valued using a
static discounted cash flow method. Under this approach, the present value is
determined by discounting the cash flows the instrument is expected to generate
by the yields currently available to investors from an instrument of comparable
risk and duration.
Future interest rates and their effects on NPV and net interest income are not
predictable. Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, prepayments, and deposit run-offs, and should not be relied upon
as indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rate on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, generally have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. After a change in interest
rates, prepayments and early withdrawal levels could deviate significantly from
those assumed in making calculations set forth above. Additionally, an increased
credit risk may result if our borrowers are unable to meet their repayment
obligations as interest rates increase.
The following table presents the NPV as of September 30, 2003. The NPV was
calculated by the OTS, based upon the above model assumptions and financial
information provided by the Company. As illustrated in the table, the
calculations show that the Company would be adversely affected by increases in
interest rates and would benefit slightly by decreases in interest rates
(dollars in thousands).
NPV as % of
Net Portfolio Value ("NPV") Present Value of Assets
--------------------------- -------------------------------
Change Basis Point
In Rates $ Amount $ Change % Change NPV Ratio Change
- -------- -------- -------- -------- --------- ------
+300 bp 54,570 (42,998) (44)% 6.92% (452) bp
+200 bp 70,099 (27,469) (28)% 8.65% (279) bp
+100 bp 85,358 (12,210) (13)% 10.25% (119) bp
0 bp 97,568 11.45%
- -100 bp 101,945 4,376 4% 11.78% 33 bp
The OTS defines the sensitivity measure as the change in NPV ratio with a 200
basis point shock. Our sensitivity measure reflects a 279 basis point decline in
NPV ratio as of September 30, 2003 compared to a sensitivity measure of 197
basis points as of September 30, 2002. The increase in our sensitivity measure
at September 30, 2003 primarily reflects the increase in longer-term interest
rates in the last few months of the fiscal year.
41
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The financial statements and supplementary data required by Regulation S-X and
by Item 302 of Regulation S-K are set forth in the pages listed below:
Page
----
Independent Auditors' Report............................................. 43
Consolidated Balance Sheets at September 30, 2003 and 2002............... 44
Consolidated Statements of Earnings for the Years Ended
September 30, 2003, 2002 and 2001.................................... 45
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 2003, 2002 and 2001.................................... 46-47
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2003, 2002 and 2001.................................... 48-49
Notes to Consolidated Financial Statements............................... 50-74
42
Independent Auditors' Report
FloridaFirst Bancorp, Inc.
Lakeland, Florida:
We have audited the accompanying consolidated balance sheets of
FloridaFirst Bancorp, Inc. and Subsidiary (the "Company") at September 30, 2003
and 2002, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the years in the three-year period ended
September 30, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at September 30, 2003 and 2002, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
/s/HACKER, JOHNSON & SMITH PA
HACKER, JOHNSON & SMITH PA
Tampa, Florida
November 14, 2003
FLORIDAFIRST BANCORP, INC. and SUBSIDIARY
Consolidated Balance Sheets
($ in thousands, except share amounts)
September 30,
----------------------
Assets 2003 2002
--------- ---------
Cash and due from banks $ 13,403 14,119
Interest-earning deposits 372 16,509
--------- ---------
Total cash and cash equivalents 13,775 30,628
Securities available for sale 252,897 272,624
Loans, net of allowance for loan losses of $4,479 and $4,519 496,684 499,433
Premises and equipment, net 13,978 14,721
Federal Home Loan Bank stock, at cost 6,955 6,966
Cash surrender value of bank-owned life insurance 17,082 16,128
Core deposit intangible, net 10,016 11,576
Other assets 7,095 7,370
--------- ---------
Total assets $ 818,482 859,446
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing deposits $ 33,741 31,265
Interest-bearing deposits 519,168 556,166
--------- ---------
Total deposits 552,909 587,431
Federal Home Loan Bank advances 136,175 129,500
Other borrowings 20,643 34,834
Other liabilities 6,783 8,703
--------- ---------
Total liabilities 716,510 760,468
--------- ---------
Commitments and contingencies (Notes 5, 14 and 15)
Stockholders' equity:
Preferred stock, no par value, 20,000,000 shares authorized,
none issued or outstanding - -
Common stock, $.10 par value, 80,000,000 shares authorized,
5,541,643 and 5,528,452 issued 554 553
Additional paid-in capital 52,610 52,044
Retained earnings 55,377 50,809
Treasury stock, at cost, 155,261 and 150,000 shares (2,806) (2,680)
Unallocated shares held by the employee stock ownership plan (4,328) (4,869)
Unallocated shares held by the restricted stock plan (1,111) (2,082)
Accumulated other comprehensive income 1,676 5,203
--------- ---------
Total stockholders' equity 101,972 98,978
--------- ---------
Total liabilities and stockholders' equity $ 818,482 859,446
========= =========
See Accompanying Notes to Consolidated Financial Statements.
44
FLORIDAFIRST BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Earnings
(In thousands, except per share amounts)
Year Ended September 30,
---------------------------
2003 2002 2001
------- ------- -------
Interest income:
Loans $33,546 36,248 36,671
Securities 11,784 12,082 7,526
Other 400 580 649
------- ------- -------
Total interest income 45,730 48,910 44,846
------- ------- -------
Interest expense:
Deposits 13,980 17,844 17,800
Federal Home Loan Bank advances and other borrowings 6,863 7,104 8,095
------- ------- -------
Total interest expense 20,843 24,948 25,895
------- ------- -------
Net interest income 24,887 23,962 18,951
Provision for loan losses 660 680 615
------- ------- -------
Net interest income after provision for loan losses 24,227 23,282 18,336
------- ------- -------
Noninterest income:
Fees and service charges 2,672 2,359 1,546
Net gain on sale of loans held for sale 712 274 209
Net gain (loss) on sale of securities 1,883 685 (234)
Earnings on bank-owned life insurance 954 1,214 563
Other 839 664 403
------- ------- -------
Total noninterest income 7,060 5,196 2,487
------- ------- -------
Noninterest expense:
Salaries and employee benefits 10,960 10,781 7,689
Occupancy expense 3,400 3,003 2,165
Data processing 729 598 500
Professional fees 691 492 437
Postage and office supplies 622 579 415
Amortization of core deposit intangible 1,560 1,080 -
Other 4,565 3,984 2,570
------- ------- -------
Total noninterest expense 22,527 20,517 13,776
------- ------- -------
Income before income taxes 8,760 7,961 7,047
Income taxes 2,739 2,357 2,178
------- ------- -------
Net income $ 6,021 5,604 4,869
======= ======= =======
Earnings per share:
Basic $ 1.19 1.10 0.92
======= ======= =======
Diluted $ 1.13 1.05 0.90
======= ======= =======
Weighted-average common and common equivalent
shares outstanding (in thousands):
Basic 5,062 5,095 5,293
======= ======= =======
Diluted 5,322 5,339 5,429
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
45
FLORIDAFIRST BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Stockholders' Equity
($ in thousands, except share and per share amounts)
Accumulated
Unallocated Other
Shares Unallocated Compre-
Common Stock Additional Held Shares hensive Total
------------------ Paid-In Retained Treasury by the Held by Income Stockholders'
Shares Amount Capital Earnings Stock ESOP the RSP (Loss) Equity
------ ------ ------- -------- ----- ---- ------- ------ ------
Balance at September 30, 2000 5,752,875 $ 575 25,085 42,506 (3,606) (1,838) (410) (1,231) 61,081
------
Comprehensive income:
Net income - - - 4,869 - - - - 4,869
Change in unrealized loss
on securities available
for sale, net of tax - - - - - - - 2,857 2,857
-------
Total comprehensive income 7,726
-------
Stock issuance, net of issuance
costs of $1,007 3,147,952 315 30,245 - - - - - 30,560
Convert common and retire
treasury stock (3,381,206) (338) (3,268) - 3,606 - - - -
Proceeds from exercise of
stock options 2,229 - 18 - - - - - 18
35,000 shares acquired for
treasury, at cost - - - - (481) - - - (481)
Fair value of ESOP and RSP
shares allocated - - (21) - - 325 157 - 461
251,836 and 51,723 shares
acquired for ESOP and
RSP, at cost - - - - - (3,897) (733) - (4,630)
Dividends ($.19 per share) - - - (921) - - - - (921)
--------- ----- ------ ------ ------ ------ ------ ----- ------
Balance at September 30, 2001 5,521,850 552 52,059 46,454 (481) (5,410) (986) 1,626 93,814
------
Comprehensive income:
Net income - - - 5,604 - - - - 5,604
Change in unrealized gain
on securities available
for sale, net of tax - - - - - - - 3,577 3,577
------
Total comprehensive income 9,181
------
Proceeds from exercise of
stock options 6,602 1 53 - - - - - 54
Fair value of ESOP and RSP
shares allocated - - (169) - - 541 1,190 - 1,562
Tax benefit from stock options
and RSP shares - - 101 - - - - - 101
115,000 and 124,658 shares acquired
for treasury and RSP, at cost - - - - (2,199) - (2,286) - (4,485)
Cash dividends ($.23 per share) - - - (1,249) - - - - (1,249)
--------- ----- ------ ------ ------ ------ ------ ----- ------
Balance at September 30, 2002 5,528,452 $ 553 52,044 50,809 (2,680) (4,869) (2,082) 5,203 98,978
--------- ----- ------ ------ ------ ------ ------ ----- -------
46
FLORIDAFIRST BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Stockholders' Equity, Continued
($ in thousands, except share and per share amounts)
Accumulated
Unallocated Other
Shares Unallocated Compre-
Common Stock Additional Held Shares hensive Total
------------------ Paid-In Retained Treasury by the Held by Income Stockholders'
Shares Amount Capital Earnings Stock ESOP the RSP (Loss) Equity
------ ------ ------- -------- ----- ---- ------- ------ ------
Balance at September 30, 2002 5,528,452 $ 553 52,044 50,809 (2,680) (4,869) (2,082) 5,203 98,978
-------
Comprehensive income:
Net income - - - 6,021 - - - - 6,021
Change in unrealized gain
on securities available
for sale, net of tax benefit - - - - - - - (3,527) (3,527)
-------
Total comprehensive income 2,494
-------
Proceeds from exercise of
stock options 13,191 1 122 - - - - - 123
Fair value of ESOP and RSP
shares allocated - - 139 - - 541 971 - 1,651
Tax benefit from stock options
and RSP shares - - 305 - - - - - 305
5,261 shares acquired for
treasury, at cost - - - - (126) - - - (126)
Cash dividends ($.27 per share) - - - (1,453) - - - - (1,453)
--------- ----- ------ ------ ------ ------ ------ ----- -------
Balance at September 30, 2003 5,541,643 $ 554 52,610 55,377 (2,806) (4,328) (1,111) 1,676 101,972
--------- ----- ------ ------ ------ ------ ------ ----- -------
See Accompanying Notes to Consolidated Financial Statements.
47
FLORIDAFIRST BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
Year Ended September 30,
------------------------------------
2003 2002 2001
--------- --------- ---------
Cash flows from operating activities:
Net income $ 6,021 5,604 4,869
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 660 680 615
Depreciation 1,502 1,004 995
Amortization of core deposit intangible 1,560 1,080 -
Net amortization of premiums and discounts on securities 1,506 270 (129)
Deferred income tax benefit (275) (62) (278)
Net (gain) loss on sale of securities (1,883) (685) 234
Tax benefit from stock options and RSP shares 305 101 -
Net gain on sale of loans held for sale (712) (274) (209)
Proceeds from sales of loans held for sale 39,690 19,631 15,258
Loans originated for sale (36,612) (21,200) (14,989)
Earnings on bank-owned life insurance (954) (1,214) (563)
Net decrease (increase) in other assets 1,314 (1,186) (76)
Net increase in other liabilities 1,156 2,370 1,323
--------- --------- ---------
Net cash provided by operating activities 13,278 6,119 7,050
--------- --------- ---------
Cash flows from investing activities:
Proceeds from calls, sales, maturities and repayments of securities
available for sale 197,703 103,062 37,008
Proceeds from sales, maturities and repayments of securities
held to maturity - - 9,675
Purchase of securities available for sale (183,198) (239,677) (65,440)
Net (increase) decrease in loans, exclusive of branch acquisition (1,380) 1,038 (34,742)
Net redemption of FHLB stock 11 704 255
Purchase of bank-owned life insurance - (4,500) (5,000)
Purchases of premises and equipment, exclusive of branch
acquisition (759) (3,531) (3,408)
Net proceeds from sales of foreclosed assets 986 937 -
Net proceeds from sale of premises and equipment - - 404
--------- --------- ---------
Net cash provided by (used in) investing activities 13,363 (141,967) (61,248)
--------- --------- ---------
Cash flows from financing activities:
Cash received upon purchase of deposits - 120,922 -
Net (decrease) increase in deposits, exclusive of branch acquisition (34,522) 25,772 44,983
Net increase (decrease) in FHLB advances 6,675 (20,000) (8,500)
Net (decrease) increase in other borrowings (14,191) 23,786 8,111
Payments to acquire treasury stock (126) (2,199) (481)
Payments to acquire shares held by the ESOP - - (3,897)
Payments to acquire shares held by the RSP - (2,286) (733)
Dividends paid (1,453) (1,249) (921)
Net proceeds received from issuance of common stock 123 54 30,578
--------- --------- ---------
Net cash (used in) provided by financing activities (43,494) 144,800 69,140
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (16,853) 8,952 14,942
Cash and cash equivalents at beginning of year 30,628 21,676 6,734
--------- --------- ---------
Cash and cash equivalents at end of year $ 13,775 30,628 21,676
========= ========= =========
(continued)
48
FLORIDAFIRST BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(In thousands)
Year Ended September 30,
------------------------
2003 2002 2001
--------- ------ ------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 21,237 24,808 25,948
========= ====== ======
Income taxes $ 1,780 2,894 2,374
========= ====== ======
Supplemental disclosure of noncash information:
Transfer loans to foreclosed assets $ 1,164 1,011 298
========= ====== ======
Loans originated on sales of foreclosed assets $ 107 - -
========= ====== ======
Accumulated other comprehensive income, unrealized
gain (loss) on securities available for sale, net of tax $ (3,527) 3,577 2,857
========= ====== ======
Fair value of restricted stock plan shares distributed $ 850 967 177
========= ====== ======
Fair value of ESOP shares allocated $ 801 595 284
========= ====== ======
Transfer of land from premises and equipment to other assets $ - 1,199 -
========= ====== ======
Common stock distribution received $ - 381 -
========= ====== ======
Acquisition of branches:
Fair value of premises and equipment acquired $ - 2,449 -
========= ====== ======
Fair value of loans acquired $ - 26,095 -
========= ====== ======
Core deposit intangible $ - 12,656 -
========= ====== ======
Deposits assumed in acquisition of branches $ - 41,200 -
========= ====== ======
See Accompanying Notes to Consolidated Financial Statements.
49
FLORIDAFIRST BANCORP, INC. and SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2003 and 2002 and each of the years in the
three-year period ended September 30, 2003
(1) General, Reorganization and Summary of Significant Accounting Policies
General. FloridaFirst Bancorp, Inc. (the "Company") is the parent of and
conducts its business principally through FloridaFirst Bank (the "Bank").
The Bank, a federally-chartered savings bank headquartered in Lakeland,
Florida, is a community-oriented savings institution that delivers retail
and commercial banking services through nineteen full-service locations.
The Company purchased seven branches during February 2002 (see Footnote
13). Principal sources of income are derived through interest earned on
loans and securities. The primary sources of funds are customer deposits
and Federal Home Loan Bank advances. The Bank is subject to various
regulations governing savings institutions and is subject to periodic
examination by its primary regulator, the Office of Thrift Supervision
(the "OTS").
Reorganization. On April 6, 1999, the Bank reorganized from a mutual
savings association into a mutual holding company named FloridaFirst
Bancorp MHC ("MHC") and formed FloridaFirst Bancorp (the "Bancorp"), a
middle-tier holding company, whereby the Bank became a wholly-owned
subsidiary of the Bancorp (the "Reorganization"). In connection with the
Reorganization, the Bancorp sold 2,703,851 shares of its Common Stock to
the public and the remaining 3,049,024 shares were held by MHC. On
December 21, 2000, the Company completed its stock offering in connection
with the conversion and reorganization of the Bank and its holding
company, the Bancorp, from the mutual holding company form of
organization to a full stock company (the "Conversion"). As part of the
conversion and reorganization, the shares formerly held by MHC were
cancelled, the Company sold 3,147,952 new shares to the public and the
shares held by stockholders of the Bancorp were exchanged for 2,372,048
shares of the Company's common stock.
At the time of the Conversion, the Bank established a liquidation account
in an amount equal to the MHC's applicable equity as discussed in the
rules of the OTS. The liquidation account will be maintained for the
benefit of eligible account holders and supplemental eligible account
holders who continue to maintain their accounts at the Bank after the
Conversion. The liquidation account will be reduced annually, to the
extent that eligible and supplemental eligible account holders have
reduced their qualifying deposits as of each anniversary date. Subsequent
increases in balances will not restore an eligible or supplemental
eligible account holder's interest in the liquidation account. In the
event of a complete liquidation of the Bank, each eligible and
supplemental eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to
the current adjusted qualifying balances for accounts then held.
Subsequent to the Conversion, the Bank may not declare or pay cash
dividends on its shares of common stock if the effect thereof would cause
equity to be reduced below applicable regulatory capital maintenance
requirements or if such declaration and payment would otherwise violate
regulatory requirements.
Summary of Significant Accounting Policies. A summary of significant
accounting policies used in preparation of the consolidated financial
statements is as follows:
Principles of Consolidation. The consolidated financial statements have
been prepared in conformity with accounting principles generally accepted
in the United States of America and include the accounts of the Company
and the Bank. All intercompany transactions and balances have been
eliminated in consolidation.
50
Use of Estimates. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates. The
major estimate made by management that is critical to the consolidated
financial statements is the appropriate level of the allowance for loan
losses which can be significantly impacted by future industry, market and
economic trends and conditions. Regulatory agencies, as a part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize changes in the
allowance based on their judgements of information available to them at
the time of their examination.
Cash and Cash Equivalents. For financial statement purposes, the Company
considers cash, due from banks and interest-earning accounts with
original maturities of three months or less in other financial
institutions to be cash and cash equivalents. The Bank is required to
maintain average balances on hand or with the Federal Reserve Bank or
with a qualified bank correspondent. At September 30, 2003 and 2002,
these reserve balances amounted to $7.8 million and $6.4 million,
respectively.
Securities. Securities available for sale are stated at fair value.
Purchase premiums and discounts are recognized into interest income using
the interest-method over the terms of the securities. Unrealized gains
and losses on securities available for sale, net of taxes, are included
in accumulated other comprehensive income in the consolidated balance
sheets until these gains or losses are realized. Securities available for
sale that experience a decline in fair value that is other than temporary
are written down to fair value and the resultant losses are reflected in
the consolidated statements of earnings. Gains and losses on the sale of
securities available for sale are recorded on the settlement date and
determined using the specific identification method.
Capital stock in the Federal Home Loan Bank of Atlanta ("FHLB") is held
in accordance with certain requirements of the FHLB. The Company's
investment in the FHLB is carried at cost and serves as collateral for
FHLB advances (see Note 7).
Loans Held For Sale. Loans originated and intended for sale by the
Company are carried at the lower of cost or estimated fair value in the
aggregate. Gains and losses on the sale of such loans are recognized
using the specific identification method.
Loan Interest Income. The Company provides an allowance for uncollected
interest generally on all accrued interest related to loans 90 days or
more delinquent. This allowance is netted against accrued interest
receivable for financial statement disclosure. Such interest, if
ultimately collected, is credited to income in the period of recovery.
Loans and Provisions for Losses. Loans are stated at unpaid principal
balances, less loans in process and an allowance for loan losses.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the loan
portfolio.
The Company follows a consistent procedural discipline and accounts for
loan losses in accordance with Statement of Financial Accounting
Standards (SFAS) No. 5, Accounting for Contingencies, and accounts for
impaired loans in conformity with SFAS No. 114, Accounting by Creditors
for Impairment of a Loan, as amended by SFAS No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure.
The following is a description of how each portion of the allowance for
loan losses is determined.
The Company segregates the loan portfolio for loan loss purposes into the
following broad segments: commercial and commercial real estate,
residential real estate, and consumer. The Company provides
51
for an allowance for losses in the portfolio by the above categories,
which consists of two components: general loss percentages and specific
loss analysis.
General loss percentages are calculated based upon historical analyses. A
portion of the allowance is calculated for inherent losses which
management believes exist as of the evaluation date even though they
might not have been identified by the more objective processes used. This
is due to the risk of error and/or inherent imprecision in the process.
This portion of the allowance is particularly subjective and requires
judgments based on qualitative factors which do not lend themselves to
exact mathematical calculations such as: trends in delinquencies and
nonaccruals; migration trends in the portfolio; trends in volume, terms,
and portfolio mix; new credit products and/or changes in the geographic
distribution of those products; changes in lending policies and
procedures; loan review reports on the effectiveness of the risk
identification process; changes in the outlook for local, regional and
national economic conditions; concentrations of credit; and peer group
comparison.
Allowances are also provided in the event the specific collateral
analysis on a loan indicates the estimated loss upon liquidation of
collateral would be in excess of the general percentage allocation. The
provision for loan losses is debited or credited in order to state the
allowance for loan losses to the required level as determined above.
The Company considers a loan to be impaired when it is probable the
Company will be unable to collect all amounts due, both principal and
interest, according to the contractual terms of the loan agreement. When
a loan is impaired, the Company may measure impairment based on (a) the
present value of the expected future cash flows of the impaired loan
discounted at the loan's original effective interest rate; (b) the
observable market price of the impaired loan; or (c) the fair value of
the collateral of a collateral-dependent loan. The Company selects the
measurement method on a loan-by-loan basis, except for
collateral-dependent loans for which foreclosure is probable must be
measured at the fair value of the collateral. In a troubled debt
restructuring involving a restructured loan, the Company measures
impairment by discounting the total expected future cash flows at the
loan's original effective interest rate.
Premises and Equipment. Land is carried at cost. Other premises and
equipment are carried at cost, less accumulated depreciation.
Depreciation of premises and equipment is computed using the
straight-line method over the estimated useful lives of the related
assets. Estimated lives are 10 to 50 years for buildings and leasehold
improvements, and 3 to 10 years for furniture, fixtures and equipment.
Maintenance and repairs are charged to expense when incurred.
Expenditures for renewals and betterments are capitalized. The costs and
accumulated depreciation relating to office properties and equipment
retired or otherwise disposed of are eliminated from the accounts, and
any resulting gains and losses are reflected in the consolidated
statements of earnings.
Foreclosed Assets. Assets acquired through foreclosure or deed in lieu of
foreclosure are recorded at the lower of cost (principal balance of the
former mortgage loan) or estimated fair value, less estimated selling
expenses. The carrying value of foreclosed assets, which includes
repossessed consumer assets, was $418,000 and $347,000 at September 30,
2003 and 2002 and is included in Other assets in the consolidated balance
sheets. The Company reported net expenses related to these foreclosed
assets of $89,000, $70,000 and $47,000 during the fiscal years ended
September 30, 2003, 2002 and 2001, respectively.
Transfer of Financial Assets. Transfers of financial assets are accounted
for as sales, when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (3) the Company
does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
52
Income Taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
include the enactment date.
Financial Instruments With Off-Balance-Sheet Risk. In the ordinary course
of business, the Company is a party to financial instruments with
off-balance-sheet risk. These financial instruments include commitments
to extend credit at both fixed- and variable-interest rates, standby
letters of credit, undisbursed construction and line of credit loans and
loans sold with recourse obligations. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized, if any, in the consolidated balance sheets. The Company's
exposure to credit loss for commitments to extend credit, undisbursed
loans and standby letters of credit is represented by the contractual
amount of these instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance
sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed-expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each
customer's credit worthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
Loans sold with recourse obligations relate to loans the Company
originates and sells in the secondary market. These sales usually require
the Company to repurchase the loans if the borrower defaults within a
certain time period after the sale, usually three to twelve months.
Self-Insurance. The Company is self-insured for employee medical and
dental benefits, but has a reinsurance contract to limit the amount of
liability for these benefits in any plan year. Benefits are administered
through a third-party administrator. The Company accrues a liability to
target a certain percentage of average claims paid over the past three
years. The plan covers only active employees as defined in the plan.
During the years ended September 30, 2003, 2002 and 2001, the Company
recognized expenses, including claims and administrative fees, net of
amounts received under the reinsurance contract and premiums received
from employees, of $1.5 million, $1.1 million and $750,000, respectively.
Stock Compensation Plans. SFAS No. 123, Accounting for Stock-Based
Compensation, encourages all entities to adopt a fair value based method
of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, whereby compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date (or other
measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Company's stock option plan have no
intrinsic value at the grant date, and under Opinion No. 25 no
compensation cost is recognized for them. The Company has elected to
continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided pro forma disclosures of net income and earnings per
share and other disclosures, as if the fair value based method of
accounting had been applied.
53
The pro forma information has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS No.
123. For purposes of pro forma disclosures, the estimated fair value was
included in expense over the period vesting occurs. The proforma
information and assumptions used in calculating the fair values of stock
options granted is as follows ($ in thousands, except per share amounts):
Year Ended September 30,
--------------------------------------
2003 2002 2001
---- ---- ----
Risk-free rate of return N/A 5.43% N/A
Annualized dividend N/A 1.50% N/A
Estimated volatility N/A 22% N/A
Expected life of options granted N/A 10 years N/A
Weighted-average grant-date fair value of options issued
during the year N/A 5.75 N/A
=== ======= ===
Net income, as reported $ 6,021 5,604 4,869
Deduct: Total stock-based employee compensation
determined under the fair value based method for
stock options awarded, net of related tax benefit (380) (771) (214)
------ ------ ------ -
Proforma net income $ 5,641 4,833 4,655
===== ===== =====
Basic earnings per share:
As reported $ 1.19 1.10 0.92
====== ====== ======
Proforma $ 1.11 0.95 0.88
====== ====== ======
Diluted earnings per share:
As reported $ 1.13 1.05 0.90
===== ====== ======
Proforma $ 1.06 0.91 0.86
====== ====== ======
Both net income, as reported and proforma net income, were reduced by
approximately $523,000, $539,000 and $113,000 for the years ended
September 30, 2003, 2002 and 2001, respectively, relating to the vesting
of shares awarded under the RSPs.
54
Earnings Per Share of Common Stock. The Company follows the provisions of
SFAS No. 128, "Earnings Per Share". SFAS No. 128 provides accounting and
reporting standards for calculating earnings per share. Basic earnings
per share of common stock has been computed by dividing the net income
for the year by the weighted-average number of shares outstanding. Shares
of common stock purchased by the ESOP (see Note 11) are only considered
outstanding when the shares are released or committed to be released for
allocation to participants. For the years ended September 30, 2003 and
2002, shares released for allocation to participants each month were
3,400. Diluted earnings per share is computed by dividing net income by
the weighted-average number of shares outstanding including the dilutive
effect of stock options (see Note 12) and shares needed to satisfy the
requirements of the restricted stock plan (see Note 12), if any, computed
using the treasury stock method prescribed by SFAS No. 128. The following
table presents the calculation of basic and diluted earnings per share of
common stock (in thousands, except per share amounts):
Year Ended September 30,
------------------------
2003 2002 2001
------ ------ ------
Weighted-average shares of common stock outstanding
before adjustments for ESOP and stock options 5,378 5,457 5,520
Adjustment to reflect the effect of unallocated ESOP shares (316) (362) (227)
------ ------ ------
Weighted-average shares for basic earnings per share 5,062 5,095 5,293
====== ====== ======
Basic earnings per share $ 1.19 1.10 .92
====== ====== ======
Weighted-average shares for basic earnings per share 5,062 5,095 5,293
Additional dilutive shares using the average market
value for the period utilizing the treasury stock method
regarding stock options and outstanding restricted stock shares 260 244 136
------ ------ ------
Weighted-average shares and equivalents
outstanding for diluted earnings per share 5,322 5,339 5,429
====== ====== ======
Diluted earnings per share $ 1.13 1.05 .90
====== ====== ======
Recent Pronouncements. In November 2002, the FASB issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" ("FIN 45"), which expands previously issued
accounting guidance and disclosure requirements for certain guarantees.
FIN 45 requires the Company to recognize an initial liability for the
fair value of an obligation assumed by issuing a guarantee. The provision
for initial recognition and measurement of the liability is applied on a
prospective basis to guarantees issued or modified after December 31,
2002. The adoption of FIN 45 did not have a material affect on the
consolidated financial statements of the Company.
In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities" ("FIN 46") which addresses
consolidation by business enterprises of variable interest entities. FIN
46 applies to variable interest entities created after January 31, 2003.
The Company has no variable interest entities, therefore FIN 46 had no
effect on the consolidated financial statements of the Company.
In May 2002 the FASB issued SFAS No. 145, "Recission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002." This Statement rescinds SFAS No. 4 and 64,
"Reporting Gains and Losses from Extinguishment of Debt" and
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,"
respectively, and restricts the classification of early extinguishment of
debt as an extraordinary item to the provisions of APB Opinion No. 30.
This Statement also rescinds SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers," which is no longer necessary because the
transition to the provisions of the Motor Carrier Act of 1980 is
complete. The Statement also amends SFAS No. 13, "Accounting for Leases,"
to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. Finally, the Statement makes various
technical corrections to existing
55
pronouncements, which are not considered substantive. This Statement is
effective for financial statements issued on or after May 15, 2002. The
adoption of this Statement had no effect on the Company's consolidated
financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 provides
guidance on the recognition and measurement of liabilities for costs
associated with exit or disposal activities. SFAS No. 146 is effective
for exit and disposal activities that are initiated after December 31,
2002. The adoption of this Statement had no effect on the Company's
consolidated financial statements.
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" was issued in December 2002. SFAS No. 148 amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide three
alternative methods of transition to SFAS 123's fair-value method of
accounting for stock-based compensation. This Statement is effective for
fiscal years ending after December 15, 2002. The Company has elected to
continue to use the Intrinsic Value Method, therefore the only effect to
the Company was additional disclosure requirements in the footnotes to
the consolidated financial statements.
Comprehensive Income. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized
gains and losses on available-for-sale securities, are reported as a
separate component of the equity section of the consolidated balance
sheets, such items, along with net income are components of comprehensive
income. The components of other comprehensive income and related tax
effects are as follows (in thousands):
2003 2002 2001
---- ---- ----
Unrealized holding gain (loss) on securities available for sale arising
during year, net of tax $(2,341) 4,009 2,710
------- ----- -----
Less- reclassification adjustment for gain (loss) included in
net income 1,883 685 (234)
Income taxes (benefit) 697 253 (87)
------- ----- -----
Reclassification adjustment for realized gain (loss), net of tax 1,186 432 (147)
------- ----- -----
Unrealized gain (loss) on securities available for sale,
net of tax $(3,527) 3,577 2,857
======= ===== =====
Reclassifications. Certain amounts in the 2002 and 2001 consolidated
financial statements have been reclassified to conform to the 2003
presentation.
56
(2) Securities Available for Sale
The amortized cost and estimated fair values of securities available for
sale are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
September 30, 2003:
Obligations of U.S. government agencies $ 40,427 381 (59) 40,749
Collateralized mortgage obligations 29,006 42 (671) 28,377
Mortgage-backed securities 135,387 1,686 (803) 136,270
Corporate bonds 24,834 1,005 (117) 25,722
Municipal bonds 20,202 1,054 (40) 21,216
Common stock 381 182 - 563
--------- ----- ------ -------
Total $ 250,237 4,350 (1,690) 252,897
========= ===== ====== =======
September 30, 2002:
Obligations of U.S. government agencies $ 28,028 506 (350) 28,184
Collateralized mortgage obligations 46,226 632 (467) 46,391
Mortgage-backed securities 141,975 4,289 (282) 145,982
Corporate bonds 28,454 2,951 (64) 31,341
Municipal bonds 19,301 1,044 - 20,345
Common stock 381 - - 381
--------- ----- ------ -------
Total $ 264,365 9,422 (1,163) 272,624
========= ===== ====== =======
57
The maturity distribution for the portfolio of securities available for
sale at September 30, 2003 is as follows (in thousands):
Amortized Fair
Cost Value
--------- -------
Due in one year or less $ 4,018 4,065
Due after one year through five years 14,050 14,367
Due after five years through ten years 18,803 18,994
Due after ten years 48,592 50,261
--------- -------
85,463 87,687
Collateralized mortgage obligations 29,006 28,377
Mortgage-backed securities 135,387 136,270
Common stock 381 563
--------- --------
Total $ 250,237 252,897
========= ========
A summary of sales of securities available for sale follows (in
thousands):
Year Ended September 30,
--------------------------------------
2003 2002 2001
-------- ------ ------
Proceeds from sales $ 54,079 48,696 10,349
======== ====== ======
Gross gains $ 1,883 828 39
Gross losses - (143) (4)
-------- ------ ------
Net gain $ 1,883 685 35
======== ====== ======
During fiscal 2002, the Company received a distribution of 18,165 shares
of common stock relating to the demutualization of the Principal
Financial Group. The Company recorded this investment at the then current
fair value of $381,000 and recorded a gain which is included in earnings
on bank-owned life insurance in the consolidated statements of earnings.
During fiscal 2001, a $257,000 loss on the impairment of a security was
recorded since the decline in value was determined to be other than
temporary.
Securities available for sale with carrying values of $49.8 million and
$68.6 million were pledged as collateral to secure public funds, Treasury
Investment Program funds, Federal Reserve discount advances, and reverse
repurchase agreements at September 30, 2003 and 2002, respectively.
(3) Securities Held to Maturity
In August 2001, the entire securities held to maturity portfolio was
sold. The decision to sell the entire portfolio was based on a variety of
reasons including price compression due to balance decline, a lagging
index, which was unpopular in the falling rate environment, and recently
increased values, resulting from the recent falling rate environment. As
a result of the sale of the held to maturity portfolio, Securities and
Exchange Commission ("SEC") regulations prohibited further classification
of securities as held to maturity for a period of two years.
Proceeds from sales of securities held to maturity for the year ended
September 30, 2001 were $8.6 million. Gross gains of $34,000 and gross
losses of $46,000 were realized on those sales during 2001.
58
(4) Loans
Loans consist of the following ($ in thousands):
September 30,
-----------------------
2003 2002
--------- ---------
Loans secured by mortgages on real estate:
Residential 1-4: (1)
Permanent $ 270,463 301,622
Construction 32,871 29,058
Commercial real estate 56,078 58,177
Land 18,699 15,806
--------- ---------
Total mortgage loans 378,111 404,663
--------- ---------
Consumer loans:
Home equity 73,184 50,240
Auto 32,921 39,989
Other 31,293 17,352
--------- ---------
Total consumer loans 137,398 107,581
--------- ---------
Commercial loans 11,600 10,806
--------- ---------
Total loans 527,109 523,050
Allowance for loan losses (4,479) (4,519)
Net deferred loan costs 23 69
Construction loans in process (25,969) (19,167)
--------- ---------
Loans, net $ 496,684 499,433
========= =========
Weighted-average yield on loans at year end 6.38% 7.20%
========= =========
(1) Includes loans held for sale of $670 and $3,036 at September 30,
2003 and 2002, respectively.
The activity in the allowance for loan losses was as follows (in
thousands):
Year Ended September 30,
------------------------
2003 2002 2001
---- ---- ----
Balance at beginning of year $ 4,519 3,652 3,321
Provision for loan losses 660 680 615
Allowance acquired - 1,000 -
Charge-offs (894) (908) (386)
Recoveries 194 95 102
------- ----- -----
Balance at end of year $ 4,479 4,519 3,652
======= ===== =====
The Company was also servicing approximately $4.1 million and $7.8
million in loans for the benefit of others at September 30, 2003 and
2002, respectively. The Company holds custodial escrow deposits for
these serviced loans totaling approximately $72,000 and $89,000 at
September 30, 2003 and 2002, respectively.
59
The Bank makes loans to executive officers and directors and their
related interests and associates in the ordinary course of business at
prevailing terms and conditions. These loans were as follows (in
thousands):
Year Ended September 30,
------------------------
2003 2002
---- ----
Balance at beginning of year $ 306 317
New loans originated 210 -
Principal repayments (31) (11)
----- ---
Balance at end of year $ 485 306
===== ===
Impaired loans have been recognized in conformity with SFAS No. 114, as
amended by SFAS No. 118. Impaired loans, all of which are collateral
dependent, and related information are as follows (in thousands):
September 30,
-------------------------------------
2003 2002 2001
---- ---- ----
Impaired loans at year end $ 1,040 1,073 960
===== ===== =====
Allowance for loan losses for impaired loans at year-end 208 215 192
====== ===== =====
Average balance of impaired loans during the year 1,057 1,221 1,028
====== ===== =====
Interest income received and recognized during the year 30 47 14
====== ===== =====
Nonaccrual and accruing loans past due ninety or more days are as follows
(in thousands):
September 30,
-------------------
2003 2002
------- -----
Nonaccrual loans $ 1,040 1,073
Accruing loans past due ninety or more days - -
------- -----
Total $ 1,040 1,073
======= =====
(5) Premises and Equipment
Premises and equipment consists of the following (in thousands):
September 30,
-------------------
2003 2002
-------- ------
Land $ 4,151 4,151
Buildings and leasehold improvements 11,916 11,219
Furniture, fixtures and equipment 6,389 6,187
Construction in progress - 486
-------- ------
Total, at cost 22,456 22,043
Less accumulated depreciation and amortization (8,478) (7,322)
-------- ------
Premises and equipment, net $ 13,978 14,721
======== ======
60
The Company conducts a portion of its operations from three leased
facilities and leases certain equipment under operating leases. As of
September 30, 2003, the Company was committed to noncancelable operating
leases with annual minimum lease payments approximating $190,000 through
September 30, 2004, $182,000 in fiscal 2005, $170,000 in fiscal 2006,
$100,000 in fiscal 2007 and $76,000 per year thereafter through fiscal
year 2010. All leases contain options to renew. Rent expense under all
operating leases was approximately $176,000, $172,000 and $159,000 for
the years ended September 30, 2003, 2002 and 2001, respectively.
(6) Deposits
Deposits and weighted-average interest rates are as follows:
September 30,
--------------------------------------------------------
2003 2002
--------------------------- -------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
($ in thousands)
Noninterest-bearing checking $ 33,741 -% $ 31,265 -%
--------- ---------
Interest-bearing checking 85,084 .60 74,923 1.31
--------- ---------
Savings accounts 55,513 .77 54,432 1.58
--------- ---------
Money-market accounts 79,361 1.01 68,634 1.99
--------- ---------
Certificate accounts:
1.00% - 1.99% 83,590 21,146
2.00% - 2.99% 63,363 101,169
3.00% - 3.99% 49,412 64,047
4.00% - 4.99% 40,879 65,813
5.00% - 5.99% 47,294 73,927
6.00% and above 14,672 32,075
--------- ---------
Total certificates accounts 299,210 3.24 358,177 3.94
--------- ---------
Total deposits $ 552,909 2.06% $ 587,431 2.95%
========= ==== ========= ====
Certificate accounts in amounts of $100,000 or more totaled approximately
$89.4 million and $112.9 million at September 30, 2003 and 2002,
respectively. Deposits in excess of $100,000 are not federally insured.
The Company had certificate accounts totaling $34.2 million and $50.2
million under public deposits programs, primarily with the State of
Florida, at September 30, 2003 and 2002, respectively. Deposits under
these programs are collateralized with securities with a carrying value
of $20.7 million and $31.0 million at September 30, 2003 and 2002,
respectively, in accordance with applicable regulations.
Interest expense on deposits is summarized as follows:
Year Ended September 30,
-----------------------------------------
2003 2002 2001
---- ---- ----
(In thousands)
Interest on interest-bearing checking and money-market
accounts $ 1,823 2,234 1,795
Interest on savings and certificate accounts 12,224 15,673 16,086
Less early withdrawal penalties (67) (63) (81)
-------- -------- -------
Total interest expense on deposits $ 13,980 17,844 17,800
====== ====== ======
61
Certificate accounts by year of scheduled maturity are as follows (in
thousands):
September 30,
Fiscal Year Ending September 30, 2003 2002
-------------------------------- ---- ----
2003 $ - 204,071
2004 174,909 79,991
2005 59,094 28,963
2006 12,745 6,916
2007 38,106 37,494
2008 and thereafter 14,356 742
--------- -------
Total $ 299,210 358,177
========= =======
(7) Advances From Federal Home Loan Bank and Other Borrowings
The Company had $136.2 million and $129.5 million in FHLB advances with
weighted-average interest rates of 4.68% and 5.23% at September 30, 2003
and 2002, respectively. The balances as of September 30, 2003 include
$21.7 million in overnight advances that reprice on a daily basis (which
was 1.23% at September 30). The balances as of September 30, 2003 include
$114.5 million in fixed-term advances, which includes $94.5 million in
convertible advances whereby the FHLB has the option at a predetermined
time to convert the fixed-interest rate to an adjustable rate tied to
LIBOR (London interbank offering rate). The Company then has the option
to prepay the advances without penalty if the FHLB converts the interest
rate. Should the Company elect to otherwise prepay these borrowings prior
to maturity, prepayment penalties may be incurred. Advances from the FHLB
are collateralized with a blanket floating lien on qualifying first
mortgage residential loans and all the Company's FHLB stock.
The Company's advances from the FHLB are as follows ($ in thousands):
Balance at
Fixed September 30,
Maturing in Year Interest ---------------------------
Ending September 30, Rate 2003 2002
--------------------- ---- ---- ----
Overnight 1.23% $ 21,675 -
Advances repaid in 2003 - 15,000
Advances subject to quarterly conversion
option in fiscal 2004:
2005 6.49 10,000 10,000
2008 5.09 10,000 10,000
2010 6.11 21,000 21,000
2011 5.21 10,000 10,000
2012 4.05 10,000 10,000
Advances subject to one time conversion option:
2006 (conversion option in 2004) 5.13 5,000 5,000
2007 (conversion option in 2005) 4.09 5,000 5,000
2010 (conversion option in 2005) 6.10 5,000 5,000
2011 (conversion option in 2006) 4.94 13,500 13,500
2012 (conversion option in 2007) 4.66 5,000 5,000
Advances not subject to a conversion option:
2004 5.72 5,000 5,000
2006 5.43 10,000 10,000
2008 5.02 5,000 5,000
--------- -------
Total $ 136,175 129,500
========= =======
62
As of September 30, 2003 and 2002, respectively, the Company had $6.3
million and $15.0 million in overnight borrowings utilizing the Treasury
Investment Program (TIP) through the Federal Reserve bearing interest at
.78% and 1.51%, respectively per annum. These borrowings are
collateralized by securities with carrying values of $12.8 million and
$17.1 million at September 30, 2003 and 2002, respectively.
As of September 30, 2003 and 2002, respectively, the Company had reverse
repurchase agreements with third parties totaling $14.3 million and $19.8
million at an average rate of 2.38% and 2.26%, respectively, per annum.
The Company has pledged $15.3 million and $20.5 million in securities at
September 30, 2003 and 2002, respectively, related to these agreements.
(8) Income Taxes
Income taxes consists of the following (in thousands):
Current Deferred Total
------- -------- -----
Year Ended September 30, 2003:
Federal $ 2,574 (235) 2,339
State 440 (40) 400
------- ---- -----
$ 3,014 (275) 2,739
======= ==== =====
Year Ended September 30, 2002:
Federal $ 2,024 (53) 1,971
State 395 (9) 386
------- ---- -----
$ 2,419 (62) 2,357
======= === =====
Year Ended September 30, 2001:
Federal $ 2,074 (234) 1,840
State 382 (44) 338
------- ---- -----
$ 2,456 (278) 2,178
======= ==== =====
63
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows (in thousands):
September 30,
--------------------
2003 2002
---- ----
Deferred tax assets:
Allowance for loan losses $ 1,286 1,278
Deferred compensation plans 507 442
Core deposit intangible 464 195
Self-insurance reserve 195 135
Other real estate owned 136 122
Other 18 13
------- -------
Total deferred tax assets 2,606 2,185
------- -------
Deferred tax liabilities:
Unrealized gain on securities available for sale (984) (3,056)
FHLB stock (195) (267)
Other securities (144) (144)
Depreciation (361) (143)
------- -------
Total deferred tax liabilities (1,684) (3,610)
------- -------
Net deferred tax asset (liability) $ 922 (1,425)
======== =======
The net deferred tax asset at September 30, 2003 is included in other
assets and the net deferred tax liability at September 30, 2002 is
included in other liabilities in the consolidated balance sheets.
The Company's effective rate on pretax income differs from the statutory
Federal income tax rate as follows ($ in thousands):
Year Ended September 30,
----------------------------------------------------------------------------
2003 % 2002 % 2001 %
---- ----- ---- ----- ---- ------
Taxes at federal statutory
rate $ 2,978 34% $ 2,707 34% $ 2,396 34%
Increase (decrease) in tax
resulting from:
Tax-exempt income, net (627) (7) (565) (7) (356) (5)
State income taxes, net of
Federal income tax benefit 264 3 255 3 234 3
Other, net 124 1 (40) - (96) (1)
------- -- ------- -- ------- --
Total $ 2,739 31% $ 2,357 30% $ 2,178 31%
======= == ======= == ======= ==
Until 1997, the Internal Revenue Code (the "Code") allowed the Company a
special bad debt deduction for additions to bad debt reserves for tax
purposes. Provisions in the Code permitted the Company to determine its
bad debt deduction by either the experience method or the percentage of
taxable income method. The statutory percentage used to calculate bad
debt deductions by the percentage of taxable income method was 8% before
such deduction. The experience method was calculated using actual loss
experience of the Company.
64
The Small Business Job Protection Act of 1996 repealed the percentage of
taxable income method of accounting for bad debts for tax years beginning
after 1995. The Company switched to the experience method above to
compute its bad debt deduction in 1997 and future years. As a result of
the change in the Code, the Company is required to recapture into taxable
income the portion of its bad debt reserves that exceeds its bad debt
reserves calculated under the experience method since 1987; a recapture
of approximately $366,000 ratably over six years beginning in 1999.
Retained earnings at September 30, 2003 and 2002 includes approximately
$5.8 million base year, tax basis bad debt reserve, for which no deferred
Federal and state income tax liability has been accrued. These amounts
represent an allocation of income to bad debt deductions for tax purposes
only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses
would create income for tax purposes only, which would be subject to the
then current corporate income tax rates. The unrecorded deferred income
tax liability on the above amounts was approximately $2.2 million at
September 30, 2003 and 2002. The base year reserves also remain subject
to income tax penalty provisions which, in general, require recapture
upon certain stock redemptions or excess distributions to stockholders.
(9) Concentration of Credit Risk
The Company originates real estate, consumer, and commercial loans
primarily in its Central Florida market area. Although the Company has a
diversified loan portfolio, a substantial portion of its borrowers'
ability to honor their contracts depends on the economic conditions of
Central Florida. The Company does not have a significant exposure to any
individual customer or counterparty.
The Company manages its credit risk by limiting the total amount of
arrangements outstanding with individual customers, by monitoring the
size and maturity structure of the loan portfolio, by obtaining
collateral based on management's credit assessment of the customers, and
by applying a uniform credit process for all credit exposures.
(10) Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Bank's or the Company's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of risk-based and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined) and adjusted total
assets (as defined).
As of September 30, 2003, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized,"
the Bank must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed
the Bank's category.
65
The Bank's actual capital amounts and percentages are as follows ($ in
thousands):
"Well Capitalized"
For Capital Under Prompt
Adequacy Corrective Action
Actual Purpose Provisions
----------------------- -------------------------- ------------------------
Amount % Amount % Amount %
------ ----- ------ -------- ------ -------
September 30, 2003:
Risk-based capital
(to risk-weighted assets) $ 76,012 14.2% $ 42,699 8.0% $ 53,374 10.0%
Tier I capital (to risk-
weighted assets) 71,533 13.4 21,350 4.0 32,025 6.0
Tier I capital
(to adjusted total assets) 71,533 8.9 32,213 4.0 40,266 5.0
September 30, 2002:
Risk-based capital
(to risk-weighted assets) 66,708 13.0 40,982 8.0 51,227 10.0
Tier I capital (to risk-
weighted assets) 62,189 12.1 20,491 4.0 30,736 6.0
Tier I capital
(to adjusted total assets) 62,189 7.4 33,525 4.0 41,906 5.0
The payment of dividends by the Bank to the Company is restricted. OTS
regulations impose limitations on all capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the institution's capital stock, payments
to stockholders of another institution in a cash-out merger and other
distributions charged against capital. A savings institution that is a
subsidiary of a savings and loan holding company, such as the Bank, must
file an application or a notice with the OTS at least 30 days before
making a capital distribution. Savings institutions are not required to
file an application for permission to make a capital distribution and
need only file a notice if the following conditions are met: (1) they are
eligible for expedited treatment under OTS regulations, (2) they would
remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income for that year
to date added to retained net income for the two preceding years, and (4)
the capital distribution would not violate any agreements between the OTS
and the savings institution or any OTS regulations. Any other situation
would require an application to the OTS.
(11) Benefit Plans
Director Retirement Plan. The Company sponsors a nonqualified Director
Retirement Plan (the "Director Plan"). The Director Plan will pay all
Directors that have served on the board at least ten years, an amount
equal to the regular board fee as of the date of the Directors'
retirement (currently $1,000 per month) for 120 months beginning at the
end of their final three-year term. If a Director dies prior to
retirement or prior to receipt of all monthly payments under the plan,
the Company has no further financial obligations to the Director or his
or her estate. For the years ended September 30, 2003, 2002 and 2001, the
Company recognized costs of approximately $34,000, $25,000 and $25,000
related to this Director Plan. These amounts were determined by
discounting the anticipated cash flow required, based on the years of
service rendered by each covered director. The weighted-average discount
rate used to measure the expense was 5.50%.
66
Employee Stock Ownership Plan. The Company sponsors an employee stock
ownership plan ("ESOP"). The ESOP covers eligible employees who have
completed twelve months of continuous employment with the Company during
which they worked at least 1,000 hours and who have attained the age of
21. As part of the Reorganization in April 1999, the ESOP borrowed $2.2
million from the Company to purchase 223,251 shares of the common stock
of the Company. After the Conversion in December 2000, the ESOP acquired
an additional 251,836 shares at a total cost of $3.9 million. The funds
were obtained through a loan from the Company. Since the ESOP is
internally leveraged, the Company does not report the loan receivable
from the ESOP as an asset and does not report the loan payable from the
ESOP as a liability. The Company's accounting for its ESOP is in
accordance with AICPA Statement of Position 93-6, Employers Accounting
for Employee Stock Ownership Plans, which requires the Company to
recognize compensation expense equal to the fair value of the ESOP shares
during the periods in which they became committed to be released. As
shares are committed to be released, the shares become outstanding for
earnings per share computations. To the extent that the fair value of the
ESOP shares differs from the cost of such shares, this differential will
be charged or credited to equity as additional paid-in capital.
Management expects the recorded amount of expense to fluctuate as
continuing adjustments are made to reflect changes in the fair value of
the ESOP shares. As of September 30, 2003 and 2002, 30,600 shares were
committed for release and the Company recorded employee benefits expense
of $935,000, $700,000 and $480,000 for the years ended September 30,
2003, 2002 and 2001, respectively, relating to the ESOP.
Dividends paid by the Company that relate to unallocated shares of the
ESOP are used to make payments on the ESOP loan or are allocated as
earnings to the participants. As of September 30, 2003, the fair value of
the 326,400 unallocated shares held by the ESOP was $8.6 million.
401(k) Retirement Plan. The Company has a 401(k) plan for eligible
employees. Subject to certain restrictions, eligible employees may
voluntarily contribute up to 100% of their annual compensation and the
Company may authorize discretionary contributions to eligible
participants. For the years ended September 30, 2003, 2002 and 2001 the
Company recognized $126,000, $134,000 and $117,900, respectively, of
employee benefits expense for the Company's matching contribution under
the plan.
Supplemental Executive Retirement Plan ("SERP"). The Company has a
nonqualified defined contribution plan to provide supplemental retirement
benefits for certain executive officers. For the years ended September
30, 2003, 2002 and 2001 the Company recognized $184,500, $191,000 and
$144,000, respectively, of employee benefits expense related to the SERP.
(12) Stock-Based Compensation Plans
Restricted Stock Plans ("RSPs"). On October 19, 1999 the Company adopted,
and the stockholders approved, the 1999 RSP for directors and officers to
enable the Bank to attract and retain experienced and qualified
personnel. Under the 1999 RSP, directors and officers of the Bank were
initially awarded 111,625 shares of the Company's stock. These restricted
shares are earned at a rate of 20% each year of continued service to the
Company. The fair value of the shares awarded was $919,000, using the
market closing price of $8.24 on the date of grant. This amount is being
amortized over a five-year period to employee benefits expense,
commencing October 1, 1999.
During 2002, the Company adopted and the shareholders approved a 2002 RSP
under which 124,750 shares of the Company stock were awarded to directors
and officers. These restricted shares are earned at a rate of either 33%
or 20% each year of continued service to the Company. The fair value of
these shares was $2.0 million using the market closing price of $16.03 on
the date of grant. This amount is being amortized over the related
vesting periods.
During the years ended September 30, 2003, 2002 and 2001, the Company
recognized $837,000, $862,000 and $181,000, respectively in employee
benefits expense related to the RSPs.
67
In the event of death or disability of a participant or change of control
of the Company, all shares awarded to the participant become immediately
vested. All shares awarded under the RSPs are considered as shares
outstanding for purposes of calculating earnings per share. The shares
earned under this plan are entitled to all voting and other stockholder
rights, except that, while restricted, the shares must be held in escrow
and cannot be sold, pledged or otherwise conveyed. The Company acquired
all shares for the plans through open market purchases in prior years. At
September 30, 2003 the plan held 68,367 unvested shares at an average
price of $16.25 per share.
Stock Option Plans. The Company has two Stock Option Plans (the "Option
Plans") under which a total of 593,848 common shares were authorized to
be granted to directors, officers and employees of the Company. Shares
granted under the Option Plans are exercisable at the market price at the
date of the grant and vest over three or five years. Options generally
expire at the earlier of ten years from the date of grant or three months
following the date an officer or employee terminates the employment
relationship for reasons other than disability (options expire one year
after disability) or death (options expire two years after death). Total
stock options available for future grants under both Option Plans at
September 30, 2003 was 20,125.
The following is a summary of option transactions:
Range of Per Weighted
Number of Share Option Average Per
Shares Price Share Price
------ ----- -----------
Outstanding, September 30, 2001 273,624 $ 7.63-10.23 $ 8.23
Exercised (6,602) 8.24 8.24
Granted 311,750 16.03-19.20 16.06
-------
Outstanding, September 30, 2002 578,772 7.63-19.20 12.45
Exercised (13,191) 7.63-16.03 9.37
Forfeited (13,713) 8.24-19.20 16.36
--------
Outstanding, September 30, 2003 551,868 $ 7.63-16.03 $ 12.42
======= ============ ========
The weighted average remaining contractual life of the outstanding
options at September 30, 2003 was 7.6 years. The outstanding options at
September 30, 2003 are exercisable as follows:
Weighted Weighted Average
Number of Average Remaining Contractual
Year Ending September 30, Shares Exercise Price Life
------------------------- ------ -------------- ----
Already vested 384,321 $ 11.93 7.4
2004 143,719 13.18 7.9
2005 12,378 15.44 8.8
2006 11,450 16.03 9.0
-------
Total 551,868 $ 12.42 7.6
======= ===== ===
(13) Branch Acquisition
On February 15, 2002, the Company finalized the purchase of seven Florida
retail sales offices ("Branch Acquisition") from SunTrust Bank coincident
with SunTrust Bank's acquisition of such offices from Huntington National
Bank ("Huntington"). Four of these Huntington offices are located in
Lakeland, Florida, and one each in Avon Park, Sebring and Wildwood,
Florida. The Company received approximately $120.9 million in cash,
$162.1 million in deposits, $26.1 million in loans and $2.4 million in
premises and equipment related to these seven offices. The transaction
resulted in a deposit premium of approximately 7.6%. This premium, along
with additional acquisition costs, resulted in a core deposit intangible
asset of $12.7 million. This intangible asset is being amortized using a
150%
68
declining balance method over twelve years and the Company recognized
$1.6 million and $1.1 million of amortization expense for the years ended
September 30, 2003 and 2002, respectively. Estimated remaining
amortization expense relating to the core deposit intangible asset is as
follows (in thousands):
Year Ending September 30, Amount
------------------------- ------
2004 $ 1,470
2005 1,380
2006 1,290
2007 1,200
2008 1,095
2009 and thereafter 3,581
--------
Total $ 10,016
========
(14) Fair Values of Financial Instruments
Fair value estimates, methods and assumptions are set forth below.
Cash and Cash Equivalents. The carrying amounts of cash and cash
equivalents (demand deposits maintained at various financial
institutions) represent fair value.
Securities. The Company's securities represent investments in U.S.
government agency obligations, CMOs, MBS, corporate bonds, municipal
bonds and common stock. The fair value of these securities was estimated
based on quoted market prices or bid quotations received from securities
dealers.
FHLB Stock. The FHLB stock is not publicly traded and the stock's
redemption value of $100 per share was used to estimate the fair value.
Loans. For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for residential, commercial real estate, commercial
and consumer loans other than variable rate loans are estimated using
discounted cash flow analysis, using the Office of Thrift Supervision
("OTS") pricing model. Fair values of impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where
applicable.
Deposits. The fair values disclosed for noninterest bearing demand
deposits are, by definition, equal to the amount payable on demand at
September 30, 2003 and 2002 (that is their carrying amounts). The
carrying amounts of variable-rate, fixed-term money-market accounts and
interest-bearing demand deposits approximate their fair value at the
reporting date. Fair values for fixed-rate time deposits are estimated
using the OTS pricing model.
Federal Home Loan Bank Advances. Fair value for Federal Home Loan Bank
advances are estimated using the OTS pricing model.
Other Borrowings. Fair values of other borrowings are estimated using
discounted cash flow analysis based on the Company's current borrowing
rates for similar types of borrowing arrangements.
69
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
At September 30,
---------------------------------------------------
2003 2002
------------------------- ---------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $ 13,775 13,775 30,628 30,628
Securities available for sale 252,897 252,897 272,624 272,624
Federal Home Loan Bank stock 6,955 6,955 6,966 6,966
Loans, net 496,684 527,592 499,433 524,850
======= ======= ======= =======
Financial liabilities:
Deposits:
Without stated maturities 253,699 253,699 229,254 229,254
With stated maturities 299,210 307,966 358,177 368,125
Federal Home Loan Bank advances 136,175 148,232 129,500 142,851
Other borrowings 20,643 19,553 34,834 35,772
======== ======= ======= =======
Commitments. The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, unused lines of credit and construction
loans and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest-rate risk in excess of
the amounts recognized in the consolidated balance sheet. The contract or
notional amounts of those instruments reflect the extent of the Company's
involvement in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit, unused lines of credit and construction loans and standby letters
of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments as it
does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed-expiration dates or other termination
clauses and may require payment of a fee. Since certain commitments
expire without being drawn upon, the total committed amounts do not
necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counter party.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers.
The Company also has recourse obligations on loans sold in the secondary
market. These recourse obligations require the Company to repurchase the
loans if the borrower defaults within a certain time period after the
loan is sold, usually three to twelve months. The Company has not had to
repurchase any loan sold in the secondary market in relation to these
recourse obligations.
70
A summary of the Company's commitments with off-balance-sheet risk at
September 30, 2003 is as follows (in thousands):
Estimated
Notional Carrying Fair
Amount Amount Value
------ ------ -----
Loan commitments $ 7,938 - -
======= ========= ========
Undisbursed construction and line of credit loans $ 53,765 - -
====== ========= ========
Standby letters of credit $ 751 - -
======== ========= ========
Loans sold with recourse obligations $ 38,039 - -
====== ========= ========
(15) Legal Contingencies
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management of the Company, will not
have a material effect on the Company's consolidated financial
statements.
(16) Other Event
On October 2, 2002, the Company entered into a definitive agreement with
BB&T Corporation ("BB&T") whereby BB&T would acquire 100% of the
outstanding common stock of the Company. However, pursuant to discussions
with regulatory officials, BB&T and the Company terminated the agreement
on October 31, 2002 so that BB&T could submit the proper application to
acquire control of the Company within three years of its second-step
conversion pursuant to regulatory guidelines. This application was filed
on November 4, 2002. The Company had capitalized approximately $725,000
in costs related to the acquisition.
On March 17, 2003, BB&T withdrew its application to acquire control of
the Company within the three year period, citing rigorous regulatory
standards that are being applied to recently converted thrifts. As a
result of application being withdrawn, the Company wrote-off capitalized
merger costs of $504,000 ($312,000 after tax) which are not recoverable
or refundable.
71
(17) Parent Company Only Financial Statements
The unconsolidated condensed financial statements of FloridaFirst
Bancorp, Inc. are as follows (in thousands):
Condensed Balance Sheets
------------------------
September 30,
------------------------------
2003 2002
---- ----
Assets
Cash and cash equivalents $ 184 141
Loans to subsidiary 16,229 17,621
Securities available for sale 2,581 2,507
Investment in subsidiary 83,040 78,739
Other assets 46 59
--------- ------
Total assets $ 102,080 99,067
========= ======
Liabilities and Stockholders' Equity
Other liabilities $ - 8
Deferred tax liability 108 81
Stockholders' equity 101,972 98,978
--------- ------
Total liabilities and stockholders' equity $ 102,080 99,067
========= ======
Condensed Statements of Earnings
--------------------------------
Year Ended September 30,
-------------------------------
2003 2002 2001
---- ---- ----
Interest income:
Securities available for sale $ 213 213 209
Loans to subsidiary 665 852 976
------- ------ ------
Total income 878 1,065 1,185
------- ----- ------
Operating expenses (713) (227) (212)
------- ------ ------
Income before income taxes and equity in undistributed
earnings of subsidiary 165 838 973
Income taxes (63) (317) (340)
------- ------ ------
Income before equity in undistributed earnings of subsidiary 102 521 633
Equity in undistributed earnings of subsidiary 5,919 5,083 4,236
------- ------ ------
Net income $ 6,021 5,604 4,869
======= ====== ======
72
Condensed Statements of Cash Flows
----------------------------------
Year Ended September 30,
-------------------------------
2003 2002 2001
------- ------- -------
Cash flows from operating activities:
Net income $ 6,021 5,604 4,869
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiary (5,919) (5,083) (4,236)
Net decrease (increase) in other assets and liabilities 5 2 (12)
------- ------- -------
Net cash provided by operating activities 107 523 621
------- ------- -------
Cash flows from investing activities:
Capital contribution to subsidiary - - (16,000)
Repayment (issuance) of loans to subsidiary 1,392 2,926 (13,761)
------- ------- -------
Net cash provided by (used in) investing activities 1,392 2,926 (29,761)
------- ------- -------
Cash flows from financing activities:
Payments to acquire treasury stock (126) (2,199) (481)
Dividends paid (1,453) (1,249) (921)
Net proceeds from stock issuances 123 54 30,578
------- ------- -------
Net cash (used in) provided by financing activities (1,456) (3,394) 29,176
------- ------- -------
Net increase in cash 43 55 36
Cash at beginning of year 141 86 50
------- ------- -------
Cash at end of year $ 184 141 86
======= ======= =======
Supplemental disclosure of noncash information:
Accumulated other comprehensive income, unrealized gain
on securities available for sale, net of tax $ 47 66 71
======= ======= =======
Change in investment in subsidiary due to:
Accumulated other comprehensive income, unrealized
gain (loss) on securities available for sale, net of tax $(3,574) 3,511 2,785
======= ======= =======
Tax benefit from stock options and RSP shares $ 305 101 -
======= ======= =======
Fair value of ESOP shares allocated $ 801 595 284
======= ======= =======
Fair value of RSP shares distributed $ 850 967 177
======= ======= =======
73
(18) Quarterly Financial Data (Unaudited)
Unaudited quarterly financial data is as follows ($ in thousands, except
per share data):
Year Ended September 30, 2003 Year Ended September 30, 2002
----------------------------------------- ----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Interest income $ 12,505 11,637 11,164 10,424 11,266 11,825 12,948 12,871
Interest expense 5,958 5,361 4,901 4,623 6,171 6,130 6,390 6,257
-------- --------- -------- -------- --------- -------- --------- --------
Net interest income 6,547 6,276 6,263 5,801 5,095 5,695 6,558 6,614
Provision for loan
losses 180 180 180 120 150 170 180 180
-------- --------- -------- -------- --------- -------- --------- --------
Net interest income after
provision for loan
losses 6,367 6,096 6,083 5,681 4,945 5,525 6,378 6,434
-------- --------- -------- -------- --------- -------- --------- --------
Noninterest income 1,562 1,441 2,093 1,964 834 1,051 1,588 1,723
Noninterest expense 5,774 6,031 5,476 5,246 3,872 4,881 5,713 6,051
-------- --------- -------- -------- --------- -------- --------- --------
Income before income
taxes 2,155 1,506 2,700 2,399 1,907 1,695 2,253 2,106
Income taxes 659 431 883 766 573 487 681 616
-------- --------- -------- -------- --------- -------- --------- --------
Net income $ 1,496 1,075 1,817 1,633 1,334 1,208 1,572 1,490
======== ========= ======== ======== ========= ======== ========= ========
Basic earnings per
share $ .30 .21 .36 .32 .26 .24 .31 .29
======== ========= ======== ======== ========= ======== ========= ========
Diluted earnings
per share $ .28 .20 .34 .31 .25 .22 .30 .28
======== ========= ======== ======== ========= ======== ========= ========
74
Item 9. Changes in and Disagreements With Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
Item 9A. Controls and Procedures
- -------- -----------------------
Evaluation of Disclosure Controls and Procedures. The Company's management
evaluated, with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, the effectiveness of the Company's disclosure controls
and procedures, as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
Internal Control Over Financial Reporting. There were no changes in the
Company's internal control over financial reporting that occurred during the
Company's last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
75
PART III
Item 10. Directors and Executive Officers
- -------- --------------------------------
Biographical Information
The business experience of each director and executive officer of the Company is
set forth below. All persons have held their present positions for five years
unless otherwise stated.
Llewellyn N. Belcourt, 71, is a stockholder of Carter, Belcourt & Atkinson,
P.A., an accounting firm headquartered in Lakeland, Florida since 1979. He is
Treasurer and a Board member of the Community Foundation of Greater Lakeland and
a Board member of the Lakeland Regional Medical Center Foundation.
J. Larry Durrence, 64, is President of Polk Community College, a state
institution with campuses in Lakeland and Winter Haven, Florida. He was an
executive manager in the Florida Department of Revenue from late 1992 to early
1998, and prior to that was in higher education. He was also a City Commissioner
and Mayor of Lakeland, 1981-1989. He currently serves on the boards of United
Way of Central Florida, Lakeland Chamber of Commerce, Polk Economic Education
Council, Polk Workforce Development Board, Volunteers in Service to the Elderly
(Advisory), and the Board of Governors of Polk Museum of Art. He serves on the
Commission on Economic and Workforce Development for the American Association of
Community Colleges and is a graduate of the AACC President's Academy.
Stephen A. Moore, Jr., 61, is President, Chief Executive Officer and a Director
of Moore Business Service, Inc., a business services firm and former major
franchisee of H&R Block in central Florida with corporate offices in Lakeland,
Florida. He has been with Moore Business Service, Inc. since 1974. Mr. Moore is
a member and Past President of the Lakeland Rotary Club. He has been active as a
board member of the Polk Community College Foundation, as an officer and board
member of the Central Florida Speech and Hearing Center, as a board member and
Past President of Goodwill Industries, Heart of Florida, Inc., as a board member
of the Lakeland Area Chamber of Commerce and as a member of the Lakeland
Regional Medical Center Community Counselor program.
Nis H. Nissen, III, 62, is President and Chief Executive Officer of Nissen
Advertising, Inc., an advertising and public relations firm located in Lakeland,
Florida that he has been affiliated with since 1971. He also is a member of the
Rotary Club, a Director of the Central Florida Speech & Hearing Center, a
Director of Crimestoppers of Polk County, Vice Chairman of the Public
Information Committee, Community Foundation of Lakeland, a member of the Fine
Arts Council of the Florida Southern Foundation of Lakeland, and a member of the
Board of Governors of Florida Southern College.
Arthur J. Rowbotham, 55, is an attorney and is President of Hall Communications,
Inc., a company that operates seventeen radio stations including four in
Lakeland, Florida. He currently serves as a director for Cross Country
Communications, LLC, Imperial Symphony Orchestra Board, City of Lakeland Civil
Service Board, City of Lakeland Pension Board, and Florida Association of
Broadcasters. He is a member of the Broadcasters' Foundation and a Lakeland
Regional Medical Center Community Counselor.
Gregory C. Wilkes, 55, has been FloridaFirst Bank's President, Chief Executive
Officer, and Director since August 1995. Mr. Wilkes came to FloridaFirst from
Home Federal Savings Bank in Rome, Georgia, where he was President, Chief
Executive Officer, and Director from 1990-1995. Mr. Wilkes was also formerly a
Regional President in North Georgia for First Union National Bank, City
President in Rome, Georgia for the Georgia Railroad Bank, and President, Chief
Executive Office, and Director of the National City Bank of Rome, Georgia. He
began his banking career with the Citizens & Southern National Bank of Atlanta
in 1971. Mr. Wilkes currently serves on the boards of the Polk Theatre, Polk
Museum of Art, and Florida Southern College President's council. He is a past
Chairman of the Lakeland Area Chamber of Commerce and a former board member of
the Florida Bankers Association, Lakeland Area Chamber of Commerce, Lakeland
Rotary Club, Lakeland YMCA, Salvation Army, and the Lakeland Regional Hospital
Foundation. He is also a past
76
director and instructor of the Florida School of Banking at the University of
Florida. Mr. Wilkes is currently the elected director for the State of Florida
to the Board of the Federal Home Loan Bank of Atlanta, and is active with
America's Community Bankers having served on the Mutual, Government Relations,
and Federal Home Loan Bank Committees.
G. F. Zimmermann, III, 59, is President and majority stockholder of Zimmermann
Associates, Inc., a design/build firm in Lakeland, Florida, since 1974. He is a
life member of the Salvation Army Advisory Board, Past President and Life Member
of the Kiwanis Club and the Lakeland Kiwanis Foundation. He currently serves on
the Board of the Central Florida Speech and Hearing Center, the Lakeland
Regional Medical Center Community Board, the Small Business Committee of the
Lakeland Chamber of Commerce, and the steering committee for the Ira Barnett
Heritage Center. Mr. Zimmermann is Director and Executive Committee member of
Bentley Lumber Company and Zimmermann Lands, Inc. He has served as director of
Habitat for Humanity, chaired the Lakeland Civil Service Board and the
Arbitration Board, and is a Trustee of the City of Lakeland Pension Board.
Executive Officers Who Are Not Directors
Don A. Burdett, 58, has been Senior Vice President of Retail Banking of
FloridaFirst Bank since November 1998. Prior to joining FloridaFirst Bank, Mr.
Burdett served as a market executive and held various sales management positions
at Barnett Bank from 1979 to 1998.
Kerry P. Charlet, 50, has been Chief Financial and Operations Officer of
FloridaFirst Bank since March 1998. Prior to joining FloridaFirst Bank, Mr.
Charlet served in various positions from 1986 to 1994 at Florida Bank, FSB,
including Executive Vice President and Chief Financial Officer. He was also
employed by AmSouth Bank of Florida from 1995 to 1998, where he served as Senior
Vice President and Chief Financial Officer. Mr. Charlet is a Leadership Lakeland
graduate and serves on the Audit Committee for the Polk County School Board and
as Treasurer for the Friends of the Library. Mr. Charlet has also served as an
officer and committee chairman for the Gator Bowl Association, Chairman of
Payment Systems Network, and president and board member of various youth
basketball organizations.
William H. Cloyd, 46, has been Chief Lending Officer of FloridaFirst Bank since
January 1998. Previously, Mr. Cloyd was Senior Vice President of Sun Trust Bank
Mid-Florida, N.A. He is a director of the Lakeland Area Chamber of Commerce and
Neighborhood Lending Partners, Inc. He has also been active with the United Way,
the North Lakeland Rotary Club, and has served as Chairman of the Lakeland
Downtown Development Authority.
Marion L. Moore, 64, has been Senior Vice President of Deposit Operations of
FloridaFirst Bank since 1984. He has also been active with the Rotary Club, the
Boy Scouts of America, the Lakeland Chamber of Commerce and the Winter Haven
Chamber of Commerce.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the 1934 Act, requires the Company's directors and executive
officers to file reports of ownership and changes in ownership of their equity
securities of the Company with the Securities and Exchange Commission and to
furnish the Company with copies of such reports. To the best of the Company's
knowledge, all of the filings by the Company's directors and executive officers
were made on a timely basis during the 2003 fiscal year. The Company is not
aware of other beneficial owners of more than ten percent of its common stock.
Code of Ethics
The Company has adopted a Code of Ethics for Financial Professionals that is
available, at no charge, to anyone who requests a copy. Requests should be
directed to the Corporate Secretary at FloridaFirst Bancorp, Inc., 205 E. Orange
Street, Lakeland, Florida 33801.
77
Audit Committee Financial Expert
The Board of Directors has determined that the Chairman of the Company's Audit
Committee, Mr. Llewellyn Belcourt is an audit committee financial expert and he
is an independent director within the meaning of the NASD listing requirements
for the Nasdaq National Market.
Item 11. Executive Compensation
- -------- ----------------------
Director Compensation. During the fiscal year ended September 30, 2003, each
director was paid a fee of $1,000 for each board annual meeting attended. The
chairman of the board receives an additional $1,500 monthly fee. Each
non-management director was paid $200 for each committee annual meeting
attended. The total fees paid to the directors for the fiscal year ended
September 30, 2003 were approximately $158,000.
In addition, the Bank maintains a Directors Consultant and Retirement Plan. If a
director agrees to become a consulting director to our Board after retirement
and completion of at least 10 years of service, he will receive a monthly
payment equal to the Board fee in effect at the date of retirement, currently
$1,000 per month, for a period of 120 months. Benefits under such plan will
begin after a director's retirement. If there is a change in control, all
directors will be presumed to have completed not less than 10 years of service,
and each director will receive a lump sum payment equal to the present value of
future benefits payable. During the fiscal year ended September 30, 2003,
$24,000 was paid to former directors under the Plan.
1999 Option Plan and Restricted Stock Plan. Under the 1999 Option Plan, each
non-employee director, except Messrs. Durrence and Rowbotham, was previously
granted 11,146 options to purchase shares of common stock at $8.24 per share.
Under the 1999 Restricted Stock Plan ("RSP"), each non-employee director, except
Messrs. Durrence and Rowbotham, was previously awarded 4,783 shares of common
stock. Option shares and restricted stock plan shares are exercisable at the
rate of 20% per year commencing on October 19, 2000. Under the 1999 Option Plan
and RSP, Mr. Wilkes received 65,832 options and 27,905 RSP shares, respectively.
In accordance with the RSP, dividends are paid on shares awarded or held in the
plan
2002 Option Plan and RSP. Under the 2002 Option Plan, each non-employee director
was previously granted 15,750 options to purchase shares of common stock at
$16.03 per share. Under the 2002 RSP, each non-employee director was previously
awarded 6,250 shares of common stock. These option shares and restricted stock
plan shares are exercisable at the rate of 33 1/3% per year commencing on
September 30, 2002. Under the 2002 Option Plan and RSP, Mr. Wilkes received
60,000 options and 25,000 shares of restricted stock, respectively. In
accordance with the 2002 RSP, dividends are paid on shares awarded or held in
the plan.
Executive Compensation. The following table sets forth the cash and non-cash
compensation awarded to or earned for each of the last three fiscal years for
services rendered by the Chief Executive Officer and by each officer whose
salary and bonus exceeded $100,000 during the last fiscal year.
78
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards
------------------------------------------ -----------------------------------
Restricted Securities
Name and Fiscal Other Annual Stock Underlying All Other
Principal Position Year Salary($) Bonus($) Compensation($) Awards(s)($)(1) Options#(2) Compensation($)
- ------------------ ---- --------- -------- --------------- --------------- ----------- ---------------
Gregory C. Wilkes, 2003 $262,000 $15,720 $ - $ - - 88,248(3)
President and 2002 262,000 60,000 3,000 400,625 (1) 60,000 91,864
Chief Executive Officer 2001 229,277 - 13,000 - - 78,622
Don A. Burdett 2003 144,804 3,510 - - - 22,660(4)
Senior Vice President 2002 116,250 18,914 - 192,300 (1) 25,000 22,788
2001 106,750 7,500 - - - 12,780
Kerry P. Charlet, 2003 165,000 5,259 - - - 67,158(5)
Senior Vice President and 2002 156,250 26,914 - 288,450 (1) 30,000 70,285
Chief Financial Officer 2001 139,076 10,000 - - - 49,129
William H. Cloyd, 2003 144,000 4,320 - - - 67,801(6)
Senior Vice President and 2002 141,000 12,000 - 240,375 (1) 25,000 71,065
Chief Lending Officer 2001 129,508 7,500 - - - 47,816
- -------------------------
(1) For Messrs. Wilkes, Burdett, Charlet and Cloyd represents awards of
25,000, 12,000, 18,000 and 15,000 shares of Common Stock, respectively,
under the 2002 Restricted Stock Plan as of December 21, 2001 on which
date the market price of such stock was $16.03 per share. Such stock
awards become non-forfeitable at the rate of 33 1/3% shares per year
commencing on September 30, 2002. Dividend rights associated with such
stock are accrued and held in arrears to be paid at the time that such
stock becomes non-forfeitable. Based upon a market price of $26.31 per
share as of September 30, 2003, such unvested shares for Messrs. Wilkes,
Burdett, Charlet and Cloyd had a market value of $219,000, $105,000,
$158,000 and $132,000, respectively.
(2) Such awards under the 2002 Option Plan are first exercisable at the rate
of 33 1/3% per year commencing on September 30, 2002. See "Stock Awards"
below.
(3) Includes $64,000 related to an accrual under the supplemental executive
retirement plan; 1,396 shares of common stock allocated under the ESOP at
a cost basis of $13.26 per share (such shares had an aggregate market
value at September 30, 2003 of $36,729); and $5,738 in the Company's
matching funds in the 401(k) retirement plan.
(4) Includes 1,396 shares of common stock allocated under the ESOP at a cost
basis of $13.26 per share (such shares had an aggregate market value at
September 30, 2003 of $36,729); and $4,149 in the Company's matching
funds in the 401(k) retirement plan.
(5) Includes $45,000 related to an accrual under the supplemental executive
retirement plan; 1,396 shares of common stock allocated under the ESOP at
a cost basis of $13.26 per share (such shares had an aggregate market
value at September 30, 2003 of $36,729); and $3,647 in the Company's
matching funds in the 401(k) retirement plan.
(6) Includes $46,000 related to an accrual under the supplemental executive
retirement plan; approximately 1,396 shares of common stock allocated
under the ESOP at a cost basis of $13.26 per share (such shares had an
aggregate market value at September 30, 2003 of $36,729); and $3,290 in
the Company's matching funds in the 401(k) retirement plan.
Stock Awards. The following table sets forth information with respect to options
held by the named executive officers as of September 30, 2003. No stock options
were granted during the fiscal year ended September 30, 2003. The Company has
not granted to the named executive officers any stock appreciation rights.
79
OPTION EXERCISES AND YEAR END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year, and FY-End Option Value
------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options at FY-End(#) Options at FY-End($)
-------------------- --------------------
Shares Acquired Value
Name on Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- -------------- ----------- ------------------------- -------------------------
Gregory C. Wilkes
1999 Option Plan __ __ 39,500 / 26,332 $713,900 / 475,900(1)
2002 Option Plan __ __ 40,000 / 20,000 411,400 / 205,700(2)
Don A. Burdett
1999 Option Plan __ __ 10,837 / 7,224 195,900 / 130,600(1)
2002 Option Plan __ __ 16,667 / 8,333 171,400 / 85,700(2)
Kerry P. Charlet
1999 Option Plan 3,400 57,300(3) 16,725 / 13,418 302,300 / 242,500(1)
2002 Option Plan __ __ 20,000 / 10,000 205,700 / 102,800(2)
William H. Cloyd
1999 Option Plan __ __ 15,482 / 10,320 279,800 / 186,500(1)
2002 Option Plan __ __ 16,667 / 8,333 171,400 / 85,700(2)
(1) Based on the exercise price of $8.24 and the closing price on September
30, 2003 of $26.31.
(2) Based on the exercise price of $16.03 and the closing price on September
30, 2003 of $26.31.
(3) Based on the difference between the exercise price and fair market value
on the date of exercise.
Other Benefits
Employment Agreements. The Bank has entered into separate employment agreements
with Messrs. Wilkes, Burdett, Charlet and Cloyd. Messrs. Wilkes' and Charlet's
employment agreements have a term of three years, while Messrs. Burdett's and
Cloyd's agreement have a term of two years. The agreements may be terminated by
the Bank for "just cause" as defined in the agreement. If the Bank terminates
any of these individuals without just cause, they will be entitled to a
continuation of their salary from the date of termination through the remaining
term of the agreement, but in no event for a period of less than one year. The
employment agreements contain a provision stating that after Messrs. Wilkes',
Burdett's, Charlet's or Cloyd's employment is terminated in connection with any
change in control, the individual will be paid a lump sum amount equal to 2.99
times his five-year average annual taxable cash compensation. In the event of a
change in control as of September 30, 2003, Messrs. Wilkes, Burdett, Charlet and
Cloyd would have received approximately $1,200,000, $500,000, $745,000 and
$635,000, respectively.
Supplemental Executive Retirement Plan. The Bank has implemented a supplemental
executive retirement plan for the benefit of Messrs. Wilkes, Charlet and Cloyd.
The supplemental executive retirement plan will provide benefits at age 65 that
would be comparable to approximately 83% of the benefits that would have accrued
under the terminated pension plan after retirement at age 65. If a participant
terminates employment prior to age 65, then the target retirement benefits will
be reduced. The accumulated deferred compensation account for each participant
will be payable to such participant at anytime following termination of
employment after attainment of age 55, the death or disability of the
participant, or termination of employment following a change in control of the
Bank whereby the Bank or its parent company is not the resulting entity. As of
the fiscal year ended September 30, 2003, Messrs. Wilkes, Charlet and Cloyd had
aggregate benefit accruals under the supplemental executive retirement plan of
approximately $325,000, $207,000, and $210,000, respectively, and such benefits
for the individuals were not vested.
80
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- --------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Securities Authorized for Issuance Under Equity Compensation Plans
Set forth below is information as of September 30, 2003 with respect to
compensation plans under which equity securities of the Registrant are
authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under equity
exercise of outstanding compensation plans (excluding
outstanding options, options, warrants securities reflected in
warrants and rights and rights column (a))
------------------- ---------- -----------
Equity compensation plans
approved by shareholders:
1999 Stock Option Plan 255,468 $ 8.24 3,825
2002 Stock Option Plan 296,400 $16.04 16,300
1999 Restricted Stock Plan (1) 42,667 __ __
2002 Restricted Stock Plan (1) 46,050 __ __
Equity compensation plans not
approved by shareholders: __ __ __
------- ------
TOTAL 640,585 $12.42 20,125
======= ======
(1) Represents the shares that have previously been awarded under these plans
but have not vested as of September 30, 2003. The restricted stock trust
has purchased and currently owns sufficient shares to satisfy the shares
that will be required for future vesting periods.
81
Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------
Percent of Shares of
Amount and Nature of Common Stock
Name and Address of Beneficial Owner Beneficial Ownership (3) Outstanding (%)
- ------------------------------------ -------------------------- ---------------
FloridaFirst Bank Employee Stock Ownership Plan ("ESOP") 467,799(1) 8.05%
205 East Orange Street
Lakeland, Florida
Bruce A. Sherman 531,498(2) 9.15%
Private Capital Management, LP
8889 Pelican Bay Blvd.
Naples, FL 34108
Llewellyn N. Belcourt (4) (5) 29,527 *
Don A. Burdett 50,055 *
Kerry P. Charlet 98,718 1.70%
William H. Cloyd 60,256 1.04%
J. Larry Durrence (4) (5) 15,072 *
Stephen A. Moore, Jr. (4) (5) 75,223 1.30%
Nis H. Nissen, III (4) (5) 64,254 1.11%
Arthur J. Rowbotham (4) (5) 14,866 *
Gregory C. Wilkes 168,648 2.90%
G. F. Zimmermann, III (4) (5) 36,954 *
All directors and named executive officers 637,566 10.98%
of the Company as a group (11 persons)
- ------------------
(1) The ESOP purchased such shares for the exclusive benefit of plan
participants with funds borrowed from the Company. These shares are held
in a suspense account and will be allocated among ESOP participants
annually as the ESOP debt is repaid. Once allocated, ESOP participants,
under certain circumstances, may withdraw their shares from the Plan. The
board of directors of FloridaFirst Bank has appointed a committee
consisting of non-employee directors Llewellyn N. Belcourt, J. Larry
Durrence, Stephen A. Moore, Jr., Nis H. Nissen, III, Arthur J. Rowbotham
and G.F. Zimmermann, III to serve as the ESOP administrative committee
("ESOP Committee") and to serve as the ESOP trustees ("ESOP Trustee").
The ESOP Committee or the Board instructs the ESOP Trustee regarding
investment of ESOP plan assets. The ESOP Trustee must vote all shares
allocated to participant accounts under the ESOP as directed by
participants. Unallocated shares and shares for which no timely voting
direction is received will be voted by the ESOP Trustee as directed by
the ESOP Committee. As of September 30, 2003, 140,161 shares have been
allocated under the ESOP to participant accounts and remain in the Plan.
(2) Pursuant to a Schedule 13G dated February 14, 2003 by Bruce A. Sherman,
Gregg J. Powers and Private Capital Management, LP ("PCM"), Mr. Sherman
has sole voting and dispositive power with respect to 40,000 shares and
Messrs. Sherman and Powers and PCM have shared voting and dispositive
power with respect to 491,398 shares.
(3) The share amounts include shares of common stock that the following
persons may acquire through the exercise of stock options under the 1999
and 2002 Option Plan within 60 days of the record date: Llewellyn N.
Belcourt - 16,417, Don A. Burdett - 31,116, Kerry P. Charlet - 43,434,
William H. Cloyd - 37,309, J. Larry Durrence 10,500, Stephen A. Moore,
Jr. - 19,417, Nis H. Nissen, III - 19,417, Arthur J. Rowbotham - 10,500,
Gregory C. Wilkes - 92,666, and G. F. Zimmermann, III - 17,188.
(4) Excludes 467,799 shares under the ESOP for which such individuals
exercise shared voting and investment
82
power with respect to such shares as an ESOP trustee. Such individuals
disclaim beneficial ownership with respect to such shares held in a
fiduciary capacity.
(5) Excludes 42,667 1999 RSP shares and 46,050 2002 RSP shares which were
previously awarded but subject to forfeiture for which such individuals
exercise shared voting and investment power with respect to such shares
as a member of the 1999 RSP and 2002 RSP committee. Such individuals
disclaim beneficial ownership with respect to such shares held in a
fiduciary capacity.
* Less than 1% of the common stock outstanding.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The Bank, like many financial institutions, has followed a policy of granting
various types of loans to officers, directors, and employees. The loans have
been made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with the Bank's other customers, and do not involve
more than the normal risk of collection, or present other unfavorable features.
Item 14. Principal Accounting Fees and Services
- -------- --------------------------------------
Audit Fees
Fees paid to Hacker, Johnson & Smith PA for each of the last two fiscal years
are set forth below.
Fiscal Audit Audit-Related Tax All Other
Year Fees Fees Fees Fees
---- ---- ---- ---- ----
2003 $ 54,000 18,600 11,000 -
2002 52,000 18,000 10,500 -
Audit fees include fees for services performed to comply with generally accepted
auditing standards, including the recurring audit of the Company's consolidated
financial statements. This category also includes fees for audits provided in
connection with statutory filings or services that generally only the principal
auditor reasonably can provide to a client, such as procedures related to audit
of income tax provisions and related reserves, consents and assistance with and
review of documents filed with the Securities and Exchange Commission.
Audit-related fees include fees associated with assurance and related services
that are reasonably related to the performance of the audit or review of the
Company's financial statements. This category includes fees related to
assistance in financial due diligence related to mergers and acquisitions,
consultations regarding generally accepted accounting principles, reviews and
evaluations of the impact of new regulatory pronouncements, general assistance
with implementation of the new SEC and Sarbanes-Oxley Act of 2002 requirements
and audit services not required by statute or regulation. Audit-related fees
also include audits of employee benefit plans, as well as the review of
information systems and general internal controls unrelated to the audit of the
financial statements.
Tax fees primarily include fees associated with tax audits, tax compliance, tax
consulting, as well as tax planning. This category also includes services
related to tax disclosure and filing requirements.
The Audit Committee has not authorized any non-audit services by the independent
auditor. The Audit Committee must approve any such services prior to the
services being performed. The Audit Committee's considerations would include
whether such services are consistent with the SEC's rules on auditor
independence. The Audit Committee would also consider whether the independent
auditor is best positioned to provide the most effective and efficient service,
for reasons such as its familiarity with the Company's business, people,
culture, accounting systems, risk profile, and whether the services enhance the
Company's ability to manage or control risks and improve audit quality.
83
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a)(1) Financial Statements:
See Item 8.
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the
information is not required under the related instructions or is
inapplicable.
(a)(3) Exhibits:
3(i) Articles of Incorporation of FloridaFirst Bancorp, Inc.*
3(ii) Bylaws of FloridaFirst Bancorp, Inc.*
4 Specimen Stock Certificate of FloridaFirst Bancorp, Inc.*
10.1 Form of Employment Agreements entered into with the named
Executive Officers of FloridaFirst Bank*
10.2 1999 Stock Option Plan **
10.3 1999 Restricted Stock Plan **
10.4 Supplemental Executive Retirement Plan for the benefit of
Certain Senior Officers*
10.5 2002 Stock Option Plan***
10.6 2002 Restricted Stock Plan***
21 Subsidiaries of Registrant (See Item 1 - Description of the
Business)
23 Consent of Accountants
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
31.2 Certification of Chief Financial Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act.
32 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 initially filed with the Commission on September 5, 2000 (File
No. 333-45150).
** Incorporated by reference to the Form S-8 filed with the Commission on
March 2, 2001 (File No. 333-56420).
*** Incorporated by reference to the Registrant's Registration Statement on
Form S-8 filed with the Commission on March 19, 2002 (File No.
333-84516).
(b) Reports on Form 8-K:
(i) A Form 8-K was filed on November 6, 2003 as notification under
Item 9 that the Company issued a press release announcing the
Company's fourth quarter earnings.
(ii) A Form 8-K was filed on August 5, 2003 as notification under
Item 9 that the Company issued a press release announcing the
Company's third quarter earnings.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FLORIDAFIRST BANCORP, INC.
Date: December 19, 2003 By: /s/Gregory C. Wilkes
-------------------------------------
Gregory C. Wilkes
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on December 19, 2003 by the following persons on behalf of
the Registrant and in the capacities indicated.
/s/Gregory C. Wilkes /s/Kerry P. Charlet
- -------------------------------------- -------------------------------------------
Gregory C. Wilkes Kerry P. Charlet
President, Chief Executive Officer and Senior Vice President and
Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
/s/Nis H. Nissen, III /s/Stephen A. Moore, Jr.
- -------------------------------------- -------------------------------------------
Nis H. Nissen, III Stephen A. Moore, Jr.
Chairman of the Board and Director Director
/s/Llewellyn N. Belcourt /s/Arthur J. Rowbotham
- -------------------------------------- -------------------------------------------
Llewellyn N. Belcourt Arthur J. Rowbotham
Director Director
/s/J. Larry Durrence /s/G. F. Zimmermann, III
- -------------------------------------- -------------------------------------------
J. Larry Durrence G. F. Zimmermann, III
Director Director
85